Thank you for standing by, and welcome to the Harley-Davidson 2022 First Quarter Investor and Analyst Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Shawn Collins. Thank you. Please go ahead.

Thank you. Good morning, everyone. This is Shawn Collins, the Director of Investor Relations at Harley-Davidson. Welcome to our Q1 2022 earnings call. You can access the slides supporting today's call on the Internet at investor.harley-davidson.com. Our comments will include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC. Harley-Davidson disclaims any obligation to update information in this call. Joining me this morning are CEO, Jochen Zeitz; and CFO, Gina Goetter. In addition, Chief Commercial Officer, Edel O’Sullivan, will join for the Q&A. Jochen, let's get started.

Thank you, Shawn, and good morning, everyone. Thank you for joining us today. Before we get into the quarter's results, I want to take a moment to recognize the devastating war that continues to unfold in Ukraine. On March 1, following the invasion of Ukraine, Harley-Davidson announced that we were suspending our business in Russia. This remains unchanged. At Harley-Davidson, our response to the humanitarian crisis has been driven by the core element of our mission as a brand, Freedom. Whether through the philanthropic donations we've made to organizations like United Way or through the efforts of our employees and the wider whole community donating time, money and resources to provide aid to those in need. It is that spirit of freedom underpinned by community that has driven our efforts. A key initiative pioneered by the company has been a fundraising t-shirt designed by our employees. We've partnered with two charities delivering aid to those in need, United Way and Open Mind. And we're committed to support these organizations and their incredible work as long as needed. With that, I'll move on to our results from the quarter. We started the fiscal year with good momentum across the business, underpinned by strong global consumer demand for our products. First quarter consolidated revenue was up 5% to $1.495 billion, driven primarily by HDMC revenue growth. And while we are pleased with our start to 2022 and anticipate the momentum to improve during the year, it's important to acknowledge the significant supply challenges that we had to work through in Q1 and that we expect to continue to impact the industry. We are cautiously optimistic on improvements to the supply chain environment in the second half of the year. However, this remains difficult to predict with certainty. That said, the brand is…

Thank you, Jochen. First quarter results reflect year-over-year revenue growth but operating profit decline as we continue to operate in a volatile and inflationary supply chain environment, and we begin lapping last year's record performance within HDFS as a result of the lower loss rates and reserve allowance release. We continue to deal with the constraints resulting from the global semiconductor shortage, higher raw material prices and broad supplier volatility, with cost inflation at levels consistent with what we experienced in the back half of 2021. Looking more closely at our financial results in the quarter, total consolidated revenue of $1.5 billion was 5% ahead of last year. This increase was largely driven by revenue growth of 6% within HDMC. Despite wholesale motorcycle units being flat year-over-year, revenue growth was attributed to strong global pricing and 11% growth across our parts and accessories business and 2% growth on the apparel business. Within the Financial Services segment, revenue was up 1% due to higher retail lending. Total operating income of $289 million was down 16% compared to last year, in line with our expectations. For HDMC, operating income was $203 million, down 11% versus last year. The profit decline is attributed to cost inflation and production limitations preventing us from achieving an optimal unit mix. At HDFS, operating income was $86 million, down 27% versus prior year, as the loss performance continues to normalize in line with expectations. First quarter GAAP earnings per share of $1.45 compares to $1.68 last year, with the decline driven by the factors already noted. Global retail sales of new motorcycles were up 2% in the quarter, with significant growth in our international markets offsetting a decline in North America. North America Q1 retail sales were down 5% versus last year as production challenges resulted in…

Thank you. [Operator Instructions]. We also ask to limit yourself to one question and return to the queue for additional questions. Thank you. Your first question comes from the line of Robbie Ohmes from Bank of America. Your line is open.

Good morning, and thanks for taking my question. It's actually two. The first one is just, Gina, could you give us some color on how this shipment has trended through the first quarter? Was there a shortfall in March on the U.S. side? And maybe some thought on -- you've given a little color on supply chain, but I think Polaris kind of said that they might be seeing some green shoots in supply chain. Is there any more color you can give on that? And then in terms of the guidance for the year, could you give some more color on timing of gross margin offsets, things that could make the gross margin look better in the back half related to term changes and potential for more surcharges? Thank you.

