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..

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?.

Thanks, Shawn, and welcome to the team. I also want to thank Shannon Burns for his great work in Investor Relations over the past 3 years as we move to a new financial 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 see 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 will lead our focus on profitably driving our core business.

Through 2021, we've been encouraged by the recovery of the tooling market. Grand American Touring is at the core of our mission and our brand. We are committed to depending on expanding our share in this segment and see potential for future growth.

By selectively targeting high-potential categories such as Adventure Touring with Pan America and Sport with Sportster, we are also maintaining our focus on long-term profitability and potential aligns to our brand and product capabilities.

The increased demand that we are seeing across both our core and expanding categories underscores the momentum behind the Harley-Davidson brand and all extend for in the pursuit of Freedom and Adventure. We've also seen interest increasing across new riders with the 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 streamlined market strategy, market headwinds including a variety of challenges from supply chain shortages to conjunction at sports and increased shipping times that is impacting our production and our other supplies in Q3, particularly in our international markets.

Like 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 brands in the coming years.

And as we focus on more profitable motorcycle unit as part of our strategy, we continue our journey towards a more efficient use of inventory. While we are below our intended inventory strategy, we've seen our dealer community adapts, improve their 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?.

Thank you, Jochen, and hello, everyone. Third quarter results reflect continued demand momentum as evidenced by our strong wholesale 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 surcharge in the U.S., optimizing production schedules to prioritize our most profitable models and market 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 & 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 $1.05 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 $3.10 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 markets.

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 America and Sportster. Pan America maintained its status as the #1 selling and Adventure Touring model in the U.S.

since its launch earlier this year, capturing a 16% market share in the third quarter in the rapidly Adventure Touring segment. And after much anticipation, the all new-Sportster motorcycles began shipping to dealers late in Q3, and we have seen very strong sell-through to date.

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 Lat Am, the declines from the model pruning and market exits were accompanied by pricing actions taken across select models. Through these actions, the Lat Am 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 35% versus last year and relatively flat to the previous quarter. Q3 inventory has been impacted by stronger demand in the U.S. as well as supplier challenges, which impacted our ability to produce at 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 costs 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 for motorcycle units, including the new Pan America and Sportster motorcycles, 8 points of growth from 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 surcharge in the U.S. from an average of 2% taken in Q2 to 3.5% to partially offset raw material inflation. And finally, 1 point of growth from foreign exchange. Q3 gross margin percent of 26.7% was down 3 percentage points versus prior year.

Our margin benefit from stronger volume, 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 percentage 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 stronger mix, pricing, lower incentives and an overall lower cost structure. These results validate the efforts that we took during the Rewire and has 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 and onload of freight, 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 detail on our cost to sales mix as well as the estimated inflation impact across the major components.

As you can see, logistics costs began to increase early in the year and peaked in Q2 at 2.5x our prior year cost before settling down a bit in Q3 at 2x prior year. Q3 was better than Q2 as we moved 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 3 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' retail credit loss ratio remained historically low at 0.84%, 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 historic levels. And while we do expect delinquency rates to normalize over time, we believe losses will continue to remain lower in the short term. Looking at HDFS' 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 U.S. economy was restrained by the pandemic, and this is reflected in the 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 uncertainty surrounding the pace of economic recovery. Wrapping up with Harley-Davidson, Inc. financial results. We delivered year-to-date 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 tariffs and the supply chain inflation laid out earlier.

Our estimated EU tariff impact for 2021 has been adjusted to approximately $64 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 than 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 products.

While we will continue to run the plants, this dynamic will limit the amount of wholesale shipments and revenue during the fourth quarter as bikes build will go into company-owned inventory ahead of the model year launch. We expect the financial impact to look 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..

profitable segments, delivering volume margin and potential and segments aligned to our brand capabilities with a clear path to leadership. In these segments, we will work hard to continue to solidify and grow our position as leaders, acknowledging that these segments are the most attractive in the global market in terms of our profit focus.

Another component of the Hardwire is 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, well on these segments to win supported by the right allocation of time and energy, talent with the right investments in products, brands 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 is squarely built on our mission to deliver 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 Ladakh in the Himalayas, the highest unpaced motorable road in the world at some 18,600 feet create a first for Harley-Davidson.

