Harley-Davidson, Inc. (HOG) Q4 2018 Earnings Report, Transcript and Summary

Good morning. My name is Heidi and I will be your conference operator today. At this time, I would like to welcome everyone to the 2018 Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Shannon Burns, Director of Investor Relations, you may begin your conference.

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. Adjacent to that link, you can find our More Roads to Harley-Davidson plan support materials. Our comments will include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC. Harley-Davidson disclaims any obligation to update information in this call. Joining me this morning are President and CEO, Matt Levatich; and CFO, John Olin. Matt, let's get started.

Thank you, Shannon. And good morning, everyone. In July, we announced the More Roads to Harley-Davidson plan, the acceleration of our strategy to build the next generation of Harley-Davidson riders, grow motorcycling and return our business to growth through 2022. During 2018, we met or exceeded all stated planned milestones [here] [ph]. Our execution is on track and we are energized that we are getting new and different people, riders and non-riders, stand up, take notice of Harley-Davidson. We're equally energized by our current riders who are deeply engaged in the brand and tell us they too are excited at the direction we are headed. It's clear that for riders today and Harley-Davidson riders of tomorrow groundwork for an exciting future is being built real time [Technical Difficulty]. Our plan to step up our strategic efforts reinforced throughout 2018 as the industry in the U.S. and certain developed international markets continued to be challenging. While most of 2018 played out largely as we expected, the declining industry performance in the fourth quarter prompted key business decision, including pulling back on shipment to drive even lower than planned [brand] [ph] inventory. We also took further belt-tightening restructuring actions in addition to our planned cost savings related to optimizing our U.S. manufacturing footprint. Our efforts to transition U.S. production to our expanded operations in York remain on track and our 2018 program costs were lower than originally planned. Through our actions and keen focus on working capital, we delivered improved year-over-year earnings and cash from operations and importantly we maintained our ability to invest in the future. We dug deeper and found ways to go faster, while continuing to deliver strong cash for our shareholders. [Technical Difficulty]. Each of the three growth catalysts, new products, broader access and stronger dealers. When it comes to new products, our 2019 motorcycles are hands down our best product offering ever, demonstrating clear commitment to the passion, preferences of our current riders. During 2018, we launched new models and debuted new rider confidence, safety performance and infotainment. Our commitment to lead in the electrification in motorcycling is also clear. In November, our first electric Harley-Davidson stole the show when it made its European debut at the Milan Motorcycle Show. Already this year, we provided a first glimpse of our broader electric portfolio at CES, which drove 2.6 million video views across social channels with the largest audience being 25 to 34 year olds. Our statement at CES garnered over 4500 media mentions on Harley's innovation, technological advancement and bold leadership stance. Even before the first LiveWire is delivered, we are reaping a strategic value of this extraordinary motorcycle. The buzz is helping build interest and relevance in Harley-Davidson amongst a new audience and redefining the global perception of our brand. As the halo product in our future portfolio of electric products, LiveWire is already doing what it is intended to do. It's value to our brand is captivating and inspiring new people about what's possible with Harley-Davidson and why riding [Technical Difficulty] a look. The positioning and pricing reflects the quality, capability and value of this incredible motorcycle. It's a serious high performance and highly innovative motorcycle. A Thoroughbred, the most thrilling motorcycle I've ever ridden. LiveWire is not only igniting passion at the highest echelon of motorcyclists, it's captivating a vast audience, who will be inspired to imagine and discover what is possible - Harley-Davidson, and that is invaluable. That’s what a Halo is all about. When it comes to broader access, we're accelerating our progress to grow reach and relevance. This growth catalyst is all about helping us cast a much wider net than we do today by aligning our efforts in integrated ways, we can attract new and different consumers, increase the value for these consumers and meet people where they are and how they want to engage. By example in line with our plans to reach more urban dwellers, especially in Asia, 23 branded Harley-Davidson apparel stores were opened in 2018. These stores in heavy-food traffic areas, offer a unique line of branded apparel which we know is one of the first easiest ways to [try] [ph] us on and begin their journey with us. In fact, our sample survey tells us over 75% of shoppers today it's their first visit to any Harley-Davidson store and over 60% are under 34 years old. In 2018, we also launched e-commerce in China via Tmall one of the largest e-commerce platforms in the world. We see tremendous long-term opportunity in China and will continue to invest in proven activities to drive awareness, interest in sales. In the U.S., we expanded our reach in a big way with the launch of Harley-Davidson- branded storefront on Amazon.com. Sales were strong and the initial data indicates that the majority of people purchasing our products on Amazon are new to the brand. We also enhanced our e-commerce store on H-D.com and exceeded our milestone for the year with 6% of general merchandise sales for H-D.com in 2018. Full year total e-commerce sales were up 32%. With these efforts we’re building an integrated multi-channel retail experience that today's consumers expect and providing new consumers an inspiring and convenient way to connect with and shop for Harley-Davidson products. In an environment of rapidly increasing customer expectation, which we're meeting with an expanded portfolio of products and services, the Motor Company and our dealers must be prepared. Dealers are a critical component of our success as they bring the spirit of Harley-Davidson motorcycling to life each and every day. That's why stronger dealers is one of our growth catalysts. It emphasizes dealer capability and puts in place increased support and incentives under a performance framework, part of this work includes creating conditions for growth, consolidation, scale and investment for every willing [Technical Difficulty]. Strong dealer’s means optimizing our network composition, providing more meaningful support, tailored individual dealer’s needs and expanding our international footprint. In 2018, 56 international dealerships were opened. Underpinning all our efforts globally is a topline strategy over the next generation of Harley-Davidson riders through 2027. We set 10 year objectives knowing this would be a long march, to change the way people think about motorcycles. It requires our very best efforts, significant change and it requires time. More Roads is our plan to accelerate our progress and it includes clear deliverables 2022. Our capabilities in building and retaining new riders are improving. We continued the momentum we started in 2017 and ended 2018 with over 52,000 more Harley-Davidson riders in the United States. All positive signs, but more is needed. Our marketing investments engage new and existing riders in 2018. Riding Academy sales conversion was up 2.2 percentage points over last year. We drove relevance and interest through our activations with celebrities and social media influencer whose content and activity generated equivalent traditional media value that was up 80%. Thousands of Sportster and Street purchasers were offered the Freedom Promise, an incentive to create [indiscernible] motorcycle and existing riders demonstrated their increased engagement by logging 45 million mile to our Ride 365 app, a 137% increase over last year. Nothing sells riding like riding and keeping existing riders engaged is a key to growing our business. Looking forward our efforts will intensify. We're on track with our new middleweight motorcycles plan to launch 2020. The Pan-America Adventure Touring and Streetfighter Motorcycle are being put through the paces on all kinds of terrain and are demonstrating power, strength and competitiveness. The immense talent and capabilities of our design and engineering team continue to boldly expand how the look, sound and feel of the Harley-Davidson motorcycle drive appeal with new types of people. Focusing now on 2019, we know market challenges will persist and we're meeting them head-on with drive, clarity of purpose and a solid plan. Our More Roads plan leverages our many strengths and it is our call to action as industry leader. In the U.S., it commands us to increase relevant [indiscernible] motorcycling. Our plan recognizes and addresses - changing global - consumer preferences towards more - accessible motorcycle and a growing interest in demand for ease, power and thrill of electric. And More Roads recognized the tremendous international opportunities that we believe will drive international sales to become at least 50% of our annual sales volume in the not so distant future. We will continue to lead with passion and focus to disrupt the status quo and ignite ultra movement for motorcycles inspiring new people and our current riders to join us all along the way. Thank you for continuing to ride with us well. And now I'll turn it over to John to discuss the financial results of the quarter and the full year. John?

