Harley Davidson's Q3
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Harley Davidson's Q3
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(FOOL CONFERENCE CALL SYNOPSIS)* By Dale Wettlaufer (MF Raleigh)
HARLEY DAVIDSON <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HDI)") else Response.Write("(NYSE: HDI)") end if %> ALEXANDRIA, Va., /FOOLWIRE/ -- Harley-Davidson, Inc. announced on October 15th record sales and earnings for its third quarter and nine month period ended Sept. 29, 1996.
Third quarter consolidated net sales totaled $385.8 million, a $58.7 million or 18.0 percent increase compared to the year-ago quarter. Net income and earnings per share were $33.2 million and 44 cents on 75.6 million shares outstanding versus $23.7 million and 32 cents on 74.8 million shares, increases of 40.1 percent and 37.5 percent, respectively. All 1995 financial data have been restated to reflect the classification of the company's Transportation Vehicles segment to that of a discontinued operation, as announced on January 22, 1996. All Harley-Davidson, Inc. sales are generated by the Motorcycles and Related Products segment (Harley-Davidson Motor Company) and the operating results of the Financial Services segment (Eaglemark Financial Services) are netted into operating income.
Compared to the year-ago quarter, the improved third quarter results are attributable primarily to an increase in motorcycle unit shipments and improved performance in the company's Parts and Accessories business. Third quarter unit shipments totaled 28,013 units, up 3,001 units or 12.0 percent from a year ago. Parts and Accessories sales totaled $90.5 million, a $14.7 million or 19.3 percent increase.
"We're on track with our production capacity expansion efforts and are scheduled to ship 118,000 units in 1996 (up 12.3 percent from 105,100 units in 1995)," said Richard F. Teerlink, chairman and chief executive officer, Harley-Davidson, Inc. While the third quarter's results are historically punctuated by uncertainty over expenses due to production transitions, "Our new model year change-over was the smoothest in recent memory and our production facilities averaged 490 units per day, with very minimal assembly line overtime. We have increased our motorcycle production rate and are scheduled to average 510 units per day in the fourth quarter." 56 working days are scheduled for the fourth quarter, compared with 60 for Q4 1995.
Motorcycle production exceeded motorcycle shipments by approximately 900 units in the third quarter. "This was primarily the result of an inventory build-up at our wholly owned French and German distributors," explained Teerlink. "Demand for heavyweight motorcycles (751+cc) is strong in Europe, but Harley-Davidson is experiencing mixed results. While our year-to-date shipments in most European markets are up compared to last year, our shipments to Germany and France, which are two of our larger markets, are down, resulting in a 6.9 percent year-over-year increase in total European shipments.
The company will be paying close attention to retail pricing in Germany and France, as the 900 unit inventory build-up was the result of the company not paying close enough attention to economic conditions in these countries. Rather than lowering prices, Harley-Davidson raised them. In addition to smoothing out pricing in Europe, where there are differences from country to country, the company will commence with several country-specific promotion initiatives to increase retail demand. This push will cost $1.5 million in Q4. The company is still learning how to perform as well in the European market as it does in the US.
"We're still early in our learning curve on the European motorcycle markets and improving our infrastructure there," Teerlink said. Although the company's market analyses are far from complete, Teerlink said Harley-Davidson has taken immediate action to remedy problems identified by dealers and customers. "For example, in September we adjusted prices in each European market to move us toward more consistent country-to-country pricing. We're also developing and implementing additional promotional efforts to stimulate retail sales in our underperforming markets." As these are new initiatives, Teerlink said he doesn't expect to see the full impact of these activities until the calendar year 1997 selling season. "We continue to believe that the countries of Europe present substantial long-term opportunities for Harley-Davidson."
