Harley-Davidson Inc (HOG) 2017 Q2 法說會逐字稿

Good morning.

My name is Lisa , and I will be your conference operator today.

At this time, I would like to welcome everyone to the Q2 2017 earnings conference call.

(Operator Instructions)

Amy Giuffre, Director of Investor Relations, you may begin your conference.

Thanks, 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 on this call.

This morning, our President and CEO, Matt Levatich; and CFO, John Olin, will be hosting the call.

Matt, let's get started.

Thanks, Amy.

Good morning, everyone, and thank you for joining us on the call today.

You have all read through the Q2 results press release.

I'll provide you with a little context on the quarter and what we expect as we move through the second half of 2017, then John will walk through the detailed financials.

So let's get started.

We have some distinct challenges in many of our markets in the second quarter, while we expected the U.S. industry to be challenged, we were disappointed by the unexpected magnitude of the industry softening in the quarter.

Our international performance in the second quarter was down, but in line with our expectations, and we continue to expect international growth in the second half of the year behind expanded distribution and availability of new, high-impact motorcycles.

In light of these challenges, however, we're pleased we delivered a strong gross margin and operating margin in the second quarter as our teams adapted well to market realities.

Based on what we believe will be continued pressure in the U.S., we're taking action in 3 areas: First, we'll address issues in the U.S. through disciplined and aggressive supply management.

This includes reducing our 2017 shipment guidance to now be down 6% to 8% compared to last year.

We also expect full year 2017 operating margin to be down approximately 1 percentage point compared to 2016 on deleveraging from the volume reduction.

Second, we'll aggressively manage our business cost structure.

Lower expected shipments means, we'll need to reduce plant production and this has implication for our manufacturing facilities, our people and our financial performance.

This action will require an hourly workforce reduction at some of our U.S. manufacturing plants.

We'll be sharing details with employees beginning today, but suffice it to say, no one wants to have to take these steps.

Our forward outlook is informed by our long-term strategic plan and the actions we must take to manage our business in the near term.

Our focus on our long-term strategy is the basis for our third action.

In February, we laid out our 10-year objectives and strategies.

And since that time, our teams worldwide have been hard at work developing their plans and taking the initial actions to grow ridership in the U.S., drive reach and impact internationally and focus on growing share and profit globally.

We're firmly committed to our long-term strategy, focused on building the next generation of Harley-Davidson riders globally.

This is our true north.

Our new product investment is 1 pillar of our strategy to build riders.

We're very pleased with the global response to the Road King Special and Street Rod, which launched this spring.

And we're energized by the strength of our model year 2018 lineup coming later this summer.

High-impact product plays an important role in inspiring ridership, but product is only one element.

As I shared with you last quarter, we've moved from thinking in terms of 'We build bikes' to thinking in terms of 'We build riders'.

This is a big mindset shift and a big part of achieving our long-term objective.

We've demonstrated our ability to attract younger, more diverse customers through our outreach efforts.

As we got that engine running, we grew our mix of sales to outreach customers in the U.S. 6 percentage points to 40% from 2010 to 2016.

We've now sharpened our customer-led approach to include a deeper understanding of consumer life stages, cultural shifts and where people are in their riding journey.

These insights are driving a richer, more targeted approach to create increased relevance for Harley-Davidson on our way to building 2 million riders in the U.S. by 2027.

The Harley-Davidson Riding Academy is one important lever we're pulling to build riders in the United States.

We know there are plenty of people in the U.S. who are interested in riding, and more importantly, who are interested in Harley-Davidson.

Rider training is a key step in someone's path to riding, but it's only part of the journey.

We're piloting enhancements to improve the impact of Riding Academy, while at the same time increasing the number of dealerships offering the program.

So far this year, we've trained nearly 32,000 riders, and we have 9 more dealers on board to offer Riding Academy for the next generation of riders.

We're also activating ridership through our partnership with EagleRider, the leading experts in the motorcycle rental space, to provide riders from around the world an enhanced rental, travel and tour experience in the United States.

In May, we announced EagleRider will be renting new Harley-Davidson motorcycles through an expanded number of locations, including select Harley-Davidson dealerships.

The EagleRider partnership also enhances the way a newly trained or returning rider can seek out their perfect bike through extended trials.

While we're dialing in and accelerating our efforts in the U.S., we're also driving our international opportunities.

As I said, second quarter performance internationally was in line with our expectations, and we continue to expect growth in the second half of the year.

We also continue to do more to accelerate brand awareness and reach, internationally.

During the quarter, we expanded our international reach with 13 new dealerships in countries like China, Thailand, Korea, Switzerland, Italy, UAE and Russia.

We know that our biggest opportunity for growth is outside the U.S. To expand our reach in high growth markets in Asia Pacific, we announced plans to open an assembly facility in Thailand.

This facility will serve the AVION markets with motorcycles built from components from our U.S. plants and global supplier network.

The facility allows us to avoid much of the significant tariff burden in the region, providing greater access to enthusiastic riders and unlocking significant growth potential.

We also recently entered a partnership with a leading global apparel expert with integrated operations from supply through to retail for numerous world-class brands.

The aim is to use authentic Harley-Davidson apparel to accelerate brand awareness in Asia Pacific.

We have an incredible opportunity to reach more people in the region, particularly young adults and create awareness and interest in our brand through our apparel.

We're aiming to create more relevance for our brand and for our style of riding.

We aren't waiting for these potential new Harley riders to find us, we're going to them using clothing as a way for them to start their journey with Harley-Davidson.

These are just a few examples of how we're ramping up our efforts to grow outside the United States.

As we enter the second half of 2017, we remain focused on our long-term objectives and on our strategies to achieve them.

At the same time, we're working with a more focus and intensity to deliver expected results in the near term.

Every year at this time, excitement builds for the new model introduction and each year that excitement grows as our focus on high-impact product increases.

In late August, we'll bring our dealers together, almost 5,000 people from around the world.

There's not a more capable, dedicated and talented group of people.

This is the best part of our year.

We'll reveal our model year '18 lineup and our new apparel and accessories to enhance the passions of our customers.

We know high-impact product is foundational to rider inspiration, whether someone is an existing rider or dreaming of becoming a rider.

The model year 2018 launch is not only the celebration of our 115th year, a year that will culminate with our 115th anniversary celebration in Milwaukee over Labor Day weekend 2018.

It's more broadly one of the most exciting launches we've seen in our company's history.

And we're still just getting started on our mission to launch 100 new high-impact products over the next decade.

As we look ahead, we continue to invest to deliver business results by attracting new riders, igniting the passions of our loyal customers, realizing our international potential and managing through whatever near-term challenges come our way.

We will manage our business with focus and discipline and take the prudent and sometimes difficult steps to compete to win for the long-term benefit of our riders, our dealers, our brand, our company and you, our shareholders.

We are stewards of the company's incredible legacy and we're stewards of your investment.

With that, John will review the details of the quarter behind us and what you can expect for the balance of 2017.

Thank you.

Thanks, Matt.

Today, I'll provide additional insight around our second quarter financial results found in our press release and supporting slides.

As Matt shared, Q2 retail sales performance was disappointing.

The positive momentum from the Milwaukee-Eight touring bikes was not enough to overcome the underlying weakness of the U.S. industry's new motorcycle sales.

As a result of the very tough market conditions in the United States, we are taking the following actions: First, address market issues in the U.S. through disciplined and aggressive supply management.

Second, aggressive cost management in the near term as we continue to invest in our future.

And third, an unrelenting focus on our long-term strategies, as Matt outlined.

Despite retail sales being lower than our expectations in the quarter, there were many positives that happened across our business, including strong brand fundamentals, higher combined sales of new and used Harley-Davidson motorcycles, firming used bike prices at auction and strong cash flow and operating margins despite lower volumes.

Not to mention the extraordinary international growth potential, which we believe lies in front of us.

The summary of the second quarter financial results starts on Slide 12.

During the quarter, revenue was $1.77 billion, net income was $258.9 million, and diluted earnings per share were $1.48.

Operating income in the motorcycles segment was down slightly from last year.

Revenue was down 5.6% from last year's second quarter behind a 7.2% reduction in motorcycle shipments.

Gross margin as a percent of revenue increased versus the prior year quarter on favorable mix and pricing.

SG&A spending was significantly lower during the second quarter.

Consequently, operating margin as a percent of revenue was up a full percentage point.

At HDFS, operating income in the second quarter was down $7.6 million or 8.5% year-over-year.

Although, it is important to note, that last year's second quarter results included the full securitization gain on sale of $9.3 million.

We remain focused on delivering strong margins and strong returns over the long term.

Worldwide retail sales of new Harley-Davidson motorcycles in Q2 are summarized on Slide 13.

Q2 worldwide retail sales of new Harley-Davidson motorcycles were down 6.7% versus prior year.

Retail sales were down in both the U.S. and our international markets.

The decline in the U.S. was significant and well below our expectations, while international performance was generally in line with what we expected.

The global competitive environment remains intense with continued competitive discounting in the U.S. and robust new product introductions worldwide.

We remain focused on maintaining our premium brand by managing supply in line with demand and by delivering high-impact products to grow ridership globally.

As an example, our Milwaukee-Eight touring bikes successfully drove sales increases within the touring segment during the first half of 2017.

And our latest models, the Road King Special and Street Rod are selling very well.

As Matt stated, given the weak U.S. industry results during the second quarter, we are reducing our full year 2017 shipment guidance to be down 6% to 8% compared to last year.

This guidance takes into account our expectation of significantly lower year-end U.S. retail inventory compared to 2016.

We believe this will help drive a healthy balance between new and used prices of Harley-Davidson motorcycles.

As we look to the remainder of the year, we expect year-over-year retail sales rates to improve over the first half of the year behind increased marketing investment focused on growing ridership in the U.S., increased availability of Street Rod internationally, international dealer network expansion, easier second half retail sales comps and high impact -- and our high impact model year 2018 motorcycles.

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

In the U.S., new motorcycle retail sales were down 9.3% versus prior year, below our expectations, driven by very weak industry conditions.

We believe soft used motorcycle prices adversely affected the industry new motorcycle sales in the quarter.

Despite very disappointing industry trends that persisted into the second quarter, there were a couple of positives: First, Harley-Davidson used motorcycles are selling very well.

Through May, we saw a healthy sales growth rates of used Harley's on a base which is approximately 2.5x larger than new.

In fact, on a combined basis, new and used Harley-Davidson motorcycle sales were up in the U.S. through May.

As was our share of 601cc new and used motorcycle sales.

While the revenue associated with the sale of used Harley-Davidson motorcycles does not directly benefit company revenue, healthy used bike sales are an indicator of the health of our brand and our sport.

Another positive indicator during the quarter was the upward trend of used bike prices at auction, which started last quarter.

