Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the 2021st quarter Earnings Conference call.
At this time all participants are in a listen only mode. After the speakers presentation, there will be a question and answer session.
You asked a question during the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded.
If you require any further assistance please press star zero.
I would now like to hand, the conference over to your Speaker today director of Investor Relations Mr. Shannon Burns. Thank you. Please go ahead.
Good morning, everyone.
You can access the slide supporting this call at Investor Day, Harley Davidson Dotcom quick to earnings materials box in the center of the page or comments will include forward looking statements that are subject to risks that could cause.
Actual results to be materially differ.
Those risks include among others matters, we have noted on our latest earnings release filings with the FCC.
Probably davison disclaims any obligation to update information in this call. Joining me. This morning, our CEO duck insights and CFO, John Olin and we're dialed in for a multiple locations the elkins, let's get started.
Thank you Shannon and good morning, everyone.
Today I'll share with you my observations initial actions and the Directionally in which I plan to take Harley Davidson.
Oh, I do I want to acknowledge the historic time, we're in an hour on a dime to be part of an organization that as shown in such incredible spirit interface with the city.
Hi, David Smith deeply rooted in community and we all know those who are sick, providing care and relief and working tirelessly to end this tariff pandemic.
This crisis has impacted as old, but I know we will prevail.
Confident that with the right focus and changes that I intend to implement sooth swiftly and diligently will emerge stronger.
From my observations over the last two months. It is clear we are the critical time in our history that requires significant changes to the company.
My key insights are as follows.
First Kuwait 19 has dramatically changed or reality for the foreseeable future and the crisis as edit to an already challenging environment.
We have a robust plan in place to protect our customers and employees and to be prudent with our resources and I'm proud of our teams response.
We are taking actions across the following areas.
For most we continue to it quickly and in line with with government efforts to protect the wellbeing of employees into holiday with community.
We have implemented restrictions enhanced annotation practices and canceled events.
Oh closure facilities and temporary suspension of manufacturing operations enabled us to install workplace protections and develop a comprehensive plan incorporating precautions and guidance from public authorities to protect employee health.
We are gradually resuming production in a measured way that is safe for employees and we'll continue to require all employees in roads that allow them to do so to continue to work from home to minimize the number of people in each facility.
For the wider community our foundation donated to the United ways Cobot, 19 relief fund and through our United We were white efforts. We are donating the proceeds of a custom like why auction and leveraging our channels to connect write us with relief opportunities that allow them to make a difference in their communities.
Last week, Jason a more helped us kick off these efforts with the powerful video launching all cobot 19 relief efforts.
Second.
This year, we have preserving about $250 million in cash by reducing capital in nonessential spending by freezing hiring reducing salaries and eliminating merit increases.
We also implemented other cost management efforts, such as Retiming the launch of new products.
Additionally, we have suspended discretionary share repurchase and reduced our Q2 cash dividend to two cents per share down from 38 cents per share in Q1.
Third we maintained a strong liquidity position with nearly $2.5 billion in liquidity at the end of the quarter.
Recently, we increased our cash position amended our $1.42 billion in credit facilities extended over 364 day loan facility and our ordinary and discussions with major use banks to secure an additional $1.3 billion of liquidity.
And finally in response to the Cobot 19 crisis, it's important that we help ease the burden of dealers and riders.
We are providing dealer support based of the unique needs of each region, including financial support for motorcycle inventory extending certain credit payment due dates and adjusting requirements were warranty and training.
While these actions offer near term relief to dealers, we do expect the network to contract through the crisis as a consequence, we will work to optimize the network and improved dealer profitability going forward.
All right as many dealers remain open for service support and we continue to sell parts and accessories and general merchandise online.
We along with our dealers are enabling home delivery of new motorcycles, where it is permitted.
Also for riders, who are impacted by core with 19 Hds as is helping keep them on the road.
After a significant number of conversations with our management and please and other stakeholders. Several other things have also become clear to me.
First we have tremendous strength in our product or riders and our dealers. However, we have challenges to address that have become more apparent in this crisis, including the high level of comps like complexity across the organization that needs to be minimized.
Our team is talented and hard working but leadership has become somewhat isolated an overly centralized.
And as a result slow to respond.
The speed of decision making needs to increase.
I've observed that after multiple rounds of cost cuts and reorganizations over the past years morale has suffered.
The is frustration as some cost cutting initiatives have tried to improve efficiency of things that are fundamentally inefficient.
As a result, we need to reignite, our Harley Davidson sold and culture.
Additionally, organization has become accustomed to overcommitting and under delivering we need to set achievable plans and realistic goals.
As I reviewed our strategy I know that elements of the more roads plan are good in principle, but it is clear that our strategy needs to be refocused to better align with our capacity and capabilities and also updated given our new reality.
We'll continue to expand beyond traditional products and markets. However, we have over index or new lenders and new market growth and lost focus on critical perfect sources.
We've made progress with our product line and to some degree our customer base, but progress is lagging expectations are unreasonable, especially given the economic environment that we are likely to encounter as the cobot 19, ripple effects will likely be with us for sometime.
We continue to move forward with the highest potential elements of more roads, but our strategy must be reassessed.