MARKET REVIEW
The most current data (through July) show that in the U.S. 751+cc market, Harley-Davidson holds a 51.7 percent market share, compared to 52.6 percent in the year-ago period. The U.S. 751+cc market has grown at a 15.3 percent rate year-to-date. European data through July show Harley-Davidson holding a 9.2 percent share of the 751+cc market, down from 10.5 last year. The European 751+cc market has grown at a 13.3 percent rate year-to-date, while retail registrations for Harley-Davidson motorcycles are about the same as last year.
"The demand for Harley-Davidson motorcycles in the U.S. continues to exceed the supply allocated to our U.S. dealers," Teerlink said. "We've long promised our dealers and customers that we would make adjustments in our allocation schedules if we saw a change in demand in any of our major markets. Our European inventory situation has presented us with the opportunity to provide our U.S. dealers with additional motorcycles and shorten the wait that many of our U.S. customers have to endure. To that end, the U.S. allocation of 1997 model year motorcycles has been increased to 72 percent of total production, up from 70 percent in previous years."
New models have been received enthusiastically by customers, especially the Heritage Springer Softtail. Improvements on the rest of the line continue. The company is scheduled to produce 127-130,000 units and in 1997 and 145-150,000 units in 1998.
PARTS AND ACCESSORIES
Third quarter Parts and Accessories (P&A) sales were better than expected, totaling $90.5 million, a $14.7 million or 19.3 percent increase from the year-ago quarter. Year-to-date P&A sales are up 9.2 percent over the same period last year. P&A sales include the combination of Genuine Motor Parts and Genuine Motor Accessories, which totaled $61.9 million, a $10.5 million or 20.4 percent increase over the year-ago quarter, and MotorClothes clothing and collectibles of $28.6 million, a $4.2 million or 17.1 percent increase. "It is important to remember, however, that last year's third quarter P&A results were below our expectations," Teerlink said.
"We believe the third quarter benefited from working closely with our suppliers to ensure a more steady flow of products to our dealers," said Teerlink. "Our new product introductions were well executed and deliveries were more timely than prior years. Seasonal MotorClothes products were also shipped earlier than in previous years so our dealers can take full advantage of the fall and holiday selling seasons." This will have a negative impact on P&A in Q4 compared with last year. In Q4 1995, $15 million in back-orders went into sales, so the comparison will be difficult for the quarter.
Teerlink added, "Although 1996 total year P&A sales will not meet our expectations, we still expect long-term P&A revenue growth to approximate the company's growth rate in motorcycle unit shipments."
CAPACITY EXPANSION
Commenting on the company's expansion efforts, Teerlink said that construction on a new manufacturing facility in Kansas City, Mo., is proceeding on schedule, as is construction in the Milwaukee area of a new Product Development Center and Parts and Accessories (P&A) Distribution Center. Due to the expected improved efficiencies of the new P&A Distribution Center and the new progressive work environment, an early retirement program was offered by Harley-Davidson and accepted by a number of union-represented employees, resulting in a charge of $2.5 million in the third quarter. The start-up of the Milwaukee engine facility will cost $2 million above Q4 1995.
"We expect to begin moving our employees into the new Product Development Center in January and into the new P&A Distribution Center by year-end," said Teerlink. "We also completed the purchase of an existing manufacturing facility in the Milwaukee area and are currently developing a detailed plan regarding the separation of our Powertrain Operations into two manufacturing facilities."
PRODUCT RECALL ON FUEL VALVE ANNOUNCED
On October 15, 1996, Harley-Davidson announced a voluntary recall of 176,915 motorcycles in the United States and Canada which were produced during the 1994 to 1997 model years. The vehicles use a vacuum-operated valve which could affect the supply of fuel to the carburetor. Harley-Davidson is not aware of any accidents or injuries caused by fuel valves on these vehicles. Total estimated repair costs of $1.1 million were charged to operations in the third quarter.
