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Highlights From HOG's Q3 Conference Call; Discontinues Buell Brand, Sees More Dealerships Closing in N-T, But Int'l Growing

1:13 pm ET 10/15/2009 - StreetInsider

Harley-Davidson (NYSE: HOG) reports Q3 EPS of $0.11, which includes items and may not compare to the analyst estimate of $0.21. Revenue for the quarter was $1.12 billion, which compares to the estimate of $1.1 billion. Surprisingly, shares are up 3.5% today.





Highlights From HOG's Q3 Conference Call:

Harley-Davidson is narrowing its guidance for full-year 2009 shipments, and now expects to ship 222,000 to 227,000 Harley-Davidson motorcycles to dealers, including 35,000 to 40,000 during the fourth quarter. The Company continues to expect full-year gross margins to be between 30.5%-31.5%.

Harley-Davidson also unveiled major elements of its go-forward business strategy to drive growth through a single-minded focus of efforts and resources on the unique strengths of the Harley-Davidson brand, and to enhance productivity and profitability through continuous improvement. As approved yesterday by Harley-Davidson's Board of Directors, the Company will discontinue its Buell product line and divest its MV Agusta unit as part of this strategy.

(CFO) To-date we are on track with previously announced restructuring activities. We're working to reduce administrative cost, eliminate excess capacity and exit non-core operations.

Our decision to discontinue Buell and sell MV Agusta takes into consideration the following. Investment in the Harley-Davidson brand has provided greater returns than either the Buell or MV Agusta brands. Harley-Davidson customers have a much higher repeat purchase intend and our success in attracting new customers to the Harley-Davidson brand indicates the brand is well positioned to grow worldwide in the future.

The Buell dealer network will continue to sell new motorcycles into 2010 and provide service into the future. We have chosen to discontinue the Buell product line as oppose to selling the business in part because Buell is so integrated into the Harley-Davidson business systems and distribution network. From an accounting perspective, Buell is not considered a separate and distinct operation and as a result will not be presented separately as a discontinued operation.

Of approximately 125 million in total cost associated with the discontinuation of Buell. We expect to incur approximately $55 million of restructuring and impairment cost in 2009 related to contractual requirements, write down of asset and severance benefits. We also expect to reduce our hourly workforce by approximately 80 employees and our non-production primarily salaried workforce by approximately 100 employees.

During Q2, we recorded a $14.2 million impairment charge relate to the fixed asset associated with Buell.

In addition to restructuring charges, we anticipate approximately $60 million in cost related to helping our dealer sell their inventory and charges for absolute inventory which will negatively impact gross margin in Q4. In addition, we expect approximately $10 million of cost in 2010. Buell revenue was $134.9 million in 2008 and $59.4 million 2009 year-to-date.

Turning to our plans to divest MV Agusta. Like Buell ongoing investment in MV Agusta does not align with the company's long-term strategy. MV Agusta has value driven by its respected heritage, exciting products and passionate workforce. It is a standalone entity with a separate distribution network. As a result we expect to report MV Agusta results as a discontinued operation which means MV revenue, cost and earnings will be reported as a separate line item below Harley-Davidson's income from continuing operations beginning in Q4.

MV Agusta revenue was 15.9 million in 2008 and 42.9 million September year-to-date. Net losses were 30.1 million in 2008 and 52.6 million through the first nine months of 2009. This includes the $18.9 million, I'm sorry, this includes an $18.9 million impairment charge of good will related to the purchase of MV Agusta recorded in the third quarter.

Our third area of focus has been to obtain funding to support the lending activities of HDFS. I'm very pleased to report that we have exceeded our $1 billion 2009 funding needs by 1.9 billion which will support any 2010 funding needs including the mitigation of 2010 financing risks. Last week we closed a $700 million TALF-eligible term securitization. We saw a strong demand in the weighted average interest rate drop to just 1.2% from 2.1% in our July transaction.

Worldwide, dealer retail sales of Harley-Davidson motorcycles during the third quarter were down 21.3% compared to down 9.6% in 2008.

On a sequential basis, worldwide sales were down less than they were in the second quarter of this year when they were down 30.1%.

During Q3, U.S. Harley-Davidson motorcycle retail sales decreased 24.3% while the U.S. 651 plus cc motorcycle market dropped 35.9%. Our market share was up 8.4 percentage points to 53.8% in the quarter versus last year.

In the international markets, we saw a sequential improvement with sales being down 13.1% in Q3 versus down 18.2% last quarter.

Between 2007 and 2008, we trimmed year end U.S. dealer inventory by approximately 22,000 units and as you know, we have taken actions in 2009 to reduce shipments which we believe will result in significantly lower inventories at the end of 2009 compared to last year.

To-date, four dealers and 10 secondary dealer locations have closed and we have, we expect 15 to 30 dealer points could close during the next six months.

Also, our shipments of Harley-Davidson motorcycles for the third quarter were 54,236, down 20,468 units from the same quarter last year in line with our third quarter shipment guidance and consistent with our previous annual shipment projection of being down 25 to 30% from 2008.

Revenue from Harley-Davidson motorcycles decreased to $803.3 million from Q3 of 2008 primarily as a result of 27.4% lower shipments of Harley Davidson motorcycles during the quarter partially offset by a favorable shipment mix resulting in increased average revenue per unit of $1,006.

