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Harley-Davidson Inc (HOG) Q3 2021 Earnings Call Transcript

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HOG earnings call for the period ending September 26, 2021.

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Harley-Davidson Inc (HOG -9.29%)
Q3 2021 Earnings Call
Oct 27, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you for standing by and welcome to the 2021 Third Quarter Investor and Analyst Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Mr Shawn Collins. Thank you. Please go ahead, sir.

Shawn Collins -- Manager, Investor Relations

Thank you. Good morning, everyone. This is Shawn Collins. The new Director of Investor Relations at Harley-Davidson. You can access the slides supporting today's call on the Internet at investor.Harley-Davidson.com. 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 CEO, Jochen Zeitz and CFO Gina Goetter. In addition, Chief Commercial Officer, Edel O'Sullivan will join for the Q&A. With that, Jochen why don't we get started?

Jochen Zeitz -- Chairman, President and Chief Executive Officer

Thanks, Shawn and welcome to the team. I also want to thank Shannon Burns for his great work in Investor Relations over the past two years as he moved to new finance role as part of our LiveWire division.

Good morning everyone and thank you for joining us today. We delivered a solid quarter, and are pleased with our year-to-date performance where you've seen many proof points that our Hardwire strategic initiatives are setting up a solid foundation for future growth at Harley-Davidson. As part of the Hardwire strategy, we renewed our focus and profitably driving our core business. Through 2021 we've been encouraged by the recovery of the Touring market. Grand American Touring sits at the core of our mission and our brand. We are committed to defending and expanding our share in the segment and see potential for future growth. By selectively targeting high potential categories such as Adventure Touring with Pan America and sports with Sportster S we are also maintaining our focus on long-term profitability and potential alinged to our brand and product capabilities. The increased demand that we have seen across both our core and expanding categories underscores the momentum behind the Harley-Davidson Brand and all it stands in the pursuit of freedom and adventure. We've also seen interest increasing across new riders with a marked increase in the participation in the Harley-Davidson Riding Academy. Through September, we've seen Riding Academy participation and completion increased 20% over 2019.

In addition to our strategic changes as part of our streamline market strategy, macro headwinds, including a variety of challenges from supply chain shortages to congestion at ports and increased shipping times that have been impacting our production and our other suppliers in Q3, in particular in our international markets. The supply chain challenges are likely to continue into 2022, our team remains committed to managing the effects of the disruption, leveraging the scale of our global network and infrastructure to mitigate the impact on our business. That said, I'm very excited by the global potential of Harley-Davidson brand in the coming years. And, as we focus on more profitable motorcycle unit as part of our strategy, we continue our journey toward a more efficient use of inventory. While we are below our intended inventory strategy, we've seen our dealer community adapt, improve the profitability and therefore improve the overall health of our dealer network.

I'll now hand over to Gina to provide more details on our financial performance for the quarter and year-to-date. Gina?

Gina Goetter -- Chief Financial Officer

Thank you, Jochen, and hello everyone. Third quarter results reflect continued demand momentum as evidenced by our strong wholesale and unit growth and share performance across the market. As Jochen said we did experience increased supplier volatility, which impacted our production and supply levels for the quarter. Despite this, our financial results demonstrate our agility in maximizing profitability, including the execution of a pricing surcharges in the US, optimizing production schedules to prioritize our most profitable models and markets and enacting tighter operating expense controls.

In the quarter, total revenue of $1.4 billion was 17% ahead of last year behind increased shipments and favorable motorcycle unit mix, primarily driven by the actions undertaken as part of the rewire. Total operating income of $204 million was ahead of last year with growth across both of our reported segments. The motorcycle segment, which includes our general merchandise and parts and Accessories products delivered $98 million of operating income, which is $51 million better than last year. And the Financial Services segment delivered $107 million of operating income, which is $15 million better than last year.

Third quarter GAAP earnings per share of $1.5 is $0.78 better than last year or up 35% year-over-year. When adjusting to exclude the impact of EU tariffs and restructuring charges our adjusted EPS was $1.18 and up 12% year-over-year.

Turning to Q3 year-to-date results, revenue of $4.3 billion is 30% ahead of 2020 and operating income of $831 million was $701 million ahead of last year. Year-to-date results reflect the strong unit growth over the pandemic impacted results of 2020 as well as the positive impact from last year's Rewire actions. GAAP year-to-date earnings per share was $4.06, up $3.42 from a year ago, while adjusted earnings per share was $4.29 up $0.03 from last year.

