Harley-Davidson Inc (HOG) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the 2021 First Quarter Investor Analyst Conference Call. (Operator Instructions)

Thank you. And now I would like to welcome Mr. Shannon Burns, Manager of Investor Relations. Sir, the floor is yours.

Good morning, everyone. You can access the slides supporting this call at investor.harley-davidson.com, click the earnings materials box in the center of the page. Our comments today 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 CEO, Jochen Zeitz; CFO, Gina Goetter; and Chief Commercial Officer, Edel O'Sullivan, will also be joining us for Q&A.

Jochen, let's get started.

Thank you, Shannon. I would like to welcome our shareholders, the financial community, dealers, employees and all our valued stakeholders who are joining us today.

As we look to 2021, it remains important to remember the unprecedented year that was 2020. I am, however, very pleased with the pace of recovery we've seen across our business and strong numbers reflecting the implementation of our new strategy, as demonstrated by the positive financial results this quarter.

We continue to manage through the impact of COVID-19 with the extraordinary efforts of our global team, keeping employee safety and community well-being at the forefront. We've overcome global shipping and supply chain challenges, adeptly managing the effects of disruption, ensuring that we were able to continue building and delivering the world's most iconic motorcycles.

As you can see today, the actions we've taken to reshape the business through The Rewire, leading into the early months of our hardwire execution are already having a positive impact on our results, in particular, in the most important North American region.

We can see the initial signs of consumer excitement and optimism returning even if parts of the world are still lagging due to continued COVID-related lockdowns and delayed vaccination efforts. As we start to execute our 5-year strategic plan The Hardwire, I'm confident Harley-Davidson in 2021 is significantly leaner, faster and more efficient organization, and we'll continue improving and delivering in line with our HD #1 culture.

I will talk more about Stage 1 of The Hardwire later. But before I hand over to Gina, I'd like to address the announcement we made yesterday regarding the amended tariff ruling by the EU. The decision taken by the EU is unprecedented, unfair and is a deliberate attempt to create a competitive disadvantage against our European competitors. We are committed to fighting it and have launched an immediate legal challenge in Europe, as we firmly believe that the original ruling on our BOI remains correct and should therefore be overturned.

Every big bike we sell in America comes straight from the hands of our hardworking men and women of Wisconsin and Pennsylvania. It bears repeating, if not for the tariffs, which are now threatening our recovering export potential, we could be investing in jobs at our American facilities, leading the world in electric innovation, research, engineering, design and advanced manufacturing. Instead, we are facing huge tariffs in trade war -- in a trade war, not of our making.

So as you saw from the numbers, we delivered a very strong quarter, and I'll hand it over to Gina for more details. Gina?

Thank you, Jochen. As Jochen mentioned, we had a good start to our fiscal year, with first quarter results reflecting stronger demand and an improved economic outlook. Total revenue of $1.4 billion was 10% ahead of last year, driven by motorcycle unit growth behind the shift in the model year launch timing, favorable motorcycle mix, thanks to our Rewire product portfolio adjustments and the lapping of the start of the COVID shutdowns in 2020.

Operating income of $346 million was well ahead of last year, with growth coming from both our reported segments. The Motorcycles and Related Products segment delivered $228 million, which is $143 million better than last year, driven by units, a stronger product mix with growth in our Touring and Cruiser families and lower operating expense versus a year ago.

The Financial Services segment delivered $119 million of operating income, $96 million better than last year due to lower actual losses and a lower loss provision. We delivered earnings per share of $1.68 with no significant restructuring charges taken within the quarter. Global retail sales of new Harley-Davidson motorcycles were up 9% versus last year behind strong demand for new model year product in our core touring and large cruiser segments in the U.S. Internationally, the impact of COVID was felt more deeply as many key countries remain under stay-at-home protocols and shipping networks were severely strained by COVID-related challenges.

LATAM declines were driven by a 30% net reduction in the number of dealers and price increases taken across the portfolio as we work to restore profitability within those markets. Across the dealer network, worldwide retail inventory of new motorcycles was down 48% versus a year ago, behind our strategic shift on supply and inventory management.

Inventories were up 60% over Q4 as we work to build back inventory ahead of riding season. It's important to remember that our strategic shift on inventory management will result in 2021, Q1 through Q3 inventories being lower than our historical averages. This shift is continuing to improve profitability and strengthen pricing dynamics with Q1 motorcycle transaction pricing in the United States, up materially across all families, most of which are at or near MSRP.

Looking at revenue, total motorcycle segment revenue was up 12% in Q1. 3 points of this growth came from volume on motorcycle units and parts and accessories as we benefited from the retiming of the new model year launch and the lapping of the 2020 COVID shutdown. One point of growth came from pricing and incentives as we eliminated the corporate discounts and incentives as part of The Hardwire strategy to rebuild the desirability of our brand and products. And finally, we realized 6 points of growth from mix as the increased contribution from touring more than offset the unit declines in our less profitable small cruiser models.

