Harley-Davidson Inc (HOG) 2017 Q1 法說會逐字稿

Good morning. My name is Lisa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Q1 2017 Earnings Conference Call. (Operator Instructions). Amy Giuffre, Director of Investor Relations, you may begin your conference.

Thank you, Lisa and good morning, everyone. You can access the slides supporting this call on harley-davidson.com, click Company at the top of the homepage, then Investor Relations and Events and Presentations.

Our comments will include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC. Harley-Davidson disclaims any obligation to update information in this call.

This morning, our President and CEO, Matt Levatich; and CFO, John Olin, will be hosting the call. Matt, let's get started.

Thank you, Amy, and good morning everyone. And thanks for joining us on the call today. Before John digs into the details for the quarter, I'd like to provide my perspective on our performance along with further insight on our long-term strategy to build the next generation of Harley-Davidson riders globally.

Overall, our first quarter results were in line with our expectations with the exception of our Asia-Pacific region. We're very pleased with the continued strong global response to our Milwaukee-Eight powered touring motorcycles, our recently introduced Road King Special and Street Rod Motorcycles and our actions to improve our retail inventory position ahead of the U.S. peak riding season.

As we anticipated, our U.S. retail sales were down behind a soft market, yet our share held strong despite our decision to limit availability of Model Year 2017 motorcycles. This decision helped dealers focus on selling down model year 2016 bikes. While we believe this holdback of hot product had a negative impact on our retail sales in the U.S., we could not be more pleased with our U.S. retail inventory position and our market share strength.

International retail sales were down primarily behind softer-than-expected sales within Asia Pacific. We expect some continued challenges in Asia Pacific, but we anticipate the region will return to growth in the second half of the year. Overall, we're confident in our full year plan, including the work we have underway to offset unexpected softness in a few key markets.

Now as most of you know, earlier this year, we shared our 10-year strategy with the headline goal of building the next generation of Harley-Davidson riders around the world. Now more than ever, our business focus goes beyond our commitment to building unmatched, unmistakable motorcycles, accessories and apparel. We're committed to building riders. We have a clear path with long-term objectives and focused strategies. By 2027, our objectives are to build 2 million new Harley-Davidson riders in the U.S., grow our International business to 50% of our annual volume, launch 100 new high-impact Harley-Davidson motorcycles, deliver superior return on invested capital for Harley-Davidson Motor Company and grow our business without growing our environmental impact.

In the U.S., we must attract more new riders to this sport. As the clear market leader, we have an obligation and opportunity to invest to secure the long-term vitality of our sport. We believe building 2 million new Harley-Davidson riders in the U.S. over the next 10 years is an ambitious yet achievable goal, one that we find incredibly inspiring and motivating. We don't think it will be easy and we don't expect the results will be linear. I'm sure sometimes even quarter-to-quarter market volatility may buffet confidence in our results. But true north is true north. We'll leverage our assets, build on key capabilities, nail the fundamentals and lean into what we already know about engaging new kinds of people in all we love about our sport.

One key pathway is the Harley-Davidson Riding Academy. We're increasing our investment and already through March of this year our dealers have trained more than 8,800 students, a 10% increase from the first quarter of last year. The increase was fueled by growth in the number of dealers offering Harley-Davidson Riding Academy and more classes being offered through existing dealers.

We'll continue to hone our ability to inspire all kinds of riders, whether new, seasoned or returning. Harley-Davidson has never been about 1 demographic or set of riders. We are about every freedom-seeking soul who wants to live for real, and we've proven it with our success since we began our outreach efforts.

We know that between 2010 and 2016, sales of new Harley-Davidson Motorcycles to outreach customers in the U.S. grew at a compound annual growth rate of 5%. And our mix of retail sales to outreach customers grew from 34% to 40% over the same period. We lead in the sale of motorcycles in every outreach segment, and we expect to build on our capabilities to further our lead. We know from IHS Markit in 2016, for the ninth straight year, Harley-Davidson was the #1 seller of new on-road motorcycles in the U.S. to outreach as well as to our very loyal core customers. And as part of our approach to building the next generation of Harley-Davidson riders, whether we're talking of racing enthusiasts, members of the military, or youth, women or experienced riders in the U.S. or in 1 of the 96 other countries where we have great dealers, we intend to continue to increase the relevance of the brand and sport through alignment and precision in all of our efforts, beginning with our deep connection to riders.

We know what they seek in products, experiences and the expertise of our dealers. We know what technical gear is necessary to make their rides safer, drier, warmer and cooler. We know what motorcycle accessories they want to dial up a bike's look, sound and feel. We aim to inspire all kinds of riders the world over with focus and discipline. The backbone of it all is great motorcycles and as I mentioned earlier, we launched 2 new high-impact motorcycles this quarter, 2 down, 98 to go. The Road King Special delivers unparalleled style and attitude, powered by the great Milwaukee-Eight engine. And for more of a city dweller, we unveiled the new Street Rod, tuned for dynamic urban performance. The Street Rod is designed with a high output Revolution X 750 engine and refined chassis, suspension and brakes to deliver more power and nimble handling, ideal for taking on less-forgiving city streets.

The Street Rod is fast, sleek and tough. The raw authentic dark custom look is already gaining attention around the world and at a great price point too.

As part of our goal to increase reach and impact internationally, in the quarter we added 7 locations in China, India, Norway, Slovenia, Spain and Thailand. As you heard us say, we plan to add 150 to 200 new dealerships internationally by 2020 alone and we're already well on our way. As we forge ahead with our international reach, it's great to pause and take note of a couple of incredible milestones. 2017 marks the 100th year of Harley-Davidson sales in both Canada and Australia. They now join the Centennial Club that also includes the U.S., England, Japan and Mexico.

