Ladies and gentlemen, thank you for standing by and welcome to the Fourth Quarter and 2019 Full Year Earnings Conference call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to your speaker today, the Director of Investor Relations, Mr. Shannon Burns. Thank you. Please go ahead, sir.

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. 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 obligations [Technical Issue] 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

Thank you, Shannon and good morning everybody. We're pleased that our fourth quarter and full year performance was in line with our expectations and indicates increased business stability, driven by the tremendous efforts of our employees and dealers to inspire writing and navigate the challenges of our dynamic business environment.

During 2019, we significantly advanced our More Roads plan, investing, building capabilities and achieving milestones keeping us on track to return to significant growth in 2021. We have a lot to be proud of and much to look forward to. More Roads is an important aspect of the total Company transformation journey that has been underway for the better part of a decade.

We began this transformation with a focus on manufacturing that includes our recent multi-year manufacturing optimization initiative anchored by the consolidation of our motorcycle assembly plant in Kansas City into our expanded plant in New York. The work on this initiative is nearly complete and we expect annual ongoing savings of approximately $70 million in 2021. John will delve into this more later. We've also transformed product development, allowing us to deliver an innovation-led approach with a 30% faster time to market, dramatically increasing our capacity and capability to broaden our product portfolio to reach and inspire more people. This includes electric products, motorcycles in new segments and sizes and even e-bicycles.

Our front foot approach to innovation is also helping to strengthen our leadership in the Touring and Cruisers segments, leading to a historically high 72.4% market share of those segments in the U.S., up 2.5 percentage points over 2018. We've delivered industry-first innovations like touring traction control with advanced ABS and H-D Connect, seamlessly linking rider and motorcycle.

We're also leading the electrification of motorcycles with class-leading products developed in conjunction with our new team and our EV development center, LiveWire labs in Silicon Valley. Our innovation and growth pursuits under More Roads have also stimulated smart targeted acquisitions like StaCyc, and new collaborations like QJ in China.

All of this transformation investment and effort has allowed us to emerge with more flexible, responsive and efficient product processes from design to build; processes we continue to improve and evolve with the changing needs of our customers.

We are now well into the final transformation phase, a comprehensive overhaul of our marketing and go-to-market capabilities to become a customer-creation company, driving demand and delivering growth by shaping our place in markets around the globe. We are becoming a company that excels and exists to not only build great bikes, but to build riders.

This focuses us beyond simply what someone is riding to why people ride, and how we can use our insights to deliver targeted experiences and increase commitment to riding. We're shifting our mindset and intentionally guiding and nurturing our culture to crave agility with deeper skills and capabilities that are oriented toward customer creation. We've challenged the structure across the company, adding new talent and organizing resources to swiftly move in these new directions.

We plan to continue new growth pursuits, including new business models, targeted acquisitions and new collaborations. Our More Roads milestones for this year include some very heavy lifting in new product delivery. We'll again raise the bar and reach impact and access when we launch our first new middleweight motorcycles, the Bronx Streetfighter, and our Pan America Adventure Touring models.

We also plan to launch a new small displacement motorcycle in China and expand outside of motorcycles with the launch of Harley-Davidson e-bicycles. Our efforts are amplifying the incredible power of our brand and leveraging and expanding our expertise to deliver more for our customers.

Our distribution model also includes more regional distribution centers, more access points and an even stronger global dealer network. Evidence of the transformation is also appearing in how we measure performance. Our 2020 guidance replaces heavyweight unit shipments with revenue as a primary performance measure.

Revenue better reflects our comprehensive efforts to amplify our brand and foster a customer-creation culture, one that builds committed riders. Revenue growth, driven by an expanded product portfolio, a fresh apparel approach and a pipeline of innovative new services that inspire, develop and engage people to ride.

We talked about this shift last quarter when we adjusted our long-term international growth objective from measuring percent of motorcycle volume to measuring percent of HDMC revenue. At that time, we also sharpened and intensified our U.S. growth objective for 2027, challenging ourselves to expand the total pool of U.S. riders by adding more riders and retaining more riders each year.

During 2019, we saw progress in the right direction. We finished 2019 with 3.1 million Harley-Davidson riders in the U.S., 55,000 more total riders than in 2018.

During the year, 527,000 riders joined the Harley-Davidson brand, that's almost 25,000 more than joined Harley-Davidson in 2018. The number of people who joined Harley-Davidson in 2019 demonstrates brand power and our improving capabilities. However, we know more is needed to reach our objective, which reinforces the criticality of our expanded focus and efforts to make riding matter more to more people.

Rider migration insights we have tell us, we need to bring people in, build their confidence and capability, and keep them riding through the critical first years of their riding journey. We are testing and developing specific programs and actions right now that nurture new riders and inspire and develop all riders to continue riding with us.

We know we must continue improving and growing the number of joiners and improve retention rates to end 2027 with four million riders in the United States. And this is the right challenge at the right time to drive continued strengthening of our customer creation capabilities as the final chapter of our decade-long transformation as a company. We set out to accomplish a lot in 2019 and we did what we said we would do-demonstrating our accelerated efforts to achieve More Roads growth and our long-term objectives.

To sum it up, in 2019, we asserted our leadership in the electrification of motorcycles with the launch of LiveWire, our first electric motorcycle, and IRONe for kids. Our commitment to leading in the electrification of motorcycles includes broad EV portfolio development, driven by the talent and capability of our EV product development team that expanded significantly in 2019. We launched high-impact new models and delivered advanced technology to our class-leading model year 2020 motorcycles to make the ride even better. We also expanded our Thailand plant to serve the ASEAN markets, increasing customer access with more competitive retail prices.

Our global e-commerce and digital capabilities were improved and expanded, broadening exposure and access to our products. In 2019, 75% of people who purchased Harley products on Amazon were new to Harley-Davidson. Finally, we advanced good to great dealers, making progress toward our customer experience and conversion targets. The dealers who participated in our U.S.

Dealer operations consulting engagements on average saw nearly a 6% increase in motorcycle retail sales over dealers not yet in the program. Outside the U.S., we began implementing stronger dealer initiatives in the second half of the year, which helped retail sales in developed markets improved markedly, finishing up year over year in the second half. We're on track with the expectations we outlined at the start of the More Roads plan, making the investments that will set us up for the growth targets we expect to achieve in 2021 and beyond. Two years in, our new products, stronger dealers broader access and amplified brand efforts are building and demonstrating key skills and capabilities.

And while competition and challenges are robust, we have risen to the task along the way, competing on our merits and delivering shareholder value, while we navigate the current environment and advance our strategy. We're driving stability in the business, underscored by our ability to mitigate tariff impact, shift away for value-depleting sales incentives and leverage HDFS as an important strategic asset to enable business performance. Harley-Davidson is 117 years strong, but it is far from the company it was before the downturn, and it is not the same company it was even three years ago. We've transformed nearly every aspect of how we do our work.

And while we have more to do in our More Roads quest to firmly establish customer creation prowess, we remain crystal clear that riding is and has always been what it's all about. We aim to make riding matter more to more people and build committed riders. From where we stand today, our return to growth is not off in the distance, it's right around the corner, and 2020 is our pivotal year. I'm looking ahead, and I feel good about the hard work that has laid our foundation for the year that we have ahead of us and the journey that we are on for the long term.

Thank you for continuing to drive with us. And now I'll turn it over to John to discuss the financial results of the quarter and the full year and what we see ahead. John?

John A. Olin - Senior Vice President & Chief Financial Officer,

Thanks, Matt. In the fourth quarter, we were pleased with our earnings and continue tempering in our U.S. retail sales declines. During the quarter, and throughout 2019, we made significant progress against our More Roads to Harley-Davidson plan.

The summary of our Q4 results is on Slide 10. In the fourth quarter, Motorcycle segment operating loss improved, driven by lower year-over-year SG&A and the favorable impact of our manufacturing optimization initiative, partially offset by lower shipments, higher year-over-year tariffs and unfavorable mix. Financial Services operating income was down 7%. Consolidated net income was up versus prior year.

Earnings per share for the quarter was $0.09. When excluding restructuring plan costs and the impact of recent EU and China tariffs, adjusted EPS was $0.20. We remain focused and disciplined on inventory management, aggressively managing costs, generating cash from operations and delivering strong shareholder returns over the long term. On Slide 11, worldwide retail sales of new Harley-Davidson motorcycles in the fourth quarter were down 1.4% versus prior year, which represents a significant improvement in the rate of decline versus last year's fourth quarter, which was down 6.7%.

In the U.S., Q4 retail sales were down 3.1% versus prior year, which represents an improvement in the rate of decline over recent quarters. Harley-Davidson's fourth quarter retail sales benefited from the year-over-year tempering of the industry's retail sales rate of decline and strong H-D market share gains. International retail sales were up 0.5% during the quarter. Emerging markets retail sales continue to increase, while developed market retail sales were down slightly.

After a challenging second quarter, we regained momentum in the third and fourth quarters as we continue to execute our stronger dealer programs, invested in amplifying the brand through increased marketing, introduced our model year 2020 bikes and aggressively managed the supply of motorcycles into the dealer network. We expect continued headwinds in 2020 in the U.S. and developed international markets. We expect to overcome these market challenges by focusing on building committed riders and executing our More Roads to Harley-Davidson plan.

We believe that we have a strong plan for the future, and we are executing with great urgency. Now let's take a closer look at the U.S. on Slide 12. During the fourth quarter, Harley-Davidson's retail sales were down 3.1% versus prior year behind improving retail sales performance and strong H-D market share gains.

We were pleased to see the continued tempering of our retail sales rate as the fourth quarter represented the lowest rate of decline in the U.S. over the last 12 quarters. Q4 retail sales for the industry were down 5.6%. This rate of decline was significantly better than 2018's fourth-quarter decline, but was sequentially higher than Q3 of 2019.

