Thank you for standing by, and welcome to the Harley-Davidson 2025 Second 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. This is Shawn Collins, the Director of Investor Relations at Harley-Davidson. You can access the slides supporting today's call on the Internet at the Harley-Davidson Investor Relations website. As you might expect, 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 today's earnings release and in our latest filings with the SEC. Joining me for this morning's call are Harley-Davidson chief Executive Officer, Jochen Zeitz; also Chief Financial Officer, Jonathan Root; and we have LiveWire's Chief Executive Officer, Karim Donnez. With that, let me turn it over to our CEO, Jochen Zeitz. Jochen?

Thank you, Shawn. Good morning, everyone, and thank you for joining today's call. This morning we're going to start with details on our HDFS transaction that were announced earlier today, before moving on to the Q2 results. We're very pleased to share that we've entered into strategic partnerships with both KKR and PIMCO for HDFS after completing a rigorous selection process with over a dozen parties bidding for the HDFS business over 3 rounds. We've consistently spoken about the strategic and financial value of the HDFS business, and we are very excited to announce this transaction that clearly reinforces our view. On our first quarter call, we laid out 4 key objectives that any transaction involving HDFS would need to achieve. And I'm pleased to say that we are checking the box on all of them, providing the business with a lot of flexibility in the future. First, we said it would have to reflect the significant value HDFS represents to Harley-Davidson and its shareholders. The investment in HDFS equity at approximately 1.75x post-transaction book valuation for these 2 world-class investors clearly achieves that goal, illustrating HDFS's class-leading returns and corresponding significantly higher valuation to book value. Second, the transaction would have to create value over the long term with a strategic partner. We expect this transaction will accomplish that across a range of fronts. Our new strategic partners will purchase about 2/3 of HDFS future retail loan originations at a premium on an annual basis for 5 years. Going forward, HDFS will retain 1/3 of new consumer loans. And when combined with new fee streams, we expect it will significantly increase HDFS' go-forward ROE to the high 20s. And with a minority equity ownership of HDFS, KKR and PIMCO are in it for the long term. Third, a transaction…

Thank you, Jochen, and good morning to all. While Jochen touched on many of the benefits of our new strategic partnerships with KKR and PIMCO, I wanted to provide a transaction overview before I go into the Q2 results at Harley-Davidson. Harley-Davidson has agreed to sell a common equity interest in HDFS at approximately 1.75x book value, with each partner acquiring a 4.9% stake. As part of this transaction, HDFS has agreed to sell over $5 billion of existing gross consumer retail loan receivables and residual interest in securitized consumer loan receivables at a premium to par value. As a result, we will have a benefit from the release of loan loss reserve and sale of consumer loan receivables at a premium to par value. We expect this to contribute $275 million to $300 million incremental to HDFS operating income in fiscal year 2025. This will allow us to execute on our expectations to reduce approximately $4 billion of HDFS debt associated with consumer retail loan receivables. In addition, going forward, on an annual basis, we expect the strategic partners to purchase around 2/3 of HDFS future retail loan originations annually for 5 years, also at a premium to par value. The partners will pay a fixed servicing fee of 1% and 2.5% for prime and subprime receivables purchased from HDFS, respectively. Of note, in this transaction, we are not selling any wholesale receivables. There is no direct impact on commercial lending, card products, insurance and protection products or international beyond the equity stake mentioned. And Harley-Davidson retains a controlling interest in HDFS with over 90% ownership. The transaction is expected to close in the second half of this year. In summary, we are excited to unlock significant value of HDFS for our shareholders through the sale of a minority…

[Operator Instructions] Our first question comes from Craig Kennison from Baird.

One on the HDFS transaction. What are the components you are using to calculate that 1.75x book value marker? I'm just not seeing it clearly in the numbers.

Sure. Craig, it's Jonathan. Great question. So as we look at where the 1.75x lands, it's actually the derivative of the proceeds that come in from KKR and PIMCO for their equity investment in the business. And as you would flow through and you would take a look at kind of where the book value of the business would come in and then how the equity is associated with that book value, it kind of lines up to a 1.75 multiple. So we'll have more disclosure in our Ks and Qs that are coming that will kind of help outline all of this, but it's effectively the relationship between the premium that they pay versus the post-transaction book value of HDFS.

Our next question comes from Joe Altobello from Raymond James.

So a couple of questions on HDFS. I guess, first, the underlying profitability of that business looks like it got better than you guys originally anticipated. What's driving that? And then post-transaction, I know you mentioned that you expect that business to grow and get back to its normal profitability over time. But what is the normalized profitability for that business under this new arrangement in 2026, for example?

