Harley-Davidson Inc (HOG) 2018 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the second quarter 2018 earnings conference call.

(Operator Instructions) Thank you.

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

Thank you, Heidi, and good morning, everyone.

You can access the slides supporting this call on harley-davidson.com.

Click About Us at the top right and select Investors from the drop-down and click the Earnings and Materials box -- Earnings Materials box in the center of the page.

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.

Joining me this morning are President and CEO, Matt Levatich; and CFO, John Olin.

Matt, let's get started.

Thanks, Amy, and good morning, everyone.

You saw in our press release this morning that we'll be sharing our accelerated strategy next Monday.

We're eager to share the specific details with all of our stakeholders because we're excited about the impact of our plans to strengthen this great company and accelerate growth.

Though we're not getting into the details today, I would like to talk about what we're driving toward and how we approached the development of the plan.

But first, I want to thank the team for the great work they all did to put Harley-Davidson in a position to accelerate our strategy for growth.

As employees, we all know we're stewards of an incredible legacy, with unmatched passion and loyalty from everyone who associates with our brand.

This universal passion is, perhaps, our greatest strength.

We're also keenly aware of the headwinds that Harley-Davidson faces today and into the future, and we are undeterred.

We are driven by these challenges.

We're fueled by the passion of our founders, who set our true north back in 1903.

As they were pioneers of a new kind of freedom back then, so we are today.

Our plan is Harley-Davidson through and through, and we'll redefine existing boundaries of our brand, reaching more customers through new types of products and channels and doing so in a way that reinforces all we stand for as a brand and as a company to secure the legacy of Harley-Davidson freedom for generations to come.

As we set out to develop the strategy, we started with a realistic assessment of the risks, opportunities and capabilities needed to stabilize and strengthen our base business, reinvigorate the U.S. business, accelerate the pace of international growth and drive value for the long term.

We leveraged our data-driven insights and leaned into our substantial competitive advantages, keeping clear focus on all it will take to grow ridership by both inspiring new riders and keeping our current riders engaged.

Last year, when we established our objectives to build more riders, our most important step was to put riding and the rider first in all of our thinking and in all of our actions.

This rider-first focus is the backbone of our strategic planning and, frankly, all of our work.

We know global consumer needs and interests are shifting, and we knew we needed to shift our thinking to bold actions, to change our trajectory and better leverage our vast capabilities and competitive firepower: excellence in product development, manufacturing, brand and our great dealer network.

We know we must deliver more compelling new products more quickly for our current riders and to inspire a new generation to join motorcycling.

Product innovation and speed to market is a capability that we firmly established and we continue to drive.

This is the core of what we do, and it's the very essence of our objective to launch 100 new high-impact products by 2027.

We must also reach more customers.

Our brand appeal is universal, but access is limited.

We need to rapidly expand the reach of our brand and products to capture hearts and fuel the passion of freedom-seeking people the world over.

Our plan is intended to create broader access through an integrated, multichannel customer experience for Harley-Davidson products that meets consumers where they are and how they want to engage, whether online or in store.

And we know we must improve Harley-Davidson customer experience.

Our dealer network is a clear advantage today and will continue to be the hub of customer experience going forward.

Customer expectations are incredibly dynamic, and we need to further strengthen our dealers to meet new customer demands and rapidly evolving retail expectations.

We will enhance our performance-driven approach to dealer network management, allowing the best-performing and most entrepreneurial retail partners to drive network innovation and success for themselves and Harley-Davidson, with exceptional customer experience at the core.

In addition, continued expansion and improvement of our international dealer network is key to providing better access to global growth opportunities.

In sum, our strategy is designed to accelerate our efforts to build the next generation of Harley-Davidson riders by delivering new products, creating broader access and strengthening our dealers.

We planned to drive revenue growth and expand operating margins, and we challenged ourselves to fund strategic opportunities while keeping intact our current investment and return profile and capital allocation strategy.

The entire team is energized, and we look forward to sharing our accelerated strategy in a few days.

Now back to the objective of this call and some of my perspectives on our second quarter.

Overall, our performance was in line with our expectations and plans, and our efforts to strengthen our business remained on target through the second quarter.

Great work continues on our manufacturing optimization, and we expect our expansion in York, Pennsylvania and the transition from Kansas City to be complete in 2019.

We are proud of our manufacturing legacy and our employees' commitment to safety, quality and global competitiveness.

And let's be clear, as we said in our 8-K, when tariffs were enacted by the EU in the second quarter, it put further pressure on our business, and we made the best decision given the circumstances, the best decision for our customers, our dealers and our business in this critical market.

We will continue to make the best business decisions for Harley-Davidson and our stakeholders based on the facts and circumstances before us, and we will continue to build Harley-Davidson motorcycles for our U.S. riders in the United States, as we have for our entire 115-year history.

Retail dynamics remain top of mind as we continue to be vigilant in managing supply in line with demand to maintain premium value for riders and dealers.

To support retail sales, during the quarter, we invested in marketing and sales support, with targeted programs to encourage trial, purchase and to build new riders.

Our efforts drove traffic into dealerships, increased access to the brand and drove global sales.

In Q2, we experienced increased international retail sales, improved the rate of Riding Academy participants who purchased Harley-Davidson motorcycles and expanded access to our products in emerging markets through new dealerships and apparel and lifestyle boutiques in urban shopping areas.