Thanks, Matt. Our fourth quarter financial results were impacted by first our decision to reduce shipments in an effort to lower worldwide retail inventories, as well as a result of slightly lower than expected retail sales in our international markets. Next we booked two voluntary recalls during the quarter. And finally, we recorded an additional restructuring charge in our efforts to aggressively manage the company cost. In the face of ongoing retail sales headwinds in the U.S., we remain focused and disciplined on tightening U.S. retail inventory, aggressively managing cost and driving improved cash from operations. In fact, in 2018, we increased operating cash by over $200 million, a 20% increase over prior year. Summary of our Q4 results is on slide 10. In the fourth quarter, revenue was down behind lower shipments. Motorcycle operating income was impacted by lower shipments, $19.4 million of restructuring charges, higher year-over-year SG&A, driven by two recalls, and the impact of incremental tariffs. Financial Services operating income was down slightly. Consolidated net income was largely flat to prior year due to lower operating income, offset by the benefit of a considerably lower tax. EPS for the quarter was $0.00 per share. When excluding restructuring plan cost and the impact of incremental tariffs, EPS was $0.17 per share. We remain focused on delivering strong margins and returns over the long-term. On slide 11, worldwide retail sales of new Harley-Davidson motorcycles in Q4 were down 6.7% versus prior year. In the U.S., Q4 retail sales were down versus prior year, driven by significant declines in the U. S. industry and slight market share declines. International retail sales were down modestly in Q4, driven by year-over-year declines in certain developed markets, partially offset by continued growth in emerging markets. While we expect our business to remain under pressure in 2019 driven by continuing challenges in the U.S. motorcycle industry, we intend to introduce exciting new products and add innovation that customers value in our new motorcycles. We also expect to aggressively manage supply and execute marketing efforts to encourage trial and increased conversion to sale. Through 2022, our More Roads to Harley-Davidson plan is designed to build the proper foundation, drive the right fundamentals to help steer the U.S. industry back to health, and to drive significant growth across our international markets. Let's take a closer look at the U.S. on slide 12. Retail sales were down 10.1% versus prior year quarter. While the U. S. retail sales decline is very disappointing, the decline was in line with our expectations. The U.S. industry was down 8.4% in the quarter. We believe the industry was down largely because of soft used bike prices and a relative shift and rider preferences towards smaller motorcycles. Looking at used bikes, prices remain at historically low levels compared to new. However, we are encouraged as we continue to see positive momentum in used bike pricing. During Q4, pricing services such as NADA and Black Book published higher values for Harley-Davidson motorcycles, while prices were slightly lower at auction. Additionally, the sixth consecutive quarter saw a rising prices of used Harley-Davidson bikes in our dealer network. Used Harley-Davidson motorcycle sales were up through November. Our share of the combined new and used motorcycle registrations was up through November and has been for the last nine consecutive years. We believe used sales are also an indicator of our brand health and provide prospects for future new bike sales. 2018 full year market share of new bike registrations was 49.7%, down 1.0 percentage points. Our U.S. market share reflects the adverse impact of a highly competitive marketplace and relatively strong growth in segments which we do not currently compete. In the segments where we do not compete, the Touring and the segments where we do compete, Touring and Cruisers segments, which represent approximately 70% of the 601+cc market, our market share was up 0.8 percentage points on a full year basis. During the quarter, we pulled back on shipments of new bikes in the channel. This resulted in yearend U.S. retail inventory decreasing approximately 350 motorcycles over the prior year. We believe this market discipline is important in maintaining customer and dealer value and will ultimately result in strong retail sales of new motorcycles. On slide 13, international retail sales were down 2.6% in the fourth quarter, slightly below our expectations. On a full year basis, international sales were up slightly. During Q4, emerging market retail sales were up 18.7% driven by double-digit growth in several markets including China, Brazil and India. Retail sales in developed international markets were down in the fourth quarter resulting primarily from ongoing weakness in Japan and Australia. During 2018, these two markets experienced cracking industry sales and competitive new product introductions of segments outside of are Touring and Cruising. Retail sales were also down modestly in Western Europe driven by weak consumer confidence in France and the U.K. On a full-year market - our full year market share in Europe 10.3%, up 0.5 percentage points versus prior year. As a detail on our More Roads plan reinforces, we remain confident in, committed to great potential that international markets offer to Harley-Davidson. We believe our brand, products and distribution will drive sustainable growth in international markets. On slide 14, wholesale motorcycle shipments were down in the quarter on a full year basis. We came in under our full year shipment guidance as a result of our decision to reduce retail inventory from plan levels in both the U.S. and international market on a lower-than-expected international retail sales. Compared to last year's fourth quarter Street and Sportster shipments as a percent of the total were up behind improved sales rates, offset by lower cruiser mix as we lap last year's initial selling of our new Softail motorcycles. On slide 