Okay. Joe, so just answering a couple of your questions. So from an HDFS profit standpoint, as we think about your first question around 2025. 2025, we have seen from an overall HDFS standpoint, we disclosed what you're seeing going on relative to delinquency. We covered some of the drivers and the characteristics from a loss standpoint. So we're pretty pleased in terms of the stabilization and slight improvement in used values. So we use the source that we find is the most consistent and most reliable in terms of used values is black book data. So as we kind of go through and parse the black book data and take a look at that, a comfort that we're seeing a slight improvement in used values. That's helping us as we think about what the overall HDFS business looks like. We're really pleased with what we're seeing from our dealers in terms of dealers showing up at our auctions. So when we do have to repossess a unit, the dealer participation at auction for us is very helpful. That helps us from both a value perspective and then also as we think about kind of giving us another swing to have another contact point with those customers. When the used motorcycles get retailed through our Harley-Davidson dealers that helps us too. So we've seen some really nice stabilization in terms of Harley-Davidson dealer control of use. We've seen some nice stabilization and slight up in used values. And then we've also been very pleased about repossession rates. The HDFS team is doing a wonderful job of really driving the repossession rate in a direction that's favorable. So as we put all of those underlying factors together in terms of kind of loss characteristics, we're very pleased with the way that the business is performing on that front. And that's been a trend that's improved as we've moved through the months in the year. So pretty pleased with base level there. Sorry, go ahead, Jochen.

Yes. No, just to add to what Jonathan said, it's not just the stabilization of used values or slight improvement, it's also that the used motorcycle business actually grew in Q2 compared to the new business. And obviously, HDFS finances both used and new. So that's an additional factor.

Okay. Thanks Jochen. And then one last point, Joe, on your question around kind of normalized earnings. If you take a look at what we've provided on Page 24 of our earnings deck, so we have a little longer earnings deck this quarter to try to cover details of the transaction. But if you would walk through that, it starts to tell you kind of the time that things take from a normalization standpoint. And we think of normalized HDFS earnings, to answer your question directly, of about $240 million, $250 million a year in operating income.

Our next question comes from Tristan Thomas Martin from BMO Capital Markets.

I know you mentioned that consumer traffic picked up in July, but has that translated to improved retail performance?

Yes, Tristan, I can't give you the final number for July yet, but we've seen a sequential significant improvement if you look at the North American figures. In fact, if you look back all the way from February, retail trends for new motorcycle unit sales improved every month. And we expect that to continue in July as well, significant improvement expected. And then going forward for the rest of the year, we believe we can actually come positive given the measures that we've taken in the market and easier comps compared to last year and some of the measures we've taken Jonathan has already highlighted. So July, another improvement in the U.S., and we expect that to continue until the end of the year.

Our next question comes from Alex Perry from Bank of America.

Just a 2-parted question. Can you just talk through about how you feel about current dealer inventories and sort of what the target is for year-end? And then the timing of the model launch shift, can you just talk about how you're going to sort of sequence that in? Are you planning to launch bikes this fall? Just wanted to get more color on how you're thinking about new model launch timing.

Yes, I'll take the first question in terms of dealer inventory. You've seen the commitment that we've made earlier in the year to significantly reduce the dealer inventory, and that has happened across the world including the U.S. with the market decline that we had mentioned earlier today. As Jonathan mentioned earlier, we expect that to continue and expect a significant reduction. To what extent, it's difficult to say right now. It, of course, also depends on retail sales. But definitely double-digit decline should be target considering that last year, last quarter of last year, we already saw a decline of about 4% in our inventory -- dealer inventory, and that then accelerated in terms of decline in the first and second quarter. And so overall, we think that we are ending the year with very healthy levels of dealer inventory.

And Alex, I'll take the piece on model year shift. So from a model year shift perspective, we're still working through some of the details with our dealer network in terms of exactly what it means and the timing. And truthfully, as we look at some of these things, there are differences between model year launch in the United States or North America and the rest of the globe, just as we think about where we have a preponderance of manufacturing. And so as we look at that carryover, kind of -- so think sort of a refresh of our touring bikes, our softails, that all takes place beginning this fall. And then we have the ability to kind of continue to drop some exciting intros throughout the year as you have seen us do over the last couple of years. I think a great example of that is as we look at this year, our Gray Ghost softail, for example, that product has sold very, very well. That is something that has generated a lot of buzz, a lot of enthusiasm and a lot of excitement across the dealer body. So you'll continue to see some special iterations and special vehicles drop throughout the year. So we will always be driving excitement and freshness into the dealer body. But we are excited to be able to pull the model year shift forward and back into the fall. For us, that does a couple of things. It really helps us as we think about throughput and how we get everything through our network into our dealers and prepared for the coming season. It also helps us to extend the season a little bit by keeping some excitement showing up in our dealerships toward the end of the calendar year. And so full details, we're working through with our dealer partners, but you will see that excitement come back into the fall. Thanks so much.

