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Harley-Davidson (NYSE:HOG)
Q1 2019 Earnings Call
April 23, 2019 9:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning. My name is Shelby and I'll be your conference operator today. At this time I would like to welcome everyone to the 2019 first quarter earnings conference call. [Operator instructions] Now let's turn the call over to Mr.

Shannon Burns, director of investor relations. Please go ahead sir.

Shannon Burns -- Director of Investor Relations

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. Adjacent to that link, you can find our "More Roads to Harley-Davidson" plan support materials. 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.

Matt Levatich -- President and Chief Executive Officer

Thanks Shannon and good morning everyone. Our strategy is clear: we're out to build the next generation of Harley-Davidson riders globally. With our objectives through 2027, we're executing a plan to accelerate our progress through 2022, More Roads to Harley-Davidson. We're acting with agility and discipline to take full advantage of rapidly evolving global markets.

In the short eight months since we announced More Roads , we've built our capabilities and met each of our planned milestones. Our progress and near-term results reinforce what we are indeed on the right strategic path and what we're doing is working. The next generation of Harley-Davidson riders is emerging, evidenced by new and different people who are taking interest in buying Harley-Davidson motorcycles today. The data tells us that 278,000 new riders joined Harley-Davidson in 2018 in the United States.

This group is the most diverse across age, ethnicity, and gender in all of the years we've tracked this data. Of the total mix of new riders, 18 to 34 year-olds, women and/or ethnically diverse riders comprised over 50% of the 2018 total and each segment's participation is up compared to five years ago. These results continued into 2019 of the total U.S. new retail sales in Q1.

The mix of 18 to 34 year olds was up 2.6 percentage points and the number of young people participating in riding academy and taking test rides was also up over last year. It's worth noting that while our intense focus remains on our more roads delivery it's also squarely on managing our business through the significant and very real pressures we're facing across the global motorcycle industry including the impact of the ongoing trade wars. Well these challenges require prudent management and attention. Our long term objectives remain our beacon and we're after them with unwavering commitment and determination.

In the first quarter, we added horsepower through targeted investments to propel us even further. Our teams around the world are leveraging our brand and the best products we've ever offered through increased awareness relevance trial and sales. We're more integrated in our approach bringing in new talent and deploying an arsenal of tools aligned with our stronger dealers and broader access growth catalysts. And as the data I shared earlier demonstrates, we are inspiring new types of customers.

In the U.S., increased marketing support that started earlier in the season reached more consumers and drove action. We deployed targeted consumer offers in the marketplace during the quarter and with smarter application of these investments, we saw a positive impact on sales and market share. The bulk of the effort and support in Q1, however, was in our equity marketing efforts and in the increased and more focused support we provided as part of our stronger dealers work. Harley-Davidson is increasingly showing up in relevant and unexpected places with current products and future electric lightweight prototypes.

A lineup that soon will include an innovative entry in a large and growing pedal assist electric bicycle market. We're at places where potential new riders are and can engage with us: CES, the Geneva auto show, X-Games, World Surf League and soon Formula E racing. Our efforts drove PR and media impressions up from about 400 million to 2 billion in Q1 this year and global traffic to h-d.com was up 29%. In line with our stronger dealer's growth catalyst, we're amplifying our work shoulder-to-shoulder with our dealers to build retail capabilities that lead to greater profitability and improved customer experience.

This quarter, we began executing our 20 19 actions that will ramp throughout the year, and we saw positive impact from a number of actions including a dealer support model with aligned policies to establish a consistent definition of performance and ensure that both we and dealers are focused on serving our customers. Dealers are now rewarded more clearly for retail performance and objective metrics are aligned with our company objectives. Our new performance consulting resource groups completed nearly 50 dealer visits to help improve aspects specific to each dealer's operations, leading to increased traffic and retail sales across the engagements. We also launched programs to help dealers improve response time and quality of online and in-dealership leads and our restructured field team was fully engaged to support dealers during the quarter.

Our competitiveness is essential as we continue to manage our business through one of the most dynamic and challenging business environments we've experienced in our history. The underlying industry trends persist and we continue to make prudent operating decisions in light of that. We're pleased to see our efforts impact the U.S. industry and our performance within it.

We're on the right track. More is needed and that's what we expect more roads will deliver. During the quarter, we saw proof in the wisdom of our Thailand manufacturing investment. We started supplying motorcycles to emerging ASEAN markets from our Thailand operations late last year.

The tariff mitigation we realized allowed more competitive pricing and access to more customers. As a result we saw Q1 retail sales in emerging ASEAN markets increase by 126 %. We plan to supply China from Thailand by the end of the year. Further leveraging the value of this aspect of our strategy.

I'm also very pleased that our Wisconsin unions ratified new five-year agreements earlier this month that will allow us to remain competitive in the core of our U.S. manufacturing base and give us the stability we need to help address the challenges of today while we advance our long term plans. The support and readiness of our employees and dealers is critical as we enable promising new products under our More Roads plan, game-changing products that dramatically expand our consumer reach and growth potential. Consider this, today, we participate in segments that represent approximately 40% of the global 601+c.

volume . When we deliver our new middleweight motorcycles under More Roads, we'll compete in segments representing nearly 90% of that global volume. Add to that the opportunities we have in global lower displacement and electric segments. We're on the-- we're on track to launch these new middleweight models beginning with a Streetfighter an Adventure Touring model next year.

