Ladies and gentlemen, thank you for standing by, and welcome to the fourth quarter and 2019 full year earnings conference call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, the Director of Investor Relations, Mr. 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 [indiscernible] in this call. Joining me this morning are President and CEO, Matt Levatich; and CFO, John Olin. Matt, let's get started.

Thank you, Shannon, and good morning, everybody. We're pleased that our fourth quarter and full year performance was in line with our expectations and indicates increased business stability, driven by the tremendous efforts of our employees and dealers to inspire riding and navigate the challenges of our dynamic business environment. During 2019, we significantly advanced our More Roads plan, investing, building capabilities and achieving milestones, keeping us on track to return to significant growth in 2021. we have a lot to be proud of and much to look forward to. More Roads is an important aspect of the total company transformation journey that has been underway for the better part of a decade. We began this transformation with a focus on manufacturing, that includes our recent multiyear manufacturing optimization initiative anchored by the consolidation of our motorcycle assembly plant in Kansas City into our expanded plant in York. The work on this initiative is nearly complete, and we expect annual ongoing savings of approximately $70 million in 2021. John will delve into this more later. We've also transformed product development, allowing us to deliver an innovation-led approach with a 30% faster time-to-market, dramatically increasing our capacity and capability to broaden our product portfolio to reach and inspire more people. This includes electric products, motorcycles in new segments and sizes and even e-bicycles. Our front foot approach to innovation is also helping to strengthen our leadership in the Touring and Cruisers segments, leading to a historically high 72.4% market share of those segments in the U.S., up 2.5 percentage points over 2018. We've delivered industry-first innovations like touring traction control with advanced ABS and H-D Connect, seamlessly linking rider and motorcycle. We're also leading the electrification of motorcycles with class-leading products developed in conjunction with our new team and our EV…

Thanks, Matt. In the fourth quarter, we were pleased with our earnings and continue tempering in our U.S. retail sales declines. During the quarter, and throughout 2019, we made significant progress against our More Roads to Harley-Davidson plan. The summary of our Q4 results is on Slide 10. In the fourth quarter, Motorcycle segment operating loss improved, driven by lower year-over-year SG&A and the favorable impact of our manufacturing optimization initiative, partially offset by lower shipments, higher year-over-year tariffs and unfavorable mix. Financial Services operating income was down 7%. Consolidated net income was up versus prior year. Earnings per share for the quarter was $0.09. When excluding restructuring plan costs and the impact of recent EU and China tariffs, adjusted EPS was $0.20. We remain focused and disciplined on inventory management, 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 the fourth quarter were down 1.4% versus prior year, which represents a significant improvement in the rate of decline versus last year's fourth quarter, which was down 6.7%. In the U.S., Q4 retail sales were down 3.1% versus prior year, which represents an improvement in the rate of decline over recent quarters. Harley-Davidson's fourth quarter retail sales benefited from the year-over-year tempering of the industry's retail sales rate of decline and strong H-D market share gains. International retail sales were up 0.5% during the quarter. Emerging markets retail sales continue to increase, while developed market retail sales were down slightly. After a challenging second quarter, we regained momentum in the third and fourth quarters as we continue to execute our stronger dealer programs, invested in amplifying the brand through increased marketing, introduced our model year 2020 bikes and aggressively managed the supply…

[Operator Instructions]. Your first question comes from the line of Craig Kennison with Baird.

Matt, I think you reported that there was 527,000 riders that joined the brand and a net gain of 55,000. So you, I think, lost 472,000. The question is, what is behind the decision by those people to leave? And then on a related note, if you're growing the total number of riders, should we ultimately see growth in P&A? Is there a strong correlation there?

Yes, Craig, thanks. It's the right question. It's a good question. And what we had year-over-year is a very similar retention rate. So as the new riders joined, the people that left also increased, as you pointed out, for a net increase of 55,000. So what we know from the rider migration database, we have a ton of insights about the profile of the exiters and the reasons why they're leaving and the single biggest driver and where we're focusing our efforts is on that early-stage rider. Those people that have raised their hand, took the time, invested the money, learned how to ride, purchased a motorcycle, intend to exit the sport within the first 3 years because they haven't yet built the confidence necessary to become what we're calling a committed rider. That is the single largest driver of that exit number, and it is, therefore, the singular focus of our efforts around building rider commitment is how do we really nurture those early-stage riders. And those programs that I referenced that are underway right now are very specific programmatic things that we're doing to address that single biggest driver of those early-stage exiters. And yes, as we see the total participation in the motorcycle increase that we're driving, we should expect to see a return to growth in P&A and apparel sales as well.