On a full-year basis, the rate of industry decline has improved significantly from down 8.7% in 2018 to down 4.1% in 2019. On a full-year basis, Harley-Davidson's retail sales decline of 5.2% was improved over 2018's decline of 10.2%. We believe that this year-over-year improvement in the rate of decline was driven by improved industry performance, our focus on stronger dealers and increased marketing investment. During the quarter, Harley-Davidson's market share of new bike registrations was 50.4%, up 1.0 percentage points, despite the continued unfavorable mix shift to segments in which we do not currently compete, but will begin competing in by the end of this year as we execute our More Roads plan.

In our segments, Touring and Cruiser, our Q4 market share was very strong, up 3.9 percentage points. We tightly managed the shipments of new bikes into the dealer network in the quarter. This resulted in quarter-end U.S. retail inventory decreasing approximately 1,500 motorcycles versus prior year.

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 13, fourth quarter international retail sales were up 0.5% behind growth in our emerging markets offset by slight declines in our developed markets. Retail sales in emerging markets were up 2.2% during the quarter versus prior year. The sales increases were led by growth in our ASEAN markets and in China.

Strong growth in these markets was partially offset by soft sales in India. Retail sales in developed markets were down 0.5% during the quarter. Our developed markets experienced strength in Japan, Southern Europe and Australia, offset by softness in Canada and Northern Europe. Our full-year market share in Europe was 8.9%, down 1.4 percentage points versus prior year.

Our market share was adversely impacted by lapping last year's strong Softail results and by lower sales of our street motorcycles as a result of the Street recall. The detail on our More Roads plan reinforces our confidence in, and commitment to, the great potential that the international markets offer to Harley-Davidson. Our plan supports the strength of our brand, products and distribution to drive sustainable growth in international markets. On Slide 14, wholesale motorcycle shipments in Q4 were down 7% and roughly at the midpoint of our guidance.

Overall family mix shifted from Touring to Cruiser motorcycles versus last year's fourth quarter. On Slide 15, Q4 revenue for the Motorcycles segment was down 8.5%, behind 7% decrease in motorcycle shipments. Average motorcycle revenue per bike was down $504, driven by less rich product mix and unfavorable foreign currency exchange, partially offset by higher year-over-year pricing. On Slide 16, gross margin in Q4 was down as a result of lower shipments, a less rich product mix, unfavorable currency and higher manufacturing expense.

Q4 product mix was unfavorable by $9.7 million, driven by a shift in family mix. Q4 gross margin was adversely impacted by $8.0 million of unfavorable currency, driven by a stronger U.S. dollar and lapping 2018 hedge gains. In Q4, manufacturing expense was unfavorably impacted by lower absorption on lower production and shipments, along with increased year-over-year tariffs, largely offset by savings of $15.5 million resulting from the implementation of our new manufacturing optimization initiative.

On Slide 17, operating margin as a percent of revenue for Q4 improved compared to last year, driven by favorable SG&A and restructuring expenses, partially offset by lower gross margin. SG&A was significantly lower than prior year as we lap charges related to recalls, and as we continue to aggressively manage costs and investing, while investing in increased marketing and our More Roads plan. Restructuring charges totaled $0.7 million in the fourth quarter, favorable to prior year by $18.7 million. Profitability and strong cash flow remain a key focus.

It is our objective to further leverage and build our capabilities to continue to drive profit, cash flow and top quartile motor company ROIC. Financial Services segment fourth-quarter operating income, shown on Slide 18, was $58.9 million, down 7% compared to the prior year. Net interest income was up $4.2 million due to higher year-over-year receivables and favorable interest rate yields, partially offset by higher interest expense. The provision for retail motorcycle loan losses was $4.0 million, unfavorable in Q4, driven by $2.3 million of higher credit losses and increase in our credit reserves.

Operating expenses were up versus prior year due, in part, to higher depreciation as a result of our investment in a new loan management system, which was implemented in January 2019. HDFS' operational results are on Slide 19. Q4 retail originations were down 5.9% versus prior year, driven by lower new bike sales. HDFS' market share remained very strong at 63.7%.

At the end of the quarter, there was $363.2 million of cash and cash equivalents at HDFS and $1.77 billion of liquidity available through bank credit and conduit facilities. During Q4, HDFS raised EUR600 million in an MTN, and paid a dividend of $40 million to Harley-Davidson, Inc. On Slide 20, both our 30-day-plus delinquency and credit loss results were up versus prior year, despite having moved past start-up efficiencies resulting from the implementation of our new loan management system. The 30-day delinquency rate for retail motorcycle loans receivable, loan receivables on balance sheet at year-end was 4.39% or 27 basis points higher than 2018.

The annual retail credit loss rate for receivables on balance sheet was 2%. The 2019 full-year loss rate increased 24 basis points, primarily due to the LMS impact in the first three quarters of 2019. Q4's loss rate was up 10 basis points, driven primarily by two factors: first driver relates to our strategic efforts to build riders, which included programs such as First Time Buyer and dealer paid no money down. While some of these loans may increase delinquency and credit loss metrics, they're prudently underwritten, and we expect the increased revenue from these programs to more than offset the higher expected risk.

The second driver of Q4's increased loss rate is softer motorcycle prices at auction. The remaining Harley-Davidson, Inc. financial results are summarized on Slide 21. Our year-end cash and marketable securities balance was $833.9 million.

