Thank you for standing by and welcome to the 2019 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your speaker today, Director of Investor Relations, Shannon Burns. Thank you. Please go ahead sir.

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 noted in our latest earnings release and filings with the SEC. Harley-Davidson disclaims any obligation to update information in this call. Joining me this morning are President and CEO, Matt Levatich; and CFO, John Olin. Matt, let's get started.

Thanks, Shannon, and good morning, everyone. We’ve closed out our third quarter with results that included EPS and operating margin that were ahead of expectations and in addition, we made noteworthy progress which I’ll get into here today. As we shared in September, we’ve sharpened the focus of our objectives to build riders in the United States and made clear how we plan to invoke the power of our brand in new ways to deepen the commitment of riders now and into the future. Our strategy and commitment to build riders is driving deeper understanding and broader capabilities that are and will continue to propel our company forward and our operating discipline along with our dealers’ efforts continue to bring increasing business stability in this dynamic marketplace. Guiding all our efforts is deeper analysis and insights on why people engage, participate and disengage from riding. Our advanced analytics capabilities and rider migration database have evolved into a powerful asset and a wealth of information and inspiration for us. We know more than ever about how to attract people to riding and keep them engaged to build committed riders and we know how this applies, no matter what their experience level, age or life stage. We have two primary focus areas, attracting more people to riding and keeping riders riding. Our execution might be different for young adult versus a returning rider. But the essence of our work is the same across the customer spectrum. We are bringing precise focus to how we influence each customer at their decision points to build the total number of committed Harley-Davidson riders, where we’ve previously had an objective to build 2 million new riders in the U.S., we now know why, where, how and what we can do to work both sides of the…

Thanks, Matt. In the third quarter, we were pleased to deliver EPS and Motorcycle segment operating margin ahead of expectations. The worldwide retail sales rate improved during the quarter versus the first half of 2019. We also made good progress as we continue to execute our More Roads with the Harley-Davidson plan to drive future growth. The summary of our Q3 results is on Slide 13. In the third quarter, Motorcycle segment operating income was impacted by lower shipments, higher year-over-year tariffs and unfavorable mix partially offset by lower year-over-year SG&A and the benefit of our manufacturing optimization initiatives. Financial services operating income was down 13.0%. Consolidated net income was down versus prior year due to lower operating income. EPS for the quarter was $0.55. When excluding restructuring plan cost and the impact of recent EU and China tariffs, adjusted EPS was $0.70. We remained 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 14, worldwide retail sales of new Harley-Davidson motorcycles in the third quarter were down 1.2% versus prior year. International retail sales were up 2.7% driven by growth in both our developed and emerging markets. In the U.S., Q3 retail sales were down 3.6% versus prior year, which represents an improvement in the sales rate over recent quarters. Our retail sales benefited from our actions and the tempering of the industry’s retail sales declines. We expect our business to remain under pressure as the U.S. and developed international markets continue to face substantial headwinds. The global competitive environment remains intense with aggressive promotional activity in the U.S., and worldwide new product introductions. We expect to overcome these market challenges by focusing on our intensified efforts to execute our More Roads plan and…

[Operator Instructions] And your first question comes from the line of Joe Altobello from Raymond James. Go ahead please. Your line is open.

Thanks. Hey guys. Good morning. So, first question, I want to delve into the international retail improvement. Obviously, pretty significant quarter-over-quarter and you talked about some of the drivers of that in Japan, the consumption tax for example. But want to get a better sense for what drove the improvement in Europe and Canada beyond that.