BUELL
The Buell Motorcycle Company, of which Harley-Davidson, Inc. is a 49 percent owner and the exclusive distributor, reported third quarter sales of 846 units or $7.4 million, versus 222 units or $2.5 million in the year-ago quarter. Teerlink said, "Buell is generating a lot of excitement in the motorcycle industry. The S1 Lightning was recently named Street Bike Magazine's '1996 Motorcycle of the Year.'" Buell has four models, three of which are new for 1997. Buell motorcycles will be introduced in Europe in 1997.
EAGLEMARK FINANCIAL SERVICES
Harley-Davidson's Financial Services segment reported third quarter operating income of $1.3 million versus $0.8 million in the year-ago quarter, reflecting continued dealer and consumer acceptance of its product and service offerings.
UTILIMASTER/B&B MOLDERS
Harley-Davidson, Inc. expects to complete the sales of the Transportation Vehicles segment's commercial vehicles business (Utilimaster) by year end, and the plastic injection-molding business (B&B Molders) in October.
QUESTION AND ANSWER SESSION
The company operates wholly-owned distributors in the UK, Germany, and France. The profit margin in these markets is actually higher than for US-sold bikes because the company makes a distributor's profit here. Half of European shipments goes to Harley distributors and the other half goes to independents. The Japanese market is even hotter than the company expected, even before some of the licensing restrictions were lifted in November. Australia is not as hot and is basically flat with last year.
Product mix: 26.3%, Sportsters, which was lower than historical trends; the Heritage Springer showed higher margins in the Custom family. Touring bikes were 21% of mix and Customs were 52.7%.
The $1.1 million recall expense charged to SG&A (sales, general, and administrative) was above and beyond normal warranty reserves. The early retirement program was charged to SG&A as well; coupled with the recall expense, the after-tax impact on SG&A was about $2.35 million for the two.
The sale of the commercial division is still being negotiated. Based on the cost of the division on the books, the company expects to show a gain on an all-cash sale.
About half the 900 units in inventory should be moved into the sales channel in Q4 along with units produced in the quarter.
The company has applied a 2.8% average selling price increase to the model line; in Europe, prices are expected to drop. Overall, due to mix shift, the company expects average selling price to increase 3% year-over-year.
Capital expenditures year-to-date are $85 million. Due to timing of expenditures for the fiscal year, most of the capital budget will be loaded into Q4 on the way to fiscal year capital expenditures of $190-200 million.
Overtime in Q3 was 18% compared to 21% last year. Production days for next year will be 242 days.
MotorClothes sales in last year's Q4 was $29 million. Q4 96 will be similar.
Unit shipments for the quarter broke down as: Domestic, 20,351; Canada, 1,344; and rest-of-world, 6,318. For Q3 1995, shipments broke down as: Domestic, 17,678; Canada, 1,307; and rest-of-world, 6,027.
Springer production for the model year will be between 8,500 and 9,000. That depends on the number of front ends, where this is a production bottleneck, the company can produce.
The company's Open House promotion in started in September has gone well. At this time, the company has decided not to sell Harley-Davidson products outside their dealer network except for licensed products.
The financial services business finances about 17% of the financed motorcycles sold in the US. The division also sells extended warranties and insurance. The business is on plan and should grow with the rest of the company.
The company will continue to evaluate equity opportunities with Buell and continue to monitor the performance bike market in Europe for Buell opportunities.
Margin improvement came from lower overtime and a better mix of bike parts compared to clothes for P&A. Italy, Harley-Davidson's second-largest market was up 11% in the quarter.
In the coming quarter, the company will record charges of $2 million for production start-ups.
Buell's bikes were very well received at a recent show in Germany. 200 units were shipped to Japan and we sold instantaneously. Calendar year 1997 production at Buell may fall somewhere near 3,500 units.
There are currently 40,000 Harley-Davidson credit card holders who charge an average of $150 per purchase.
Buell is expected to show a loss in all four quarters of 1996, amounting to about a half million dollars, which will be reflected in the "other" line of the income statement, below operating income. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |