Harley-Davidson Q2 results: U.S. retail down 6.4 percent

Harley-Davidson, Inc. (NYSE:HOG) today reported second quarter 2018 results and announced it will share details about its accelerated strategy for growth on July 30, 2018.

Second Quarter 2018

• EPS $1.45 ($1.52 excluding manufacturing optimization costs)
• HDFS lower year-over-year provision for credit losses; full-year outlook improved
• Dividend up versus prior year; repurchased 0.9 million shares
• Growth in international retail sales
• Manufacturing optimization initiative on track
• Confirmed full-year shipment guidance
• Strategy announcement set for July 30, 2018

Second quarter 2018 GAAP diluted EPS was $1.45. Excluding manufacturing optimization costs, diluted EPS was $1.52. Second quarter 2017 GAAP diluted EPS was $1.48. Second quarter 2018 net income was $242.3 million on consolidated revenue of $1.71 billion versus net income of $258.9 million on consolidated revenue of $1.77 billion in the second quarter of 2017.

Harley-Davidson international retail motorcycle sales were up 0.7 percent in the second quarter of 2018 compared to 2017 and U.S. retail sales were down 6.4 percent. Worldwide retail sales decreased 3.6 percent.

“Our results in the second quarter reflect business performance that is in line with our expectations. With the focus of every employee and dealer, we are making progress building the next generation of Harley-Davidson riders in line with our long-term objectives. Our manufacturing optimization, demand-driving investments and commitment to manage supply in line with demand remain on target and continue to strengthen our business,” said Matt Levatich, president and chief executive officer, Harley-Davidson, Inc.

Strategy to Build Riders Globally

On July 30, Harley-Davidson will share plans to accelerate its strategy to build the next generation of riders globally. Leveraging core strengths in the business, brand and dealer network, the company intends to invest in opportunities that inspire increased ridership sooner and deliver sustainable growth for the future. Harley-Davidson’s strategy supports the company’s 2027 objectives to: build 2 million new riders in the U.S., grow its international business to 50 percent of annual volume, launch 100 new high impact motorcycles and do so profitably and sustainably.

Harley-Davidson’s accelerated strategy will deliver:

New products – Keep current riders engaged and inspire a new generation of Harley-Davidson riders

Broader access – Meet customers where they are and how they want to engage with a multi-channel retail experience

Stronger dealers – Drive a performance framework to improve our dealer financial strength and the Harley-Davidson customer experience

The company believes its accelerated strategy is in line with and reinforces its objectives to drive revenue growth and expand operating margins. The company expects to fund strategic opportunities while maintaining its current investment and return profile and capital allocation strategy.

“We will take bold actions that better leverage our vast capabilities and competitive firepower — excellence in product development, manufacturing, brand and our great dealer network. We will motivate our existing loyal riders and inspire future riders who are not even thinking about two-wheeled freedom,” stated Levatich. “We are tapping into the spirit that drove our founders back in 1903. Our plan will redefine existing boundaries of our brand — reaching more customers through new types of products and channels and doing so in a way that reinforces all we stand for as a brand and as a company. We’re out to secure the legacy of Harley-Davidson freedom for the next generations of riders.”

Building Riders

As Harley-Davidson continues to build the next generation of riders globally, the company increased its reach and impact during the second quarter through a wide range of efforts including:

• Expanded Hooligan racing at the X Games and brought the first-ever flat track racing event to India
• Improved rate of Riding Academy participants who purchased Harley-Davidson motorcycles
• Drove 4.5 million visits to HD.com, a 29 percent increase
• Delivered 36.7 million social media impressions from #MotorcycleMonday; reached over 6 million Facebook viewers with #freedomstories and #harleyasia
• Garnered 9.8 million social media views of #FindYourFreedom interns content. From 7,500 applications, selected 8 young riders to explore U.S. motorcycle culture on their new Harley-Davidson motorcycles and inspire new riders along the way
• Increased access to Harley-Davidson by adding new international dealers and new apparel and lifestyle boutiques in popular shopping areas

Manufacturing Optimization

To further improve its manufacturing operations and cost structure, in the first quarter of 2018 the company commenced its multi-year manufacturing optimization initiative anchored by the consolidation of its motorcycle assembly plant in Kansas City, Mo. into its plant in York, Pa. The company continues to expect to incur restructuring and other consolidation costs of $170 million to $200 million and capital investment of approximately $75 million through 2019 and expects ongoing annual cash savings of $65 million to $75 million after 2020. In the second quarter 2018, costs related to the manufacturing optimization were $14.8 million and year-to-date were $62.3 million.

Harley-Davidson Retail Motorcycle Sales

The U.S. 601+cc industry was down 6.3 percent in the second quarter compared to 2017. Harley-Davidson’s second quarter U.S. market share was 48.4 percent. The 601+cc industry in Europe was down 0.8 percent in the second quarter compared to 2017. Harley-Davidson’s second quarter Europe market share was up 0.9 percentage point to 10.4 percent.

Second quarter revenue from the Motorcycles and related products segment (Motorcycles segment) was down versus the prior year. Operating margin as a percent of revenue decreased in the quarter compared to 2017 primarily due to lower shipments, costs associated with our manufacturing optimization initiative and higher operating expenses.

Financial Services segment operating income decreased modestly in the second quarter compared to 2017.

Income Tax Rate

Harley-Davidson’s year-to-date effective tax rate was 24.1 percent compared to 34.4 percent in 2017. The decreased tax rate was due to the favorable impact of the 2017 Tax Cuts and Jobs Act.

Other Results

Cash and cash equivalents were $978.7 million at the end of Q2 2018, compared to $988.5 million in 2017. Harley-Davidson generated $735.9 million of cash from operating activities year-to-date in 2018 compared to $627.1 million in 2017. The company paid a cash dividend of $0.37 per share for the second quarter, an increase of 1.4 percent compared to the prior year. On a discretionary basis, Harley-Davidson repurchased 0.9 million shares of its common stock during the second quarter for $38.2 million. During the quarter, there were approximately 167.2 million weighted-average diluted common shares outstanding. At the end of the quarter, 23.2 million shares remained on board-approved share repurchase authorizations.

2018 Outlook

For the full-year 2018, the company continues to expect the following:

• Motorcycle shipments to be approximately 231,000 to 236,000 motorcycles. In the third quarter, the company expects to ship approximately 45,500 to 50,500 motorcycles
• Capital expenditures of $250 million to $270 million including approximately $50 million to support manufacturing optimization
• Effective tax rate of approximately 23.5 to 25.0 percent

The company has adjusted its outlook relating to the following and now expects:

• Motorcycles segment operating margin as a percent of revenue to be approximately 9 to 10 percent given the expected impact of tariffs in 2018
• Financial Services segment operating income to be flat to up slightly given strong year-to-date performance