Harley-Davidson, Inc. (HOG) Q2 2019 Earnings Report, Transcript and Summary

Good morning. My name is Lisa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the 2019 Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I would now like to turn the call over to 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. 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 noticed in our latest earnings release and filings with the SEC. Harley-Davidson disclaims any obligation to update information in this call. Joining me this morning are President and CEO, Matt Levatich; and CFO, John Olin. Matt, let's get started.

Thanks, Shannon, and good morning, everyone. Last quarter I discussed how we're facing the evolving market conditions with the grit that has defined Harley-Davidson throughout our history. Today, I'll comment on the noteworthy advancements this organization, our determined employees and dealers, drove during the quarter. In June, we successfully completed key milestones of our manufacturing optimization and initiative including growth and expansion of our York, Pennsylvania plant. We added two new lines and hired over 400 U.S. workers. York is bigger, more efficient and ready to supply model year 2020 motorcycles around the world, including our first electric motorcycle LiveWire, which is in production now. Our manufacturing optimization initiative was a significant undertaking and is a tracking on time to deliver cash savings this year that will accumulate to $65 million to $75 million annually by the end of 2020. On the cost side of our business, we continue to scrutinize and optimize all spending to drive value and growth near and long-term. By example, over the past four years, we've increased our investment in marketing and product development by 43%, while we've driven overall SG&A down by 4%. We are challenging ourselves to appropriately address today's market while we invest in our future. Our future with more riders enjoying a broader array of Harley-Davidson motorcycles. Our team has been working intensely to minimize the impact of tariffs on our business in a highly uncertain environment. It was just over a year ago when the European Union imposed significant incremental tariffs on Harley-Davidson motorcycles made in the U.S. and exported to the EU driving tariffs from 6% to 31%, tariffs that are scheduled to increase to 56% in 2021. We acted decisively and established our primary path to leverage our Thailand operations still under construction at that point to get tariffs back to 6% as soon as possible. During the quarter, we obtained regulatory approvals to import from Thailand all Softail and Sportster motorcycles, the majority of our EU volume at the 6% tariff rate. The approval process took longer than we expected and delayed our ability to achieve expected savings this year and activating contingencies drove higher costs as well. Then an impact further pressured by lower than expected sales in Europe in the first half of the year necessitates that we adjust full year volume and operating margin expectations for 2019. However, in the U.S., retail sales were on plan and we continue to see some tempering of declines in the U.S. industry. We're seeing some light, but key developed markets remain troubled and that requires even more of us. Our approach in the U.S. and all of our markets is to maximize value while we continue to invest in future strength and growth. We are walking this line in all we do with keen awareness and focus. At the start of the selling season, we leveraged increasing strength from our broader access and stronger dealers initiatives and augmented that with increased marketing and sales incentives. In Q2, we pulled back significantly on incentives in favor of increased value driving equity marketing and further improving capabilities across our dealer network. We continue to test effectiveness of various concepts regionally, expanding what works and scaling back less effective efforts. One example was a campaign emphasizing affordable monthly payments for Sportster’s that drove a significant lift in sales without offering incentives or promotional financing rates. Combined efforts in the quarter resulted in a 20% increase in web traffic and 475 million media impressions, a 54% increase compared to last year. More as needed of course and our resolve and capability are only deepening. Together, our marketing and More Road efforts are aimed at supporting sustainable growth and protecting the strong foundation of value that defines our brand and our company. The strength of the Harley-Davidson brand endures as our share of new sales remains incredibly strong and our combined share of new and used sales continues to underscore the incredible appeal of our bikes and brand amongst U.S. riders. In the U.S., quarter-to-quarter market share fluctuations in this highly competitive market have not unsettled the nearly 50% share we've held for many years. We're committed to market leadership and growth. You've heard me talk about our mindset shift from we build bikes to we build riders. Ridership is a holistic idea focused on inspiring and providing access to new riders and keeping existing riders engaged, riding and purchasing great new Harley-Davidson motorcycles. As we embrace this approach and work our strategy, we are building the next generation of Harley-Davidson riders. Harley-Davidson ridership has increased every year since 2001 and we ended 2018 with an all time high of over 3 million Harley-Davidson riders in the U.S. And overall industry ridership was up for the first time since the recession. People of all ages are riding. And as I stated last quarter, in the U.S. of the total mix of new Harley-Davidson riders in 2018, 18 to 34 year olds, women and/or ethnically diverse riders comprised over 50%. Looking just at young