All I've shared here today is just a sampling of us working our long-term plan. These are investments to deliver the near-term results that drive long-term performance and value for all of our stakeholders. We're confident our investments will grow ridership, reach, impact and share and profit. We've set high expectations for ourselves over the next 10 years. Building the next generation of Harley-Davidson riders is a long-term play with long-term value, and results will not happen overnight. We have plenty more work to do, executing and delivering our plan. We're confident our focus strategy, powerful brand and commitment to excellence position us well for the challenges of today's dynamic marketplace. We're here to build the next generation of Harley-Davidson riders, ignite their dreams of personal freedom, however they define it, and we're on it.

So with that, I'll have John go through the detail on the first quarter. Thank you.

Thanks, Matt. Today, I'll provide additional insight around our first quarter financial results found in our press release and supporting slides. As Matt stated, our first quarter was adversely impacted by our decision to significantly reduce our Q1 shipments compared to last year. We did this to help enable U.S. dealers to sell through the model year 2016 motorcycles that were in retail inventory at the end of 2016. This action was significant -- this action significantly limited our model year 2017 motorcycle availability in the quarter, in particular, our Milwaukee-Eight powered bikes. As planned, quarter-end retail inventory was significantly lower year-over-year and the mix of model year 2017 to model year 2016 motorcycles improved. We believe the financial impact of this decision will move profit out of Q1 and into the back half of the year, basically retiming shipments and gross margin percent. We're pleased with the execution and results of this action and believe the current level and model year mix of U.S. dealer inventory has well-positioned Harley-Davidson for the spring selling season.

The summary of first quarter results starts on Slide 12.

During the quarter, revenue was $1.50 billion, net income was $184.4 million, and diluted earnings per share were $1.05. Operating income in the Motorcycles segment was down 28.2% from last year. Revenue was down 15.7% from last year's first quarter behind a 14.7% decrease in motorcycle shipments. Gross margin as a percent of revenue decreased versus the prior year quarter on unfavorable mix and manufacturing expense. Timing of SG&A spend resulted in significantly lower SG&A during the year's first quarter. And operating margin as a percent of revenue decreased by 3.1 percentage points.

At HDFS, operating income in the first quarter was down 6.6% year-over-year. During the quarter, we took important actions to set the business up for future growth, underscoring our commitment to perform in a much more competitive and dynamic marketplace. We remain focused on delivering strong margins and strong returns over the long term.

Worldwide retail sales of new Harley-Davidson motorcycles in Q1 are summarized on Slide 13. Q1 worldwide retail sales of new Harley-Davidson motorcycles were down 4.2% versus prior year. As expected, U.S. retail sales were down compared to last year's first quarter. Our U.S. business is on target to deliver our plan. International results, however, came in below our expectations, driven by weak sales in the Asia-Pacific region. The global competitive environment remains intense. Our teams around the world are adapting to changing market conditions and are poised to grow our business. We continue to work hard to protect and reinforce the strength of the Harley-Davidson brand. We expect worldwide retail sales growth for the remainder of the year will be driven by: improved availability of Milwaukee-Eight powered bikes and the introduction of our model year 2018 motorcycles; strong execution of our U.S. ridership growth initiatives; expansion of our international dealer network; and easing of year-over-year sales comps in both the U.S. and international markets.

We remain confident in our full year motorcycle shipment guidance.

Let's take a closer look at the U.S. on Slide 14.

In the U.S., retail sales were down versus prior year as we anticipated. U.S. retail sales were adversely impacted by weak industry sales and limited availability of model year 2017 motorcycles, partially offset by strong sales of our Milwaukee-Eight touring bikes and our focus on growing ridership. We believe the U.S. industry continues to be adversely affected by soft used bike prices and weakness in the oil-dependent areas, and we continue to expect the industry will remain soft for the full year. However, comps are easier starting in Q2 as we lap the initial industry declines that started in the second quarter of 2016. Year-over-year market share growth continued in the quarter despite facing significant industry headwinds.

During the quarter, we expected lower year-over-year U.S. retail sales and stable market share. The quarter largely unfolded as we anticipated, in spite of the unexpected liquidation of Victory Motorcycles. The Victory wind-down benefited industry performance in Q1 and negatively impacted our market share. We expect this impact to continue through the second quarter and largely reverse in the back half of this year when the remaining Victory inventory is liquidated.

Again, our decision to limit availability of model year 2017 motorcycles, in particular, Milwaukee-Eight bikes, helped focus U.S. dealers on selling model year 2016 bikes and achieve an improved inventory mix prior to the selling season. It also resulted in quarter-end retail inventory being down approximately 8,200 motorcycles versus prior year. However, we also believe the constrained supply of model year 2017 bikes negatively impacted our retail sales and market share for the quarter. As we look forward to the end of the second quarter, we expect year-over-year U.S. dealer retail inventory to continue to remain lower than prior year to support the appropriate -- an appropriate model year transition. We continue to expect 2017 year-end U.S. retail inventory to be essentially flat to 2016 as we remain committed to aggressively managing supply in line with demand.

We're pleased with -- we're pleased that the U.S. is on plan after the first quarter. We're looking forward to the spring selling season and are excited about creating the next generation of Harley-Davidson riders, improving the availability of Milwaukee-Eight powered bikes and introducing our model year 2018 motorcycles.

On Slide 15, you'll see retail sales in our international markets were down 1.8%. First quarter retail sales were below our expectations driven by weak sales in Asia Pacific, partially offset by strong growth in Latin America. While EMEA and Canada were both down during the quarter, we believe that the underlying business fundamentals in these markets remain strong. More specifically, EMEA retail sales were down 0.4% during the quarter as we lap very strong prior year growth of 8.8%. We believe underlying demand remains healthy, especially for the S Model motorcycles and the new Milwaukee-Eight powered bikes. Market share in Europe through February was 10.0%, up 0.3 percentage points from prior year. The industry was down 8.5% during the same period.

In Asia-Pacific, Q1 retail sales were down 9.3% from last year. Sales were adversely impacted by softness in our emerging markets and in Japan. India sales continue to be down in the high double digits due in large part to the continued impact of last quarter's demonetization. Japan was down behind soft industry results. However, we increased our #1 market share position by nearly 2 percentage points in the quarter.