Absolute gross margin percent of 34.1% was up 5.1 points versus prior year, driven by stronger volume, favorable mix and the lapping of heavier promotional periods in Q1 of last year. As anticipated, while we did realize higher logistics spend in the quarter, we were able to offset with other savings across our supply chain.

Total operating margin of 18.5% was up significantly versus prior year due to the drivers already noted, lower operating expense. The lower expense was the result of the Rewire actions executed last year as well as some timing shifts in our Hardwire related investments. We do expect the favorability realized in the quarter tied to these Hardwire initiatives to be retimed and spent back in subsequent quarters.

The Financial Services segment operating income in Q1 was $119 million, up over $95 million compared to last year. Net interest income was down due to higher average outstanding debt as we proactively manage liquidity during the ongoing pandemic. The total provision for credit losses decreased $102 million from Q1 2020, driven by an allowance decrease of $82 million and lower actual credit losses of $20 million.

The provision adjustment reflects an improved economic outlook and appropriately represents the estimated lifetime losses in our portfolio at the end of the quarter. Actual retail credit losses continued to be down versus last year as a result of lower delinquencies as customers were supported by the recent federal stimulus packages and continued elevated levels of COVID-related loan payment extensions granted to qualified customers.

Focusing in on HDFS' base business, new retail originations in Q1 were up 25.8% versus last year behind higher new motorcycle sales as well as strong used motorcycle origination volume. Market share for new U.S. retail financing remains strong at 63.5%.

At the end of Q1 2021, HDFS had approximately $1.7 billion in cash and cash equivalents on hand and approximately $1.6 billion in availability under its committed credit and conduit facilities for total available liquidity of $3.3 billion. Cash and cash equivalents remained elevated, but were down approximately $800 million from Q4 2020 levels as we gradually pull cash back down to normalized levels. HDFS continues to manage its debt-to-equity ratio between 5 and 7x and well within the debt covenants of no higher than 10:1.

HDFS' retail 30-day plus delinquency rate was 2.14%, down 123 basis points compared to the first quarter of last year. The retail credit loss ratio was also favorable at 1.4%, a 133 basis point improvement over last year. The favorable delinquency performance is largely due to federal stimulus assistance and elevated levels of COVID-related extensions. The vast majority of the extended accounts have made at least 1 payment after the expiration of their extension period.

While we do expect the delinquency rate to normalize over time, given the influx of stimulus funding and the improved economic conditions, it's likely losses could remain low through most of the year.

Wrapping up with Harley-Davidson, Inc. financial results. We delivered first quarter operating cash flow of $163 million, up $171 million over prior year. Key drivers of the improved cash flow were improved net income and lower inventory levels. Cash and cash equivalents ended the quarter at $2.3 billion, which is $856 million higher than Q1 last year, but $937 million less than the end of Q4 2020 as we gradually work down the higher cash balances that were held in the face of the pandemic.

Finally, the company's Q1 effective income tax rate was 24%, slightly lower than Q1 2020.

Looking forward to the balance of the year, a number of factors occurred in the quarter that have given us confidence in taking our guidance up over the previous estimate. First, we have better clarity on the cost impact of the supply chain challenges and our ability to adapt, which we had built in as a significant headwind in our original plan. Also, the economic outlook is much improved with falling unemployment numbers, a newly approved federal stimulus in the U.S. and continued progress on the global COVID vaccine rollout.

Finally, we have also been able to get a much better read on profitable demand for our new model year '21 motorcycles, which is stronger than we had anticipated, particularly in our most profitable segments of Touring and large Cruiser. As a result of these factors, we are raising our motorcycle segment revenue growth to be 30% to 35%, an increase from the previously communicated growth range of 20% to 25%.

Moving on to Motorcycle segment operating income margins. Assuming a successful outcome regarding the EU tariff situation, our updated guidance is a range of 7% to 9%, up from the previously communicated range of 5% to 7%. This 200 basis point increase reflects an improved demand outlook and confidence in our ability to continue navigating through the global supply chain headwinds. However, if we are unable to reach resolution negating the additional EU tariffs, the impact would bring us back to our original guidance of 5% to 7%.

The Financial Services segment operating income growth guidance is now 50% to 60%, an increase from the previously communicated range of 10% to 15%, driven primarily by the loss provision adjustment.

Lastly, capital expenditures guidance remains flat to our original guidance of $190 million to $220 million. Given the shift of our model year launch cadence, we acknowledge that modeling out this guidance can be a bit tricky. Given that, we've added Slide 12 to help provide transparency on how our revenue and profit margin is split. We expect approximately 60% of our revenue to come in the first half of the year as we ride the momentum of our model year launch through the riding season. As we get into the back half, we'll start to see inventories come down from the peak in Q2. And in Q4, we will change over the factories to begin production in model year '22.