people in 2018, there were 24% more 18 to 34 year old riders than in 2002. Growth among younger riders continued into 2019 of total U.S. new retail sales the year-over-year mix of 18 to 34 year olds was up 2.6 points in Q1 and 2.7 points in Q2. We believe our More Roads initiatives will continue this momentum as we enter into the largest and fastest growing segments with strong no-excuses products that are priced right and feature all the specs and dynamic capabilities people are looking for. Segments, including Adventure Touring, Streetfighter and electric motorcycles that span the entire range of powered two wheel passion from StaCyc and Iron e to pedal-assist electric bicycles to mid power and high power motorcycles like LiveWire. The More Roads initiatives, stronger dealers work in particular is helping to build riders today and prepare us and our dealers to welcome the next generation of riders. In the U.S. significant programs have been implemented, and in 2019 our new retail marketing and dealer operations consulting teams have completed 59 onsite dealer visits and more than 160 dealer business operations have been evaluated, so we can help dealers assess their operations and provide the tools and process support they need to take their business to the next level. Dealers who engaged in in-dealership marketing, retail marketing consulting experienced an average improvement of 17 percentage points in new vehicle sales in the three months after the workshop. We are scaling the positive results and learnings from our U.S. stronger dealers work to continuously improve effectiveness and more broadly implement best practices in international markets as well. Other notable More Roads progress occurred during the quarter specifically with broadening access into Asia. Thailand operations implemented primarily to serve key Asian markets, enabled lower tariffs for more affordable product positioning Harley-Davidson to reach more people driving sales up 77% in ASEAN markets in Q2. We also announced a collaboration that joins our motorcycle leadership with Qianjiang Motorcycle Company to launch a smaller displacement motorcycle planned for China by next year with other Asia markets to follow. This collaboration will significantly expand access to Harley-Davidson for even more riders and drive incremental sales both for this new bike and for traditional Harley-Davidson products currently offered in Asia. Through the quarter, we and our dealers continued preparations for the September arrival of LiveWire, our first electric motorcycle. We're training dealer master technicians and sales professionals together, a first, because we know customers' interest in LiveWire will desire and benefit from a deep understanding of the many innovations featured on this breakthrough motorcycle. We're also committed to doing our part to drive a strong global charging network and charging flexibility that suits the needs of our riders. All Harley-Davidson LiveWire dealers will offer a public chargepoint DC fast charging station. And we’re working with global partners to support infrastructure development. In the U.S. we’re collaborating with Electrify America whose DC fast charge stations are expected to be at most 70 miles apart by the end of the year. LiveWire is powering up, production is underway and two weeks ago I participated in the first wave of the LiveWire global media launch seeing how this extraordinary motor cycle inspired the experienced motor journalist demonstrated there's no better way to inspire the next generation of riders than with our electric motorcycles. And we’re seeing an unprecedented level of positive feedback across more media outlets than ever before. Development continues full force on our other electric products right alongside our class leading combustion engine products launching in the coming years. In fact, our middleweight motorcycles are an active testing now and are on track for the first models to be launched next year. We're synthesizing our learnings and insights from concept development to deliver products that inspire the next generation of riders with cool bikes that caused people to sit up and take notice, products and experiences reinforced by strengthening Harley Davidson dealers that will make riding an Harley Davidson matter more to more people. Our efforts are also triggering new thinking about Harley Davidson. During the quarter we were invited to speak at the annual Code Conference that features companies who are leading in innovation and addressing evolving consumer and business needs. The emphasis was on the progress and promise of EV that is emerging today on the new horizon and how Harley Davidson's participation and leadership make so much sense. We're all about inspired mobility since our founders put power to two wheels back in 1903 we've evolved with consumers, technology and the ever-changing transportation landscape. Our products are for riders who want to move, be moved and live for real. Harley Davidson is engaging new riders, more riders than ever before as we more fully engage the power of the brand and the company to achieve our long-term objectives. With the added leadership of our Brand President, Neil Grimmer, our team will continue our deliberate shift to show up in unexpected places and show up powerfully and differently as a brand. We will amplify smart investments and make decisions based on what is working. We'll do more with the Harley Davidson brand to drive relevance, inspire ridership, and make riding matter to more people. We’re determined to work today's challenges and invest in our future with the vision and resolve required to advance our leadership and grow our business, drive the industry and create more riders. And now I'll turn it over to John to discuss the financial results for the quarter. John?