Global retail sales of new motorcycles were down 6% in the quarter with growth in North America offset by declines in our international market. North America Q3 retail sales were up 2% versus last year driven primarily by 5% growth in Grand American Touring, our most profitable segment and the successful launches of Pan American and Sportster S. Pan America maintained its status as the number one selling adventure touring model in the US since its launch earlier this year, capturing a 16% market share in the third quarter in a rapidly growing adventure touring segment and after much anticipation beyond these Sportster S motorcycles began shipping to dealers late in Q3 and we have seen very strong sell-through today.

In our international markets the retail sales declines were primarily driven by the actions taken during Rewire to exit markets and prune unprofitable models. EMEA, and APAC sales were disproportionately impacted by the decision to exit the unprofitable Street and Legacy Sportster bikes, and in LATAM the declines in the model pruning and market exits were accompanied by pricing actions taken across select models. Through these actions the LATAM region has improved their profitability, which we expect will set up a solid foundation for future growth.

Worldwide retail inventory of new motorcycles was down 30% versus last year and relatively flat to the previous quarter. Q3 inventory has been impacted by stronger demand in the US as well as supplier challenges, which impacted our ability to produce to planned levels. while inventory levels are lower than our original plan We have seen improvement in desirability as measured by stronger pricing dynamics across both new and used motorcycles and strong dealer profitability. international markets continue to be impacted more profoundly by global transport challenges, which resulted in higher cost and longer ship times to key ports.

Looking at revenue, total motorcycle segment revenue was up 20% in Q3, and up 36% on a year-to-date basis. Focusing on current quarter activity 9 points of growth came from higher year-over-year volume from motorcycle units, including the new Pan America and Sportster S motorcycle, 8 points of growth for mix driven by a larger percentage of touring bikes in the quarter and reductions across Legacy, Sportster and Street, 2 points of growth from pricing and incentives, and during the quarter we increased the pricing surcharges in the US from an average of 2% taken in Q2 to 3.5% to partially offset raw material inflation and finally, one point of growth from foreign exchange.

Q3 gross margin percent of 26.7 was down 3% points versus prior year. Our margin benefit from stronger volume, profitable profitable mix and pricing was more than offset by the negative cost headwinds across the supply chain and higher EU tariffs. Q3 operating margin finished at 8.4% and was up 3.6% points over the prior year. The positive margin benefit from volume, mix, pricing and reduced restructuring expense was able to offset the negative gross margin drivers already noted. Year-to-date operating margin is significantly ahead of last year given the COVID impact and it is also 4.6 points ahead of 2019. Despite absolute unit decline versus 2019 profit per unit has increased behind a stronger mix, pricing, lower incentives and an overall lower cost structure. These results validate the efforts that we took during the rewire in a set up a more profitable foundation for future growth.

As mentioned previously, the global supply chain remains volatile, not only for our business, but across the global manufacturing sector. Our team has continued to do a great job navigating through the unprecedented challenges and demonstrating agility and managing production schedules to optimize output. We have continued to see increasing inflation within raw materials in all modes of freights and we are forecasting this to continue at least through the balance of the year.

To help provide additional insight into the supply chain Slide 9 provides a detail on our cost of sales mix as well as the estimated inflation impact across the major components. As you can see, logistics cost began to increase early in the year and peaked in Q2 at 2.5 times our prior year cost before settling down a bit in Q3 at two times prior year. Q3 was better than Q2 as we move past the cost incurred with our 3PL conversion in North America. Materials and components cost inflation accelerated through the third quarter, where we experienced a 6% to 7% increase versus last year. This includes the cost of raw materials and higher cost of purchase components. And finally, manufacturing inflation which includes labor cost has been relatively consistent throughout the year at 3%. We're forecasting continued inflation pressure across all three buckets in the fourth quarter at similar levels to what we've seen in Q3.

The Financial Services Segment operating income in Q3 was $107 million, up $15 million compared to last year, primarily driven by $23 million of interest expense favorability. HDFS's retail credit loss ratio remained historically low at 0.8%, a 56 basis point improvement over last year. Overall retail delinquency rates have been favorably impacted by improved economic conditions and the benefits provided to individuals under the federal stimulus packages earlier this year. Delinquency rates have continued to run much lower than pre-pandemic historical levels and what we do expect delinquency rates to normalize over time we believe losses will continue to remain lower in the short term.