With all the new middleweight models, we aim to have a powerful Harley-Davidson presence in some of the world's largest and fastest-growing motorcycle segments. Other more roads progress in Q1 included progress toward a partnership for a premium small displacement offering in Asia to expand our reach in that region. We're just over a year away from launching our first model that will help provide access to millions of customers in emerging markets in the region. With the acquisition of StaCyc, we've extenuated our efforts to build more riders, kids who are enjoying two-wheeled freedom with their families, connecting through Harley Davidson dealerships and events.

Starting at $649, StayCyc products further broaden the spectrum we've promised in the electric two-wheel space. We're serious about leading the electrification of motorcycling as part of inspiring the next generation to ride and to firmly rooting our place in the future of mobility. Owning a Harley-Davidson Livewire electric motorcycle is just months away. Dealers are booking preorders and installing DC fast charging stations and are already seeing opportunity unfold.

Our dealer in San Antonio tells us that immediately after his charging station went live, potential customers were coming to his store, shopping while their vehicles charged. Our efforts are igniting interest. Our social media listening reveals Harley-Davidson electric vehicle strategy is extremely positive and is driving over 50% of category social media conversation. In about one quarter of the initial interest in LiveWire including preorders, is from young adults, new people with new ideas about two-wheel freedom under the Harley-Davidson brand.

our brand remains our Vanguard known worldwide, consistently, and powerfully. I believe there's more we can do with and within the Harley-Davidson brand to drive relevance and inspire ridership. During the quarter, I hired Neil Grimmer as our first-ever Brand President. As part of our More Roads plan, Neil will bring together our consumer-facing teams around the world to invigorate Harley-Davidson experience.

The teams will deliver a global brand force that resonates with new riders and engages today's riders even more deeply to support our growth and the incredible bond our brand is known for. Neil brings over 20 years of experience in innovative company and brand building and has a strong affinity for riding and our brand experience. In fact, he rode his Street Glide from Oakland to Milwaukee last week, visiting dealers along the way for a strong start. In summary, our strategy to build the next generation of Harley-Davidson riders continues to be our true north, and our direction, clarity, and conviction could not be more sound.

In all I've shared, including the examples of More Roads progress, three things are clear. First, we're continuing to invest in our future and bring even more horsepower to our efforts and actions to drive increased value for all our stakeholders. Second, we're carefully managing our business through the challenges and toward the opportunities ahead. And third, global market conditions are continuing to evolve and so are we with agility, determination and the grit that has defined Harley-Davidson throughout our history.

We, along with our dealers, are flat-out determined to continue our leadership and stimulate global industry growth. And now I'll turn it over to John to discuss the financial results of the quarter. John?

John Olin -- Senior Vice President and Chief Financial Officer

Thanks, Matt. Our first quarter financial results came in a stronger than we anticipated driven by higher shipments and stronger operating margins than we had planned. We were encouraged by our retail sales performance in the first quarter despite the adverse impact that a recent recall had on the availability of our Street motorcycles, but we also remain cautious as we move into the height of the selling season. The summary of our Q1 results is on Slide 11.

In the first quarter, motorcycle operating income was impacted by lower shipments, unfavorable mix and incremental tariffs partially offset by lower year-over-year SG&A and lower restructuring charges. Financial Services operating income was down 7.6%. Consolidated net income was down versus prior year due to lower operating income. EPS for the quarter was $0.80.

When excluding restructuring plan costs and the impact of incremental tariffs, EPS was $0.98. In the face of ongoing retail sales headwinds in the United States, we remained focused and disciplined on tightening U.S. retail inventories, aggressively managing costs, generating cash from operations and delivering strong shareholder returns over the long term. On Slide 12, worldwide retail sales of new Harley-Davidson motorcycles in Q1 were down 3.8% versus prior year.

For the quarter, retail sales of Street motorcycles were slight-- were significantly impacted by limited availability following a recall announced in January. Sales of Street motorcycles resumed in late March, slightly ahead of our expectations. Excluding Street motorcycle sales, first quarter worldwide retail sales were up 0.4%. In the U.S., first-quarter retail sales were down 4.2% versus prior year.

The decline was driven by continued weak industry results partially offset by gains in our Q1 market share. International retail sales were down in the first quarter driven by very limited availability of Street motorcycles. While Q1 retail sales have significantly improved from recent sales trends, we expect our business to remain under pressure in 2019 driven by continuing challenges in the U.S. motorcycle industry.

We continue to aggressively manage supply and execute our marketing efforts to encourage trial, create new riders and increase conversion to sale. We also continue to introduce exciting new products and add innovation that customers value on our new motorcycles. In February, we introduced the Electra Glide Standard at a U.S. MSRP of $18,999.

Early sales of this model and feedback from dealers have been very positive. We believe our More Roads to Harley-Davidson plan is building the proper foundation and driving the right fundamentals to help steer the U.S. industry back to health and will drive significant growth across our international markets. Now let's take a closer look at the U.S.on Slide 13.

Retail sales were down versus the prior-year quarter as a result of continued headwinds within the U.S. industry partially offset by Harley-Davidson market share gains. Our Q1 decline of 4.2% represents the lowest rate of decline over the last nine quarters and was accomplished in an incredibly competitive marketplace.

The U.S. industry was down 4.7% in the quarter, which also represented an improvement versus recent industry sales trends. We believe the U.S. industry for new bikes continues to be challenged by soft-used bike prices.

We also believe that the improvement in U.S. industry sales trend was due in part to a highly competitive and promotional marketplace. Looking at used bikes, we see prices remaining at low levels compared to new. However, we are encouraged by the firming of used bike prices over the past several quarters.