As a result of my observations and assessment I've concluded that we need to take significant actions and we why as a company now in terms of priorities execution operating model and strategy to drive sustained profit in long term growth.
We are calling it the rewire and it's our playbook for the next few months, leading to new five year strategic plan, which we will share wouldn't visibility to the future returns.
I'll highlight some of the key elements of the rewire.
First will enhance our core strength and better balance expansion into new spaces.
It's more important than ever to return focus and strength of our brand and company, starting with our dealers customers and our strong whole product and committed employees around the world.
HD. If asked is also strategic advantage with a track record that will help us navigate through this crisis.
We'll reevaluate our strategies to reach new riders and build ridership.
Second we prioritize the markets that matter.
We'll invest in the markets products and customers that offer the most profit and potential.
This includes building on our strong position in the U.S.
We're narrowing our focus time and energy in the most critical countries in market segments that can move the needle phos today.
We'll also diligently played a long game by identifying select strategic markets that may not contribute to enterprise profitability in the near term, but are critical for future.
We will also simplify the market coverage model and take costs out of the process.
Third we reset our product launches and lineup with simplicity and maximum impact.
Launches, our six to 12 months to reflect on new reality and to allow our launch calendar for the first time in our recent history to align with the start of the riding season.
We simplify launches over time to better suit the kept test capacity of our dealers and company resources to support them.
From here will expand our profitable iconic heritage bikes to excite our existing customers.
Also remain committed to treat venture touring street fighter and advancing our efforts in electric.
We will continue to be guided by the voice of our customers and dealers as we bring new focus to offerings to optimize value and profit delivery.
Next we'll build our parts and accessories and general merchandise businesses to full potential.
We are developing a comprehensive strategy across these businesses that focuses on assortment and distribution opportunities.
Maximizes channels improves ecommerce capabilities in gross revenues and margins for both the company and dealers.
Well, we will align this strategy with our motorcycle strategy for realistic presentation to the market.
And finally, we'll adjust and align our organization structure cost structure and operating model to set the organization up for stability and success.
We are designing frame up for success in organization that is more focused and nimble lined with an appropriate cost structure adjusted to the new realities of the market post crisis.
We will also reset our operating model to increase in Parliament diversity and accountability for critical decisions.
Essentially our refreshed organization will be less complex with a sharper focus and able to make and able to make faster decisions.
We are creating the right central and new regional structures that are commercially led to establish the REIT focused on dealers and selling.
We will also in the elevate the role of motorcycle management within the organization and shop more marketing strategy and execution to enable a bigger impact with an improved go to market process.
The rewired is underway and we've taken actions across each of these key elements of the playbook and more in development.
I've mentioned some of the significant actions that we've already taken to allow the organization to move forward.
Other recent actions include setting the organizational superstructure with three new senior management members appointed to key roles.
We are promoting talent, who know the company our dealers and our customers.
To bring the appropriate sales focus we've created a new commercial entity, including a simplified regional sales structure as well as a refreshed parts and accessories and general merchandise businesses.
To leverage expertise and a historical insight as we hope and our strategy of engaged our senior leaders beyond the executive team and they missed and establishing a CEO Ron take round table comprised of select dealers and former Harley Davidson leaders.
The team is hard at work re energizing the business and we will share more about our progress during our Q2 update.
In closing two complex. What lies ahead. It is important as we continue to rally together today, where United as a Harley Davidson global community in support of our families friends and seller riders through time of crisis that we hope will end soon.
I offer my gratitude to our family of employees dealers and riders for doing their part to stay safe and healthy there well being is above all the most important thing.
While the entered this pandemics uncertain, what defines Harley Davidson and dues.
It's a welcoming beacon that shines beyond this time that were in.
I see this as an incredible opportunity to re why are the company and set our says on a path for great success in the future.
We are addressing our realities with conviction and I believe will come out of this stronger than ever.
We will reignite Harley Davidson.
And we will rally around our newly state admission.
More than building machines, we stand for the timeless pursuit of adventure freedom for the soul.
And now I'd like to turn over to John to discuss the financial results of the quarter.
Thank you again.
In summary of our Q1 results is on slide six in the quarter motorcycle segment operating income was lower year over year, driven by lower shipments and unfavorable currency, partially offset by strong manufacturing productivity lower year over year tariffs and lapping last year's restructuring charge.
Financial services operating income was down 60.9% driven by adjustments to our provision for loan losses as a result of cobot 19, and the impact of a new accounting pronouncement.
Consequently, consolidated net income was down versus prior year EPS for the quarter was 45 cents.
Despite the covert 19 crisis, our long term focus remains on disciplined inventory management aggressively managing costs generating cash from operations and delivering strong shareholder returns.
On slide seven first quarter worldwide retail sales of new Harley Davidson motorcycles were down 17.7% versus prior year.
During the first quarter retail sales were off to a strong start across the globe, but were significantly hindered as consumer concerns and governmental efforts.
Related to covert 19 spread throughout most of our world markets first in Asia than Europe. Finally in the U.S., Canada and parts of Latin America.
Looking past the near term crisis, we believe our brand distribution and innovative products provide a great base for long term success as a result of the focus that our Harley Davidson rewire actions will bring to optimize value and profit delivery.
We believe we will emerge a much stronger company in the future.