15, revenue for the motorcycle segment was down 8.7% in the fourth quarter and a 7.9% decrease in year-over-year motorcycle shipments. Revenue during the quarter benefited from $230 increase in the average motorcycle revenue per bike, this increase was driven by higher year-over-year pricing and favorable mix, partially offset by unfavorable foreign currency exchange. Both P&A and general merchandise sales lagged, retail motorcycle sales growth in the fourth quarter due in large part the timing of our fiscal calendar that had one less week versus last year’s calendar. In addition, general merchandise was down as it lapped strong sell-in of our 115th anniversary products. Full year revenue was [up 1.1%, bike] shipments being down 5.3%. We believe this demonstrates a resilience of our company and brand in the face [Technical Difficulty]. On slide 16, gross margin in Q4 was down as a result of lower shipments, unfavorable manufacturing expense and higher raw material cost partially offset by higher pricing and favorable currency. Financial impact of currency was favorable by $4.0 million during the fourth quarter. Q4 foreign currency exchange gains were partially offset by a stronger U.S. dollar, which adversely impacted revenue by 1.5%. Raw material costs were higher during the quarter behind increased steel and aluminum pricing. Finally, manufacturing was unfavorable versus prior year driven by the impact of incremental tariffs, lower absorption on reduced production and shipments and temporary inefficiencies related to our manufacturing optimization. Q4 tariff costs increased by $13.4 million driven by higher EU and China tariffs, the full year impact of incremental tariffs $23.7 million. On slide 17, operating margin as a percent of revenue for Q4 was lower compared to last year, driven by lower gross margin, higher SG&A and restructuring expense. SG&A was adversely impacted by two voluntary recalls booked in the fourth quarter. The first was a $35 million clutch recall on certain Touring and Softail bikes which we discussed last quarter. The second was a brake recall on our street motorcycles for which we recorded a $20 million charge. We believe that limited parts availability for referring our street motorcycles will adversely impacted for Q1 2019 retail sales by approximately 2500 motorcycles, primarily in our international market. We do not believe that these recalls will have a meaningful impact on our full year retail sales. Restructuring charges totaled $19.4 million in the fourth quarter including ongoing manufacturing optimization of $15.5 million and an additional $3.9 million restructuring charge related to cost-reduction efforts. Profitability and strong cash flow remain a key focus. It is our objective to further leverage our established capabilities to drive profit, cash flow, top quartile ROIC into the future. Financial Services Q4 operating income shown on slide 18 was slightly lower compared to prior year. Net interest income was up $4.4 million due to higher year-over-year receivables. In Q4, there was a reporting change in which Harley-Davidson dealer systems business moved from the motorcycle segment to the Financial Services segment, Harley-Davidson dealer systems by its dealer management system software and services to the majority of our U.S. dealers. Under the leadership of HDFS, this business will leverage HDFS e-competencies related to managing dealer facing systems and servicing the U.S. dealer network. During 2019, we expect the reporting change will increase both financial services revenue and operating expense by between $10 million to $13 million, while having only a modest impact on operating income. HDFS's operational results are on slide 19. Q4 originations were up 8.0% versus prior year, driven by increased used motorcycle sales in the dealer network and a higher HDFS market share of new motorcycle sales. Market share was 69.5%, up a very strong 9.6 percentage points during the quarter, driven by competitive U.S. sales rates and HDFS continued commitment to full credits from lending. At the end of - quarter's end there were $609.2 million of cash, cash equivalents at HDFS and $1.0 billion of liquidity available through bank credit and conduit facility. During 2018, HDFS paid dividends of $235 million to Harley-Davidson. On slide 20, 30 day delinquency rate for retail motorcycle loan receivables on our yearend balance sheet was 4.12% or 9 basis points lower than Q4 2017. The annual retail credit loss rate for receivables on a balance sheet was 1.76% or 14 basis points lower than 2017. HDFS continues to maintain a robust liquidity position, contributed strong profitability to the company. The remaining Harley-Davidson Inc. financial results are summarized on slide 21. Our yearend cash and marketable securities balance of $526.3 over prior year and anticipation of paying off a $600 million MTN matured on January 15. Year-to-date operating cash flow was up over $200 million or 20% from last year driven by lower working capital as we remain pretty focused and diligent on our use-of-operating cash. Our effective tax rate was 22.6% in 2018 was considerably lower than last year driven by - driven due to the impact of the Tax Cuts and Job Act. In addition, fourth quarter of 2018 benefited from lapping last year's write-down of $53 million of deferred tax assets related to the 2017 Act. And finally, starting liquidity company has and intends to continue maintain a minimum of 12 months of effective liquidity needs in cash and/or committed credit facilities. Harley-Davidson's full year financial results are summarized on slide 22. Revenue net income earnings per share were all up in 2018 despite lower shipments $106.3 million charges related to our restructuring plan cost, $23.7 million due to the impact of [Technical Difficulty] an increased in SG&A and [higher recall] cost. EPS for the year was $3.19 and when excluding restructuring plan cost the impact of incremental tariffs EPS was $3.78. We believe the charts on slide 23 demonstrate that we benchmarked very well against various