During the quarter, prices of used Harley-Davidson bikes in our dealer network rose for the seventh consecutive quarter. 2019 Q1 market share of new bike registrations was 51.1%, up 0.6 percentage points. Our U.S. market share gains were driven by the execution of our stronger dealers growth catalyst, which included increased marketing and sales support, and was partially offset by what we believe to be increased competitive promotional activity and stronger performance in segments which we do not currently complete but will next year as part of our More Roads plan.

In the segments where we do compete, the Touring and Cruisers segments, which represent approximately 70% of the 601+cc market, our market share was up 2.5 percentage points for the quarter. During the quarter, we tightly managed shipments of new bikes into the dealer network. This resulted in quarter end U.S. retail inventory decreasing approximately 3,450 motorcycles over the prior year.

We are very pleased with our dealers' inventory levels and the mix of products in the field as we move into the height of the selling season. We believe this market discipline is important in maintaining customer-and-dealer value and will ultimately result in stronger retail sales of new motorcycles. On Slide 14, first quarter international retail sales were down 3.3% versus prior year. Q1 sales were down as a result of lower developed market sales partially offset by higher emerging market sales.

International retail sales were significantly impacted by the lack of Street motorcycles available for sale in the quarter. Excluding Street motorcycles, Q1 international retail sales were up 7.7% -- 4.7%. During the first quarter, emerging market-retail sales were up 5.2% driven by double-digit growth in numerous markets. Retail sales in developed international markets were down 6.2% in the first quarter.

Retail sales in Japan and Australia continued to be weak in Q1 behind contracting industry sales and competitive new product introductions in segments outside of Touring and Cruisers. We continue to support our dealers in these markets with incentives and a strong focus on a national test ride campaign. Our full-year market share in Europe was 8.8%, down 1.6 percentage points versus the prior year. As a detail on our More Roads plan reinforces, we remain confident in and committed to the great potential that international markets offer to Harley-Davidson.

Furthermore, with our Thailand facility up and running, we are excited about the growth opportunities in ASEAN region now that we can offer more competitive pricing. We believe our brand, products and distribution will drive sustained growth in international markets. On Slide 15, wholesale motorcycle shipments were down 7.9% in the quarter. Q1 shipments came in higher than our guidance of 53,000 to 58,000 motorcycles as a result of higher-than-expected U.S.retail sales.

In addition, we were able to ship more Street motorcycles late in the quarter than we had planned as a result of receiving replacement parts earlier than expected. Comparing mix to last year's first quarter, Sportster shipments as a percent of total were up behind improved sales rate offset by lower percentage of Touring shipments. On Slide 16, revenue for the motorcycle segment was down 12.3% in the first quarter behind a 7.9% decrease in year-over-year motorcycle shipments.

Revenue during the quarter was adversely impacted by a $1,163 decrease in the average motorcycle revenue per bike. This decrease was driven by unfavorable mix, unfavorable foreign currency exchange and increased sales support partially offset by higher year-over-year pricing. Both P&A and general merchandise sales were largely in line with retail sales growth in the first quarter. On Slide 17, gross margin in Q1 was down as a result of lower shipments, higher manufacturing expense and unfavorable mix in currency exchange.

Manufacturing was unfavorable versus prior year driven largely by the impact of incremental tariffs, lower absorption on reduced production and shipments and temporary inefficiencies. Q1 tariff costs increased by $21.0 million driven by incremental EU and China tariffs. Product mix was unfavorable by $26.9 million in the quarter driven by higher shipment mix of our Sportster motorcycles. Q1 revenue was down 2.4% due to a stronger U.S. dollar, which was partially offset by hedge gains.

As a result, Q1 gross margin was unfavorable by $15.1 million. Finally, raw material costs were higher during the quarter with increased steel cost. On Slide 18, operating margin as a percent of revenue for Q1 was lower compared to last year driven by lower gross margin partially offset by lower SG&A and restructuring expense.

Q1 SG&A benefited from lower year-over-year net warranty and recall expense and aggressive expense management partially offset by higher marketing investments. Restructuring charges for manufacturing optimization totaled $14.0 million for the first quarter of 2019 versus $46.8 million in 2018. Profitability and strong cash flow remain a key focus. It is our objective to further leverage our established capabilities to continue to drive profit, cash flow and top-quartile ROIC sustainably.

Financial services segment first quarter operating income shown on Slide 19 was $58.7 million, down 7.6% compared to the prior year. Net interest income was up $1.9 million due to higher year-over-year receivables. The provision for retail motorcycle loan losses was $4.9 million unfavorable in the quarter. The provision increased as a result of higher credit losses and higher receivables.

Operating expenses were up versus prior year as a result of a reporting change in which Harley-Davidson Dealer Systems business moved from the motorcycle segment to the Financial Services segment and due to higher depreciation as a result of our investment in a new loan management system, which went live on January 1.

HDFS operational results are on Slide 20. Q1 originations were up 5.4% versus prior year, driven by higher market share and increased financing of used motorcycle sales in the dealer network. Market share was 64.5%, up a very strong 5.9 percentage points during the quarter driven by our Q1 financing promotion, competitive U.S. retail rates and HDFS' continued commitment to full-credit spectrum lending.

At the end of the quarter's end, there was $365.2 million of cash and cash equivalents at HDFS and $952.1 million of liquidity available through bank credit and conduit facilities. During Q1, HDFS paid dividends of $45.0 million to Harley-Davidson, Inc. and also issued $550 million three-year MTN.