Let's take a closer look at the U.S. on slide eight.
US retail sales were down 15.5% for the first quarter versus prior year, but not before peaking at 6.6% quarter to date growth through mid March behind the success of our stronger dealer efforts and the introduction of several new models.
HD retail sales fell significantly in the back half of March due to consumer concerns and approximately 50% of our dealers being temporarily closed for motorcycle sales in the U.S. due to covert 19.
During the quarter Harley Davidson's market share for new bike registrations was 48.9% down 2.2 percentage points driven by aggressive discounting by our competitors lapping hds prior year finance offer and an unfavorable shift in sales mix from segments in which we compete to segments, which we do not currently compete.
But we'll begin competing in would Pan American and Bronx motorcycles.
Our share was also down in segments in which we compete.
As a result of the corporate 19 impact quarter end us retail inventory rose by approximately 1600 motorcycles versus prior year.
We will aggressively manage the supply of motorcycles into the dealer network as we managed through this crisis.
On slide nine international retail sales were down 20.7% in the first quarter as cobot 19 fears and dealer closures spread from Asia to Europe to Canada, and Latin America.
Yeah me a on declined significantly across all markets and finished down 28 point, 28.4% Asia Pacific was down 5.3% driven by declines in China, and South Korea, partially offset by growth in Japan and India.
Latin America saw declines in Mexico, and Brazil, and finished the quarter down 21.5%.
Our Q1 market share in Europe was 7.6% down 1.3 percentage points versus prior year, our market share was adversely impacted by an unfavorable shift in sales mix to non HD segments and increased competition.
On slide 10 wholesale motorcycle shipments in the first quarter were down 10.0% shipments were impacted by Corbett 19 related disruptions of our manufacturing operations.
Overall family mix shifted from touring and sports or street motorcycles to cruiser motorcycles versus last year's first quarter.
On Slide 11, Q1 revenue for the motorcycle segment was 1.1 billion down 8% behind at 10% decrease in motorcycle shipments.
Average motorcycle revenue per byte was up $599 driven by favorable product mix lower sales incentives and higher year over year pricing, partially offset by unfavorable foreign currency exchange.
On slide 12 gross margin in Q1 was down as a result of lower shipments less rich product mix and the unfavorable currency exchange, partially offset by lower manufacturing expense.
Q1 product mix was unfavorable by $3.4 million, driven by a shipped and family mix and unfavorable parts and accessories mix.
Q1, gross margin was adversely impacted by 10.8 million of currency exchange.
Foreign currency was unfavorable largely due to a stronger us dollar.
First quarter manufacturing expense was favorably impacted by strong productivity lower tariffs and lapping prior year temporary inefficiencies, partially offset by lower absorption of fixed manufacturing costs.
On slide 13 operating margin as a percent of revenue for Q1 was unfavorable compared to last year, driven by lower gross margin and increase SGN a due to lapping of prior year recall recoveries, largely offset by aggressive cost management.
Profitability and cash flows remain a key focus.
Turning to our financial services segment on Slide 14, as we discussed last quarter on January Onest 2020, we adopted Cecil the new accounting pronouncement for credit losses. As a result, we took a one time increase in the allowance for credit losses of $100.6 million with the offset being a reduction to retained earnings.
Net of taxes.
This new accounting standard will not have an impact on the economics or cash flow of rage GFS business. However, as we have discussed we do expect the adoption of Cecil to result in increased earnings volatility and that we'd certainly played out in the first quarter of 2020.
H. DFS as first quarter operating income was $22.9 million down 60.9% compared to the prior year.
The first quarter provision for both retail and wholesale loan losses was $44.9 million on favorable them to prior year.
The increase in the provision was due to two factors first 8.9 million of higher actual credit losses, and second a $36 million increase in our allowance for credit losses.
Actual credit losses were higher primarily due to cold at 19, including lower prices at auction slowed repossessions and delayed consumer payments at the end of the quarter.
The increase of 36 million in retail and wholesale credit reserves was the result of two drivers first the economic impact of coded 19 as it relates to our expectation of our customers' ability to repay their loans.
And second with the adoption of the seasonal accounting pronouncement, we adjusted our reserves to include the estimated Hoover 19 impact over the entire life of loans in our portfolio.
Each DFS is operational results are on slide 15, Q1, retail originations were down 10.8% versus prior year, driven by lower new bike sales each DFS as market share remained relatively flat at a very strong 64.3%.
At the end of the quarter. There was 1.05 billion of cash and cash equivalents at H., GFS and 1 billion of liquidity available through bank credit and conduit facilities.
On slide 16, our 30 day, plus delinquency were favorable down 36 basis points as we lap the startup inefficiencies, resulting from the implementation of our new loan management system. In January of 2019. However, we believe delinquencies were modestly impacted by cobot 19 crisis towards the end of March.
[music].
The Q1 retail credit loss rate was 2.73% a 51 basis point increase over prior year as previously mentioned losses increased in the first quarter, primarily due to who bid 19 impact.
The remaining Harley Davidson in financial results are summarized on slide 17, our quarter end cash and marketable securities balance was $1.47 billion, we've increased our cash holdings in the quarter as a precaution due to the uncertainty driven by the crisis.
Q1, operating cash was an outflow of 8.6 million driven by lower net income this year compared to last year.
We believe the charts on slide 18 demonstrate that over time, we're a leader in ROI C of the motor company and return on equity at age DFS, and we are demonstrated leader and their ability to generate cash.
Slide 19 illustrates our cash return cash returns for our shareholders in the first quarter of 2020, we paid a quarterly dividend of 38 cents per share.
As you will note, we did not repurchase any of our stock on a discretionary basis during the quarter.
Moving on to guidance on slide 20.
Our 8-K filed on March 26, we withdrew all guidance as a result of the uncertainty surrounding the magnitude and duration of the pandemic.
As you can mentioned earlier, our covert 19 action plan on slide three consists of four major focuses I'd like to provide a bit more color around two of those areas first preserving cash and second securing additional liquidity.
We are focused on preserving cash an increasing or decreasing liquidity to weather the storm.
We entered the pandemic with a very strong balance sheet and 12 months of liquidity.
We've taken a number of specific actions to preserve cash, including first and foremost, reducing non essential cost and lowering our 2020 capital spending.
We have done this while prioritizing investments in our new motorcycles, including adventure turning Street fighter and electric.
We're also extending cash outflows, where it makes sense at the same time, we are working to secure our supply chain and parts availability in order to sure we can get the plants up and running as soon as possible.
Regarding liquidity, we maintain 2.47 billion and total liquidity, including 1.47 billion in cash. We're currently in discussions with two major banks to secure an additional 1.3 billion of liquidity with one transaction targeted to be complete by the end of this week.
In addition, we anticipate executing transactions and capital markets in the upcoming weeks.
As of the close of business on April 24th we have an estimated 2.28 billion of consolidated liquidity.
As we look forward, we have to MTN maturing over the remainder of the year one for 450 million in May and the other for 350 million in June.
Assuming no motor company revenues.
And without any additional liquidity are mitigating actions. We believe we have sufficient liquidity to operate through the end of the year.
The company's credit ratings, all remain investment grade and we remain chain excess to commercial paper markets.
Also as we've experienced in the great recession, each DFS tends to be a source of cash for the company. When motorcycle sales are falling over the last six weeks H. DFS has had a net cash inflow of approximately $200 million.
We're also well within our debt covenants are each DFS covenants required debt to equity to be no higher than 10 to one as of Q1, our debt to equity ratio was 6.6 to one.
We believe our balance sheet and strong cash and available liquidity will allow us to address the cobot 19, driven adversities.
Thank you and now let's take your questions.
As a reminder, in order to ask your question. Please press Star line on your telephone keypad to be placed into the queue.
We ask that you limit yourself to one question.
And any further questions. Please press star one again can reenter the queue.
Please standby, while we can pile of acuity roster.
Your first question comes from Greg Badishkanian with Wolfe Research. Your line is now thanks.
Great. Thank you.
The two part question.
The first the first one is retail sales were strong if I read right, 6.6% positive prior to that Kogut outbreak.
One of the best would be would have been one of the best quarters year. So what drove that performance. What can you utilize going forward post Covidien <unk> did I Miss I did hear a quarter to date you asked for for April I'm, just wondering how those trends.
We're for you because I think some of the other power sports like Polaris things seem to have gotten a bit better and not in April I'm wondering if that was the same for you.
Thanks, Greg This is John Yeah, Greg through the quarter was a tale of two quarters right first the 10 week period, and then a three week period through the first 10 weeks, we were doing very well in terms of retail sales and as we had mentioned the U.S. was up 6.6%, Greg a lot of that was driven by.
The activities that we've been pursuing over the last year I'm under stronger dealers and on those have continued to take hold we see more dealers adopting and I'm certainly strong results coming out of those actions. The second thing is as we also brought several products to market in the first quarter a lot of it late in the quarter.
But they also drove a fair amount of sales.
When we talk about so so the last three weeks, we saw a precipitous fall off of retail sales on for obvious reasons and.
It was a lot of that was led Greg by the closure of dealers. So we started the month of of March there was about 4% of our dealers were closed and that can considerably escalated by the end of March it was 55% and on through April on where we sit today above 59% is closed so we're starting to.
See the dealer closures plateaued for sales of new motorcycles.
But with that retail sales are down on their down a fair amount in the month of April however, they're not down to the same extent the dealer closures are so retail sales are outperforming our dealer closures and with that.
I would suggest the dealers that are open our selling near a year ago levels.
And Greg if I may add your from here.
The you mentioned new model introductions into first quarter, we had four new models that will focus around to call of our business with the anniversary of Thirtyth anniversary Fatboy self day of standard Eli and Patriot and that certainly helped to if we sell a says in the first couple of months.
I appreciate that.
Your next question comes some Phillies Felicia Hendrix with Barclays. Your line is open.
Felicia Hendrix your line is open.
Your next question comes from Craig Kennison with Baird. Your line is open.
Hey, good morning, Thank you for taking my question.
Multipart question related to the CEO search.
Yes, Yochum first of all his unique feelers in or what are they seek gain in a new leader at Harley Davidson and second how should investors in check breadth.
The decision to really pursue a five year plan before you actually higher the permanent CEO of does that mean, you're candice. Thank you.
