Harley-Davidson Inc (HOG) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the 2020 third quarter earnings conference call.

(Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to hand the conference over to Director of Investor Relations, Shannon Burns.

Please go ahead.

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 will include forward-looking statements that are subject to risks that could cause actual results to be materially different.

Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC.

Harley-Davidson disclaims any obligation to update information on this call.

Joining me this morning are CEO, Jochen Zeitz; CFO, Gina Goetter.

And Chief Commercial Officer, Larry Hund, will also be joining us for Q&A.

Jochen, let's get started.

Hello, everyone.

With most of the year now behind us, I reflect on how we've driven significant progress and delivered many changes that we believe are setting our course for winning future.

We've stabilized our business through ongoing COVID-19 impacts.

We executed across each of the 5 key elements of The Rewire playbook, and our initial actions aimed at desirability are starting to drive value for our brand, our products and our customers.

I'm very pleased with our team's achievements in such a short time, and I'm encouraged by early positive signs we are seeing, including posting solid net income in Q3.

We are building a strong foundation that will support the work ahead for the rest of the year, including the ongoing development of The Hardwire strategic plan.

As COVID-19 continues to surge and strain the economy, we will not relax our response efforts.

We continue to implement our robust protocol to keep workers safe in our factories, whilst the wider team continues to work from home.

We are carefully managing cash, and our cost management efforts are expected to deliver $250 million in cash savings this year.

Share repurchase remains suspended.

And today, we announced the Q4 dividend of $0.02 per share, which is in line with Q2 and Q3.

We maintain a strong liquidity position with over $3.5 billion in cash and equivalents at the end of the third quarter and $4.7 billion in liquidity.

Earlier this year, I initiated The Rewire to overhaul Harley-Davidson.

We've already addressed many of the areas I identified as needing significant changes.

After 6 months, the team has significantly reduced complexity, narrowed focus on only those things that make a difference, made progress across all 5 key elements of The Rewire playbook, and we've reset our cultural priorities as well as our leadership principles, building upon our new mission and vision.

Let me share more detail about the progress we've made to date in each of the 5 key areas of The Rewire playbook.

First, we've reset our operating model across every function for simplicity, focus and speed.

The changes have driven significant efficiency, including over $115 million in expected annual ongoing savings beginning in 2021.

We've also changed our leadership team with most leaders being new to their roles and many bringing new perspectives and capabilities from outside the company.

These fresh viewpoints and experiences are essential for us to become a high-performing organization.

Recent additions to our team include Gina, our CFO, who is joining me on the call today.

She's the first woman in this role for Harley-Davidson in our 117-year history -- or time, I would say.

Jag Krishnan joined us as -- in his new role as Chief Digital Officer and will lead our GIS and digital transformation.

Theo Keetell, Vice President of Marketing, reports to me in my role as CMO; and Chad Beightol, GM of our General Merchandise business, to name but a few.

Second, we are focused on protecting the value of our products for our customers.

We believe that a powerful network of profitable dealers is essential to delivering the best possible Harley-Davidson experience.

We've committed significant resources to improve the network's overall profitability.

We've reduced our global network by 4% to date and are working with our dealers to drive consistency in customer experience and to evolve our margin and incentive structure to best align with our common goals around our brand and product.

We sharpened our approach and policies around supply and inventory management to help preserve the value of our bikes for our customers while almost completely eliminating promotions and discounting activities.

We expect to drive significantly higher inventory turns and much lower incentive spend as a result.

And we are already seeing a reduced gap in price versus MSRP, which we believe is a critical step towards preserving the long-term value of our brand and our motorcycles.

Resetting our global footprint and priorities is the third major focus of The Rewire.

The U.S. continues to be the most important priority market.

We've significantly restructured our global business with country-specific implementation, including a fundamental model change in certain markets, such as India, which we announced in a separate release this morning.

Under our focused participation model, we are exiting about 40 markets where low volume and little profit do not warrant investment.

We're establishing dealer-direct or distributor models in about 17 markets, and our 36 highest-potential markets will have the leadership, resources and a clearly defined operating framework that we believe will drive desirable growth, profitability in the future.

With a complete reset of our regional structure, we now have a less cumbersome and much more efficient setup and have defined a clearer regional strategy in North America, EMEA, APAC and LatAm.

We've reset our subregional structures, as noted in our supporting slides.

In this new structure, we are able to reduce the 5 regional offices to efficiently and effectively support restructured operations.

Fourth, we are focused on streamlining our product portfolio and rebuilding our launch practices for maximum impact.

We eliminated models with the lowest profit or potential, reducing the complexity of our planned product portfolio by 30%.