Full-year operating cash flow of $868.3 million was down versus last year, 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 and/or committed credit facilities. We believe the charts on Slide 22 demonstrates that over time, we are a leader in ROIC at the motor company and return on equity 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 strategy and execution through 2027 is to deliver superior return on invested capital as measured by motor company ROIC in the top quartile of the S&P 500, and by best-in-class returns on equity at HDFS.

Slide 23 illustrates our recent history of returning cash to our shareholders. In the fourth quarter of 2019, we paid a dividend of $0.375 per share and repurchased 87.7 million - I'm sorry, $78.7 million of our stock. Driving superior value for our stakeholders is a top priority. 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. Slide 24 is the summary of our multiyear manufacturing optimization. Full-year results came in favorable to our expectations, with total realized savings of $32.2 million and an incurred cost of $43.0 million in 2019. As of the end of the fourth quarter, our investment in manufacturing optimization is largely compete - complete.

We continue to expect annual ongoing savings of $65 million to $75 million after 2020. Moving on to our 2020 full-year guidance on Slide 25. In 2020, we expect Motorcycle segment revenue to be approximately $4.53 billion to $4.66 billion, or down 1% to up 2% versus 2019. As Matt mentioned, in 2020, we are now providing revenue guidance instead of our shipment guidance.

We are making this change because revenue is a much more comprehensive view of our business given the breadth of revenue growth drivers included in our More Roads plan that are not captured by motorcycle shipments. These revenue drivers include such things as small displacement motorcycles, electric bicycles, electric two-wheelers for kids and expanded focus on broadening access to our general merchandise offerings. To help bridge the changeover to revenue guidance, we expect 601+cc and LiveWire worldwide motorcycle shipments to be down modestly to up slightly in 2020. We expect H-D's U.S.

Retail sales to be lower year over year behind lower U.S. industry retail sales, but to continue to temper during the year. During 2020, we expect worldwide retail sales to be positively impacted by sharpened focus on increasing committed riders and our investment in stronger dealers; model year '20 and model year '21 motorcycles, including our entry into the dual and sports segments with Pan America and Bronx models in late 2020; and expansion of the international dealer network. However, we expect these positive sales impacts to continue to be met by strong headwinds, including a declining U.S.

New bike industry, a relative shift in rider preference toward segments in which we do not currently compete, but we'll enter by the end of this year and a marketplace crowded with highly competitive promotions, incentives and discounts. We expect to continue to aggressively manage the supply of retail inventory. However, we do expect year-end worldwide retail inventory to increase moderately behind dealer fill of our new middleweight motorcycles and with the replenishment of our European dealer inventory, which was reduced at the end of 2019 in anticipation of low tariff motorcycles shipping from Thailand. In 2020, motorcycle segment operating margin as a percent of revenue is expected to be between 7% and 8%, up from 2019 operating margin of 6.3%.

We expect gross margin to increase in 2020 behind lower year-over-year EU and China tariffs and strong operational productivity, including approximately $23 million in incremental manufacturing optimization savings. However, we expect these gains in gross margin to be partially offset by unfavorable motorcycle mix. During 2020, we expect the impact of recent EU and China tariffs to be approximately $30 million, which is down significantly from 2019's tariff impacts of $97.9 million. This includes EU tariffs of approximately $20 million due to the sell-through of high-tariff inventory and tariffs on our Trikes and CVO models, which we will continue to produce in the United States.

In addition, we expect to incur approximately $15 million in Section 301 Tariffs. While we continue to drive costs out of our SG&A spend, we do expect it to be higher in 2020 behind increased investment in our More Roads plan as we lapped $34 million of 2019 recall benefits, primarily driven by supplier recall cost recoveries that we do not expect to repeat. In 2020, our investment in our More Roads plan peaks as we finalize product development and plan to launch our new middleweight motorcycles, electric bicycles and a small displacement motorcycle in China. Finally, we do not expect any restructuring costs in 2020, which will compare favorably to the $32.4 million of charges incurred in 2019.

At HDFS, we expect modestly higher revenue in 2020 to be largely offset by a higher provision for credit losses and higher interest costs as we roll over low interest rate MTNs. Credit loss are expected to be slightly higher despite lapping last year's higher losses driven by the implementation of the LMS system. We expect 2020 credit losses to be affected, in part, by higher loss experience on certain financing programs. In 2020, we will adopt CECL, the new accounting pronouncement for credit losses.

As a result, we expect a one-time increase in the allowance for credit losses in the range of $70 million to $110 million, with the offset being a reduction to retained earnings net of taxes. This new accounting standard will not have an impact on the economics or cash flows of the HDFS business. However, we do expect increased earnings volatility as a result of CECL. To help our investors better understand HDFS' changes in provision expense, we will begin providing actual year-over-year credit losses in addition to changes in reserves.

Capital expenditures in 2020 are expected to be between $215 million and $235 million. We expect our full-year effective tax rate to be 24% to 25%. As we look forward to the first quarter of 2020, we expect Motorcycle segment revenue to be between $1.09 billion and $1.17 billion down 2% to down 9% versus prior year. Motorcycle segment operating margin as a percent of revenue is also expected to be down approximately 2.5 percentage points.