We expect our Asia-Pacific region to return to growth in the back half of 2017, largely behind expanded distribution, the introduction of the new Street Rod and increased marketing spending for the remainder of the year. Retail sales in Latin America were up 24.2% in Q1 compared to a year-ago decline of 26.5%. During the quarter, we saw significant strength in Brazil where we lapped the impact of prior year price increases. Finally, retail sales in Canada were down 4.4% as we lapped very strong prior year growth of 16.3%. In support of our strategy to increase brand access, we plan to continue to expand our international distribution. As Matt noted, in the first quarter, we opened 7 new international dealerships.

On Slide 16, you'll see wholesale motorcycle shipments were down 14.7% in the quarter and within our shipment guidance range. As we have discussed, we significantly reduced Q1 shipments versus prior year, predominantly touring motorcycles, to support the sell-through of model year 2016 motorcycles in the U.S. retail inventory.

On Slide 17, you'll see revenue for the motorcycles and related products segment was down in the first quarter behind lower year-over-year motorcycle shipments. The average motorcycle revenue per unit was down $342 for the quarter as we shipped fewer touring bikes, partially offset by the impact of higher pricing. Parts and Accessories and General Merchandise revenues were down for the quarter due in large part to lower motorcycle shipments and lower retail motorcycle sales.

Our gross margin review is on Slide 18. Gross margin as a percent of revenue was down during the quarter driven by unfavorable product mix and higher manufacturing expense, partially offset by increased pricing and favorable foreign currency exchange. Mix was unfavorable during the quarter as we shipped a significantly lower mix of touring motorcycles compared to last year. Gross margin was also unfavorably impacted by $10.3 million of higher manufacturing expense. Q1's manufacturing expense was up due to the timing of fixed cost absorption and higher depreciation, which was partially offset by strong productivity. First quarter startup costs were flat to prior year.

Currency exchange was favorable for the quarter despite U.S. dollar strengthening slightly against our key foreign currencies on a year-over-year basis. The favorability was driven by positive balance sheet remeasurement at the end of the quarter. To dimensionalize foreign currency exchange risk, if currencies held at current levels for the remainder of 2017, we estimate that our expected full year motorcycle segment revenue would be adversely impacted by approximately 3/4 of a percent and our gross margin would be approximately flat to down $10 million. We were very pleased with our first quarter gross margin performance, which exceeded our expectations by a full percentage point. We expect to recover a portion of Q1's mix unfavorability in Q2 and the majority of the first quarter's loss absorption in Q4.

On Slide 19, operating margin as a percent of revenue for Q1 was 18.0%, down compared to last year. Operating margin was unfavorably impacted by lower gross margin, partially offset by lower SG&A. First quarter SG&A was $19.1 million lower than prior year, primarily due to timing of marketing and engineering spending. We continue to expect full year SG&A spending to be approximately in line with 2016 SG&A. Profitability remains a key focus, and we believe we can further leverage our established capabilities to continue to drive profit and strong ROIC in the future.

Moving on to HDFS on Slide 20. During the quarter, HDFS' operating profit decreased $3.7 million or 6.6% compared to last year. The primary factors impacting Q1 results were: First, net interest income was up over prior year by $0.8 million. Second, the provision for retail motorcycle loan losses increased over prior year by $6.6 million driven by higher retail credit losses and an associated increase in the allowance.

HDFS' operational results are on Slide 21. For the quarter, originations were up 3.8% compared to last year. HDFS' strong market share gains of 6.1 percentage points, 62.9%, reflect the finance offers that supported the sell-through of certain 2016 models through the end of February. During the quarter, we raised $500 million of funding through the issuance of 2 medium-term notes.

At the end of the quarter, we had $360.3 million of cash and cash equivalents at HDFS. In addition, HDFS had $1.09 billion of available liquidity through bank credit and conduit facilities.

On Slide 22, you'll see 30-day delinquency rate for the motorcycle loan receivables on the balance sheet at the end of February was 3.17%, or 29 basis points higher than Q1 of 2016. 8 basis points of the increase represents a change in the mix of the portfolio after Q2 2016 full securitization of prime receivables. Consistent with the vehicle financing industry trends, the increase on a managed basis was due to higher delinquencies across the portfolio. The annual retail credit loss rate for receivables on balance sheet was 2.31%, or 33 basis points higher than Q1 2016. On a managed basis, the credit loss rate was 2.25%. The increase was due to higher defaults across the portfolio.

While both 30-day delinquencies and credit losses were up in the quarter, the rate of increase of both has tempered from last year's run rates. HDFS continues to maintain a robust liquidity position and contributed strong profitability to the company, as demonstrated by the $106 million dividend HDFS paid to Harley-Davidson, Inc. in January.

The remaining Harley-Davidson, Inc. financial results are summarized on Slide 23. A few things to note. Operating cash flow was up from last year driven by low financing, partially offset by low net income. And the full year tax rate was 34.5%, the same rate as in Q1 of 2016. The company has and intends to continue to maintain a minimum of 12 months of projected liquidity needs in cash and/or committed credit facilities.

Turning to Slide 24. Returning value to our shareholders is a top priority. We're committed to driving motor company ROIC, which is the top quartile of the S&P 500, through the disciplined investments that we make and invest in class ROE at HDFS. We expect to return all excess cash to our shareholders in the form of increasing dividends and continued share repurchases. During the first quarter, we repurchased 1.2 million shares for $70.9 million. We also increased our dividend by 4.3% to $0.365 per share in the quarter. We will continue to look for opportunities to deliver shareholder value by investing to maximize the long-term value of the company and the brand and by returning excess cash to our shareholders.