Improved and enhanced marketing investments drove millions of engagements with the Harley-Davidson brand.

Visits to our website alone were up 29% in the quarter.

Here are some additional Q2 marketing highlights by the numbers.

We drove nearly 37 million social media impressions from #MotorcycleMonday, 10 million social media views of #FindYourFreedom intern content and 6 million Facebook views of #FreedomStories and Harley Asia.

Millions of points of inspiration for existing, new and future riders.

We are acting now, and for the future, to provide clear leadership as the global motorcycle industry continues to serve up challenges.

Industry weakness in certain global markets is being met with additional marketing support and intensified focus.

We are responding in real time in a dynamic world with smart agility, all while we intensify our focus on improving the strengths and prospects of our business for the long term through accelerating our strategic actions.

I am proud of the team, our employees, our dealers and suppliers, and I want to thank our loyal and passionate riders, who we all worked tirelessly to serve.

We are ready to welcome them to the birthplace of Harley-Davidson as we celebrate our 115th Anniversary here in Milwaukee over Labor Day weekend.

If our 115th party in Prague earlier this month was any indication, it will be one hell of a good time.

And now John will review the financial results for the second quarter.

John?

Thanks, Matt.

Our second quarter financial results are in line with our plans.

In the face of ongoing retail sales headwinds in the United States, we remained focused on reducing U.S. retail inventory, reducing costs and investing in our strategy to drive value for our riders, dealers and shareholders.

The summary of our Q2 results is on Slide 8. In the second quarter, revenue was down modestly despite a significant decrease in shipments.

We planned to lower shipments in the quarter to support reduced year-over-year retail inventories in the United States.

As planned, motorcycle operating income was down as a result of lower shipments, a $12.4 million restructuring charge and increased operating expense.

Financial Services operating income was down 1.7%.

Consolidated net income was down 6.4% due to lower operating income, partially offset by the benefit of a considerably lower tax rate.

Earnings per share was $1.45 for the quarter.

When excluding manufacturing optimization costs, EPS was $1.52.

We remain focused on delivering strong margins and strong returns over the long term despite near-term headwinds.

On Slide 9. Worldwide retail sales of new Harley-Davidson motorcycles in Q2 were down 3.6% versus prior year.

Sequentially, the year-over-year Q2 retail sales rate improved compared to the Q1 2018 sales rate, which was down 7.2%.

We were pleased to see the year-over-year U.S. industry rate of decline improve sequentially from Q1 to Q2 2018.

However, as we expected, U.S. retail sales in Q2 continued to be adversely impacted by very weak U.S. industry sales.

In international markets, we experienced retail sales growth behind strength in Europe and emerging markets.

For the full year, we continue to expect retail sales to be down in the United States, while international retail sales are expected to grow.

During the quarter, we were encouraged by a strong revenue growth for motorcycle, international retail sales growth, our U.S. dealers inventory position and, certainly, by the actions we are taking to build ridership.

Now let's take a closer look at the U.S. on Slide 10.

U.S. retail sales were down 6.4% in Q2, which is in line with our expectations.

Retail sales started off very weak behind unseasonable weather in April.

We experienced a good rebound in May and June, partially aided by increased promotional support intended to spark spring sales momentum.

The U.S. industry was down 6.3%.

We believe the new motorcycle industry sales continued to be adversely impacted by soft used bike prices.

Sales of used Harley-Davidson motorcycles continued to outperform sales of new Harley-Davidson motorcycles.

Also, Q2 used Harley-Davidson wholesale prices at auctions were in line with year-ago levels and pricing services, such as NADA and Black Book, continue to publish higher retail values year-over-year for used Harley-Davidson motorcycles.

Additionally, used Harley-Davidson motorcycle prices in our dealerships increased for the fourth straight quarter.

Stronger Harley-Davidson used bike prices reinforce our disciplined focus on driving premium value for our riders, dealers and the brand.

Moving on to new motorcycle market share.

Harley-Davidson's share in the quarter remained a very healthy 48.4%, largely flat to last year's Q2 despite a highly competitive marketplace.

We remain very competitive in the segments in which we compete.

Harley-Davidson's market share in the Touring and Cruisers segments, which represents approximately 75% of the 601+cc market, was up in both the quarter and year-to-date.

We believe our discipline to reduce supply and improve model-year mix in the U.S. retail channel delivered its intended results.

U.S. inventory was down approximately 14,100 units compared to a year ago.

On Slide 11.

International retail sales were up slightly in the second quarter, driven by growth in emerging markets, which were up 3.5%.

We experienced significant growth in several emerging markets, including China, Brazil and Mexico, partially offset by declines in India.

We were pleased to see growth -- our growth trajectory in emerging markets continue to accelerate for the second consecutive quarter.

In developed international markets, Q2 retail sales were largely flat to prior year, a result of 4.3% growth in Western Europe offset by continued weakness in Japan and Australia.

Europe sales were fueled by strong demand for our new Softail motorcycles.

Retail sales in Japan and Australia continued to be weak in Q2 behind contracting industry sales and competitive new product introductions in segments outside of Touring and Cruising (sic) [Cruisers].

We continue to support our dealers in these markets with incentives and a strong focus on national test ride campaigns.

Year-to-date market share in Europe was 10.4%, up 0.9 percentage points versus the prior year quarter.