Good morning, Robbie. Thanks for the questions, plural. Let's start with shipments and how they moved throughout the quarter. I would say March was definitely worse than earlier in the quarter. And this really had everything to do with our chips supply and how that impacted our production as we move through kind of the balance of first quarter. So we didn't see kind of that rate of production slow as we moved through. In terms of supply chain and what we're seeing here, in the first quarter very similar to what we saw in the back half of last year. Q4 looked very similar to what we're seeing here in Q1. And as we move through the balance of the year, what we're seeing is that from a supplier and chip availability, we do see some improvements in chips in the back half of the year. But we do expect that supplier volatility will remain. So that's something of what we saw in Q1 and is going to continue as we move through the balance of the year. Where we see some green shoots for improvement are within logistics and within our manufacturing environment. So within manufacturing, as that chip supply becomes more competent, we're able to better produce and more efficiently produce. And so you can see that we had that slide in the deck that shows that our manufacturing kind of inflation rate in the front half of the year is a bit worse than the back half of the year. And it has everything to do with how we're able to efficiently run our operation due to that acute issue with chips. Logistics is the other one that we are forecasting gets better in the back half of the year. And it's not as though costs are going to come down, but we're saying that costs are not going to inflate as much as we saw here in Q1. Remember, last year, we didn't have much inflation in Q1. All of that inflation really started picking up for logistics in Q2 and kind of kept accelerating as we moved through Q3, Q4. So this quarter, again, reflects the last quarter and the four quarters go up of higher inflation. And so in terms of how we're thinking about guidance, because of our better visibility on chip supply and the competence that gives us what we're able to produce and how we see the supply chain phasing, that's what gives us the competence to say we -- from a margin perspective, we see a step up as we move into the back half of the year. And remember too we have pricing. Pricing that carries -- global pricing that carries us through the whole year plus other actions that we're taking across cost that help to keep our eye on an overall margin.

Thank you. Our next question comes from the line of Joe Altobello from Raymond James. Your line is now open.

Thanks. Good morning. A couple of quick questions. I guess, first, the dichotomy between retail trends in the U.S. and internationally in Q1, was that all due to the difference in base period compares? You mentioned in terms of EMEA better availability, et cetera. But it just seemed like it was a big difference this quarter. So I'm curious what you saw from a demand standpoint internationally that maybe you didn't see in the U.S.?

Joe, demand is equally strong throughout the region. You need to consider that especially in the first quarter of last year in the EMEA region, we had a drop that we were compensating with the first quarter of this year, but there is no demand difference. Demand is equally strong in all regions. Also what you need to bear in mind is maybe as an additional comment is we serve as market from our [indiscernible] factoring plant and Thailand serves the EMEA region as well. So there's also differences in timing in terms of when we were manufacturing in particularly March.

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

Hi. Good morning. Thanks for taking my question. It's on the economy. Obviously, there's a lot of focus on your supply chain challenges, and rightly so. But we do get a lot more questions on the economy and demand trends as the Fed looks to fight inflation and the potential for a recession as they try to get ahead of it. I guess in your mind, what can you do to prepare for a recession? And how likely is that as you see your current demand trends today?

Thanks, Craig. Demand trends and signals are strong, as Gina mentioned. We have now 92% of our dealer network that are leveraging our reservation system. Reservations are up 48% versus last year. So quantitatively and qualitatively, the feedback data we are getting from our dealers confirm that demand for our product is very strong. I also mentioned the inventory levels versus end weeks [ph] inventory levels down 24%. And that is a result of the strong demand that continues. Market share in our most profitable categories is actually growing, more riders than ever through our Riding Academy. And if you look at our spread between used and new bike prices, it's as small as it's ever been. And as also Gina mentioned, transaction prices are at or above MSRP. So everything we see continues to suggest that you can't anticipate a recession, right? But what would help if market at some point goes into recession is that we have extremely low inventory levels and that will allow us into the pipeline if they [indiscernible] affecting our wholesales negatively. I think also from an HDFS, they're really starting from a very healthy position. If you look at the cost of funds, they're half the rate of where they were back in 2009. Rates are more competitive and we [indiscernible] overall, I think coming from -- we are obviously preparing ourselves, but we see no indication of this for our products. Demand is strong and that's what we're planning for.

Thank you. Our next question comes from the line of Brett Andress from KeyBanc. Your line is now open. Brett Andress from KeyBanc, please check your mute button. Your line is now open. Our next question comes from the line of David MacGregor from Longbow Research. Your line is now open.

Good morning. This is Joe Nolan on for David MacGregor. I was just wondering if you could talk about within the 5% to 10% motorcycle revenue growth guidance for the year, could you just talk about how you're thinking about volume versus price within that guidance.

Sure. Good morning, Joe. This is Gina. So in that 5% to 10%, how we've talked about it at the low end of the range of that 5%, it's basically all price. At the high end of the range at 10%, that is both a combination of volume and price.

Thank you. Our next question comes from the line of Jamie Katz from Morningstar. Your line is now open.

Hi. Good morning. Thank you for taking my questions. First, I'm curious if you would be willing to discuss what your composition of dealer inventory looks like right now and maybe where your optimal time on the show floor would be? It's obviously somewhere between two weeks and 10 weeks, but I'm guessing we maybe aren't at that level yet. And then as you think about mix of units for the rest of the year, if you have any insight as to how you expect that to play out that would be really helpful from a gross margin perspective? Thank you. Edel O’Sullivan: Good morning, Jamie. Thank you for your questions. Let me tackle the first part of it first around where we think the optimal inventory level. As you referenced, I think we have certainly seen that we are a little bit lighter than we would like to be today in the dealer network. That is certainly something we hear, as Jochen mentioned, both qualitatively from our dealers and we can also see it in just the speed of how those units are turning. Now we think that there are a lot of things that we are doing in the short term to help support that leaner inventory position, both domestically and internationally, with our reservations and preorder systems that's paramount among those measures. They will certainly like to see the inventory growing to be a little bit more robust over time. That said, to your reference to sort of the high end of that range of 10 weeks, we certainly do not envision the need to go back to that level of inventory. I think both ourselves and our dealers have learned how to operate much more efficiently and to find different ways to meet our customer demand…

Thank you. Our next question comes from the line of Brett Andress from KeyBanc. Your line is now open.