Okay, Joe. This is John. With regards to the improvement that we saw quarter-over-quarter, one very – I am very pleased with it. Second quarter, we had the developed markets down 13.6% and they were up 1.8%. All developed markets improved on a quarter-over-quarter basis. Canada, Australia, and Japan all posted pretty strong gains on a year-over-year basis and that’s a first time in several quarters that they’ve been up year-over-year and Western Europe, while it was down slightly, still had some significant improvement. As we look across all of them, we’ve talked about stronger dealer efforts, which started about five or six quarters ago in the United States. We’ve been looking to fast the depots’ efforts into our international markets. And you are seeing some of that come through in the third quarter. So, Joe, for example, on the dealer sales incentives, we changed our dealer sales incentives in the United States about four quarters ago, just changed them in the third quarter internationally. Much more simplified dealers certainly got a lot more clarity as what they are doing on retail sales and we believe that benefited. Second aspect is, we really fell off, the dealer network fell off a little bit on the demo rides and test rides that they were doing. We got that was back on track in the third quarter. And then finally, similar to the United States, as we look to amplify the brand, we increased our brand equity marketing in international markets in the third quarter, as well.

That’s very helpful, John. Thank you. And then just one quick follow-up, in terms of the operating margin outlook, you mentioned fourth quarter minus 5.5% but that’s a GAAP number. I think on an adjusted basis, you are probably looking at something – if you are looking at a full year 10% margin, fourth quarter adjusted operating margins are likely going to be up modestly, is that the case?

They will be improved. I don’t have that number in front of us. Basically, it peel out the tariffs which are going to be up incrementally $14 million, as well as the year-over-year manufacturing optimization spending. I don’t have that number in front of me, Joe.

Okay. Perfect. Thank you guys.

Your next question comes from the line of Jaime Katz from Morningstar. Go ahead please. Your line is open.

Hi, good morning. I am curious if you guys have factored the promotional environment into your outlook for the full year. I mean, if you have and what impact it might have on the ability to capture rising prices and revenues in the quarter ahead and into next year? Thanks.

Hi, Jaime. If I am understanding the question, first of all, we are in a higher promotional environment today. As we look quarter-over-quarter, we believe that about half of our competitors have increased amount of promotional activity from last year to this year. And at the same time, they are doing that, we are starting to back off of somewhat we would call sales incentives. And that’s promotional offers and finance offers. And so, again, when we look at the results that we posted in the United States in Q3, while they were down, that certainly tempered, but that was in the phase of pulling back on some of the sales incentives that we had been offering. They are actually down about 50% in the third quarter. As we look across the full year, we are continuing to look to shift money from sales incentive into more brand equity-based and more sustainable marketing.

Okay. And then, I think in the prepared remarks, there were some comments that there was an expectation of retail sales for LiveWire. Would you care to share that with us?

I don’t think there was, Jaime. We do not provide model level shipment or retail sales data. What we did on LiveWire is we began shipping in the last week of September. And so we had some shipments, but on the 40,000 units or so that we shipped is very minor and we are just very excited to have LiveWire in the market and starting to deliver to our customers.

Thank you.

[Operator Instructions] Your next question comes from the line of David MacGregor from Longbow Research. Go ahead please. Your line is open.

Yes, good morning everyone. John, the question was on HDFS and just you are looking at an increase in your provisioning, I think it was $11 million increase in provisioning and you talked about financing promotions and it sounds like maybe you are dialing those back a little bit now. But can you talk about the extent to which the provision increases were a function of the financing promotions versus maybe other factors and to what extent do you expect that provisioning to pullback now that maybe you are easing back on the promotions?

Thanks, David. We don’t – there is – we don’t believe that there is anything with regards to the finance offers driving those higher provisions. So what you are referring to is in the quarter, we had an increased provision of $11.4 million and that was driven by about half of that is driven by higher credit losses and we talked about that for the last several quarters. The majority of that is being driven by the LMS system implementation and the startup that we had and as we’ve got things going, we expect those to be largely behind us. But in the third quarter, the majority of that was driven by the LMS. The other half of it simply is the provisioning in the reserves on a year-over-year basis and we look at those reserves are made up of two things. One is the reserves that we have booked this year and those are slightly higher in the third quarter. But the biggest piece of the reserves is what happened in the 2018 third quarter is we actually reduced reserves by a fair amount and so we are just lapping that. So that provision is made up of two pieces, credit losses as well as the reserves about half and half. There is not a significant impact due to the promotions that we’ve had or the finance offers that we’ve made.