Finally, we continued to expand our international dealer network and added 12 new dealers during the quarter.

We remain confident and committed to the great potential that international markets offer Harley-Davidson.

We continue to leverage our brand, products and distribution opportunities to drive sustainable growth in international markets.

On Slide 12.

Wholesale motorcycle shipments were down significantly in the quarter and were at the high end of our shipment guidance.

Mix in Q2 reflects strong global demand for our new Softail motorcycles.

On Slide 13.

Revenue for the motorcycles segment was down 3.3% in the second quarter despite year-over-year motorcycle shipments being down 11.3%.

Revenue during the quarter benefited from 1 -- a $1,244 increase in the average motorcycle revenue per bike.

This increase was driven by a richer product mix, higher year-over-year pricing and favorable currency exchange.

Both P&A and General Merchandise revenue growth outperformed motorcycle retail sales growth during the quarter.

We were pleased to see a very profitable mix of products again in the second quarter.

We are working to grow our business and remain focused on our approach to optimize profitability and maximize brand value.

On Slide 14.

Gross margin in the second quarter was down as a result of lower shipments and higher manufacturing costs, partially offset by strong mix and higher pricing.

Mix favorability was driven by a shift to higher-trim models within our product families.

The financial impact of currency was flat during the second quarter.

A weaker U.S. dollar benefited revenue by 1.5%.

However, this benefit was largely offset by a loss as we remeasured our balance sheet at the end of the second quarter.

Raw material costs were higher during the quarter behind increased steel and aluminum prices.

Finally, manufacturing was unfavorable versus prior year, driven by lower absorption on lower production and shipments and higher depreciation.

On Slide 15.

Operating margin as a percent of revenue for Q2 was 16.0%, down 4.1 percentage points compared to last year.

Operating margin percent was adversely impacted by lower gross margin, higher SG&A spending as we invested in higher levels of marketing and product development and a $12.4 million restructuring charge related to our manufacturing optimization.

Profitability and strong cash flow remain a key focus.

It is our objective to further leverage our established capabilities to continue to drive profit, cash flow and tap -- top quartile ROIC into the future.

HDFS Q2 operating income, shown on Slide 16, decreased 1.7% compared to last year behind lower net interest income, offset by a favorable provision for loan losses.

Net income -- net interest income was down $6.3 million due to higher borrowing costs.

The provision for retail loan losses was favorable by $5.9 million, driven by lower credit losses and a reduction in the reserve rate compared to rising reserve rate in Q2 2017.

HDFS operational results are on Slide 17.

Q2 originations were up 7.2% versus prior year despite lower new retail sales in the U.S. Market share was up 1.6 percentage points during the quarter.

At the end of the quarter, there was $351 million of cash and cash equivalents at HDFS and $817.7 million of liquidity available through bank credit and conduit facilities.

During the quarter, HDFS issued medium-term notes totaling $800 million.

On Slide 18.

The 30-day delinquency rate for retail motorcycle loan receivables on our balance sheet at the end of June was 3.09% or 16 basis points lower than Q2 2017.

The annualized retail credit loss rate for receivables on our balance sheet was 1.56% or 15 basis points lower than 2017.

We were encouraged to see a year-over-year decline in credit losses for another quarter after having experienced an extended period of increases as credit losses normalized.

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

The remaining HD -- Harley-Davidson, Inc.

financial results are summarized on Slide 19.

Year-to-date operating cash flow was up $108.8 million or 17.3% from last year, driven by lower wholesale financing.

Our effective tax rate was 24.1% year-to-date, which was considerably lower than last year, largely due to the impact of the Tax Cuts and Jobs Act.

And finally, regarding liquidity, 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.

We believe the charts on Slide 20 demonstrate that we benchmark very well against various peer groups in our ability to generate and return cash to our shareholders for the period of 2015 to 2017.

One of the 5 objectives guiding our business strategies and execution through 2027 is to deliver superior return on invested capital as measured by Motor Company ROIC in the top quartile of the S&P 500 and by a best-in-class return on equity at HDFS.

Harley-Davidson is a leader in ROIC at the Motor Company and ROE at HDFS and is the clear leader in our ability to generate and return cash to our shareholders.

Slide 1 -- Slide 21 illustrates our recent history of returning cash to our shareholders.

In the second quarter of 2018, we paid a quarterly dividend of $0.37 per share and repurchased $38.2 million of our stock.

Share repurchases during Q2 were limited as we halted trading of our stock for company insiders and company share repurchases due to our work on the accelerated growth strategy.

We intend to resume our share repurchase program after we provide more information on our plans.

Driving superior value for all our stakeholders is a top priority.

We will continue to look for opportunities to grow value through investments that maximize the performance and long-term potential of the company and the brand.

We have a robust and disciplined process for our investment decisions.

After investing in our business, we intend to return excess cash to our shareholders in the form of increasing dividends and share repurchases.

On Slide 22 is a summary of expectations and year-to-date actual results for our multi-year manufacturing optimization initiative.

We continue to expect our efforts to result in a reduction in operating income of $170 million to $200 million through 2019, of which roughly 30% will be noncash write-downs of existing assets.

We also plan to invest approximately $75 million in capital and expect annual ongoing cash savings of between $65 million to $75 million after 2020.