We are now pruning further by eliminating optional offerings that customers value the least.

This critical assessment is part of our new process, and it reduces complexity for our dealers and confusion for our customers, while helping ensure we'll be more competitive with our winning products.

We can now focus our resources where they can make the most impact, investing directly in areas that we believe have the highest potential for short-, mid- and long-term success, like our stronghold core categories and new segments, like Adventure Touring.

We did not hesitate to delay or cancel products, like Streetfighter, that do not provide the right timing or return profile or advance others that were slated for later market introduction.

In addition, we decided to outsource and restructure our eBicycles business, creating a new venture with minority equity participation.

This approach allows us to have measured participation in the eBicycle market while maintaining clear focus on key motorcycle segments.

This reduces complexity at the Motor Company and allows the new company to operate independently with agility without risking brand dilution.

eBicycles will be marketed as Serial 1, Powered by Harley-Davidson.

We're now committed to what we believe is a vastly improved launch cadence and approach that benefits our customers, dealers and the company.

Our model year will now change over early in Q1 each year, creating product excitement at the time most riders are preparing for the riding season.

While this year's retiming from August is causing some near-term impact, further exacerbated by COVID, an early year launch will allow products a full season to sell, minimizing aged inventory and floor plan costs that are more likely to accumulate during the off season.

Our new marketing plan puts the spotlight back on our brand and mission, on events that drive true conversion and on investments that build desirability.

We will also properly plan for the investment required to successfully launch and promote our new products.

In the past few months, we've executed impactful marketing campaigns with influencers, such as Jason Momoa and Ewan McGregor.

The Momoa video featured in our United We Will Ride campaign generated over 500 million views, and our efforts promoting The Long Way Up LiveWire campaign garnered over 100 million positive media impressions in addition to an exciting Apple TV series with LiveWire at the center of an incredible adventure.

Finally, our Rewire playbook has expanded our business focus beyond motorcycles.

Our Parts & Accessories and General Merchandise businesses, which had been underperforming for years, are now organized around dedicated leaders and a professional business unit setup that will allow us to capitalize on their potential and new opportunities as we invest in a better product assortment with a clear sales channel strategy.

For General Merchandise, going forward, we intend to strengthen the link to our brand heritage, reestablish design and quality principles and focus on the most profitable SKUs in critical categories.

For Parts & Accessories, we intend to reestablish our lead as innovators in customization and tightly align our P&A strategy with new motorcycle launches.

We plan to improve pricing and inventory strategy, enhance training and field support and reduce SKUs by 15% next year.

Strong foundation created by The Rewire will be a starting point for The Hardwire, our forthcoming 5-year strategic plan, which I'll talk more about later.

Now I'll hand over to Gina to review our financial results.

Thank you, Jochen, and hello, everyone.

I've been CFO for about 1 month, and I look forward to meeting and talking with you all over the coming weeks.

Overall, we delivered solid financial performance within the quarter as we continued to execute against The Rewire playbook.

Consolidated net income was up 38.9%, and earnings per share was $0.78 or up 41.8% over a year ago.

The Motorcycles segment operating income in the quarter was slightly down year-over-year as shipment declines and restructuring expense were offset by cost reductions across manufacturing and SG&A.

Financial Services operating income was up 25%, driven by a lower provision for credit losses and reduced operating expenses.

As we continue to work through The Rewire playbook, we incurred restructuring charges of $44 million during the quarter, bringing year-to-date restructuring charges to $86 million.

We continue to expect restructuring costs to be $169 million.

As you heard from Jochen, the execution of The Rewire is going as planned, and we continue to expect to deliver $115 million of annual ongoing savings beginning in 2021.

Global retail sales of new Harley-Davidson motorcycles in Q3 were down 8.1% versus last year.

This retail performance was primarily driven by a 10.3% decline in the U.S. due in part to the timing shift of our new model year launch from Q3 to Q1.

Last year, new model year bikes were in the U.S. market in August.

Given this timing shift, we were encouraged by solid retail performance through most of the quarter, with year-over-year sales rate declines accelerating in September but in line with our expectations.

We expect to see global sales declines continue throughout Q4 as we adjust to the new model year timing and we continue to experience the impact resulting from lower inventory.

U.S. retail sales also continued to be impacted by new model launch timing and our focus on strong inventory management.

Our Q3 601+cc U.S. new bike registrations was 41.4%, down 8.5 points.

While the underlying market is strong with U.S. 601+cc new retail sales up 7.5% over last year, which is the first quarter with industry-wide growth since Q1 of 2016, we believe our share loss is primarily impacted by the planned inventory contraction.

In the international regions, EMEA retail sales were up nearly 7% in the quarter, driven by strong performance in Northern European markets.