On Slide 25, you'll see our full year expectations for 2017 remain unchanged. In the second quarter, we expect shipments to be approximately 80,000 to 85,000 motorcycles, which is down approximately 4% to 9% compared to last year, driven by our commitment to aggressively manage supply in line with demand. We expect to end Q2 with retail inventory that is considerably lower than prior year to prepare the dealer network for the new model year transition.

HDFS' operating income in Q2 will be down as we lap last year's gain on the full securitization of $9.3 million and as we expect higher provision for retail credit losses.

Overall, we remain confident in our ability to deliver our full year shipment and earnings guidance. We're extremely pleased with the incredible response to the new model year 2017 motorcycles, which demonstrates our product innovation leadership and reinforces our strategy to invest in high-impacting products. We're on the right path, are disciplined in the execution of our strategies and continue to make the necessary decisions to support a prudent retail inventory position and to protect our strong brand and profitability into the future.

Through disciplined and focused investments, we plan to build the next generation of riders globally and deliver strong returns to our investors and sustain the company for the long term.

With that, let's take your questions.

(Operator Instructions) And our first question comes from the line of Sharon Zackfia from William Blair.

I have a couple of questions. First on the finance business. I guess, one, could you give any color on the market share increase you saw on the quarter because that seems pretty high. And then secondarily, I appreciate your lapping the securitization, but ex the securitization, do you expect there to be continued pressure in the back half of the year on HDFS income?

Thanks, Sharon. First question is with regards to HDFS' market share. They ended market share of 63%, which was up about 6 percentage points versus prior year. A lot of this was driven by the financing that the company did in January and February. In January and February, we offered incentives on model year '16 motorcycles only, Touring, trike and our CVO models, which were the most highest inventory position at that time, to help our dealers sell through those motorcycles. In addition, we constrained limited availability of 2017s, but the financing also helped pull that through. And with that, we gained a fair amount of market share during the quarter. We believe that will not be with us. It was just a function of the strong financing that we offered. The second question, Sharon, you asked is, in the second quarter, certainly, we will lap the $9.3 million full securitization that we don't expect to repeat in the second quarter. The question is, what do we expect the back half of HDFS to be. We expect the back half of HDFS to be stronger, given the fact that we will lap a fair amount of reserves that were set up in the back half of the year. Overall, HDFS on a full year basis, we expect to be down largely driven by lapping that $9.3 million full securitization. We do expect, however, on a full year basis that credit losses will be up and interest expense will be up. And for that, we look to minimize that with price increases that we took in early January on the portfolio.

Okay. And then, secondarily, on the retail side, are you seeing any stabilization in the oil regions? And any commentary on kind of what you're seeing with used bike prices would be helpful.

Yes. So the answer is yes to both. But cautiously -- cautious, yes, on both. So we've talked about the industry as we move into 2017 being soft, driven by those 2 that you had mentioned, Sharon: Used bike prices as well as oil-dependent regions. In the -- for Harley-Davidson, in oil-dependent regions in the first quarter, we're down about 5%, I think it was 5.2%. A little bit accelerated from what we saw in the fourth quarter, but significantly down from what we've seen over the past, I don't know, 6 quarters. We had been running in 2016 at 10% to 15% down in those -- retail sales down in those markets. So the first quarter is down 5.2. As we continue through the year, we would expect this to get -- or to narrow throughout the year. With regards to used bike pricing, the industry was down in the first quarter, down about -- the best of the data that we have, down about 1 to 1.5 percentage points. Harley-Davidson's used bike price is down a little bit more than that, which we would expect given the innovation and the value that we added, in particular, with the Milwaukee-Eight engine. It also, for the industry, marks the ninth straight quarter that used bike prices were down. Now having said that, we did see some positive signs in the quarter, in particular, at auction. Overall, auctions while they started out -- prices started out the beginning of the quarter down versus prior year. They actually finished the quarter favorable to prior year. So as a data point of 1, we'll keep a close eye on it, but we're certainly pleased to see used bikes pricing at the auction firm up.

Our next question comes from the line of James Hardiman from Wedbush.

Maybe if we could dig into the margin situation a bit. Sounds like margin -- gross margin, in particular, but maybe in SG&A significantly better in the first quarter, sounds like some of that was currency, but that the guidance is unchanged for the year. So I guess, first, maybe help us quantify the currency benefit that you saw in the first quarter and then just explain sort of -- maybe the guidance isn't specific enough to change going forward, but it seems like the implication is that margin guidance for the remainder of the year might be a little bit worse. So help us sift through those -- those various data points.

Great, James. I'd be happy to do that. And also happy to point out we still have 3 more quarters to go. But we're very pleased with gross margin in the first quarter. Coming out in January, we thought that gross margin would be down by 2.5 percentage points. And again, the reason for that is we're taking a fair amount of shipments and production out of the first quarter and putting them in the back half of the year, ended up being 12,200 units lower in the first quarter that will move -- with that will move a fair amount of loss absorption. So we don't expect overall gross margin to change because of the volume. We just expect the profitability to change by quarter. The other piece of that is we expect the first quarter to be down quite significantly because of mix as we constrain overall inventories of model year 2017s to generate that focus by the dealer network. We also shifted the mix because of the bigger problem in excess model year 2016s was Touring. So we saw that to be unfavorable. That will also come back more largely in the second quarter. Now having said that, we did end up favorable on the quarter by a full percentage point to our expectation. That was driven by 2 things, James: number one is the one that you'd mentioned, currency; and the other one was manufacturing expense. So starting with currency, we were expecting currency to be flat on a year-over-year basis to down a little bit or unfavorable a little bit. And what we saw was, even though the dollar strengthened slightly against our basket of foreign currencies, which was a negative to revenue, it was more than offset by the remeasurement of assets. And what we saw within the quarter was about a 4% strengthening of the U.S. dollar from the beginning of the quarter to the end and that's how we marked the -- remeasured the assets from the beginning of the quarter to the end of the quarter. So we're feeling a little bit better about currency. Again, it's very volatile. We have a fair amount of hedges on for the remainder of the year. We still expect currency to be flat to down, but little bit more positive, and it's certainly helped the quarter out. More importantly, and more significantly, was manufacturing expense. It was down very high $10.3 million. All of that and then some was driven by the absorption that will get back in the back half of the year. Also unfavorable was depreciation expense, which we expected, because of the investments that we made over the last couple of years, largely in the Milwaukee-Eight, the retooling and the ERP system. But where we're very excited in the first quarter was overall productivity came in higher than expected. So the plants are running well and overall, we feel good about gross margin. And as you pointed out, James, we're not looking to change our guidance, which is gross margin largely in line with prior year. But we're out of the gates, and we feel pretty good about gross margin. We'll have to keep an eye on it.

