Harley-Davidson profit falls as it faces millions of dollars in tariff costs

Rick Barrett | Milwaukee Journal Sentinel

Swept up in President Donald Trump's trade war, Harley-Davidson Inc. said Tuesday it faces up to $100 million in European Union tariff costs in 2019.

That's in addition to about $50 million this year as the company calculates the damages from recently imposed tariffs — a tax on imported goods — from the EU and foreign metal.

"We are doing everything we can as a company to absorb the costs," Chief Financial Officer John Olin said during a conference call with financial analysts.

"But we can't eat the whole $45 million to $55 million," Olin said, so the company has lowered its motorcycle-segment operating profit margin this year to reflect the tariffs.

Harley now says the margin will be between 9 percent and 10 percent, down from an estimate of 9.5 percent to 10.5 percent before the tariffs.

The $90 million to $100 million in European Union tariffs in 2019, if unchecked, would represent most of the the company's profit in that market.

"We are making every effort to mitigate the costs," Olin said.

Harley said its U.S. motorcycle sales fell in the recent quarter ended July 1, and it reported a 6.4 percent drop in profit.

The company had net income of $242.3 million, or $1.45 per share in the quarter, down from $258.9 million, or $1.48 per share, a year earlier.

Revenue fell 3.3 percent to $1.71 billion.

Harley's U.S. motorcycle sales were down more than 6 percent, while international sales were up 0.7 percent. Worldwide, including the U.S., sales fell 3.6 percent.

President Donald Trump takes Harley-Davidson to task for production leaving country President Donald Trump told Harley-Davidson to keep its production in the United States.

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In June, Harley-Davidson was one of the high-profile American companies singled out by the European Union and hit with tariffs in retaliation for tariffs the U.S. put on foreign aluminum and steel.

Harley got caught in the global trade crossfire and said a 31 percent tariff the

EU imposed on U.S.-built motorcycles would force the company to build those bikes overseas.

That announcement prompted a series of angry Tweets from Trump who chastised the company for producing motorcycles outside of the country.

Tuesday, Harley said it's working with every government it can, including the Trump administration, to have tariffs removed.

Meanwhile, the company is moving ahead with plans to open a factory in Thailand this fall as a way to sidestep tariffs.

"When we start to produce out of Thailand, we will be able to lower our (motorcycle) prices to dealers ... the affordability of our products will increase," Olin said.

"We will continue to build Harley-Davidson motorcycles for our U.S. riders in the U.S., as we have for our entire 115-year history," said CEO Matt Levatich.

The company also has assembly plants in India and Brazil where it could produce motorcycles for the European Union.

"We are looking at all of our options," Olin said.

Harley said it will make a strategy announcement July 30 based on its 10-year plan of training 2 million new U.S. riders, growing international business to 50% of sales and launching 100 new "high impact" motorcycles.

EU is Harley's second-largest market

The company said it had significant sales growth in emerging markets in the recent quarter, including China, Brazil and Mexico, offset by a sales decline in India.

Sales growth in western Europe was offset by weakness in Japan and Australia.

The European Union, that raised its tariff on U.S.-built motorcycles to 31 percent from 6 percent, is Harley's second-largest market behind the United States.

"While tariffs will affect short-term financial results, we believe the company can successfully shift production to avoid the tariff burden," said industry analyst Robin Diedrich with Edward Jones Co.

Harley's U.S. sales were sluggish in April but gained traction in May following a sales promotion, according to the company.

Year after year, Harley and other makers of cruiser and touring motorcycles have seen sales fall as baby boomers begin to age out of riding and fewer younger people step up to take their place.

"We are doing a lot on the marketing side to bring in the next generation of riders," Olin said, but the overall industry is in a downturn.

Harley's earnings beat the $1.35 per share that analysts surveyed by Zacks Investment Research predicted. Overall revenue topped the $1.42 billion that analysts expected.

"Expectations were already low, and Harley's results were better than feared on higher motorcycle shipments to dealers, better pricing and product mix," Diedrich said

"U.S. sales continued to decline, reflecting weak trends in the heavyweight motorcycle industry, but the pace of declines slowed compared with the last quarter ... We believe Harley is generally managing its brand well by scaling back production and focusing on new product innovation to attract new customers in this slowing market," she added.

After Tuesday's announcement, Harley's shares closed at $44.64, up 7.7 percent.

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