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…

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%…

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…

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.