Your next question comes from the line of Sharon Zackfia with William Blair.

So I guess, from the outside, it's really hard to gauge the transformation you're going through from the numbers we're seeing? And I know you highlighted some things in your prepared commentary. I guess, if you go back to, I want to say, it was a few years ago where you unveiled the transformation strategy, can you help us gauge like where you might be ahead of where you had thought you would be at this point where you might be lagging a little bit just so we could kind of level set ahead of what looks like is an expected bigger ramp in 2021?

Yes, Sharon, thanks. This is Matt. I appreciate the question. I would say when you look at the net increase of riders in 2018 was to 26,000, I believe. And last year, 2019, was 55,000. So we are improving, but -- and I mentioned this in my remarks, we need to accelerate our efforts. And that's what's behind this targeted effort that I mentioned in answering Craig's question. So we set out 10-year objectives and that objective specifically is to increase the number of riders in the U.S. to 4 million. It's at 3.1 million now, so clearly, we have to pick up the pace to close that gap. And we have very specific programs in place that we're piloting right now to do that. And we feel good about it. And part of what's challenging about this transformation is it's really challenging the culture of the company, including even in the dealer network. When for 100 plus years, we've woken up every morning and told ourselves, our job is to make great motorcycles, and we did a great job at that. It is quite a different challenge to wake up in the morning and say we now need to build riders. That requires different skills, different capabilities and different mindsets and a different cultural attitude and culture, our culture is very powerful, it's important, and to shift that culture, we're very -- taking very deliberate steps with talent, with organizational structures and conscious efforts to just reinforce to everybody associated with the brand that our job is beyond just building great bikes, it's really becoming very skilled at building riders and customer creation, as I had mentioned. And it's simply to say that of all the transformations that we've done, and they've been very significant and very difficult, whether we're talking manufacturing or product development, this one is the most significant because we're thinking differently about what we're here to do and that requires all of us to show up differently in the company and even including in the dealer network. So we're into it and we have a lot more work to go, you can see that in the numbers, we need to accelerate our pace and we're adding things to the mix to do that.

Your next question comes from the line of Tim Conder with Wells Fargo Securities.

Matt, if I would, just maybe do -- can you delve into a little bit of the specific programs maybe that you started in 2019 and then maybe some new ones that you may be doing in 2020 here to help further reduce that churn rate, which again, you're making the net progress, which is good. But again, as you said, that's the key focus within the first 3 years of ridership. And then just a follow-up for John, on HDFS. Just, John, would you anticipate now given that we're past the anniversary of the system changeover, those delinquencies to kind of level off here, even though you said that your maybe that's popped up a little in Q4 due to some of the new programs.

Okay. I'll start. Just I would say broadly, there's 4 target areas that we have based on the rider retention and ridership insights. So -- and we have pilots of various types in place in Q1. Last year, we did some sort of intermediate steps short of riding academy to give people the opportunity to just have a simple sort of 2 hour overview so that they could get in first gear, get their foot up on the pegs and right across the parking lot and just begin to feel beyond the jump-start that we've been doing, what it's actually like to ride to just nurture them into the whole process of deeper learning. So that is ongoing, and we've added to the mix notionally or conceptually anyway, specific programs around riders, recruiting riders, so leveraging the passion of existing riders to help build the next-generation of riders. Rider recruiting riders, riders coaching riders, which is to help those people in those early stage gain the confidence and the skills and capabilities that they need to fully enjoy riding. And in addition to offer riders of various experience levels, opportunity to increase their experience on their turf and on their terms, not, if you will, locked into specific programs. The third is riding anywhere anytime. And this is addressing some of the barriers that people have that are practical around "I don't have a bike" or "I don't have the gear," or "I don't have someone to ride with," I don't know -- "I can't find the time to do it." So we're piloting different things to see if we can unlock some of those barriers. And the fourth one is really into solidifying rider commitment, and we know from our research that riding epic journeys as simple as your first overnight ride tends to really solidify the power of riding as sort of a transformational personal experience. And so that riding epic journeys idea is about how do we help people, again, get deeper into the passion that we all have for riding. So that's the programmatic themes or concepts, if you will, that we have specific in market tests that were underway right now that we'll begin reporting on as we go through the year.