Thanks Matt. Our second quarter financial results generally finished as expected. However, retail sales were challenged by weakness in our developed international markets. During the quarter, the EU tariff relief, that Matt noted, came later than expected and as a key factor to the reduction in our expectations for full year shipments and operating margin. We look forward to putting the burden and uncertainty of the European incremental tariffs behind us and we look forward to restoring roughly a $100 million of annualized margin which we expect to begin early in the second quarter of 2020. The summary of our Q2 results is on Slide 10. In the second quarter, motorcycle segment operating income was impacted by lower shipments, incremental tariffs and unfavorable mix, partially offset by lower year-over-year SG&A and lower restructuring charges. Financial services operating income was down 6.2%. Consolidated net income was down versus prior year due to lower operating income. Earnings per share for the quarter was a $1.23. when excluding restructuring plan costs and the impact of incremental tariffs adjusted EPS was a $1.46. In the face of ongoing retail sales headwinds, we remain focused and disciplined on tightening retail inventory, aggressively managing costs, generating cash from operations, and delivering strong shareholder returns over the long-term. On Slide 11 worldwide retail sales of new Harley Davidson motorcycles in Q2, we're down 8.4% versus prior year. Our second quarter retail sales rate was lower than the improved rate of decline, which we experienced in the first quarter. In the U.S. Q2 retail sales were down 8.0% versus prior year. Through the first six months, U.S. retail sales were down 6.5% which was an improvement over last year's rate of decline and was in line with our expectations. International markets in the second quarter were down 8.9% driven by weakness in our developed markets. Through the first six months international markets were down 6.6% which was short of our plan. We expect 2019 to be a difficult year and it is unfolding as such especially in our developed international markets. In the near term we are addressing the softness in our U.S. and developed international markets by continuing to addressabley manage inventory levels and increasing marketing investments to encourage trial and increase conversion to sale. And our exciting new 2020 motor year motor cycles are just weeks away from launching. We also continue to invest in our strategy to build the next generation of Harley-Davidson riders. Thorough 2022 our more roads in Harley-Davidson plan is aimed at stabilizing our core business in the U.S. as we grow more riders globally. We believe more roads is building the proper foundation and driving the fundamentals to help steer the U.S. industry back to growth and deliver significant growth over our international markets. Let’s take a closer look at the U.S. on Slide 12. Retail sales were down versus the prior year quarter as a result of continued headwinds within the U.S. industry and due to lower HD market share. The U.S. industry was down 4.9% in the quarter an improvement over last year's Q2 rate and sequentially in line with Q1’s improved rate of decline. While we are encouraged by the tempering of the industry decline over the last two quarters, we believe the U.S. industry for new bikes continues to be challenged by soft use bike prices. We also continue to see shifting new bike demand toward other styles of motorcycles, including the smaller displacement bikes. Second quarter of market share for new bike registrations was 46.6%, down 1.8 percentage points, driven by stronger performance in segments, which we do not currently compete, but we will enter these segments starting next year as part of our more roads plan. In the segments where we do participate the Touring and Cruiser segments, which represent approximately 70% of the 601 plus CC market, our market share was up 2.0 percentage points for the quarter. During the first quarter our retail sales were positively impacted by increased sales incentives and the execution of our stronger dealer growth initiatives as we move to jumpstart a very slow start to the selling season. In the second quarter, we increased the execution of our longer term focused stronger dealer efforts and increased equity marketing while dialing back shorter term focus sales incentives. We believe our Q1 incentives were effective and will play a role as we move forward, but expect our focus to be on more strategic and sustainable investments. Looking at used bikes second quarter prices of Harley Davidson used bikes and our dealer network rose for the eighth consecutive quarter. While we were encouraged by the firming of use bike prices over the past several quarters, used bike prices remain at low levels compared to new. We tightly manage shipments of new bikes into the dealer network in the quarter. This resulted in quarter end U.S. retail inventory decreasing approximately 1,350 motorcycles versus the prior year. We were pleased with the dealer inventory at the end of the quarter and believe inventory is in a good place as we cut over to the new model year. On slide 13, second quarter international retail sales were down 8.9% versus prior year and as I noted below our expectations. International sales were down as a result of lower sales in developed markets, partially offset by higher emerging markets sales which were up 7.6%. Retail sales increases in emerging markets were driven by double digit growth in various markets including China and our ASEAN markets. However, Q2 retail sales in developed international markets were down 13.6%. Retail sales were down across most markets in Western Europe as we lapped strong initial sales of our new Softail motorcycles. Weakness in Japan and Australia continued behind contracting industry sales and competitive new product introductions in segments outside of Touring and Cruising. We expanding our stronger dealer efforts internationally and will continue to support our dealers in these markets with programs and a strong focus on test ride campaigns. Our year-to-date market share in Europe was 8.8% down 1.6 percentage points versus the prior year adversely impacted by lapping last year's strong Softail results and by lower sales of our Street motorcycles due to the impact of implementing the Street recall. As a detail on our more – plan reinforces, we remain confident in and committed to the great potential that international markets offer to Harley-Davidson. On Slide 14, wholesale motorcycle shipments in Q2 were down 5.3% and roughly at the midpoint of our guidance. Overall, family mix shifted slightly to Touring versus last year’s second quarter. On Slide 15, revenue for the Motorcycles segment was down 6.0% in the second quarter behind a 5.3% decrease in year-over-year motorcycle shipments. Revenue during the quarter was adversely impacted by a $144 decrease in the average motorcycle revenue per bike. This decrease was largely driven by unfavorable currency exchange, which adversely impacted Q2 revenue by 1.6%, partially offset by higher year-over-year pricing and decrease sales support. Both P&A and general merchandise sales outperformed retail motorcycle sales growth in the second quarter. On Slide 16, gross margin in Q2 was down as a result of lower shipments, higher manufacturing expense and unfavorable mix, partially offset by higher pricing. Product mix was unfavorable by $14.3 million in the quarter driven by unfavorable model mix within families and unfavorable P&A and general merchandise mix. In Q2, manufacturing was unfavorable versus prior year driven largely by $34.4 million of incremental EU and China tariff costs. Manufacturing was also adversely impacted by lower absorption on reduced production and shipments and temporary inefficiencies related to our manufacturing optimization initiative. On Slide 17, operating margin as a percent of revenue for Q2 was lower compared to last year, driven by lower