Looking at HDFS's base business, retail originations in Q3 were up 13% versus last year behind strong new and used motorcycle origination volume. As a result, ending retail finance receivables in Q3 were $6.7 billion, which is up 2.2% from last year. In addition, the retail allowance for credit losses at the end of Q3 was 5.1%, which is flat sequentially and down from 5.9% at the end of Q3 last year. A year ago the US economy was restrained by the pandemic and this is reflected in higher allowance rate. While today's allowance rate has improved versus the peaks of 2020, it is still above pre-pandemic levels, given the continued uncertainties surrounding the pace of economic recovery.

Wrapping up with Harley-Davidson Inc financial results, we delivered year-to-ate, operating cash flow of $926 million, down $210 million from the year-over-year period. The key driver of unfavorable cash flow was an increase in wholesale finance receivable originations. Total cash and cash equivalents ended the quarter at $2.1 billion, which is $1.5 billion lower than Q3 last year as we worked down higher cash balances held as a result of the pandemic.

As we look to the balance of the year, we are maintaining our guidance on the Motorcycles segment revenue growth of 30% to 35%. We are also maintaining our GAAP Motorcycles segment operating income margin guidance of 6% to 8%, which is inclusive of the full impact of the incremental EU tariff and the supply chain inflation laid out earlier. Our estimated EU tariff impact for 2021 has been adjusted to approximately $54 million in line with our unit forecast. We are lowering our capital expenditures guidance to $135 million to $150 million from the previously communicated range of $190 million to $220 million. The spending change is driven by tighter cash management across projects as well as changes in the cash flow phasing across key initiatives.

And lastly, we are increasing the Financial Services segment operating income growth guidance to 95% to 105% which is an increase from the previously communicated range of 75% to 85%. The improved outlook takes into account the year-to-date loss favorability, the reserve releases early in the year and our outlook for Q4. Cash allocation priorities remain to first fund growth through the Hardwire initiatives then to pay dividends, and the company may also choose to execute discretionary share repurchases in 2021 and 2022.

As we look ahead to the fourth quarter, On slide 14 there are a few known and expected factors to consider regarding our revenue and profitability. First, as we've discussed, we will be shifting our motorcycle production in the middle of the quarter to begin producing the 2022 model year product. While we will continue to run the plant this dynamic will limit the amount of wholesale shipments and revenue during the fourth quarter as bikes builds will go into company-owned inventory ahead of the model year launch. We expect the financial impact was very similar to the impact we saw last year in Q4. Other Q4 factors include higher expected expense and capital spending to support upcoming launches and marketing campaigns, and as we previously mentioned, we also expect to see supply chain inflation consistent with what we experienced in Q3. This will be slightly offset by lower Q4 restructuring spending versus last year. Restructuring charges in Q4 2021 will not be material and we no longer plan to spend the $20 million full-year estimate mentioned in previous quarters.

At this point, I'll turn it back to Jochen, who will take us through our progress executing against our Hardwire strategic plan.

Jochen Zeitz -- Chairman, President and Chief Executive Officer

Thank you, Gina. As we pursue our Hardwire goals we continue to enhance our organization and processes, focusing on alignment and efficiency. Underpinned by drive to win as a team, which is the basis for our culture, we will look to ensure that Harley-Davidson as a company and as a brand is getting stronger than ever and is positioned for long-term success. As ever, my thanks go to the whole Harley-Davidson team for all their hard work. By designing, engineering and bulding the most desirable motorcycles in the world reflected in quality innovation and craftsmanship we continue to further our legacy as the only American motorcycle brand with 118 years of uninterrupted heritage. As you know desirability provides the framework for our Hardwire strategic plan, our 5-year roadmap to both enhance and grow our position as the most desirable motorcycle brand in the world. Desirability not only impacts those new to our sport and our brand, but also a dedicated community of riders and non-riders alike.

As we recognize the post pandemic conversations around the sport of motorcycling have changed, we also see a rider base that has a desire to escape, explore the outdoors and rediscover passion for riding, all of which fits squarely in the Harley-Davidson mission of delivering freedom for the soul in the pursuit of adventure. Desirability is also a motivating factor for getting people into the sport. We know there are plenty of people who are interested in riding, but more importantly interested in riding Harley-Davidson. The Harley-Davidson Riding Academy is an important way in which would build ridership and deepen our connection with our customers.