Total revenue for the segment was 1.12 billion, down 21.2% from Q3 2008.

Gross margins in the quarter decreased to 33.1% of revenue compared to last year.

We are pleased to maintain our expectation of full year gross margin between 30.5 and 31.5% despite the impact from discontinuing the Buell product line.

For Q4, we expect gross margins to be negatively impacted by fixed cost spread over 14, the 19,000 fewer units and the impact of approximately $60 million charge resulting from the discontinuation of Buell.

Operating margin for Q3 2009 decreased to 9.5%, negatively impacted by lower gross margin, restructuring charges and asset and goodwill impairments, partially offset by lower SG&A funding.

Now moving on to our Financial Services segment. During Q3 HDFS reported an operating loss of 31.5 million, a decrease of 67.1 million compared to last year. This decrease was driven by several items. First, a $41.4 million increase in the provision for retail loan loss allowance. Of that total, 28 million was due to expected higher loss incidents and lower recovery values of repossessed motorcycles in the future.

(Chief Operating Officer, Harley-Davidson Financial Services) During Q3, HDFS originated 588 million in retail motorcycle loans compared to 821 million in the third quarter of 2008. This 28% decrease is primarily attributable to lower retail sales of Harley-Davidson motorcycles in the U.S.

HDFS retail market share of new Harley-Davidson motorcycle sold in the U.S. was 51.2% in the third quarter of 2009 compared to 57.6% in the third quarter of 2008. This decrease in market share shows that there continues to be a competitive marketplace in retail financing for Harley-Davidson motorcycles.

At the end of Q3 approximately 5.18 billion of receivables were classified as held for investment. Of these receivables, 938.6 million were wholesale and 4.24 billion were retail.

Regarding delinquencies and credit losses, the impact of the recession and high unemployment continue to drive increases. The 30-day delinquency rates for managed retail motorcycle loans at September 27, 2009 is 5.8% compared to 5.59% at the end of Q3 of 2008.

From a credit loss perspective, annualized retail credit losses totaled 2.7% for the year-to-date versus 1.97% last year.

(CFO) Cash and cash equivalents as of the end of the quarter totaled 1.52 billion.

(CEO) Between now and 2014, we expect to expand our international dealer network by 100 to 150 dealer points primarily in markets where we already have a presence and see opportunities to create and fulfill additional demand. In Mexico, for example we are going to 13 dealers this year from the eight that we had at the start of 2009.

And with our product plan we are confident that we will continue to expand the appeal of Harley-Davidson motorcycles to the under age, under 35 age group.

And we expect earnings to grow at a faster rate than revenue through 2014 including productivity savings net of inflation of 120 to $150 million including the restructuring of our York operations and SG&A to decrease as a percentage of revenue.

(Q&A) Keith, could you just clarify one of the last statements you made there the 120 to $150 million, if you could just maybe go through that again and expand on that last statement and was that inclusive or exclusive of what you're looking to do at York? (A)That is inclusive of the restructuring at York and its net of inflation.

Okay, so over a 120 to $115 million, is that so that's you already restarting post the savings that you've already outlined with the restructuring again through 14 or I guess everything collective? (A)Yeah, that's post.

Okay, so the 140 to 150 and add another 120 to 150 on to that what's you are saying? (A) Yes.

And then the other question is it appears that you all are very comfortable with the sell-through that you are seeing right now or the levels of inventory in the channels you narrowed your guidance to the upper half of the range, should we anticipate any - on a go-forward basis, your productions and to basically match the sell-through that we are seeing? (A)What we've given for the remainder of this year, beyond this year Tim?

Beyond this year, I mean, if you take looking forward, just as a general rule do you want to expand basically any supply demand gap that's there or do you want to kind of keep it where it is and let that fluctuate and according to how your sell-through goes? (A)By the end of the year, we are very comfortable where inventory levels are and they will decrease between now and the end of the year as we take our production down. As we move in the 2010, we will look to keep that inventory level tight through 2010.

Okay, okay, and then may be a question for Larry or whoever wants to take this. Given what you outline with HDFS, we're assuming no further improvement, no deterioration in the current economic environment. Would you anticipate your reserves in that, at what point would you anticipate the level of reserve that you're taking to moderate or maybe turn positive? (A)I think really probably two things would be drivers of that. One is obviously we're looking at unemployment very closely. So if we start to see improvement and unemployment; I think that's going to have a positive impact on our portfolio and then the required reserve levels. And I think the second thing, as I talked about is, we made significant changes to our underwriting criteria, beginning 2009. We're seeing positive trends there as that, as those new assets become a greater percentage of the total portfolio over time. Today they're not that bigger percentage of total portfolio, but over time as they become a bigger percentage that should drive better credit performance and lower reserve requirements.

Good morning and John, congratulations on your new permanent role. Don't think I've been a part of the quarter with packed with more information than this, so I'll try to be brief. With respect to your negotiations in York, can you give us an update on your upcoming events as the year concludes? (A)We are currently in negotiations with our labor union and I would characterize those as just being sort of in the beginning phases and we do expect and will have an answer and a decision on New York sometime between the 1st and 31st of December and whereby we will either be staying in New York and restructuring that operation in a way that will be sustainable for our company going forward or we will then move the operations to another location.

Harley-Davidson, Inc., through its subsidiaries, produces heavyweight motorcycles, as well as offers motorcycle parts, accessories, and related services.

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