Harley-Davidson, Inc. (NYSE:HOG) today reported second quarter 2019 results. The company made progress towards its plan to build more riders through its More Roads to Harley-Davidson accelerated plan for growth and expects to substantially mitigate incremental EU and China tariffs early in the second quarter of 2020.
Second Quarter 2019 Highlights
- Delivered GAAP diluted EPS of $1.23 per share
- Repurchased $42.9 million of shares; paid dividends of $0.375 per share
- Obtained regulatory approvals required to mitigate the majority of incremental EU tariffs
- Completed key milestones in its manufacturing optimization initiative
- Reduced U.S. retail motorcycle inventory, believe positioned well for cutover to model year 2020
- Drove year-over-year retail sales growth of 77 percent in its ASEAN markets through Thailand manufacturing strategy
- Confirmed highest ever Harley-Davidson U.S. ridership; over 3 million riders in 2018
- Announced a broader access initiative for Asia with a small displacement motorcycle planned for 2020
- Second quarter 2019 GAAP diluted EPS was $1.23. Year-ago GAAP diluted EPS was $1.45. Excluding restructuring plan costs and the impact of incremental tariffs, second quarter 2019 diluted EPS was $1.46 compared to $1.52 in the second quarter of 2018. Second quarter 2019 net income was $195.6 million on consolidated revenue of $1.63 billion versus net income of $242.3 million on consolidated revenue of $1.71 billion in 2018.
Harley-Davidson worldwide retail sales decreased 8.4 percent in the second quarter. U.S. retail sales were down 8.0 percent in the quarter driven largely by continued weak industry sales. Harley-Davidson international retail sales were down 8.9 percent driven by weakness in developed international markets on the lapping of strong initial sales of new models introduced last year.
"In the second quarter we achieved significant advancements under our More Roads plan and we continued to lay a solid foundation for future growth," said Matt Levatich, president and chief executive officer, Harley-Davidson, Inc. "The decisions and investments we're making, within a highly dynamic and competitive global marketplace, demonstrate our intense focus to build the next generation of riders and maximize shareholder value."
Strategy to Build the Next Generation of Riders
Harley-Davidson continues to inspire diverse, new riders around the globe. Harley-Davidson ridership in the U.S. has been up each year since 2001 and was at an all-time high of over 3 million riders in 2018. The company increased its reach and impact in the second quarter and delivered the following:
- More, younger riders – U.S. rider training participation was up, with the greatest increase among 18-34 year-olds
- Of total U.S. new retail sales in Q2, the mix of 18-34 year-olds was up 2.7 percentage points
- Emerging market year-over-year retail sales growth of 7.6 percent was aided by more accessible pricing from local manufacturing in Thailand
- More Roads to Harley-Davidson accelerated plan for growth
- Harley-Davidson's strategic objectives through 2027 are to: build 2 million new riders in the U.S., grow international business to 50 percent of annual volume, launch 100 new high impact motorcycles and do so profitably and sustainably.
The More Roads to Harley-Davidson accelerated plan for growth drives the company's strategy to deliver sustainable growth and build the next generation of riders by delivering exciting products in existing and new spaces, broader access to Harley-Davidson and an optimized customer experience through an even stronger dealer network. The company plans to maintain its investment and return profile and capital allocation strategy, while it funds strategic opportunities expected to drive revenue growth and expand operating margin through 2022.
During the second quarter, Harley-Davidson made further progress on its More Roads plan, most notably announcing a collaboration that joins Harley-Davidson's global motorcycle leadership with the capabilities of Qianjiang Motorcycle Company Limited to launch a smaller, more accessible Harley-Davidson motorcycle planned for China in 2020 with additional Asian markets to follow. This move is intended to expand access to the Harley-Davidson brand to more riders in Asia. During the second quarter, the company's efforts to increase access in emerging Asian markets, including through its Thailand manufacturing strategy, drove sales increases of 77 percent in its ASEAN (Association of Southeast Asian Nations) markets.
Harley-Davidson also strengthened its leadership in the electrification of motorcycling. Company and dealer preparations continued for the targeted September retail delivery of LiveWire, the company's first electric motorcycle. Harley-Davidson's commitment includes helping to enable a strong global charging network. Dealers are installing public DC fast charging stations and the company is working with global partners to support charging infrastructure development.
"There are more riders on Harleys in the U.S. than at any point in our history, and the number of young riders continues to grow. The strength of the Harley-Davidson brand, and bare knuckle grit of this company and our global dealers, will continue to be leveraged and sharpened to make riding matter to more people," said Levatich.
Key milestones of the company's multi-year manufacturing optimization initiative, designed to further improve its manufacturing operations and cost structure, were completed during the quarter. Starting in the first quarter of 2018 the company began work to close its wheel manufacturing facility in Australia and consolidate its motorcycle assembly plant in Kansas City, Mo. into its plant in York, Pa. Full year savings of $25 million to $30 million for 2019 and ongoing annual cash savings of $65 million to $75 million after 2020 are still expected. In the second quarter 2019, costs related to the manufacturing optimization were $14.4 million. For the full year, the company now expects to incur $40 million to $50 million of operating expense for this initiative, $10 million less than previously expected.
The U.S. 601+cc industry was down 4.9 percent in the second quarter compared to the same period in 2018. Harley-Davidson's second quarter U.S. market share was 46.6 percent. Harley-Davidson's year-to-date Europe market share was 8.8 percent through June.
Financial Services segment second quarter operating income of $75.5 million was down 6.2 percent.
Cash and cash equivalents were $924.6 million at the end of the second quarter of 2019, compared to $978.7 million in 2018. Harley-Davidson generated $496.2 million of cash from operating activities in the first half of 2019 compared to $735.9 million in the first half of 2018. The company paid a cash dividend of $0.375 per share in the second quarter of 2019. On a discretionary basis, Harley-Davidson repurchased 1.2 million shares of its common stock during the quarter for $42.9 million. During the quarter, there were approximately 159.4 million weighted-average diluted common shares outstanding. At the end of the quarter, 13.7 million shares remained on a board-approved share repurchase authorization.
Harley-Davidson's year-to-date effective tax rate was 24.1 percent, flat to 2018.
Harley-Davidson recently obtained regulatory approvals confirming that motorcycles shipped from the company's Thailand operations to the EU would receive more favorable tariff treatment than if they were shipped from the U.S. However, the approval process took considerably longer than the company had planned.
As a result of the timing of these approvals and softer than expected European retail sales as key drivers, the company has adjusted its 2019 outlook and now expects:
- Motorcycle shipments to be approximately 212,000 to 217,000 for the full year. In the third quarter, the company expects to ship approximately 43,000 to 48,000 motorcycles
- Motorcycles segment operating margin as a percent of revenue to be approximately 6 to 7 percent for the full year
For the full-year 2019, the company continues to expect:
- Financial Services segment operating income to be down year-over-year
- Effective tax rate of approximately 24 to 25 percent
- Capital expenditures of approximately $225 million to $245 million including $20 million to support manufacturing optimization