Already we are focused on North America we have plans to take the HD Riding Academy to high potential markets across the world including China, where we see a high potential to leverage our brand and introduce new riders to the sport. We are also mindful of the need for riders to hone their riding skills at this part of their journey in pursuit of adventure. The latest offering from the Harley-Davidson Riding Academy [Indecipherable] the adventure touring rider course specifically designed the offering to complement our Pan American motorcycle. This course which we are planning to expand strategically over time is a perfect experience for new and existing adventure touring riders offering the skills and knowledge to get more out of the offroad experience by prioritizing rider safety.

With improved market conditions we've seen growing consumer appetite for our brand and our iconic motorcycles, including the new products we launched this year. Since launching Hardwire we've experienced strong demand for our products and our brand and the demand that we have seeing is in our strongest and most profitable segments. Despite the continued impact of the pandemic and related supply chain challenges we can see the potential of our streamlined market strategy as we maintain a long-term focus on profitable growth in line with our Hardwire ambitions. As we continue to execute against our strategy of 70-20-10 SKUs two of our stronghold segments of Touring, Large Cruiser and Trike we remain guided by our commitment to two critical conditions, profitable segments, improving volume, margin and potential and segments aligned to our brand capabilities with a clear path to leadership.

[Technical Issues] work hard to continue to solidify and grow our position as leaders, acknowledging that these segments are the most attractive of the global market in terms of our profit focus, another component of the Hardwire selective expansion. The focus on selective expansion also allows us to target segments that deliver balanced combination of volume, margin and growth potential and that are aligned with our brand capabilities and identity. Again, we run these segments supported by the right allocation of time and energy balanced with the right investments in product, brand and go-to market capabilities.

In February, this year we launched our first adventure touring motorcycle to Pan America. Taking inspiration from our heritage we wanted to create a motorcycle that redefine the category. The Pan America squarely built in our mission to the deliver to adventure for our riders on and off the road. The performance of the Pan America has recently been demonstrated by a group of riders who reached the summit of the Key La Pass in the Himalayas, the highest unpaved motorable road in the world at some 18,600ft, a feat at first for Harley-Davidson.

This quarter saw the Pan America [Indecipherable] to become the number one selling adventure model in the United States, an accolade that we are very proud of. We believe we will continue to grow the category in North America and the potential of the Pan America across the world is significant. For example, the North America the category accounts for 5% of the overall market and has grown 51% since 2017. When you look to Europe Adventure Touring currently represents 33% of the motorcycle market as a whole, growing 33% since 2018 and we believe it's continuing to grow. We see great opportunity to build on the success of Pan America in the first 6 months in markets and look to win in Europe and further as we actively target new Harley-Davidson riders in the Adventure Touring space. In July, we also launched the latest information of the iconic Sportster, the Sportster S at our Global Reveal event. Building on our Revolution Max platform, the Sportster S has set a new performance standard for the line and has received an extraordinary welcome in the market. Immediate response to the Sportster S has been exceptional with positive reviews including motorcycle.com praising the Revolution Max as their new favorite motorcycle engine, [Indecipherable] calling out the bike as a pillar [Indecipherable].

At launch we saw one of the largest engagement rates on our Harley-Davidson social channels. We've been pleased to see this excitement translating into orders for the Sportster S allocation being sold out through our integrated pre-order system. With our pre-order system, our dealers are able to effectively create an integrated reservation system. This direct line of communication has allowed us to work through manufacturing allocations and improves the overall dealer visibility on orders.

In Q4 this year Harley-Davidson will officially launch the reservation process in the US and Canada to capture early demand on select 2022 models. This process will provide a consistent experience both in Harley-Davidson.com and at the dealership network and will allow dealers to engage with customers on contributing and customizing the new motorcycle, keep them notified of when to expect delivery, and inform future enhancements that strengthen and support the Harley-Davidson community online and on the road. With our ambition to put our customers at the forefront of everything we do aligned to our Hardwire goals. By facilitating early engagement between dealers and customers, we are investing in strengthening this important relationship to move and integrated tools that we creating. For dealers we believe this new reservation process will improve the sell-through rate and for Harley-Davidson, it will help ensure production better match customer demand. We are excited to see the Sportster S make its way into the hands of our customers around the world and look forward to this new generation of Sportster hitting the streets in full force.

