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Text: This is Shawn Collins.
The new Director of Investor Relations at Harley-Davidson.
You can access the slides supporting today's call on the Internet at investor.
In addition, Chief Commercial Officer, Edel O'Sullivan will join for the Q&A.
With that, Jochen why don't we get started?
We delivered a solid quarter, and are pleased with our year-to-date performance where you've seen many proof points that our Hardwire strategic initiatives are setting up a solid foundation for future growth at Harley-Davidson.
As part of the Hardwire strategy, we renewed our focus and profitably driving our core business.
Through 2021 we've been encouraged by the recovery of the Touring market.
Grand American Touring sits at the core of our mission and our brand.
We are committed to defending and expanding our share in the segment and see potential for future growth.
By selectively targeting high potential categories such as Adventure Touring with Pan America and sports with Sportster S we are also maintaining our focus on long-term profitability and potential alinged to our brand and product capabilities.
The increased demand that we have seen across both our core and expanding categories underscores the momentum behind the Harley-Davidson Brand and all it stands in the pursuit of freedom and adventure.
We've also seen interest increasing across new riders with a marked increase in the participation in the Harley-Davidson Riding Academy.
Through September, we've seen Riding Academy participation and completion increased 20% over 2019.
In addition to our strategic changes as part of our streamline market strategy, macro headwinds, including a variety of challenges from supply chain shortages to congestion at ports and increased shipping times that have been impacting our production and our other suppliers in Q3, in particular in our international markets.
The supply chain challenges are likely to continue into 2022, our team remains committed to managing the effects of the disruption, leveraging the scale of our global network and infrastructure to mitigate the impact on our business.
That said, I'm very excited by the global potential of Harley-Davidson brand in the coming years.
And, as we focus on more profitable motorcycle unit as part of our strategy, we continue our journey toward a more efficient use of inventory.
While we are below our intended inventory strategy, we've seen our dealer community adapt, improve the profitability and therefore improve the overall health of our dealer network.
I'll now hand over to Gina to provide more details on our financial performance for the quarter and year-to-date.
Third quarter results reflect continued demand momentum as evidenced by our strong wholesale and unit growth and share performance across the market.
As Jochen said we did experience increased supplier volatility, which impacted our production and supply levels for the quarter.
Despite this, our financial results demonstrate our agility in maximizing profitability, including the execution of a pricing surcharges in the US, optimizing production schedules to prioritize our most profitable models and markets and enacting tighter operating expense controls.
In the quarter, total revenue of $1.4 billion was 17% ahead of last year behind increased shipments and favorable motorcycle unit mix, primarily driven by the actions undertaken as part of the rewire.
Total operating income of $204 million was ahead of last year with growth across both of our reported segments.
The motorcycle segment, which includes our general merchandise and parts and Accessories products delivered $98 million of operating income, which is $51 million better than last year.
And the Financial Services segment delivered $107 million of operating income, which is $15 million better than last year.
Third quarter GAAP earnings per share of $1.5 is $0.78 better than last year or up 35% year-over-year.
When adjusting to exclude the impact of EU tariffs and restructuring charges our adjusted earnings per share was $1.18 and up 12% year-over-year.
Turning to Q3 year-to-date results, revenue of $4.3 billion is 30% ahead of 2020 and operating income of $831 million was $701 million ahead of last year.
Year-to-date results reflect the strong unit growth over the pandemic impacted results of 2020 as well as the positive impact from last year's Rewire actions.
GAAP year-to-date earnings per share was $4.06, up $3.42 from a year ago, while adjusted earnings per share was $4.29 up $0.03 from last year.
Global retail sales of new motorcycles were down 6% in the quarter with growth in North America offset by declines in our international market.
North America Q3 retail sales were up 2% versus last year driven primarily by 5% growth in Grand American Touring, our most profitable segment and the successful launches of Pan American and Sportster S. Pan America maintained its status as the number one selling adventure touring model in the US since its launch earlier this year, capturing a 16% market share in the third quarter in a rapidly growing adventure touring segment and after much anticipation beyond these Sportster S motorcycles began shipping to dealers late in Q3 and we have seen very strong sell-through today.