peer groups in our ability to generate and return cash to shareholders period of 2015 to 2017. One of the five objectives guiding our business strategy and execution through 2027 is to deliver superior return on invested capital measured by Motor Company ROIC being in the top quartile of the S&P 500 and by a best-in-class return on equity at HDFS. Harley-Davidson is a leader in ROIC at the Motor Company and ROE at HDFS is a clear leader in our ability to generate and return cash to our shareholders. Slide 24 illustrates our recent history of returning cash to shareholder. In the fourth quarter of 2018 we paid a quarterly dividend of $0.37 per share, repurchased $194.2 million of our stock. Driving superior value for stakeholders is a top priority. After investing in our business, we intend to return excess cash to our shareholders in the form of increasing dividends, share repurchase. Slide 25 is a summary of our multi-year manufacturing optimization initiative. We now expect total program costs to be between $152 million to $162 million versus our most recent estimate of $155 million to $185 million. We are also lowering our capital estimates at $65 million versus our most recent estimate of $75 million. We continue to expect our manufacturing optimization to yield ongoing cash savings of $65 million, $75 million. In Q1, we expect manufacturing optimization cost of approximately $20 million. We believe these investments have very attractive return. When completed we expect this initiative will simplify our manufacturing footprint, provide focus in our operational investments and improve gross margin by roughly 1.25 percentage. Moving on to 2019 guidance on slide 26, we expect the declines in the U.S. industry to continue into 2019, albeit at a more temperate pace than in 2018 and we expect international sales grow - as a result in 2019 we expect to ship between 2017 222,000 motorcycles which is down approximately 3% to 5% versus prior year. During 2019 we expect retail sales to be positively impacted by, focused investment in our strategy to increase global ridership, model year 2019 and 2020 motorcycles and continued expansion of our international dealer network. However, we expect these positives to be more than offset by strong headwinds including, the weak U.S. new bike industry, a relative shift in U.S. rider preference towards smaller motorcycles and a marketplace crowd with highly competitive promotions incentives and discounts. In 2019 we will continue to aggressively manage supply in line with demand and plan for U.S. yearend inventory to be down versus 2018. We expect gross margin as a percent of revenue to be lower than prior year driven by significant increase in incremental tariffs lower volumes and unfavorable mix, partially offset by aggressive cost reductions including the benefit of $25 million to $30 million of manufacturing optimization sales. During 2019, we expect incremental tariff cost to be approximately $100 million to $120 million. These costs include EU, China tariffs on our products shipped from the U.S., as well as U.S. tariffs on certain items coming back coming from international market. This estimate excludes metals costs, belting from U.S. steel and aluminum tariffs, but we do expect for metals costs that are included in our gross margin guidance. We intend to mitigate the impact of incremental EU and China tariffs by year end. Our plant in Thailand came online in Q3, 2018. As we explained when we announced this project in 2017 we intend to utilize it to make more of our products accessible to customers and targeted international market, including our China and ASEAN market. As our operations in Thailand ramp up the fact that realize manufacturing efficiencies and to lower our cost of motorcycles produced there through other international markets. Looking at SG&A we expect SG&A to be lower in 2019 behind aggressive cost management and lapping 2018 recall cost. For 2019 we have relocated substantial amount of our SG&A spending to invest in our more roads plan to drive future growth. For 2019 the motorcycle segment operating income is expected to be between 8.0% or 9.0%. Excluding the impact of incremental tariffs, manufacturing optimization cost, we expect operating margin as a percent of revenue to be largely flat to 2018. We are very focused on improving operating margin, in line with are plans we expect motorcycle segment operating income in 2022 improve by approximately $170 million to $200 million versus 2019 as we complete for manufacturing optimization and continue to address tariff impacts on our business. We expect Financial Services operating income in 2019 to be down compared to 2018 driven by higher cost of debt and higher depreciation on our investment, a new loan management system which went live on January 1st. Capital expenditures in 2019 are expected to be between $225 million to $245 million, which includes approximately $20 million deferred manufacturing optimization. We expect our full year effective tax rate will be approximately 24% to 25%. As we look forward to the first quarter we expect 53,000 to 58,000 motorcycles which is down approximately 9% to 17%. Segment operating margin as a percent of revenue is expected to be down approximately 6 percentage points from Q1, 2018. We expect first quarter will be adversely affected by incremental tariffs, unfavorable mix, lost absorption on lower shipments and unfavorable currency, partially offset by lower year-over-year restructuring costs. Despite the challenges we faced in 2018, Harley-Davidson's demonstrated its incredible resilience by growing revenue and profits, delivering significant higher year-over-year operating cash and returning $628 million to our shareholders through dividends and share repurchases. As we look beyond 2018, we are prepared for an extremely dynamic and highly competitive global market motorcycle market. We will continue to focus our investments, deliver strong returns to our shareholders and drive growth for the company over the long-term. Thank you. And now let's take your questions.