As evidenced by strong performance this quarter, HDFS's strategic asset with [Technical Issues] growth and profitability. With HDFS Harley-Davidson is uniquely positioned to be able to offer our customers value the financing options for their motorcycles. With over 65% of Harley-Davidson motorcycles financed by HDFS. Going forward, it is our goal to make HDFS the preferred choice for all Harley-Davidson riders, but in the new capabilities that rival the innovators of financial services. HDFS is integral to the Harley-Davidson success and with the plant expansion in Europe in the near-to-medium term, I'm excited for the future. With HD1 marketplace I think for HDFS it was our intention to change the face of the online market for pre-owned Harley-Davidson motorcycles blaming the best of digital and in dealer experiences aligned to our Hardwire priorities. Since launching in July H-D1 marketplace has become the go to online Harley-Davidson marketplace for dealer based listings, with the largest selection of dealer pre-owned Harley-Davidson motorcycles in the United States, including the largest selection of HD-certified motorcycles ensuring the ultimate choice in preowned. We've seen the power of the HD certified program driving desirability and enhancing the overall consumer experience while providing customers with an extra level of confidence in their purchases. As of this month, H-D1 marketplace features over 25,000 owned Harley-Davidson motorcycle listing,1200 Harley-Davidson certified motorcycles, over 500,000 units released since launch and over 550 participating Harley-Davidson dealers. Backed by the strength of our dealer network we want to continue to ensure that our riders have access to the largest selection of the best Harley-Davidson motorcycles.

We believe the H-D1 will drive connectivity and engagement with our Harley-Davidson customers and dealers, acknowledging the important part that riders of pre-owned Harley-Davidsons play in our community. While we have achieved this initial goal in the United States, it is our ambition that marketplace will continue to evolve and that it will become the the ultimate column for pre-owned Harley-Davidson motorcycles. For over a decade, Harley-Davidsons has produced and published Annual Sustainability Report, ahead of many in our sector. Over that time we've made solid progress and that progress has reinforced the importance of inclusive stakeholder management as a key [Technical Issues] as we recognize that our future will be defined not only by our product and experiences, but how we deliver value for all our stakeholders.

In publishing our 2020 inclusive stakeholder management report, we made a commitment to create a high performing, engaged and diverse workforce, create an inclusive and more sustainable dealer network and supply base, create a path to net zero environmental impact by 2050 at the latest, deliver positive impact in our communities, and aling the rewards of inclusive shareholders. By making inclusive stakeholder management a key part of our strategy, we are prioritizing long-term profitable growth and value for our stakeholders, our communities, our people and our planet. I will invite you all to read our report in full. Through the quarter and year-to-date, we've seen many of our Hardwire strategic initiatives performed well against our expectations [Indecipherable]

The initial proof points of our 5-year strategy. I believe there is tremendous potential for our brand and business globally and we will not rest until we have the best in class in every marketing segment in which we compete.

In closing, before we go to questions, I would also like to provide a brief update on EU tariff situation so far to the fact our company. At the negotiations between EF and EU continue, we are quite optimistic that a resolution will be found. We've been especially encouraged by the positive media reporting of the negotiations that we have seen over the past few weeks. We've actively engaged with both the US administration and EU as we expect throughout, we believe that Harley-Davidson bear has place in this political dispute that is not of our making.

Thank you. And now we'll take your questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Robert arms from Bank of America. Please. Please ask your question. Your line is open.

Robert F. Ohmes -- Bank of America -- Analyst

Good morning and congrats on a strong quarter in what is obviously a really tough environment for a lot of companies out there. My one question is on the pricing outlook. You spoke a lot about the average price per motorcycle obviously has gone up maybe more than we were modeling in support of the quarter, the surcharges to dealers you guys did. Can you maybe comment about what the pricing outlook could look like next year for Harley-Davidson with the new models and will some of these surcharges to become sort of a higher level of pricing going forward?

Gina Goetter -- Chief Financial Officer

Good morning and thank you for the question. I do know we took several pricing actions over the course of the past few months and we are actively assessing their impact as we go forward. That is certainly part of what we are looking at in 2022 and we remain committed to managing the profitability and the desirability of a motorcycle. So certainly, that is part of the efforts across all our product lines that we look to 2022.

Operator

Your next question comes connect the line

Gina Goetter -- Chief Financial Officer

I am sorry, can I just add one comment to that question on pricing. Robert, you remember that our surcharges really were only effective in the US. So as we look beyond into 2022 the opportunity is to take that pricing surcharge model and look holistically across the portfolio.

Operator

Your next question comes from the line of Gerrick Johnson from BMO Capital Markets. Your line is open, please ask your question.