You also mentioned SG&A. SG&A was favorable by $19 million. Our full year guidance is for SG&A to be largely flat to 2016. We still expect that to happen. SG&A is all timing in the first quarter. That $19.1 million was driven predominantly by marketing spending and some engineering spending. We had planned to move some of that spending out of the first quarter more into the third quarter. So we would expect the third quarter to be more unfavorable as we make up that timing, in particular, on marketing spending.

Our next question comes from the line of Gerrick Johnson from BMO Capital Markets.

So you said, U.S. retail was down as anticipated. And I don't recall you conveying your anticipations to us. But you do say that U.S. is on target for your plan for the remainder of the year. So maybe you could share with us what your target is for the year and what you anticipate for 2Q?

Thanks, Gerrick. Actually in January, we -- when we gave guidance for overall shipments, which was flat to down modestly, we said that we expected the U.S. to be down (technical difficulty) made up by growth in the international markets. While we didn't break it out by quarter, we certainly expected the U.S. in the first quarter to be by far the toughest quarter out of the 4 quarters that we faced. And the reason for that, Gerrick, is very simple. And when we look at industry growth and again, the industry was growing very well for a 5-year period of time at a CAGR of 3%, that ended in the second quarter of 2016, driven by soft bike prices. Certainly, the oil-dependent area weakness that we were seeing, consumer confidence and the like. That quarter was down 8.6%, and we were down in the third quarter 6.3%, the industry, was and then 3.2%. If you average those 3 quarters, you get 6% lower industry. We expected the industry to continue to be down and cycle through a full 4 quarters and lo and behold, the industry was down about 6% in the first quarter. So on a full year last 4 quarter basis, the industry has been down 6%. Now we expect that to get significantly better in terms of the industry over the next 3 quarters as we lap the very softness that we experienced and as previously, I think, that Sharon asked the question, as we start to see the oil-dependent areas firm up a bit as well as used bike prices.

Okay. Do you have a plan for 2Q? Is your 2Q plan up 5, up 10? Or do you have a plan for the full year?

Gerrick, let me tell you, we got a plan for Q2. We've got a plan for the next 5 years. Yes, we absolutely do. And we don't share our quarters publicly. But we certainly have a plan. We feel very good about that plan. We feel good about how we're set up, and in particular, the inventory situation in the United States. We're incredibly competitive. When we look at market share in the United States and around the world, we had a fantastic first quarter with market share being up in the United States and Canada, in Japan, Australia and Europe. So now we've got a plan and we feel very good about that plan and what we wanted to do is convey to everyone is that coming out of the first quarter we were down. We read all the stuff that are published as well as far as the dealer surveys. They had the industry wrong. They had Harley-Davidson wrong. But we did not have it wrong. We're on plan as we move out of the first quarter with the exception of Asia Pacific.

Okay. Congratulations for not blaming weather. I think that would have been an easy one for you to throw out there. And looks like, that gets a little better for you.

We're hoping. We have.

Our next question comes from the line of Craig Kennison from Baird.

Matt, I wanted to focus on your strategy to build more riders. I think you indicated that in the first quarter you saw a 10% increase in the number of riders trained. I believe last year you trained 65,000 riders. So what's the target for 2017 and what is the plan to improve conversion of that rider group?

So, Craig, I'm going to focus on the second part of that equation. Our focus is on both the capacity and the capability of our Riding Academy. But as I said in my opening remarks, it is a pathway into the sport and one that we have to continue to enhance, because a trained rider doesn't necessarily build a rider. And this is all part of the strategy when we talk about embracing use and how we shift our mindset from rider training to rider learning and what does it mean when you're coming out of Riding Academy to gain the confidence necessary to become an avid rider. So this is the focus of our emphasis, and we have plans for Riding academy. We're pleased with the growth that we saw in the first quarter. But it is one component of the 10-year journey to build riders. It's an important component. It's an incredible asset that we have as a company, our dealer network, our training program, The Street motorcycle and we're doing a number of things within Riding Academy. But I think the more important thing is what we're doing beyond Riding Academy to inspire the next generation riders, get them trained properly and have them become riders. So thanks for the question.

Our next question comes from the line of Joe Spak from RBC Capital.

I guess, just at a high level, given the delayed shipments of the model year '17 and what looks like a very back-end loaded shipment year, what gives you the confidence that we won't run into basically the same issue next year as the model year '18s come out and that you are stuck with higher level of '17s?

Thanks, Joe. Joe, from what you saw in the first quarter, we shipped in the United States about 12,000 less motorcycles. And when you look at our Q2 shipment guidance, we don't break it out by markets, but overall, we're expecting Q2 to be down in shipments anywhere between 3,000 and 8,000 units. So the idea here is that we ended up with last year with significantly more excess product. So we're taking down the overall inventory throughout the first 3 quarters of the year and you saw that in the first quarter we were down 8,200 units, and we expect to be down more than that when we finish the second quarter. That will limit the amount of product that's in the marketplace. And so when we come out with the new model year, we will be significantly less potential for carryover inventory. The only part of the equation that's left is retail sales, but the magnitude of inventory that we're taking out, that we have taken out and that we will take out through the remainder of the second quarter will assure us that the inventory position coming out of or going into the next model year will be dramatically better than it was a year ago. Again, remember a year ago, things were going really well until that second quarter. And we certainly do not expect the industry to be down 6% on average for 3 quarters, and that's what drove the excess inventory. We're going to start out from a much better position this year than we did last year.