While auction prices did not translate to higher prices in the broader used market in Q2, we believe that it is a positive step in towards tightening the price gap between new and used.

We also expect that our efforts to reduce new retail inventory will stimulate improvement in the balance of new and used bike prices.

Our market share for new bike sales in the quarter was 48.5%, down 1.0 percentage points as we lapped last year's strong market share gains of 2.0 percentage points.

We believe that overall market share in Q2 was adversely impacted as we lapped last year's low rate financing offers and on lower prime financing of new motorcycles this year.

Retail inventory in the U.S. was down approximately 7,200 motorcycles at the end of Q2.

While this was a significant reduction, it was less than we planned as retail sales fell late in the quarter.

At the same time, we were building out the final model year 2017 motorcycles.

We will work closely with our dealers to sell-through the remaining 2017 inventory in anticipation of our model year 2018 bikes.

In addition, we expect at year-end U.S. retail inventory will be down significantly year-over-year.

On Slide 15, you'll see retail sales in our international markets were down 2.3%, which is in line with our expectations.

We expect growth in our international retail sales in the back half of this year behind expanded distribution, broader availability of Street Rod, the launch of our model year 2018 motorcycles and as we lap significantly easier comps.

In EMEA, retail sales were down modestly versus Q2 2016, as we lapped strong prior year growth of 8.2%.

We believe underlying demand remains strong, especially for the new Milwaukee-Eight powered bikes and Street Rod.

Market share in Europe through May was 9.4%, down 0.9 percentage points from prior year.

The industry was up 1.2% in the same period.

In Asia Pacific, Q2 retail sales were down 3.2%, a substantial improvement from the first quarter's run rate.

Sales were lower in Australia and Japan.

Emerging markets grew quite well during the quarter with the exception of India, where that market's retail sales reflected the continued impact of demonetization and a newly implemented national sales tax.

Retail sales in Latin America were down 8.5% in Q2 compared to last year driven by declines in Mexico, partially offset by gains in Brazil.

And finally, retail sales in Canada were up 0.4% in a highly competitive environment.

We remain confident in our international growth prospects.

In support of our strategy to increase brand access, we plan to continue to expand our international distribution.

As Matt noted, in the second quarter, we opened 13 new international dealerships.

On Slide 16, you'll see wholesale motorcycle shipments were down 7.2% in the quarter and within our shipment guidance range.

As expected, touring shipments increased behind the success of our Milwaukee-Eight powered touring bikes.

On Slide 17, you'll see revenue from the motorcycles and related product segment was down in the second quarter behind lower year-over-year motorcycle shipments.

The average motorcycle revenue per unit was up $436 for the quarter as we shipped more touring bikes as a percent of the total compared to last year and due to higher pricing, partially offset by unfavorable currency.

P&A and general merchandise revenues were down for the quarter, due in large part to lower motorcycle shipments and lower retail motorcycle sales.

In addition, we have substantially reduced year-to-date shipments of general merchandise in order to free dealer capacity in preparation for new merchandise, which we will be introducing to our dealers in August, including our 115th anniversary collection.

Our gross margin review is on Slide 18.

Gross margin as a percent of revenue was up slightly during the quarter driven by favorable product mix and pricing, partially offset by unfavorable currency exchange and higher year-over-year raw materials and manufacturing costs.

Currency exchange adversely impacted gross margin in the quarter behind a stronger U.S. dollar.

Raw material costs were significantly higher during the quarter behind rising steel and aluminum costs.

Q2's manufacturing expense was up compared to last year due in part to lower fixed cost absorption and higher depreciation.

Second quarter startup costs were flat to prior year.

We were pleased with our second quarter gross margin performance.

Our margin structure has remained strong despite lower volumes.

On Slide 19, operating margin as a percent of revenue for Q2 was 20.3%, up compared to last year.

Operating margin was favorably impacted by slightly higher gross margin and $28.9 million of lower SG&A, primarily due to lower year-over-year employee cost, lower recall cost and timing of marketing investment.

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 $7.6 million or 8.5% compared to last year.

The primary factors impacting Q2 were: First, HDFS' year-over-year operating income was lower driven by last year's gain on sale from the full securitization transaction, which did not reoccur this year.

Second, the provision for retail motorcycle loan losses increased only $1.4 million over last year driven by higher retail credit losses.

This retail provision increase was the smallest increase in the last 8 quarters.

We were pleased to see the -- a slowing in the rate of increase in both delinquencies and losses in the second quarter.

Finally, HDFS experienced positive results in other income due to higher licensing and insurance commission revenue.

HDFS' operational results are on Slide 21.

For the quarter, originations were down 4.4% compared to last year and market share was down 1.0 percentage points during the quarter as we lapped a significantly higher level of finance offers in Q2 of 2016.

At the end of the quarter, we had $401.6 million of cash and cash equivalents at HDFS.

In addition, HDFS had $1.23 billion of available liquidity through bank credit and conduit facilities.

On Slide 22, you'll see 30-day delinquency rate.

The retail motorcycle loan receivables on balance sheet at the end of June was 3.25% or 9 basis points higher than Q2 2016.

The annualized retail credit loss for receivables on balance sheet was 1.71% or 21 basis points higher than Q2 2016.

Consistent with vehicle financing industry trends, credit losses were higher across the portfolio.

While both 30-day delinquency and credit losses were up in the quarter, the rate of increase for both tempered from last year.

HDFS continued to maintain a robust liquidity position and contributed strong profitability to the company.

The remaining Harley-Davidson, Inc.

financial results are summarized on Slide 23.