During the second quarter, we incurred $12.4 million of restructuring expense, driven primarily by accelerated depreciation.

We also incurred $2.4 million in temporary inefficiencies related to our manufacturing optimization.

We believe these investments have very attractive returns.

When completed, we expect this initiative will simplify our manufacturing footprint, provide focus in our operational investments and improve gross margin by approximately 1.25 percentage points.

A summary of our expectations for 2018 is on Slide 23.

We are confirming our 2018 guidance with the exception of operating margin and HDFS operating income.

Previously, we expected operating margin as a percent of revenue for the motorcycles segment to be approximately 9.5% to 10.5% for the full year 2018, which was down approximately 2 to 3 percentage points compared to 2017, primarily driven by our planned manufacturing optimization expenditures of $120 million to $140 million in 2018.

As a result of the released -- recently enacted tariffs, we expect to incur approximately $45 million to $55 million of increased costs.

This includes incremental costs of approximately $15 million to $20 million for steel and aluminum and approximately $30 million to $35 million for EU tariffs.

We expect to absorb a significant portion of these incremental costs through disciplined business management.

However, given the magnitude of these unplanned costs, we are adjusting our full year 2018 operating margin guidance.

We now expect operating margin as a percent of revenue for the motorcycles segment to be approximately 9% to 10% for the full year 2018.

Behind HDFS' strong first half results, we now expect Financial Services segment operating income will be flat to up slightly in 2018.

In the third quarter, we expect to ship approximately 45,500 to 50,500 motorcycles, up 9% to 21%.

First half shipments were down 10.5%.

Consequently, to achieve our full year shipment guidance of down 2% to 4%, we expect back half shipments to be up roughly 6% to 12%.

We believe the shipment cadence will result in appropriate U.S. retail inventory through the selling season, including an improved level of carryover inventory at model-year changeover.

Timing of shipments is expected to result in flat year-end retail inventory in the U.S., and it supports our disciplined supply strategy, which we believe is delivering its intended results.

Finally, we expect the shipment cadence will also impact the timing of our operating margin in the remaining quarters of 2018.

Finally, during Q3, we expect to incur approximately $25 million in manufacturing optimization costs, including $18 million in restructuring expense and $7 million in temporary inefficiencies.

To wrap up, we will continue to be disciplined in our management of motorcycle supply; drive premium value for our riders, dealers and our brand; amplify our cost management efforts; and relentlessly focus on our long-term objectives.

We look forward to announcing our accelerated strategy to build the next generation of Harley-Davidson riders globally on Monday.

We will continue to focus our investments, deliver strong returns to our shareholders and drive growth for our company for the long term.

Thank you, and now let's take your questions.

(Operator Instructions) Your first question comes from the line of Felicia Hendrix with Barclays.

So my first question is, I was just wondering, John, if you could just call out for us the impact of EagleRider and the rental sales on the domestic retail registration in the quarter?

Or to word it another way: How many EagleRider rental units were sold in the quarter?

And just remind me, last year, the benefit was in the third quarter, and maybe it's the second quarter this year.

And then I have a follow-up.

All right.

To remind everyone, EagleRider is a partnership for rentals of our motorcycles that we established about a year ago, second quarter.

And over this period of time, we've been signing up dealers, and things are going as expected, and we're very pleased with that relationship.

When we look at the first half results, Felicia, with EagleRider, this year versus our authorized rentals last year, overall sales of -- I'm sorry, shipments and retail sales are about flat with each other.

So the first quarter was neck and neck as to where we were.

When we look at by quarter, in the first quarter this year, we shipped in a little bit more and, in the second quarter, a little bit less, but nothing of large numbers.

Last year -- you had mentioned what happened last year.

Last year, we got the partnership started in the second quarter, and we had a higher level of shipments in the third quarter last year.

And remember that overall EagleRider only represents about 2% of our annual sales.

Okay, so it doesn't seem like it really affected the results in the quarter.

No, it did not, Felicia.

Okay.

And then I think in the past, maybe if you said it, I might have missed it, but in the past, you had talked about growth in the portfolio including new plus used bikes.

So I was wondering, if you haven't mentioned that, or can you -- if I missed it, can you just quantify that?

Yes, when we look at, what we call, total demand, which is the combination of new sales and used sales of Harley-Davidson motorcycles, remember, that information is lagged by a month, and through May, we're seeing that used sales was about flat.

You see what our new sales were down during that period of time.

And so net total demand is down a little bit for the -- through the first 5 months of this year.

Okay.

Do you expect that to improve through the rest of the year?

I don't know.

I think that when you add in the month of June, it will improve.

As far as the rest of the year, we'll have to see.

Okay, if you add in June, do you think it will be up or just -- or flat?

We don't provide that type of forward look, Felicia.

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

First off, John, you said that May and June rebounded.

What does that mean?

Does that mean May and June grew or were just down less?

In aggregate, they were down less, Gerrick.

When we look at April, April was down in the mid-teens, May was largely flat, and June was down a little bit.

Okay, great.

And then on your marketing metrics.

They look impressive, but it seems so far, they've failed to drive growth in sales.

So is there a disconnect?

And why is that, perhaps, not resonating?

No, I don't think there's a disconnect at all.

We're doing a lot on the marketing side to bring in the next generation of riders, and what we are facing, Gerrick, is very strong headwinds in the overall industry.