So I know you don't typically do this, but help people get comfortable. I mean for inventory to be flat on a year-over-year basis, it would seem our back of the envelope math would -- it would suggest -- it would seem that retail has got to be about flat for the remaining 3 quarters. Is that -- can you confirm that?

I'm sorry, Joe, you said flat? Flat over what period of time? I'm...

For the remainder of the year -- let's just say, the next 3 quarters. U.S. retail has got to be about flattish for you to sort of hit a flat shipment guide and inventories be stable year-over-year.

So on a year-over-year basis, we expect inventories to be flat. We expect shipments to be flat to down modestly. So with those 2 -- with shipments being down flat to down modestly, we would expect given our read of what retail sales will be is that we will end the year with flat inventories on a year-over-year basis in the United States. And again, but prior to getting there, we would expect inventory to be down quite significantly in the 3 quarters prior to that and overall, tightening up of inventory. When the industry is not growing and we haven't seen it grow now for 4 quarters, we want to be more conservative and more defensive on the inventory position and tighten things up to make sure that we maintain that premium brand. So we would expect inventories to be down at the end of the Q1, Q2 and Q3, and we're moving a lot of that shipments to the fourth quarter. And we'll have inventories at a year-over-year level basis and that will give us the trajectory that we need for 2018 to get over the selling season hump.

Our next question comes from the line of Tim Conder from Wells Fargo Securities.

Just 2 quick ones here. Matt, if you could just maybe expand on the rollout timing here of the rider learning programs. You covered some of those in the Analyst Day presentation. But just maybe the cadence of how we should start to see some of those rollout. And then, can you expand a little bit, John, on the programs that are out there to support the used bikes sales or prices? And are you doing anything with that as customers trade the bikes in?

All right. I'll start out, Tim, with the second part of the question. Then Matt will answer your question on the rollout of rider training. So with regards to our part of removing the excess inventory, we're really doing 3 things. One we've talked a lot about in this call is we've significantly limited availability of model year '17s to put pressure and focus on model year '16s. And to that end when you look in United States, our shipments were down 30% in the fourth quarter and down 21% in the first quarter, and we've seen inventories go from, at the end of the third quarter, plus 9,700 units to down 8,200 units. So we've been very successful in limiting the amount of inventory and garnering that focus. So that's the first part. The second part is consumer activities. Now we talked a little bit about the financing. We did some low rate financing in January or February. There is none in the market at this time or since February, but that helped out. That was only offered on model year '16 Touring and trike and CVO. We also offer winter warranty for our customers to get them more willing to buy in the dead of winter versus waiting for spring because they don't lose any warranty coverage. Then the third aspect is with the dealers. And we've talked a little bit about this. We've helped the dealers on trades. And where we have pockets of model year '16s, we've helped facilitate trades between dealers to get them to places where they can sell. Secondly, is we provided overall financial incentives for the dealers to help defray or to help their profitability out over that period of time. So those are the things that we've done. We feel very good about where we're at. And the dealer network did a fantastic job of reducing overall model year '16 inventories. We couldn't be more pleased. And with that, we've seen the percentage of new to used increase by about 30 percentage points from the beginning to the end of the quarter. Having said that, overall during the quarter, model year '17 bikes have been quite limited and down about 25% across the whole model. And then when you look at Touring, down a fair amount more than that. So they have been constrained. It worked and as we exit the quarter, we've now got a much better mix of '17s and again, well positioned for the selling season.

Okay, Tim. So thanks for your question. I think the key idea here that I mentioned at the Investor Day was the entire enterprise shifting its mindset from we build motorcycles to we build riders. And everyone in the company and across the dealer network can say without pause how many motorcycles they sold that day, or how many motorcycles as a company we built and shipped that day. What we need to be able to do and this is why this is a 10-year strategy, is to be able to talk about how many customers did we build today and who are those customers and where are they coming from and how embedded are they in our sport. And so this is why -- I know there will be a call for lots of metrics in reporting and we will be working on ways that we talk about the things that we're doing to achieve that, but it starts with a mindset shift. And the mindset shift is already generated. Comments that I made this morning already and at the Investor Day about when you think about building riders, you think about the business differently and we're thinking about the role of Riding Academy differently. It's in the context of a lot of things that are necessary to create a rider. It is an important piece of that journey, but more needs to be added to that journey to build a confident, enthusiastic rider on the other side. So Craig's question earlier, the simple measure around increasing the capacity and the capability to Riding Academy is an important part of our strategy, there are a number of other things that we're doing and that are under developed -- development and will be developed over time to continue to move toward this point where we're building riders every day and people have the same clarity around how many riders we built, as they do today about how many motorcycles were sold. So it's not -- I guess, the answer is, there's not a lot of specific what are we rolling out, what are the tactics and the actions. We'll clearly be talking more about that over time, but right now the focus is on getting everybody's mentality turning to shift to the idea we build riders and what does that mean for the work we have to do.

Our next question comes from the line of David MacGregor from Longbow Research.

Just more on the topic of the Riders Academy. I can appreciate that you don't want to quantify this and get into that kind of discussion on a quarter-on-quarter basis. But can you at least help us understand whether this conversion rate was up or down year-over-year. And then, secondly, just I'm guessing a lot of these Riders Academy graduates are drawn by the economics of buying a used bike. Can you talk about what you might be doing right now beyond Street Rod to create more excitement around the opening price points?

Thanks, David. With regards to conversion rate, in 2016, it was down a bit. And several reasons for that. One is we offered a lot of it free. And we learned some things through that. And we had Heroes Ride Free program, which provided that we would pay for military, police, fire and first responders. And one of the learnings is when you offer things free some people don't -- they go to have something to do. And -- but so the conversion was down a touch last year and those, we're making adjustments for and some of the things that Matt talked about, to improve that conversion rate. And we're learning that it's really people moving out of the class and that period between finishing the class and buying the motorcycles and giving them confidence to become an owner. And so we're looking at additional refresher courses for Rider Academy to offer, also looking at various mentoring programs, but there is a lot of focus on improving the overall conversion rate.

