Harley-Davidson, Inc. (NYSE:HOG) today reported first quarter 2020 results and provided an update on the actions it has taken to address the impact of COVID-19 as it restarts production and begins moving toward recovery. The company also outlined near-term actions that will lead to a new strategic plan.
"Throughout this global crisis, we prioritize the well-being of our employees and the Harley-Davidson community in every decision we make. Our brand is rooted in community, and we care deeply for all of those who have been personally affected. We also honor the heroes working tirelessly to bring care, relief and an end to this terrible pandemic. Finally, in the face of significant uncertainty, we have taken swift action to protect the company by bolstering our already strong balance sheet and liquidity position," said Jochen Zeitz, acting president and CEO of Harley-Davidson.
"COVID-19 has dramatically changed our business environment and it is critical we respond with agility to this new reality. The crisis has provided an opportunity to reevaluate every aspect of our business and strategic plan. We have determined that we need to make significant changes to the company; to our priorities, to our operating model and to our strategy to drive more consistent performance as we emerge from this crisis. We will reduce complexity, sharpen focus and increase the speed of decision-making. These efforts will pave the way for a new strategic plan that incorporates some key products and initiatives from the current plan but focuses on improved profitability and long-term growth. As a result, we will emerge as a stronger and more efficient company and reignite the Harley-Davidson soul," said Zeitz.
COVID-19 Response and Recovery Actions
The company is executing its plan to address the impact of COVID-19 and begin its recovery through a multitude of recent actions across the following areas:
- Cash Preservation — Reduced planned capital spending and also reduced planned spending across every part of the organization including freezing hiring, temporarily reducing salaries and eliminating merit increases for employees in 2020. The company also implemented other aggressive cost management efforts such as retiming the launch of new products. In total, the company expects these efforts to preserve approximately $250 million of cash in 2020. Additionally, the company suspended discretionary share repurchases. Today the Board of Directors approved a cash dividend of $0.02 per share for the second quarter of 2020, down from the first quarter 2020 dividend of $0.38. The second quarter dividend is payable June 12, 2020 to the shareholders of record of the company's common stock as of May 22, 2020.
- Liquidity — Maintained $2.47 billion in liquidity including $1.47 billion cash as of the end of the quarter and remains compliant with all covenants. Recently, the company amended its $1.42 billion credit facilities, extended its 364-day loan facility and is in discussions with major U.S. banks to secure an additional $1.30 billion in liquidity. Additionally, the company expects to access the capital markets in the near future.
- Supporting Dealers and Riders — Eased the burden on Harley-Davidson dealers by providing support based on the unique needs of each region, including financial support for motorcycle inventory, extending credit payment due dates on Parts & Accessories (P&A) and General Merchandise (GM) and adjusting dealer requirements for warranty and training. The company also offered dealer discounts on certain GM products and is engaging with dealership staff via live chat sessions to share unique ways to stay connected during the crisis. For customers, many dealers remain open for service support and the company continues online sales of P&A and GM, and along with dealers, is offering home delivery of new motorcycles in states and countries where it is permitted. For riders who have been impacted by COVID-19, Harley-Davidson Financial Services (HDFS) is helping keep riders on the road.
- Community Strength — Acted quickly and in alignment with government efforts to protect the safety and health of employees and the Harley-Davidson community. The company implemented travel restrictions, enhanced sanitation practices, cancelled events and closed facilities including temporarily suspending global manufacturing starting in March. In support of relief efforts, the Harley-Davidson Foundation donated $150,000 to the United Way's COVID-19 relief fund. Through its "United We Will Ride" efforts, the company is connecting riders who want to help provide relief through food drives, blood donations and other ways to make a difference in their communities.
As the company focuses on recovery efforts for the business, it has prepared and started implementing rigorous protocols and procedures for worker safety and is working with its supply chain to be ready to resume operations. The company has restarted some manufacturing and will gradually ease work-at-home restrictions at the appropriate time, which will vary by region.
The company is executing a set of actions, referred to as The Rewire, that will be further developed over the coming months, leading to a new strategic plan. These actions are part of a comprehensive Rewire playbook designed to address top priority opportunities, drive consistent execution and reset the company's operating model in order to reduce complexity, sharpen focus and increase the speed of decision making. The company expects The Rewire actions — those already taken and those that will be implemented over the coming months — to lead to the definition of a new five-year strategic plan that will incorporate key products and initiatives from the More Roads plan but will focus more on the markets and products that can drive performance in terms of profitability and growth. Key elements of The Rewire:
Enhance core strengths and better balance expansion into new spaces
- Return focus to the strength of brand and company, starting with dealers, customers, stronghold products and committed employees globally.
- Re-evaluate strategies to reach new riders and build ridership.
Prioritize the markets that matter
- Narrow focus and invest in the markets, products and customer segments that offer the most profit and potential. This includes building on Harley-Davidson's strong position in the U.S.
- Establish a simplified market coverage model and take cost out of the process.
Reset product launches and product line up for simplicity and maximum impact
- Continue to be guided by the voice of customers and dealers to optimize value and profit delivery.
- Simplify and retime launches to reflect the new reality, align with the start of riding season and better suit the capacity of the company and dealers.
- Expand profitable iconic motorcycles to excite existing customers. Remain committed to Adventure Touring, Streetfighter and advancing electric motorcycles.
Build the Parts & Accessories and General Merchandise businesses to full potential
- Develop a comprehensive strategy across P&A and GM businesses that focuses on assortment and distribution opportunities, maximizes channels, improves ecommerce capabilities and grows revenue and margins for both the company and dealers.
- Align P&A and GM strategies with motorcycle strategy for a holistic presentation to the market.
Adjust and align the organizational structure, cost structure and operating model to reduce complexity and drive efficiency to set Harley-Davidson up for stability and success
- Create a framework including an organization that is more focused, profitable and nimble; a cost structure that is adjusted to the new realities of the market post crisis; and an operating model designed to increase empowerment and accountability.
- Establish commercially led central and new regional structures to gain a deeper understanding of customers and to return focus to dealers and selling.
- Elevate the role of Motorcycle Management and sharpen marketing strategy and execution to enable a bigger impact with an improved go-to-market process.
Each of these key elements of The Rewire playbook includes actions that have been implemented or are currently being developed. The company plans to share more about The Rewire in its Q2 update.
First Quarter 2020 Results
First quarter 2020 results reflect the impact of COVID-19 on the company's business. GAAP diluted EPS was $0.45 versus $0.80 in 2019. Net income was $69.7 million on consolidated revenue of $1.30 billion versus net income of $127.9 million on consolidated revenue of $1.38 billion in 2019.
Harley-Davidson Retail Motorcycle Sales
Global retail motorcycle sales in the first quarter were significantly impacted by COVID-19. U.S. retail sales were up a strong 6.6 percent until the pandemic took hold in the U.S. in mid-March. For the full quarter, U.S. retail sales finished down 15.5 percent compared to prior year and U.S. 601+cc market share was down 2.2 percentage points, to 48.9 percent. International retail sales were down 20.7 percent compared to 2019 and Europe 601+cc market share was 7.6 percent in the first quarter.
Motorcycles and Related Products Segment Results
Revenue from the Motorcycles and Related Products segment was down in the first quarter compared to prior year reflecting the temporary global motorcycle manufacturing suspension that began in mid-March. Gross margin was largely flat during the quarter, while operating margin was down year-over-year primarily due to lower revenues and increased SG&A, offset by lower restructuring expense.
Financial Services Segment Results
Financial Services segment first quarter operating income of $22.9 million was down 60.9 percent driven by an increase in the provision for loan losses related to the impact of the COVID-19 crisis as well as the impact of the new "Current Expected Credit Losses" or CECL accounting pronouncement.
Cash — Cash and marketable securities were $1.47 billion at the end of first quarter, compared to $759.6 million in Q1 2019. Harley-Davidson's cash from operating activities was an outflow of $8.6 million in the first quarter compared to an inflow of $32.7 million in Q1 2019.
Tax Rate — Harley-Davidson's first quarter effective tax rate was 26.3 percent compared to 24.9 percent in Q1 2019.
Dividend & Share Repurchase — The company paid a cash dividend of $0.38 per share for the first quarter. The company did not repurchase shares on a discretionary basis during the first quarter. During the quarter, there were 153.7 million weighted-average diluted common shares outstanding and 18.2 million shares remained on board-approved share repurchase authorizations.
As a result of the uncertainty surrounding the magnitude and duration of the COVID-19 pandemic, Harley-Davidson withdrew all guidance on March 26, 2020.