We've got a strong undertow, and despite the marketing efforts and great product that we're bringing to the market, we are working through very difficult industry conditions.

Your next question comes from the line of Sharon Zackfia with William Blair.

I guess I was intrigued by a comment in the slides about the Thailand facility and the potential to lower pricing to some international markets.

Can you talk about when Thailand's up and running and, kind of, what percent of your international markets might be seeing lower retail pricing as a result of that?

When we look at our Thailand facility, which will come online in -- early in the fourth quarter, the purpose of the facility, like we have in Brazil and India, is to be able to provide a lower price to our consumers, and one that is not burdened with excessive tariffs.

And so when we start to produce out of Thailand, we'll be able to lower our price to the dealers, and our dealers to -- on to our customers, and we feel that the affordability of our products will increase.

That's happening largely, Sharon, in our ASEAN markets, which, at this time, are not a huge part of our volume but certainly, a significant portion of our future growth opportunity.

Okay.

And have you confirmed that Thailand's where you're going to manufacture the EU bikes?

No, we haven't.

We are looking at all of our options there.

We've got 3 international facilities, and we're looking at the best opportunity to supply the EU out of those facilities.

So when should we expect a decision on that?

When we have it, and it is the appropriate time, we'll provide it to all our stakeholders.

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

Matt, I know you've invested in Big Data to understand consumer trends in the U.S. I'm wondering whether you're making similar investments in the European and maybe other international markets and how your strategy might be influenced by similar Big Data investments.

Yes, thanks, Craig.

And clearly, the U.S. being the most significant market for us, that's where our efforts were first, and we have and continue to build a knowledge base of data assets that are helping us understand participation and migration trends.

Collectively, we call that the rider migration knowledge base, and we're leveraging that in focusing our actions in the near term and for the long term.

As you point out -- and we also suspect that developed markets globally, probably have some of the same trends and tendencies, so we're investing now to build that knowledge market by market.

It becomes more challenging to do so, given different country laws and so forth and availability of data.

But obviously, data is key to smart decisions, and that's where we're placing our investment as well as we roll forward.

And then as a follow-up on your European market, I know you've announced plans to absorb that tariff impact, something like $2,200 per bike.

Curious how dealers have reacted to that decision and how you would characterize the attitude towards Harley-Davidson more broadly in Europe.

Thanks, Craig.

The response I initially got directly from several dealers in Europe was it was one of the proudest days of their long association with the brand, for the company to see and protect their investment and the stability and ongoing growth of their market.

And so that continued as well for the folks at the company that were in Prague.

We had 110,000 people from over 70 countries in Prague, and the dealers that were there, many of them were there, they also reiterated time and time again their appreciation for the solidarity that the company has with them as our business partner.

And that was a very key part of our decision when the tariffs went into effect, to protect the marketplace and our customer value equation as well as our dealer business model, which is so key to our growth as we roll forward.

Your next question comes from the line of James Hardiman with Wedbush Securities.

So the second quarter shipments were obviously at the high end of your guide.

Maybe talk a little bit about Europe.

I would think that there was probably some buy ahead at both the real -- retail and the dealer level, just given that the tariffs were, I think, widely anticipated at the beginning of 3Q.

Maybe talk a little about that, how that maybe impacted your numbers and how we should think about that for 3Q.

And then I have a follow-up.

This is John.

We did not see any discernible shift in the patterns -- sales patterns in Europe throughout the tariff period.

Matter of fact, our sales in Europe were not as strong as they were in the first quarter, when there was no talk of the tariffs.

So we don't see it.

It could have happened a bit, but nothing that we could discern.

But you didn't try to get any of those bikes out on the water to maybe minimize the tariff's impact?

I'm sorry, I misunderstood.

Yes, absolutely.

As we learned about the potential for -- for increased tariffs in the region, we did our best to move product into Europe.

And as you can see, our overall company inventory is up quite a bit.

A piece of that is company-owned inventory.

Got it.

And then, maybe on the margin front.

You're lowering your operating margin by about 50 basis -- well, exactly 50 basis points, I should say, at the high end and the low end.

Maybe a little bit of a bridge.

I mean, the $30 million to $45 million from tariffs, it seems like it would actually be more than that 50 basis points.

And then the $15 million to $20 million you mentioned for steel and aluminum, I can't tell if that's the same $15 million to $20 million that you talked about 3 months ago, or if that's incremental.

Maybe a little bit more clarification on the puts and the takes there.

Great, good question, James.

So I want to make this as clear as possible.

When the tariffs first happened, we believed that there would be an impact to raw material costs of $15 million to $20 million, and we have not changed that.

The markets have done what they've done.

They haven't changed much, and -- nor has our perspective of the cost of incremental steel and aluminum costs.

That is $15 million to $20 million.

With regards to the tariffs, and that is the tariffs in European Union going from 6% to 31%, we believe that will be $30 million to $35 million.

In our 8-K, we had a broader range for just that piece of it.

And the reason for that was that -- your previous question with regards to inventory, and we were looking to see what the inventory situation would be when the tariffs got enacted.

And with that, we've got a much finer number, and that is $30 million to $35 million.

So in aggregate, we believe that the cost of tariffs this year will be $45 million to $50 million.

And you're absolutely right, when we look at our operating margin, we've come down 50 basis points, which does not -- which only represents about half that amount.