On Slide 21, Q1 30-day delinquency rate for retail motorcycle loan receivables on our Q1 2019 balance sheet was 3.73% or 42 basis points higher than Q1 2018. The annualized retail credit loss rate for receivables on balance sheet was 2.22% or seven basis points higher than 2018. We believe inefficiencies resulting from the implementation of our new loan management system were a big driver in the higher 30-day delinquency rate and increased loss rate. We expect these inefficiencies to be temporary.

HDFS continues to maintain a robust liquidity position and contributed strong profitability to the company. The remaining Harley-Davidson Inc. financial results are summarized on Slide 22. Our quarter-end cash and marketable securities balance was $759.6 million, flat to last year.

Year-to-date operating cash flow was down $158.9 million driven by higher working capital and lower net income. Regarding liquidity, the company has and intends to continue to maintain a minimum of 12 months of projected liquidity needs in cash or committed credit facilities. We believe the charts on Slide 23 demonstrate that we are a leader in ROIC at the Motor Company and ROE at HDFS, and we are a clear leader in our ability to generate and return cash to our shareholders. One of the five objectives guiding our business strategies and execution through 2027 is to deliver superior return on invested capital as measured by Motor Company ROIC being in the top quartile of the S&P 500 and by a best-in-class return on equity at HDFS.

Slide 24 illustrates the recent history of returning cash to our shareholders. In the first quarter of 2019, we increased our quarterly dividend to $0.375 per share or an increase of 1.4% and repurchased $52.6 million of our stock. Driving superior value for our shareholders is our top priority. We will continue to look for opportunities to grow value through investments that maximize the performance and long-term potential of the company and the brand.

We have a robust and disciplined process for our investment decisions. After investing in our business, we intend to return excess cash to our shareholders in the form of increasing dividends and share repurchases. On Slide 25 is a summary of our multiyear manufacturing optimization initiative. Consistent with last quarter, we expect total program operating cost to be between $152 million and $162 million with a capital investment of $65 million.

We also continue to expect manufacturing optimization to yield on-going cash savings of $65 million to $75 million after 2020. In Q1, we incurred $17.6 million of operating optimization costs. In Q2, we expect manufacturing optimization costs of approximately $20 million. We believe these investments have very attractive returns.

When completed, we expect this initiative will simplify our manufacturing footprint, provide focus on our operational investments and improve gross margin by roughly 1.25 percentage points. Moving on to 2019 guidance on Slide 26. Our 2019 full year guidance remains unchanged. In the second quarter, we expect to ship approximately 65,500 to 70,500 motorcycles, down 3% to 10% versus prior year.

In the second quarter, we expect motorcycle operating margin to be down approximately four percentage points versus last year driven in part by the impact of the incremental tariffs and lower planned shipments and unfavorable mix. In the first quarter, Harley-Davidson again demonstrated its incredible resilience in the face of challenging headwinds by delivering improved retail sales trends and a better-than-expected financial performance.

We also delivered value to our shareholders through increased dividends and share repurchases, all while taking key steps toward -- to deliver our More Roads to Harley-Davidson plan. As we look forward to the remainder of 2019, we are cautiously encouraged by the momentum of recent retail sales trends but also understand we face substantial headwinds, including an extremely competitive U.S. marketplace and incremental tariffs.

We are all well-prepared -- we are well-prepared to face these challenges and committed to driving long-term growth for the company and strong returns for our shareholders.

Thank you. Now let's take your questions. 

Questions and Answers:


[Operator instructions] Thank you. Now let's take your questions at this time. Your first question comes from David Beckel of Bernstein.

David Beckel -- Bernstein Global Wealth Management -- Analyst

Hi. Thanks for the question. I just had a question about your outlook for the remainder of the year. Has Q1 changed anything? And John, you had said, I believe I have this right, that you remain cautious heading into peak season despite a better-than-expected Q1.

Is there any reason to believe that some of the drivers of improved sales in Q1 will not be as effective going forward?

John Olin -- Senior Vice President and Chief Financial Officer

Thanks. Thanks Dave. First, before I answer Dave's question, in the prepared remarks, I had mentioned on the gross margin bridge that mix was unfavorable impact of $26.9 million, on the slides and the actual number is $39.3 million. Apologize for that mistake.

All right. Dave, with regards to our outlook for the remainder of the year, has anything in Q1 changed that? The answer is absolutely not. We had a very good quarter in the first quarter. Again, came in better from a financial standpoint.

And operating margins, we were looking -- expecting to be down 6 percentage points, we came in down 3.6 points. The driver of that was largely with more favorable SG&A than we had anticipated as well as slightly more favorable mix. Even though mix was very unfavorable, it was more favorable than we intended. But our outlook remains the same.

We expect operating margins to be 8% to 9% on a full year basis. And there was a comment that was made with regards to we're looking -- we're cautious as we move into the height of the selling season and are the drivers any different? The answer is absolutely not. The drivers are not different. Matter-of-fact, we learned a lot in the first quarter.

A lot of things that worked very well for us as we integrated the approach between our stronger dealers growth catalyst as well as increased marketing investment. And a lot of that -- those things that worked well, we'll repeat as we move throughout the year. So there is nothing with regards to what we saw in the first quarter that doesn't give us encouragement and confidence in the rest of the year. The comment was meant and said largely because of the fact that the reality of the first quarter represents about 21% of our retail sales, and as we move into the second quarter, it's a much bigger quarter and represents about 37% of our year.

And so we've got a plan. The plan is in place. The plan is working, and we're executing against it, and we feeling very good as we move forward.

David Beckel -- Bernstein Global Wealth Management -- Analyst

Great and if I could a quick follow-up. I know you're restricted to one question but was the promotional expense associated with those targeted advertisements at you know inclusive or part of your overall expectations for your projections for the year. Or was it higher than expected.

John Olin -- Senior Vice President and Chief Financial Officer

No. It's in line with our plans, and it's certainly incorporated in our full margin guidance of 8% to 9%.


Thank you. Your next question comes from Craig Kennison of Robert W. Baird.

Craig Kennison -- Baird -- Analyst

Good morning thanks for taking my question. Matt, could you expand on the objectives of this new Brand President role and why you felt you needed to add that role?

Matt Levatich -- President and Chief Executive Officer

Yes. Thanks, Craig. One of the things that we -- wherever I go in the world, the power and the sort of meaning of the Harley-Davidson brand just stands out. And we -- I believe, that the brand itself is in essence a fourth-growth catalyst.

How do we think about better leveraging? How we show up as a brand in every way that we show up as a brand, whether that's through motorcycle product, apparel product, retail, design, obviously the digital presence through -- which is increasingly important, and every aspect of marketing but including commerce through h-d.com and showing up in a unified and powerful way both for existing riders and to inspire future riders. This is a move to bring unity and leverage the power of the brand even further through, again, all the ways we show up as a brand to consumers to create a very compelling and inspiring reason for them to join the sport of motorcycling and join it on a Harley-Davidson product.


Your next question comes from Greg Badishkanian of Citi Group.

Greg Badishkanian -- Citi -- Analyst

Great. Yes. Can you-- Can you talk just a little bit about the broader political tariff background that you're seeing today? It seems like the U.S. could potentially reciprocate tariffs against the EU tariffs.

Today, President Trump mentioned that the European Union tariffs hitting Harley-Davidson are "unfair." So how is that impacting your thinking today on that topic?

Matt Levatich -- President and Chief Executive Officer

This is Matt, I'll take that. Just to back up a little bit here on this. We're impacted by the trade wars in a number of different ways. The input costs as we've mentioned on prior calls with steel and aluminum, raw material, we're managing as an ordinary course in our business.

We're not as impacted with tariffs on Chinese imports because we don't import much from China. The big impact for us is the European Union tariffs, and nothing has changed since the European Union increased the import tariff from 6% to 31% last June. It is on the books as -- in conjunction with that act last June that, that tariff will increase another 25 points in June of '21 to 56 points total -- 56% total. And so we're pursuing our strategy as we've talked about many times to get to the European Union marketplace through our international manufacturing footprint.

We have a strong case that's at the European -- at the Belgian authority within the European Union and we're waiting approval. Should that approval be denied, we have other plans to continue to pursue a strategy to enter Europe at the base rate of 6%. Clearly, this is an imperative for us as a business. And as I've said many times before, we're continuing in our path, and we'll continue to execute that strategy unless and until the circumstances change in this environment.

And it's unfortunate, but we're pushing forward with our strategy to make sure that we preserve the integrity and the growth potential within the European market. It's a significant part of our business today. It's even more important to us as we bring on the new middleweight products that play very well into international markets, particularly European markets. So the growth production that's represented in that, we cannot afford it to be hamstrung with incremental tariffs that are currently at 31% and scheduled to get to 56% two years, basically, from today.

So that's our situation. We're working through it. We're very confident in our application and in our contingency plan should that application not be approved.


Thank you. Your next question comes from Felicia Hendrix of Barclays.

Felicia Hendrix -- Barclays -- Analyst

Hi. Thank you for the question and good morning. I just -- Matt, just as a little tag along to that answer when you were just talking about your alternative plans, was that referring to the potential for the knockdown facility in Europe?

Matt Levatich -- President and Chief Executive Officer

We are. Europe has always been an option as we looked at how to mitigate the EU retaliatory tariffs. It wasn't our preferred option, Thailand was. So we have a number of other alternatives that we have at our disposal should that approval not come our way.

Again, we have a very strong case in front of the authority today. We're awaiting that approval, and we're prepared in the event that, that approval doesn't come. And that includes Europe as a possibility just as -- that's always been a possibility from the beginning of this situation.

Felicia Hendrix -- Barclays -- Analyst

OK. That's helpful. Thanks. John, in your prepared comments when you were talking about market share, you'd said you faced a headwind due to certain segments in which we don't compete but you will later in the year.

That seems like a little teaser to me, so I was wondering if you could elaborate on that at all.

John Olin -- Senior Vice President and Chief Financial Officer

Well, when we look at over-all market share or the segment of the 601+cc market in the United States, it's comprised of six segments. We participate in three of them, Felicia, and that's touring, large cruiser and small cruiser, somewhat of a misnomer because those are very large bikes as well, and those are Street and Sportster. Within that, that segment of the market has been declining at a faster rate than the other part of the market, which represents about 30% of the sales. And those are segments of the standard segment, dual and performance segments.

So in the segments that we compete in, overall, we gain market share during the quarter of 0.6%. In the segments we compete in, our market was up 2.5 percentage points. And the comment was that with More Roads and the new middleweight that Matt mentioned, in less than 6 quarters here, we will be participating in 100% of the markets in the United States. So we will enter into the performance with the Streetfighter and in the dual segment with an Adventure Touring and in the standard segment with the lower displacement motorcycles.

And obviously, they don't come with -- those are all incremental sales. They don't have used bikes in the United States. But even more exciting is the part of the world market, and the world market is much bigger in terms of streetfighting and performance and traditional segments than the United States is. And in Matt's prepared comments, he had mentioned that right now, we are in the addressable market of about 41% of the world's market.

And with the new middleweight coming out, that will be in excess of roughly 90% in six short quarters. So we couldn't be more thrilled with regards to our overall More Roads to Harley-Davidson plan and entering with the world's most powerful brand into many segments that we don't currently compete today.

Matt Levatich -- President and Chief Executive Officer

And I'm just going to add, John, that we're also eyes wide open to how competitive those segments are from a performance, technology and pricing perspective. So we're clear-eyed in the nature of our investment to deliver products that are going to be head-to-head with some formidable competitors, and we aim to complete and grow with our entry into those segments.

Felicia Hendrix -- Barclays -- Analyst

OK. Can I just ask a quick question on HDFS? John, just -- can you just walk through the thought process behind the March Madness? Just wondering -- that promotion that you did, I was just wondering what the driver was. And to what extent do think that accelerated retail sales in the quarter?

John Olin -- Senior Vice President and Chief Financial Officer

I think you're referring to the finance promotion that we had, 2.99% and no down for the top-tier? Yes, it's very much a standard promotion that we've run in the past. Matter-of-fact, we ran it last year in the second quarter. And it is just on our Touring bikes and Softail. We offer it through the top three tiers, and the top tier has got a lower rate than standard of 2.99% and no money down.

And we ran it beginning in I believe February 11 through the end of the quarter, and people buying the motorcycle at that time had the opportunity to have preferable finance rate. We're very pleased with what we saw during the promotion.


Your next question comes from comes from Jamie Katz of Morningstar.

Jamie Katz -- Morningstar -- Analyst

Hi good morning. Thanks for taking my questions. So now that the Street bikes are back to being shipped again, is that fully accounted for in the second quarter or whatever you believe you can make up from the lost sales in the first quarter?

Jaime Katz -- Morningstar -- Analyst

Right. Is that all embedded in the second quarter outlook that you expect?

John Olin -- Chief Financial Officer & Senior Vice President

I'm sorry, the -- yes. I'm sorry, it is fully accounted for in the second quarter guidance, which we have as down 3% to 10%. And again, when you look at the first half, obviously, our shipment guidance is down more than what we expect on a full year basis, and this is in line with a lot of our conversation that we had in the first quarter or as we exited the year is that we look to keep inventories very tight in the first half and through the selling season. And to that end, inventories were down 3,450 units in the first quarter.

We feel very good about where inventories stand in the dealer network and certainly the mix of that inventory. And we're excited about having Street back in the lineup in the second quarter.

Jaime Katz -- Morningstar -- Analyst

And then last quarter, you called out weakness in both the U.K. and France, and it looks like France has dropped off of at least the slide commentary. So could you articulate whether there has been any change in that region, worse or better?

John Olin -- Chief Financial Officer & Senior Vice President

Thank you. Yes. Certainly, in the fourth quarter, France was going through some consumer confidence declines, largely, we believe, driven by the yellow jacket protests. And we saw our volumes down a fair amount in the fourth quarter in France.

And that has reversed in the first quarter and we saw good growth in France in the first quarter. Likewise, the U.K. we called out last quarter. Again, lack of consumer confidence driven by what we believe to be Brexit, and that unfortunately has continued.

And we saw retail sales in the U.K. in the first quarter down double digit. And there's a lot of uncertainty driven by Brexit. There's a lot of business uncertainty and certainly a lot of consumer uncertainty and that has now been extended through October.

So we got a close eye on that market. We're working on marketing programs. But right now, there's just a lot of uncertainty in the market.


[Operator instructions] Your next question comes from James Hardiman of Wedbush Securities.

James Hardiman -- FTN Capital Markets -- Analyst

Good morning. Thanks for taking my call. So Matt and John, I think you guys both talked about better recent sales trends. Maybe, to the extent you feel comfortable, quantify that, talk about that. Sounds like maybe March was a little bit better.

And then to the extent that they were relevant, I guess maybe talk about the earlier street shipments that you got if that impacted retail, obviously you talked about it impacting wholesale, as well as, the equity marketing promos if that impacted things, and then EagleRider, I know that, that moves around quite a bit.

John Olin -- Chief Financial Officer & Senior Vice President

All right. The recent sales trends I think was the first part of that, James. And yes, in the first quarter, we saw certainly increased sales momentum. In January, retail sales were down, let's call it, well into the double digit.

In February, retail sales were near double-digit down. And in March, which is -- represents the same size as both January and February combined, was up mid-single digits. And we feel the drivers clearly are investment in our stronger dealers growth catalyst as well as increased marketing and brand support that we had in the quarter. And a lot of that takes time to take hold, and certainly the selling season starts in the March time-frame.

So we're very pleased with the trends that we saw during the quarter. We're certainly very pleased with the things that we're doing with the dealer network and on the media side. Media was up about 90% during the quarter, increased marketing events and brand work. Again, we're investing $100 million in More Roads this year.

All those things are working for us, and we saw that pay off late in the quarter. The question on -- I believe there was a question on Street. Street, we again expected to be out for the entire quarter, and last year, talked about at retail, that would be about 2,500 units. It wasn't quite that much.

It was more around 2,100 units that was affected by Street. The reason it was little bit less is that parts availability, which was expected to come in, in the first half of April came in at the back half of March. So we were able to get kits out as well as ship some Street motorcycles at the end of the quarter. And some of those did get retailed, James, about 400 more than we had anticipated.

With regards to EagleRider, when we started with EagleRider a couple of years ago, we were a little bit off cadence in terms of quarter-over-quarter versus what we had in authorized rentals. This year, we're dead on in terms of the overall shipment cadence. And so EagleRider was not an impact to the first quarter on a year-over-year basis. So when we talk about Street, that was -- the global number is up 400 units, that's across all markets.

James Hardiman -- FTN Capital Markets -- Analyst

OK. And the promo, I mean, certainly, it seems like pretty massive turnaround in March. How much do you think that equity marketing promo impacted that.

John Olin -- Senior Vice President and Chief Financial Officer

I don't know. It's an integrated approach. This is not one thing that we're doing. We're doing all types of things.

And the stronger dealer growth catalyst had all kinds of things going. We had reorganized the sales organization, we created dealer-performance intensives,instituted sales, and marketing performance consulting, exited underperforming dealers, a lot of focus on test rides, driving sales with lead management. In addition to that, we had a lot more marketing going on. So within that, there was a couple sales and support incentives, and that was the finance offer.

The Freedom Promise was going, which we did in the year-ago period. And then we worked some positive-equity leads with our dealers from HDFS, loans that had positive equity and provided a private offer for that. So all those in concert, James, did the trick. And we feel good about how they performed.

Again, we learned a lot, and we'll apply that a lot for the remainder of the year. And we feel very good about our plans as we move into the second quarter.


Your next question comes from Tim Conder, Wells Fargo Securities.

Tim Conder -- Wells Fargo Securities -- Analyst

Thank you. I just kind of wanted to follow up on that on the promotional side. Collectively, John or Matt, whoever want to take this, are you promotions different or the volume of those different as a percentage basis year-over-year? Or is it the mix of the direct-to-consumer, is that different within the overall promotions? And then as a result of that, John, you alluded to about the HDFS delinquencies having some issues with the systems transitions. If we look at that, though, I mean, we're sitting at 3.73%, and we haven't really been at that level since 2011.

What do you think of that as you get the system now kicked back-up? Do you expect that to come down? Where can we kind of see that level out? I guess any color you can give from that perspective.

John Olin -- Senior Vice President and Chief Financial Officer

All right. The first question is with regards to promotions, are they different? One is on the financing offer, it's not different in any way. But last quarter, we ran it in beginning of April, and this quarter, we ran it a little bit earlier. So that's different, the timing is different.

And again, that was in support of all the other things that we were doing in the marketplace. Freedom Promise, we ran last year, very successful. And what that does is provides a opportunity for someone to trade up and get a credit for what they paid for a Sportster to trade up to a larger Harley. So that's the same.

In terms of some of the stuff that we're doing with HDFS and using the positive equity loans, that is new. And we feel very good. Our dealers certainly are using those leads and working with them, and we're seeing good results from that. So I don't see a tremendous amount of difference, but that one is different.

Matt Levatich -- President and Chief Executive Officer

I would just add, James, that in general, the teams are becoming much more surgical in the application of reaching different customers on the terms that the customers are going to respond to. So the positive equity leads being an example of leveraging the data and the insight that we have about consumers to be much more targeted in appealing to them in ways that are going to inspire them. We are in a very competitive general industry environment, and the finance promo that John referenced is sort of a headline rate to just to be sure that we don't -- we aren't dismissed from anybody's consideration set given what's going on in the broader industry. And it's all supported with much sharper and broader top-line marketing investment to create and drive awareness, trial, test rides and so forth.

And then you start bringing in some of the specific changes within stronger dealers that John mentioned, plus things like the dealers and ourselves made much sharper with lead and contact and customer follow-up to just continue engaging with consumers to take them down the path to purchase and to enjoying riding.


Your next question comes from Sharon Zackfia of William Blair.

Sharon Zackfia -- William Blair and Company -- Analyst

Good morning. I'll stick to the one question with an add-on. But just on the SG&A, was there anything onetime in nature or was there a timing difference between this quarter and the rest of the quarters because it was extremely well controlled? So if you can give us some more color on that? And then just to clarify for the tariffs for this year, is this still $100 million to $120 million incremental?

John Olin -- Senior Vice President and Chief Financial Officer

Thanks, Sharon. With regards to SG&A, we had three drivers of SG&A that we had mentioned. Is -- one is warranty and recall overall was favorable. The other piece of it is just in general, it can't really be parsed out that closely, is overall the company has been very focused on expense management and being very prudent with the dollars that we have.

And the rallying cry for that has really been that any dollar we save gets reinvested in turning around the industry here in the United States and driving sales around the world. So a lot of incentive to be prudent with our spending, and we couldn't be prouder of the employee base and what we have done not this quarter but over the last several quarters. And then finally, those two were offset by an increase in marketing spending, a fair increase in marketing spending, which has always been the plan. And we expect on a full-year basis that our marketing spending will be up well into the double digits, all in concert with our More Roads investment, which we expect to be about $100 million this year.

Matt Levatich -- President and Chief Executive Officer

And I'll just add on, Sharon, that within the macro number, there's a significant amount of reallocation under the More Roads growth catalyst, which is our commitment to self-fund the pivot that we're doing as an organization, so everything John said plus a fair amount of reallocation of dollars we used to spend that we're now investing within and under the three growth catalysts.

John Olin -- Senior Vice President and Chief Financial Officer

Your second question, Sharon, was with regards to incremental tariffs. We pay a lot of tariffs, but the incremental piece given the recent trade disputes is still expected to be on an annualized basis $100 million to $120 million. And again, we're looking to by the end of the year have the majority of our production coming from Thailand and avoiding those tariffs as we move forward.


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

Gerrick Johnson -- BMO Capital Markets -- Analyst

Hey, good morning. March had a lot of consumer-facing offers, the 2.99%, the Freedom Promise. It seems like the targeted credits work probably the best. But with all of that, where is that hitting your P&L? Is that hitting HDFS? Or is that in your gross margin?

John Olin -- Senior Vice President and Chief Financial Officer

So -- well, they're all different types of promotions, Gerrick. So I'll start with the finance offer. When we do a below-rate financing, what we do is we subvent that with HDFS, which means the Motor Company pays for the buy down of that rate and the cost of having no money down because there's risk to that rate. And so what happens in the quarter is that the Motor Company will pay HDFS.

That is an expense in the quarter in which that happens. So it's in the first quarter, so those are in first quarter results and they happen as a contra revenue -- in the revenue line item as a contra account. Now the accounting from HDFS is a little bit different. They haven't earned that money yet because the loan hasn't gone through its paces.

So that sits on the balance sheet and is accrued into -- released into earnings as the loan is paid down that got the benefit. So those are how that's accounted for. Freedom Promise is a little bit different. That is not an off-invoice, but that is -- we forecast how much we believe that will cost in terms of people that will accept the offer, trade up the motorcycle and what we would need to pay the dealer because of them accepting the trade-in at the price that was paid.

And again, that's booked in the quarter that the offer is released.


Your final question comes from Brandon Rolle of Northcoast Research.

Brandon Rolle -- Northcoast Research -- Analyst

Hi. All my questions have been asked. Thank you.

Shannon Burns -- Director of Investor Relations

Let's do one more.

Matt Levatich -- President and Chief Executive Officer

Let's do one more then.


Your next question comes from Joe Altobello of Raymond James.

Unknown Analyst

Hi guys. This is Adam on for Joe. So I believe you mentioned there's been some early LiveWire interest from a younger demographic. Would you mind walking us through kind of the pace of the rollout here? Maybe how many dealers expect to get the product this year?

Matt Levatich -- President and Chief Executive Officer

Yes. This is Matt. So we're very pleased with the rollout. Everything is on track.

We've got about 100 dealers that are signed up. As I mentioned in my remarks, they're getting ready with the installation of DC fast charging, which is an enhanced charging infrastructure than what's typically out there. And as I mentioned, they're starting to see people in cars seek out the dealerships because they've got faster charging capabilities. We've got a training circuit out in the field traveling dealer to dealer to train the dealership staff not just on the product but actually more so on the customer who's likely to be interested in LiveWire.

And through the preorders that we're getting and the deposits that are received, we're able to plan specifically where the demand is for LiveWire here in the United States, and with that, better plan the ongoing rollout of LiveWire globally so we know we can support it with the capacity that we have. So everything is on track. Very encouraging signs with not just the age but the full nature of the consumer that's interested in LiveWire and the type of traffic and interest that it's driving to the dealer network and to the brand. And we're just at the very beginning of our EV initiative, the tip of the spear being this really amazing LiveWire motorcycle.


Your final question comes from David MacGregor of Longbow Research.

David MacGregor -- Longbow Research -- Analyst

I guess the question is really on the profitability of the middleweight bikes and I guess the new bikes that you're rolling out in the three new categories. Can you just talk a little bit about the expected profitability of those products? And you talked about the fact that you're entering more competitive markets. So I guess I'm just trying to get a sense of context here, how they're going to compare with what you're offering now but also the ramp process. How long it's going to take you to ramp to get to that targeted margin level? And just any kind of color you can give us around that would be helpful.

John Olin -- Senior Vice President and Chief Financial Officer

OK. Thanks, David. With regards to overall profitability, the middleweight bikes that come out will be very profitable at a very strong overall margin, but the margins will not be at the level that we currently see our Touring and Cruiser motorcycles, which are the highest margins in the world. And -- but those margins will be very -- compared to any the motorcycle manufacturer, the margins will be very attractive.

And also, obviously, with the growth that we expect the middleweight to drive, the spreading of the fixed cost in our plants also add a tremendous amount of opportunity for us. And as we've talked about before, while we have a gross margin in the 33%, 34% range, each incremental volume unit that goes through our factories is in the 45% to 47% range, and so we pick up a lot with that as well. The overall profitability and the ramp is really from day one, the gross margin will be set, and there's not a lot to ramp up. We got certainly start-up costs that we will talk more about next year when we get closer to it, but those typically are a couple quarters before we get in it.

But there's no big time to getting -- realizing that profitability. Right.

Shannon Burns -- Director of Investor Relations

All right. Thanks, everyone. The audio for -- 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 May 6.

The ID is 9355508. We appreciate your investment in Harley-Davidson. Have a great day.


[Operator signoff]

Duration: 65 minutes

Call Participants:

Shannon Burns -- Director of Investor Relations

Matt Levatich -- President and Chief Executive Officer

John Olin -- Senior Vice President and Chief Financial Officer

David Beckel -- Bernstein Global Wealth Management -- Analyst

Craig Kennison -- Baird -- Analyst

Matt Levatich -- President and Chief Executive Officer

Greg Badishkanian -- Citi -- Analyst

Felicia Hendrix -- Barclays -- Analyst

Jamie Katz -- Morningstar -- Analyst

James Hardiman -- FTN Capital Markets -- Analyst

Tim Conder -- Wells Fargo Securities -- Analyst

Sharon Zackfia -- William Blair and Company -- Analyst

Gerrick Johnson -- BMO Capital Markets -- Analyst

Brandon Rolle -- Northcoast Research -- Analyst

David MacGregor -- Longbow Research -- Analyst

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