And across Europe, our year-to-date market share was 7.7%, down 1.5 points versus prior year.

Overall, Asia Pacific was down 5.5% versus a year ago, driven by declines in Japan and Australia, however, we did see nice growth in the China and South Korean markets.

Across the dealer network, we finished the quarter with worldwide motorcycle inventory down 34%.

We remain committed to our approach to supply and inventory management, and we are encouraged to see these actions driving long-term fundamental improvements across our business and driving value for our customers.

Our objective is to deliver desirable and profitable volume, not simply unit growth.

We do expect that our market share will be volatile over the coming quarters as we reset model year launch timing and retail inventory levels remain tighter.

As we look to wholesale motorcycle shipments, in Q3, we were down 6.2%, primarily driven by declines within the Touring family.

Overall revenue was down 9.8% due to the unit volume decline.

On a year-to-date basis, the average motorcycle revenue per bike was relatively flat year-over-year, with positive impacts from lower sales incentives and higher pricing offsetting the unfavorable mix shift due to more Sportsters and Cruisers versus Touring bikes.

Moving on to margins.

Total absolute gross margin was down due to unfavorable product mix, lower shipments and unfavorable foreign currency exchange.

These negative drivers were slightly offset by favorable raw material pricing and lower incremental tariffs within manufacturing.

The Q3 gross margin as a percent of revenue was essentially flat to year ago.

Total Q3 operating income was largely flat versus last year, with strong cost management within SG&A offsetting the absolute gross margin declines and restructuring expense.

Year-to-date SG&A was down $136 million, which is in line with the committed planned cash savings declared in the face of the COVID-19 pandemic.

The Financial Services segment operating income in Q3 was $91 million, up 25.1% compared to last year.

Net interest income was down $16 million due to higher average outstanding debt as we proactively manage our liquidity in the face of the ongoing pandemic.

The Q3 total provision for credit losses was $26 million favorable to Q3 last year.

This includes a $20 million decrease in actual credit losses as well as a $6 million decrease in the allowance.

Retail credit losses continued to be down versus last year as a result of lower delinquencies, driven by high-volume of COVID-related loan payment extensions for qualified customers as well as improved used motorcycle values at auction.

The increased volume of extensions, which occurred during the second and into the beginning of the third quarter of this year, resulted in fewer past due accounts and lower repossessions and losses.

Improved used motorcycle values stem from a lower number of motorcycles at auction and limited new inventory in dealerships.

The overall change in the allowance for credit losses was favorably impacted by a modest improvement in the company's outlook on economic conditions during the quarter.

However, there continues to be significant future economic uncertainty as COVID-19 continues to restrain the U.S. economy.

We believe the allowance for credit losses appropriately reflects the company's outlook on economic conditions and represents estimated lifetime losses in our portfolio at the end of the third quarter.

Financial Services retail originations in Q3 were down 4.2% versus last year.

However, our market share for new U.S. retail sales remained strong at 67.5%.

New retail motorcycle originations were down on lower new retail sales inventory availability partially offset by higher used motorcycle originations as dealers supplemented the shortfall of new inventory with used sales.

At the end of the quarter, HDFS had $2.83 billion of cash and cash equivalents and $1.13 billion of liquidity available through bank credit and conduit facilities for total available liquidity of $3.96 billion.

Cash and cash equivalents remained elevated as we prudently hold cash in the face of economic uncertainty.

As of Q3, HDFS debt-to-equity ratio was 4.6:1.

This is well within our debt covenants, which require debt-to-equity to be no higher than 10:1.

HDFS' retail 30-day plus delinquency rate was 2.59%, down 116 basis points compared to the third quarter of last year.

The retail credit loss ratio was also favorable at 1.4%, a 43 basis point improvement over the third quarter of last year.

The favorable delinquency performance was primarily driven by a high-volume of COVID-related retail loan payment due date extensions for qualified customers.

Many of the extended accounts have made at least 1 payment after the expiration of their extension period.

We do expect that the delinquency rate will normalize as customers face longer-term financial impacts from COVID-19.

The remaining Harley-Davidson, Inc.

financial results are summarized on Slide 14.

We ended the quarter with $3.56 billion in cash and cash equivalents, again, maintaining high liquidity as we manage through the pandemic.

Year-to-date operating cash flow was $1.14 billion and favorable to prior year, driven by lower inventory levels and favorable cash flow from wholesale financing.

As the charts on Slide 15 demonstrate, we believe that, over time, we are a leader amongst our peers in return on invested capital at the Motor Company and return on equity at HDFS, and we are a demonstrated leader in our ability to generate cash.

