Harley-Davidson Q3 earnings call: Used prices, tight inventory… and hurricanes

Highlights from Harley-Davidson’s the third-quarter call with financial analysts. Comments are from Harley-Davidson CEO Matt Levatich and CFO/SVP John Olin. (See also: “Harley-Davidson: U.S. retail inventory will be down ‘significantly’ in 2017”)

‘Hurricanes accounted for 1.5-2 percent of retail sales decline’

“The industry was down 9.2 percent in the third quarter, which represents the eighth consecutive quarter of industry weakness. We believe the industry was adversely impacted by soft used bike prices and the hurricanes that hit Texas and the Southeast.” – John Olin

“While it is very difficult to isolate, we estimate the impact of the hurricanes accounted for approximately 1.5 to 2 percentage points of Harley-Davidson’s retail sales decline during the quarter.” This also may affect Harley-Davidson Financial Services: “We expect credit losses to be incurred because of the impact of the hurricanes. We would expect these losses to be largely reserved for in the fourth quarter.” – John Olin

“The industry has been challenged for eight quarters and down quite significantly for six. Every quarter is a little different, but that core rate has been running down between 6 and 7 percent. We believe a big factor of that is the disparity between new and used motorcycle pricing. That has been the constant over this period of time and has been building up for numerous quarters — again, it just switched after 12 quarters so we believe that’s the biggest piece. But you get into the third quarter and the Southeast was down quite significantly behind the hurricanes. Also, out West, the extreme heat that they were experiencing in the third quarter – the West was lower. But those go back and forth, and we’re not seeing any patterns of any of our Southern regions that we track that are down more than the average over time, so it is really more driven, we believe, by the soft used bike pricing.” – John Olin

‘I don’t know anyone that has called the industry right at this point.’

“We expected the U.S. to be down slightly, offset by international at the onset of the year. But it was down significantly more than we expected, and that’s really driving everything that you’re seeing with regard to retail sales.” – John Olin

“It’s much easier to forecast when you look at new and used combined, but given the divergence that we have in growth rates between new and used, it’s become very difficult to forecast. We understand the pain that’s causing for our shareholders and others, but I don’t know anyone that has called the industry right at this point. It’s an industry that has grown 28 out of 33 years, and there [have] only been two periods in three decades where it’s been down – one was in the recession in 2009-10 and then over the last two years. We’re doing our best to forecast it.” – John Olin

“We continue to address the issues that we’re facing from a principled standpoint, making sure that we do not discount we do not cheapen the brand, and we take the hard actions in terms of managing the inventory in the system.” – John Olin

‘Pleased to see used bike prices moving in the right direction.’

“You cannot overlook the importance of the used bike prices. We first saw the signs of goodness in the first quarter, and we saw the auction or the wholesale market prices rise on a year-over-year basis. That held in the second quarter, and in the second quarter we also saw the pricing services start to pick up the activity at auction, and those pricing services published higher prices. In the second quarter the broader market still was down on a year-over-year basis, and that was 12 quarters of being down.” – John Olin

“[For third quarter] we’re still very firm at auction. The pricing services are still posting much higher prices, in some cases 15 percent higher on some of our touring product, and we’ve seen that move into the broader market and we’ve seen used bike prices up on a year-over-year basis.” – John Olin

“We’re very pleased to see used bike prices moving in the right direction. As prices rise, more people will make the choice to buy new vs. used, because with the new they get all the innovation, the new engine, new chassis. They get a bike with no miles and they get a warranty, a two-year-warranty, which is worth a lot.” – John Olin

‘Will continue to main a very tight inventory level in the U.S.’

“We’re committed to making the critical business decisions necessary to manage through the prolonged weakness in this key market… While we believe limiting model-year 2018 product had a negative impact on retail sales in the U.S., we could not be more pleased with our U.S. retail inventory position.” – Matt Levatich

“Last quarter we decided to significantly reduce the flow of new motorcycles into the channel in an effort to operate with a much tighter U.S. retail inventory in the face of an uncertain industry. Throughout the quarter, U.S. retail motorcycle inventory was down 20 to 30 percent, and we believe retail sales were adversely impacted as a result of limited availability. U.S. retail inventory at the end of the quarter was down approximately 12,200 motorcycles compared to prior year. We continue to expect 2017 year-end U.S. retail inventory will be down vs. 2016.” – John Olin

“We will continue to maintain a very tight inventory level in the U.S. as long as the industry remains soft and uncertain. Now, having said that, when we look at shipments vs. retail sales next year, there is an opportunity to ship in at a little bit higher rate just because of the way we’re taking the inventory out this year. We’ve said that this year we would finish with inventory down quite a bit at year end, and we will, and we would need to ship in a little bit more in terms of a percent next year or we would run inventory way too low at the end of 2018. But that’s not to be confused with the fact that overall inventory levels will remain tight through the fourth quarter and into 2018.” – John Olin

‘There is a rider development path, and rider training plays a role in it’

“In the quarter, we trained more than 19,000 riders, which brings us to just over 51,000 year to date.” – Matt Levatich

“There is a “lot of training and different thinking with respect to the Dealers, and understanding that there is a rider development path and rider training plays a role in it, but getting the right people into the course and making sure not only that they have a good experience in the training class itself but on the back side of that training class — what do we offer for them to continue their journey to becoming a confident rider?” – Matt Levatich

“We’re piloting a number of different programs… One in particular allows a recent Riding Academy graduate to get into a very cost-effective short-term lease on a used motorcycle on the Dealer’s floor, so that once they finish the class they’re able to quickly get into a motorcycle. We’re [also] looking at different pilots where we pair experienced riders with newly minted Riding Academy graduates to help mentor them in their journey to riding.” – Matt Levatich

2018 model offerings ‘much easier to understand’

“To understand what the strategy was behind [the 2018 Softail line], it was to take three previous platforms — which were the old Softail, Dyna and V-Rod, which we had 11 models of in the previous year — and we came out with eight new Softails that were highly differentiated and covered all the’ need states’ that the previous models did without the overlap between families. We believe that, from a customer standpoint, [the Softail lineup] is much easier for the customer to understand.” – John Olin

“In the quarter, the eight new 2018 Softail models had a significantly higher sell-through rate compared to the rate of last year’s 11 models of Softail, Dyna and V-Rod during third quarter of 2016. In addition, our market share of cruisers was up nearly 5.5 percentage points in September. We believe this demonstrates increased consumer appeal with reduced complexity. We expected reduced complexity to also improve the Dealer sales process, enhance our customers’ purchase experience, and drive manufacturing productivity with lower capital investment.” – John Olin

Product quality from all manufacturers ‘never been better’

“I think that the product quality in the marketplace from all the competition, and Harley included, has never been better, and that’s good for the industry. We aim to compete on our merits for share with our product and our channel and our marketing, whatever the competition might do. I do think that the weaker dollar settling in at a weaker level should help with discounting pressure from the non-U.S. manufacturers. But we’re bringing everything we have to bear on this markeplace to not only grow ridership but to compete for share and do it profitably.” – Matt Levatich

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Craig Ballantyne

I love anything to do with Harley Davidson and have two beautiful children and a beautiful partner. In my spare time i like building websites and love anything to do with the internet.

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