Harley-Davidson Inc (HOG) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the 2020 first quarter earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Director of Investor Relations, Mr. Shannon Burns. Thank you. 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 in this call. Joining me this morning are CEO, Jochen Zeitz; and CFO, John Olin, and we are dialed in from multiple locations. Jochen, let's get started.

Thank you, Shannon, and good morning, everyone. Today, I'll share with you my observations, initial actions and the direction in which I plan to take Harley-Davidson. Before I do, I want to acknowledge the historic time we are in and how honored I am to be part of an organization that has shown such incredible spirit in the face of adversity. Harley-Davidson is deeply rooted in community and we honor those who are sick, providing care and relief and working tirelessly to end this terrible pandemic.

This crisis has impacted us all, but I know we will prevail. I'm confident that with the right focus and changes that I intend to implement swiftly and diligently, we will emerge stronger. From my observations over the last 2 months, it is clear we are at a critical time in our history that requires significant changes to the company. My key insights are as follows: first, COVID-19 has dramatically changed our reality for the foreseeable future and the crisis has added to an already challenging environment. We have a robust plan in place to protect our customers and employees and to be prudent with our resources and I'm proud of our team's response. We're taking actions across the following areas. Foremost, we continue to act quickly and in alignment with government efforts to protect the well-being of employees and the Harley-Davidson community. We've implemented restrictions, enhanced sanitation practices and canceled events. Our closure of facilities and temporary suspension of manufacturing operations enabled us to install workplace protections and develop a comprehensive plan incorporating precautions and guidance from public authorities to protect employee health. We are gradually resuming production in a measured way that is safe for employees and will continue to require all employees in roles that allow them to do so to continue to work from home to minimize the number of people in each facility.

For the wider community, our foundation donated to the United Way's COVID-19 relief fund, and through United, we will write efforts. We are donating the proceeds of a custom live wire auction and leveraging our channels to connect riders with relief opportunities that allow them to make a difference in their communities. Last week, Jason Momoa helped us kick off these efforts with a powerful video launching our COVID-19 relief efforts.

Second, this year, we are preserving about $250 million in cash by reducing capital and nonessential spending, by freezing hiring, reducing salaries and eliminating merit increases. We also implemented other cost management efforts, such as retiming the launch of new products. Additionally, we have suspended discretionary share repurchase and reduced our Q2 cash dividend to $0.02 per share, down from $0.38 per share in Q1. We believe these are prudent actions given the uncertainty of the COVID-19 crisis. Third, we maintain a strong liquidity position with nearly $2.5 billion in liquidity at the end of the quarter. Recently, we increased our cash position, amended our $1.42 billion in credit facilities, extended our 364-day loan facility and are also in discussions with major U.S. banks to secure an additional $1.3 billion of liquidity.

And finally, in response to the COVID-19 crisis, it's important that we help ease the burden on dealers and riders. We're providing dealer support based on the unique needs of each region, including financial support for motorcycle inventory, extending certain credit payment due dates and adjusting requirements with warranty and training. While these actions offer near-term relief to dealers, we do expect the network to contract through the crisis. As a consequence, we will work to optimize the network and improve dealer profitability going forward. For our riders, many dealers remain open for service support, and we continue to sell parts and accessories and general merchandise online. We, along with our dealers, are enabling home delivery of new motorcycles where it is permitted. Also, for riders, who are impacted by COVID-19, HDFS is helping keep them on the road. After a significant number of conversations with our management, employees and other stakeholders, several other things have also become clear to me. First, we have tremendous strength in our products, our riders and our dealers. However, we have challenges to address that have become more apparent in this crisis, including the high level of complexity across the organization that needs to be minimized. Our team is talented and hardworking, but leadership has become somewhat isolated and overly centralized, and as a result, slow to respond. The speed of decision-making needs to increase. I've observed that after multiple rounds of cost cuts and reorganizations over the past years, morale has suffered. There is frustration as some cost-cutting initiatives have tried to improve efficiency of things that are fundamentally inefficient. As a result, we need to reignite our Harley-Davidson's soul and culture. Additionally, our organization has become accustomed to overcommitting and underdelivering. We need to set achievable plans and realistic goals. As I reviewed our strategy, I know that elements of the More Roads plan are good in principle, but it is clear that our strategy needs to be refocused to better align with our capacity and capabilities and also updated, given our new reality. We'll continue to expand beyond traditional products and markets, however, we have over-indexed on new riders and new market growth and lost focus on critical profit sources. We made progress with our product line, and to some degree, our customer base, but progress is lagging and expectations are unreasonable, especially given the economic environment that we are likely to encounter as the COVID-19 ripple effects will likely be with us for some time. We'll continue to move forward with the highest potential elements of More Roads, but our strategy must be reassessed.

As a result of my observations and assessment, I've concluded that we need to take significant actions and rewire the company now in terms of priorities, execution, operating model and strategy to drive sustained profit and long-term growth. We are calling it The Rewire. And it's our playbook for the next few months, leading to a new 5-year strategic plan, which we will share when visibility to the future returns.