Gerrick Johnson -- BMO Capital Markets Corp. -- Analyst

Hi, good morning. Thank you. I was pleased to hear that Edel will be available for Q&A because I was going to ask something in her ballpark. Edel can you talk about the progress in reshaping the general merchandise program, and what's been going on with your SKU reduction, are you getting better productivity? Just talk about where we are in that process. Thank you.

Edel O'Sullivan -- Chief Commercial Officer

Yes, thank you for the question. So, as you know we are in a journey with our general merchandise business, which we think is an enormous untapped opportunity for Harley-Davidson as a whole. As Jochen has referenced in his previous commentary in previous quarters and as we talk about Hardwire strategy, the brand opportunity in the power that exist for Harley-Davidson as both an apparel business and more broadly at the lifestyle business is a significant one that we intend to tap into over the course of the Hardwire and beyond. In terms of action taken to date you will note that we have increased our seasonal offering of product to bring more freshness into our dealer channel to drive more traffic into the dealership. We continue to invest in expanding our e-comm capabilities so that we can offer more choice to our customers as they look across channels and how to engage with us, and going forward, we intend to both continue to expand on the range in the quality of the products and to grow, what is a significant part of our business inviting apparel specifically other motorcycle volume continues to grow and diversify over the coming years. So it's enormous opportunity linked directly to motorcycles and to riding beyond that as we expand into lifestyle categories and we think about the potential of the brand overall and certainly continue to drive opportunities across channels so that our consumers have the most choice possible. Tons of opportunity and in GM, and I think one that Harley-Davidson in particular is well suited to capture.

Operator

Your next question comes from the line of Craig Kennison from Baird. Your line is open, please ask your question.

Craig Kennison -- Robert W. Baird & Co., Inc -- Analyst

Yeah, good morning. Thanks for taking my question and Shawn congratulations on your new role, has to do with this new reservation system that sounds promising, I'm wondering if you have any way to estimate kind of the mist retail opportunity in Q3 because of the inventory shortage. Is there any way to frame maybe what you lost there, and then as it relates to the reservation system what are some of the dynamics there? Will consumers be expected to put money down in order to reserve a slot. Thank you.

Edel O'Sullivan -- Chief Commercial Officer

Thank you. So first, let me take the second part of your question around the impact in Q3 and if we think that there has been a volume loss. It certainly is a question that is complicated by a variety of factors as we look back to maybe 2019, given the 2020 was such a unique year. There are lots of changes that have occurred as part of the Hardwire strategy so Gino referenced some of these market exits and new product introductions, et cetera and as well, they have those significant changes in the environment around us, how we think about inventory, how our dealers are operating more efficiently with the inventory that they have and certainly all of the challenges that have existed and that continue to exist in terms of the supply. So if you look at our share position internationally, we certainly haven't lost ground. We have been most affected by the difficulty in shipping to those markets. In North America, our share position would indicate that we have somewhat managed to keep up with demand, but I think it is fair to say as you look across the balance of all of those factors, and as you consider what we are hearing from our dealers that there is some volume loss that has occurred of some market demand, let me say more appropriately that we have not been able to necessarily full sale in Q3. This brings into the other part of your question around the preorder system,m reservation system. It's intended to exactly go after that. Our main goal is to ensure that our dealers able to meet the customers' demand as they walk in the door and that nobody leaves a dealership not being able to satisfy or have an answer on when they can have the product that they desire. So the reservation system will allow us to start that dialog with the customer to be able to establish what exactly is the product of their interest, have the dealer engage with the customer along that journey, providing not only the opportunities, as Jochen mentioned, to customize and to engage more fully with the product, but also have a little bit more visibility as to where that product is in the production. It will allow us to also optimize our allocation processes and ensure that we start to to target that demand more specifically, and how we think about production and ultimately ensure that the customer is able to get what they want as part of this process. So it is a very exciting for us. I think it will build upon processes that we have used before that our dealers are well familiar with, but really it intends to make sure that in this environment as we know, we will continue to potentially be challenged by some of the same supply factors we have the ability to meet the customers' demand when they with our dealers.

Operator

Your next question comes from the line of the David MacGregor from from Longbow Research. Your line is open, please ask your question.

David S. MacGregor -- Longbow Research LLC -- Analyst

Thanks for taking the question, and good morning, everyone. I wanted to ask about the Pan America and obviously off to a very strong start. So, congratulations on the early success there. But given that early success, how do you invest behind that at this point, and you talked about the European market for Adventure Touring, can you just elaborate a little further on how you see that opportunity from a timing standpoint, what your expectations would be to to take advantage of that and generate penetration into that market?

Jochen Zeitz -- Chairman, President and Chief Executive Officer

I'm happy to take that. I think first of all, the launch has been extremely successful and how we've marketed, a new product like to Pan America for the first time I think has really resonated with existing riders and new Harley-Davidson customers, and the fact that all our marketing material is still available, it's accessible on YouTube, that we've engaged with bloggers and others to review our bike and actually had riding academies with the bike immediately available, I think helped us to build significant momentum. Overall right now, you could say that pretty much every Pan America is sold out. We had another inventory that sold out within like 5 minutes just recently. So there is a very strong demand we feel how we are marketing the new product exactly the way to build excitement and get people into the brand. And what's also interesting is that we are seeing about half of the customers being existing Harley customers, about 50%, the other 50% are actually new customers to Harley. So we are achieving exactly what we wanted to achieve with the bike and that stands true also for our European market, for our Asian market where we see the potential. As I mentioned in my speech and we think in the US, we can now based on the momentum we've built in the last three months, grow the category and lead the category from here on. And in Europe, obviously Adventure Touring is a much more significant market, we believe that we can, we can tap into the market share of our competitors because we have a truly competitive bike and we will do that by getting people to write the product. That's the best thing we can do. Traditional advertising is not going to do the trick from our perspective, but really getting people to ride, get others to review our bikes is giving us exactly the type of response you want to see, in addition to us being able to uniquely customize those bikes and make them specifically Harley in a category that we haven't been. And so overall, I think we have a clear plan and we want to execute on that plan, and there is significant potential and in terms of units going forward.

Operator

Your next question comes from the line of Jaime Katz from Morningstar. Your line is open, please ask your question.

Jaime Katz -- Morningstar, Inc. -- Analyst

Hi, good morning. This is Jamie. I have a question on capex in the revised spend. My understanding and maybe this is wrong, is that this is a temporary step down in capex, but that's the Hardwire plan is still $190 million to $250 million a year. And if that's the case, what was print back in 2021 is then is that going to be pushed into 2022 for some of those projects. Thanks.

Gina Goetter -- Chief Financial Officer

Hai Jaime, this is Gina. Thanks for the question. So from a capital standpoint as we look out beyond 2021-2022 getting into the hardware we do not see that guidance changing at this point. The change that we made this quarter reflects, one just some timing of when that cash flow is going to head so all of the initiatives are still in motion. It's just a reflection of when that timing is going to hit as well as we think about capital versus expense dollars there were just some kind of rejiggering of how that fell within the P&L. So, initiatives still in motion for this year and Hardwire and as we look beyond 2021 the capital guidance is not has not changed.

Operator

Your next question comes from the line of Joe Altobello from from Raymond James, your line is open, please ask your question.

Joseph Altobello -- Raymond James & Associates, Inc. -- Analyst

Thanks. Hey guys, good morning. Just want to go back to dealer inventory, I think pre COVID you guys have typically had about 15 weeks or so in the channel, the intent obviously to bring that down which you did. You have actually cut that in half, I think you're about 7 weeks right now but seem to have overshot your target. What's the right level of inventory that you want to see in the channel. Is it somewhere in between, you call it 11 weeks going forward?

Edel O'Sullivan -- Chief Commercial Officer

Well, we wouldn't want to comment on the specific levels, as you say, there are a lot of factors that go into that, I would say that, overall, we are certainly lighter than we would like to be. I think this ties into the question previously around our ability to meet the demand in the market. This is entirely driven by some of our challenges on the supply chain that have been noted and and that is expect to continue into 2022. We are working to align supply with demand. We do intend to be efficient going forward working with our dealers, all that we have learned in 2021 of how we can best manage our inventory and do all of this in the framework of desirability. So, it is certainly a question that will be important as we move into 2022. We believe that we are, as I said a little bit lighter now than we would want to be, but something that we intend to manage as we align supply and demand into the New Year.

Operator

Your next question comes from the line of James Hardiman from Wedbush Securities. Your line is open, please ask your questions.

James Hardiman -- Wedbush Securities, Inc. -- Analyst

Hi, good morning. Thanks for taking my call. So, a question on the guidance, specifically, the margin guidance, maintained it at 6% to 8% for the year, obviously, three quarters into the year, sort of the implied guidance for range for 4Q you could kind of drive a truck through at this point. Is it at least safe to say that we're going to be at the high end of that range as we finish the year, and then on the supply chain front, I'm curious, I have really liked slide 9 and sort of how you guys broke out all of the components of what's going on with supply chain, maybe bottom line that for us and help us sort of quantify just the magnitude of the impact that all that stuff is having on your margin for this year. Thanks.