In our international markets the retail sales declines were primarily driven by the actions taken during Rewire to exit markets and prune unprofitable models.
EMEA, and APAC sales were disproportionately impacted by the decision to exit the unprofitable Street and Legacy Sportster bikes, and in LATAM the declines in the model pruning and market exits were accompanied by pricing actions taken across select models.
Through these actions the LATAM region has improved their profitability, which we expect will set up a solid foundation for future growth.
Worldwide retail inventory of new motorcycles was down 30% versus last year and relatively flat to the previous quarter.
Q3 inventory has been impacted by stronger demand in the US as well as supplier challenges, which impacted our ability to produce to planned levels.
while inventory levels are lower than our original plan We have seen improvement in desirability as measured by stronger pricing dynamics across both new and used motorcycles and strong dealer profitability.
international markets continue to be impacted more profoundly by global transport challenges, which resulted in higher cost and longer ship times to key ports.
Looking at revenue, total motorcycle segment revenue was up 20% in Q3, and up 36% on a year-to-date basis.
Focusing on current quarter activity 9 points of growth came from higher year-over-year volume from motorcycle units, including the new Pan America and Sportster S motorcycle, 8 points of growth for mix driven by a larger percentage of touring bikes in the quarter and reductions across Legacy, Sportster and Street, 2 points of growth from pricing and incentives, and during the quarter we increased the pricing surcharges in the US from an average of 2% taken in Q2 to 3.5% to partially offset raw material inflation and finally, one point of growth from foreign exchange.
Q3 gross margin percent of 26.7 was down 3% points versus prior year.
Our margin benefit from stronger volume, profitable profitable mix and pricing was more than offset by the negative cost headwinds across the supply chain and higher EU tariffs.
Q3 operating margin finished at 8.4% and was up 3.6% points over the prior year.
The positive margin benefit from volume, mix, pricing and reduced restructuring expense was able to offset the negative gross margin drivers already noted.
Year-to-date operating margin is significantly ahead of last year given the COVID impact and it is also 4.6 points ahead of 2019.
Despite absolute unit decline versus 2019 profit per unit has increased behind a stronger mix, pricing, lower incentives and an overall lower cost structure.
These results validate the efforts that we took during the rewire in a set up a more profitable foundation for future growth.
As mentioned previously, the global supply chain remains volatile, not only for our business, but across the global manufacturing sector.
Our team has continued to do a great job navigating through the unprecedented challenges and demonstrating agility and managing production schedules to optimize output.
We have continued to see increasing inflation within raw materials in all modes of freights and we are forecasting this to continue at least through the balance of the year.
To help provide additional insight into the supply chain Slide 9 provides a detail on our cost of sales mix as well as the estimated inflation impact across the major components.
As you can see, logistics cost began to increase early in the year and peaked in Q2 at 2.5 times our prior year cost before settling down a bit in Q3 at two times prior year.
Q3 was better than Q2 as we move past the cost incurred with our 3PL conversion in North America.
Materials and components cost inflation accelerated through the third quarter, where we experienced a 6% to 7% increase versus last year.
This includes the cost of raw materials and higher cost of purchase components.
And finally, manufacturing inflation which includes labor cost has been relatively consistent throughout the year at 3%.
We're forecasting continued inflation pressure across all three buckets in the fourth quarter at similar levels to what we've seen in Q3.
The Financial Services Segment operating income in Q3 was $107 million, up $15 million compared to last year, primarily driven by $23 million of interest expense favorability.
HDFS's retail credit loss ratio remained historically low at 0.8%, a 56 basis point improvement over last year.
Overall retail delinquency rates have been favorably impacted by improved economic conditions and the benefits provided to individuals under the federal stimulus packages earlier this year.
Delinquency rates have continued to run much lower than pre-pandemic historical levels and what we do expect delinquency rates to normalize over time we believe losses will continue to remain lower in the short term.
Looking at HDFS's base business, retail originations in Q3 were up 13% versus last year behind strong new and used motorcycle origination volume.