Our year-to-date effective tax rate was 10.8% compared to 24.6% last year.

The decrease was primarily due to discrete income tax benefits, which reduced the company's income tax expense expressed as a percent of the pretax income.

Shareholder returns in Q3 included a quarterly dividend of $0.02 per share.

We did not repurchase any of our stock on a discretionary basis during Q3 and do not intend to repurchase stock in Q4 as we continue to preserve cash given the uncertainty of the ongoing pandemic.

As we assess the current environment and the pandemic's impact on the global economy and in our business, it is difficult to reasonably forecast our financial performance, and we are not providing guidance at this time.

To wrap up the financials, we saw some positive financial signs in the quarter, including an improved quality of earnings, realization of The Rewire SG&A reductions and a strong balance sheet.

As we look to the rest of the year, we continue to expect to be impacted by our model year timing change and our continued focus on inventory and supply management.

We are confident The Rewire will strengthen our business.

And now I'll turn it back to Jochen, who will share a first look at The Hardwire.

Thank you, Gina.

The Rewire is the execution of a playbook that creates a strong foundation for the company, including a new operating model that realigns the organization for performance, reduces costs and sharpen focus on profitable products and markets.

The Rewire foundation will be the starting point for The Hardwire, our forthcoming 5-year strategic plan to deliver profitable growth and shareholder value based on building and expanding the desirability of Harley-Davidson.

The work we are doing to develop our 5-year strategic plan and the positive initial results we are seeing reinforces our belief that a strategy grounded in desirability is the right path forward.

As I mentioned last quarter, I would like to share a first look at The Hardwire that is coming into focus now.

Our strategic plan will be guided by our new vision and mission.

Our vision is to build on our legend and lead our industry through innovation, evolution and emotion.

Our mission is more than building machines, we stand for the timeless pursuit of adventure.

Freedom for the soul.

Both statements will keep us grounded in our authentic brand, delivering adventure and freedom in only the way Harley-Davidson can.

The basis of The Hardwire is Harley-Davidson being the most desirable motorcycle brand in the world and the company that defines motorcycle culture globally.

Desirability will provide the framework for our work and for our success measures.

It will be organized around a desirable growth strategy for Motorcycles, Parts & Accessories and General Merchandise in priority markets; desirable customer focus, inclusive of distinct products, brand and purchase experiences; desirable operations that are high performance, lean and efficient; desirable impact with emphasis on inclusive stakeholder management and delivering long-term value; and a desirable workplace that is diverse, inclusive and built around top talent rooted in a high-performance, winning culture.

Let me give you a few details on each of these aspects that are under development as part of The Hardwire.

Desirable growth will be based on the appropriate balance of our stronghold segments and new segments where we are best positioned to win.

We'll strive for products that are best-in-class, leveraging the Harley-Davidson tradition and priced to match our value.

We believe there's meaningful headroom in our stronghold motorcycle segments, and we intend to defend and grow our leading positions.

We are aligning our investment strategy to further push innovation in these segments, reinvigorate the attraction for customers that love these products and capture the growth spurred by renewed interest in auto activities.

We also believe we have room to grow profitably with attractive new products.

Adventure Touring, for example, will redefine our market participation in a very positive way.

This segment is highly aligned with our capabilities and our mission.

Beyond these segments, we believe there are further attractive and strategic opportunities that support our long-term evaluation and evolution.

We are exploring these with focus and rigor, recognizing the importance of balancing their potential within our investment framework.

Finally, we believe there's a large untapped opportunity to grow our complementary businesses, Parts & Accessories, General Merchandise and HDFS, by speaking not only to those riders who purchase new bikes but to the large installed base of existing Harley riders.

We're actively exploring ways to capitalize on the broader Harley-Davidson community of riders, a significant asset.

We believe there's immense potential in building a future-looking customer journey that combines the best of our dealers' capabilities with Harley-Davidson enhancements, supported by digital.

For that purpose, we're taking a clean-slate approach to building future experiences that will contribute to keeping riders engaged and also will meaningfully deliver on our mission.

This approach will be designed around the perspective on our customers that is less rooted in demographics and more focused on its attitudes and attuned to where customer is along the purchase and ownership journey.

We're assessing transformative moves to reinvent our operations.

As discussed, The Rewire has delivered meaningful efficiencies in how we operate from procurement to inventory management.

The Rewire, however, has also brought to light opportunities to continue to transform our end-to-end supply chain for further efficiency and cost effectiveness.

The past few years brought significant dislocation to our operations in response to external dynamics, particularly for our European markets.

We'll now turn our attention to addressing these impacts to support our future strategy.