I'll highlight some of the key elements of The Rewire. First, we'll enhance our core strength and better balance expansion into new spaces. It's more important than ever to return focus and strength of our brand and company, starting with our dealers, customers and our stronghold products and committed employees around the world. HDFS is also a strategic advantage with a track record that will help us navigate through this crisis. We'll reevaluate our strategies to reach new riders and build ridership. Second, we prioritize the markets that matter. We'll invest in the markets, products and customers that offer the most profit and potential. This includes building on our strong position in the U.S. We'll narrow our focus, time and energy in the most critical countries and market segments that can move the needle for us today. We'll also diligently play the long game by identifying select strategic markets that may not contribute to enterprise profitability in the near term but are critical for our future. We will also simplify the market coverage model and take costs out of the process. Third, we reset our product launches and line up for simplicity and maximum impact. Launches are 6 to 12 months to reflect our new reality and to allow our launch calendar for the first time in our recent history to align with the start of the riding season. We'll simplify launches over time to better suit the capacity of our dealers and company resources to support them. From here, we'll expand our profitable iconic heritage bikes to excite our existing customers. We also remain committed to Adventure Touring Streetfighter and advancing our efforts in electric. We will continue to be guided by the voice of our customers and dealers as we bring new focus to our offerings to optimize value and profit delivery. Next, we'll build our parts and accessories and general merchandise businesses to full potential. We're developing a comprehensive strategy across these businesses that focuses on assortment and distribution opportunities, maximizes channels, improved e-commerce capabilities and growth revenues and margins for both the company and dealers. We will align this strategy with our motorcycle strategy for holistic presentation to the market.

And finally, we'll adjust and align our organization structure, cost structure and operating model to set the organization up for stability and success. We are designing a framework for success, an organization that is more focused and nimble, aligned with an appropriate cost structure adjusted to the new realities of the market post-crisis. We will also reset our operating model to increase empowerment, diversity and accountability for critical decisions. Essentially, our refreshed organization will be less complex with a sharper focus and able to make faster decisions. We are creating the right central and new regional structures that are commercially led to establish the right focus on dealers and selling. We will also elevate the role of motorcycle management within the organization and sharpen our marketing strategy and execution to enable a bigger impact with an improved go-to-market process.

The Rewire is underway, and we have taken actions across each of these key elements of the playbook and more are in development. I've mentioned some of the significant actions that we've already taken to allow the organization to move forward. Other recent actions include setting the organizational superstructure with 3 new senior management members appointed to key roles. We are promoting talent who know the company, our dealers and our customers. To bring the appropriate sales focus, we've created a new commercial entity, including a simplified regional sales structure as well as refreshed parts and accessories and general merchandise businesses. To leverage expertise and historical insight as we hone our strategy, I've engaged our senior leaders beyond the executive team and establishing a CEO roundtable comprised of select dealers and former Harley-Davidson leaders. The team is hard at work, reenergizing the business, and we will share more about our progress during our Q2 update.

In closing, to accomplish what lies ahead, it is important that we continue to rally together. Today, we are united as a Harley-Davidson global community in support of our families, friends and fellow riders through a time of crisis that we hope will end soon. I offer my gratitude to our family of employees, dealers and riders for doing their part to stay safe and healthy. Their well-being is, above all, the most important thing.

While the end to this pandemic is uncertain, what defines Harley-Davidson endures. It's a welcoming beacon that shines beyond this time that we're in. I see this as an incredible opportunity to rewire the company and set ourselves on a path for great success in the future. We are addressing our realities with conviction, and I believe we will come out of this stronger than ever. We will reignite Harley-Davidson. And we will rally around our newly stated mission, more than building machines, we stand for the timeless pursuit of adventure, freedom for the soul.

And now I'd like to turn over to John to discuss the financial results of the quarter.

Thank you, Jochen. The summary of our Q1 results is on Slide 6.

In the quarter, Motorcycle segment operating income was lower year-over-year, driven by lower shipments and unfavorable currency, partially offset by strong manufacturing productivity, lower year-over-year tariffs and lapping last year's restructuring charge. Financial services operating income was down 60.9%, driven by adjustments to our provision for loan losses as a result of COVID-19 and the impact of a new accounting pronouncement. Consequently, consolidated net income was down versus prior year. EPS for the quarter was $0.45. Despite the COVID-19 crisis, our long-term focus remains on disciplined inventory management, aggressively managing costs, generating cash from operations and delivering strong shareholder returns.

On Slide 7, first quarter worldwide retail sales of new Harley-Davidson motorcycles were down 17.7% versus prior year. During the first quarter, retail sales were off to a strong start across the globe, but were significantly hindered as consumer concerns and governmental efforts to -- related to COVID-19 spread throughout most of our world markets, first in Asia, then Europe, finally in the U.S., Canada and parts of Latin America. Looking past the near-term crisis, we believe our brand, distribution and innovative products provide a great base for long-term success. As a result of the focus that our Harley-Davidson Rewire actions will bring to optimize value and profit delivery, we believe we will emerge a much stronger company in the future.