First quarter gross margin is expected to be flat, driven by favorable tariff impacts and increased productivity, while we expect to be - which we expect to be offset by unfavorable mix. SG&A is expected to be higher as we lap approximately $28 million of 2019 favorability related to recall recoveries. To wrap up, we faced and overcame a number of challenges in 2019. Most notably, we have a plan to mitigate the majority of our recent EU and China tariff impacts and made significant progress on our More Roads plan.

As we look to 2020, we are very encouraged by the momentum that we have gained over the last year on retail sales trends, but also recognize the substantial headwinds that we continue to face. Looking longer term, we are incredibly excited about our 2020 More Roads milestones, which will strengthen our existing business and unlock sustainable growth that will propel us in a new direction and deliver significant value through 2022. We are committed to driving long-term growth for the company and strong returns for our shareholders. Thank you.

And now let's take your questions.

Question & Answers

Operator

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

Craig Kennison - Baird - Analyst

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

Matt Levatich - President and Chief Executive Officer

Thanks. It's the right question. It's a good question. And what we had year over year is a very similar retention rate. So as the new riders joined, the people that left also increased, as you pointed out, for a net increase of 55,000. So what we know from the rider migration database, we have a ton of insights about the profile of the exiters and the reasons why they're leaving and the single biggest driver and where we're focusing our efforts is on that early stage rider. Those people that have raised their hand, took the time, invested the money, learned how to ride, purchased a motorcycle, intend to exit the sport within the first three years because they haven't yet built the confidence necessary to become what we're calling a committed rider.

That is the single largest driver of that exit number, and it is, therefore, the singular focus of our efforts around building rider commitment is how do we really nurture those early stage riders. And those programs that I referenced that are under way right now are very specific programmatic things that we're doing to address that single biggest driver of those early stage exiters. And yes, as we see the total participation in the motorcycle increase that we're driving, we should expect to see a return to growth in P&A and apparel sales as well.

Craig Kennison - Baird - Analyst

Thank you.

Operator

Your next question comes from the line of Sharon Zackfia with William Blair. Sharon, your line is open.

Sharon Zackfia - William Blair - Analyst

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

Matt Levatich - President and Chief Executive Officer

Yes, Sharon. Thanks. This is Matt. I appreciate the question. I would say when you look at the net increase of riders in 2018 was to 26,000, I believe. And last year, 2019, was 55,000. So we are improving, but - and I mentioned this in my remarks, we need to accelerate our efforts. And that's what's behind this targeted effort that I mentioned in answering Craig's question. So we set out 10-year objectives and that objective specifically is to increase the number of riders in the U.S. to four million. It's at 3.1 million now, so clearly, we have to pick up the pace to close that gap. And we have very specific programs in place that we're piloting right now to do that.

And we feel good about it. And part of what's challenging about this transformation is it's really challenging the culture of the company, including even in the dealer network. When for 100 plus years, we've woken up every morning and told ourselves, our job is to make great motorcycles, and we did a great job at that. It is quite a different challenge to wake up in the morning and say we now need to build riders.

That requires different skills, different capabilities and different mindsets and a different cultural attitude and culture, our culture is very powerful, it's important, and to shift that culture, we're very - taking very deliberate steps with talent, with organizational structures and conscious efforts to just reinforce to everybody associated with the brand that our job is beyond just building great bikes, it's really becoming very skilled at building riders and customer creation, as I had mentioned. And it's simply to say that of all the transformations that we've done, and they've been very significant and very difficult, whether we're talking manufacturing or product development, this one is the most significant because we're thinking differently about what we're here to do and that requires all of us to show up differently in the company and even including in the dealer network. So we're into it and we have a lot more work to go, you can see that in the numbers, we need to accelerate our pace and we're adding things to the mix to do that.

Operator

Your next question comes from the line of Tim Conder with Wells Fargo Securities. Tim, your line is open.

Tim Conder - Wells Fargo Securities - Analyst

Thank you. Matt, if I would, just maybe do - can you delve into a little bit of the specific programs maybe that you started in 2019 and then maybe some new ones that you may be doing in 2020 here to help further reduce that churn rate, which again, you're making the net progress, which is good. But again, as you said, that's the key focus within the first three years of ridership. And then just a follow-up for John, on HDFS.

Just, John, would you anticipate now given that we're past the anniversary of the system changeover, those delinquencies to kind of level off here, even though you said that your maybe that's popped up a little in Q4 due to some of the new programs. Thank you.

Matt Levatich - President and Chief Executive Officer

Okay. I'll start. Just I would say broadly, there's four target areas that we have based on the rider retention and ridership insights. So - and we have pilots of various types in place in Q1.

Last year, we did some sort of intermediate steps short of riding academy to give people the opportunity to just have a simple sort of two hour overview so that they could get in first gear, get their foot up on the pegs and right across the parking lot and just begin to feel beyond the jump-start that we've been doing, what it's actually like to ride to just nurture them into the whole process of deeper learning. So that is ongoing, and we've added to the mix notionally or conceptually anyway, specific programs around riders, recruiting riders, so leveraging the passion of existing riders to help build the next-generation of riders. Rider recruiting riders, riders coaching riders, which is to help those people in those early stage gain the confidence and the skills and capabilities that they need to fully enjoy riding. And in addition to offer riders of various experience levels, opportunity to increase their experience on their turf and on their terms, not, if you will, locked into specific programs.