Thanks, Craig.
In terms of the CEO search there's really nothing to report at this point on focusing clearly on the developing and the implementation of the plan to deal with the crisis.
And make sure that we get through the stronger within Rewire plan, which I'm also planning to implement a end to end develop obviously as way in the middle of that so there's nothing really to add at this point in time in terms of the D. is as CEO search.
And in terms of what theaters or CKD in a new leader well I don't know what the less as seeking what we know what we are seeking as a forward and ER and those criteria. They have ethylene established so I think there's nothing to add to that and I think in developing a five year plan is always pod Oh.
Over Ceos joke, acting or not and I.
I made it very clear at the beginning that I'm, not an interim CEO, but an acting CEO and the as we have during our requiring process and playbook. We obviously have to also look at our existing a strategic plan and see what's with what's still valid what is known so my duties also to develop a new five year plan.
And Thats, what we are focusing on that at the same time.
Very helpful. Thank you.
Your next question comes from James Hardiman with Wedbush. Your line is open.
Hi, good morning, Thanks for taking my call. So I wanted to dig into a CFS a little bit I think I generally get a what's going on with Cecil, but maybe give us an idea the increased reserves that 36 million dollar number.
What would that have looked like if if we werent using the Cecil standard I'm, obviously, that's getting amplified there and and I guess my bigger question is as we look forward. How do we think about eight yes, I would assume that 8.9 million dollar higher axle credit loss.
Losses is something we're going to be dealing with over the next few quarters, but that.
Assuming credit.
Metrics don't get significantly worse that we shouldn't be worried about that $36 million number repeating going forward.
Should we think about that.
Thanks, James This is John.
As you had noted the reserves were increased by 36 million overall provision was up 45 million and that's made up of the two pieces you mentioned 8.9 million an actual losses and then the reserve piece of that at 36, I'm soap Cecil did create or cause that to be a higher number than it would have otherwise Ben.
So we estimate that up to 36 million about three quarters of it hold 17 $18 million would have been they're on the incurred basis and the and the incurred method that Tom the industry followed prior to us Cecil so that leaves about quarter of a due to seasonal and the Cecil piece actually has two pieces. One is just the higher reserve.
Which is about 50% increase as to what changes would have been in the past and the other pieces of seasonality I'm adjustment, which as new as well and so the seasonality was actually favorable in the first quarter and we'd expect to see some of that reverse out in the second and third quarters.
So when we look at the 36 million and that reserve that was set at the end of March and at that time, we look at all the data that's available and that includes such things as the expectation of of recession. The severity of recession in the duration I'm. It also looks at other economic data such.
As I'm unemployment GDP and certainly used bike values all of that is taken in at that point on March 30, Onest run through the models and that came back in suggested that we needed to increase the reserves by 36 million and if everything held at those assumptions, we would have expected that that way.
Be all that we would need to do and on that would cover on the issues that Corbett has driven.
However, I will tell you James that since March 30, Onest, there has been a a deterioration of that economic data.
Between March 31st in today, certainly in terms of unemployment GDP expectations. The severity of the recession coming out of this and so we don't know what's going to happen by the ended the quarter when we have to Mark again.
But if they economic stay as they are today, we would expect that there would be another increase in the reserves at each DFS at the end of the second quarter again, we'll have to wait and see on with regards to that and that could also have an impact on on the credit losses that 8.9 million that you had mentioned.
We're watching it closely h. DFS is I'm being very proactive interactions they have mad made changes to the underwriting.
Standards, which include restricting ltvs and tightening payment to income.
Tightening maximum amounts financed and increasing proof of income.
And also underwrite tightening underwriting in oil patch areas. So they are all over it but.
We will continue to read the economy and make adjustments that we need to as we move forward.
It's really helpful. Thanks, John just to be clear that 8.9 million, even if if assumption stayed consistent with where they were on March 31st that's something we would have to deal with for the next three plus quarters.
No I I'm not completely sure I understand James the 8.9 is what we've written off.
Right and it was our loans that we do not expect the to collect we will continue to try to collect them, but they are written off they are behind us they have nothing to do with us going forward.
Okay, and so we would we shouldn't assume that at that level of actual loss increases would happen in future quarters. That's already been accounted for in the increased provision well those specific loans have been written off we've got a lot of other loans and nice quarter, we will look at which ones of those would go to write off right and.
And those are predicated on and on our customers' ability to repay unemployment in all those other factors that we mentioned.
Got it okay. Thanks, Josh.
Thank you James.
Your next question comes on Felicia Hendrix of Barclays. Your line is open.
Hi can you hear me now.
Yes.
[laughter] that starts to get a new filing I think I.
So just kind of staying on that line of questioning and good morning on John did have a question for them on kind of just see Cecil related question in the credit loss provisions on just by the way that when calculating things that 45 million increasing in the credit loss provisions just looks a little bit you know.
Oh, it's only at a 10 million increase from some last year. So you know can you just talked about the assumptions behind that change given the news T cell accounting standards, we thought it would be.
Higher and then just also wondering what percentage of your customers. They're currently on a agreed upon forbearance plan at all and ends will they would that be included in your 30 day delinquency in annualized Alon known us metrics if that is the case.