gross margin, partially offset by lower SG&A and restructuring expenses. SG&A continued to benefit from aggressive expense management, partially offset by higher marketing and increase More Roads investment. Restructuring charges for manufacturing optimization totaled $10.4 million in the second quarter down $1.9 million from prior year financial. Financial Services segment’s second quarter operating income shown on Slide 18 was $75.5 million down 6.2% compared to the prior year. Net interest income was up $7.7 million due to higher year-over-year receivables and strong interest rate yields on the portfolio. The provision for retail motorcycle loan losses was $6.9 million unfavorable in the quarter, driven by higher credit losses. Operating expenses were up versus prior year as a result of a reporting change in which Harley-Davidson Dealer Systems business moved from the motorcycle segment to the financial services segment and due to higher depreciation as a result of our investment in the new loan management system, which was implemented in January of 2019. HDFS' operational results are on Slide 19. Q2 retail originations were down 1.8% versus prior year driven by lower motorcycles sales partially offset by higher HDFS market share. HDFS market share was 65.9% up a strong 1.9 percentage points during the quarter. At the end of the quarter, there was $364.2 million of cash and cash equivalents at HDFS and $1.93 billion of liquidity available through bank credit and conduit facilities. During Q2, HDFS pay dividends of $45 million to Harley-Davidson Inc. and also completed two asset-backed securitization transactions totaling just over $1 billion. On Slide 20, both our 30-day plus delinquency and credit losses were adversely impacted by startup inefficiencies resulting from the implementation of our new loan management system in the first quarter. The operational issues are largely behind us; however, we will continue to work through higher delinquencies that occurred during the system implementation. We expect key metrics to be impacted through the third quarter. The 30-day delinquency rate for retail motorcycle loan receivables on our balance sheet in Q2 was 3.33% or 24 basis points higher than last year’s Q2 rate, but sequentially improved from Q1 2019 which was up 42 basis points. The annualized retail credit loss rate for receivables on balance sheet was 1.82%. Q2’s loss rate increase of 26 basis points was above Q1 2019 which was up seven basis points as it takes time for the increased delinquent loans to roll through to credit losses. The remaining Harley-Davidson Inc. financial results are summarized on Slide 21. Our quarter end cash and cash equivalents balance was $924.6 million slightly lower than last year. Year-to-date operating cash flow was $496.2 million, which was down versus last year, driven by higher working capital and lower net income. Regarding liquidity, the company has and intends to continue to maintain a minimum of 12 months of projected liquidity needs in cash and/or committed credit facilities. We believe the charts on Slide 22 demonstrate that we are a leader in ROIC at the motor company and ROE at HDFS, and we are a clear leader in our ability to generate and return cash to our shareholders. One of the five objectives guiding our business strategies and execution through 2027 is to deliver superior return on invested capital as measured by motor company ROIC in the top quartile of the S&P 500 and by best-in-class return on equity at HDFS. Slide 23 illustrates our recent history of returning cash to our shareholders. In the second quarter of 2019, we paid a quarterly dividend of $0.375 per share and repurchased $42.9 million of our stock. Driving superior value for all our 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 and share repurchases. Slide 24 is a summary of our multiyear manufacturing optimization initiative. Key milestones in this initiative were successfully completed in the second quarter. We continue to expect $25 million to $30 million in savings for 2019. As Matt noted, annual ongoing cash savings are expected to be $65 million to $75 million after 2020. Manufacturing optimization costs were $14.4 million in Q2 and we expect costs of approximately $10 million in Q3. For the full year, we expect to incur $40 million to $50 million of operating expense, which is a $10 million reduction over our most recent guidance. We believe these investments have very attractive returns. They simplify our manufacturing footprint, provide focus in our operational investments and improve gross margin by roughly one and a quarter percentage points. Moving on to 2019 guidance on Slide 25. As Matt discussed, we recently obtained favorable EU tariff treatment for our Softail and Sportster motorcycles produced at our Thailand facility reducing tariffs on these bikes from 31% to 6%. We expect a similar approval for nontrite terrain motorcycles later this year. We expect to begin production for EU market in Thailand in late October. After shipping and inventory flow through, we expect motorcycles at the lower tariff rates to reach our European dealers in early Q2 2020. The approval process took considerably longer than we had anticipated and the delay has had an adverse impact on our shipment and operating income guidance. With regards to our shipments, the original plan was for sales of low tariff bikes to begin in the EU in early Q4 versus the revised timing of early Q2 2020. Our transition plan included a significant reduction in high-tariff inventory prior to the receipt of low-tariff replenishment, temporarily constraining supply in Q3 of 2019. The delayed start-up production shifts the inventory de-load of high tariff inventory to the end of the year. As a result, we expect to ship fewer bikes into Europe in Q4 than we originally planned. We expect the combination of company and dealer inventory in Europe to be down approximately 3,200 motorcycles due to the shift in timing of our approval. With regards to our operating margin, our 2019 operating income will not benefit from lower tariff rates in 2019 as originally anticipated. In addition, we have experienced a cost of idle manufacturing capacity in Thailand as we awaited approval as well as increased costs resulting from a dual-path approach in the event of a denial. Consequently with the delay of these approvals and softer than expected European retail sales as key drivers, we are lowering our 2019 full year shipment guidance by 5,000 units to 212,000 to 217,000 units. In addition, we are reducing our 2019 full year operating income margin guidance to 6% to 7% from the original guidance of 8% to 9%. Full year 2019 incremental tariff costs are expected to be approximately $100 million from our previous expectation of $100 million to $120 million. Tariff costs have been reduced behind lower expected European shipments as we de-load high tariff motorcycle inventory and lower demand in Europe. Other expectations for full year 2019 are largely unchanged. In the third quarter, we expect to ship approximately 43,000 motorcycles to 48,000 motorcycles. We also expect third quarter operating margin to be down approximately three percentage points versus last year, driven by lower planned shipments, continuing impact of tariffs and higher SG&A behind increased marketing investment. We continue to make the right decisions and investments to drive long-term sustainable growth and to provide long-term value to our shareholders. We continue to proactively manage through various and often significant global market headwinds, while continuing to invest in our future through our More Roads plan. As we look forward, we are excited to put the uncertainty of the European incremental tariffs behind us and look forward to restoring roughly a $100 million of annualized margin. We are prepared to face the challenges ahead and committed to driving long-term growth for the company and strong returns for our shareholders. Thank you. And now let's take your questions.

