Head N.V. looked to the Winter Sports business in the second quarter to reverse the negative sales trend of the first quarter, but the total sales increase for the period was not enough to bring the year-to-date revenue line into positive growth territory as H1 sales were still off 2.7% from the prior year period. The bottom line benefited from a $7.2 million gain from the June 2005 sale of property in Estonia, but were also impacted by $3.0 million in restructuring costs related to the 90% reduction of its tennis racquet production in Austria and the Czech Republic. The year-ago period was hurt by $20.6 million (€17 mm) in income tax expenses.

Operating profit before restructuring costs and the gain on the sale of the Estonia facility was $1.2 million profit in Q2 versus a $5.7 million loss in Q2 2004.

While the second quarter is the smallest period for the Winter Sports division, the division nearly doubled its share of the total Head business for the quarter to roughly 15% of sales in Q2 this year, compared to just 7.6% of total company revenues for the year-ago period. The division saw gross margin surge 36 full percentage points to 36.9% of sales in the second quarter, compared to 0.9% of sales in Q2 last year, due primarily to a change in product mix and higher sales. The sales increase was said to be due to “higher sales volumes of ski boots” and OEM bindings, as well as the strengthening of the Euro against the U.S. Dollar.

Bindings made up 82% of total Winter Sports sales versus 85% of sales last year. Skis category sales increased at the same rate as the total division, maintaining a 12% share of the business, while Boot doubled its share of the divisional business to 6% of sales from 3% of division sales in Q2 last year.

Head said the “market remains cautious,” but said they were 90% booked for the back half and expect revenues to be “broadly in line” with last year.

The Racquet Sports division saw sales increase on the introduction of the new Flexpoint technology, higher sales volumes of tennis balls, and the strengthening of the Euro against the U.S. Dollar, but the gain was not enough to offset the Q1 declines here either as first half sales still decreased 6.6% versus H1 2004. Head said the H1 decline was due in part to the shutdown of its Irish tennis ball plant and the resulting loss of European OEM business as well as lower sales volumes and a change in product mix in tennis racquets.

While first half gross margins for the Racquet Sports division still lag behind 2004, GM for the second period jumped 480 basis points to 45.6% of sales versus 40.8% in the year-ago quarter.

Racquet sales were up about 4% to approximately $23.4 million in the second quarter, representing 49% of division sales versus 48% of sales in Q2 last year.
Ball sales were up about 4% in the period to roughly $17.6 million, delivering 37% of division sales versus 36% in the year-ago period.

Head sad that, based on the available market data, the U.S. tennis racket market showed healthy sell-in driven by product launches, but that sell through growth is slightly lower. The European markets apparently saw nearly double-digit declines for the first six months. While Head’s bookings “developed positively during Q2,” they expect full year Racquet Sports sales to be “slightly behind prior year.”

Diving revenues for the quarter decreased by $3.6 million, or 13.9%, to $22.4 million from $26.0 million in the comparable 2004 period. This decrease comes from the Italian market as well as from the reduction of the company’s product range to optimize profitability. The strengthening of the Euro against the U.S. dollar partially offset the negative development.

As for the 2005 outlook, Head management said they were encouraged by the positive development in the business during the second quarter. Despite market conditions they see as “challenging,” the company is more optimistic about the outcome for the full year of 2005. Still, operating profits plus the planned restructuring costs and gains on sales of property will still be lower than last year.

Based on the optimistic view, HED shares were up 17.5% for the week to close at $3.16 on Friday.

Head N.V. 
Second Quarter Results
(in $ millions)  2005 2004 Change  € Chg*
Total Sales $86.0 $83.2 3.4% -1.6%
Europe $47.3 $45.8 3.4% -1.6%
N. America $27.5 $27.5 0.2% -4.6%
Rest of World $11.2 $10.0 12.0% 6.6%
Winter Sports $12.9 $7.3 76.0% 68.2%
Europe $12.0 $6.4 88.9% 79.8%
N. America $0.5 $0.2 136.0% 124.0%
Rest of World $0.4 $0.7 -47.0% -49.5%
Racquet Sports $47.7 $46.9 1.7% -3.2%
Europe $20.5 $19.7 4.1% -0.9%
N. America $22.4 $22.5 -0.4% -5.2%
Rest of World $4.8 $4.7 1.7% -3.2%

About The Author

Teresa Hartford

Teresa Hartford Editorial & Creative Director | SGB Media teresa@sgbonline.com | 704.651.5741



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