Let's take a closer look at the U.S. on Slide 8. U.S. retail sales were down 15.5% for the first quarter versus prior year, but not before peaking at 6.6% quarter-to-date growth through mid-March behind the success of our stronger dealer efforts and the introduction of several new models. HD retail sales fell significantly in the back half of March due to consumer concerns and approximately 50% of our dealers being temporarily closed for motorcycle sales in the U.S. due to COVID-19.

During the quarter, Harley-Davidson's market share for new bike registrations was 48.9%, down 2.2 percentage points, driven by aggressive discounting by our competitors, lapping HD's prior year finance offer and an unfavorable shift in sales mix from segments in which we compete to segments which we do not currently compete, but will begin competing in with Pan America and Bronx motorcycles. Our share was also down in segments in which we compete. As a result of the COVID-19 impact, quarter end U.S. retail inventory rose by approximately 1,600 motorcycles versus prior year. We will aggressively manage the supply of motorcycles into the dealer network as we manage through this crisis.

On Slide 9, international retail sales were down 20.7% in the first quarter as COVID-19 fears and dealer closures spread from Asia to Europe to Canada and Latin America. EMEA declined significantly across all markets and finished down 28.4%. Asia Pacific was down 5.3%, driven by declines in China and South Korea, partially offset by growth in Japan and India. Latin America saw declines in Mexico and Brazil and finished the quarter down 21.5%. Our Q1 market share in Europe was 7.6%, down 1.3 percentage points versus prior year. Our market share was adversely impacted by an unfavorable shift in sales mix to non-HD segments and increased competition.

On Slide 10, wholesale motorcycle shipments in the first quarter were down 10.0%. Shipments were impacted by COVID-19-related disruptions of our manufacturing operations. Overall, family mix shifted from touring and sports to street motorcycles to cruiser motorcycles versus last year's first quarter.

On Slide 11, Q1 revenue for the Motorcycle segment was $1.1 billion, down 8% behind a 10% decrease in motorcycle shipments. Average motorcycle revenue per bike was up $599, driven by favorable product mix, lower sales incentives, and higher year-over-year pricing, partially offset by unfavorable foreign currency exchange.

On Slide 12, gross margin in Q1 was down as a result of lower shipments, less rich product mix and unfavorable currency exchange, partially offset by lower manufacturing expense. Q1 product mix was unfavorable by $3.4 million, driven by a shift in family mix and unfavorable parts and accessories mix. Q1 gross margin was adversely impacted by $10.8 million of currency exchange. Foreign currency was unfavorable, largely due to a stronger U.S. dollar. First quarter manufacturing expense was favorably impacted by strong productivity, lower tariffs and lapping prior year temporary inefficiencies, partially offset by lower absorption of fixed manufacturing costs.

On Slide 13, operating margin as a percent of revenue for Q1 was unfavorable compared to last year driven by lower gross margin and increased SG&A due to the lapping of prior year recall recoveries, largely offset by aggressive cost management. Profitability and cash flows remain a key focus.

Turning to our Financial Services segment on Slide 14. As we discussed last quarter, on January 1, 2020, we adopted CECL, the new accounting pronouncement for credit losses. As a result, we took a onetime increase in the allowance for credit losses of $100.6 million with the offset being a reduction to retained earnings net of taxes. This new accounting standard will not have an impact on the economics or cash flow of our HDFS business. However, as we have discussed, we do expect the adoption of CECL to result in increased earnings volatility, and that we have certainly played out in the first quarter of 2020. HDFS' first quarter operating income was $22.9 million, down 60.9% compared to the prior year. The first quarter provision for both retail and wholesale loan losses was $44.9 million unfavorable to prior year. The increase in the provision was due to 2 factors: first, $8.9 million of higher actual credit losses; and second, a $36 million increase in our allowance for credit losses. Actual credit losses were higher primarily due to COVID-19, including lower prices at auction, slowed repossessions and delayed consumer payments at the end of the quarter. The increase of $36 million in retail and wholesale credit reserves was the result of 2 drivers: first, the economic impact of COVID-19 as it relates to our expectation of our customers' ability to repay their loans; and second, with the adoption of the CECL accounting pronouncement, we adjusted our reserves to include the estimated COVID-19 impact over the entire life of loans in our portfolio.

HDFS' operational results are on Slide 15. Q1 retail originations were down 10.8% versus prior year, driven by lower new bike sales. HDFS' market share remained relatively flat at a very strong 64.3%. At the end of the quarter, there was $1.05 billion of cash and cash equivalents at HDFS and $1 billion of liquidity available through bank credit and conduit facilities.

