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    Harley-Davidson Inc (HOG)

    Q1 2024 Earnings Summary

    Reported on Jan 16, 2025 (Before Market Open)
    Pre-Earnings Price$39.44Last close (Apr 24, 2024)
    Post-Earnings Price$38.35Open (Apr 25, 2024)
    Price Change
    $-1.09(-2.76%)

    What went well

    • Harley-Davidson expects North America to outperform for the entire year due to the strong reception of its new touring motorcycles, indicating robust sales potential in its largest market.
    • The company is confident in achieving its margin targets, expecting improvements in gross profit margin in upcoming quarters, supporting a strong profitability outlook.
    • Harley-Davidson has ratified new 5-year union contracts in line with expectations, ensuring labor cost stability and demonstrating strong alignment with its workforce.

    What went wrong

    • Management expressed skepticism about the Asia Pacific market, particularly China, noting that while some improvement is expected, it's unlikely to turn significantly positive, potentially dampening international sales growth.
    • Gross margin decreased in Q1 2024 compared to prior year, with gross margin at 31.2% versus 35.8% in Q1 2023, a decline of 450 basis points, driven by lower operating leverage and higher fixed costs per unit, indicating potential profitability pressures.
    • The second quarter in North America faces tougher year-over-year comparisons, raising uncertainty about achieving growth in the near term despite management's confidence in the market.

    Q&A Summary

    1. Dealer Inventory and Health
      Q: How is the health of the dealer network and current inventory levels?
      A: Management acknowledges concerns about dealer health due to higher interest rates affecting floor plan financing. In North America, about 35% of dealer inventory is comprised of 2023 or older models. They expect 2023 models to be largely sold through by the end of Q2. They are supporting dealers with programs to help move inventory and balancing shipments with retail demand.

    2. Retail Trends and Model Year Sales
      Q: How did retail growth in North America split between 2023 and 2024 models?
      A: Early in Q1, 75%–80% of sales were 2023 models, shifting to a majority of 2024 models by March. Customer interest, especially in touring bikes, increased with the arrival of new models.

    3. Gross Margins and Cost Pressures
      Q: How did HDMC gross margins perform versus expectations, and what is the outlook?
      A: Q1 gross margin was 31.2%, down 450 basis points from prior year due to lower operating leverage. This was expected, and they are maintaining margin guidance, anticipating improvements through the year.

    4. Retail Outlook and Quarterly Cadence
      Q: How do you see retail trends quarterly, and do you need macro help to meet guidance?
      A: International markets are expected to improve as new models arrive. North America may outperform, with tougher comps in Q2 and easier in H2. They are positive about the year and maintaining guidance.

    5. Pricing and MSRP Realization
      Q: Are 2024 models realizing the typical +/-2% MSRP increase?
      A: Yes, the 2024 models are realizing MSRP increases of approximately 2%, in line with expectations.

    6. Dealer Support and Inventory Sell-Through
      Q: Is the dealer support reserve sufficient to clear 2023 models?
      A: They reserved $40 million in Q4 for dealer support and took an additional $18 million charge in Q1. They believe the majority of support costs have been reserved, and exposure decreases as 2023 inventory sells through.

    7. U.S. Versus International Performance
      Q: Will the U.S. market outperform internationally due to touring models?
      A: Yes, it's likely that North America will outperform international markets this year, as touring models have a stronger impact in the U.S..

    8. HDFS Credit Losses and Portfolio Health
      Q: How is HDFS portfolio health, and what are expectations for credit losses?
      A: The portfolio is performing as expected, with credit losses following normal seasonality. They expect losses to decrease in Q2 and Q3 and feel well reserved.

    9. Weather Impact and Flex Financing Adoption
      Q: How has weather impacted retail, and what's the update on Flex financing adoption?
      A: Adverse weather in some regions hurt sales; overall, weather hasn't been supportive. Flex financing adoption is progressing slowly; full dealer adoption may take 12–24 months.

    10. Tax Rate and Interest Income Outlook
      Q: How should we think about tax rate and interest income going forward?
      A: Q1 tax rate was favorable but may not remain so for the full year. Higher interest rates may provide additional favorable impact below the line.

    11. LiveWire Operating Loss Expectations
      Q: What's behind the improved operating loss expectations for LiveWire?
      A: Relocating LiveWire operations to Wisconsin will deliver synergies, reducing headcount by about 10% and employee costs by 15%, improving operating loss guidance by $10 million.

    12. Union Contracts and Labor Costs
      Q: What impact will the new union contract have on labor costs?
      A: The new 5-year union contract is in line with expectations and plans. There are no unexpected increases in labor costs, and they are pleased with the outcome.

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