I'll just add. Obviously, conversion is very important, but going back to my prior comments when your focus is selling a bike, your focus stops at that conversion rate. And when your focus is on building riders, we have to actually think well beyond how many of them buy a bike to how many of them are riding. And so this is examples of the mentality shift. In the last 10 years, the Riding Academy has trained almost 0.5 million riders and 25% of them were trained in the last 2 years. How many of those actually became avid full-time riders, that's the work we have to do to make sure that our efforts are focused on the right thing, which is building riders. Whether they buy a new bike or whether they buy a used bike and how the role -- how used bikes play a role in people entering the sport and the brand from a price point perspective, et cetera, is very important to this whole constellation of things that we need to do to build riders, not just sell machines.

David, I think the other part of your question, you asked about the economics of used. And we've talked a little bit about that already. As we have seen and the industry has seen, used bikes prices soften. And on the face of it, feels like a negative thing, because it does put short-term pressure on new motorcycles. And we're not viewing it as a negative thing. We're viewing it as an opportunity to get more people into the Harley-Davidson brand. And we see the vast majority of outreach people coming in. Even though 40% come in on new, a lot much higher percentage of that come in on used. Young adults, in particular, are several times more likely to come in on used than new. And so what we're trying to do is just change our thinking around that and look at it more as here's an incredibly loyal customer that we've got, comes in on used. We don't make as much on the upfront piece of that. We do make money on the financing, the parts and accessories, the credit cards, the H.O.G. memberships and all the things that we do offer. But that is an annuity way into the future and a rider for life. And as we look to build 2 million more riders, it becomes very important and used becomes a big vehicle to bring people in. And certainly, the short-term headwinds as used bike prices fall, but over the long-term we feel very good about it. Now having said that, we have picked up a tremendous amount of a market share on used. Ever since the currency has flipped back in the fourth quarter of 2014, our used bikes have sold very well and much faster than new motorcycles. The first quarter of this year no different. The used bike is delayed by a month, but when we look at used sales through February, they were up over 5% for Harley-Davidson. And that put total demand up through that same period of up over 4%. So you look at our new sales much softer than that. But overall, people are choosing Harley-Davidson motorcycles over other brands and market share in the first 2 months was up quite significantly on used and you saw market share was up 4/10ths of a point United States on new.

And just one further comment, because I think you had mentioned the role of new bike pricing in that equation and not just the price, and I made this comment earlier, but the appeal and the impact of that product and Street Rod is a great example of an incredibly appealing motorcycle to the next generation of riders, priced right for them to access the sport on a new vehicle, the work that we're doing in flat track racing to stimulate the excitement around competition and so forth. So there's a whole host of things that we're doing in this spirit of shifting our mindset to building riders. And there's more to come. The teams are busy. Already, you can see the creativity that this has stimulated. Once we start thinking differently about what we are here to do, the ideas about how to do it are flowing and we're excited about that potential.

Our next question comes from the line of David Beckel from Bernstein.

You mentioned the market weakness over the last year and change. Do you have a sense at all for how the market for new bikes would have performed absent oil and gas weakness or weakness in used prices? That is, would sales have more closely tracked traditional economic indicators? Or do you think we're really starting to see the beginnings of a shift in demographics that you're essentially preparing for in your 10-year plan?

David, that's a great question. I wish I had the answer for it. A piece of it is that certainly on the weakness of oil-dependent we can be quantitative on that. We define that as about 15% of our overall volume is in oil-dependent areas. And last year, overall, that market was down about 10%. So last year that was probably 1.5 to a couple of points of growth. Last year, I think, overall, the United States was down -- jeez, my memory test -- 3% to 4% and so that explains a part of it. The used bike pricing is much harder to get our hands around as far as what a driver is. And then you've got all the other stuff that happened last year, the political, the uncertainty. We believe that played into it, but no real way to measure it. Suffice to say though that we're now lapping 4 quarters of it at a new lower level of the industry, and we are seeing used bike prices improve, albeit just at the auctions at this point. And we know that we're lapping some big numbers on the oil-dependent, and we would expect that to start to become stable as the year continues to progress.

Our next question comes from the line of Felicia Hendrix from Barclays.

Just a few questions. First, I just was hoping that you could clarify, John, something you said earlier. You gave us the second quarter unit shipment guidance. So when we think about the second half and the cadence there, I think you said that would be more skewed to the fourth quarter. So I just wanted to make sure I understood that. And then if we just could kind of look back at the first quarter and we've talked about it a lot, but I was just wondering if you could talk us through the cadence of the quarter, the months in terms of retail sales, how they trended? Like were they kind of better earlier in the quarter and maybe kind of decelerated throughout? And then, clearly, given the comps and the bad weather last year, April should be better. So I was just wondering if you could give us any color you have on that.

Okay. Thanks, Felicia. So to clarify on the overall shipments. We were down 12,000 units in shipments in the first quarter. We expect to be at 80,000 to 85,000 of shipments in the second quarter, which is down 4% to 9% and down about 3,000 to 5,000 units. We would expect most of that first half decline of 15 to 18 or whatever that works out to be, 15,000 to 18,000-ish, we would expect that to move to the back half, but mainly into the fourth quarter. And again, that goes to our desire to tighten up inventory over the first 3 quarters. And then as we add it back in the fourth quarter, that helps us get to the trajectory that we need to have enough motorcycles in the spring selling season of model year '18. With the surge production and capability that we have, we need to end the year at about year-ago levels to make it for the next year's bikes. So that will largely come back in the fourth quarter. With that will come back the profitability of those shipments, and with that will come back a lot of absorption and therefore, make the fourth quarter a higher profit quarter as well as on gross margin significantly improved during that quarter.