Thank you. [Operator Instructions] And our first question comes from the line of Tim Conder from Wells Fargo. Your line is open.

Thank you. And thank you for the color gentleman. Just John, basically on one of your last statements there, could you just refresh us now given the timing and what you described about the EU bikes ramping up in early Q2 of 2020 now, what your margin improvement expectations are now for 2020 versus 2019 or however you want to frame that? It'll obviously limit some of those improvements in 2020. Just a broad update there, if you could.

Thanks Tim. As we talked about right now when we look at the base of 2019 we expect to have embedded in that a $100 million of tariff costs this year. And that will be the entire year with tariffs from the EU and China. And as we move forward, the Europe – Chinese tariffs will fall off at the end of this year. And so through inventory flow-through, we will be selling lower-tariff bikes at the beginning of first quarter in China in 2020. However, again, because of the timing delay and inventory flow through, we will start realizing the tariff benefits in Europe, which is certainly the lion's share of $100 million. Probably $90 million of the $100 million will start being realized in the beginning of the second quarter. So overall the vast majority of the $100 million will be reduced in 2022.

Okay. Thank you.

Our next question comes from the line of Sharon Zackfia from William Blair. Your line is open.

Hi, good morning. Hey John, you went through some of those conversations about Europe pretty quickly in the prepared comments. So I guess just to clarify the impact from the regulatory approval lasting longer, could you kind of explain that again? What the impact is on the back half for you going to curtail shipments until the regulatory approval was obtained and that's why there's that 3,200-bike impact? And then I missed what the 1,800 bikes were relative to the 5,000 revision to the guidance.

Thanks Sharon. The whole tariff situation has been complicated from day one. And this certainly further complicates it. So let me take you back to when we initially issued guidance. At the end of last year, we submitted an application, which we felt was a very strong application with the authorities in Europe. And with that, we had planned to begin production in Thailand at the beginning of the second quarter of this year. And with that and kind of following through the flow is it would take two months on the water to get from Thailand to Europe. And then it hits our DC in Europe, and then it needs to flow through the dealer network. And there's typically about four months of inventory in Europe. And so with that flow-through time and us constraining some inventory, which I'll get back to in a second, we would expect about three months before we would start to realize those benefits. So the original plan had baked in benefits beginning – at the beginning of the fourth quarter of this year. Now what happened is the delays began and the timing kind of got thrown off from where we would have expected. And with that we had a plant ready to go. We had a workforce ready for the beginning of the second quarter. We kept them at bay waiting for the decision to come. And at the same time, we spooled up a study to do what the next best location was and worked out contingency plans. In any event a couple of weeks ago, a few weeks ago, we received notice from the authorities that they approved it, which we couldn't be more excited. With regards to the LMS system, it is a massive system that powers most of HDFS, anywhere from loan origination to collections, the repossessions and the accounting. And like any big system implementation, there are startup inefficiencies and we had them at the beginning and a lot of it was a learning curve of collectors. And with that, they fell behind on some of the collection calls. And we saw in the first quarter, delinquencies jumped and they were up 42 basis points in the first quarter. And as they get over the learning curve and things get all bedded down, we are seeing them fall off. And so they were up 24 basis points this quarter. So good improvement, we would expect them to still be a little bit elevated in the third quarter and then no impact from the system implementation in the fourth quarter. Conversely, credit losses, and this is maybe what you're referring to as rising, Joe, is credit losses are delayed from delinquencies. And so while we saw credit losses up a little bit in the first quarter as those delinquent loans, some of them roll through to credit losses, we've seen that jump in the second quarter and so delinquencies were up 26 basis points in the second quarter. We would expect in the third quarter that they remain elevated as they roll through loss. And then, again, in the fourth quarter no impact. Otherwise, we feel very good about the business at HDFS. Very strong revenue growth through the first half of 5.5%, the biggest driver of revenue is new motorcycles sales, which were down in the first half, and they've done it on gaining market share and financing used bikes. But we're very pleased with that and this onetime will roll through HDFS over the next quarter.

Our next question comes from the line of Craig Kennison from Baird. Your line is open.