So a few things to note.

Year-over-year operating cash flow was up substantially from last year driven by lower wholesale financing and lower working capital, partially offset by lower net income.

And year-to-date tax rate was 34.4%.

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 are committed to driving motor company ROIC, which is in the top quartile of the S&P 500, through the disciplined investments that we make and a best-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 second quarter, we repurchased 3.0 million shares for $163.2 million.

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.

As discussed, given the deterioration of the U.S. industry sales in the second quarter of 2017, we are reducing our shipment guidance and now expect to ship 241,000 to 246,000 motorcycles in 2017, which is down 6% to 8% compared to last year.

Our shipment guidance takes into account our expectation of significantly lower year-end U.S. retail inventory compared to 2016.

In the third quarter, we expect to ship 39,000 to 44,000 motorcycles, which is down approximately 10% to 20% compared to last year.

As we adjust to the current environment, we have reduced our margin outlook and now expect our gross margin to be down modestly.

We will aggressively manage our costs and now expect SG&A will be down compared to last year, but slightly higher as a percent of revenue.

Consequently, operating margin is expected to be down approximately 1 percentage point year-over-year.

Looking forward to the third quarter, we expect gross margin as a percentage of revenue to be down approximately 2.5 percentage points compared to Q3 2016.

The decrease in gross margin will be primarily driven by lower fixed cost absorption as we slow production.

We expect the lower gross margin in Q3 to be largely recovered in Q4.

We also expect Q3 SG&A to be higher than prior year driven by increased marketing investments as we launch our model year 2018 motorcycles and invest in increasing ridership in the United States.

To wrap up, in the face of current challenges, we will continue to execute our strategies and make the necessary decisions to support our brand and profitability into the future.

We were encouraged by the strong combined sales of new and used Harley-Davidson motorcycles in Q2.

And we were particularly pleased with the positive trends of used bike prices at auction into the second quarter.

As Matt stated, our opportunities are significant.

We have the right strategies in place, they are appropriately funded and we are disciplined in our execution.

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

With that, let's take your questions.

(Operator Instructions) Our first question comes from the line of James Hardiman from Wedbush Securities.

Still trying to wrap my brain around the retail decline in the second quarter.

Much bigger than at least we were expecting.

I guess, help me, if you could give us sort of the magnitude of the new and used growth in the quarter.

I thought that was an interesting comment that, that does seem to be growing.

I guess, my question is, do you think that the problem here is just that the used bikes are taking too much share from the new bikes, hurting demand?

And is there anything you can do about that?

Obviously, it seems like you're doing everything you can to firm up used bike values.

Is there an opportunity to maybe take new pricing down such that you're able to accelerate the closing of that gap and hopefully reinvigorate the new bike sales going forward?

Thanks, James.

The retail decline in the second quarter was certainly bigger than we expected.

Going back 4 quarters, Q2 of last year, the industry softened and for a 4-quarter period it was down about 6%.

And we were expecting that, that gap would close a bit.

We did expect the industry to remain down for the remainder of the year, but not to the magnitude of what we saw in the second quarter.

So as you pointed out and very important to note is that the brand and the sport is healthy.

It is the mix of products that we are selling -- or the mix of the type of bikes.

When you look at the data through May, and again used bike data is on a month lag, is used motorcycles are selling extremely well.

They are in the near mid-single digits and that is on a base that is 2.5x larger than our new motorcycle sales.

When you combine the two, our retail sales are up.

And when you look at that level of retail sales, it is the highest in the history of the company.

In addition, market share is also up.

And it is the highest market share that we've ever had of new and used motorcycles since that was -- began being tracked and it has been up 7 out of the last 8 years.

So while we completely and really understand that we do not make that revenue on used bikes, it is an indicator of the strength of the brand and an indicator of the health of the sport.

But it also indicates and that we do have a balance issue between pricing of new and used motorcycles, and we are all about addressing that.

And we started out the year talking about some of our new strategies, one was to embrace used.

And with that, we came out and looked to take down new motorcycle inventory through the first 3 quarters of the year.

In the first quarter, inventories were down 8,200 units.

And with that, within a month of us taking that inventory down, we saw used motorcycle prices rise at auction.

I'm very pleased with that and a quarter ago, we said that was the first data point.

What we are very pleased, as we get into the second point -- second quarter that used motorcycle prices continued to rise.

So that's the first step.

The next step is for the services that price on the retail -- provide retail data is for them to pick up that.

And they did.

When you look at services such as NADA and Black Book, they increase the prices of used motorcycles, Harley motorcycles.

I think Black Book, James, was up about 4% on a year-over-year basis in the quarter.

Now the next step, and the final step, is to have that move into the broader market.

And while, overall, our retail -- our used bike prices were down in the second quarter, they were down slightly, significantly improved from what we saw down in the first quarter.

So that is starting to move through the marketplace.

So that is what we can do and that is what we are doing.

And in addition, when we give our shipment guidance, and again, second quarter was a big disappointment in taking out our shipments.

We are going to take out a fair amount more than the retail sales would suggest and make sure that year-end inventories are down a fair amount as we end the year to keep that pressure on used bike prices as we go throughout the year.

And no, we do not believe that reducing new bike prices will help the situation.

As a matter of fact, James, it's quite the opposite.

It is the lower new bike prices that we have in particular on model year '16, because we overproduced is putting downward pressure on used bike prices.

And again, model year '16, we addressed as quick as we could, but lower prices at new is not the answer.