[Operator Instructions] And your first question comes from the line of Sharon Zackfia with William Blair. Please go ahead.

Hi, good morning. I guess a question on the used bike pricing, so I think you've been talking at least fairly consistently throughout 2018 about the bike pricing improving in your dealer network and in some other auction sources that you get. But it hasn't really manifested itself seemingly in any improvement in retail sales. So as you've looked at this historically what kind of lag is there normally? I mean when would you expect to see those used bike prices start to I guess narrow the gap so that the trade-off and [to use this] [ph] less attractive to the consumer than it seems to be today?

Thanks Sharon. This is John. Sharon, coming out of the fourth quarter of 2014, we saw a precipitous drop in used bike prize for about 13 consecutive quarters and we have seen improvement for the last six. But the level that at which it felt for those first 13 quarters is much more than we have seen an improvement in the last several quarters. And we still have a sizable gap and the gap between new and used is at historical levels. We expect first to see the stabilization. We've got stabilization used bike prices, next we would expect to see stabilization in the industry of new motorcycle sales. And as we look forward to 2019, we do expect them to improve part of the reason being is behind a more stable price gap between new and used. But having said that, the gap is still wide and we still would expect the overall industry to be down.

And I'll just add Sharon, this goes back again to the focus on building new rider by creating more riders demand on the side of total supply side. So growing 50,000 additional Harley riders in 2018 is building momentum and obviously continued to invest even more behind that. As we go forward that should help dynamic.

Okay. Thank you.

And your next question comes from the line of Felicia Hendrix with Barclays. Please go ahead.

Hi, good morning. Just one thing I know you've had this issue on other quarters. When you guys have been talking, you've been kind of drifting in and out some things have been hard to hear, so just an FYI,. John, can you just talk for a moment about your outlook for 2019 shipments and the cadence? It seems like your first quarter definitely is factoring in the challenges that you're seeing and that you've discussed on the call and then when we look forward at the second to fourth quarter, does that implies a flattish growth in shipments? So maybe first you could help us just understand, how you're thinking about the cadence throughout the year with maybe second quarter be down and then the second half be up something like that. And then, just why are you confident in your overall outlook given the challenges that retail and the industry both internationally and domestic? And it seems like some of the international pressures are relatively new? Thanks.

Thanks, Felicia. As we look to the - let's start with the first quarter, as we look to the first quarter we expect shipments to be down 7% to 19%. And you're absolutely right Felicia that a portion of that is the fact that we will not be shipping - we do not expect to ship Street motorcycles in the fourth - first, I am sorry, in the first quarter. That represents about 4%, 4.5% of that total. In addition, we expect coming out of the first quarter with lower inventories in the U.S., so we’re going to continue to keep overall inventories very tight as we move into the selling season. What we would expect from there is to see shipments really track well with retail sales and throughout the year we would expect retail sales to improve as we invest in stronger dealers which is part of our More Roads strategy. And in fact, when we look at 2019 overall we will have a significant investment in More Roads in the neighborhood of $100 million. So to get to the final part of your question Felicia is why do we expect - why do we have confidence in the shipment guidance that we've given, is that is a big part of it. We are investing heavily in More Roads and stronger dealers and certainly the new products and broader access. And as Matt has just mentioned, we came off of 2018 creating 52,000 new riders to Harley-Davidson that weren't there a year ago. We’re gaining momentum from ‘17 to ‘18 and we expect that momentum to increase and continue into 2019.

So just as far as the cadence goes, can you give some color there, and can you help us understand how many dealers you are adding internationally this year?

Yes, from a standpoint of the cadence I can't provide a lot more. You've got the first quarter and we will see an improvement throughout the year. In terms of international dealers, we expect to add 25 to 35 more dealers in international markets in 2019.

Okay. Thank you.

And your next question comes from the line of David Beckel with Bernstein Research. Please go ahead.

Hi, good morning. Just had a question about 52,000 new riders that you added this year. Can you provide us some color on maybe demographic aspects of these new riders? How they differ from your existing base and to what extent are they buying new versus used? Anything along those lines would be helpful?

Thanks, David. This is Matt. As I hope we've adequately described in the past, rider migration [Technical Difficulty] actually was last Tuesday and it begins the analysis. What we have right now is that top-level - obviously we have all need to get out of the question you asked, not surprised, the nature of our work and the focus, high leverage [Technical Difficulty] potential customers and [indiscernible] what John talked about on to guidance of sales. So it's work that we're doing right now. Obviously [Technical Difficulty] this year.