Thank you.

Your next question comes from the line of Sharon Zackfia from William Blair. Go ahead please. Your line is open.

Hi, good morning. John, I wanted to ask a question about the motorcycle operating margin in the quarter. I think, originally you have guided for it to be about 300 basis points and it was kind of down half of that. So, could you give us some color on what the price of the positive on the motorcycle margins?

Great and thanks for the question, Sharon. I love to share this one with you. You are absolutely right. It came in about 1.5 points favorable and that’s largely driven by lower SG&A and to that reason and why I say I am glad you asked it is, our employees have done an absolutely fantastic job of becoming more efficient evaluating every dollar that they spend and as we’ve talked about for quite some time is we are looking to fund our More Roads investment internally. And so, while we’ve got those costs rising on More Roads, as well as our Amplifying the Brand, we’ve increased marketing, as Matt had mentioned over 30% in the quarter. All of that was paid for by our employees doing their jobs and doing them more efficiently every day. So, we couldn’t be more pleased with that. And so, that came in higher than what we expected and on the quarter basis, SG&A was lower by about a $1.5 million, again, absorbing all the cost with our More Roads and a 30% increase in marketing expending. We couldn’t be more thrilled with that performance.

Okay. Thank you.

Your next question comes from the line of James Hardiman from Wedbush Securities. Go ahead please. Your line is open.

Hey, good morning. Thanks for taking my question. So, some of my questions are answered, but I wanted to maybe circle back on one of the – somewhat – one of the questions I’ve got a lot coming out of the Analyst Day and that’s how to think about gross margins in 2020. Just as a point of clarification, I think you guys mentioned that with some of the new middle weight bikes, gross margins would be down. But, am I wrong in saying, that’s on a pro forma basis excluding tariffs. But that, when we factor in the tariffs gross margins should still be up next year. And maybe just lay out – you mentioned some stuff in the prepared remarks about tariffs this year and next. Maybe just give us the best estimate right now based on the timetable of when you are going to be up and running in Thailand and shipping into the EU. Just how much of a tariff benefit should we expect in 2020?

Okay, James. First of all, we have not provided a guidance on gross margin in 2020 and the middle weights will not have a significant impact in 2020, because they will come out later in the year. We will provide more guidance on operating margin next quarter. But in general, we’ve said over the next three year period of time, or through 2022 is that, we would face some gross margin headwinds because of the new products that we’re coming out with – that are coming out at very strong margins. But just not at the same level as the products that we’ve been delivering for 116 years in our Touring and Cruiser bikes. And with that headwind, some of that will be offset by the absorption and the higher growth that we expect coming out of those investments. But then overall, operating margin would increase through the period of – or through 2022 as we further leverage SG&A. So, that’s what’s been said about gross margin. When we talk about tariffs, and I had mentioned in the prepared remarks is that, tariffs are expected to be a $105 million this year. And that’s made up of three component pieces. Approximately $90 million of that change is EU tariffs, right? And with that, we expect to mitigate the vast majority of them. There is a couple models that we will continue to ship from the United States. But that will come in early in the second quarter. So, the timing is, is that we will start producing in late October in Thailand. There is time on the water. It will arrive in the EU market at the end of 2019, in the beginning of 2020. We need time to burn off the existing inventory. We are taking down production right…

That’s really helpful. Thanks guys.

Your next question comes from the line of Craig Kennison with Baird. Go ahead please. Your line is open.

Thanks. Just a quick two-part question. First on James’s question. As it relates to the EU tariff and then $90 million this year, should we just take one quarter of that and apply it into next year? And then, Matt, as it relates to the U.S. economy today, what’s your view on things? Unemployment is low, but recession periods are rising. I am curious what your take is overall.

I’ll answer the first part, Craig. With regards to the first quarter, we are going to be in the neighborhood of that. We will provide more granularity at the end of January when we do our call and we will see the inventories, what ended up in market and so on and so forth. But by and large, we are early into the second quarter is when those tariffs would be mitigated.