On Slide 16, our 30-day plus delinquency were favorable, down 36 basis points as we lapped the start-up inefficiencies resulting from the implementation of our new loan management system in January of 2019. However, we believe delinquencies were modestly impacted by COVID-19 crisis towards the end of March. The Q1 retail credit loss rate was 2.73%, a 51 basis point increase over prior year. As previously mentioned, losses increased in the first quarter, primarily due to COVID-19 impact. Remaining Harley-Davidson, Inc. financial results are summarized on Slide 17.

Our quarter-end cash and marketable securities balance was $1.47 billion, we have increased our cash holdings in the quarter as a precaution due to the uncertainty driven by the crisis. Q1 operating cash was an outflow of $8.6 million, driven by lower net income this year compared to last year. We believe the charts on Slide 18 demonstrate that over time, we are a leader in ROIC at the motor company and return on equity at HDFS, and we are a demonstrated leader in our ability to generate cash.

Slide 19 illustrates our cash returns to our shareholders. In the first quarter of 2020, we paid a quarterly dividend of $0.38 per share. As you will note, we did not repurchase any of our stock on a discretionary basis during the quarter.

Moving on to guidance on Slide 20. Our 8-K filed on March 26, we withdraw all guidance as a result of the uncertainty surrounding the magnitude and duration of the pandemic. As Jochen mentioned earlier, our COVID-19 action plan on Slide 3 consists of 4 major focuses. I'd like to provide a bit more color around 2 of those areas: first, preserving cash; and second, securing additional liquidity. We are focused on preserving cash and increasing liquidity to weather the storm. We entered the pandemic with a very strong balance sheet and 12 months of liquidity. We've taken a number of specific actions to preserve cash, including, first and foremost, reducing nonessential costs and lowering our 2020 capital spending. We have done this while prioritizing investments in our new motorcycles, including Adventure Touring, Streetfighter and electric. We are also extending cash outflows where it makes sense. At the same time, we are working to secure our supply chain and parts availability in order to ensure we can get the plants up and running as soon as possible. Regarding liquidity, we maintained $2.47 billion in total liquidity, including $1.47 billion in cash. We are currently in discussions with 2 major banks to secure an additional $1.3 billion of liquidity, with 1 transaction targeted to be complete by the end of this week. In addition, we anticipate executing transactions and capital markets in the upcoming weeks.

As of the close of business on April 24, we have an estimated $2.28 billion of consolidated liquidity. As we look forward, we have 2 MTNs maturing over the remainder of the year, 1 for $450 million in May and the other for $350 million in June. Assuming no motor company revenues and without any additional liquidity or mitigating actions, we believe we have sufficient liquidity to operate through the end of the year. The company's credit ratings all remain investment grade and we maintain access to commercial paper markets.

Also, as we've experienced in the great recession, HDFS tends to be a source of cash for the company when motorcycle sales are falling. Over the last 6 weeks, HDFS has had a net cash inflow of approximately $200 million. We are also well within our debt covenants. Our HDFS covenants require debt-to-equity to be no higher than 10:1. As of Q1, our debt-to-equity ratio was 6.6:1. We believe our balance sheet and strong cash and available liquidity will allow us to address the COVID-19-driven adversities. Thank you, and now let's take your questions.

(Operator Instructions) Your first question comes from Greg Badishkanian with Wolfe Research.

A 2-part question. The first one is retail sales were strong, if I read right, 6.6% positive prior to the COVID outbreak. One of the best -- it would have been one of the best quarters in years. So what drove that performance? What can you utilize going forward post-COVID? And did I miss -- I didn't hear a quarter-to-date U.S. for April. I'm just wondering how those trends were for you because I think some of the other power sports like Polaris seem to have gotten a little bit better in April. I'm wondering if that was the same for you.

Thanks, Greg. This is John. Yes, Greg, through -- the quarter was a tale of 2 quarters, right, versus the 10-week period and then a 3-week period. Through the first 10 weeks, we were doing very well in terms of retail sales. And as we had mentioned, the U.S. was up 6.6%. Greg, a lot of that was driven by the activities that we've been pursuing over the last year under stronger dealers and those have continued to take hold. We see more dealers adopting and certainly strong results coming out of those actions. The second thing is, we also brought several products to market in the first quarter. A lot of it late in the quarter, but they also drove a fair amount of sales. When we talk about -- so the last 3 weeks, we saw a precipitous fall off of retail sales for obvious reasons. And that was a lot of -- that was led, Greg, by the closure of dealers. So we started the month of March. There was about 4% of our dealers were closed, and that considerably escalated by the end of March, it was 55%. And through April, where we sit today, about 59% is closed. So we're starting to see the dealer closures plateau for sales of new motorcycles. But with that, retail sales are down. They're down a fair amount in the month of April. However, they're not down to the same extent that dealer closures are. So retail sales are outperforming our dealer closures. And with that, we would suggest that dealers that are open are selling year ago levels.

And Greg, if I may, it's Jochen here. You mentioned new model introductions in the first quarter. We had 4 new models that were all focused around the core of our business with the anniversary, 30th anniversary Fat Boy, Softail, Standard, EV line and Patriot, and that certainly helped to boost our sales in the first couple of months.