Got it. Thanks. And one quick follow-up if I could by what amount do you expect inventories to be down at the end of the year? I think you mentioned you expected that?

Yes, this is John. We are not providing an exact amount. We expect overall U. S. shipments to be down and consequently, inventory will follow.

Great. Thanks.

And your next question comes from the line of James Hardiman with Wedbush Securities. Please go ahead.

Hi, good morning. Thanks for taking my call. I just wanted to follow-up on that last point on inventories. Obviously, 350 bikes in terms of a domestic decline is a start, but it kind of feels like a drop in the bucket versus 17,000 bikes that retail was down in 2018? So, I guess, my question John, you don't need to give us actual numbers, but it's pretty clear that inventory turns worsened materially in 2018. Is the goal to get back to the inventory turn number that you had coming into 2018 just given how much of that appears to have changed based on the numbers that you've given us?

Thanks James. I probably wouldn't agree completely with your overall assessment, but you're absolutely right, in the fourth quarter 350 was not enough to hold year-end turns. But when you look across the entire year, actually, over the last - we have reduced inventories in each of the four quarter anywhere between 10% and 35%. And our guidance all year long has been for flat. We came in a little bit below that and at this point we couldn't feel more comfortable with where our inventories are. Certainly our dealers echo that and all the surveys that are run, it’s 80% plus that feel comfortable or that they have too little inventory. So, we have absolutely no issues with where we're at with regards to inventory in the mix considerably better than last year. Again, as I had mentioned to Felicia we'll continue - pressure on overall inventories and we will take inventories down in the first quarter in the United States, but we feel very comfortable where that - we're at. To answer your final question, we'd be looking to hold turn…

I'm sorry you broke up there. Your aim is to hold turns?

I'm sorry, 2019 would be the hold turns constant versus…

Versus 2018 or versus 2017?

No, versus 2018. 2019, we'll look to hold turns to 2018.

Right. But the 2018 turns were a lot worse than 2017, right? I mean, maybe…

Just went through that. There are four quarter of the year. The turns were better in the three of the four quarter. In the fourth quarter, we talked about this as well, push back our surge manufacturing - [indiscernible] a lot of efficiencies plus reductions in our plans. Out of December into January, right now we feel very comfortable where inventories are. Our dealers certainly feel the same [indiscernible] feel pressure that they're too little and we'll continue to manage turns at this rate as we go forward. And…

I apologize. You're cutting in and out John. But it sounds like you're saying that inventory turns didn't get worse in 2018? I mean, I think about 350 bikes that's may be a 1% decline versus a 10% retail decline. Am I not thinking about that the right way?

James I told you that in the fourth quarter turns got worse. In the other three quarters, they got better. We sell products throughout the four quarters of the year. We've kept turns - turns got a little bit worse in the fourth quarter and consequently on a full year basis because of manufacturing. We pushed back our surge manufacturing to gain additional efficiencies and we feel very comfortable where yearend inventories are this year. Next year, we will reduce inventories in United States as we expect shipments to also reduce because of a weak U.S. industry thereby holding turns on a year-over-year basis from 2019 to 2018.

Okay. Thank you.

And your next question comes from the line of Craig Kennison with Baird. Please go ahead.

Good morning. Thanks for taking my question. It's on Thailand. Can you shed more light on the timing of additional capacity in Thailand? What do you think your eventual capacity will be from a unit perspective? How long is that going to take to ramp up? And just remind us which markets you plan to serve from that facility?

Thanks, Craig. Craig we’re currently investing and expanding the capacity of our Thailand facility and we expect to be producing the majority of our motorcycles for the EU, China and Asian markets by the end of this year. Next question?

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

Thank you. John, I don't know if you've cut out there again. But in all honestly you guys the call quality here is pretty poor. There's a lot of cutting in and out on the whole call. But did you say expecting to produce the majority of those by year-end was that your last part of your response to Craig's question?

I'm sorry. Sorry for the poor audio quality. Yes, by the end of this year we will have the capacity in our Thailand facility to be shipping and the amount of capacity to cover our needs in the EU, China and ASEAN markets by the end of this year. Over that, we expect overall tariff cost to be $100 million to $120 million in 2019 and we would expect those to come out in 2020 as we would be producing from our Thailand facility at the end of this year.

Okay, okay. Thank you. So from a cost perspective is this included within the manufacturing optimization that you all outlined earlier in the call? Those costs for the Thai facility, just want to clarify that?

Thanks, Tim. No, they are not included in that. The manufacturing optimization is largely the consolidation of our two final assembly plants in the United States moving Casey to York and exiting a wheel manufacturing plant in Australia. With that, we are well on the path to completing that project which will be completed later this year and deliver separate savings of $25 million to $30 million for this year and then building up to $65 million to $75 million of savings.

Okay. That's helpful. So with that and what is the cost for the Thai investment ramp what's included in the guidance this year related to the Thailand plant? And again, expansion in the ramping-related costs.

Right. So the Thailand plant again was something that we announced back in 2017 and the plant was completed and came online in the third quarter of last year of 2018. And that was the bulk of the spending on that plan. Given the fact that we are now looking to supply additional markets from Thailand, we're expanding that plant and that's a cost increase in both operating expense as well as capital. The capital investment in 2019 is about $15 million.

And from a ramping cost the inefficiency cost, however you want to frame it any color there John?

It will be a higher cost. I don't have that number in front of me. But it is a manageable cost by the company.

Okay. Great. Thank you.