Hey, good morning. Thanks for taking my question. Matt, this is a longer winded question on ridership and demographics, but your data is showing U.S. ridership is that a record level over 3 million Harley-Davidson riders. What's that data showing about the age profile of the rider base? Specifically, I'm wondering how ridership levels and new bike demand look over the next three to five years. If you extrapolate trends among, I guess, your exiting baby boomers and your incoming millennials. And the question is, is there a point when those trends all converge to form some kind of demographic bottom and ultimately provide you a lift from all the work you're doing on More Roads.

Thanks Craig. This is obviously something that we are paying a tremendous amount of attention to and actually have been even going back to the outreach work that we started around 2010. And if you remember back then our strategy was to really work to "fatten the tails" of that bell curve of age distribution and in fact that's what the profile today shows. So the work that we've been doing has been effective in the sense that we have kept existing riders riding longer. And as I mentioned, there are 24% more young adults riding Harleys today than they were in 2002. So if you would – if you can visualize that bell curve, the left and right tails of the bell curve have in fact lifted through our efforts and what we are paying attention to and working on in direct correlation. Your question is what's going on in the middle age demographic and where this gets particularly challenging is the whole shift in late-stage events that's driving consumer behavior. People getting married later, having children later and we've historically seen a sweet spot, if you will, of reentry into motorcycling after people get through their family years sort of in the mid 40s age range and we are seeing that shifting a little bit out as people emerge from their family years a little bit later. So it's a little bit hard to model that to be honest, but we are very encouraged and we continue to focus on bringing new people into the sport, making sure that motorcycling is a vital consideration for young adults of today and obviously doing a lot with existing product and marketing and so forth and reasons to ride for existing passionate, loyal customers who have more time and more money than any generation in the history of the planet. So not a direct answer to your question, but just to give you a little bit of color into – we absolutely get where you're going with that is when – how do we model forward these trends and ensure that we don't have some disruption in our business, but we continue to have buyers for the new and used motorcycles that exist in this marketplace and continue to grow the number of riders, so that we assure that's a healthy, balanced system. We will be – we are working on an Investor Day and we will be getting into this in a lot of detail as we roll forward and start planning for deeper information for all of you on that dimension. So thanks.

Thank you.

Our next question comes from the line of Felicia Hendrix from Barclays. Your line is open.

Hi, thanks. Matt, can we just talk about LiveWire for a moment? I was wondering if there's any plans down the road for a lower ASP bike. And also, can you just help us understand how many dealers are opting to invest in the LiveWire infrastructure and perhaps maybe how much it would cost the dealer and has that been trending up?

Okay. Thanks Felicia. Yes, we couldn't be more thrilled with the response. I mean, again, I mentioned in my opening remarks, I've seen a lot of motorcycle launches from all kinds of brands over my time in this industry. And quite honestly, I've never seen a response. And these are from very demanding journalists who weren't necessarily fans of the brand, who got on this product with some sort of dubious suspicion about its capabilities and were completely transformed. So we made a deliberate decision to launch a halo product to demonstrate what's possible in electric, a no-excuses electric Harley-Davidson. And we feel very good that we've done that. We've planted a stake in the ground for the industry to say this is what's possible with this technology. This is what's possible from Harley-Davidson. And that builds and creates space for us to enter in that mid-powered segment that I mentioned in my remarks. And that's very much a part of our strategy to lead in the electrification. So more accessible products from a physical power performance perspective as well as a price perspective to continue to leverage EV as a pathway into the sport. One of the things that is commonly mentioned across the journalists is how effortless it is to ride, how there's no – there's nothing interfering with the pleasure of riding, the complexity of riding disappears, it's twist-and-go simplicity. And we see that as not just being attractive to people that have never ridden before, but as the motor journalist to test in and of itself it is a different and fantastic riding experience for experienced riders as well. So again, we couldn't be more happy. We have, as I mentioned, excellent uptake on our dealer network. We have about 150 dealers in the United States. The investment level varies, but it includes training, as I mentioned, equipment and tools and obviously the DC fast charge, which is the biggest part of the investment. Some of that sometimes requires power feeds and sometimes that's a direct install to their existing infrastructure. So, the dealers have made those investments eagerly. We expect over time, as the portfolio builds, we'll have more dealers investing in carrying our full electric portfolio. And we expect this business to grow and be very profitable for the dealers as well as for the company. Yes, I mentioned, the mid power will be lower priced and also physically – I mean LiveWire is a high-performance motorcycle. There is no doubt about it. So getting price and performance and ease of access is a goal as part of the midweight – mid-power strategy with electric. So thanks.

Okay. Thank you.

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

Yes, thanks. John, maybe first one just a housekeeping clarification. With the old operating margin guidance of 8% to 9%, you used to say ex restructuring and tariffs that was flat year-over-year, which I think the year before was 11.1%. So with the new 6% to 7%, can you just update us on the ex all other costs target and then just on HDFS, thinking out to the future as you begin to target a younger demographic and use HDFS to drive sales a little bit more, should we expect that that loss rate and delinquency will be higher in the future than it has been historically?

