HARLEY-DAVIDSON, INC. 2016 FOURTH QUARTER UPDATE JANUARY 31, 2017
2016 FOURTH QUARTER UPDATE THIS PRESENTATION SUPPORTS THE AUDIO CONFERENCE CALL CONFERENCE CALL AGENDA Introduction Amy Giuffre, Director, Investor Relations Business Perspectives Matt Levatich, President and CEO Financial Results John Olin, Senior Vice President and CFO Long-Term Strategy Matt Levatich, President and CEO Q&A All This presentation includes 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 presentation and filings with the SEC. Harley-Davidson disclaims any obligation to update information in this presentation. Additional information and risk factors are included at the end of this presentation 2
2016 FOURTH QUARTER BUSINESS PERSPECTIVES MATT LEVATICH, PRESIDENT & CEO, HARLEY-DAVIDSON, INC.
2016 OVERVIEW In a highly competitive environment, we drove demand Increased U.S. market share Launched Milwaukee-Eight powered Touring line Achieved best-ever retail sales in AP, EMEA Trained 65,000+ new riders through U.S. H-D Riding Academy Added 40 new dealer points internationally Milwaukee-Eight Engine Leveraging established capabilities Built focus and momentum Added new capabilities 4
2016 FOURTH QUARTER FINANCIAL RESULTS JOHN OLIN, SENIOR VICE PRESIDENT & CFO, HARLEY-DAVIDSON, INC.
Consolidated Motorcycles and Related Products and Financial Services Segments Q4 2016 VS. Q4 2015 RESULTS REVENUE NET INCOME EPS $1.11 $47.2 $0.27 Billion Million (5.9)% 11.8% 22.7% Earnings impacted by: Motorcycles Segment operating income up $2.9M, or 45.6% Revenue down 7.4% on 11.9% lower shipments Gross margin percent of 30.7%, down 1.2 pts. Lower yr./yr. SG&A Operating margin of 1.0%, up 0.4 pts. Financial Services Segment operating income down 1.2% Lower effective tax rate 6
Motorcycles and Related Products Segment WORLDWIDE RETAIL SALES Versus prior year Versus prior year Motorcycles Q4 16 Motorcycles FY 16 Worldwide 46,610-0.5% 260,289-1.6% U.S. 26,077 0.1% 161,658-3.9% International 20,533-1.3% 98,631 2.3% U.S. new retail sales rebounded from Q3, but below expectations Industry remains soft despite lower yr./yr. comps Bikes featuring the Milwaukee-Eight engine and new suspension sold well Availability of MY 2017 constrained motorcycles in the U.S. to focus on retail sales of MY 2016 motorcycles and support flat year-end retail inventory International new retail sales generally strong with exception of three markets India (demonetization), Indonesia (dealer reset) and Brazil (pricing and economy) Global competitive environment remains intense; macro-economic challenges persist 7
INVENTORY Motorcycles and Related Products Segment RETAIL SALES Motorcycles (thousands) SHARE U.S. RETAIL SALES H-D U.S. NEW RETAIL MOTORCYCLE SALES 168.2 161.7 H-D U.S. NEW 601+CC RETAIL MARKET SHARE* 51.4% 53.4% 50.2% 51.2% -3.9% +2.0 pts. +1.0 pts. 26.0 26.1 +0.1% Q4 '15 Q4 '16 FY '15 FY '16 Q4 retail sales impacted by: Strong Market Share + Demand driving and product development investments + Fantastic response to Milwaukee-Eight engine and new suspension - Limited availability of 2017 MY bikes Weak Industry Sales - Weakness in oil-dependent areas - Softer yr./yr. used motorcycle values - Economic uncertainty Continued industry competitiveness Q4 '15 Q4 '16 FY '15 FY ' 16 New Milwaukee-Eight powered motorcycles drove 2.0 pts. of share growth in Q4 FY share growth on demand driving and new product investments Largely flat to prior year * Source: Motorcycle Industry Council H-D U.S. NEW RETAIL MOTORCYCLE INVENTORY - Significant reduction from end of Q3 - Addressing still too high carry-over inventory (MY 16) Committed to aggressively manage supply in line with demand in 2017 8