Our next question comes from Stephen Grambling from Morgan Stanley.

This is a bit of a multi-parter on the HDFS transaction. Why was the 4.9% equity sale the right level sold. Are there any tax ramifications to think through that are incorporated into that $1.25 billion in cash unlocked? Or is that a gross number? And then also, how is the exchange rate in the HOG stock set that's in the presentation?

Okay. Thank you, Stephen. So I'll start with the 4.9% question. So a really good one. Why 4.9%? As we go through and we take a look at the HDFS business, it is a pretty complex little business. We're super proud of the way that, that business runs and what it generates across Harley-Davidson. One of the elements that we have to factor in from an HDFS standpoint is the fact that we have an industrial loan corporation, so Eaglemark Savings Bank. ESB is FDIC regulated. And so from an FDIC perspective, there are caps and covenants around ownership, the percentage of it that we would own and then investment into the business. So the 4.9% threshold is something that the FDIC has a comfort level with in terms of any sort of additional owner. So we limited around the 4.9%, to a high degree, because of regulatory ease. And when we start moving beyond that, it's not that it can't be done, it's just a little more complex in terms of the hoops that you have to jump through. So that's really why the limit KKR with their 4.9% ownership and then PIMCO with their 4.9% ownership. That's the rationale for the 4.9% limit. As we think about the $1.25 billion, the $1.25 billion that flows up from a distribution from HDFS to the parent company, that is a pretax figure. So obviously, we will end up having to sort of flow through all of our normal tax planning and tax management on that front. I think in the latest quarter, you saw us probably low 20s from a tax rate perspective that we've been running at on a year-to-date basis. And then as we think about your last question around exchange, right? I think as you flow through that piece, we probably need to have a follow-up conversation with you just to make sure that we understand the detailed nature of your query on that front. I don't quite know what the question is, so I'll struggle to answer that one.

And the business is primarily the U.S. business that we're talking about, so there shouldn't be any significant exchange effects. But we'll get back to that, Stephen. Just to add to what Jonathan said, so the reasons you highlighted are, I think, important reasons why we've limited to say that 4.9% from both perspectives, from the partners' perspective and our perspective. And as we mentioned earlier, we had more than a dozen bids that ranged from all the way from long-term committed purchases of loan receivables but also to an outright sale of the majority of the business. And we actually could have so the majority or all at significant premium to book value. But given the 4 key objectives that I had mentioned, that any transaction involving HDFS would need to achieve that we set out already earlier in the year, we feel that this was the best possible outcome, at least complex -- requiring least complexity, and a big win really on all these levels.

Our next question comes from Robin Farley from UBS.

I also wanted to ask about the HDFS transaction, kind of 2-part question, I guess. One is, is the transaction assuming any kind of growth in retail sales of Harley or growth in receivables? Or any kind of guarantee at all along those lines that's coming with the sale where the terms might change if certain sales or receivable or operating income thresholds aren't hit? And then also, just thinking about that, what you're giving up in exchange for the 1.25%. Just looking historically, financial services I think last year was more than 40% of the total company earnings, maybe would be more than 50% this year. I know there's no guidance for the full year. So just trying to think about, can you help us quantify what earnings come out of your go-forward number in exchange for those proceeds?

Okay. Robin, so let's start with the first part in terms of guarantees. So as you would imagine, both KKR and PIMCO are pretty highly-esteemed, pretty savvy investors. There are no guarantees around maintaining a certain growth rate, maintaining certain loss levels. So as we take a look at the way that that's done, there aren't guarantees of any nature, sort of kind of in answer to your question and the pieces that go into that. The great news is that, as Jochen touches on, we had -- as we go through this process, we kind of began with a pretty wide range of parties that were interested in the business. We narrowed that down to about a dozen or so as we got into more serious negotiations, and then came down to the final 2 in terms of KKR and PIMCO. They have a super high degree of comfort in terms of the way that the business is run, the prudence with which the team underwrites the business, collects on everything. And I think it really is a testament to the leadership that we have at HDFS and the way that, that business runs. So there aren't any sort of guarantees in terms of performance where we have risk or exposure from that standpoint. There's a high degree of comfort that we will continue to run the business in the way that we have where it runs profitably kind of through cycles. And obviously, when we look at the strength of the partners and what it means from a liquidity standpoint and a comfort level as to how we actually fund that business going forward, we are extremely happy to have each of them as engaged partners in the business. As we think about what we're giving up, the…

Our next question comes from James Hardiman from Citi.