And your next question comes from the line of Jaime Katz with MorningStar. Please go ahead.

Hi. Good morning. Can you talk a little bit about the financing landscape outside of HDFS that looks you guys are taking a larger share of lending domestically? And I'm curious if that's because it's maybe backed off from other originators or if you guys have seen just a different opportunity set for that part of the business? Thanks.

Thanks, Jaime. We don't see a big change in the competitive set in lending. Remember that most of the people lending on motorcycles are only lending in the top-tier prime segment and not in sub-prime. But we haven't seen a dramatic change and the next largest competitor Harley-Davidson is very small. So I don't think we would really discern a big change. And what you're seeing being at this year and you've seen it for the last three or four consecutive years is HDFS doing an absolute fantastic job of delivering to our dealers, integrating into their business process and being very high-quality at what they do. And that is garnering the share that you're seeing. It couldn't be more happy and for that I'll put a plug-in for HDFS. They had a record earnings year and it was done in an absolutely fantastic way and they grew revenues 2.2% despite the fact that new motorcycle sales in United States were down and they improved the delinquencies as well as credit losses. So we're very pleased with the business there including a market share that they have garnered.

Okay. And then can you guys talk a little about the 52,000 domestic riders. We are now three years into this program to get two million new domestic riders by 2027 and obviously the math gets harder every year you fall short of 10% for whatever if you want to divide it evenly. So is the implication that the market will stabilize and that get much better or that the products was just attracted that many more customers to help you meet your goal as you think about it longer term? Thank you.

Yes. This is Matt. When we put the two million riders goal out it really was a stake in the ground to get the attention of the organization and the dealer network about the work we had to do. It was prior to have any insights that we now are able to gain with the rider migration database, talk a little bit about that earlier. We increased the number of Harley-Davidson riders ultimately what we are after and everything that we doing, the exact math doesn't necessarily correlate to the two million, but to put a little bit of perspective on the next 52,000 increase, it came as a result of people entering the sport on Harley and it came as a result of people exiting the sport. We brought in 278,000 new riders Harley-Davidson [Audio Gap] in 2018 that exceeded the number of people that exited by 52,000. And so when we look at the task that we have and all of our efforts under More Roads, it's really about two things, it's about bringing in new riders inspiring them with new kinds of products like what's represented in our full EV portfolio and the middle-weight platform. And it's about keeping existing riders – and riding longer. I mentioned the ride 365 -- 137 -- number of riders. So we're focused as an organization on the test to build riders. I think the challenge that we have with connecting 2 million new riders the insights we now had about writer migration is something we will continue to dimensionalize for everybody. But I think the important message is, we are making progress, increasing the number of Harley riders and we expect More Roads to accelerate that trend as well as capitalize on global market for the company.

Thank you.

And your next question comes from the line of Joe Altobello with Raymond James. Please go ahead.

Hey. Thanks, guys. Good morning. I guess first question is just a clarification on the Q1 guidance and I apologize the call has been going in and out. But I think you guys said operating margin for the Motor Company in the first quarter down 600 basis points. Is that a report number or is that excluding restructuring cost and tariffs?

No, that's a reported number. So all in GAAP reporting we would expect Q1 operating margin at the Motor Company to be down about six percentage points driven by the incremental tariffs in particular, but the shipments being down 9% to 17% as well as unfavorable mix.

Got it. Okay. And then secondly sort of a broader question, this is -- as you mentioned the sixth quarter in a row where the gap between new and used pricing has gotten better, still wide but getting better. How much of that gap is due to a lack of what the consumer perceives as meaningful incremental innovation in the motorcycle industry? And how much of that do you think is an affordability issue where the average consumer just can't afford a $20000 vehicle?

With regards to, I don't know what the separation of those two are. I just think that we're in a situation that when a value buyer is looking at a motorcycle they can receive a 2 year-old Harley-Davidson at a very attractive price. And they're willing to forgo some of the innovation and the larger engines and some of the features and benefits that we've put down over the last two years just because of a very large price gap. And again we are pleased to start to see that stabilize and start to improve a little bit. But there still is, as we talked about before there still is a large gap and value buyers are choosing used motorcycles.

Is there a thought to maybe taking a more drastic approach to pricing; meaning, lowering the price of new bikes to kind of lower that gap and hopefully attract more riders?

This is Matt. I would say the approach is rather continued to invest value of [Technical Difficulty]-really smart content - some of that - that speaks sort of trade-offs existing sort of pool of buyers and then when you look at every More Roads - no way platform and e-portfolios, you're speaking of totally different -- of rider. So this is what, why the strategy going forward and we explained it was products and broader access for stronger dealers. Just to dimensionalize the middle-weight segments that we'll be entering; Adventure Touring and Streetfighter. Today the company's heavyweight cover in major global markets is about 43%. Those are the 43% of the heavyweight segments we participate in with Touring and Cruiser. When we add streetfighter and Adventure Touring to our mix that will more than double or about double our coverage, as far as the heavyweight segment. This is the power of us entering the segment speaking to different rider in addition more interesting to reach out to new riders and inspire people to ride, primarily I would say through the EV portfolio but everything else we're doing with content as well. So product plays a major role, but hand in hand with broader [Technical Difficulty] what we're about and make sure that they are broad in business into the experience, fantastic experience.

Got it. Okay. Thank you guys.

And your next question comes from the line of Greg Badishkanian with Citi. Please go ahead.