Finally, remember that we will begin lapping the impact of cost savings actions we took in the face of the pandemic and our Rewire savings initiatives beginning in Q3. The patterns on inventory and shipments will be similar to what we experienced in the back half of 2020.

I'll turn it back to Jochen who will take us through our progress executing against our Hardwire strategic plan.

Thank you, Gina. We believe the substantial changes implemented with The Rewire have set us up to win, and we will not rest here. We will continue to explore additional opportunities as The Hardwire strategic plan is implemented and as we continue to deliver organizational speed, alignment and efficiency.

As we close this first quarter, we can see that we've been through a significant transformation over the course of the past year. These changes are manifested in strong first quarter results and reinforce our decision to move the model year to coincide with the start of riding season for the first time in our modern history.

This new journey is powered by Harley-Davidson #1, a high-performing winning organization based on our 10 defined leadership principles and build on the powerful vision and mission of Harley-Davidson. Through the pandemic and into this first quarter, we have seen the willingness and growing capabilities of our team to win. Our future successes will only come from an effort by everybody in our team. So thank you, your team, Harley-Davidson. I know many of you are listening in today.

As you know, The Hardwire and its success is rooted in desirability and our ambition to enhance our position as the most desirable motorcycle brand in the world. Desirability is a motivating force driven by emotion. It's in our DNA. It's embedded in our vision. And it's at the heart of our mission, and it's part of our 118-year legacy.

Done right, Harley-Davidson desirability preserves the value of our customers' purchases, builds our brand beyond our riders, ensures loyalty and drives engagement. Our strategic ambition for desirability is very simple. Design engine advance the most desirable motorcycles in the world, reflected in quality, innovation and craftsmanship. Build a lifestyle brand valued for the emotion reflected in every product and experience for riders and non-riders alike and focus on our customers delivering adventure and freedom for the sale.

Desirability provides the framework of our hardware strategic plan and the framework for our success measures. I will now address a few specific highlights for the quarter delivered against some of The Hardwire strategic priorities.

First, profit focus. I'm increasingly more confident of the market conditions and consumer appetite for our brand, our iconic motorcycles and our new products. The pandemic has provided a reminder of the power of getting outside, reconnecting with our community and the significant freedom and adventure that our brand represents.

We've experienced significant demand in the market for our products and our brand, especially since March of this year. And the demand we are seeing is strongest in our most profitable segments. This improved mix is resulting in stronger year-over-year motorcycle segment margins and can be attributed directly to our desirability and Rewire efforts. This quarter has demonstrated the increasing strength of the market and the enduring power of our brand in both the U.S.A. and Canada as well as Asia.

Despite the continued impacts of the pandemic, especially in Europe, we also see post-pandemic potential as part of our streamlined market strategy. We maintain a long-term focus on sustained, profitable and desirable growth, in line with The Hardwire strategy, and we're excited by the initial impacts.

As we begin to execute against our strategy of 70/20/10 skewed to our stronghold segments of Touring, large Cruise and Trike, we will work hard to continue to solidify our position as leaders, acknowledging that these segments are the most attractive of the global market in terms of our profit focus.

With The Hardwire, we also made a commitment to introduce a series of models that align with our commitment to further increase desirability and to drive the legacy of Harley-Davidson in our core segments. In this context today, I'm pleased to introduce our new icons collection, and this year's icon model, the Electric Light Revival. Launching April 26, Icons will be extraordinary adaptations of production motorcycles, which look to our story past and bright future. Produce only ones, each model will have a limited serialized production round of 1,500 bikes and deliver on what Harley-Davidson has always done so well, Iconic design and historic moments.

A new icons collection model will be released within each model year with no more than 2 models being released in any given year. Production will be enough to fill allocation of approximately 1 per dealer globally, making each icon a rare and highly coveted model for our riders, while increasing the overall desirability of our brand.

Selective expansion. When we announced The Hardwire, we also identified a focused expansion into new segments. They are attractive and profitable segments that deliver a balanced combination of volume, margin and potential. And they are well aligned with our product and brand capabilities with a clear path to leadership.

By narrowing our focus on those opportunities that meet these criteria, we make our intention clear. We are in them to win, supported by the right allocation of time and energy, balanced with the right investments in product, brand and go-to-market capabilities.

This gets me to our PR and marketing launch of the Pan America, our first adventure touring bike. With the Pan America, we see the potential to build on our off-road heritage and to innovate into the high-growth and attractive margin segment of adventure touring. We're targeting a new customer, but a new customer that wants the craftsmanship, heritage and legacy of Harley-Davidson and wants to be part of our community.

Pan America was launched globally on February 22 at a virtual launch, viewed by over 350,000 participants across the world. We partner with movie star, Jason Momoa to produce launch content that build desirability and excitement for Pan America around the launch. If you haven't already watched everything as a road, the path to Pan America, I'd encourage you to do so.