Thanks Joe. From an operating margin standpoint, so let's first talk about coming down from 8% to 9% to 6% to 7%. So that's about a two percentage point decline. As we talked about the tariff timing, that accounts for about 60% of that reduction or 1.2 percentage points. And the reason being is one is the volume piece. But again, when we put the original volume I'm sorry, the operating margin guidance together, we expected a quarter of tariff savings and mitigation this year. And we're running at about $9 million a month in terms of tariff costs, so you look at that and it's about $30 million. Those increased costs that we talked about and inefficiencies at the plant and having a workforce ready to go as well as the spooling up another contingency plan, that's in the $7 million to $10 million cost range. And then you've got the absorption from the 3,200 units of fixed and SG&A absorption. So overall, that's about 1.2 percentage points. Again we would expect that to come back in the next year and the timing obviously is the issue there. The other piece is with the lower volumes coming out of Europe largely due to the Street – I'm sorry, the Street motorcycle. That represents about 40% of the overall 2 percentage points. So getting back to your specific question with regards to excluding restructuring and tariffs, on a year-over-year basis, we would expect this year's operating margin to be down in the range of one percentage point. And that’s largely the piece of one times that’s not going to come back, but about one percentage point Joe. The second piece is as we look at HDFS and the younger demographic is we do not expect our underwriting standards to change from where they are today. And now having said that our underwriting standards are very accommodating to young adults and HDFS does a fantastic job of underwriting those folks. And folks within files or no credit, as well as, as ones that have, more of a credit history. So we are financing a lot of young adults today. And again we're doing that across the credit spectrum, including prime loans as well as subprime. So we don't expect a change in overall margins at HDFS due to the demographic shift.

Shall we have the next question?

Our next question comes from the line of Garrett Johnson from BMO Capital Markets. Your line is open.

Hey, good morning. I think I have three questions here. First, can you talk about preorders for LiveWire and how they're tracking and tracking towards expectations? And then the international plans for LiveWire. And then also, can you talk about the economics of the deal with Qianjiang in China and the expectation for you to sell there. And I have one more after that. Thank you.

Alright, Garrett, this is John, with regards to the preorders, preorders are coming in as expected. And as we get closer to the overall launch and especially with some of the press coming out, we had 10 days with the media in Portland. And the press has been absolutely fantastic. We're seeing a ramp up in those. But everything is looking fine from a preorder standpoint. As you know we don't provide that number. But we feel very good about where we're at and couldn't be more excited about that overall launch. The launch is going to be initially focused in the U.S. and a quick, fast following, on international dealers. So just a little bit of a delay and that's partly the delay of getting motorcycles over there. But this will be a full launch over the next six months, both domestic and international dealerships. And then finally with regards to QJ, our partner in China, first let me say we couldn't be more excited to be partnered with such a high quality, large motorcycle manufacturer in China. This is a relationship more of a contractual relationship. There is no equity. I'm swapped out. And QJ will produce motorcycles and manufacturer from us in China. We will design and work with them on what that motorcycle is. It will be Harley Davidson branded. And we will be in market by the end of next year and couldn’t be more excited. This will be the first entry in a small displacement for Harley Davidson. And when we look at that segment that it'll participate in, it's going to be a 338 cc motorcycle. And it will participate in the 150 to 400 segment in China, which has over two million sales a year. So again very excited to bring Harley Davidson in a big way to our Chinese market. And we also look to take this motorcycle to other Asian markets.

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

Hi, good morning. Wanted to maybe talk a little bit about the outlook for Europe, now that the Street recall issues are behind us do we expect that to moderate, do you expect that to get better? I didn't hear a whole lot of conversation about the macro conditions in Europe, which aren't great. And then I mean, I guess one of the issues that we previously put to bed with just maybe brand issues surrounding the trade war and whether or not that was having an impact on you guys. And then I guess lastly with respect to Europe have you done consumer studies to get comfortable with the notion that European customers aren't going to have an issue with their bikes being made in Asia rather than the U.S.? Thanks.

Thanks James. This is Matt. I'll take that. First of all, the European market has historically been very product driven. And we see some of the – we enjoyed that last year, as John mentioned, with our initial sell-in of Softails and a little bit of a reversion more than we expected this year, but also a lot of competitive action with some of the strong European players in the adventure touring space, that is really the dominant segment in Europe. And on that note with the middleweight products that we're launching next year, they will play a huge role in us participating more fully in the European marketplace. So when you step back and look at Europe for us long term, we're weathering softness this year but we expect Europe to be an engine of growth for the company. With our EV investments and with our middleweight investments, particularly in the sense that we're going into those really large and fast growing segments in a big way with a product that is absolutely class-leading for those riders. So all that is we feel very good about, we're weathering the initial sort of conditions today. Some of that's impacted by economics. We do know to your point about the receptivity of motorcycles, from first of all we're shipping into Europe and have been since inception from our plant in India, our Street motorcycles in new Europe. And we've had no customer reaction whatsoever to that component of our supply. If you were to walk into any of our plants worldwide, Thailand included, and if I blindfolded you and walked you into those plants, you would absolutely see them as Harley Davidson plant, same process, same standards, same expectations and that's what we’re going to deliver to our customers. And I think under the circumstances of the tariffs, they understand already we know that this is the smart thing for the company to do to keep supplying them with affordable Harley Davidson motorcycles. So, no big risk there and we're full speed ahead on our strategy to really make a difference for our business and for our customers in Europe.