Thanks, Felicia the I'm the $45 million provision you had mentioned the up 10 million and you would have expected more the provision is up on a year over year basis by the 45 million.
So that is made up of two pieces. One is the them. The write offs that we've taken of 8.9 million and and then the the increased reserve, which is made up of the coded crisis as well as a kind of above a booster with regards to the see select toning provision.
Agents.
So that is said John sorry, just that's true I'm, sorry, I should have they found more that it more clearly the increase in credit launch.
Hi that 45 million increase in the credit loss provisions. That's what we thought was let's leave it with the increase.
Yes, and so and that was.
A little bit where we talked about at the end of the quarter. We marked everything as of the data that was available on March 30 Onest.
And given the data that we had 45 million was the right number to book.
Since then we have seen a significant deterioration in the economic data and the the economy.
Unemployment I'm GDP forecast and all those types of things. So Felicia we would expect that if things ended where they are today. The second quarter, we would have to take another increase in that.
Provision and reserve more money at the end of the second quarter.
Okay, and then on the on under Forbearances, if there are any.
No we don't we don't necessarily.
However look at the Forbearances, what we do have is we've called customer extensions and as customers come in and they have issues pain because of coded 19 on we will look to extend the loan. It's a common practice that we follow and we followed in and areas that are impacted by her.
Mccain's another on natural disasters, we're following that same I'm process here and it allows the consumer a little bit of time to get themselves squared away.
Certainly helps our riders. So we are offering some extensions with regards to that.
I I don't know when you talk about forbearance, if you're talking about on the wholesale side.
Where we haven't seen any losses I'm in terms of the wholesale side I'm actually in years, but in the downturn 10 years ago, We blossom dealerships and we lost some had some write downs of those and as you'll see in the financial results that we set aside 7.3 million.
Dollars of reserves on the wholesale side too as we would expect on losses I'm going forward, there and some of our dealers can't make it through this crisis.
Okay. Thank you.
Your next question comes from Joe Altobello with Raymond James Your line is open. Thanks, guys. Good morning. So it's got a couple of questions on rewire.
First why do you think you guys have fallen short time, adding net new riders in the package and what do you intend to do differently increase the participation.
Board.
Thanks jail.
Well that's a good question I mean, you know the numbers of riders that we've created in 2019 in 18, we had about 3.1 million a highly riders in the U.S. in 2019 at the end of the yeah.
55000, more total riders that in 2018, but we also judiciously a year lost a ride is and that led us with a net of 24000 more than before.
I can't really tell you why that is the case that we went able to create riders you know we've been testing for initiatives to help drive big increases in total write a shift to where focus more on.
Designing to accelerate the journey to becoming a committed rider, which includes providing access to motorcycles and individual training and that to others.
The two other initiatives were designed to retain existing leidos and include creating epic leidos and rewarding existing leidos for miles riding and be new people to Motorcycling, we will evaluate those four initiatives as soon as we can obviously not now because they were down hole and then determine as part of the reliable way and what we can do but it better.
That to not only increase right as shaped by creating new ride as but also making sure that those are the who are in this board will will be retained so I I hope to be able to give you more details in the future as we defined the rewire program and as we can start testing again.
Now that's very helpful. Just a question a follow up on that for you I can enhance is probably not how you want to Q.
Figure tenure as CEO start during a pandemic, but but here. We are so with that said are you considering moving the acting moniker at some point.
Taking on the CEO role permanently.
Well as I said Jill you know at this point, there's really nothing to add to what I, what I said earlier, I'm I'm, focusing developing and implementing the plan and then also getting the rewire program in playbook defined and implemented as we are looking to redefine our next new five year strategic plan.
I knew pretty wide of auto as getting myself into so you know no worries there, although nobody could have predicted that the severity of the koby 19 crisis, you and I agree to to take on digital I assume this would be a tough right and to but I'm used to it so.
Okay, great. Thank you.
Your next question comes from Gerrick Johnson with BMO capital markets. Your line is open.
Good morning. Thank you you can high you mentioned optimizing the dealer network I know one last a couple of weeks there has been at least for dealership closures that I know of.
So what's the plan to rationalize the dealer base, what is a new dealer base look like and what actions do you guys need to take to get there.
Yeah. As you said in fact, we had five underperforming dealers in the U.S. and that closed in the into first quarter, we had 20 closures internationally.
We don't know what this picture is going to look like as we get out of covert 19 crisis. So it's very hard to say in the lock into great recession, we had about 100 dealers closing.
And but we have no prediction, obviously, we have some on watch a close watch and would do that we do that on a daily basis.
And then you know as Steve has exited there maybe opportunities to converge dealerships and as as some might be bought up by existing dealers somewhere to go away and and as I said below optimization will be important as a result, so that.
We can improve profitability of the dealers that are going forward or other than that I can't really said much more light on that but we are looking at this very actively and with good systems and plans in place to make sure that the dealer network will be strengthened in the future coming out of this.
Okay, Let me put it this way prior to covert was their plan in place to to rationalize the dealer base or is the optimization of dealer base a reaction to the covert 19 crisis.
It's a combination of both obviously you always need to improve your dealer network. When you. When you when you look at your your mapping and existing sales, which changed from year to year. So there was an ongoing plan, but that is being revised and fine tuned and you know they also opportunities.