To date, the Pan America has received widespread global media acclaim with over 2 billion media impressions at a 97% positive media sentiment. With the Pan America launch earning rob reports endorsement as I quote, the most important model release in memory, signaling a shift in both philosophy and demographic. The press writing reviews that have been going on for several weeks now around the world have also been exceptional with overwhelmingly positive feedback from around the world.

The launch delivered a full sellout of the preorder allocation, which is currently in production and on schedule to be delivered to our dealers around the world from May onwards. The venture touring is the largest segment in many European markets and is a largely untapped market in North America. We believe this bike places us in a position to take market share in Europe and become market leader in the segment in North America. There's also clear affinity for the bike in other high-potential global markets with the Pan America being awarded Best Bike of 2021 at the 42nd Bangkok International Motor Show. And just this morning, I received the extraordinary feedback from our team in China at the Shanghai Automotive Show following the launch and press conference of Pan America.

Looking forward, we have great plans to expand on Pan America with unrivaled innovation and design in new products that will reach new audiences as we look to unlock new customers and opportunities. Following on from the Pan America launch, we continue to execute on our priority to selectively compete in attractive segments where we can profit and win. And we're excited for the upcoming launch of our next product from the Rev Max platform which will redefine the premium middleweight cruiser segment. We intend to increase the profitability of our offerings overall in the small to midsized cruiser segment and change the competitive landscape.

Leading in electric. Combustion remains the core of our business. However, we see great potential for long-term growth in electric vehicles. With LiveWire widely regard as the leading electric motorcycle in the world, we're excited about our future in this space. Earlier this year, we announced our intentions to work towards a dedicated EV division, and this work is now in full swing. This division will allow for a dedicated level of strategic focus required to deliver desirable growth in this segment.

In the quarter, we hired our Chief EV Officer to help guide this focus as we look to build on the success of LiveWire and win in electric.

By investing in electric technology, it remains our intent to be at the forefront of innovation and development as we look to be the pioneers in EV. We'll be telling you more about our dedicated EV plans in Q2.

Growth beyond bikes. We've always been about more than a machine in our related businesses are huge opportunities for long-term expansion of the brand. Parts and accessories and general merchandise form part of the Harley-Davidson lifestyle and together with HDFS playing an important role in inspiring existing and new customers to discover the adventure.

Each business plays an important role in our overall vision and mission. We see enormous potential to grow our customer base, both with riders and non-riders, shaping our future success as a global lifestyle brand.

In parts and accessories, with customization as part of our heritage, we continue working towards enhancing our position as the destination for high-quality parts for all our riders, both with new and used motorcycles. As part of this new approach to our P&A business, the Pan America reveal included both P&A and general merchandise designed specifically for Harley-Davidson adventure touring motorcycles and riders.

Harley-Davidson's heritage underpins our general merchandise business. It is authentic to motorcycle culture and puts us in a unique position to reach beyond motorcycle riders and into the sport and lifestyle space. With prominent brand collaborations in the works for general merchandise, we see long-term potential to leverage our brand value. We'll be telling you more about this important strategic pillar for future growth in the second half of the year.

As evidenced by strong performance this quarter, HDFS is a strategic assets with a track record of delivering growth and profitability. It is our goal to make HDFS the preferred choice for all Harley-Davidson riders by building digital capabilities and the drive of -- the innovators of financial services.

HDFS is integral to Harley-Davidson's success. And with expansion in Europe on the horizon, we're excited about its future. Led by HDFS earlier this month, as you know, we announced HD certified, the first certified pre-owned Harley-Davidson motorcycle program, designed to lead our industry, satisfy our existing loyal riders and also reach new customers venture into Harley ownership for the first time.

HD certified is a strategic effort to strengthen our competitive position and is part of our new approach to the used motorcycle marketplace, aligned to the strategic priorities of The Hardwire, targeting long-term profitable growth.

In partnership with our strong dealer network, we want to enhance the overall customer experience, encouraging brand loyalty while supporting growth in parts and accessories, general merchandise and HDFS, built around the used Harley-Davidson market. To date, over 350 of our U.S. dealers have signed up to the program, representing 63% of the U.S. dealer network on the day of launch.

Each certified preowned motorcycle will be sold with a 12-month limited warranty on the engine and transmission and will include a 12-month complementary membership in Hawk, our owners group. In addition, special financing rates will be available through HDFS to support the program.

We believe HD certified will drive Harley-Davidson connectivity and engagement with our customers and enhance the overall customer experience, allowing more riders to have access to our motorcycles, providing them with an added level of confidence in their purchase and an invitation into the Harley-Davidson community.

A few words to summarize. The strong Q1 financial performance despite the supply chain challenges of the quarter and an increase in demand gives us the confidence to increase our guidance, as Gina mentioned, to deliver a strong performance for the full year. That said, we expect the unprecedented pandemic-related supply chain and logistics challenges to continue and recognize the potential associated risks well into the year.

Our brand is powerful, and it is one of the most recognized globally. With 118 years of uninterrupted heritage, craftsmanship and iconic design, we are unique, no other brand even comes close to Harley-Davidson. We've been through significant change, but I believe this change has set us up to be stronger than ever before. We will not rest until we are best-in-class in everything we do.

I will now take your questions.

(Operator Instructions) Your first question is from the line of Craig Kennison from William Blair (sic) [Robert Baird].

It's Craig from Baird. It's on Pan America. We've certainly heard good feedback from dealers, the desirability of that particular model, but are you satisfied with the availability of the model? We've heard a lot of frustration, I think, among dealers saying that it's just an incredibly hot product, but they can't get their hands on it. Just trying to figure out whether that's part of the plan for scarcity or whether you're struggling to get enough bikes in the channel?

No, not struggling at all, quite the opposite. But we've always said that we are decoupling the launch, the online launch from the actual delivery of our bikes. So the bikes will be delivered as of May in the U.S. markets and as of June in the international markets. And we've launched the bikes independently because we feel we wanted to build excitement around the product. We wanted to -- our dealers and in particular, the press to test -- get the test results out there before we actually ship our bikes. We have quite an astonishing amount of preorders already, and we are ready for launch. But as we said, we wanted to decouple the actual marketing launch from the delivery of our bikes and get everybody 100% ready. So we're very happy with that. And the dealers -- and the products are shipping as of next month.

Your next question is from the line of Robby Ohmes from Bank of America.

Jochen, I was hoping you could talk about dealer feedback in general? You've got so many initiatives going on right now. You've got the model year timing launch change, which happened this quarter. So you've got some feedback on how that feels to the dealer. So far, you got electric, you've got the certified program rolling out. You've got -- now you got these icon models. Like can you maybe just talk about what's been really good so far, broadly from the dealer response and maybe what has not been good so far? And have you thought a lot about just how many initiatives you're pushing under the dealers at the same time if that could create issues?

Yes. Thanks for the question. I mean, it's a lot of change. And just like we change as a company, our dealers need to change with us. But I personally have heard nothing but positive news. Dealer profitability is up significantly. And all the programs, whether that's the change of the model year, our certified programs, icons, we are literally launching as we speak now. And Pan America, I've only heard positive feedback.

So I -- I mean,, you guys are talking to dealers all the time. So you're getting the feedback. Obviously, we know that we had supply chain issues in the first quarter. So getting the bikes out was a bit of a challenge. It was -- we could call it the perfect storm because we had severely stressed transportation networks and we had high demand. We had historically bad weather in February, not just in Texas, but also on the East Coast with the bike manufacture and significant raw material and component shortages.

You put that together and then switching over to a new logistics firm and trying to get trucking companies to come on the weekends at the night certainly posed its challenges, but we've overcome those challenges, and we believe we made the right decision. So overall, I would say, very positive feedback. But of course, our deliveries were challenged. But if you look at the results and our market share in our retail sell-through, it shows that the measures are working.

Our next question is from the line of Shawn Collins from Citi Group Research.

Yes. Great. I wanted to ask about Harley retail sales in Europe. Obviously, a soft quarter, down 36%. Retail is about 20 -- roughly 20% of Harley volumes. I know you mentioned COVID lockdowns model changes and transport shipping delays in Europe. Can you provide more commentary on some of these things and kind of your new and updated strategy for Europe? And also maybe just touch upon what type of -- how severe the shipping delays were in Europe? Obviously, there was the Suez Canal incident and global supply chain congestion, but any color might be helpful.

This is Edel. I'm happy to take your question. I think all of the factors that you mentioned were certainly part of the situation in Europe in Q1, starting from the COVID lockdowns, which continue as well as the shipping disruptions exactly, as we mentioned from the Suez Canal and just the availability of shipping containers globally.

It is important to also note some of the other changes that were driven by our Hardwire strategy in terms of our sports star lineup as well as the Euro IV, Euro V compliance that made some of the volume availability for the first quarter to be lower than historic levels.

Looking forward, we think that Pan America, as Jochen mentioned, is an incredibly important launch for the European region. It is about 1/3 of the overall market size. We're very much excited about the potential for that in '21 and beyond. And as well, all of the actions that we're taking and extending a new product on our Rev Max platform will allow us to be competitive in a new way in the small-to-middle weight cruiser, which I think will also have a positive impact for Europe. So a combination of certainly a very stressed Q1 on a variety of fronts, but opportunity going forward for the continent.

Great. That's helpful, Gina (sic) [Edel]. Just a quick follow-up, staying with Europe. Obviously, you mentioned the EU tariff development yesterday. I'm newer to the industry, but this was a surprise for me. Can you just walk us through some of the developments and kind of narrative leading up to this news yesterday?