As a result, ending retail finance receivables in Q3 were $6.7 billion, which is up 2.2% from last year.
In addition, the retail allowance for credit losses at the end of Q3 was 5.1%, which is flat sequentially and down from 5.9% at the end of Q3 last year.
A year ago the US economy was restrained by the pandemic and this is reflected in higher allowance rate.
While today's allowance rate has improved versus the peaks of 2020, it is still above pre-pandemic levels, given the continued uncertainties surrounding the pace of economic recovery.
Wrapping up with Harley-Davidson Inc financial results, we delivered year-to-ate, operating cash flow of $926 million, down $210 million from the year-over-year period.
The key driver of unfavorable cash flow was an increase in wholesale finance receivable originations.
Total cash and cash equivalents ended the quarter at $2.1 billion, which is $1.5 billion lower than Q3 last year as we worked down higher cash balances held as a result of the pandemic.
As we look to the balance of the year, we are maintaining our guidance on the Motorcycles segment revenue growth of 30% to 35%.
We are also maintaining our GAAP Motorcycles segment operating income margin guidance of 6% to 8%, which is inclusive of the full impact of the incremental EU tariff and the supply chain inflation laid out earlier.
Our estimated EU tariff impact for 2021 has been adjusted to approximately $54 million in line with our unit forecast.
We are lowering our capital expenditures guidance to $135 million to $150 million from the previously communicated range of $190 million to $220 million.
The spending change is driven by tighter cash management across projects as well as changes in the cash flow phasing across key initiatives.
And lastly, we are increasing the Financial Services segment operating income growth guidance to 95% to 105% which is an increase from the previously communicated range of 75% to 85%.
The improved outlook takes into account the year-to-date loss favorability, the reserve releases early in the year and our outlook for Q4.
Cash allocation priorities remain to first fund growth through the Hardwire initiatives then to pay dividends, and the company may also choose to execute discretionary share repurchases in 2021 and 2022.
As we look ahead to the fourth quarter, On slide 14 there are a few known and expected factors to consider regarding our revenue and profitability.
First, as we've discussed, we will be shifting our motorcycle production in the middle of the quarter to begin producing the 2022 model year product.
While we will continue to run the plant this dynamic will limit the amount of wholesale shipments and revenue during the fourth quarter as bikes builds will go into company-owned inventory ahead of the model year launch.
We expect the financial impact was very similar to the impact we saw last year in Q4.
Other Q4 factors include higher expected expense and capital spending to support upcoming launches and marketing campaigns, and as we previously mentioned, we also expect to see supply chain inflation consistent with what we experienced in Q3.
This will be slightly offset by lower Q4 restructuring spending versus last year.
Restructuring charges in Q4 2021 will not be material and we no longer plan to spend the $20 million full-year estimate mentioned in previous quarters.
As we pursue our Hardwire goals we continue to enhance our organization and processes, focusing on alignment and efficiency.
Underpinned by drive to win as a team, which is the basis for our culture, we will look to ensure that Harley-Davidson as a company and as a brand is getting stronger than ever and is positioned for long-term success.
By designing, engineering and bulding the most desirable motorcycles in the world reflected in quality innovation and craftsmanship we continue to further our legacy as the only American motorcycle brand with 118 years of uninterrupted heritage.
As you know desirability provides the framework for our Hardwire strategic plan, our 5-year roadmap to both enhance and grow our position as the most desirable motorcycle brand in the world.
Desirability not only impacts those new to our sport and our brand, but also a dedicated community of riders and non-riders alike.
As we recognize the post pandemic conversations around the sport of motorcycling have changed, we also see a rider base that has a desire to escape, explore the outdoors and rediscover passion for riding, all of which fits squarely in the Harley-Davidson mission of delivering freedom for the soul in the pursuit of adventure.
Desirability is also a motivating factor for getting people into the sport.
We know there are plenty of people who are interested in riding, but more importantly interested in riding Harley-Davidson.
The Harley-Davidson Riding Academy is an important way in which would build ridership and deepen our connection with our customers.
Already we are focused on North America we have plans to take the HD Riding Academy to high potential markets across the world including China, where we see a high potential to leverage our brand and introduce new riders to the sport.
We are also mindful of the need for riders to hone their riding skills at this part of their journey in pursuit of adventure.
The latest offering from the Harley-Davidson Riding Academy [Indecipherable] the adventure touring rider course specifically designed the offering to complement our Pan American motorcycle.
This course which we are planning to expand strategically over time is a perfect experience for new and existing adventure touring riders offering the skills and knowledge to get more out of the offroad experience by prioritizing rider safety.
With improved market conditions we've seen growing consumer appetite for our brand and our iconic motorcycles, including the new products we launched this year.
Since launching Hardwire we've experienced strong demand for our products and our brand and the demand that we have seeing is in our strongest and most profitable segments.
Despite the continued impact of the pandemic and related supply chain challenges we can see the potential of our streamlined market strategy as we maintain a long-term focus on profitable growth in line with our Hardwire ambitions.
As we continue to execute against our strategy of 70-20-10 SKUs two of our stronghold segments of Touring, Large Cruiser and Trike we remain guided by our commitment to two critical conditions, profitable segments, improving volume, margin and potential and segments aligned to our brand capabilities with a clear path to leadership.
[Technical Issues] work hard to continue to solidify and grow our position as leaders, acknowledging that these segments are the most attractive of the global market in terms of our profit focus, another component of the Hardwire selective expansion.
The focus on selective expansion also allows us to target segments that deliver balanced combination of volume, margin and growth potential and that are aligned with our brand capabilities and identity.
Again, we run these segments supported by the right allocation of time and energy balanced with the right investments in product, brand and go-to market capabilities.
In February, this year we launched our first adventure touring motorcycle to Pan America.
Taking inspiration from our heritage we wanted to create a motorcycle that redefine the category.
The Pan America squarely built in our mission to the deliver to adventure for our riders on and off the road.
The performance of the Pan America has recently been demonstrated by a group of riders who reached the summit of the Key La Pass in the Himalayas, the highest unpaved motorable road in the world at some 18,600ft, a feat at first for Harley-Davidson.
This quarter saw the Pan America [Indecipherable] to become the number one selling adventure model in the United States, an accolade that we are very proud of.
We believe we will continue to grow the category in North America and the potential of the Pan America across the world is significant.
For example, the North America the category accounts for 5% of the overall market and has grown 51% since 2017.
When you look to Europe Adventure Touring currently represents 33% of the motorcycle market as a whole, growing 33% since 2018 and we believe it's continuing to grow.
We see great opportunity to build on the success of Pan America in the first 6 months in markets and look to win in Europe and further as we actively target new Harley-Davidson riders in the Adventure Touring space.
In July, we also launched the latest information of the iconic Sportster, the Sportster S at our Global Reveal event.
Immediate response to the Sportster S has been exceptional with positive reviews including motorcycle.com praising the Revolution Max as their new favorite motorcycle engine, [Indecipherable] calling out the bike as a pillar [Indecipherable].
At launch we saw one of the largest engagement rates on our Harley-Davidson social channels.
We've been pleased to see this excitement translating into orders for the Sportster S allocation being sold out through our integrated pre-order system.
With our pre-order system, our dealers are able to effectively create an integrated reservation system.
This direct line of communication has allowed us to work through manufacturing allocations and improves the overall dealer visibility on orders.
In Q4 this year Harley-Davidson will officially launch the reservation process in the US and Canada to capture early demand on select 2022 models.
This process will provide a consistent experience both in Harley-Davidson.com and at the dealership network and will allow dealers to engage with customers on contributing and customizing the new motorcycle, keep them notified of when to expect delivery, and inform future enhancements that strengthen and support the Harley-Davidson community online and on the road.
With our ambition to put our customers at the forefront of everything we do aligned to our Hardwire goals.
By facilitating early engagement between dealers and customers, we are investing in strengthening this important relationship to move and integrated tools that we creating.
For dealers we believe this new reservation process will improve the sell-through rate and for Harley-Davidson, it will help ensure production better match customer demand.