Hi. Good morning. Sorry about that earlier. Gina, you helped us with the phasing of the motor co. Is there any way you can help us with HDFS phasing for the rest of the year? And maybe how some of these CECL provisions might play into that?

Yes, good question. I would say it's going to be relatively constant with what you saw play through here in Q1. There's not any big spike up or down. When you think about the reserve release and what happened last year, it was a pretty kind of steady decline as we moved quarter-by-quarter. When you look at where our reserve rate is in Q1, relatively unchanged from what we saw in Q4. So we're not at this point expecting any big swings up or down in that reserve rate as we move through the balance of the year. And that was what was really creating, I would say, the lumpiness in last year's results.

Thank you. Our next question comes from the line of Gerrick Johnson from BMO Capital Markets. Your line is now open.

Great, thank you. Good morning. I was hoping we could talk a little bit more about pricing, particularly surcharges. I think in international, maybe you did not have some surcharges last year, and if you're implementing those international markets this year? And then also the contribution from the reduction in dealer margin and how you came to that decision to go forward with a lower margin for dealers? Thank you. Edel O’Sullivan: Good morning. Thank you for your questions. So as your reference, we have taken several pricing actions starting last year and into the first part of this year on an ongoing basis across all regions and all family lines, so both motorcycles as well as parts and accessories and apparel and licensing. Those actions have largely offset the cost inflation that we are seeing this year. However, we continue to monitor that very closely to ensure that we are preserving our margin as much as possible through pricing actions. We also, of course, are monitoring price realization and understanding of where some of those metrics may be landing both domestically and internationally. As you say, we have used a mixture of MSRP as well as surcharges. We believe that this provides us flexibility. You will see that play out differently in different markets. But certainly the combination of those two factors is something that we think provides, again, that flexibility to monitor the situation as we go throughout the year. To your second question around the dealer margin, I wouldn't like to comment on the specifics of sort of the economic terms between ourselves and our key partners that are dealers in North America. I will say that for us a strong and healthy dealer network is an incredibly important part of the Hardwire strategy and what we intend to do over the next few years. Dealer profitability is at near record levels, which to us is great to see and we intend to continue to partner with their dealers to continue to evolve the model of how we work together to best serve our customers over the course of Hardwire and beyond.

Thank you. Our next question comes from the line of Ryan Sundby from William Blair. Your line is now open.

Hi. Good morning. Thanks for the question. Gina, thanks for the color there on what the production schedule look like as we moved through the quarter. Could you flip that around maybe and talk about what the demand trends have looked like during the quarter, because particularly as we've seen gas prices move higher here in the last couple of months?

Sorry, Ryan. What was the last part of your question? You kind of faded out here.

Yes, sorry.

On demand trends.

Just with gas prices moving up here for the consumer, has that started to impact demand at all?

In short, no. We have not seen any of that kind of current acute issues on inflation that are hitting consumers, impacting our demand. No, we're not seeing that. So yes, the biggest thing that impacted our shipments in Q1 was our ability to produce to the demand. So it wasn't a slowdown in any sense of the imagination, and Edel can provide some more color commentary from a dealer lens. But it was all -- everything that you see in Q1 was our ability to produce. Edel O’Sullivan: Gina, maybe let me add to that and reiterate some of the points you also made earlier. Every dimension that we look at in terms of the data, preorders, price realization, the growth in demand and some of those key categories, Touring, Trike, Large Cruiser as well as the relative speed of the inventory, turning out sort of unprecedented rates at more or less two weeks, and that includes those shipments, all of those we find to be positive. Some of the other metrics that we look at to monitor demand, the used price gap versus new as well as even how many students are coming through Riding Academy are also very positive. And then to the third factor that Gina referenced, the qualitative feedback that we get from our dealers, I think the consistent message both in the U.S. and Canada and in other international markets is really around, if we had more bikes, you could sell them. So I think that all of those factors contribute to giving us confidence in what we are seeing in terms of demand.

Thank you. Our next question comes from the line of Fred Wightman from Wolfe Research. Your line is now open.

Hi, guys. Good morning. Thanks for the question. I just wanted to follow up on the comment about just that gap between new and used pricing. It's not something that you guys have been working on for a really long time. But as we think about whether it's later this year or into next year, how do you see that gap trending? Should we expect it to expand a little bit? Could there be a little bit more seasonality?

I would not expect -- Fred, this is Gina. I would not expect that gap to widen too dramatically as we move through, I would say the next kind of balance of this year and next fiscal, just given what is happening on the supply side. We've had in '20, in '21 and in 2022 just from what we've been able to produce in new is going to create good economics in the used market.

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Shawn Collins for closing remarks.

Great. Well, thanks everyone for joining today's call and we hope you have a great day and obviously check in with us with any questions. Thanks.

This concludes today's conference call. Thank you for participating. You may now disconnect.