RETAIL SALES INTERNATIONAL RETAIL SALES H-D EUROPE 601+CC RETAIL MARKET SHARE Motorcycles and Related Products Segment H-D INTERNATIONAL NEW RETAIL MOTORCYCLE SALES 10.5% 10.8% Versus prior year Q4 16 FY International -1.3% 2.3% - EMEA 2.6% 5.9% Strong demand behind new Cruisers and Milwaukee-Eight - Asia Pacific -0.4% 2.0% India impacted by demonetization, Indonesia down on reset of dealer network opened 3 dealerships late in quarter - Latin America -14.4% -13.2% Macro-economic challenges and increased pricing in Brazil - Canada 0.2% 5.5% Lapping strong prior year Q4 growth of 12.3% OPPORTUNITY SHARE FY '15 FY '16 Share up from 15 in a highly competitive environment INTERNATIONAL GROWTH Objective: Grow international retail sales at a faster rate than the U.S. Focus on reach and impact - Plan to add 150 to 200 new international dealerships between 2016 through 2020 - +20 dealerships added in Q4; +40 FY 2016 - Invest in product awareness and brand relevance 9
Motorcycles and Related Products Segment SHIPMENTS & MIX SHIPMENTS MOTORCYCLE SEGMENT Q4 16 vs. PY FY 16 vs. PY Total 42,414 (11.9)% 262,221 (1.6)% Touring 42.3% 2.0 pts. 41.0% (2.1) pts. Cruiser* 35.0% (1.2) pts. 35.6% 2.1 pts. Street / Sportster 22.7% 100.0% (0.8) pts. 23.4% 100.0% - * Includes Dyna, Softail, V-Rod and CVO platforms Q4 2016 shipments down 5,735 motorcycles yr./yr. Below guidance range of 44,200 to 49,200 motorcycles to support retail inventory reduction in the U.S. 52.5% of motorcycle shipments were international Q4 Mix unfavorable, Touring up behind strong demand for the 2017 Touring motorcycles 10
Motorcycles and Related Products Segment REVENUE REVENUE MOTORCYCLES SEGMENT ($ millions) Q4 16 vs. PY FY 16 vs. PY Motorcycle $685.0 (8.8)% $4,122.1 (0.1)% P&A 169.4 (0.2)% 842.6 (2.3)% General Merchandise 72.9 (8.1)% 284.6 (2.6)% Other 5.7 (15.3)% 22.1 (15.4)% Total Revenue $933.0 (7.4)% $5,271.4 (0.7)% Motorcycles segment revenue was down $74.0 million yr./yr. in Q4 2016 behind an 11.9% decrease in motorcycle shipments Average motorcycle revenue per unit yr./yr. increased $546 in Q4 2016 behind higher pricing, a richer product mix and slightly favorable currency exchange 11
Motorcycles and Related Products Segment GROSS MARGIN GROSS MARGIN MOTORCYCLES SEGMENT ($ millions) Q4 FY 2015 Gross Margin $320.9 $1,952.5 % of revenue 31.9% 36.8% - Volume (47.1) (46.8) - Pricing net of cost 12.1 54.0 - Mix 5.6 (13.7) - Currency (14.5) (47.7) - Raw materials 0.2 17.6 - Manufacturing / other 9.6 (64.2) 2016 Gross Margin $286.8 $1,851.7 % of revenue 30.7% 35.1% Q4 Motorcycles Segment gross margin % of revenue was impacted by: - Mix favorable motorcycle family mix - Currency Stronger U.S. dollar - Manufacturing Return to normal manufacturing operations and lower P&A costs 12
Motorcycles and Related Products Segment OPERATING MARGIN OPERATING MARGIN MOTORCYCLES SEGMENT ($ millions) Q4 FY 2015 Operating Income $6.4 $875.5 % of revenue 0.6% 16.5% - Gross Margin (34.1) (100.8) - SG&A 37.0 (1.3) 2016 Operating Income $9.3 $773.4 % of revenue 1.0% 14.7% Q4 Motorcycles segment operating income was up $2.9M, or 45.6% compared to prior year - SG&A lower yr./yr. - $18.2M Reorganization costs 13
Financial Services Segment HDFS OPERATING INCOME FINANCIAL SERVICES SEGMENT ($ millions) Q4 FY 2015 Operating Income $60.9 $280.2 - Net interest income 1.8 10.9 - Gain on securitization - 9.3 - Provision for retail motorcycle loan losses (8.5) (39.8) - Provision for wholesale loan losses 1.8 3.8 - Operating expenses 3.4 3.9 - All other 0.7 7.2 2016 Operating Income $60.1 $275.5 Financial Services Q4 operating income was lower due to increased provision for retail loan losses 14 14
Financial Services Segment HDFS 2016 FINANCIAL SERVICES SEGMENT OPERATIONS Originations New and used H-D retail motorcycle loans Q4 $496.8M 2.8% vs. Q4 15 FY $3.10B (2.3)% vs. FY 15 YTD approximately 80% prime Market share U.S. H-D new retail motorcycle sales Q4 59.6% 1.2 pts vs. Q4 15 FY 61.7% (0.5) pts vs. FY 15 Finance receivables outstanding Retail $5.98B Wholesale 1.03B Total $7.01B Flat vs. FY 15 LIQUIDITY (Millions) Cash & equivalents $334.4 Availability Bank Credit Facilities $383.8 Asset-Backed Conduits 900.0 Total Availability $1,283.8 Other HDFS paid H-D, Inc. a dividend of $106 million in January 2017 15 15
Financial Services Segment HDFS RETAIL MOTORCYCLE LOAN PERFORMANCE 6% 5% 4% 3% 5.07% 30+ Day Delinquencies December 31 3.85% 3.94% 3.71% 3.78% 3.61% 4.25% 4.12% 30+ day delinquency 4.25% on-balance sheet receivables 4.12% on a managed basis (Including receivables sold in the Q2 16 full securitization) 2% 2010 2011 2012 2013 2014 2015 2016 3% 2% 1% 2.11% 1.20% Annual Loss Experience 1.09% 1.22% 0.79% 1.42% 1.83% 1.80% Annual loss rate 1.83% on-balance sheet receivables 1.80% on a managed basis (Including receivables sold in the Q2 16 full securitization) 0% 2010 2011 2012 2013 2014 2015 2016 16 16
Consolidated Motorcycles and Related Products and Financial Services Segments HARLEY-DAVIDSON, INC. 2016 FY HARLEY-DAVIDSON, INC. VS. PRIOR YEAR Cash & Marketable Securities at the end of 2016 - $765.5 million vs. $767.4 million Operating cash flow - $1.17 billion vs. $1.10 billion Capital spending - $256.3 million vs. $260.0 million Depreciation/Amortization expense - $209.6 million vs. $198.1 million Tax rate - 32.4% vs. 34.6% 17
Consolidated Motorcycles and Related Products and Financial Services Segments FY 2016 VS. FY 2015 RESULTS REVENUE NET INCOME EPS $6.00 $692.2 $3.83 Billion Million (8.0)% 3.8% Earnings impacted by: Motorcycles Segment operating income down 11.7% Revenue down 0.7% on 1.6% lower shipments Gross margin percent of 35.1%, down 1.7 pts. Flat yr./yr. SG&A despite significant increase in demand driving and product development investments Operating margin of 14.7%, down 1.8 pts. Financial Services Segment operating income down 1.7% Lower effective tax rate EPS up yr./yr. on lower share count behind 2015 recapitalization 18
Multi-Year Millions Year-over-year Millions SHAREHOLDER RETURNS Harley-Davidson has consistently returned cash to our shareholders Dividends Per Share Discretionary Share Repurchases $1.50 $1.30 $1.10 $0.90 $0.70 $0.50 $0.30 $0.10 $0.31 Q4 $0.35 2015 2016 $1.24 FY $1.40 $2,000 $1,525.8* $1,500 $1,000 $642.4 $459.1 $500 $91.0 $0 Q4 FY 2015 2016 * Includes shares repurchased in conjunction with 2015 HDI debt issuance $1.40 $1.20 CAGR 24% $1.10 $1.24 $1.40 $1,600 $1,400 $1,200 $1,526** $1.00 $0.84 $1,000 $0.80 $0.60 $0.40 $0.20 $0.00 $0.62 $0.475 2011 2012 2013 2014 2015 2016 $800 $600 $400 $200 $0 $604 $456 $459 $218 $300 2011 2012 2013 2014 2015 2016 ** $750 million funded by HDI debt issuance 19
GUIDANCE 2017 EXPECTATIONS as of January 31, 2017 Motorcycle shipments Flat to down modestly vs. 2016 [Q1 66,000 71,000] Motorcycles and related products segment Gross margin % Approximately in line with 2016 SG&A Approximately in line with 2016 Flat as a percent of revenue Operating margin % Approximately in line with 2016 Financial services segment HDFS operating income Down yr./yr. Harley-Davidson, Inc. Capital expenditures $200 million - $220 million Effective tax rate Approximately 34.5% 20
HARLEY-DAVIDSON Through focused investment in growth, Harley-Davidson plans to: Drive demand Increase impact Further broaden appeal Deliver strong value to shareholders Harley-Davidson Metropolitan, Bangkok, Thailand Harley-Davidson Tibet, Lhasa City, Tibet 21
LONG-TERM STRATEGY MATT LEVATICH, PRESIDENT & CEO, HARLEY-DAVIDSON, INC.
THE NEXT CHAPTER To build the next generation of Harley-Davidson riders
THE NEXT CHAPTER Our long-term strategy focuses on Growing ridership in the U.S. Growing reach and impact internationally Growing share AND profit in every market we serve 24
THE NEXT CHAPTER Growing ridership in the U.S. Attracting new riders to the sport Reaching all demographics Expanding our urban presence, impact Sharpening and strengthening dealer network Embracing the used motorcycle market 25
THE NEXT CHAPTER Growing reach and impact internationally Expanding and enhancing the dealer network in emerging and developed markets Adding 150 to 200 new dealers between 2016 and 2020 Growing reach through premium apparel Harley-Davidson Street 26
THE NEXT CHAPTER Growing share AND profit Growing market share by building riders - Maintaining and growing existing #1 positions - Targeting share leadership in all markets Delivering strong returns to shareholders - Delivering Motor Company ROIC in the top quartile of S&P 500 - Delivering strong ROE at HDFS 27
THE NEXT CHAPTER Over the next five years, we will launch 50 new motorcycles Demonstrating the power and strength of our products Changing the way people view Harley-Davidson Project LiveWire 28
THE NEXT CHAPTER To build the next generation of Harley-Davidson riders
FORWARD-LOOKING STATEMENTS The company intends that certain matters discussed in this presentation are "forward-looking statements" intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forwardlooking statements can generally be identified as such because the context of the statement will include words such as the company "believes," "anticipates," "expects," "plans," or "estimates" or words of similar meaning. Similarly, statements that describe future plans, objectives, outlooks, targets, guidance or goals are also forward-looking statements. Such forwardlooking statements are subject to certain risks and uncertainties that could cause actual results to differ materially, unfavorably or favorably, from those anticipated as of the date of this presentation. Certain of such risks and uncertainties are described below. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and cautioned not to place undue reliance on such forward-looking statements. The forwardlooking statements included in this presentation are only made as of the date of this presentation, and the company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. The company's ability to meet the targets and expectations noted depends upon, among other factors, the company's ability to (i) execute its business strategy, (ii) manage through changes in general economic and business conditions, including changing capital, credit and retail markets, and the changing political environment, (iii) accurately estimate and adjust to fluctuations in foreign currency exchange rates, interest rates and commodity prices, (iv) prevent a cybersecurity breach involving consumer, employee, dealer, supplier, or company data and respond to evolving regulatory requirements regarding data security, (v) drive demand by executing its marketing strategy of appealing to and growing sales to multi-generational and multi-cultural customers worldwide in an increasingly competitive marketplace, (vi) develop and introduce products, services and experiences that are successful in the marketplace, (vii) manage the credit quality, the loan servicing and collection activities, and the recovery rates of HDFS' loan portfolio, (viii) balance production volumes for its new motorcycles with consumer demand, including in circumstances where competitors may be supplying new motorcycles to the market in excess of demand at reduced prices, (ix) manage the impact that prices for and supply of used motorcycles may have on its business, including on retail sales of new motorcycles, Cont. 30
FORWARD-LOOKING STATEMENTS (x) prevent and detect any issues with its motorcycles or any associated manufacturing processes to avoid delays in new model launches, recall campaigns, regulatory agency investigations, increased warranty costs or litigation and adverse effects on its reputation and brand strength, (xi) continue to develop the capabilities of its distributors and dealers and manage the risks that its independent dealers may have difficulty obtaining capital and managing through changing economic conditions and consumer demand, (xii) manage risks that arise through expanding international manufacturing, operations and sales, (xiii) adjust to tax reform, healthcare inflation and reform and pension reform, (xiv) manage through the effects inconsistent and unpredictable weather patterns may have on retail sales of motorcycles, (xv) manage supply chain issues, including quality issues and any unexpected interruptions or price increases caused by raw material shortages or natural disasters, (xvi) implement and manage enterprise-wide information technology systems, including systems at its manufacturing facilities, (xvii) manage changes and prepare for requirements in legislative and regulatory environments for its products, services and operations, (xviii) manage its exposure to product liability claims and commercial or contractual disputes, (xix) execute its flexible production strategy, (xx) retain and attract talented employees, (xxi) successfully access the capital and/or credit markets on terms (including interest rates) that are acceptable to the company and within its expectations, and (xxii) continue to manage the relationships and agreements that the company has with its labor unions to help drive long-term competitiveness. In addition, the company could experience delays or disruptions in its operations as a result of work stoppages, strikes, natural causes, terrorism or other factors. Other factors are described in risk factors that the company has disclosed in documents previously filed with the Securities and Exchange Commission. The company's ability to sell its motorcycles and related products and services and to meet its financial expectations also depends on the ability of the company's independent dealers to sell its motorcycles and related products and services to retail customers. The company depends on the capability and financial capacity of its independent dealers and distributors to develop and implement effective retail sales plans to create demand for the motorcycles and related products and services they purchase from the company. In addition, the company's independent dealers and distributors may experience difficulties in operating their businesses and selling Harley-Davidson motorcycles and related products and services as a result of weather, economic conditions or other factors. 31