The conference call with analysts that always follows release of Harley's results each quarter is usually a pretty bland affair. But after evidence of investor disquiet emerged in January, the Q1 call in April provided the first opportunity for acting President/CEO Jochen Zeitz to go public with his observations about where he thinks Harley has been going wrong, and some of the changes that he thinks need to be introduced - and he did not hold back, neither did he deny that he could take the CEO job permanently…
"From my observations over the last two months, it is clear we are at a critical time in our history. COVID-19 has dramatically changed our reality for the foreseeable future and the crisis has added to an already challenging environment.
After a significant number of conversations with our management, employees and other stakeholders, several other things have also become clear to me. First, we are providing dealer support, but we do expect the dealer network to contract through the crisis. As a consequence, we will work to optimize the network and improve dealer profitability going forward.
We have tremendous strength in our product, our riders and our dealers. However, we have challenges to address that have become more apparent in this crisis, including the high level of complexity across the organization that needs to be minimized.
Leadership has become isolated and 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. There 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 soul and culture.
're-evaluate our strategies to reach new riders and build ridership'
Additionally, our organization has become accustomed to over-committing 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 to be updated given our new reality.
We’ll continue to expand beyond traditional products and markets, however, we have over-indexed on new riders and new market growth and lost focus on critical profit sources. We made progress with our product line and to some degree our customer base, but profit is lagging and our expectations are unreasonable, especially given the economic environment that we are likely to encounter as the COVID-19 ripple effect will likely be with us for some time.
We’ve continued 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 rewire the company now in terms of priorities, execution, operating model and strategy to drive sustained profit and long-term growth. We're calling it The Rewire and is our playbook for the next few months, leading to a new five-year strategic plan, which we’ll share when visibility to the future returns.
'reignite our soul and culture'
I'll highlight some of the key elements of The Rewire. First, we’ll 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 stronghold product and committed employees around the world. HDFS has also a strategic advantage with a track record that will help us navigate through this crisis. We re-evaluate 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’ll narrow our focus, time and energy in the most critical countries and market segment that can move the needle for us today. We’ll also diligently play the long game by identifying select strategic markets that may not contribute to enterprise profitability in the near term but are critical for our future. We will also simplify the market coverage model and take costs out of the process.
Third, we’ll reset our product launches and line-up for simplicity and maximum impact. Launches six to twelve months out will reflect our new reality and allow our launch calendar for the first time in our recent history to align with the start of the riding season.
We’ll simplify launches over time to better suit the capacity of our dealers and company resources to support them. From here, we’ll expand our profitable iconic heritage bikes to excite our existing customers. We also remain committed to Adventure Touring, Streetfighter 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 our offerings to optimize value and profit delivery.
Next, we’ll build our Parts & 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 its channels, improves e-commerce capabilities and gross revenues and margins for both the company and dealers. We will align this strategy with our Motorcycle strategy for realistic presentation to the market.
'we have over-indexed on new riders and new market growth'
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 a framework for success, an organization that is more focused and nimbler, aligned with an appropriate cost structure adjusted to the new realities of the market post crisis.
We will also reset our operating model to increase empowerment, diversity and accountability for critical decisions. Essentially our refreshed organization would be less complex with a sharper focus and able to make faster decisions.
We are creating the right central and new regional structures that have commercially led to establish the right focus on dealers and selling. We will also elevate the role of Motorcycle Management within the organization and sharpen our marketing strategy and execution to enable a bigger impact with an improved go-to-market process.
The Rewire is underway and we've taken actions across each of these key elements of the playbook, and more are 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 talented people who know the company, our dealers and our customers. To bring the appropriate sales focus, we have created a new commercial entity, including a simplified regional sales structure, as well as refreshed Parts & Accessories and General Merchandise businesses.
To leverage expertise and a historical insight as we hone our strategy, I've engaged our senior leaders beyond the executive team and established a CEO Roundtable comprised of select dealers and former Harley-Davidson leaders.
To accomplish what lies ahead, it is important that we continue to rally together. Today we are united as a Harley-Davidson global community in support of our families, friends and fellow riders through a 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. Their well-being is above all the most important thing."
Zeitz spoke about the need to "elevate the role of Motorcycle Management within the organization", "sharpen marketing strategy and execution" and to reset the "organizational superstructure with three new senior management members appointed to key roles."
The changes and simplifications in management structures revolve around a tranche of internal promotions after Michelle Kumbier was invited to relinquish her post as Chief Operations Officer.