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

So it sounds like based on the fact that used and new were better, is it safe to assume, maybe I'm assuming too much here that, that is technically within your parameters of your 10-year plan of growing riders, not necessarily new bikes?

And as a follow-on, a quick follow-on to that.

Just curious, if you could help us fill us on exactly what you're doing, besides what you already mentioned, to sort of embrace the used market.

What does that mean sort of philosophically to you over the long run?

David, this is Matt.

I'll just provide a little perspective on this.

I think when you look at, what John mentioned of size of the used bike market, it's obviously a very important dynamic in our business.

And as we look at the strategy to build riders and you look at that marketplace and that dynamic, it becomes a very exciting lever to pull in our quest to build new riders.

Used motorcycles represent not only typically a more affordable entry point into the Harley-Davidson brand, they also, for a new rider, represent an opportunity to experience the bike in maybe a little bit less of an intense situation versus buying a brand new beautiful Harley.

So the used bike market is a key part of our strategy for ridership.

It's a great entry point for more price-sensitive buyers, for new riders, for young adults, millennial riders, so we feel very good about it.

There is a lot of work that we need to do to best do that.

But as far as it supporting our strategy for ridership, it's actually a tremendous asset for us, and we have to find all the right levers to pull and find the right balance.

To -- kind of to John's earlier point about how we balance that with our new motorcycle sales levels as well as how we try and monetize better beyond what we currently do, which is pretty good with HDFS through the dealerships, but better monetize the used marketplace for the company.

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

John, could you define -- the first sort of the housekeeping question here, define what you were meaning that your channel inventories will be down significantly by year-end.

Just any parameters on that?

And then I guess the broad question here, Matt, I don't know if you want to take this is, if you could parse out what you're seeing over the last 12 months, the trends in your millennial purchasers, whether that's on new or used versus other demographic buckets such as gender or ethnic demographics?

I guess, the key one though would be that millennial purchaser versus non-millennial purchaser.

Thanks, Tim.

With regards to our guidance, as you recall prior we were looking to be flat in the United States, and we will reduce that significantly.

We don't provide an absolute inventory.

But significantly, it'd be down in the range of double digits and meaningful enough to continue to keep upward pressure at the auction level on our used bike prices.

So Tim, thanks for the question.

First of all, to kind of back up a second, I mean when I talked earlier about outreach and the shift in our mix that we saw -- that we drove between 2010 and 2016 through a lot of focused efforts and that included that, what we call young adults, which happens to line up directly on top of what's defined as millennials.

So we saw great success across every one of those target outreach segments as we invested and did things differently with product, did things differently with promotions, did things differently with the retail experience and things with dealer training about how to speak to broader bases of customers.

So we feel very good about that as a demonstration of capabilities.

What we are now bringing to that is a more refined view about consumer life stages and so forth, and what does that mean for where people are in their journey.

There are a lot of other dynamics going on in the world as far as life stage.

People getting married later, people having children later and so forth.

What are the impacts of those trends on not just millennials, but even Gen X, and what does that mean and what do we do about it?

I'll just offer a little bit of broader perspective.

As a company, we've been inspiring riders across every American generation since 1903 through all of their life stages and each of those generations has seemed different in what they do, what they like, how they express themselves, what personal freedom means to them.

And millennials seem different too.

But we know that among them there are plenty of freedom loving adventure seekers, who aspire to the values that we stand for.

Plenty of millennials ride motorcycles.

A lot of the data that is easy to get is new motorcycle sales, but you look at that used marketplace, there are plenty of millennials that are riding and it's up to us to inspire even more of them to ride and to engage with Harley-Davidson through our products and experiences.

And the strategy that we have laid out, every one of our objectives, our product plan, every initiative within the U.S. and international is driven by our deep understanding of the current and future customers of every generation.

Our quest to build 2 million riders in the United States is going to come from millennials, it's going to come from Gen X'ers, it's going to come from Gen Z, it's going to come from generations yet to come.

And yes, it's even going to come from baby boomers.

And 2 million sounds like a big number, because it is a big number.

And with our 115 years of experience, we feel very good about the journey to build 2 million more riders in the United States.

We feel very good about how our outreach's success sets us up to dial that in even further as we build more insights about life stages, trends, tendencies and what we need to do about it.

But we've laid this out as a 10-year journey, and we feel very good about it.

So thank you for the question.

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

So I just wanted to ask about EagleRider for a moment.

I'm wondering, in the quarter, how many bikes were shipped into that program and then how many do you expect to ship for the year?

And also, if you could help us understand that in terms of into how many dealers and what regions?

And then what I'm curious about is, were the units that were shipped in the quarter included in the retail registration number you reported this morning?

And if so, can you help us understand what the retail registration number was adjusting for EagleRider?

Thanks, Felicia.

When we look at the second quarter results, our partnership with EagleRider did not have an impact, when you look at authorized rentals that our dealers have been engaged in and EagleRider and the onset of that agreement, there was no benefit or detriment in the quarter, in the second quarter.

Going forward, we do expect a benefit in terms of overall sales of motorcycles given the relationship that we have with EagleRider.

And I'm sorry, the last -- I think the other question that you asked was with regards to how they are accounted for in terms of sales.

Whether it's authorized rentals or into the EagleRider program, they would be accounted as a retail sale.

And Felicia, let me add.

This is Matt.

As far as dealer coverage, this is something that needs to unfold over time.

As you can imagine, there are a wide variety of appeal, if you will, in the location of various dealers.