And Tim, your second question, this is John. Your second question was, do we expect credit losses to level off in 2020? And the answer is broadly yes. In our prepared remarks, we do expect a slight increase in credit losses, but nothing what we saw this year, but a slight increase, and that will be offset by increased revenue at HDFS.

Your next question comes from the line of Adam Jonas with Morgan Stanley.

First want to say I really appreciate and respect how you articulate the challenges. It really is kind of daunting, things like e-bikes and building riders, the cultural change for the 117-year-old company, it's really profound. You clearly demonstrate a very high awareness and they're trying a bunch of really valiant efforts here. I guess [indiscernible] we're having this conversation, though, at a time of arguably the greatest U.S. economic expansion, one of the greatest economic expansions and greatest equity bull markets in history. So it'll be one thing if we were having these problems like in a downturn, but it's just the economy is really humming along, right? So I guess, if in the event, over the next year, which you described it as a pivot year, I think, people on this call agree. If these efforts don't really show the fruit that you're hoping here, and then there's no guarantee of success, would your management team and your Board of Directors consider strategic alternatives, including a potential sale of the company to help preserve this incredible franchise and brand and to maximize shareholder value?

Thanks, Adam. I would say that the board is always mindful of maximizing shareholder value and assessing all the decision and obviously, the strategy of the company. So we're obviously very -- as a board, very tied into the operations performance and strategy of the company, and we'll continue to evaluate it. We have a lot of growth platforms beyond just increasing ridership in the United States. And so you'd need to look no further than the investment in the middleweight platform and the potential that, that has, as we gain access to the significant majority of the heavyweight marketplace outside the United States. So we've been laying the groundwork with dealer distribution points, stronger dealer initiatives, the plant in Thailand, laying the groundwork for a very strong and potent impact of that middleweight platform investment. And so independent of those U.S. ridership investments, we have growth trajectories that are part of our strategy. EV is another one. Not just to the ease of ridership on an EV product is remarkable, but also investing in making sure that we are positioned as the leader of the electrification of 2 wheels because that is clearly the direction that automotive products are going over time, and they make for phenomenal products. So all these things are part of the strategy. I would say that it is important for this organization to challenge ourselves in the way that we are to become a customer-creation company here in the United States. Anything short of that, and it may have proved that, that is a very difficult, durable problem to solve, but we are all about it because it's important that we be about it, that we change the way we show up as a company and get skilled in the ways needed to do that. The challenge today is significant, not just people are joining the sport of motorcycling. And people are leaving for different reasons, as I alluded to earlier. But we -- it's not -- we're not talking about competition in the way we used to talk about competition. Competition is about competition for people's scarce time, people's scarce funding and commitment. We use that word a lot, commitment is becoming scarcer in the decisions people make as far as investing their time. And you can see that in all kinds of other industries that require a lot of time to become really embedded in doing something, and that's what our efforts are about. We think those efforts are very important skill and capability building for the company anyway, even if this challenge proves more durable than we are setting out to achieve. And in the meantime, we have lots of other growth platforms that we're investing in as well.

Your next question comes from the line of Jamie Katz with Morningstar.

I hope you can offer some clarification on the late 2020 launch of some of these other displacement bikes. I'm curious if that will be more heavily weighted to the fourth quarter relative to the third quarter, the year could look very different depending on when you guys are anticipating launching them. And then also, if you could clarify what you might have as adjusted operating margins -- motorcycle operating margins for your outlook? I know you've said 7% to 8%. But I think, maybe excluding those tariffs, again, that will be closer to 9%.

Thanks, Jamie. This is John. With regards to the launch, we -- I think you're referring two of the middleweight motorcycle that will bring us into the segments that we don't currently compete in, in particular, the dual segment with Pan America and the sports segment with our Bronx motorcycle. So that will be coming out towards the end of the year, and we would expect some shipments, largely in the United States for that and some retail sales in the U.S. and not so much on the retail side of our European markets at that point, given the time for shipment. The second question is on operating margin. Our guidance is for 7% to 8%. And I believe you had mentioned 9%., given the fact that we have tariffs. So when we look at the overall guidance of 8 to -- 7% to 8%, that includes tariff and manufacturing optimization favorability and -- but there's a couple of offsets to that. And I think that's why you may be at a little bit higher number. So let's talk through that for a second. On tariffs, again, to be very clear, we had $98 million embedded in our 2019 actuals. And we expect, going forward, that to be $35 million. I believe, on the prepared remarks, I said $30 million on the piece of paper, it said $35 million, and it $35 million. So Jamie, that is $63 million of year-over-year favorability as we start to come off the tariffs because of the actions that we've taken. The second piece is the productivity side of it, which includes our manufacturing optimization. If we kind of dissect that, there's 3 components of that. There's a restructuring component that won't repeat next year, that's $33 million of favorability. There's a temporary inefficiency…

Your next question comes from the line of Joe Altobello with Raymond James.

John, I want to go back to a comment you made earlier about softer use motorcycle prices at auction in the quarter. And maybe give us a sense for where that's been trending of late? It sounds like the gap between new and used pricing has widened a bit, and how you're thinking about that heading into 2020?

So when we look at overall pricing, we've typically talked in 3 levels; what's happening at auction; what's happening with pricing services that provide data to consumers and dealers; and then finally, what's happening in our dealer network. So Joe, you asked about the first one, which is at auction. We've now seen, after 9 quarters of improvement, we had a flat quarter in Q2, and 2 quarters that we've been down slightly in terms of auction prices in Q3 and Q4. As we tag on to that, the pricing services had about 8 quarters of increased pricing direction. But in the last quarter, we had them split. We had one service that was projecting higher prices and then the other lower. And then the third level of how we look at used bike prices is what's actually transacting in our dealer network. And with that, we've had 10 consecutive quarters of used bike prices rising, which is very good news. And again, this quarter -- in the fourth quarter, they rose. So we've got a little bit of mix here. We have got a close eye on what's happening at auction because that typically ripples through to the dealer network. But at this point, we are seeing improving used bike prices in our dealer network.

Your next question comes from the line of Gerrick Johnson with BMO Capital Markets.

I want to talk about the departure of Neil Grimmer. He was a highlight at the Analyst Day. I thought he had a great presentation. Wondering who's replacing him? And are there changes to the brand development strategy?

Gerrick, I'll take that. Yes. I -- the same reasons for bringing Neil in exists today, and I'm actively recruiting for a new brand President and the work that was done while he was here and since is inherent in the strategy that we have for building committed riders. So we are hard at work on that direction, and we've got a great team that is in place doing that work, and in the meantime, I'm leading that team and making sure that their work is fully integrated as we go to market here in the United States and around the world. So steady as she goes. We need leadership of that nature for the work that we need to do to become really skilled at customer creation. And as soon as we get that talent, we'll be delighted to get them in front of our investors.

Your next question comes from the line of David MacGregor with Longbow Research.

Just a question on the international business, and you'd indicated that the sales -- retail sales in the developed markets were down slightly. I guess the question is, are you seeing something change in terms of credit availability from the legacy lenders in those markets that would have contributed to a growth headwind there?

Thanks, David. This is John. We are not seeing any change in credit availability in our developed markets or international markets. Remember, HDFS plays a very critical role in our access to credit in those markets, and they're certainly well schooled in working with third-party providers. As you know, we only had landed underwrite in Canada and the United States. But they are working with us side by side, and we're not seeing any change in credit availability of those developed markets. And again, with that, we're very pleased with what we've seen in the back half of this year on our sales in international markets. After our first half of being down about 6.6% we've seen growth in the back half so thanks, David.

And just as a follow-up question, John. I guess, you ran a number of promotions in the quarter, the extended warranty promotion, a few other things. How do you feel riders responded to those promotions? And what does that tell you about how you guide your promotional activity going forward?

Thanks, David. Actually, we had very little promotions in the fourth quarter this year. We didn't have a whole lot last year either. The extended warranty program is one of those, but that's been more of a perennial program. We've offered that for several years. And that just is an opportunity for somebody that comes in and the dead of winter, to give them a couple more months of warranty so that they don't use that up when I'm sitting in their garage or in storage. So that has not been a core driver of promotional activity, but again, consistent over the last several years. Overall, as you know, from the first quarter of this year, we've been tempering our promotional activity and incentives. We did do a finance offer in the third quarter, much smaller than the one that we had in the third quarter of 2018. But in the fourth quarter of this year, we didn't have any notable promotions or dollars off promotions. We had some in 2018 fourth quarter. We had a private offer out there, no real financing offers in the fourth quarter and this is the way we're moving forward. We've redirected those funds to building and amplifying the brand and have been very pleased with the results that we've seen.