The third is riding anywhere anytime. And this is addressing some of the barriers that people have that are practical around, I don't have a bike, or I don't have the gear, or I don't have someone to ride with, I don't know - I can't find the time to do it. So we're piloting different things to see if we can unlock some of those barriers. And the fourth one is really into solidifying rider commitment, and we know from our research that riding epic journeys as simple as your first overnight ride tends to really solidify the power of riding as sort of a transformational personal experience. And so that riding epic journeys idea is about how do we help people, again, get deeper into the passion that we all have for riding.

So that's the programmatic themes or concepts, if you will, that we have specific in market tests that were under way right now that we'll begin reporting on as we go through the year.

John A. Olin - Senior Vice President & Chief Financial Officer,

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

Tim Conder - Wells Fargo Securities - Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Adam Jonas with Morgan Stanley. Adam, your line is open.

Adam Jonas - Morgan Stanley - Analyst

Thanks, everyone. I want - first want to say I really appreciate and respect how you articulate the challenges. It really is kind of daunting, things like e-bikes and building riders, the cultural change for the 117-year-old company, it's really profound. You clearly demonstrate a very high awareness and they're trying a bunch of really valiant efforts here.

I guess [Indecipherable] we're having this conversation, though, at a time of arguably the greatest U.S. economic expansion, one of the greatest economic expansions and greatest equity bull markets in history. So it'll be one thing if we were having these problems like in a downturn, but it's just the economy is really humming along, right? So I guess, if in the event, over the next year, which you described it as a pivot year, I think, people on this call agree. If these efforts don't really show the fruit that you're hoping here, and then there's no guarantee of success, would your management team and your board of directors consider strategic alternatives, including a potential sale of the company to help preserve this incredible franchise and brand and to maximize shareholder value? Thank you.

Matt Levatich - President and Chief Executive Officer

Thanks, Adam. I would say that the board is always mindful of maximizing shareholder value and assessing all the decision and obviously, the strategy of the company. So we're obviously very - as a board, very tied into the operations performance and strategy of the company, and we'll continue to evaluate it. We have a lot of growth platforms beyond just increasing ridership in the United States.

And so you'd need to look no further than the investment in the middleweight platform and the potential that, that has, as we gain access to the significant majority of the heavyweight marketplace outside the United States. So we've been laying the groundwork with dealer distribution points, stronger dealer initiatives, the plant in Thailand, laying the groundwork for a very strong and potent impact of that middleweight platform investment. And so independent of those U.S. ridership investments, we have growth trajectories that are part of our strategy.

EV is another one. Not just to the ease of ridership on an EV product is remarkable, but also investing in making sure that we are positioned as the leader of the electrification of two wheels because that is clearly the direction that automotive products are going over time, and they make for phenomenal products. So all these things are part of the strategy. I would say that it is important for this organization to challenge ourselves in the way that we are to become a customer-creation company here in the United States.

Anything short of that, and it may have proved that, that is a very difficult, durable problem to solve, but we are all about it because it's important that we be about it, that we change the way we show up as a company and get skilled in the ways needed to do that. The challenge today is significant, not just people are joining the sport of motorcycling. And people are leaving for different reasons, as I alluded to earlier. But we - it's not - we're not talking about competition in the way we used to talk about competition.

Competition is about competition for people's scarce time, people's scarce funding and commitment. We use that word a lot, commitment is becoming scarcer in the decisions people make as far as investing their time. And you can see that in all kinds of other industries that require a lot of time to become really embedded in doing something, and that's what our efforts are about. We think those efforts are very important skill and capability building for the company anyway, even if this challenge proves more durable than we are setting out to achieve. And in the meantime, we have lots of other growth platforms that we're investing in as well.

Adam Jonas - Morgan Stanley - Analyst

Thank you.

Operator

Thank you. Your next question comes from the line of Jaime Katz with Morningstar. Jaime, your line is open.

Jaime Katz - Morningstar - Analyst

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

John A. Olin - Senior Vice President & Chief Financial Officer,

Thanks, Jamie. This is John. With regards to the launch, we - I think you're referring two of the middleweight motorcycle that will bring us into the segments that we don't currently compete in, in particular, the dual segment with Pan America and the sports segment with our Bronx motorcycle. So that will be coming out toward the end of the year, and we would expect some shipments, largely in the United States for that and some retail sales in the U.S.

And not so much on the retail side of our European markets at that point, given the time for shipment. The second question is on operating margin. Our guidance is for 7% to 8%. And I believe you had mentioned 9%., given the fact that we have tariffs.

So when we look at the overall guidance of eight to - 7% to 8%, that includes tariff and manufacturing optimization favorability and - but there's a couple of offsets to that. And I think that's why you may be at a little bit higher number. So let's talk through that for a second. On tariffs, again, to be very clear, we had $98 million embedded in our 2019 actuals.