We are excited to see the Sportster S make its way into the hands of our customers around the world and look forward to this new generation of Sportster hitting the streets in full force.
As evidenced by strong performance this quarter, HDFS's strategic asset with [Technical Issues] growth and profitability.
With HDFS Harley-Davidson is uniquely positioned to be able to offer our customers value the financing options for their motorcycles.
With over 65% of Harley-Davidson motorcycles financed by HDFS.
Going forward, it is our goal to make HDFS the preferred choice for all Harley-Davidson riders, but in the new capabilities that rival the innovators of financial services.
HDFS is integral to the Harley-Davidson success and with the plant expansion in Europe in the near-to-medium term, I'm excited for the future.
With HD1 marketplace I think for HDFS it was our intention to change the face of the online market for pre-owned Harley-Davidson motorcycles blaming the best of digital and in dealer experiences aligned to our Hardwire priorities.
Since launching in July H-D1 marketplace has become the go to online Harley-Davidson marketplace for dealer based listings, with the largest selection of dealer pre-owned Harley-Davidson motorcycles in the United States, including the largest selection of HD-certified motorcycles ensuring the ultimate choice in preowned.
We've seen the power of the HD certified program driving desirability and enhancing the overall consumer experience while providing customers with an extra level of confidence in their purchases.
As of this month, H-D1 marketplace features over 25,000 owned Harley-Davidson motorcycle listing,1200 Harley-Davidson certified motorcycles, over 500,000 units released since launch and over 550 participating Harley-Davidson dealers.
Backed by the strength of our dealer network we want to continue to ensure that our riders have access to the largest selection of the best Harley-Davidson motorcycles.
We believe the H-D1 will drive connectivity and engagement with our Harley-Davidson customers and dealers, acknowledging the important part that riders of pre-owned Harley-Davidsons play in our community.
While we have achieved this initial goal in the United States, it is our ambition that marketplace will continue to evolve and that it will become the the ultimate column for pre-owned Harley-Davidson motorcycles.
For over a decade, Harley-Davidsons has produced and published Annual Sustainability Report, ahead of many in our sector.
Over that time we've made solid progress and that progress has reinforced the importance of inclusive stakeholder management as a key [Technical Issues] as we recognize that our future will be defined not only by our product and experiences, but how we deliver value for all our stakeholders.
In publishing our 2020 inclusive stakeholder management report, we made a commitment to create a high performing, engaged and diverse workforce, create an inclusive and more sustainable dealer network and supply base, create a path to net zero environmental impact by 2050 at the latest, deliver positive impact in our communities, and aling the rewards of inclusive shareholders.
By making inclusive stakeholder management a key part of our strategy, we are prioritizing long-term profitable growth and value for our stakeholders, our communities, our people and our planet.
I will invite you all to read our report in full.
The initial proof points of our 5-year strategy.
I believe there is tremendous potential for our brand and business globally and we will not rest until we have the best in class in every marketing segment in which we compete.
In closing, before we go to questions, I would also like to provide a brief update on EU tariff situation so far to the fact our company.
At the negotiations between EF and EU continue, we are quite optimistic that a resolution will be found.
We've been especially encouraged by the positive media reporting of the negotiations that we have seen over the past few weeks.
We've actively engaged with both the US administration and EU as we expect throughout, we believe that Harley-Davidson bear has place in this political dispute that is not of our making.

user
sees fy financial services segment operating income growth of 95 to 105 percent,.
full-year 2021 motorcycles segment guidance remains unchanged relative to prior guidance.
compname says fy 2021 capital expenditures of $135 million to $150 million, decrease from previously communicated range of $190 million to $225 million.
sees fy 2021 motorcycles segment revenue growth to be 30 to 35 percent.
qtrly motorcycle shipments, in thousands, of 47.9, up 12%.
sees fy 2021 financial services segment operating income growth of 95% to 105%, increase from prior range of 75% to 85%.
sees fy capital expenditures of $135 million to $150 million.
harley-davidson - qtrly motorcycles segment operating margin was driven by unit mix, pricing & reduced restructuring expense.

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