That we need to look at that.
You know, allowing our dealers to satisfy online, which we've created it that as part of this crisis mitigation.
Our ability to to deliver bikes.
With dealerships that are being close to that so that also other ways to optimize the opportunities of existing dealers to sales and thats, we'll be able to doing in the crisis.
Your next question comes from Joseph Spak with RBC capital markets. Your line is open.
Hi, Thanks, very much Tom I guess, you know with respect to Rewire. This this program sounds.
Like a much narrower focus for focus versus MRO trust to certainly I think trying to be broader and more exclusive any sort of how does a lot of buildouts and.
International growth.
And at least to this alessandra refreshing.
But I'm wondering you spent a lot of money over the prior years trying to broaden out the base I mean, how much of your investments that you've already made you think are sort of reusable every purposeful here as you may begin to embark on the rewire strategy.
Yeah. That's a good question I think narrow for sure but that does not mean as I said in my in my speech that a elements of the more roads plan will not be incorporated in our new plan going forward.
A lot of wood will depend on the crisis itself and the re why a program that we are developing and as we as we go a long into development also implement.
We would certainly ensure that a lot of investments made to you know, we'll we'll we'll have a positive effect, but I'm I'm not able or willing at this point to give any detail what I did say, though is that.
Our launch into adventure touring and street fighter segments, and ER and into electric those three segments. We are committed to into future Endos took up a significant amount of our of our product development cost. So those will continue the launch timing of those however, as I also mentioned to has.
In impacted by the crisis, and we will make sure that we are ready with a very strong go to market process for each of them.
Your next question comes from David Macgregor with Longbow Research. Your line is open.
Yes, good morning, everyone. Thanks for taking the question.
Okay, I wonder if I could get you to go back to some of the comments you made around the rewire in your prepared remarks, and the press release and then there you make reference to a cost structure, that's adjusted to the new reality, so the market post crisis, which obviously.
That is across it should be addressed here, but it seems a little vague and I'm wondering if I could get you to elaborate a little further and just exactly.
But as you're trying to accomplish there and I guess, maybe as well.
[music].
Asking you to sort of offer some view based on your history as a member of the board, but how do you think about what these assets should be generating in terms of a target levels of profitability a return on capital.
Yeah. Thank you I mean, obviously this crisis has an impact on our sales and into and and that will have an impact on our cost structure and would we cannot.
Really defined right now how big that impact is going to be and I understand that everyone would like to get to get us to give some guidance, but we simply do not have enough visibility to provide a full cost and therefore I can really onset of your questions. At this point hopefully with the second quarter, we will be able to assuming that week.
Had better visibility that we have now and we get to starting to get out of this crisis. We can start focusing again, but we would certainly not do that until we have a clear view and that also applies to your last question in terms of target levels all of that would be part of the rewiring program and playbook and.
Obviously, our new five your strategic plan, so with that we will then.
Ill give you clear guidance for what we expect in terms of return on capital and so on.
Your next question comes from Brett Andress with Keybanc capital markets. Your line is open.
Hey, good morning, I'm, just a clarification on the greater than 30 day delinquency rate that you reported.
You mentioned softer trends at the end of March. So can you give any color on what that rate you know it right now either here in April or what it was at the end of March and then the second part of that question is have you seen any increase in the the less than 30 day delinquency rate as well.
Thanks, Brett This is John Brett on the 30 day delinquency rate, we were very pleased to see that come down by 36 basis points, but remember a lot of that was due to what happened a year ago and if you go back to 2018, I think we were I'm still up about seven basis points and that's probably mainly.
He explained by by Sea, So I'm, sorry, I'm, sorry by Covance and up the last couple of weeks of payments I got extended I'm, there's no way to come out and do a perfect due to widen that but over a two year beard period of time, we are down a little bit in the biggest driver that would be on what we're seeing in.
In the Corbett crisis. The other piece of it is when you look at on what's happening in less than 30 day delinquencies.
It's not what we are seeing is more of those extensions that I mentioned the earlier I'm. So we're seeing a lot of prime customers coming in saying that you know I need a little bit more time to pay on because of coal bed and then some of those were extending the time.
For that piece of it so that's what we're seeing I'm under 30 days, but I do not have an interim period to 'em delinquency measure either on less than 30 days or I'm not in the 30 day plus.
Understood. Thanks.
Your next question comes from Adam Jonas with Morgan Stanley. Your line is open.
Hey, everybody I'm beyond kind of want I want to try a third time do you want to be CEO of Harley if the board once you remove acting or you an option [laughter].
Yeah, I I, if you don't want to answer then it's a problem because given the scope.
This is probably the [laughter] that release and that strategy was so refreshing and must be a huge really for your dealers. Your employees stakeholder here investors I know you, but on the board since 2007, some preaching to acquire but that has a huge huge.
Open ended area and it just I'm not asking for you to break new ground here, but are you even an option.
I'd say, if I take it as a compliment. Thank you very much but as I said nothing to add to this point in time, but I will I will I have hit the ground running and there's a lot to be done and we have very very focused on implementing our plan and to and developing a new plan for the next five years. So.
You should be confident about that.