And we expect, going forward, that to be $35 million. I believe, on the prepared remarks, I said $30 million on the piece of paper, it said $35 million, and it $35 million. So Jamie, that is $63 million of year-over-year favorability as we start to come off the tariffs because of the actions that we've taken. The second piece is the productivity side of it, which includes our manufacturing optimization.

If we kind of dissect that, there's three components of that. There's a restructuring component that won't repeat next year, that's $33 million of favorability. There's a temporary inefficiency piece that's embedded in our 2019 performance, that's $10 million, that will be favorable next year because we won't have those inefficiencies as we move forward. And then finally, the reason that we did it is to gain savings moving forward.

We had $32 million of savings in 2019, and we expect an additional $23 million. So those three components, Jamie, add up to $66 million. So you add those two together, we do have tailwinds of about $129 million as we move into 2020, which is clearly over - that represents a little over 2.5 percentage points, and that's over where our guidance is. So I think your question is, why is it 7% to 8%., and there are two things that are going to pull us down from the 9% that you had mentioned.

One is this unfavorable mix. We saw unfavorable mix in 2019 and and largely driven by touring becoming a smaller part of our overall mix. And this is something that we've been talking about for a couple of years now, and this is the shift of consumer preference to motorcycles outside of the ones that we make and, clearly, the driving force behind our investment in More Roads. We expect that trend to continue into 2020, and so there'll be a headwind on mix that may not be in your models.

The other piece of it is on SG&A. So there's two component pieces of SG&A that are going to be higher. One is, again, lapping, call it, a onetime or a non-repeating item with regards to the supplier recoveries and recalls. That's $34 million headwind as we move into 2020.

And then the second piece is, is that the spending on our More Roads and product development, in the 5-year period that we call our More Roads plan, the peak investment period is 2020. And the reason for that is very straightforward as we're coming out with a lot of new and different products, which requires a lot of engineering investment and product development spending is typically the highest before a product is launched. And then the second piece is our More Roads investment to launch those products and the go-to-market spending to make sure everyone understands those products and the consumer benefits. So we will hit a peak on that spending and SG&A will be up a little bit more than what we're seeing in the investment analysts models.

So with those two, we do expect operating margin to be between 7% and 8%, all-inclusive.

Operator

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

Joe Altobello - Raymond James - Analyst

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

John A. Olin - Senior Vice President & Chief Financial Officer,

Thank you, Joe. So when we look at overall pricing, we've typically talked in three levels; what's happening at auction; what's happening with pricing services that provide data to consumers and dealers; and then finally, what's happening in our dealer network. So Joe, you asked about the first one, which is at auction. We've now seen, after nine quarters of improvement, we had a flat quarter in Q2, and two quarters that we've been down slightly in terms of auction prices in Q3 and Q4.

As we tag on to that, the pricing services had about eight quarters of increased pricing direction. But in the last quarter, we had them split. We had one service that was projecting higher prices and then the other lower. And then the third level of how we look at used bike prices is what's actually transacting in our dealer network.

And with that, we've had 10 consecutive quarters of used bike prices rising, which is very good news. And again, this quarter - in the fourth quarter, they rose. So we've got a little bit of mix here. We have got a close eye on what's happening at auction because that typically ripples through to the dealer network. But at this point, we are seeing improving used bike prices in our dealer network.

Operator

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

Gerrick Johnson - BMO Capital Markets - Analyst

Hey. Good morning. I want to talk about the departure of Neil Grimmer. He was a highlight at the analyst day. I thought he had a great presentation. Wondering who's replacing him? And are there changes to the brand development strategy? Thank you.

Matt Levatich - President and Chief Executive Officer

Gerrick, I'll take that. Yes. I - the same reasons for bringing Neil in exists today, and I'm actively recruiting for a new brand President and the work that was done while he was here and since is inherent in the strategy that we have for building committed riders. So we are hard at work on that direction, and we've got a great team that is in place doing that work, and in the meantime, I'm leading that team and making sure that their work is fully integrated as we go to market here in the United States and around the world.

So steady as she goes. We need leadership of that nature for the work that we need to do to become really skilled at customer creation. And as soon as we get that talent, we'll be delighted to get them in front of our investors.

Operator

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

David MacGregor - Longbow Research - Analyst

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

John A. Olin - Senior Vice President & Chief Financial Officer,

Thanks, David. This is John. We are not seeing any change in credit availability in our developed markets or international markets. Remember, HDFS plays a very critical role in our access to credit in those markets, and they're certainly well schooled in working with third-party providers.

As you know, we only had landed underwrite in Canada and the United States. But they are working with us side by side, and we're not seeing any change in credit availability of those developed markets. And again, with that, we're very pleased with what we've seen in the back half of this year on our sales in international markets. After our first half of being down about 6.6% we've seen growth in the back half. So thanks, David.

David MacGregor - Longbow Research - Analyst

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

John A. Olin - Senior Vice President & Chief Financial Officer,

Thanks, David. Actually, we had very little promotions in the fourth quarter this year. We didn't have a whole lot last year either. The extended warranty program is one of those, but that's been more of a perennial program.