Your next question comes from the line of James Hardiman with Wedbush.

A lot of my questions were answered, but I wanted to circle back, John, to your -- I think it was Jamie's question on margin. And I think a lot of the detail you gave was really helpful with the bridge. But 2 questions on that front. I guess, first, $34 million in, I guess, you call them warranty recovery benefits. I don't remember those being talked about in the past, but maybe give us -- or help us understand the timing of those in 2019? Presumably, we would want to then pull those benefits out of our numbers as we roll forward into 2020. It sounds like some of that even happened in the first quarter. So help us with the timing there? Number one. And then the EU waiver, obviously, the timing there was a big negative in 2019, and I seem to recall it was going to be a nice positive here in 2020. When does that hit? And how much does that benefit shipments and margins?

Okay. First question is with regards to the timing of supplier -- largely supplier recoveries. If you remember back in Q4 of 2018, we had 2 recalls, a total of $55 million. In the first quarter of 2019, we received a supplier recovery of $28 million. And that would have been listed in K and was mentioned in the call at that time. Over the year, largely in the second quarter, James, we also had a release of other recall reserves of about $6 million. So those 2, we do not expect to repeat in 2020, but will be a headwind, and again, they total $34 million. And yes, 24 -- $28 million of it, and we talked about the first quarter, is going to hit and be a headwind in the first quarter of 2020. The second piece is, with regards to the EU. So we were looking for a decision from the EU that came later than we had anticipated. And with that, in the second quarter, we called down some of our shipment volumes because we were going to take inventories down in -- at the end of the year in anticipation of lower tariff inventory coming in from the plant in Thailand. That's not the only reason we took it down, there's some softness in international markets as well. So that has come. And the company did a fantastic job, and our team in Europe did a fantastic job of working down inventories. Overall, international inventory was down 3,000 units. We expect that about 2,000 out of Europe, and we got a little bit more than that. And so we will look to replenish inventories in 2020, and that's part of the revenue drivers that we have of being down 1% to up 2% as we will replenish that inventory with lower tariff bikes coming from Thailand. And so that is a shift of revenue, not necessarily a margin. Also, we did have increased cost from that delayed decision and that cost will be lapped. I think that was in the $5 million range, and so there'll be a benefit in 2020, which is incorporated in our operating margin guidance of 7% to 8%.

Your final question comes from the line of Greg Badishkanian with Citi.

So LiveWire deliveries were slower than expected, just given some of the manufacturing issues from a while ago. Can you talk about the -- maybe the sales momentum of that line? And continued enthusiasm and the level of enthusiasm by consumers as well as dealers?

This is Matt. I -- we're a couple of things. So we are back at the planned rate, and it took us time to get to that rate as we worked these early supply chains, and we're extremely diligent and cautious about making sure that every motorcycle that gets out in the market is perfect in the eyes of the customer. The early feedback has been fantastic. I would say, from an underlying demand perspective, it's hard to tell for 2 reasons; one, we're filling preorders still; and two, it's the winter. So we'll really know a lot more about the underlying demand for LiveWire when there's [indiscernible] in our LiveWire launch as we established a one-to-one white glove process where various folks within the company, within engineering, customer service are very knowledgeable about the product, had one-to-one relationships with early buyers. And answering their questions, gauging their enthusiasm and interest, and that's part of the feedback that we're getting from early owners and the feedback is just phenomenal. So we're extremely pleased with the reaction from the press and the reaction from the early owners. We're working through the pre orders for a planned rate. We're building out inventory in the dealer channel. We're building out availability outside the United States as well. We've got phase 2 dealers coming on in the U.S. this year. So there's a lot to look forward to with LiveWire. And we'll know a lot more when spring season hits and there's availability to fulfill sort of instantaneous demand.

This concludes our question-and-answer session. I will now turn the call back over to Shannon Burns for closing 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 855-805-92056 or 404-537-3406 until February 11 the ID is 6026039. We appreciate your investment in Harley-Davidson. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.