Well, I guess and I don't have any other questions. It's just that I hope you sympathetic to why that is potentially very frustrating and that by the time, the second quarter as an opportunity for you to share more.
More information on the plan.
That you know, it's it's fair to all stakeholders that that there is.
There is a more permanent.
Solution for for leadership, and I I Hope I hope and I hope that you are using everything and I'm sure you are at Buybuy to queue at least we can we can be in a better positioned to answer. These questions. Thank you for the certainly thank you.
Your next question comes on 10 got hundreds with Wells Fargo. Your line is open.
Thank you that was on my list, So I'll I'll Echo Alaska, those those things, but multipart question here on the on the retail.
John any color on on how very recent let's call. It in March on things have looked coming out of the oil patch areas, Oh oil and gas just given the collapse we've seen there.
And then I did want to ask a johan in any any additional color you can give on the market refocus it sounds like maybe Asia style back end to end. The a is it permanent or temporary change in your launch schedule of your of your of the annual new products. Thank you.
I'll start off with the first question Tim on retail sales.
You know, it's really difficult to tell now everything is down a lot.
Almost 60% of dealers are closed so everything is down it's hard to pull apart what we're seeing in oil patch areas. We're still a we're certainly back into looking at it right and that with several years ago. We had a similar issue and certainly it had an in fact on the motorcycle industry in Harley Davidson sales folks that work in the industry.
In those areas are very good customers and.
We are we understand where oil prices are and that there may be a knock on effect I'm of course bid, but also on the lower oil prices and as I had mentioned some of our underwriting.
Changes that we're making are taking those learnings from several years ago and applying them here, but I can't separate out because of dealer closures and whatnot.
Where we're at dealer patch verse, I'm, sorry oil patch states versus others.
Yeah and to the to your other two questions in terms of refocusing on markets. I mean definitely I believe strongly believe we need is tied to focus on our coal markets and as I mentioned.
You know that's a market said our biggest profit drive as you as needs more focus going forward. Some of the international markets not just from a profitability point of view, but from a potential point of view and I think there will certainly be some de emphasizing a in order to create increased focus I mentioned earlier units about.
Speed it better focus, it's about reducing complexity, which will help us to.
Set our organization up a full for really profitable future and a and that means focusing on key markets as well.
In terms of the the timing of our launch schedule that is a permanent change as I mentioned Weve time, Retimed, our multi a change over from overseas to early Q1.
In order to allow a launch calendar for the first time in our history to lie with Estado. The writing seasons that made all the things to me and I don't see any reason why we should go back to the old schedule. So that's a permanent change.
Your next question comes from Sharon Zackfia with William Blair. Your line is open.
Hi, Good morning, Hey, John I Might've missed sense, but could you talk to answer that what you're currently great cash burn rate is and then separately on the Chinanet 15 million I'm going I think you guys are targeting in terms of preserving liquidity can you break that out between capex versus what's going to the piano.
Thanks Sharon.
You know when you look at our overall cash burn.
Less the 250 million that we took out we're in the range of anywhere between 80 and $100 million a month right. That's pretty simple to would you take a billion dollars a best DNA and divided through and I'm take off a couple of hundred million dollars and we got the fixed cost in the plans to run the plants that are running through cost of.
Good sold without the dividend on the dividend significantly being reduced we've got some interest payments in their of I don't know $15 million a quarter.
So I'm, an overall burn rate of somewhere in the $80 million to $100 million a month and again as I had mentioned given the liquidity that we have now the debt that we have that will be maturing I'm in the near future and again churn based on assumptions that we have absolutely no revenue. We are revenue is down very significantly in the first three.
And a half weeks of April, but we still have revenue so with those assumptions, we've got enough runway to make it to the ended the year and a little bit into next year.
So we feel very good about that we haven't broken out the 250 into its pieces, but it is predominantly Amit up of 'em SGT expense.
Your next question comes from Jamie Katz with Morningstar. Your line is open.
Hi, Good morning, I'm not sure. If you guys. Congrats I put it out but not all they could shelter in place orders there could you give us any improbable, how though I'm delighted that getting and shattered versus non shattered stay if there's any information to share their frank.
Both Jamie olds, we know we it's it's it's pretty difficult you know dubbed the piece that I'll.
When we look at it in totality and we can see that the dealers that are selling are outperforming the dealer closures that we have and again as we sit here today I'm, 59% of our dealers are closed however, our retail sales in the first three and a half weeks of April are not down that much so that does.
Adjusted the dealers that are opened our selling at near year ago levels.
But we don't have a an analysis or we don't have anything to share with regards to exactly which states. They are.
All right thanks, everyone.
The on slides for today's call will be available at Harley Davidson Dot com or for the audio call. It 558, fivenine to 056 or floral four five through seven three 406 until May 12. The I'd is seven seven to six <unk> one seven.
And thanks, So Shannon and John and Thank you for your time. This morning for your interest and investment in Harley Davidson.
As the Penitentiary pandemic persists, we will continue to protect the well being of our people and the strength of our business I'm confident that Harley Davidson Rewire will result in the company that is less complex with sharpened focus and makes decisions faster I.
I look forward to sharing more during our second quarter up that stay well everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[noise].
Oh.
[music].
[music].
[music].