We've offered that for for several years. And that just is an opportunity for somebody that comes in and the dead of winter, to give them a couple more months of warranty so that they don't use that up when I'm sitting in their garage or in storage. So that has not been a core driver of promotional activity, but again, consistent over the last several years. Overall, as you know, from the first quarter of this year, we've been tempering our promotional activity and incentives.

We did do a finance offer in the third quarter, much smaller than the one that we had in the third quarter of 2018. But in the fourth quarter of this year, we didn't have any notable promotions or dollars off promotions. We had some in 2018 fourth quarter. We had a private offer out there, no real financing offers in the fourth quarter.

So - and this is the way we're moving forward. We've redirected those funds to building and amplifying the brand and have been very pleased with the results that we've seen.

Operator

Your next question comes from the line of James Hardiman with Wedbush. James, your line is open.

James Hardiman - Wedbush - Analyst

Good morning. Thanks for filling me in. A lot of my questions were answered, but I wanted to circle back, John, to your - I think it was Jamie's question on margin. And I think a lot of the detail you gave was really helpful with the bridge.

But two questions on that front. I guess, first, $34 million in, I guess, you call them warranty recovery benefits. I don't remember those being talked about in the past, but maybe give us - or help us understand the timing of those in 2019? Presumably, we would want to then pull those benefits out of our numbers as we roll forward into 2020. It sounds like some of that even happened in the first quarter.

So help us with the timing there? Number one. And then the EU waiver, obviously, the timing there was a big negative in 2019, and I seem to recall it was going to be a nice positive here in 2020. When does that hit? And how much does that benefit shipments and margins?

Matt Levatich - President and Chief Executive Officer

Okay. Thanks, James. First question is with regards to the timing of supplier - largely supplier recoveries. If you remember back in Q4 of 2018, we had two recalls, a total of $55 million.

In the first quarter of 2019, we received a supplier recovery of $28 million. And that would have been listed in K and was mentioned in the call at that time. Over the year, largely in the second quarter, James, we also had a release of other recall reserves of about $6 million. So those two, we do not expect to repeat in 2020, but will be a headwind, and again, they total $34 million.

And yes, 24 - $28 million of it, and we talked about the first quarter, is going to hit and be a headwind in the first quarter of 2020. The second piece is, with regards to the EU. So we were looking for a decision from the EU that came later than we had anticipated. And with that, in the second quarter, we called down some of our shipment volumes because we were going to take inventories down in - at the end of the year in anticipation of lower tariff inventory coming in from the plant in Thailand.

That's not the only reason we took it down, there's some softness in international markets as well. So that has come. And the company did a fantastic job, and our team in Europe did a fantastic job of working down inventories. Overall, international inventory was down 3,000 units.

We expect that about 2,000 out of Europe, and we got a little bit more than that. And so we will look to replenish inventories in 2020, and that's part of the revenue drivers that we have of being down 1% to up 2% as we will replenish that inventory with lower tariff bikes coming from Thailand. And so that is a shift of revenue, not necessarily a margin. Also, we did have increased cost from that delayed decision and that cost will be lapped. I think that was in the $5 million range, and so there'll be a benefit in 2020, which is incorporated in our operating margin guidance of 7% to 8%.

Operator

Your final question comes from the line of Greg Badishkanian with Citi. Greg, your line is open.

Greg Badishkanian - Citi - Analyst

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

Matt Levatich - President and Chief Executive Officer

Yes. Thanks for the question. This is Matt. I - well, a couple of things.

So we are back at the planned rate, and it took us time to get to that rate as we worked these early supply chains, and we're extremely diligent and cautious about making sure that every motorcycle that gets out in the market is perfect in the eyes of the customer. The early feedback has been fantastic. I would say, from an underlying demand perspective, it's hard to tell for two reasons; one, we're filling pre orders still; and two, it's the winter. So we'll really know a lot more about the underlying demand for LiveWire when there's [Indecipherable] in our LiveWire launch as we established a one-to-one white glove process where various folks within the company, within engineering, customer service are very knowledgeable about the product, had one-to-one relationships with early buyers.

And answering their questions, gauging their enthusiasm and interest, and that's part of the feedback that we're getting from early owners and the feedback is just phenomenal. So we're extremely pleased with the reaction from the press and the reaction from the early owners. We're working through the pre orders for a planned rate. We're building out inventory in the dealer channel.

We're building out availability outside the United States as well. We've got Phase 2 dealers coming on in the U.S. this year. So there's a lot to look forward to with LiveWire.

And we'll know a lot more when spring season hits and there's availability to fulfill sort of instantaneous demand.

Operator

This concludes our question-and-answer session. I will now turn the call back over to Shannon Burns for closing remarks.

Shannon Burns - Director of Investor Relations

All right. Thanks, everyone. The audio and slides for today's call will be available at harley-davidson.com, or for the audio, call (855) 8:05 92056 or (404) 537-3406 until February 11 the ID is 6026039. We appreciate your investment in Harley-Davidson. Have a great day.

Operator

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HARLEY-DAVIDSON INC

Q4 2019

Earnings Transcript

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