Great. Yes. Just on the international side, you called out weak consumer confidence in the U.K. and France. So, when could you start to see some weakness in those two markets and have you seen any stabilization yet?

Yes, thanks Greg. We have been very pleased with our business in Europe. We're picking up market share growing obviously faster than the market and it's been very widespread throughout the European countries. It's really just in the fourth quarter that we saw the softness in the U.K. and we believe that is a function in part due to Brexit and then in France due to the yellow jacket demonstration. So hopefully, this is something that will pass quickly certainly Brexit is still up for decision, but John we're keeping a close eye on them. But other than that Europe continues to perform very strong and we've been very pleased with it and new Softail motorcycles have been really good sellers all year long.

Great. And also just any may be on the feedback on the customer response to LiveWire that launch, anything incremental that you're hiring?

This is Matt. Thanks for the question. I think it's been a fantastic response, as I mentioned in my opening comments. But between Milan than at the [Technical Difficulty] we had not only LiveWire displayed in development prototypes in our lightweight space. And then most recently last weekend at the [Technical Difficulty] significant positive response outside of [Technical Difficulty] in all three cases outside of just the motorcycle space. So people are noticing what we're doing there. They're looking at Harley-Davidson in a different way and that is very important as part of our strategy to kind of change peoples perspectives about how often riding can [Technical Difficulty]. The feedback on LiveWire has been exceptional and people haven't [Technical Difficulty] more excitement about LiveWire and the rest of the portfolio.

Thank you.

And your next question comes from the line of Gerrick Johnson with BMO Capital Markets. Please go ahead.

Hi, good morning. I just wanted to be clear about the tariff impacts that you're excluding from EPS in the quarter and going forward. Is this the gross impact or is this the net impact of pricing and other actions? Is it just 301 and reciprocal does that include 232 and if it does include 232 how do you estimate that? Thank you.

For the quarter, we had approximately 20 -- I'm sorry, 2018 approximately $26 million tariffs. Those will be 301 and reciprocal in your terms Gerrick. That does not include metals. We do believe that we experienced higher metals costs. Overall raw material costs were up $17 million on the year. We believe the primary driver of that was the tariffs, but that's not included in how we are defining our actual tariffs for 2018 of $26 billion and on a similar basis, we expect that $26 million to be between $100 million and $120 million in 2019 when we look at the full year impact of tariffs of our products through the EU of our shipments to China and of tariffs that are coming back from international markets primarily China in the United States on the incremental tariffs that have been placed on those products.

Okay. So just one more point of clarification. Is that a gross number or are those that number after pricing actions and other actions?

That's a gross number -- gross amount of incremental tariffs. That's not the total tariffs. That's just the increase, largely of the 25 percentage points in the EU and in China and in a lot of cases 10% to 25% back in the United States. Not the entire tariff, but it's just the incremental piece and it does not include any other items in there such as pricing.

Okay. But when you report earnings going forward, you're going to report earnings excluding the total impact of tariffs not the incremental. So can we talk about the total gross impact?

The amount of tariffs going forward will be reported - estimated at $100 million to $120 million. That is 301 tariffs of our shipments into the EU into China which have incremental tariffs of 25 percentage points. We are only reporting the 25 percentage points incremental. And for the tariffs coming back largely from China and in United States those tariffs range from 10% to 25% increase. We're only going to report that increase. We are reporting it the same way that we reported $26 million in 2018 to 2019.

Okay. Thank you. That’s very clear. I’ll get back in queue. Thanks.

And your final question comes from the line of David Tamberrino with Goldman Sachs. Please go ahead.

Thank you for taking my question. Just wanted to understand on the international dealer build out, it says 56 new dealers. Is that a net increase or were there some that closed? I'm asking because I'm just trying to understand the average inventory levels internationally as full year retail sales were essentially flat at 95000 units, international shipments were essentially flat may be down a touch at 96000 units. But you added 56 new dealers. So has there been inventory reduction at the existing international dealers and is that finished? Thanks.

Yes overall, David, the 56 dealers that we opened internationally, there is a limited number of offsets to that, a handful or two offset to that. Overall, when we look at international inventories, we are up on several hundred units on a year-over-year basis and that would imply that overall inventories are down in the same stores internationally.

Okay. I mean is that -- do you feel like you're right sized for your inventory internationally given what you're seeing from a retail sales perspective or could that continue in 2019?

We feel good about where the overall inventories are. The fourth quarter was a little bit lower than what we expected on retail sales and instead of shipping in those and holding on to guidance, we decided not to build inventory beyond what we had planned which was up. And in addition to that we decided to take down primarily our international inventories as well and that's why we missed our shipment. So it's good about were inventories are internationally. And when will look to 2019 we would expect international inventories to be largely flat on a year-over-year basis despite us adding 25 to 35 new dealerships. And remember in six short quarters we're going to be adding a plethora of new products under our More Roads plan or an as Matt had mentioned and Adventure Touring, Streetfighter and the traditional segment we want to make sure that our dealers are ready to receive those vehicles.

Understood. Thanks, John.

All right, thanks everyone. There are a few questions remaining in the queue. And I will follow-up with each of the analyst we did not have a chance to get to. Due to some sound quality challenges we will post our comments on the website before transcripts are available. The audio and slides for today's call will be available at harley-davidson.com or for the audio call 855 859-2056 or 404-537-3406 until February 12. The ID is 1474809. We appreciate your investment in Harley-Davidson. Have a great day.

And this concludes today's conference call. You may now disconnect.