The second question was with regards to the first quarter retail sales and the cadence within the quarter. When we look at the quarter, January, February did much better than March. March was a very tough month for the industry and certainly, for Harley-Davidson. We picked up a fair amount of share in the month of March, but overall it got tougher in the month of March. And when we look at the overall regions, we saw a softness in the West, Southwest and North East. Other markets were good. And as we -- we didn't talk about weather, we don't think that weather on a full year -- or a full quarter basis impacted overall sales. It was one of the warmest quarters, but was also one of the wettest quarters. And -- but it did have some impact on various markets within the U.S., but others benefited. And I'm sorry, on April, with regards to the sales, we don't comment on any quarter retail sales.

Our next question comes from the line of David Tamberrino from Goldman Sachs.

Just wanted to dive into a little bit of what you're doing from the HDFS standpoint, which you're potentially doing from a rebate standpoint, if you are at all. Our channel checks throughout the quarter kind of pointed to you doing more preferred financing, which you mentioned was discontinued as of February for model year '16 bikes. But we had heard that some of the dealerships were layering on some incentives to move out the model year '16s. And then more recently, we've heard that Harley-Davidson itself is offering some rebates or dealer incentives, if you will, to help move some of that model year '16 inventory. So I just wanted to get your comments on that if that is actually occurring or not and how typical or atypical is that for you to offer those types of rebates to move some of that slower-moving inventory.

Thanks, David. #1 is HDFS. All of our programs that are company-sponsored ended at the end of February. And -- but various dealers, HDFS would be -- puts together custom programs for dealers. They would pay for that, whether it be lower rate or no down. So that certainly could be happening out in the dealer network. But what we were sponsoring ended at the end of February, and that was 60 months at the top tier at 0.99% financing. With regards to rebate, I don't think that's the right term. But we certainly recognize the fact that we put in too much inventory at the end of the second quarter, and the excess carryover of model year '16 was higher than it's been historically. It's higher than we intended it to be, and we certainly didn't see what was going to happen with the industry over the next couple quarters. And so with that, that was part of the 3 programs that I had mentioned. And with regards to helping the dealers out, yes, we have provided incentives to the dealers to help defray the cost of them moving those motorcycles. And that is very atypical, but it is also very atypical that we've had this much carryover inventory model year 2016s.

Our next question comes from the line of Greg Badishkanian from Citi.

You mentioned that Victory picked up share. And I'm wondering what kind of impact do you think that could have had on you. And if -- as the brand is shut down, could that reverse? And do you think those are customers that otherwise would have bought a Harley, you think could benefit from Victory winding down in the longer term?

Good question, Greg. When we look at the Victory liquidation, in the first 12 -- when they announced liquidation, we believe, estimates of the data that we have, they had a little bit shy of a year's inventory in the system in the United States. And we would expect that to sell much quicker than it typically would over a year's period of time. And we saw that in the first quarter. Overall, the sales of Victory were up quite a bit and with that it benefited the industry. So the industry would have been down more than 5.9%, excluding Victory. And consequently, because we're 50% of the industry, our market share would have been up quite a bit. That doesn't mean that we believe that we're losing sales because of that. It just means the timing of those shipments are going to happen in a condensed period of time and the term that you used, Greg, I think, is right on. That impact or that effect will reverse itself when the inventory is liquidated. The industry will have a headwind because it will be comparing less overall sales because a year ago there were sales of Victory motorcycles and the impact on our market share will reverse and it will benefit our market share, we believe, largely in the back half of the year.

Our final question comes from the line of Jaime Katz from Morningstar.

I just have a quick question on your high-impact models. You guys launched 2 high-impact models and you're still clearing 2016 models and there's limited 2017 models. So how do you guys on a strategy sort of level think about launching these new high-impact models during these periods of industry distress? And going forward, how does the cadence of that change when the environment is difficult to launch into and it might be a little bit harder to take pricing?

So we've had no issues with pricing, but Jaime, that's exactly why we took the actions in the fourth quarter and the first quarter of limiting shipments in the United States by 30% and 21% respectively. As we knew these models are coming out, we want to launch them and we always, not for the purpose of new models or any other reason, we always want the inventory and the business model that we follow to be is that they're selling predominantly new motorcycles each and every quarter of the year. And again, for the events of that we talked about, we got a little bit away from that. We produced excess model year 2016s and that's why we addressed it. It was a tough thing to do. I mean, Jaime, look what we did. We took the hottest selling product that we've had in Milwaukee-Eight and constrained it. Not only is it the hottest product selling, it's the most profitable. And again, that shows the resolve that we have in making sure that we're aggressively managing supply in line with demand. So to answer your question, those models both came out. We did not change the timing of those models. They both came out late in the third quarter and as we exit the third quarter, we feel very good about the market situation -- I'm sorry, I said the third quarter -- the first quarter. We feel very good about how we exited the first quarter in terms of overall inventory levels and mix, and we're ready to go. We're ready for the spring selling season, these 2 models. We've got a little bit more data on the Road King Special. It's selling fantastic. We will gain distribution in the Street Rod in international markets largely by the middle of April, and we're very excited about that. And when you look at our International business, remember, in Asia Pacific, Street is by far the best-selling model that we have and now we've got a new model to that family. It's got 18% more power, 8% more torque, refined suspension and brakes. We couldn't be more excited. But we see no issues in launching the Road King Special or Street Rod in this market.

I'll now turn the call back to the presenters for closing remarks.

Thank you, Lisa, and thank you all for your time this morning. The audio and slides will be available at harley-davidson.com. The audio can also be accessed until May 2 by calling (404) 537-3406 or (855) 859-2056. The conference ID# is 89720632. We appreciate your investment in Harley-Davidson. If you have any questions, please contact Investor Relations at (414) 343-8002. Thanks.

This concludes today's conference call. You may now disconnect.