Okay, Craig, it’s Matt. Yes, thanks for the question. If I had that crystal ball, I would be utilizing it on a daily basis. I think the market continues, whether you are talking at the corporate level or the consumer level to face quite a bit of uncertainty regarding all manner of sort of economic stability related to the tariffs and obviously the political Presidential campaign and so forth. But having said that, sitting here right now, I don’t think that that uncertainty is higher than it was six months ago and in fact, seeing the industry pick up that we saw in the third quarter is obviously an encouraging sign. I would just say that, from a company perspective, we are looking at our business with the abundance of caution necessary in an environment like this and that underscores how pleased we are with the increased predictability and performance to plan that we see in our business. We’ve done a nice job really dialing in our measures and our dashboard of how things are moving, keeping inventory very tight, being very nimble in production and shipments, recognizing that we are in probably the most uncertain forward environment that we’ve been in, in a long time. And we’ll continue to do that. That’s the focus, because we can’t predict the future anymore than anyone else can. All we can do is be as nimble and responsive as possible. And I think we are well positioned to do that. So thanks.

Thank you.

Your next question comes from the line of Adam Jonas from Morgan Stanley. Go ahead please. Your line is open.

Hi, this is Billy Kovanis for Adam Jonas. A question on HDFS. In the quarter, it looked it B2 motorcycle operating margins was offset by HDFS, with HDFS margins down year-over-year despite pretty supportive credit conditions? What management changes aside and accounting changes aside? Could you please comment on how HDFS may have been impacted by assets on new riders? Is it reasonable to assume as a slight sacrifice in credit quality in HDFS in order to drive some revenue growth? Thanks.

I am sorry. My mike was off. So, when we talk about the quality of the company’s portfolio, Billy, is we couldn’t be more pleased with where the portfolio is. We’ve got a very strong portfolio and it’s performing very well aside from the LMS issues that we’ve talked about. And I think when you talk about credit quality, what you are referring to, I would assume is a subprime as a percentage of the total. And we’ve been in a range of 15% to 20% of our loans are subprime. And this year, we are seeing subprime up a little bit on a year-over-year basis still and well within that range and I guess, actually in 2018, we saw subprime down about the same amount. So it kind of goes up and down. But I would caution to equate that subprime is a bad thing. As a matter of fact, subprime is a very good thing. It does push up some of the credit losses and credit metrics and delinquencies. But that is a shift in mix. When we look at subprime, those loans have a tremendously high return on equity or very profitable and they also come with, in most cases, an incremental motorcycle sale. Because there is no other lender of subprime motorcycle customers in the United States. And so, we are very judicious about it and we have been keeping again in that 15% to 20% channel. But the answer to your question, we couldn’t feel better about the loan portfolio that we have aside from the issues that kind of the ripple effect to the LMS.

That’s very helpful. Thank you.

Your next question comes from the line of Tim Conder from Wells Fargo Securities. Go ahead please. Your line is open.

Thank you. And John, I would like to just follow-up on that question a little bit. We do get a lot of questions related to the HDFS. So, I guess, another way to ask it is, are you seeing the trends in the credit metrics, if you split prime and subprime and you talk about the mix, but as far as the actual credit losses, how are those trending? Or would you all be looking in the future to maybe kind of break the disclosures of those losses out between prime and subprime? Just any color if you could give us there . And then, the other follow-up would be the third quarter retail cadence in the U.S. in particular, just to clarify, was July – did those benefit from the promotions I think that were done by yourselves and the industry and then how did August and September look year-over-year relative to the month of July year-over-year? Thank you.