Our next question comes from Felicia Hendrix with Barclays.

Your next question comes from Craig Kennison with Baird.

Really, a multipart question related to the CEO search. But Jochen, first of all, as you meet with dealers, what are they seeking in a new leader at Harley-Davidson? And second, how should investors interpret the decision to really pursue a 5-year plan before you actually hire the permanent CEO? And does that mean you're a candidate?

Thanks, Craig. In terms of the CEO search, there's really nothing to report at this point. I'm focusing clearly on the developing and the implementation of the plan to deal with the crisis and make sure that we get through this stronger with The Rewire plan, which I'm also planning to implement and develop, obviously, as we're in the middle of that. So there's nothing really to add at this point in time in terms of the CEO search.

And in terms of what dealers are seeking in a new leader?

Well, I don't know what dealers are seeking. We know what we are seeking as a Board and those criteria have been established. So I think there's nothing to add to that. And I think in developing a 5-year plan is always part of a CEO's job, acting or not. And I've made it very clear in the beginning that I'm not an interim CEO but an acting CEO. And as we are doing our rewiring process and playbook, we obviously have to also look at our existing strategic plan and see what's still valid and what is not. So my duty is also to develop a new 5-year plan, and that's what we are focusing on at the same time.

Your next question comes from James Hardiman with Wedbush.

So I wanted to dig into HDFS a little bit. I think I generally get what's going on with CECL. But maybe give us an idea the increased reserves, that $36 million number, what would that have looked like if we weren't using the CECL standard? Obviously, that's getting amplified there. And I guess my bigger question is, as we look forward, how do we think about HDFS? I would assume that, that $8.9 million higher actual credit losses is something we're going to be dealing with over the next few quarters, but assuming credit metrics don't get significantly worse, that we shouldn't be worried about that $36 million number repeating going forward. How should we think about that?

Thanks, James. This is John. As you had noted, the reserves were increased by $36 million. Overall, provision was up $45 million, and that's made up of the 2 pieces you mentioned, $8.9 million in actual losses and then the reserve piece of that at $36 million. So CECL did create or cause that to be a higher number than it would have otherwise been. So we estimate that of the $36 million, about 3/4 of it, call it $17 million, $18 million, would have been there on the incurred basis and the incurred method that the industry followed prior to CECL. So that leaves about 1/4 of it due to CECL. And the CECL piece actually has 2 pieces: one is just the higher reserve, which is about a 50% increase as to what changes would have been in the past. And the other piece is seasonality adjustment, which is new as well. And so the seasonality was actually favorable in the first quarter, and we'd expect to see some of that reverse out in the second and third quarters. So when we look at the $36 million in that reserve, that was set at the end of March. And at that time, we look at all the data that's available and that includes such things as the expectation of recession, the severity of recession and the duration. It also looks at other economic data such as unemployment, GDP and certainly used-bike values. All of that is taken in, at that point, on March 31, run through the models, and that came back and suggested that we needed to increase the reserves by $36 million. And if everything held at those assumptions, we would have expected that, that would be all that we would need to do and that would cover the issues that COVID has driven. However, I will tell you, James, that since March 31, there has been a deterioration of that economic data between March 31 and today, certainly in terms of unemployment, GDP expectations, the severity of the recession coming out of this. And so we don't know what's going to happen by the end of the quarter when we have to mark again. But if the economics stay as they are today, we would expect that there would be another increase in the reserves at HDFS at the end of the second quarter. Again, we'll have to wait and see with regards to that. And that could also have an impact on the credit losses, that $8.9 million that you had mentioned. We're watching it closely. HDFS is being very proactive in their actions. They have made changes to the underwriting standards, which include restricting LTVs and tightening payment to income, tightening maximum amounts financed and increasing proof of income and also under -- tightening our underwriting in oil patch areas. So they are all over it, but we will continue to read the economy and make the adjustments that we need to as we move forward.

Really helpful. And just to be clear, that $8.9 million, even if assumptions stayed consistent with where they were on March 31, that's something we would have to deal with for the next 3 plus quarters?

No. I'm not completely sure I understand, James, the 8.9% is what we've written off. Those are loans that we do not expect to collect. We will continue to try to collect them, but they are written off. They are behind us. They have nothing to do with us going forward.

Okay. And so we shouldn't assume that, that level of actual loss increases would happen in future quarters, that's already been accounted for in the increased provision?

Well, those specific loans have been written off. We've got a lot of other loans. And this quarter, we will look at which ones of those would go to write-off, right? And those are predicated on our customers' ability to repay, unemployment and all those other factors that we mentioned.

Your next question comes from Felicia Hendrix with Barclays.

Can you hear me now?

Very well.

Yes, Felicia, we can.