If you consider Las Vegas for example, or Chicago, where a lot of Europeans like to begin their journey on Route 66 on Harley.

So the scale of the offering and the depth of the offering will vary market-by-market.

And we're even considering access in the case of very small rural dealers where someone wants to do the ride of their lifetime or as I mentioned in my remarks, trial a motorcycle for an extended period of time where the EagleRider relationship would take on a different form to support those needs as well.

And so as we develop this, it's considering all those types of scenarios and it will unfold over time as EagleRider works with each individual dealer to set up the right level of engagement depending on the dealer's interest and the local market potential for rentals, tours and trials.

But how many were shipped in the first quarter?

I mean, in this quarter, sorry, in the second quarter?

We don't provide that level of detail.

But again, when you look at the overall rentals of the company whether they're authorized or EagleRider, they were similar to the last year number.

Okay.

And you won't talk about your plans for the full year?

I did.

I did, Felicia.

No, in terms of a number.

We won't give a number, but we expect it to benefit our retail sales in the back half of the year.

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

I wanted to follow-up on an earlier question that Tim asked.

But have you done any work to understand who is selling bikes in particular and also who is buying?

I guess, I'm wondering if you're seeing an increase in boomers who are exiting the sport as they reach a certain age and they are being replaced by millennials who might be entering the sport, but doing so on a used bike?

Well, first of all, Craig, I'll jump in, in terms of how the used bikes are priced is focused on the auction market, and we don't have data on the demographics within that market.

But we do know that, that market of 7% of overall used bike sales sets the price for the rest of the market, and we certainly know who is buying and selling in that market.

And over the last several years, we've seen demand come down because of international buyers exiting the market and Harley-Davidson dealers to some extent exiting the market.

With regards to more recently, we have seen a rising demand at auction largely to Harley-Davidson dealers.

Craig, this is Matt.

At the Investor Conference in February, we talked about our investment in data and analytics and it's exactly in this space that you're describing, but we don't have any information to share at this point.

But what it represents, which you're hinting in your question is, what is on the mind of the rider versus what is happening to the machine.

And that's what the data, when you look at registration data down to the individual person, we can understand better the flows in and out of the sport and then dig deeper into the reasons why and therefore, what we need to do about it.

That's the nature of the work that we're continuing to do to better inform and target our investments in ridership going forward.

Our next question comes from the line of Rod Lache from Deutsche Bank.

Just wanted to ask a couple of things.

Just first, just to put the 2 million rider goal into context, can you just remind me what's the base of U.S. riders today?

It's around 5.5 million, I think, Harley riders.

I think the total marketplace park is over 6 million, but I'm not certain of that exact number.

I think interestingly for perspective for those on the call, motorcycling engages about 2.8% of U.S. adults.

So we are dealing with some very unique minded individuals who choose to ride and they exist, by the way, across all demographics and this is where the targeting our efforts becomes very important.

And where, obviously, the park of used motorcycles represents an alternative for riders and how embracing used plays into our strategy to grow ridership, but those are roughly the scale of the market size for the total market and for Harley.

Okay, great.

And what's the size of the motorcycle park today?

Well, that -- the park is around that 6 million number in total.

Okay.

So that's equivalent to the rider population?

Yes.

You mentioned that there's still an issue in the used versus new pricing, and I was wondering if you could just comment on what that implies for pricing strategy as you move into the new model year?

And also, the outlook for some of the other areas, obviously, FX may be improving here going forward.

I assume that most of that is hedged at least in the next near term and materials.

So given the pricing of new and used, we don't see a big impact on our pricing of new going forward.

We're certainly not going to provide any details on model year '18 pricing.

But again, we're working to fix the supply demand relationship at auction to push up used motorcycle prices, which will provide a lot of benefits throughout the system, is a trade-up rider, we'll get a better economics when he trades up.

Certainly, a new rider coming in will get a better value out of the new and it will certainly help profits at HDFS as those used bikes rise.

Rod, you had mentioned in addition to that with regards to hedging, I'm not sure I completely understand the question there.

If that's relating to rising raw material costs or something else?

Well, the U.S. dollar weakening now, right?

So the -- presumably the headwind is moderating, but you may have already hedged much of that for the rest of the year?

Yes.

Thanks, Rod.

I'm sorry, I misunderstood.

With regards to overall currency, we feel pretty good where we're at right now.

Again, anything can happen in those markets.

We are seeing a little bit more stability than we have in the last several years.

And with regards to the remainder of the year, we have a fair amount of hedge on our key currencies.

So we'll have to watch the markets.

There's always the balance sheet revaluation that affects our profits.

But right now, the quarter was tough, the dollar strengthened by 2 percentage points, but when you look at the futures market, we feel pretty good about where we are for the rest of the year.

And just lastly, there's been a lot of talk about consolidation in the industry, Ducati has come up.

Is expanding to other brand is something that this management team would consider?

No, I'll just comment -- we're not going to comment specifically on Ducati.

I think the focus is on riders and whatever we need to do as a company to grow the number of riders.

We don't feel that other brands will necessarily be key to that strategy, but we're not going to close any doors on what we need to do to grow ridership and to grow to our potential internationally.

But again, our focus has been and continues to be on the Harley-Davidson brand and leveraging it appropriately and fully as we see fit.

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

Look, I understand second quarter retail was worse than you'd planned for.

But if you look at the magnitude of the shipment decline, it's still seems bigger, especially since it sounds like you think the pace of retail declines improves in the second half.