Aligned with this, our guiding principle is to be customer first by ensuring the right flexibility, customization potential, price points and service levels for our markets, working back through the supply chain in order to deliver on the same.

We will examine every assumption about how we operate, and we believe there's significant potential in this effort to power a next-level change in cost and efficiency.

Inclusive stakeholder management will be a unifying theme for our role in society.

Celebrating unity is at the root of our mission for Harley-Davidson.

We will walk the talk in every aspect of our business from diversity to environmental responsibility to employee empowerment.

We think about inclusive stakeholder management as increased unity of purpose, United We Will Ride.

Last but certainly not least, just as critical as the business overhaul to reignite the company's soul and spirit, our culture must also evolve.

We're moving fast, making swift changes, and all of us together, including our dealers, need to up our game substantially to compete successfully in the coming years.

We're calling our cultural journey Harley-Davidson number 1, represented by our recognizable number 1 logo that was introduced in 1969 to celebrate a national championship.

Harley-Davidson racing teams have historically used the number 1 on their winning motorcycles.

The number 1 is uniquely ours.

It's an iconic symbol of winning and the hard work and high-performance it takes to get there.

We are redefining our culture, our organizational principles, employee engagement and expectations to focus on the strength and spirit of our 117-year legacy.

Desirability defines success.

The Hardwire will target growth that is focused and profitable across the businesses.

Our targets will be achievable and will not pursue growth merely for growth's sake.

Our brand is powerful and recognized globally, backed by an incredible heritage in iconic products.

We have a new foundation to execute a new strategy that will solidify our place as the most desirable motorcycle brand in the world.

We are committed to this multiyear journey.

Now we'll open for questions.

(Operator Instructions) The first question will come from the line of James Hardiman with Wedbush Securities.

Two-part question is the way I'm going to get around that.

But maybe talk a little bit about this new distributor model.

Help us understand.

Obviously, I think you've identified some of these markets as maybe not being sort of the home runs that you once thought that they would be, but it doesn't sound like you're necessarily giving anything up on the top line by going to a distributor model.

What is the impact on margins ultimately?

Are you sort of giving back whatever cost savings you might be getting from exiting those markets from a manufacturing perspective, giving that -- those -- some cut of revenues to your partners in those markets?

Help us understand that a little bit better.

And then, I guess, more broadly, do you think the long-term top line potential after you're done with a lot of the cost cuts that are underway here, is that necessarily less than it once was?

Is it similar to it once was?

Or is it even maybe greater than it once was?

So James, this is Larry.

Let me take your first part of your question.

Really, we don't see a whole lot of impact to margin on the change to distributor models.

I mean these are not -- if you look at overall number of units compared to total motorcycle shipments or retail sales for the company, are not that large.

In a lot of cases, these are -- in smaller markets, these are single-dealer markets, maybe 2-dealer markets.

So once again, not a huge impact from that.

So overall, we think that the overall impact probably is not that great.

To your second question, James, well, it depends on what you want to compare to.

When you say what -- is the long-term top line potential less than it once was, I would need to know what the once was, was.

So -- but we are not giving top line guidance at this point.

And I think the refocus that we've done with The Rewire strategy will obviously also impact our Hardwire strategy.

The key is not the top line growth.

The key is that we want to grow desirably and profitably.

So this -- as I said, it's really important to bear that in mind.

We don't want to grow for the sake of growing.

We want to grow profitably.

And if we can grow profitably, well, we'll take that at the time that happens.

Having said that, we do see a lot of potential.

I mentioned Parts & Accessories, General Merchandise, HDFS.

And we do see, of course, also potential in our Motorcycles business.

But focus is key.

Not trying to do everything at once and making sure that what you launch in terms of existing categories and new categories is manageable with a powerful go-to-market process.

So we believe growth comes through focus as well.

And The Rewire has reset our operating model, and it was not a -- as I mentioned, just an initiative to reduce costs but to really make us an efficient, effective and high-performance organization.

So it was done very carefully, but without compromise really, setting us up for a faster, more-focused, less-complex organization.

Our next question will come from the line of Gerrick Johnson with BMO Capital Markets.

So when we walk into some dealerships, they kind of look like ghost towns, and they'll tell us they're not getting any bikes until February.

So clearly, you've shipped about 25,000 bikes in U.S., so how are you allocating those motorcycles to your dealership base?

So Gerrick, we are looking at dealer supply, right?

And we are measuring dealer supply, and we are filling based on days forward sales for dealers.

So the dealers who are, call it, shortest on supply relative to our projected forward sales over the next couple of months get supplied first, and then we continue to work down the list like that.

I would say at the end of the quarter, we were pretty close to a couple of months forward sales at our dealers.

So we actually felt decent about our strategy on that.

We were probably a little light at points as we went through the quarter.

Our next question will come from the line of Brandon Rolle with Northcoast Research.

Congrats on the strong earnings performance.

I guess, my question was kind of also on the dealer base.

Could you kind of break out the impact of dealers possibly going away or being eliminated as you create this stronger, more profitable base?

And I guess, break that out from a shipment and retail perspective, if you can?

So we probably won't give that kind of detail on this.

What I will say is that we have closed about 61 full-line dealerships, I think, as it was reported in the comments, about 4% of our total.

And that those are -- those, call it, closures, combined with our managing inventory on a much tighter, in line with supply and demand, are driving some real positive impacts for our dealer network.

We're seeing improved pricing on news motorcycles.

We're seeing improved new motorcycle selling right around MSRP.

We're seeing a tightening of the gap between pricing for new and used motorcycles.

And I would say that despite lower sales, we have seen improvement in dealer profits and, in fact, many dealers having very strong profits throughout the third quarter.

So dealers are certainly seeing the benefit of all these actions.

Our next question will come from the line of Greg Badishkanian with Wolfe Research.

It's actually Fred Wightman on for Greg.

You in your prepared remarks mentioned plans to defend and grow your leading position when you were talking about Hardwire, but the U.S. share was down over 800 basis points again in the quarter.

So I understand that, that's going to be volatile, but can you sort of help us understand what your expectations are for that metric as we move into the beginning part of next year and the model year reset takes place?

Yes.

Thank you, Fred.

Look, we've always said that market share right now doesn't really matter simply because we have to focus not on volume but on desirability.

And we will not devalue our brand by oversupplying the market, resulting in price promotion and discounting activities, which have seized this quarter and also in the previous quarter.

And we will not pursue volume growth at the expense of the right fundamentals for our business.

And that is very much the case for this year.

So we are -- all I can say right now is we are focused on taking the needed actions to ensure that we are the most desirable motorcycle brand in the world.

And as part of that, we are managing inventory in line and/or rather a little short of demand.

And as Larry just said, these actions are driving the intended results, increased demand and increased pricing for used motorcycles, dealers are selling new bike at or very close to MSRP, higher dealer profitability.

And I think that's what really counts.

And while some of our competitors are rather price aggressive, it's not something that we want to buy into.

And hence, there was quite an inventory glut in the system that we managed to now work through the system due to COVID-19 and our restricted inventory policy, and then it's showing the right results.

What that will mean in terms of market share going forward, we will comment on once The Hardwire strategy is launched.

But as we said, this is not just about market share.

This is about desirable market share, and for that, we had to take the actions we had to take.

That will be done by the end of the year, and from there, we can rebuild.

And certainly, our goal is to expand market share desirably in the future as well as part of The Hardwire strategy, profitably though.

Our next question will come from the line of Shawn Collins with Citigroup.

My question is on manufacturing in the U.S. and if you are possibly seeing any supply chain disruptions or complexities.

I think Polaris cited some intermittent supply chain disruptions this morning at its snowmobile segment.

So if you might just be able to talk about that subject, I'd appreciate it.

Yes.

Shawn, supply chain disruptions, we don't see right now.

Obviously, we had disruption when our factories were closed and as part of the restart.

Has it become much more complex?

Absolutely.

And -- but I think the team has done an extraordinary job to navigate through COVID-19.

We have the right safety and security protocols in place to deal with COVID-19, and we haven't seen any substantial shutdown since.

So in supply chain, there's always one or the other smaller disruption, but nothing significant at this point in time.

Our next question will come from the line of Adam Jonas with Morgan Stanley.

Congrats, Gina.

Welcome to the team.

I hope you don't think that stock price up 15% every earnings result is normal.

It's nice.

This isn't normal?

I think we should make it normal.

I wouldn't extrapolate.

We'll call it the Gina effect, okay?

Just one question.

Jochen, in your closing remarks, you kind of piqued my interest when you talked about beyond -- after your comments on Adventure Touring, you said beyond these segments -- I'll have to check the transcript, but you said we want to continue to look at attractive and strategic segments and we're exploring them with rigor.

Maybe -- I think I'm probably crazy, but I keep -- I can't help but think about 3-wheel and 4-wheel on and off-road adventure vehicles, both in ICE powertrains and also BEV powertrains.

Could this categorically be included in one of those potentially unexploited opportunities for Harley-Davidson?

Well, thanks, Adam.

I would say it cannot be categorically excluded, but I don't want -- so look, at this point, we are looking at every opportunity there is.

The key thing is focusing on the things that we think have the most potential for success, and that means clear focus on our core segments, expansion.

And that's the majority of our business, but that doesn't exclude certainly 3-wheels, simply because our trike business has been quite successful.

We see potential in that.

And I'm not going to rule out 4-wheels, but you shouldn't take that as an indication that we will get into 4 wheels.

But once you -- or while you develop a new strategy, I think everything has to be at the table.

And there are certainly no categories that we don't think could potentially be an opportunity, either in the short, mid- or long term.

I know that's a little cryptic.

No, I understand.

But I'll keep it at that.

We are categorically not excluding anything.

But that doesn't mean that -- we will certainly not jump into everything that offers an opportunity.

We want to stay very focused.

And any adventure we are taking will need to be very thought-through and chances of success have to be very high, and we need to see a competitive advantage that we bring to that new category that we might enter with the Harley-Davidson brand and our product.

The next question will come from the line of Felicia Hendrix with Barclays.

Jochen, as you look into the future, and maybe not so far out, let's call it the midterm, what do you think is the right normalized run rate for worldwide shipments over time?

Do you see the company getting back to 200,000 plus units a year?

And then also, when do you expect the Motor Company to get back to a regular introduction rate of new models?

Well, regular introduction of new models will start next year.

What has just changed is that the change of model year to model year is no longer happening in August, it's now happening at the beginning of a new year.

So that's a onetime effect.

From here on, we will continue to introduce new models throughout the year.

But with a model year changeover actually happening in the calendar year, the changeover -- supposed to happen rather than the year before.

Look, we are not commenting on run rate and units normalized.

I mean -- and I don't want to really give any guidance for next year at this point in time.

I think we've done what we need to do in terms of making sure that the base of our business is desirable, and that is a good platform to grow.

And -- but I need to leave it at that today.

Okay.

Just to clarify on the first part, I probably should have been more clear, in terms of more of a, I guess, the cadence of the introduction, I know that not model year is changing, just in terms of the number of new models a year, I mean, will that be kind of more of a gradual ramp?

Or we'll hit that next year right away?

Well, certainly the carryover bikes and the majority of new bikes will be launched in the first quarter, but we will have launches also in one or the other quarter following the new model year introduction.

So not every new product will come in the first quarter of future years.

We don't -- I don't think that makes much sense.

You want to make sure that there is enough new product out there in the following quarters to create desirability and demand.

So the majority, yes, first quarter, but thereafter, there will be either new categories that we -- or segments that we're venturing into or new products, in particular in our core segments.

Our next question will come from the line of Jaime Katz with Morningstar.

Can you guys just delineate what the 39 markets that you're exiting represents as a percentage of sales and profit, so we can get an idea of what the impact of that might be?

And then just a clarification.

I think the language that you used for average selling prices said they were flat year-over-year, but I think maybe that stripped out the mix shift of it.

So if I did my math right, I think, actually, the ASPs were down.

Can you just confirm that?

So Jaime, I can take the first part of your question.

The impact on sales and profits of the -- of those markets we are exiting is minimal, probably less than 1% of worldwide unit sales and profit.

Like I say, profit really not particularly meaningful.

Yes.

And average selling price hasn't really changed that much.

And as Larry mentioned earlier, our MSRP is -- has actually gone up.

So there's not a significant shift within the models and within the segments.

And -- but obviously, there's some impact due to the decline in the Touring segment.

But overall, our segments are holding up well according to our plans for this year.

Next question will come from the line of Craig Kennison with Baird.

Gina, congratulations.

Most of my questions have been asked, so I'll shift to a bigger-picture question.

California has proposed a ban on gas cars by 2035.

Obviously, motorcycles are not cars, but it's not hard to connect to that.

So to what extent are you preparing Harley-Davidson for any similar action against gas-powered motorcycles?

Yes.

That's a good question, and that's why we have launched LiveWire.

And we believe electric is -- needs to play an important role in the future of Harley-Davidson.

It's still an emerging category, so sales volume -- and volumes are relative.

But from what I can see through August, we actually believe that LiveWire is the best-selling electric on-highway or dual-electric motorcycle in the U.S., actually selling more than double the next highest electric motorcycles.

So that means we are leading the way.

We have an extraordinary product.

And that is the starting point to continue to expand in the electric motorcycle segment.

So we believe this is important.

We have an important role to play.

We are leading in the segment.

LiveWire has just been elected as the best electric motorcycle in 2020 by Motorcycle News.

It's an extraordinary product, and it's the starting point to more.

So we are fully committed to electric, not just because of California but because we believe it can be an important segment and must be an important segment in the long-term future of the company.

And it's also attracting new riders and new customers to the brand that might not have considered Harley-Davidson before.

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

So just a quick question on SG&A.

Obviously, down nearly $70 million this quarter.

It's down roughly double that year-to-date.

How much of that reduction is sustainable?

And is $200 million a quarter roughly a good run rate as we start to think about 2021?

I'm assuming some cost savings that you're experiencing this year are COVID related and probably come back next year, but then you've got the restructuring savings happening next year as well.

So just trying to get a sense of what the -- or what a good run rate for SG&A is going forward.

Joe, coming back to SG&A and what we've committed to from a restructuring standpoint, so we've said that there's $169 million of restructuring costs, and that equates to $115 million of ongoing savings, and that estimate remains unchanged.

So I wouldn't take this quarter as the runway that would move throughout because there's a combination of both kind of the near-term actions that we took to kind of reserve and preserve cash in the quarter.

I would anchor to that $115 million of annual ongoing savings.

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

Certainly, the long-term plan is very exciting here.

But just focusing on the near term, you mentioned earlier that market share doesn't matter right now, but I would like to see if you could explore for us that 840 basis point drop in market share.

And I realize it's probably a good measure, that's the planned inventory retractions.

But could you separate out for us just the impact of the inventory retractions from just what the competitive dynamic was in the quarter?

So David, I would say a couple of things.

One is we -- there was some growth in the market in certain parts of the market where we don't compete this quarter, so that certainly had an impact on the market share.

The -- not having the new model year launch certainly had an impact as well.

Normally, we see a little bit of a lift when -- in September after those new bikes are introduced.

And then combined with that, I think the key impact, as we talked about in the prepared comments about tighter inventory management, certainly had an impact as well.

So a combination really of those 3 things, I think, drove the market share.

But as we've said, the trade-off has been stronger pricing of new and used motorcycles, better profitability for our dealers, higher margins for our dealers.

So I think we are really executing our strategy of building desirability for Harley-Davidson motorcycles and the brand.

And to add to what Larry said, no promotional activities.

We had no promotion -- significant promotion in the market in comparison to some of our competitors that have been highly promotional and continue to be highly promotional.

The next question is a follow-up question from Gerrick Johnson with BMO Capital Markets.

Sorry, I didn't expect you'd get back to me so soon.

Question for Gina.

Just in general, surprises?

What are you most excited about?

How your talents can most benefit Harley-Davidson?

Surprises and -- I guess, I'm overly -- I'm super excited to be here.

I'm super excited to be part of this amazing transformation.

All of the kind of the actions that Jochen laid out and the actions that the leadership are taking.

I'm very inspired to be part of the journey that they're on.

So I don't know that I have any real surprises, but I guess, pleasant surprise that there's an organization that has lined up behind this mission and ready to go, which is great.

We have a follow-up question from Adam Jonas with Morgan Stanley.

Forgive me if I missed this, but can you remind us when we should expect to hear the 5-year plan, The Hardwire plan next year?

Sure.

That's going to be with the announcement of the fourth quarter results in February.

Okay.

So it's -- it's not a separate -- it's just part of the normal earnings presentation.

It's not a separate Capital Markets Day as such.

No.

That's correct.

With that, we are showing -- actually, we just received a follow-up from James Hardiman with Wedbush Securities.

So obviously, September was the month where the model year comparison was toughest.

Safe to say that if I think about sort of -- maybe it was a 10% decline domestically and 8% globally, that, that was probably worse in September.

Just trying to think about how I should frame the fourth quarter as I think about sort of retail, which we're still going to have that difficult comparison from a model year perspective.

And then as I look to next year, I'm not going to ask you anything about guidance, but just maybe help us understand if there's going to be significant fallout from these markets you're exiting.

It doesn't sound like they represented much in terms of overall shipments or overall retail, but I don't know, is there going to be a material impact from you exiting markets as I think about shipments in 2021?

So James, on the -- I'll just -- what I'll talk about is in the third quarter kind of the sequencing of the sales that we went through the quarter, if you will, sales were pretty solid in the month of July.

And then really through the first 3 weeks of August, then you start lapping those last 5 weeks of the quarter where you're lapping the new model year introduction.

And that's where we really saw, I think, some decline, particularly in the U.S. market, which tends to have a stronger sale of those new products.

And then as I said earlier, the impact of these markets we're exiting, a lot of small markets, a lot of kind of 1-, 2-dealer markets, so not a significant fallout next year that we expect on market exits.

I mean there will be some, but not a meaningful amount.

And with that, we show no further audio questions.

I will now hand the conference back for closing remarks.

All right.

Thanks for joining us today, everyone.

We appreciate your interest in Harley-Davidson.

Have a fantastic day.

Bye-bye.

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