This quarter saw the Pan America 1250 Special become the #1 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, in 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 a 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 afield as we actively target new Harley-Davidson riders in the Adventure Touring space. In July, we also launched the latest incarnation of the iconic Sportster, the Sportster S, at our Global Reveal event.

Building on our Revolution X platform, Sportster S has had a new performance standard for the line and has received an extraordinary welcome in the market.

The media response to the Sportster S has been exceptional with positive reviews including motorcycle.com, praising the Revolution X as their new favorite motorcycle engine and the [indiscernible] calling out the bike as a pillar Harley-Davidson cool. At launch, we saw one of the largest engagement rates in our Harley-Davidson social channels.

We've been pleased to see this excitement translating into orders with the Sportster S allocation being sold out through our integrated preapproved order system. With our preorder system, our dealers are able to effectively create an integrated reservation system.

This direct line of communications allows us to work through manufacturing allocations and improve the overall dealer visibility on orders. In Q4 of this year, Harley-Davidson will officially launch a reservation process in the U.S. 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 configuring and customizing the new motorcycle, keep them notified of when they expect delivery and inform future enhancements that strengthen and support the Harley-Davidson community online and on the road.

It's our ambition to put our customer at the forefront of everything we do, aligned to our Hardwire goals. By facilitating early engagement between dealers and customers, we're investing in strengthening this important relationship through new and integrated tools that we are creating.

For dealers, we believe this new reservation process will improve the sell-through rate and for Harley-Davidson it will have to 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 its strong performance this quarter, HDFS is a strategic asset with existing [indiscernible] delivery 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 motorcycle sales financed by HDFS.

Going forward, it is our goal to make HDFS the preferred choice for all Harley-Davidson riders by building new capabilities that driving the innovators of financial services. HDFS is integral to the Harley Davidson success and with a planned expansion in Europe in the near to medium term, I'm excited about its future.

With H-D1 marketplace and HDFS, it was our intention to change the face of the online marketplace for pre-owned Harley-Davidson motorcycles, blending the best of digital and in-dealer experiences aligned to our Hardwire priorities.

Since launching into our 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 H-D certified motorcycles, ensuring the ultimate choice in preowned.

We've seen the power of the H-D 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 pre-owned Harley-Davidson motorcycle listings, 1,200 Harley-Davidson certified motorcycles, over 500,000 units used since launch and over 550 participating U.S. 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 markets will drive connectivity and engagement with our Harley-Davidson customers and dealers, acknowledging the important path that riders of preowned Harley-Davidson play in our community.

While we've achieved this initial goal in the United States, it is our ambition that marketplace will continue to evolve and that we will become the ultimate home for preowned Harley-Davidson motorcycles. For over a decade, Harley-Davidson has produced and published annual sustainability reports ahead of many in our sector.

Over that time, we have made solid progress. And that progress has reinforced the importance of inclusive stakeholder management as a key partner [indiscernible] 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, delivered positive impact in our communities and align the rewards for at least with our 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 would invite you all to read our report before.

Through the quarter and year-to-date, we've seen many of our Hardwire strategic initiatives performed well against our expectations, indicating 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 are 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 the EU tariff situation and so far as it affects our company.

As the negotiations between the U.S. and EU continue, we are optimistic that a resolution will be found. We've been especially encouraged by the positive media reporting of the negotiations that we've seen over the past few weeks. We've actively engaged with both the U.S. administration and the EU.

And as we've said throughout, we believe that Harley-Davidson has no place in this political dispute that is not of our making. Thank you, and now we'll take your questions..

[Operator Instructions]. Your first question comes from the line of Robert Ohmes from Bank of America..

And congrats on a strong quarter and 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 promoter cycle 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 become sort of a higher level of pricing going forward?.

Thank you for the question. As you 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 in 2022. We remain committed to managing the profitability and the desirability of our motorcycle.

So certainly, that is part of the efforts across all our product lines as we look to 2022..

Your next question comes from the line....

Can I just add one comment to that question on pricing. Robbie, remember that our surcharges really were only effective in the U.S. So as we look beyond into 2022, the opportunity is to take that pricing surcharge model and look holistically across the portfolio..

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

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..

