Harley-Davidson Q2 U.S. retail down 27%; Hardwire five-year plan ahead

Harley-Davidson, Inc. on Tuesday announced actions it has taken to rewire the company, setting the foundation for a five-year plan as the most desirable motorcycle brand in the world. The company also reported second quarter 2020 financial results, and its ongoing actions to manage the impacts of COVID-19 on its business.

"I'm very pleased with our accomplishments in these times of extraordinary challenges and uncertainty. Through all of this, we have made significant progress toward the goals of The Rewire; the positive feedback from key stakeholders and the early impacts we are seeing in the marketplace are very encouraging," said Jochen Zeitz, chairman, president and CEO, Harley-Davidson. "A total rewire is necessary to make Harley-Davidson a high-performance company. Building on our strong brand legacy, we are reinvigorating our core profit driving business —powered by our strongest dealers, most exciting products and careful inventory management, while focusing on the most important opportunities for future expansion. We're overhauling our operating model and our product plan and are rewiring our market structure and organization to focus on the strengths of our brand and company. We are now working on our new five-year strategic plan, The Hardwire, which will be grounded in enhancing the desirability of our brand and protecting the value of our iconic products."

New Operating Model: Reduced Complexity and Increased Speed

Vast changes to the company's operating model under The Rewire include all areas of the business globally, from commercial operations to center-led support functions. Significant work has been undertaken to eliminate duplication, inefficiencies and complexity throughout the organization. As previously announced, the streamlined structure requires 700 fewer positions across its global operations.

Refined Motorcycle Line-Up and High-Impact Product Launches

The company plans to rewire its product offering to more precisely match customer desires and to strengthen the value of its products. The company will also improve product timing and go-to-market plans to achieve the greatest market impact.

Highlights of the new approach include:

  • Streamlining planned motorcycle models by approximately 30 percent; balancing investments between current stronghold categories and new, high-potential segments
  • Expanding product offerings of its best-selling, iconic motorcycles
  • Delivering its first Adventure Touring motorcycle - Pan America 1250 - in 2021
  • Shifting annual product launch timing from August to early in the first quarter
  • Reinvigorating launch efforts including collaborations with key influencers to bring the brand and new products to life drive brand desirability

Among other plans, the company is set to launch a new marketing campaign including a collaboration with Jason Momoa to celebrate the shared journey and unrelenting spirit of Harley-Davidson.

Growth through Parts & Accessories and General Merchandise

The company is intensifying focus on its Parts & Accessories and General Merchandise businesses, encouraging customers to customize their entire riding experience to match their own style. Now part of the new Commercial function, new leadership has designed strategies for each business aligned to the company's motorcycle and market priorities with the goal of delivering a holistic experience in the marketplace.

Reset Global Business and Focus on High-Potential Markets

Harley-Davidson plans to concentrate on approximately 50 markets primarily in North America, Europe and parts of Asia Pacific that represent the vast majority of the company's volume and growth potential. The company is evaluating plans to exit international markets where volumes and profitability do not support continued investment in line with the future strategy.

The company also plans to shift resources and marketing investments into the regions for maximum impact. As part of this effort, the company has streamlined regional offices and created new groups of high potential countries that will have the autonomy, within a clearly defined framework, to drive the business. Additionally, the company plans to optimize its dealer network to provide an improved and integrated customer experience.

Protecting Value

Harley-Davidson has revamped its approach to supply and inventory management focusing on products and initiatives that add value, while significantly reducing discounting and price promotions. This is expected to drive retail pricing to help preserve the value and desirability of Harley-Davidson motorcycles for its customers and brand.

The Rewire

All of the above efforts of The Rewire aim to provide a better starting point for the future and to build desirability for the Harley-Davidson brand and products.

The Rewire outcomes and other highlights at the end of Q2:

  • $250 million in cash savings (excluding restructuring charges) including SG&A and capital reductions expected in 2020
  • Restructuring charges of $42 million expected to result in approximately $100 million in ongoing annual savings based upon actions taken
  • Global dealer inventory down 32 percent
  • On average, U.S. new Model Year 2020 motorcycles selling at MSRP
  • Used Harley-Davidson pricing up significantly at retail and auction

The Rewire is expected to continue through the end of the year, leading to a first look at the company's 2021-2025 strategic plan, The Hardwire, expected in the fourth quarter. Building on the foundation and principles of The Rewire, the driver of the new plan will be Harley-Davidson as the most desirable motorcycle brand in the world for its customers, employees, community and investors.

COVID-19 Response and Recovery

The company continues to proactively manage its business through the pandemic and has implemented robust protocols to keep workers safe in its factories. Most non-production workers will continue to work from home until the end of the year. Its response and recovery plans include supporting global dealers and customers. At the end of the quarter, about 93 percent of its global dealers were open for retail motorcycle sales following pandemic interruptions.

Included in the company's broad cost and cash savings measures are SG&A reductions, curtailed capital spending, suspended discretionary share repurchases and a prudent approach to dividend payments. The company announced it will pay a third quarter cash dividend of $0.02 per share, in line with its second quarter dividend. The dividend is payable September 25, 2020 to the shareholders of record of the company's common stock as of September 10, 2020.

The company has also further strengthened its strong liquidity position with nearly $4.7 billion in liquidity at the end of the quarter.

Second Quarter 2020 Results

Second quarter 2020 results reflect the impacts of COVID-19 and also the actions taken in the second quarter to rewire the company. Q2 GAAP diluted EPS was $(0.60) versus $1.23 in Q2 2019. Excluding restructuring plan costs and the impact of recent tariffs, adjusted Q2 diluted EPS was $(0.35) versus $1.46 in Q2 2019. Second quarter net loss was $92 million on consolidated revenue of $865 million versus net income of $196 million on consolidated revenue of $1.6 billion in Q2 2019.

Global retail motorcycle sales in the second quarter of 2020 were significantly impacted by COVID-19. U.S. retail sales finished down 27 percent compared to prior year.

Revenue from the Motorcycles and Related Products segment was down in the second quarter of 2020 compared to prior year primarily driven by the temporary motorcycle manufacturing suspension during most of the quarter related to COVID-19. Gross margin and operating margin were down during the quarter primarily due to lower productivity and absorption resulting from the suspension of manufacturing.

Financial Services Segment Results

Financial Services segment second quarter operating income of $5 million was down 94 percent driven by an increase in the provision for loan losses related to COVID-19's impact on economic projections.

Other Results

Cash - Cash and cash equivalents were $3.9 billion at the end of second quarter of 2020, compared to $925 million at the end of Q2 2019. Harley-Davidson generated $610 million of cash from operating activities year-to-date 2020 compared to $496 million year-to-date 2019.

Tax Rate - Harley-Davidson's year-to-date effective tax rate was 3.7 percent compared to 24.1 percent in Q2 2019.

Dividend & Share Repurchase - The company paid a cash dividend of $0.02 per share for the second quarter of 2020. The company did not repurchase shares on a discretionary basis during the second quarter of 2020. During the quarter, there were 153 million weighted-average diluted common shares outstanding and 18 million shares remained on board-approved share repurchase authorizations.

2020 Outlook

Given the uncertainty that remains surrounding the impact and duration of the COVID-19 pandemic, the company is not providing financial guidance.

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