We are doing everything we can as a company to absorb on the costs that we can, and as we look forward, we can't eat the whole $45 million to $50 million or can't cover it in other parts of our business.

And for that, we are bringing down our guidance by the 50 basis points.

Your next question comes from the line of Jaime Katz with Morningstar.

So given your commentary on tariffs earlier in this call and the fact that Thailand is likely to open at the end of the year, and your decision to reallocate production is probably coming before that time frame, is it right to think that all of the exposure to tariffs will be off of the table by year-end?

And then that motorcycle operating margins, sort of, resume whatever a normalized rate is?

No, that is not safe to assume at all.

The annual ongoing impact of the margins is $90 million to $100 million.

And it is our aim to mitigate those over time, but this is going to take some amount of work, Jaime, to get this done.

We've never contemplated moving our European volume out of the United States.

Consequently, we are analyzing the capacity options that we have, manufacturing costs, supply chain logistics, in an effort to optimize it and to reduce and mitigate those tariffs.

This will go into 2019.

And again, we are working on the overall plans, and when we have them, we'll provide more information.

But you should not expect that those costs will be mitigated fully in 2019.

You can expect that some portion of them will be mitigated but not the full amount.

That's really helpful.

And then I saw that used bike prices were up again in the commentary.

This is the fourth straight quarter.

Can you talk about the spread between used and new?

And how maybe you think that's impacted demand?

Well, overall, when we look at -- so we're very pleased that over the last several quarters, 4 quarters that we've seen in our dealerships and in the broader market, we have seen used bike prices rise, but they have a long way to go.

When we look at previous to those 4 quarters, used bike prices had fallen for 13 straight quarters.

And so we still have price value -- or price dislocation in used to new, but it is getting better as we see used bike prices rise.

We're going to continue to be very diligent in our supply of motorcycles, which is the only lever that we have to pull, but we're pleased to see those prices rise.

Your next question comes from the line of Joseph Spak with RBC Capital Markets.

John, I just want to make sure I understand because it sounds like you're saying the impact from the tariff this year was -- you put a finer point on the annualized number, that $90 million to $100 million didn't change.

So is that because you were able to get some more bikes out this quarter, but -- so there's a -- as we think about the first half of '19, we should expect sort of a giveback to that?

No, no.

You should expect an annualized impact of $90 million to $100 million.

That number didn't change because the tariffs are very easy to understand, right, 6% to 20 -- to 31%.

What was tough for us was just this year, and that was the inventory position that we would have when the tariffs were put in place.

And so we've got a fine number on that.

So there is no change.

The way to think about it is, if there is no mitigation of tariffs by the company into 2019, you would expect $90 million to $100 million.

We are making every effort to mitigate the costs of those tariffs.

That $90 million to $100 million represents the vast majority of profits in that market.

But we don't have that plan yet.

And when we do have that plan, we'll take that and fine tune that $90 million to $100 million for 2019, and that will come down.

And again, when we have the plan, we'll provide it to you.

Okay.

And then, I know you've historically shied away from giving absolute dealer inventory or even day sales metrics, and I don't really expect you to start now.

But given the magnitude of the de-stocking and also the soft retail environment, I was wondering if you could help us, just on a relative basis, how you stand now versus historically.

It's down a lot.

It's -- we took 14,100 units out, and that is a significant percentage, well into the double-digit percents.

On top of that, a year ago, we took out 7,100 units.

So in aggregate, coming out of the second quarter, we're down about 21,000 units.

And we have significantly tightened things up, and that will help us when we get to the model-year changeover.

And we're seeing the intended results of that, and that is putting upward pressure on those used bike prices.

Your next question comes from the line of David Beckel with Bernstein.

On the topic of mitigating factors or potential mitigating factors, there's been some, I guess, scuttlebutt on Twitter about certain mediating factors or potential olive branches to certain industries, granting them exceptions.

Have you been able to work with the U.S. government at all to try to figure out a way to keep production in the U.S. without also suffering the tariff charge?

We are working with the administration.

We are working with all governments we can to do the best we can to get these tariffs removed, and that's all I can say about it.

We are very engaged and got a dialogue and a constant dialogue going on with the respective parties that we need to.

Great, thanks.

And just as a quick follow-up.

Your expectation of flat inventory in the U.S. at the end of the year, in combination with your overall goal of maintaining supply discipline, does that more or less imply you expect sales to be either flat or maybe slightly up in 2019?

No, that doesn't imply anything.

We'll provide 2019 guidance in January of next year.

The smallest quarter that we have in inventory is the fourth quarter, and we also need that as a jump-off spot for production to get over the seasonal aspect of our business.

So we will bring inventories back to year-ago levels at the end of the year, and that will provide us the opportunity to supply the next year's selling season, but it shouldn't be taken as anything except that inventories will end up flat in the United States on a year-over-year basis.

David, are you still on?

Yes.

Were you asking about U.S. sales for 2018, our assumptions for that?

No, just heading into 2019.

Into '19.

Okay, thank you.

Just wanted to be sure.

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

Wanted to ask the same question regarding timing of shipments or anything that you're seeing in Canada.

Same question was asked related to the EU.

And then, John, also, any update, given we've had some significant moves in the dollar and maybe given the back of late here in the last few days, but -- on FX impact for the year?

All right, I'm going to start with the second one first, and that's with regards to currency.