Yes. Thank you for the question. So as you know, we're 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 and the power that exists for Harley-Davidson as both an apparel business and more broadly as a lifestyle business is significant and 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 products to bring more freshness into our dealer channel to drive more traffic into the dealership.

We continue to invest in expanding our e-com 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 and 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 we see enormous opportunity linked directly to motorcycles and to riding apparel 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.

So tons of opportunity in GM, and I think one that Harley-Davidson in particular is well suited to capture..

Your next question comes from the line of Craig Kennison from Baird..

And Shawn, congratulations on your new role. It has to do with this new reservation system that sounds promising.

I'm wondering, if you have any way to estimate kind of the missed retail opportunity in Q3 because of the inventory shortage? Is there any way to frame maybe what's 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?.

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 that 2020 was such a unique year. There are lots of changes that have occurred as part of the Hardwire strategy.

So Gina referenced some of these market exits and new product introductions, et cetera. And as well, there have been 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 that continue to exist in terms of the supply. So if you look at our share position internationally, we certainly have 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 or some market demand, let me say more appropriately that we have not been able to necessarily fulfill in Q3.

This brings me to the other part of your question around the preorder system and reservation system. It's intended to exactly go after that.

Our main goal is to ensure that our dealers are 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 to start that dialogue with the customer to be able to establish what exactly is the product of their interest, have the dealer engaged with the customer along that journey, providing not only the opportunities, as Jochen mentioned, to customize and to engage mostly with the product, but also have a little bit more visibility as to where that product gets in the production.

It will allow us to also optimize our allocation processes and make sure that we start to target that demand more specifically on 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 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 are with our dealers..

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

I wanted to ask about the Pan American and obviously off to a very strong start. So congratulations on the early success there. 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? And what your expectations would be to take advantage of that and generate penetration into that market?.

I'm happy that -- I think, first of all, the launch has been extremely successful. And how we've marketed a new product like the Pan America for the first time, I think, has really resonated with thin riders and new Harley-Davidson customers. And the fact that all our marketed 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 50 in our inventory that is sold out within like 5 minutes just recently. So there's a very strong demand, and 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, but 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, we think in the U.S., we can -- now based on the momentum we've built in the last 3 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 tap into the market share of our competitors because we have a truly competitive product. We will do that by getting people to ride 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 we 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 in.

So overall, I think we have a clear plan, and we want to execute on that plan and there's significant potential in terms of units going forward..

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

This is Jamie. I have a question on CapEx and the revised spend. My understanding, and maybe this is wrong, is that this is a temporary step-down in CapEx. But that the Hardwire plan is still $190 million to $250 million a year.

And if that's the case, what was pruned back in 2021 and has been that going to be pushed into 2022 for some of those projects?.

Jamie, this is Gina. Thanks for the question. So from a capital standpoint, as we look out beyond '21, '22, getting into the Hardwire, 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 hit. 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 on Hardwire. And as we look beyond '21, the capital guidance has not changed..

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

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, what you did. Even if we cut that in half, I think you're about 7 weeks right now, but seems 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, call it, 11 weeks going forward?.

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 these ties into a question asked 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 that is we 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..

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

So a question on the guidance, specifically the margin guidance, maintained it at 6% to 8% for the year. Obviously, 3 quarters into the year. So 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 really like 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?.

Perfect. James, this is Gina. I'm actually going to start with the second part of your question and then come back to how these 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 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 plant 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 stably in the same spot as Q3.

So we're calling from a 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 then of 6% to 8%, 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 today. So we're going to stick with that range for now..

Your next question comes from the line of Billy Kovanis from Morgan Stanley..

Two questions.

One, Jochen, what are the sort of 1 or 2 areas of bright spots that you see that you have visibility on that the market may be missing, like 1 or 2 things that you're excited about? And then secondly, Gina, just a question on HDFS and sort 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% of the midpoint of your guide? Just where does that go next year?.

Yes. 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 and 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 tactical challenges with supply, which are significant. But at the same time, we are executing really well on our longer-term strategies. I mentioned them. 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 with Pan America, also our other model year products, our new Icons Collection, Marketplace, you name it, standing up LiveWire as a separate division, a lot 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 not just 1 or 2 bright spots, I think, across the board, we are executing extremely well based on our strategy..

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

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

This concludes today's conference call..

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