So just a quick clarification, Jochen. I think you said that you expected retail to be positive in the second half. Just maybe clarify that and how do we get there. But my bigger picture question, the small displacement bike, right? There was some discussion of that in the prepared remarks. There's a lot that you guys are working through today. That seems like a really big deal, particularly as we think about what's been elusive to Harley historically, right? An entry-level bike that's both popular and profitable. And so if you're successful with that, that could really move the needle, but maybe speak a little bit more about how that's possible, right? That profitability component in particular, how have you been able to accomplish that, whereas previous generations of Harley management has not and what that profitability should look like going forward?

James, yes, going forward, we expect retail sales certainly in North America to be positive, for the given reasons that we had mentioned. That's confirmed. And as we've seen the trends in February improve, it won't take much to achieve that considering also the easier comps as of August. In terms of [ HDV ], I completely agree with you. This is a big step for the company, not only with our [ HDV ] but also with the iconic cruiser that we are working on that we are going to launch thereafter and both for the first time in a manner that we believe that we can actually make money on both of them. And a price point starting at $6,000 and then adding additional price points over future years that will allow us to play in a segment which, especially when you look through this year, but even last year, is the only area that really shows growth right now, which very much is a result of affordability issues that our core customers have, that we need to take into consideration. This bike has been in development since '21. It's taking time. But we feel confident that it can achieve a profitable margin. And from there, obviously, we can build a profitable business in various segments that we have not -- or partly not competed in the cruiser segment, that we had competed in before. But as you know, that has never been a profitable business for many decades. We believe that how we've engineered this product, it will be profitable. So that's a significant unlock, which is why we've mentioned it. We've mentioned it also on this call because we are going to present the small displacement vehicle to our dealers in early October. And as you are very well connected, we thought we'd give you a heads- up already now rather than wait until October. But that's -- I don't want to go into specifics of how we feel we've accomplished that. But we have worked very hard over a long period of time and believe this is absolutely possible. And we learned a lot in the last 5 years, in particular, to be confident that we can achieve this finally for the company. So yes, agree, significant unlock for the business and especially in the current business environment. So if you at some point, see the business returning in the big bike segment, which has been challenged over the last almost 2 years, and in addition, the new fuel that we will be put on the fire with these bikes over the next few years, coupled with new product developments that will come out starting next year, this is, I think, all good news.

Our last question comes from Jaime Katz from Morningstar.

Just a clarification to start. The $300 million that's going into HDFS, should we dump that into 3Q or 4Q? Because it's going to swing the earnings significantly whenever it goes in, I suppose. And the other thing you guys talked about that wasn't mentioned was a new efficiency program. Is there any intel on the magnitude of that impact? Are you in the early stages? And what might you be focusing on?

Okay. Thank you, Jaime. So as we look at the $300 million upside that you referenced from an HDFS perspective, we will likely end up closing -- I think we've announced we're closing in the second half of the year. Due to the sort of complexity of this as we settle different elements of the transaction, there will probably be some elements that close in Q3 and then also some elements that close in Q4. So I think as we look at different tranches of the loans and some different buckets, it's kind of broken into those 2 quarters. We are going to make sure that we are clearly working with our partners, KKR and PIMCO, on the settlement of each of those pieces. So more to come on that front. And Jochen, I'll hand it over to you from an efficiency standpoint.

Yes. Jonathan already talked about our $400 million productivity gain commitment that we've made that we will be overachieving by about 10%. We have identified new opportunities to further those productivities and increase those productivity gains, but we also see significant opportunity in a new efficiency program, details of which will be outlined in future earnings calls. And we believe that, especially technology, including AI, will really help drive substantial cost savings for the business and will affect the overall structure of the business going forward to drive further productivity gains across the entire business. Rest assured, the decisions that we are taking in this regard will be aligned -- closely aligned with the Board and then the incoming CEO, so there's full alignment in the handover process and the transition process with regards to this efficiency program as well. But we're not going to go into detail, but we feel confident that there are a number of activities that we can start immediately and many more to follow by -- until the end of the year to really change the model quite significantly, also with the help of AI.

There are no further questions at this time. This concludes today's conference call. Thank you all for joining. You may now disconnect.