So I guess, I was just wondering what else changed with your strategic planning and thinking as it looks like you're finally really trying to flush the inventory, but it also seems like that's something you -- could have been done the past couple of quarters or certainly last quarter?

So I wanted to get some insight into sort of your -- management's thinking there.

And then also, look, I think credibility is a little bit low here and you've lowered shipment guidance I think 4 out of last 10 quarters.

So maybe your sense of how bad you think retail can get that would still cause you to be comfortable with the current shipment guidance?

Okay.

Joe, with regards to the shipment guidance as we look at down 6% to 8%, we've talked about retail sales.

We're sitting through the first half at down 5.7%.

We do expect retail sales on a worldwide basis to improve in the back half, largely driven by growth in our international markets.

As we look at the U.S. market, we're going to continue to keep pressure on new bike inventories.

And you said, we could have started it a couple of quarters ago.

We did.

And in the first quarter inventories were down 8,200 units, which is a significant amount and that did jump-start price rises in the auction market.

As we finished the second quarter, inventories were still down a fair amount, 7,200 units.

We would have expected them to be down more, because we didn't expect the second quarter to be -- the industry to be down 7% in the second quarter.

So while we've got great improvement on a year-over-year basis of our inventory, dealer inventory at the end of the second quarter, which will help as we move into the carryover or the changeover of model years, we would have preferred it to be a little bit lower.

We're working with our dealer network to make sure that we are as clean as we can be coming into the model year '18, which we're very excited about.

And so overall, when down that -- down 6% to 8%, a portion of that's made up of retail sales, a new view of retail sales, but a lot of it is also made up of lowering overall inventories at year-end in the United States.

We're doing our best to read the market and these markets are moving at a pretty large percentages, and we're doing the best we can do to read them and then we're providing that information to our investors.

I'm sorry, just, John, to clarify you said you expect globally retail sales to improve.

Did you mean, absolutely?

So you actually think they'll be up in the back half or did you mean the pace improves?

No, we -- I'm sorry, Joe, on an international basis, we expect retail sales to be up in the back half.

On a worldwide basis, we expect the decline to improve in the back half from what we saw in the front half.

We're not expecting any big improvement in the United States market.

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

Yes, could you talk a little bit about the cadence within the quarter.

If I heard you right, I think it sounded like there was some volatility there.

And any type of regions or markets like oil and gas that really stood out to you in the quarter?

Thanks, Greg.

The cadence in the quarter was the industry and Harley-Davidson were down in April.

The industry and Harley-Davidson were down more in May.

And the industry and Harley-Davidson were down a fair amount more in June.

And in terms of the regions around our sales regions, not a lot of difference.

Most of them were down in the same range.

I think the west was down a little bit more than the others and that was due to very wet weather in the first quarter, nothing notable in the second quarter.

In terms of oil and gas, we are still facing a headwind with regards to sales there.

Sales in those areas, as we call oil dependent, were down more than our average, not significantly more, but still a persistent problem.

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

I guess, I'm just looking at shipments down.

You've got some moderating patterns evolving in your credit metrics.

Did you tighten up on credit a little bit this quarter?

And could you just talk about kind of the posture in credit heading into the second half of the year and any trends you may see kind of unfolding in that part of the business?

Great, David.

We did not do anything in particular in the second quarter with regards to tightening credit.

As we've talked about the last couple of calls, we have tightened subprime credit over the last 4 -- about 4 quarters, and you're seeing some of that in our market share.

When we look at, overall market share was down a percentage point, certainly in line with what we expected.

We were lapping a big market share in the year ago period.

But one of the drivers of that is lending the subprime customers is down in the second quarter of 2017 versus 2016.

And again, we expected that because we have tightened credit.

Now having said that, we look at HDFS and the business there is performing extremely well.

If you take out the onetime gain, overall earnings were up.

I mean, the loss provision was the lowest it's been in 8 quarters, and more importantly, the metrics that we follow in terms of 90-day delinquency and -- I'm sorry, 30-day delinquency and credit losses have both improved quite significantly.

For example, if you look at delinquencies, they were up 9 basis points.

The trailing 4 quarters were up 41 basis points.

So dramatic improvement in that measure.

Credit losses, very similar, in the quarter, were up 21 basis points versus the last trailing 4 quarters at up 39 basis points.

So we're seeing that improvement.

Part of the improvement in credit losses is the fact that used bike prices are rising, so when we repossess a motorcycle, we fare better with that transaction.

So we feel pretty good about the trends at HDFS and their business model at this time.

But we are going to have some headwinds on retail sales, because of tightening of subprime credit over the last several quarters.

So we just have to anniversary this out?

I'm sorry, David?

So we just have to anniversary this out or do you anticipate further tightening as we go forward?

At this time, we feel comfortable where we're at with our underwriting, both on prime and subprime.

Our next question comes from the line of Joe Altobello from Raymond James.

First, a couple of questions on used bikes.

You mentioned it was up mid-single digits.

Was that for the quarter or year-to-date?

That was year-to-date measured through May.

Year cycle date is on a month lag.

Okay.

And then any sense for the used buyer, is that more of a new rider versus an existing rider?

And has that trend improved in your favor?

We don't see any change in the trends.

The price gaps have certainly picked up the number of people buying used versus new.

Okay.

I'm just curious how that plays into your long-term strategy obviously to get new riders into the category.

If those new -- if those used purchasers are new riders that's obviously a positive, I'm just curious if you are seeing a change in that trend?

Not necessarily a change, but a significant amount of people that come in, in particular outreach customers, are new to the brand that come in through used.