Okay. It's time to get a new phone, I think, sorry. So just kind of staying on that line of questioning, John, I did have a question for the kind of CECL-related question and the credit loss provisions. Just by the way that we're calculating things, the $45 million increase in the credit loss provisions just looks a little bit low, it's only a $10 million increase from last year. So can you just talk to us about the assumptions behind that change given the new CECL accounting standards? We thought it would be higher. And then just also wondering what percentage of your customers are currently on agreed-upon forbearance plan at all? And would that be included in your 30-day delinquency in annualized loan loss metrics, if that is the case?

Thanks, Felicia. The $45 million provision, you had mentioned up $10 million, you would have expected more. The provision is up on a year-over-year basis by the $45 million. So that is made up of 2 pieces. One is the write-offs that we've taken of $8.9 million. And then the increased reserve, which is made up of the COVID crisis as well as kind of a booster with regards to the CECL accounting provisions. So that is...

So John, sorry, just -- that's -- I'm sorry, I should have worded it more clearly. The increase in credit -- I'm sorry, the $45 million increase in the credit loss provisions, that's what we thought was low was the increase.

Yes. And so that was a little bit what we talked about. At the end of the quarter, we marked everything as of the data that was available on March 31. And given the data that we had, $45 million was the right number to book. Since then, we have seen a significant deterioration in the economic data -- in the economy: unemployment, GDP forecast and all those types of things. So Felicia, we would expect that if things ended where they are today, the second quarter, we would have to take another increase in that provision and reserve more money at the end of the second quarter.

Okay. And then on the forbearances, if there are any?

No. We don't necessarily have a look at the forbearances. What we do have is what we call customer extensions. And as customers come in and they have issues paying because of COVID-19, we will look to extend the loan. It's a common practice that we follow, and we followed it in areas that are impacted by hurricanes and other natural disasters. We're following that same process here. And it allows the consumer a little bit of time to get them self-squared away and certainly helps our riders. So we are offering some extensions with regards to that. I don't know when you talk about forbearance, if you're talking about on the wholesale side, we haven't seen any losses in terms of the wholesale side, actually in years. But in the downturn 10 years ago, we lost some dealerships, and we lost or had some write-downs of those. And as you'll see in the financial results that we set aside $7.3 million of reserves on the wholesale side, too, as we would expect on losses going forward there as some of our dealers can't make it through this crisis.

Your next question comes from Joe Altobello with Raymond James.

So just got a couple of questions on Rewire. First, why do you think you guys have fallen short in adding net new riders in the past? And what do you intend to do differently to increase the participation in the Board?

Thanks, Joe. Well, that's a good question. I mean, you know the numbers of riders that we've created in 2019 and '18. We had about 3.1 million Harley riders in the U.S. in 2019 at the end of the year, 55,000 more total riders than in 2018. But we also, during this year lost riders and that led us with a net of 24,000 more than before. I can't really tell you why that is the case that we weren't able to create riders. We've been testing 4 initiatives to help drive bigger increases in total ridership, too. We are focused more on designing to accelerate the journey to becoming a committed rider, which includes providing access to motorcycles and individual training and then 2 others -- the 2 other initiatives were designed to retain existing riders and include creating epic riders and rewarding existing riders for miles riding and bring new people to motorcycling. We will evaluate those 4 initiatives as soon as we can, obviously, not now because they are on hold, and then determine as part of The Rewire program, what we can do good and better to not only increase ridership by creating new riders but also making sure that those are -- who are in the sport will be retained. So I hope to be able to give you more details in the future as we define The Rewire program and as we can start testing again.

No, that's very helpful. And just a question to follow up on that for you, Jochen. This is probably not how you wanted to see your tenure as CEO start during a pandemic, but here we are. So with that said, are you considering moving the acting moniker at some point and taking on the CEO role permanently?

Well, as I said, Joe, at this point, there's really nothing to add to what I said earlier. I'm focused on developing and implementing the plan. And then also getting The Rewire program and playbook defined and implemented as we are looking to redefine our next new 5-year strategic plan. I knew pretty well what I was getting myself into, so no worries there. Although nobody could have predicted the severity of the COVID-19 crisis. When I agreed to take on this role, I assumed this would be a tough ride, and -- but I'm used to it.

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

Jochen, you mentioned optimizing the dealer network. I know in the last couple of weeks, there has been at least 4 dealership closures that I know of. So what's the plan to rationalize the dealer base? What does the new dealer base look like? And what actions do you guys need to take to get there?

Yes. As you said, in fact, we had 5 underperforming dealers in the U.S. that closed in the first quarter. We had 20 closures internationally. We don't know what this picture is going to look like as we get out of COVID-19 crisis, so it's very hard to say. In the Great Recession, we had about 100 dealers closing. And -- but we had no prediction. Obviously, we have some on watch, on close watch, and we do that on a daily basis. And then as dealers exit, there may be opportunities to merge dealerships as some might be bought up by existing dealers, some will go away. And as I said, dealer optimization will be important as a result so that we can improve profitability of the dealers that are going forward. Other than that, I can't really shed much more light on that, but we are looking at this very actively, and we have good systems and plans in place to make sure that the dealer network will be strengthened in the future coming out of this.