Larry Hund has moved from his role as President and COO of Harley's Financial Services business to be Chief Commercial Officer at the Motor Co., focused on Motorcycle, P&A, General Merchandise sales and the Milwaukee Museum (with Bill Davidson still running the museum).
Reporting to Larry Hund will be a streamlined rebuild of Harley's existing and notoriously inefficient global region motorcycle sales management structure, with Dave Cotteleer as VP and Managing Director for North America, Nigel Keough as VP and Managing Director for Asia Pacific and Latin America and Andy Benka as VP and Managing Director for EMEA. Jonathan Root succeeds Hund as the leader of HDFS.
COVID-19 Response and Recovery Actions
The company is executing its plan to address the impact of COVID-19 and begin its recovery through a multitude of recent actions across the following areas:
Reduced planned capital spending and also reduced planned spending across every part of the organization including freezing hiring, temporarily reducing salaries and eliminating merit increases for employees in 2020. The company also implemented other aggressive cost management efforts such as retiming the launch of new products. In total, the company expects these efforts to preserve approximately $250m of cash in 2020. Additionally, the company suspended discretionary share repurchases and reduced the cash dividend to $0.02 per share for Q2, down from $0.38 for Q1.
Maintained $2.47bn in liquidity including $1.47bn cash as of the end of the quarter and remains compliant with all covenants. Recently, the company amended its $1.42bn credit facilities, extended its 364-day loan facility and is in discussions with major U.S. banks to secure an additional $1.30bn in liquidity. Additionally, the company expects to access the capital markets in the near future.
Supporting Dealers and Riders
Eased the burden on Harley-Davidson dealers by providing support based on the unique needs of each region, including financial support for motorcycle inventory, extending credit payment due dates on Parts & Accessories (P&A) and General Merchandise (GM) and adjusting dealer requirements for warranty and training. The company also offered dealer discounts on certain GM products and is engaging with dealership staff via live chat sessions to share unique ways to stay connected during the crisis. For customers, many dealers remain open for service support and the company continues online sales of P&A and GM, and along with dealers, is offering home delivery of new motorcycles in states and countries where it is permitted. For riders who have been impacted by COVID-19, Harley-Davidson Financial Services (HDFS) is helping keep riders on the road.
Acted quickly and in alignment with government efforts to protect the safety and health of employees and the Harley-Davidson community. The company implemented travel restrictions, enhanced sanitation practices, cancelled events and closed facilities including temporarily suspending global manufacturing starting in March. In support of relief efforts, the Harley-Davidson Foundation donated $150,000 to the United Way's COVID-19 relief fund. Through its "United We Will Ride" efforts, the company is connecting riders who want to help provide relief through food drives, blood donations and other ways to make a difference in their communities.
Rumors - 20% Fewer Variants, Less Paint
Jochen Zeitz openly discussed needing to break the habit of "over-committing and under-delivering", to "set achievable plans and realistic goals" and highlighted needing to refocus on a new strategy to "better align with our capacity and capabilities."
|Zeitz has excessive special edition paint jobs and multiple colorways in his sights.|
While he intends to continue to "expand beyond traditional products and markets," he is clearly aware that not all models are equal in terms of their production overhead and profit, with "profit is lagging" and "expectations unreasonable."
One aspect of Dr Zeitz' patented medicine appears likely to be a rationalization of the existing product range to make room for the new models - the Bronx and Pan America in particular.
One rumor doing the rounds is of an across the board 20% cut in the number of individual bike models, with the slowest sellers disappearing and certain designs being selected for early retirement! The FXDRS appears to be at the front of the list of potential casualties, and we also hear that there is to be a "fire in the paint shop" with the number of colorway options for any given model being dramatically reduced.
|The FXDRS could be a casualty.|
The following is the framework for the replacement of the 'More Roads' Strategic Plan – the 'Rewire' that acting President/CEO Jochen Zeitz outlined with the Q1 financial release on March 28 …
The company is executing a set of actions, referred to as The Rewire, that will be further developed over the coming months, leading to a new strategic plan.
These actions are part of a comprehensive 'Rewire' playbook designed to address top priority opportunities, drive consistent execution and reset the company's operating model in order to reduce complexity, sharpen focus and increase the speed of decision-making.
The company expects the 'Rewire' actions - those already taken and those that will be implemented over the coming months - to lead to the definition of a new 5-year strategic plan that will incorporate key products and initiatives from the 'More Roads' plan, but will focus more on the markets and products that can drive performance in terms of profitability and growth.
Key elements of The Rewire: