Harley-Davidson’s Q2 financial results (released July 24) showed reduced profit for the period to June 30 with domestic U.S. unit sales down by -6.4 percent for the quarter (46,490 units) in a domestic U.S. heavyweight motorcycle market that was down by -6.3 percent for the quarter.
The decline in profits reflect the decline in sales, the strength of the U.S. Dollar and the first effects of tariffs on imported aluminium and steel and on European import tariffs that are expected to cost Harley around $50m this year, and anywhere between $90m and $120m in the full year (tariffs on Harleys will increase from a WTO standard of 6 percent per bike to an average of 31 percent or $2,200 a bike).
In response to the EU retaliation against President Trump’s decision, Harley had earlier moved to defend its dealers and customers from the price increase by saying it would absorb the increased tariffs and move production of EU destined models overseas to an as yet unconfirmed facility.
The speculation is that Harley will make its European inventory at a factory in Thailand that is already expected to come on line later this year, however, that would likely only be a short-term fix. The company is targeting for 50 percent of sales by unit volume to be outside the U.S. by 2017 (as are Indian Motorcycle) with the largest slice of that being in Europe. Further announcements of growth initiatives are planned for July 30.
Asked about the reaction in Europe to Harley’s decision to “eat” the tariff damage, CEO Matt Levatich said the reaction among dealers had been universally positive and that the fact that the company would back their commitment to Harley in this way “made them very proud” to be associated with Harley. Conversely, he said that the general reaction among U.S dealers to seeing some production transitioning overseas had been phlegmatic – he said that for the most part domestic dealers appeared to understand that the company “had to do what’s best” to keep itself healthy.
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| Matt Levatich, President and Chief Executive Officer, told investors that Harley needed “new types of products and channels” |
Despite the profit drop, Harley’s Q2 Fiscals were not as bad as analysts had feared and their lacklustre share price actually bounced on the news by around 10 percent. Although domestic U.S. unit sales were down, again, the decline is broadly tracking wider market atrophy rather than being ahead of it, as had been the case most of last year. Sales are -8.7 percent (75,800 units) YTD for a 49.2 percent share so far this year (-0.4 percent). Motorcycle shipments for Q2 were 72,593 units and 136,537 for the calendar YTD.
While domestic demand meant that overall global retail sales were down by -3.6 percent for the quarter, their international results were much better. Asia Pacific and Canada remain challenged (Japan and Australia have been notably soft for Harley in the second quarter), but the welcome news is that Latin American sales are up (thanks largely to growth in Brazil and Mexico), and that in Europe (EMEA) sales were +3.6 percent for the quarter and are tracking at +4.8 percent YTD, giving Harley an improved in-class market share of 10.4 percent.
Harley says its European performance is being driven by “strong Softail sales,” and the addition of another 12 international dealers can’t have hurt as the company continues its plan to have added some 150 – 200 new dealers internationally in the four years to 2020.
The effects of inventory management can be seen in the fact that total revenue (at $1,525.1 billion) was “only” down by -3.3 percent despite -11.3 percent lower shipments. YTD revenue was $2,889.1 billion; the average motorcycle revenue has increased.
The 2018 motorcycles segment gross margin is down somewhat on 2017 at $532.1 million (34.9 percent of revenue) for the second quarter and $1,005.9 billion (34.8 percent of revenue) YTD due to the higher steel and aluminium costs, among other factors.
For the latest on the new model plans contained in Harley’s recent “More Roads” strategic announcement, see our coverage from AMD Magazine at https://americanmotorcycledesign.blogspot.com/2018/08/harley-davidson.html