Okay. Let me put it this way. Prior to COVID, was there a plan in place to rationalize the dealer base? Or is the optimization of dealer base a reaction to the COVID-19 crisis?

It's a combination of both. Obviously, you always need to improve your dealer network when you look at your mapping and existing sales, which change from year-to-year. So there was an ongoing plan, but that is being revised and fine-tuned. And there are also opportunities that we need to look at, that are allowing our dealers to sell online, which we've created as part of this crisis mitigation. Our ability to deliver bikes with dealerships that are being closed -- so there are also other ways to optimize the opportunities of existing dealers to sell, and that's what we're also doing in the crisis.

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

I guess with respect to Rewire, this program sounds like a much narrower focus versus More Roads, which was, certainly, I think, trying to be broader and more exclusive and you sort of had a lot of build-outs and international growth. And at least to this sounds -- that sounds refreshing. But I'm wondering, you spent a lot of money over the prior years trying to broaden out the base. I mean, how much of your -- the investments that you've already made, you think are sort of reusable or repurposeful here as you begin to embark on The Rewire strategy?

Yes. It's a good question. I think narrower for sure, but that does not mean, as I said in my speech that elements of the More Roads plan will not be incorporated in our new plan going forward. A lot of it will depend on the crisis itself and The Rewire program that we are developing, and as we go along, the development also implement. We will certainly ensure that a lot of the investments made will have a positive effect, but I'm not able or willing at this point to give any details. What I did say, though, is that our launch into Adventure Touring and Streetfighter segments and into electric, those 3 segments we are committed to in the future, and those took up a significant amount of our product development costs so those will continue. The launch timing of those, however, as I also mentioned, has been impacted by the crisis, and we will make sure that we are ready with a very strong go-to-market process for each of them.

Your next question comes from David MacGregor with Longbow Research.

Jochen, I wonder if I could get you to go back to some of the comments you made around The Rewire in your prepared remarks and in the press release. And in there, you make reference to a cost structure that's adjusted to the new realities of the market post-crisis, which obviously, there's a cost issue to be addressed here, but it seems a little vague. And I'm wondering if I could get you to elaborate a little further on just exactly what it is you're trying to accomplish there. And I guess maybe as well, asking you to sort of offer some view based on your history as a member of the Board, but how do you think about what these assets should be generating in terms of target levels of profitability or return on capital?

Yes. Thank you. I mean, obviously, this crisis has an impact on our sales and that will have an impact on our cost structure. And what we cannot really define right now how big that impact is going to be. And I understand that everyone would like to get us to give some guidance, but we simply do not have enough visibility to provide a forecast. And therefore, I can't really answer your questions at this point. Hopefully, with the second quarter, we will be able to, assuming that we have better visibility than we have now and we're starting to get out of this crisis, we can start forecasting again, but we will certainly not do that until we have a clear view. And that also applies to your last question in terms of target levels. All of that will be part of the rewiring program and playbook and obviously, our new 5-year strategic plan. So with that, we will then give you clear guidance of what we expect in terms of return on capital and so on.

Your next question comes from Brett Andress with KeyBanc Capital Markets.

Just a clarification on the greater than 30-day delinquency rate that you reported. You mentioned softer trends at the end of March. So can you give any color on what that rate is right now, either here in April or what it was at the end of March? And then the second part of that question is, have you seen any increase in the less than 30-day delinquency rate as well?

Thanks, Brett. This is John. Brett, on the 30-day delinquency rate, we were very pleased to see that come down by 36 basis points. But remember, a lot of that was due to what happened a year ago. And if you go back to 2018, I think we were still up about 7 basis points, and that's probably mainly explained by CECL -- I'm sorry, by COVID and the last couple of weeks of payments that got extended. There's no way to come out and do a perfect due to on that. But over a 2-year period of time, we are down a little bit, and the biggest driver of that would be what we're seeing in the COVID crisis. The other piece of it is when you look at what's happening in less than 30-day delinquencies, it's -- what we are seeing is more of those extensions that I mentioned earlier. So we're seeing a lot of prime customers coming and saying that I need a little bit more time to pay because of COVID and then some of those we're extending the time for that piece of it. So that's what we're seeing under 30 days. But I do not have an inter-period delinquency measure, either less than 30 days or on the 30-day plus.

Your next question comes from Adam Jonas with Morgan Stanley.

Yes, I want to try a third time. Do you want to be CEO of Harley if the Board wants to remove acting? Are you an option? If you don't want to answer then it's a problem because given the scope, this is probably the -- that release and that strategy was so refreshing and must be a huge relief for your dealers, your employees, stakeholders, your investors. I know you've been on the Board since 2007, so I'm preaching to the choir, but that is a huge, huge open-ended area. And I just -- I'm not asking for you to break new ground here, but are you even an option?

I take it as a compliment. Thank you very much. But as I said, nothing to add at this point in time. But I will -- I have hit the ground running, and there's a lot to be done, and we are very, very focused on implementing our plan and developing a new plan for the next 5 years. So you should be confident about that.

Well, I guess -- and I don't have any other questions. It's just -- I hope you sympathetic to why that is potentially very frustrating and that by the time the second quarter is an opportunity for you to share more information on the plan that it's fair to all stakeholders that there is a more permanent solution for leadership. And I hope, I hope, and I hope that you're using everything, and I'm sure you are, by 2Q, at least, we can be in a better position to answer these questions.

Certainly. Thank you.

Your next question comes from Tim Conder with Wells Fargo.

That was on my list. So I'll let go those things, but multipart question here. On the retail, John, any color on how very recent, let's call it, in March on, things have looked coming out of the oil patch areas, oil and gas, just given the collapse we've seen there? And then I did want to ask, Jochen, any additional color you can give on the market refocus? It sounds like maybe Asia had styled back. And the -- is it permanent or temporary change in your launch schedule of your -- of the annual new products?

I'll start off with the first question, Tim, on retail sales. It's really difficult to tell now. Everything is down a lot. Almost 60% of our dealers are closed, so everything is down. It's hard to peel apart what we're seeing in oil patch areas. We are certainly back into looking at it, right? And that was several years ago, we had a similar issue. And certainly, it had an effect on the motorcycle industry and Harley-Davidson sales. Folks that work in the industry and in those areas are very good customers. And we understand where oil prices are and that there may be a knock-on effect of COVID but also on the lower oil prices. And as I had mentioned, some of our underwriting changes that we're making are taking those learnings from several years ago and applying them here. But I can't separate out because of dealer closures and whatnot, where we're at in dealer patch versus -- I'm sorry, oil-patched states versus others.

Yes. And to your other 2 questions, in terms of refocusing on markets, I mean, definitely, I strongly believe we need a tighter focus on our core markets. And as I've mentioned, there are some markets that are our biggest profit drivers. U.S. needs more focus going forward, some of the international markets, not just from a profitability point of view but from a potential point of view. And I think there will certainly be some deemphasizing in order to create increased focus. I mentioned earlier, it's about speed, it's about focus, it's about reducing complexity, which will help us to set our organization up for really profitable future, and that means focusing on key markets as well. In terms of the timing of our launch schedule, that is a permanent change. As I've mentioned, we've retimed our model year change over from August to early Q1 in order to allow our launch calendar for the first time in our history to align with the start of the riding season. That made all the sense to me, and I don't see any reason why we should go back to the old schedule. So that's a permanent change.

Your next question comes from Sharon Zackfia with William Blair.

John, I might have missed this, but could you talk to us about what your current weekly cash burn rate is? And then separately, on the $250 million, that I think you guys are targeting in terms of preserved liquidity, can you break that out between CapEx versus what's flowing through the P&L?

Thanks, Sharon. When you look at our overall cash burn, less -- the $250 million that we took out, we're in the range of anywhere between $80 million and $100 million a month, right? And that's pretty simple, too, as you take $1 billion of SG&A and divide it through and take off a couple hundred million dollars. And then we got the fixed cost in the plants to run the plants that are running through cost of goods sold without the dividend. The dividend significantly being reduced, we've got some interest payments in thereof, I don't know, $15 million a quarter. So an overall burn rate of somewhere in the $80 million to $100 million a month. And again, as I had mentioned, given the liquidity that we have now, the debt that we have that will be maturing in the near future. And again, Sharon based on assumptions that we have absolutely no revenue. We -- our revenue is down very significantly in the first 3.5 weeks of April, but we still have revenue. So with those assumptions, we've got enough runway to make it to the end of the year and a little bit into next year. So we feel very good about that. We haven't broken out the $250 million into its pieces, but it is predominantly made up of SG&A expense.

Your next question comes from Jamie Katz with Morningstar.

I'm not sure if you guys have this bifurcated out, but not all states have shelter (sic) [shuttered] and place orders. So could you give us any insight into how the dealers are doing in shuttered versus nonshuttered states, if there's any information to share there?

Well, Jamie, as we -- no, we -- it's pretty difficult to piece that out. When we look at it in totality, we can see that the dealers that are selling are outperforming the dealer closures that we have. And again, as we sit here today, 59% of our dealers are closed. However, our retail sales in the first 3.5 weeks of April are not down that much. So that does suggest that the dealers that are open are selling at year ago levels. But we don't have an analysis or we don't have anything to share with regards to exactly which states they are.

All right. Thanks, everyone. The audio on slides for today's call will be available at harley-davidson.com, or for the audio, call (855) 859-2056 or (404) 537-3406 until May 12. The ID is 7726817.

And thanks, Shannon and John, and thank you for your time this morning for your interest and investment in Harley-Davidson. As the pandemic persists, we will continue to protect the well-being of our people and the strength of our business. I'm confident that Harley-Davidson Rewire will result in a company that is less complex with sharpened focus and makes decisions faster. I look forward to sharing more during our second quarter update. Stay well, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.