It was an -- somewhat of an unusual period or quarter for currency.

On a year-over-year basis, when you look at our basket of currencies, the U.S. dollar was weaker by 4% versus a year ago.

And therefore, we had a favorable revenue impact of about $23 million, and that represents about 1.5% of overall revenue, a pickup of revenue because of currency.

However, when you look at our gross margin walk, you'll see that currency was largely flat.

So what that means is that $23 million was absorbed, and what -- why it was absorbed is largely on remeasurement losses.

And so while on a year-over-year basis, our currency is -- the U.S. dollar is weaker, and that is favorable to us, during the quarter, we saw a substantial increase or strengthening of the U.S. dollar of about 5 percentage points.

With that, we re-mark our balance sheet assets and liabilities at the end of each quarter, and therefore, there was a loss that offset that.

So consequently, very little financial benefit, certainly none at gross margin.

The second question, Tim, I'm not completely clear what you mean of shipments of -- or timing of shipments into Canada.

If you're referring to tariffs, there has been -- we have not been included in any talk of tariffs in Canada, Mexico or India.

And therefore, we have not changed our shipment patterns as per usual into Canada or any of those other markets.

Okay, okay.

And just the Canadian, also from this perspective of maybe a little bit of lag and, even more so, from a weather perspective, any adjustments you had to make there from shipment timing?

No.

Okay.

Last question, dealer -- international dealer outlook, in the overall multi-year perspective, you gave that -- the 12 dealers added during the quarter.

In total, what do you -- just an update, what do you expect to add in this year and then just any change on that long-term perspective?

No change on our long-term perspective or excitement for our international markets.

So we talk about our strategies next week.

We'll talk certainly more about international.

We don't -- haven't provided the full year number of dealer openings through

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I wouldn't expect much of a change from what we've seen in the past couple of years in that respect.

Your next question comes from the line of Adam Jonas with Morgan Stanley.

First one is just to kind of clarify on that European pre-buy issue.

John, you mentioned that there was -- that you did make an effort to get some bikes on the water.

I'm just curious if you could quantify.

Was that revenue recognized in 2Q, or is this a spillover into 3Q?

And maybe, the amount there.

No, there is no change in revenue recognition.

It was just the way that the authorities measure whether the product is subject to tariff or not.

Has nothing to do with sales.

We did not sell them into the dealer network.

So those bikes are not -- so those bikes were not sold yet, or they -- or were they sold?

No, they were not sold on to dealers.

But they will not be subject to the tariff, is what you're saying?

Correct.

We took them -- yes.

So you will get a bump in 3Q?

I don't know what you mean by a bump.

We have higher inventories on our balance sheet for increased amount of finished goods inventory.

We do not believe that retail sales were dramatically affected by the tariffs.

We do not believe that our -- and our shipments were not affected.

Where we recognize revenue is when it leaves the -- arrives in our dealerships in Europe.

Understood.

I understand.

Because you are able to slip in the bikes ahead of the tariff, whether they're -- whether that could lead to an unusual level of sales in 3Q that then creates a bit of a hangover later in the quarter into 4Q (inaudible).

No, no, no.

No, we are keeping prices flat.

We are not pricing for the tariffs.

So what that does is it reduces our costs, and that's why in the 8-K, we had a bigger range than we expected to be.

So that's a savings to the company.

Okay, understood.

And just as a follow-up, on a longer term, your efforts to build new riders is obviously recognizing and is meant to face up to some pretty powerful demographic shifts.

It seems like it's more secular rather than cyclical given the health of the economy.

So I'm just wondering if you -- I can't think of many examples in business where a company, through marketing efforts, really successfully execute a strategy of, kind of, creating its own demand.

I -- without front-running too much what you're doing next -- what you're going to announce in a few days -- next week, just, can you give us some examples of what you're looking at from -- that you might have studied that helped your team execute the strategy?

Yes, Adam, this is Matt.

I just would encourage you to tune in next Monday.

We're going to talk about the issues that we've identified as we laid out our 10-year objectives last year about the need to build the next generation of Harley-Davidson riders across the globe, and how we're going to accelerate those efforts, how we're going to leverage, as I mentioned in my remarks, our products, access and stronger dealers to do that.

But yes, this is what we're after in our strategy, and we're accelerating our efforts, and we're excited to share that next week.

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

So 2 quick questions for you.

I guess, first, was curious about the success you guys have had with Freedom Promise.

In our most recent dealer survey, a few dealers mentioned it fairly positively.

So thoughts on that and maybe extending that beyond August 31.

And then secondly, a balance sheet question.

Inventories, I guess, year-over-year up almost $100 million.

So help us understand what's driving that.

We're very excited -- first of all, we're very excited about the Freedom Promise.

At this point, we are not looking to extend it.

But it has met our expectations and is a great bridge for a new person coming into Harley-Davidson and buying the first motorcycle and their ability to trade in on their next motorcycle at the same price that they bought in at.

But again, I'm very pleased with that.

Secondly, inventories are up on our balance sheet.

They're up $93 million or 25%, which is a lot.

There are 3 areas of increase.

We've talked about one of them, is finished goods, made motorcycles.

That has increased, and that's just an issue of timing.

We talked about one of the reasons for that timing, and that is certainly putting more bikes into Europe.

The second piece of it is raw materials.

And matter of fact, raw materials is about half of it.

And with the activity that we have going on in our plants, largely, we are reloading our Kansas City plant manufacturing into our York plant.

We are holding a lot of duplicate inventories as we start the -- start up production in the third quarter here in York for our Softail motorcycles.

And then secondly, as we have talked about, we have a plant in Thailand coming on.

We're starting to bring raw materials into that plant as that production will start up later in the quarter, and ultimately, start shipping in early fourth quarter.

The third piece of it is our related products.

Related products is up for 2 reasons.

Number one is increased availability, largely through general merchandise.

Also pleased to see in the quarter that general merchandise was up almost 9%, but we did increase overall availability of general merchandise with our dealers.

Second piece of it is parts and accessories, which is up as well.

And as you know, last year, we came out with a new Softail, which had 3 other models go away: V-Rod, Dyna and our old Softail.

And with that, we need to do what's called life-of-parts buys because those parts we need to continue to service well into the future.

So that is also pushing up inventory.

So those 3, in aggregate, total up to the $93 million.

We would start to -- expect to see that to come down somewhat by year-end.

Your next question comes from the line of Greg Badishkanian with Citi.

You mentioned that the European dealers responded positively on your decision to shift manufacturing.

Have you got any feedback from your U.S. dealers or U.S. consumers on that move as well?

Yes, I think that the -- I think mostly the U.S. dealers understand the nature of the decision to protect the business model within Europe and can see that if somehow the shoe was on the other foot, that we would do the right thing to take care of them.

So first and foremost, the dealers have a great global connection to one another.

We assemble them annually at our annual dealer meeting.

They're in the same business.

We approach the business in the same way wherever we do business in the world.

And so, as they see through the challenge with the tariff situation, they see us doing the right thing for our customers, our dealers and our business, and they would appreciate us doing that for them if somehow, again, the situation was affecting them.

And then U.S. consumers (inaudible)?

Yes, we have done actually quite a lot of consumer research, and not just with sales as we closed out the quarter, but just direct consumer research on the impact of the matter, and we see no discernible shift in the sales patterns and no discernible favorability to the brand.

So we'll continue to make sure we monitor it, and we'll do the right things to emphasize what Harley-Davidson stands for and why and correct errors in interpretation that seem to pop up from time to time.

But we are on it and paying very close attention to it.

I guess, just one final.

The $1500 rebate introduced in May, how did that resonate with consumers?

Remember, we talked about the way the quarter unfolded, and in April, we were down quite significantly.

We did 2 things, Greg, at that time.

One, in the beginning of April, we came out with a finance offer.

I think it was 1.99% for a short period of time, 2 weeks.

And the other piece of it was we offered a trading incentive.

That was a private offer mailed to -- through our precision marketing team to customers that we thought may be ready for the purchase of a new motorcycle.

And that we offered in May and in June.

And I think between those 2, it really helped pull us out of the poor sales that we had in April, and we finished the quarter in line with our expectations.

So overall, we feel very good about the activity during the quarter and ending up on track for the full quarter.

Your next question comes from the line of Brandon Rolle with Longbow Research.

It's David MacGregor here.

I guess, John, did I hear you say that used bike dealer inventories are up?

And I guess my question is whether dealers are committing more of their limited working capital in their willingness to finance the used inventory and therefore, putting a financial squeeze on their ability to support new bike inventory.

David, you did not hear me say that used bike inventories were up, or if I did, I did not intend to say that.

So when we look at -- overall, new bike inventory was down.

I will tell you that used bike inventories in our dealer network were up slightly during the quarter.

But when we look over time, the last 14 quarters actually, used bike inventories in our dealer network have been down 10 of the last 14 quarters, but they were up a little bit in the second quarter.

Overall, it's in line with what we would expect.

And just as a follow-on to that.

Your originations were up 7.2% versus the second quarter of last year.

Can you break out new originations versus used originations?

We don't typically break those out, but actually, both were up.

Used were up well into the double digits and even in the U.S., where sales were down, were up.

And again, we had a very powerful mix of products, and that helped drive the value of those originations up in the United States.

And we haven't talked much about that during the call, but you talk about the resilience of this company and the ability to offset the tough headwinds that we've got in the United States.

When 75% to 80% of your revenue is made up of motorcycle shipments, and they're down over 11%, and revenue ends up only down 3.3%, it's pretty powerful, and we're very pleased with the mix shift.

But that's also aiding in those origination numbers that you're seeing at HDFS.

And by the way, we haven't talked about HDFS.

They had a fantastic quarter, they've had a fantastic first half.

We feel great about the portfolio.

Credit losses are down for 2 quarters in a row, and originations are up.

So things are going very well at HDFS.

I would now like to turn the call back over to Amy Giuffre.

Thanks, Heidi, and thanks, everyone.

Information about our accelerated strategy will be announced in a press release, and additional materials will be posted on our website on July 30.

Additionally, we will be hosting a webcast conference call on July 30 at 12:30 p.m.

Central Time to address analyst questions.

Details will be available in the press release.

The audio and slides for today's call will be available at harley-davidson.com, or for the audio, call (855) 859-2056 or (404) 537-3406 until August 7. The ID is 6258707.

We appreciate your investment in Harley-Davidson.

Thanks.

This concludes today's conference call.

You may now disconnect.