Yes. I mean I'd like to refer to our press release that we put out yesterday. I mean, essentially, the Brussels, at the request of EU, withdrew the BOI, the 5 BOIs that we had, and that allowed us to import products from our international manufacturing into Europe at 6% tariff, and that was revoked. And that's obviously something we will not accept. The revocation essentially would lead to an increase from the 6% to then a total of 31% and assuming the higher tariffs between the U.S. and Europe come into effect in June, to a total of 56%, which obviously is unacceptable and make you uncompetitive in an important region like Europe. So for more news, if you don't mind, I'd like to refer to our press statement to what I said earlier.

Your next question is from the line of Jaime Katz from Morningstar.

I guess piggybacking on that question. Can you sort of share with us what a time line looks like for repealing this tariff? And what the probability is of it being sort of step back before the June start date?

Well, we are launching an appeal as we speak. And from there on, it takes its course. I can't really disclose too much at this point. The lawyers are in charge of the process, but we will certainly communicate more as soon as we know more. But we will be asking for temporary relief, which will essentially -- would essentially allow us to continue to import at the lower import rate until a final ruling is being made, but we don't know until we know. So that's all we can say at this point.

Okay. And I think you called out stimulus as a potential helper. And I'm curious if you can remind us or quantify what the magnitude of that help might have been in prior stimulus offerings?

Well, I don't think we can allocate an number. But obviously, the stimulus, that have been received by customers and consumers, have had a positive effect overall in the economy. So we assume the same is the case for our consumer, but to quantify that is actually impossible.

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

Not exactly sure how to ask the inventory question. But certainly, every dealer that we talk to says, if they had more bikes, they could sell more bikes. It seems like you guys are coming around to the idea that maybe the 2020 drawdown was a bit overdone, both domestically and internationally. So my question is, what do you think is the right amount of inventory for the dealer channel, whether it's units or better yet sort of days on hand? And when do you think you'll get there ultimately? And obviously, I get that part of the answer is complicated by seasonality in which quarter. So, however, you want to answer this. It sounds like you had some commentary about 2Q and 3Q, but also, how do you see -- where do you see yourself finishing inventories for the year?

Well, first, obviously, demand has strengthened, as I said in my speech earlier, especially a pickup in the March retail numbers. And as a result, we have modified our production strategy. We are now running at maximum available capacity in Q2. We are assessing opportunities to increase production in the third and the fourth quarter in support of the current model year.

Bear in mind, though, that we will be changing our production to the next model year in early Q4. So those preps will be happening then. And we are in the process of working through the timing right now so that we can capitalize on the strong demand that we are seeing today. But obviously, without compromising our growth in '22.

That said, as I said, the global supply chain has been challenged. I think the way we came out of Q1 is quite extraordinary, and the dealers that want more, they are getting more to an extent where we continue to make sure that the desirability of our brand is taken into consideration. And those dealers that can sell more, they are taking preorders, and they are selling those spikes as soon as they're getting them. And I think you see reflected in the strong retail numbers that we don't believe we've missed sales in the quarter.

And maybe just a clarification, I apologize. But you brought it up sort of the pickup in March retail numbers. Can you maybe quantify how retail trended within the quarter? Obviously, there was a really -- there was an easier comparison, obviously, towards the end of March. But it sounds like what you're seeing is more than that? So I don't know if you want to compare it to 2019, but maybe speak to the relative strength over the course of the quarter?

Yes. I mean I don't think you can compare with 2019 because in March of 2019, we actually -- or actually, in 2020 -- we can't compare to 2020, as we know. 2019, I can't really compare it other than the demand -- or we still had the push model where we pushed a lot of bikes into the market and MSRP or our transaction values were well below MSRP, we're not seeing that. We are seeing transaction values near or at MSRP, which is great. We've seen used bike prices up significantly. So -- but we saw -- and we are not giving monthly guidance, but we saw a significant pickup in March in comparison to January, February, which had 2 effects, better-than-expected weather in March and many parts of America, and obviously, our model year hitting retail as well with an incentive for consumers to buy because of the stimulus package that we mentioned earlier. And that saw that significant uptick in March. And as I said, we've adjusted our production strategy accordingly and hence, our increased guidance for the year.

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

Gina, maybe just some housekeeping. You mentioned some lower expense this quarter that helped from some timing shift in Hardwire-related investments. How much did that help? And when should we expect that to come back? And then maybe similarly, at least for the year, can you quantify how much the logistics and supply chain headwind will be?

Sure. For OpEx, as you look at it, I would say roughly half of the favorability, that you saw play through in the quarter, is associated with our Rewire initiatives and will stick through the balance of the year, and about half of it will be retimed to subsequent quarters.

In terms of logistics, we're not giving additional detail. We did see increased costs. We were able to offset it with other favorability within supply chain across the quarter. And as we think about our guidance for the full year, we factored in kind of continued headwinds on logistics into that updated guidance.

Okay. And then Jochen, just to clarify on the Europe issue. If you're in appeal, you can still import at current rates. And then in the worst-case scenario where you lose a decision, does that mean you would look to potentially exit Europe? Or are there other potential paths you could take?

Well, exiting Europe is certainly not an option. And as I mentioned, we are appealing now, and we should be knowing in a few weeks' time, if that appeal is granted. If it's not granted, obviously, the increased tariffs will come into effect right away. And hence, why we've said if we take the worst case scenario, that's why the adjusted -- the guidance, as Gina mentioned, would essentially go back to the levels that we communicated early on in the year.

So -- I mean, we are looking at all options right now. We are vigorously defending our position. And we believe that the original ruling of the BOIs is correct. We are hoping for a resolution, and we are looking at all appeal routes in Belgium and the EU, and that's the primary focus right now.

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

Okay. So many. I don't know what to choose. How about Asia Pacific, the dynamics there. The impact from exiting certain markets that might not be profitable as well as the QJ partnership, what's coming through there. So what are the dynamics in Asia right now?

Let me start with QJ. So we continue with our partnership with QJ. And we are not sharing specific plans about our product launches, but we continue to work with QJ. So that hasn't changed. And we are seeing very strong demand in China. I mentioned earlier, we just said the Shanghai orders show very strong -- very strong feedback for new Pan America launch. And overall, we have high hopes for the Chinese market. It's a huge opportunity that we're tapping into. And all the efforts that we are taking out of markets that really didn't make a difference from a profitability point of view, we're putting into the core markets in Asia, mainly China, Japan, Korea, and a few others. But we think there's a long-term significant opportunity in the region. Edel, I don't know if you want to add anything here.

Yes. Just to build on that, I think you see some of that reflected in the results of the quarter despite all of the actions taken as part of Hardwire in terms of country presence and pricing actions even our product lineup. And adding to that, which continues to be a very challenged supply chain, both for not only Europe but also for the Asia Pacific region. I think it was a strong quarter in terms of profitability and comparisons to our 2020 results. So I think that, that, again, adds to the credibility of The Hardwire strategy as we look internationally to continue to build upon a more profitable offering and a story of profitable growth towards the future.

And if I may add something actually related to Europe because the question came up, you look at the shipments and you're saying, "Oh, you're down so much and with all the reasons that Edel has mentioned." But if you actually look at the profitability, it's up dramatically. So all the actions we have taken as part of The Rewire are working out. And as Edel mentioned also, exiting nonprofitable segments is essentially allowing us to sell higher profitable segments, and it's showing up very clearly in a significant increase in profitability despite the lower numbers. But we do believe, as Europe comes out of a lockdown, there's certainly opportunity for more sales.

Okay. And since it seems everyone got 2, I'm going to throw another one in there. Of the $102 million credit loss benefit, it looked like there was a big surprise there, right? Your guidance went from 10% to 15% to 50% to 60% up. So how much of that is sort of a onetime thing? And why did that occur as a onetime issue?

Well, I don't know that I would say that it was a surprise when you think about how the lost provision is calculated. A large part of it is based on the macroeconomic conditions, which saw a significant improvement from when we set the reserve at the end of Q4. So when you think about what that loss reserve is doing, it's protecting for the lifetime losses of the loan and again, some of those elements are outside of our direct control. Very consistent with what you saw across banking last week as they were reporting earnings and we're seeing these loss reserves come back down. So I don't know that I would classify it as a surprise as sort just given how we calculate it every quarter.

Your next question is from the line of Ryan Sundby from William Blair.

Yes. You're going to sound like 350 dealers were 63% of the network has signed up for the HD certified program. I know it's just starting up now, but can you talk about what kind of consumer interest they're spending the product so far? And then what's the pushback then or hesitancy maybe from the remaining dealer base to accept the program?

Yes. Thanks, Ryan. So the consumer interest, I can't tell you anything about it because we are literally launching today. The last couple of months, we've been signing up our dealers, and we're going live as we speak. So consumer interest, I will be able to grouch in -- certainly in the next few weeks and then report on with our Q2 results.

If you look at the historic programs that we've rolled out to dealers, I would say this is on the very high end, getting such number of deals -- such a high number of dealers signing up that early to a new program. So we are really pleased with the 63% not even having had any launch and experience in the market itself. We believe this number will continue to grow. But overall, from a historic context, that's actually very high sign-up by our dealer network.

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

Sorry to harp on this EU tariff question, but I just want to get more clarification on your recourse at this point. You mentioned that you filed an appeal. But my first question is, who hears that appeal? Is it the same court that ruled against you? Or is it another court? And beyond the legal route, there is another route, which is political or negotiation between the USTR and the EU. Is there a sense that the Biden administration has taken up your case here and is talking to the European Union? Or that's not on the agenda at this point?

Good question. I mean, as you can imagine, we are pursuing all available remedies. We do not talk about individual conversations, but obviously, conversations are to be had. We are filing, as we speak, for extended reliance for our 5 BOIs, which, if granted, will allow us the legal certainty to continue to import at a rate of 6%. And that's all we can say really at this point in time. We are looking at all avenues. But I wouldn't say that having those BOIs revoked doesn't mean we have a chance to appeal. And we do have, and there are several opportunities that we have, and we will consider those. The chance of success, I can't really estimate at this point.

Your next question is from the line of Brandon Rolle from Northcoast Research.

Congratulations on a strong quarter. My question was largely on the new dealer incentive program you're implementing starting in Q3. Could you kind of talk about how you're raising the bar for dealers? And how it might be a little more difficult for them to achieve those incentives versus what they saw in the past?

You're muted, Edel.

Can you hear me now?

Yes, but Edel is on mute.

Sorry about that. Thank you for the question. So certainly, that is an important component of The Hardwire strategy for us to realign our incentives with our dealers to make sure that we are working towards the same goals of profitability and growth. And the program is one that we are, as we mentioned, implementing over the course of the year. We think that it is really important that we work with our dealers to deliver the best possible customer experience and strong profitable growth for the future. So this program is certainly an important component of aligning those incentives. And we look forward to seeing it implemented in the course of the year.

Your next question is from the line of David MacGregor from Longbow Research.

Congratulations on the progress to date. I guess just on the dealer question, while we're there, you mentioned dealer count was down about 30% year-over-year. Do you expect that to stabilize at this level? Or are you expecting dealer count to maybe undergo some further reductions as we move forward? Does it just talk maybe a little about how you expect that dynamic to play out in it? I guess just with respect to the HDFS, I appreciate the explanation on revision. But can you just talk about what you're seeing in terms of average FICO scores that are getting approved and credit trends just generally overall?

Certainly, I'm happy to take the first part of the question. So over Q1, to your point, we did continue some additional closures, both within the U.S. and internationally. And as you compare the numbers to the beginning or the same period in 2020, we are down about 160 dealers. We are building what we think is a high performance and very competitive network of dealers. And we -- our aim is for it to be the best in the industry. And that is obviously, as I mentioned before, really critical for what we're trying to deliver to our customers in terms of the customer experience. We do think that there is a handful more as we continue to finalize the actions around the network structure and all with the intent of driving and growing a strong profitable dealer network for the future. And referring back to the previous question, certainly, the new incentive structure is an important part of that as well to help drive that profitable growth.

And in terms of the HDFS and the FICO scores, we have seen no material change in our FICO scores as we've gone throughout the quarters here. And in terms of like our prime versus subprime, we continue -- 80% of our loans are in that prime status. So really no material change.

Your next question is from the line of Greg Badishkanian from Wolfe Research.

It's actually Fred Wightman on for Greg. When you issued the midterm targets last quarter, you had mentioned that you were looking to move the company towards more of an underpromise or towards more of an underpromise and overdeliver mindset. I mean just given the pretty meaningful increase in the 2021 guidance here in the first quarter, can you talk about how we should view those 2025 targets from last quarter?

Well, I don't know that we use exactly those words as you just said. We set out realistic targets for '21 and realistic -- realistic guidance for '21 and realistic targets for the 5-year plan based on what we knew at the time. We're not adjusting our 5-year goals. And remember, when we set out those 5-year targets, they were base -- the base year was 2021. So as our current year continues to strengthen, that algorithm that we laid out there grows on top of that stronger base. So the guidance now for 2021 reflects our best estimate based on some strengthening in demand as our ability to navigate the supply chain and just our ability to see that profitability start playing through.

Your last question is from the line of Billy Kovanis from Morgan Stanley.

Congrats on the call. As a management team, it's clearly made great strides in improving margins. My question is on revenue growth beyond '21. Is this mainly going to be a function of pricing increases and improvements to mix, as you mentioned in your comments? Or do you eventually have a plan to increase the shipments beyond sort of 2019 levels? I understand, Jochen, your focus on desirability. What gives you conviction that you can remove models from lineup, maintain less inventory in your dealer channels? How less dealers in the network and still grow shipments? Is there a trade-off between growth and margins here?

Well, I would say less is more in this context. Being more focused on the models that make the difference, being selective in product launches and what we focus on should allow us to continue to grow our business. So I think the philosophy of having a bloated product portfolio and thinking every new model you introduce sells more on a strategy that was really unfocused is not a strategy that makes any sense.

So I would say in this context really less is more. And we will certainly look at every opportunity to improve our top line, whatever that might be, and that could be selective price, increases in some markets that where we see an opportunity. It could be increased shipments, assuming the demand is there, but not operating with the push model that we're used to, but making sure the demand is there before we ship. And obviously, mix as soon as you focus your portfolio, your mix improves and the focus within the mix is towards the higher profit model. So I think all of that is all, as I said earlier, built around desirability, which is the primary driver of our strategy.

Mr. Shannon Burns, please go ahead.

All right. That's our call for today. Thanks, everyone, for joining us, and I hope you have a fantastic day.

Thank you, everybody.

And with that, this concludes today's conference call. Thank you for attending. You may now disconnect.