Gina Goetter -- Chief Financial Officer

Perfect. Morning, James. This is Gina.I'm actually going to start with the second part of your question, and then come back to how this plays into guidance. So as we move through Q2 to Q3, we did see the broad supply chain environment get worse. From a numeric standpoint actually, the impact to our margin structure was relatively the same. So, when you look at when we talked last quarter we talked about, call it 5 basis points or and I am sorry 5 margin points of inflation that was hitting the P&L between logistics and raw materials. As we went into Q3, we saw that same kind of 5 points hit the P&L, but it was in different spots. So logistics got to take better and then the broader raw material inflation and supplier components piece of it got worse. From an operational standpoint, we saw the same thing. So, we saw logistics start to stay equally tough. So no material improvement in the logistics environment, but there was also no significant degradation as well. But on the supplier side and what we saw going on with components, that became a tougher environment for our organization to manage through, I mean, our team is doing a fantastic job working hand-in-hand with all of our suppliers to make sure that we're getting the parts in and keeping our plants running and to date we have not seen any sort of material blackout plants shutting down which is good news, but we did see that environment within the suppliers get tougher, and that impacted our production levels, as we've talked about. So we do think as we move into Q4, we are stable in the same spot as Q3's, we're calling from inflation outlook for Q4. We think it's going to play very similar to what we saw here in Q3. And as we think about the margin guidance on a 6% to 8% that that has been factored into that guidance. I'm not going to comment on if we think we're going to be at the higher end or lower end, we feel confident in our guidance that we're giving, but there is just still volatility that is within the supply chain space. So we're going to stick with that range for now. Y

Operator

Our next question comes from the line of Billy Kovanis from Morgan Stanley, your line is open, please ask your question.

Billy Kovanis -- Morgan Stanley & Co. LLC. -- Analyst

Hi. Two questions, one, Jochen what are the sort of one or two areas, the bright spot that you see that you have visibility on the market may be missing, one or two things that you're excited about. And then secondly Gina. Just a question on HDFS's instead of op income in 2022, are you able to just provide any color there on sort of the trajectory given the sort of growth this year of around 100% at the midpoint of your guide, just where does that go next year. Thanks.

Jochen Zeitz -- Chairman, President and Chief Executive Officer

Yeah, thanks Billy. Good question I keep asking myself that question. There are more than a few bright spots, I think and I've tried to highlight them today in the last quarter. I think we are executing extremely well as per our Hardwire strategy, at least on plan, if not even better and as I said, I'm really excited about how everything is going in a tough environment, we have to bear that in mind. We have technical challenges with supply which are significant, but at the same time we are executing really well on our longer term strategies. I mentioned and it's not just one or the other bright spot, I think there are several including and in particular with our new products that we've launched with Sportster S, with Pan America, also our other Part 6 02:03____________ model year products, our new icons collection, marketplace, you name, it standing up, LiveWire is a separate division,. alot has really happened in the first 9 months of the year, and I'm particularly pleased with the progress we are making. So I'd say it's not just one or two bright spots, I think, across the board we are executing extremely well based on our strategy.

Operator

There are no further question at this time, I will now turn the call over back to Mr Shawn Collins

Shawn Collins -- Manager, Investor Relations

Well thanks everyone for joining today's call. We really hope you have a great day.

Jochen Zeitz -- Chairman, President and Chief Executive Officer

Thank you everybody.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Shawn Collins -- Manager, Investor Relations

Jochen Zeitz -- Chairman, President and Chief Executive Officer

Gina Goetter -- Chief Financial Officer

Edel O'Sullivan -- Chief Commercial Officer

Robert F. Ohmes -- Bank of America -- Analyst

Gerrick Johnson -- BMO Capital Markets Corp. -- Analyst

Craig Kennison -- Robert W. Baird & Co., Inc -- Analyst

David S. MacGregor -- Longbow Research LLC -- Analyst

Jaime Katz -- Morningstar, Inc. -- Analyst

Joseph Altobello -- Raymond James & Associates, Inc. -- Analyst

James Hardiman -- Wedbush Securities, Inc. -- Analyst

Billy Kovanis -- Morgan Stanley & Co. LLC. -- Analyst

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