That's great. And then just a quick clarification, just two seconds. You mentioned earlier that you expect the U.S. to get better in the second half. Is that a moderating decline versus the 6.5%? First half decline, are you actually expecting the U.S. to be up year-over-year in the second half?

This is John. It would be a moderating decline in the back half of the year. Again, we are on plan for the U.S. sales through the first half and we expect those two drivers which is lapping easy comps and stronger dealer initiatives that we're doing to help further mitigate it by end of the year. But we would expect that back half to be down James.

Got it. That's what I thought. Thank you.

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

Hi, good morning. I'm curious about the market share slide. I see that you guys are allocating this sort of shift to smaller displacement bikes as something that's been more pervasive. But I'm curious how you mitigate share losses ahead? Like, what are your best opportunity is to either recapture that share losses now that – those share losses now that you are sort of sticking with the Touring and Cruiser segments? And I think the initial intention was to maybe only do smaller displacement bikes outside of the U.S., thanks.

Thanks, Jamie. Thanks for the question. Again when we look at market share was down 1.8 percentage points in the second quarter. And I really appreciate the question because the bigger thing of what it was down versus why it was down. And when we bisect that it plays right into our More Roads strategy, which I'll get to in a second. So if we look at the segments in which we compete, the Touring and Cruiser segments, our market share was very strong. We were up two percentage points. That represents 70% of the 601 plus CC market. We've seen it up in the quarter, we saw it up last quarter, we saw it up last year, we saw it up the year before. We're doing very well on head to head competition for customers that are looking for touring and cruising motorcycles. The other part of the market, United States is 30% and that segment of the market was up 10%, 9.8%, whereas the segments that we participate in were down 11%. And we will be participating – so our plan is to participate in those markets. And in a year's time we will be out with the middleweight and participating in those segments that include dual and Streetfighters. And we couldn't be more excited about moving into a growing segment of the market with the Harley Davidson brand and those products. And while those segments are 30% in the United States on an international basis it is dramatically different. So it's almost a mirror opposite. The segments that we're not currently participating in are much larger on a worldwide basis. To kind of wrap all of that up Jamie is today we are participating in 41% of the addressable heavyweight motorcycle market in the world. And of that 41% we participate in we have a tremendous market share of around 70%. We will be moving with our new middleweight into the other segments that we don't participate in. And in a year's time we will be participating in 89% of the world addressable market. So that's how we are going to address market share as we move forward.

And I'll just add, thanks John. That there is interest in smaller-displacement, non-600 and above that we see in our plan in developed markets is to address that through our EV strategy with light and mid-powered electric vehicles to invest in the next century’s technology for developed markets to primarily as a gateway into the sport and into our brand.

Our next question comes from the line of Greg Badishkanian from Citi. Your line is open.

Great, thank you. Could you maybe just talk about any weather impact on retail in the quarter? And then also just promotions, how were they year-over-year versus second quarter of last year, was it elevated, or overall marketing spending as well, was that elevated versus second quarter or in line with last year?

Thanks Greg. With regards to weather when you look at the quarter and you break weather up into temperature and precipitation, there was clearly worse on a year-over-year basis in the second quarter in particular on the wet side. But weather happens it may have had some impact on the industry sales, we don't think that it was any huge impact and nothing that – not a lot, but weather was not as good on year-over-year basis. With regards to the promotions, two things, number one is from an industry standpoint, as we look at the second quarter, we are at the highest levels of promotion that we've seen, seen as long as I've been here for 15 years. But we haven't – we did not see it get worse in the second quarter. It is extremely elevated but similar to what it was in the first quarter and on a year-over-year basis, similar to what we saw on a year-over-year basis. Now that's the overall industry. Our sales incentives were down quite a bit in the second quarter. And that kind of plays into the rate that we were down, the sales rate in the United States that we were down versus the first quarter as one is the comps played a big role in that. And secondly, is how we spent our sales incentive money. If you remember we started out the year, very slowly. The industry did, we did and through February sales were down double digit and we pulled forward some of our sales incentive money. What we wanted to do is to get people in the dealerships at the onset of the selling season. And we did various sales incentives in particular a financing, promo in the month of March was very successful and we had value or retail sales up in the month of March. And with that we plan fully backed off of those sales incentives in the second quarter and shifted our focus to brand equity marketing, which was up 34% in the second quarter. However, when we look at our spending on sales incentives, it was down 80% to 90% on a year-over-year basis. So in aggregate, again, we ended up the first quarter on plan. We are a little bit ahead of our internal plans in the first quarter, a little bit behind in the second quarter, but right on plan as we exit and looking forward to the back half of the year.

All right. Thanks, everyone. The audio and slides for today’s call will be available at harley-davidson.com, or for the audio, call 855-859-2056 or 404-537-3406 until August 6th. The ID is 8975068. We appreciate your investment in Harley-Davidson. Have a great day.

This concludes today's conference call. You may now disconnect.