And we do know that a young adult is 2.5x more likely to come in on used than new, which makes a lot of sense.

I don't know, if we're seeing a dramatic change in that data in the short term, but we certainly understand who's coming in on used and how they come in, but not significant changes.

Okay.

And just last one on Victory.

Any estimate on what the impact of the wind down there had on industry growth and your market share in the first half and second quarter?

Yes.

We talked about the first quarter.

The sell down and the liquidation was pretty strong in the first quarter.

Their retail sales far exceeded the industry and their market share was up a lot, which had adverse impact on our market share.

We kind of expected that to come through in the second quarter as well, follow that trend, it did not.

The sales lift for Victory didn't materialize in the second quarter.

They were more in line with where the industry was.

And so very little impact on the industry or our market share in the second quarter.

And there's still a fair amount of inventory that we would expect will be settled down over the next couple of quarters.

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

You mentioned it a couple of times and we touched on it, rider penetration.

I look at registrations and, at least on our data, it's really been flat for maybe the last decade.

So as U.S. population growth increases your rider penetrations actually come down as a percentage of the population.

So when I look at that, and I think about industry shipments that peaked 2 years ago have been declining.

And I think about your opportunity set to go out and grow and go after new riders, I'm really wondering what you've been seeing so far as the largest impediment to bring in folks into the sport of motorcycling?

Is it the price point?

Is it a safety issue?

Do think it's a brand association?

What headwinds are you seeing that's kept at least registrations plateaued and your percentage of penetration of the U.S. adults flat to down over the last decade or so?

Well, David, we have to sync up the data.

When we look at the percent of -- or the incidents of riding at Harley-Davidson, it has been rising for the last 10 years.

We're starting to see that flatten out at around 2.8%, but it was still rising as of a year ago.

So I'm not sure, but it is certainly slowing down.

When you look, again, at the total pool of new and used that has been rising, certainly since the downturn.

And overall for Harley-Davidson, we're at the highest levels of new and used motorcycles.

When you look at the barriers, I think the barriers are the same ones that we have faced for a lot of years.

Price is one of them.

It is a big investment for someone to buy and that's why a lot of people come in and lot of riders are coming in on used and with low used bike prices we're pulling in more people.

But I don't think the barriers have changed in any great respect.

Yes, I would just add.

It's a good question in the sense that the answer is, it depends.

There are lots of reasons why people ride and lots of reasons why people choose not to.

And one -- a lot of the insight that we gained through the outreach efforts, which really began in 2007, we started to get real traction in 2010, as we unpacked all the thinking that was going on in these various groups and then started to systematically address the barriers to people considering the sport and considering the brand, whatever those barriers were.

And that's actually the real strength that we now have as a company to take on this next challenge that is more of a, if you will, a life stage or maybe more of a psychological challenge about what people are thinking and how can we appeal to their thinking with the things that we do with product, with promotion, with the dealer experience, with even recognizing that rider training is one step on the path to ridership.

The ridership path is a long-term path and training is only one component of it.

What more can we do, do we need to do to inspire and support and nurture and create riders through Riding Academy and other steps that we need to do.

So I would -- I simply characterize all this as the next step in our evolution of being a lot smarter about how we create customers to continue to have the kind of vital business that we want.

Got it.

And just to tack on to that.

When you think about that ridership experience and kind of graduating that customer from a used into a new, what's the typical time period between if I were to go out to a Rider Academy this weekend and enroll, go through the program?

How long would you expect for it take me to show up at your door for a new vehicle purchase versus a used vehicle purchase?

The answer is, it's all over the map, depending on the individual.

Their status, their -- we have different profiles between people that buy new and buy used.

There are different psychologies involved with people that choose only to buy used or choose only to buy new.

So the -- it's impossible to give a simple answer, but what matters is the insights that we're building to understand how to target and how to affect the decisions that people are making to either enter the sport and enter our brand.

Okay.

Understanding it's different psychologically for different individuals, but when you target this in growing the 2 million riders, I'm just trying to understand how that pipeline looks, just like we all are.

Because if we're at 5.5 million or so or 6 million in total, adding another 2 million riders in the sport is a 33% increase.

And over the next decade, when do we see that potentially come into new vehicle sales?

First of all, I appreciate everybody's interest and engagement on our strategy, because that's what we're all about.

We have, as we -- and we shared this in February, there are 2.4 million competitive owners.

There are 15 million in tenders, people that have raised their hand and said, I'm interested in purchasing a motorcycle within 3 years.

We have 7.8 million what we call, sleeping license holders.

People who have, for whatever reason, chosen to step out of the sport, but they're already licensed, they're already experienced, they've already participated.

So when you look at the pools from that perspective and you add to it the fact that we have 2.8% of U.S. adults riding.

We have -- and I'll just make sure -- I now have the actual figures here, right?

We have 3 million riders in the United States of Harley-Davidson motorcycles.

In perspective, 2.4 million competitive owners, 15 million in tenders, 7.8 million sleeping license holders and 3 million active Harley-Davidson riders.

So there's lots of opportunity here that we need to very surgically mine and develop through our focus on building riders.

And again, I appreciate everybody's engagement with the strategy because we're fully committed to it.

So thank you.

All right.

Thank you, everyone, for your time this morning.

The audio and slides will be available at harley-davidson.com.

The audio can also be accessed until August 1, by calling (404) 537-3406 or (855) 859-2056 in the U.S. The conference ID number is 41372592.

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Thanks.

This concludes today's conference call.

You may now disconnect.