With supply chain costs up $82 million in Q1, Harley still expects improvements in second half

Last updated on May 3rd, 2022 at 01:22 pm

Milwaukee-based Harley-Davidson faced an additional $82 million in supply chain costs during the first quarter compared to 2021 and also faced production limitations for certain motorcycle models.

Motorcycle shipments overall were flat at 54,800 and the company’s motorcycle segment saw revenue grow nearly 6% to $1.3 billion behind pricing actions and higher sales of parts and accessories.

Executives did attribute 2 percentage points of revenue decline, around $24 million, to supply limitations that primarily impacted Harley’s Touring models in North America.

Overall, motorcycle operating margins decreased from 18.5% last year to 15.6%. In addition to supply chain and mix headwinds, the company’s operating expenses was $12 million higher.

Those issues were partially offset by an $81 million benefit from pricing actions and a $10 million benefit from volume.

For the entire company, net income declined from $259 million to $223 million.

Like many manufacturers, Harley has been dealing with increased costs throughout its business. In 2021, logistics costs were up more than 100% while manufacturing was up 3% and materials costs increased 5%.

In the first quarter, logistics costs were up around 50%, manufacturing was up 7% and materials were up 4%. The company is expecting logistics costs in the second half of the year to be flat with manufacturing up around 4% and materials up 3% to 5%.

“It’s not as though costs are going to come down, but we’re saying that costs are not going to inflate as much as we saw here in Q1,” Gina Goetter, chief financial officer of Harley-Davidson, said during the company’s earnings call.

She pointed out that logistics cost inflation started to pick up in the second quarter last year and continued throughout the year.

Harley’s production limitations were generally tied to global shortages of semiconductors. Goetter said supply issues became worse throughout the quarter and slowed the company’s rate of production.

“What we’re seeing is that from a supplier and a chip availability, we do see some improvements in chips in the back half of the year, but we do expect that supplier volatility will remain” she said.

Supply chain and production limitations are showing up at Harley dealers. Worldwide, there were 28,000 motorcycles in inventory at Harley dealerships at the end of the first quarter, down from 37,000 last year and 74,000 at the end of March 2019.

On average, a motorcycle is on a showroom floor in the U.S. for less than two weeks, compared to around 10 weeks in 2019, Jochen Zeitz, chairman and CEO of Harley, told analysts.

While Harley has worked to reduce inventory levels in recent years as part of a strategic overhaul of the company’s direction, Edel O’Sullivan, chief commercial officer, acknowledged “we are a little bit lighter than we would like to be today in the dealer network.

“That is certainly something we hear … both qualitatively from our dealers, and we can also see it in just the speed of how those units are turning,” O’Sullivan said, noting reservations and pre-orders can help manage through the issues in the short-term. “But we would certainly like to see the inventory growing to be a little bit more robust over time.”

She added that the company does not see the need to go back close to levels where bikes were at dealers for 10 weeks on average.

Arthur covers banking and finance and the economy at BizTimes while also leading special projects as an associate editor. He also spent five years covering manufacturing at BizTimes. He previously was managing editor at The Waukesha Freeman. He is a graduate of Carroll University and did graduate coursework at Marquette. A native of southeastern Wisconsin, he is also a nationally certified gymnastics judge and enjoys golf on the weekends.

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