Harley-Davidson Inc. Earnings Call Nuggets: Used Inventory, Cadence

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On Wednesday, Harley-Davidson Inc (NYSE:HOG) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with analysts and investors.

Used Inventory

Edward Aaron – RBC Capital Markets: Really nice quarter everybody. You mentioned in your prepared remarks that the industry is still working off used inventory. I was hoping, you could maybe just give us some color on where you are with your used situation versus your competitors, because it does seem like your used inventory has really dried up and I’m wondering if you’re having a cleaner inventory mix out there, it might have driven some of the market share gain in the quarter. So, I was hoping, if you could also maybe comment on how your used growth compares to your new bike growth for Q1?

John A. Olin – SVP and CFO: When we look at Harley-Davidson in particular, in the quarter, we saw basically pricing flat or stable versus prior year and we also saw that in the fourth quarter. So, we saw a lot of gains prior to that, probably four or five straight quarters, and much more flat performance in the fourth quarter and the first quarter here. When we look at overall used bike sales, or kind of the growth between used and new, we did see what looked to be an inflection point in the fourth quarter of last year, where we saw actually new start to exceed the growth of used. In the fourth quarter, new was up about 12% and used was up by just shy of 6%. Last year total demand for new and used was up 8.1%. As we look in the first two months of this year, our data is on a month lag, so through February, total demand for Harley-Davidson motorcycles was up 22.5%, with new slightly exceeding the used growth rate. So, we’re pretty pleased with that. Used to new ratio was flat on a year-over-year basis.

Harley-Davidson Hogs U.S. Industry Earnings>>

Edward Aaron – RBC Capital Markets: One quick follow-up and then I’ll pass it on, but the change in the timing of ERP rollout, did that affect how many bikes you kind of pre-built in the first quarter versus what you might have expected to pre-build previously?

Keith E. Wandell – President and CEO: Not the changing of the ERP. In the first quarter, let’s kind of take a step back in the conference call, we talked about we entered the quarter with 7,000 excess units, and at that time, we had intended to build our Company-owned inventory in anticipation of the ERP launch, and we also expected to build retail inventories a little bit. Moving the ERP launch did not have any impact, but as we go forward three months, what we did see is that we were able to maintain the excess inventory that we had built in the fourth quarter of 2011. We still have approximately 7,000 units of excess inventory. However, our Company inventory fell by 4,400 units. But the movement of the ERP did not affect that. What it does affect is our ability to continue to produce throughout the second quarter in the height of the selling season. So, as we look at inventories, while they are down coming into it, we had the excess inventory that we would expect to release in the quarter and feel that pretty much for the second quarter we’ll be at year ago inventory levels.

Cadence

Sharon Zackfia – William Blair: I had a couple of questions on cadence, I think John you mentioned that shipments will be down in the fourth quarter year-over-year as you prepare for surge capacity in 2013, so does that still imply that your expected shipments to be positive in the third quarter with ERP. And then just secondarily on gross margin, should we assume peak gross margins than in the second quarter as well given the shipment cadence in the second quarter?

Keith E. Wandell – President and CEO: Let’s talk about the cadence driven by the ERP move. So we had first anticipated that production would fall in the second quarter as we implemented the ERP system. Now we will move that to July and so we would expect production to continue throughout the second quarter, but that production will be down a little bit in the second quarter versus the first quarter. What we have done now is pushed that production out, the production reduction to July and in doing that we’re also sinking it up with our model year 2013 product. So when we look at the second quarter, we will have very healthy shipments into the trade. We are looking to shipping 79,000 to 84,000 units, which well exceeds our year ago second quarter which was 64,000, and a lot of that is coming from inventory. So as we proceed to the second quarter, which we’re starting out at very low levels of inventory, we’ll ship in the vast majority of the excess 7000 units and we’ll ship out most all the 2012, remaining 2012 product prior to July. The reason being is that we have the new model-year coming right behind the ERP launch, so what we want to do is get that out into the trade. Now, the nice thing about moving the ERP system back is, this is the time when dealers are typically used to having inventories run low in anticipation of the new model-year. So, we had pretty strong production in the first quarter, it’d be slightly down in the second quarter, it will be down in the third quarter and the fourth quarter. Down in the third quarter because of the ERP launch; and in the fourth quarter because of the ability to surge up capacity at York in the first half of 2013.

Sharon Zackfia – William Blair: Then on gross margins?

John A. Olin – SVP and CFO: The question on gross margin was, we would expect gross margin to be better in the second quarter than the third quarter because of the shift in the production. When you look quarter-over-quarter production is down slightly from first quarter to second quarters, so gross margin would probably be pretty much in line with what we saw in the first quarter.

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