Thanks, Tim. With regards to the splits between prime and subprime and you look at the higher credit losses that we have at higher delinquencies, I think you might find it little counterintuitive is, this year, we are seeing a larger increase in prime or a denigration in prime that we are subprime. And again, the LMS system is driving that. But we keep a close eye on – of those that are very segmented to us and we use different drivers to improve them. But again, overall, the metrics that we are seeing are driven by the LMS. Prime is a little bit worse than subprime and we are working with that and expect also that to drop off by the fourth quarter. Your next question, Tim, was with regards to the sales cadence within the third quarter. I think to understand the sales cadence of the third quarter is really to look at what happened in the third quarter of 2018 and it’s really the mere opposite of it. But as we walk through it in the month of July, retail sales were up in the United States in the low-single-digits. In August, they were down in the mid-single-digits and in September, they were down in the mid to upper-single-digits. With regards to the promotional activity in July, we had very little promotional activity in 2019 in the month of July. We had very little promotional activity in the third quarter, net effect the biggest thing that we did in terms of sales incentive in the third quarter was a two week finance offer in September, net compared to the year ago period of a six week finance offer across Touring and Softail. This year, we did two weeks on just Touring and we did that again, get people to come into the dealerships with the arrivals of the new model year motorcycles, as well as help our dealers with carryover inventory. And as I have mentioned, carryover inventory is in very good shape. It’s the best that it’s been in many years. But also looking to help the dealers because there is very little price increase on a year-over-year basis that help them move out some of the excess carryover.

Great. Thank you. Very helpful.

Your next question comes from the line of Joseph Spak with RBC Capital Markets. Go ahead please. Your line is open.

Thanks, good morning. John, just maybe a clarification, because, on the second quarter call, you talked about the incremental tariff headwind for this year being lower to $100 million. Now it seems like you are saying, it’s actually $80 million with the incremental $40 million. And then, we look at sort of what was already done year-to-date. The gross margin guidance is always sort of just down year-over-year and that remains, but it also seems like that’s lower, you have some savings progress. So, is there another change we should think about in the gross margin?

I am not completely tracking with you, Joe. In the second quarter, we are expecting approximately $100 million of tariffs this year that wasn’t an incremental year-over-year, that’s what we were expecting this year. We did incur some tariffs in 2018. So the incremental piece is lower than $100 million. We’ve increased that from a $100 million to $105 million and then we talked about what’s going to happen in 2019 – I am sorry, in 2020. EU tariffs will start to fall off in the second quarter. China tariffs will fall off at the beginning of the year and the 301s are going to be with us until we can mitigate those. If you can give me a little bit more, I can help out, but that’s…

Yes, no, maybe it’s just sort of bad or a misspeak. But if I go back to the second quarter transcript, the tariffs you talked about on an incremental basis being $100 million. So your answer sort of clarified that. Maybe in lieu of that if I could just ask just one on HDFS. I guess, just maybe you could just give us some color about how you think about the return on some of the actions you are taken the issue of as holistically, because I know it’s sort of not a perfect metric here, but if you look at sort of what’s happened to HDFS income plus motorcycle gross profit, that is sort of still down. So, I mean, how do you think about the incremental return from using HDFS a little bit more to stimulate sales?

Yes, I think if you go back and look at overall margins, going back several years ago, they were higher. And I believe they are higher for all financial service companies and the reason being is that, coming out of the downturn, we saw customers are really focused on repairing their credit. In addition and a bigger driver was that we have all the recoveries. Once we write-off alone, we never stop going after recovering it and so out of the downturn for several years after that, there was a lot of recoveries coming in and credit loan losses were at historically low levels and they have risen since then, one, because consumer behavior is changing and two is, just because they were at such a low level to begin with. So, we have seen overall operating margins on fall. We've also seen on the cost of debt going up. It was very low last three or four years ago and it’s starting to rise a little bit. But when we look at the returns, which we measure ourselves on return on equity of HDFS, and Joe, it’s never been higher. It’s at 22% last year and that is an absolutely extraordinary return on equity for any financial service firms. Banking is a - good return is a little bit over 10. So, we are in a class of our own in terms of the returns that we are delivering from HDFS and couldn’t be prouder in what that organization has done and the power of the brand to deliver those returns.

Thank you.

And with that, I would like to turn the call back over to Mr. Shannon Burns for some concluding remarks.

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 November 5th. The ID is 9498744. We appreciate your investment in Harley-Davidson. Have a fantastic day.

Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation. You may now disconnect.