Harley-Davidson Inc (HOG) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to Harley-Davidson's third quarter, 2002 financial results conference call.

At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation.

It is now my pleasure to turn the call over to your host, Vice President and Chief Financial Officer, Mr. Jim Ziemer.

Sir, you may begin.

Thanks,

.

Good morning and welcome to Harley-Davidson's third quarter conference call.

I'd like to remind you that this call is being recorded and a replay will be available after 11:00 a.m. this morning.

Please dial 973-341-3080 and enter the PIN number 3473780 and the pound sign.

The recording will be available through October 23rd.

There's also a Webcast live on our Web site Harley-davidson.com.

The Webcast will be available for replay throughout the next several weeks.

It's going to be archived on the Investor Relations portion of our Website.

In compliance with regulation

, I'll be making the following statements: this call will include forward-looking statement that are subject to risks that could cause actual results to be materially different.

Those risks include, among others, that is we have noted in our latest earnings release and filings with the SEC.

Harley-Davidson disclaims any obligation to update the information in this call.

As is our typical approach, I will spend a few minutes discussing some of the highlights of the quarter and then I'll open it up for questions.

The third quarter was a great quarter and as the press release stated, we achieved all time records for any quarter in revenue earnings.

some of the financial highlights of the third quarter.

units -- 67,474 units, up 19.2 percent.

Revenue -- 1.14 billion, up 31.8 percent.

Gross profit: 397 million, up 33.4 percent.

Net income: 165 million, up 47.7 percent.

Net income percent: 14.5 percent of sales.

For more detail, I'll start with the motorcycles and related products segment.

During the quarter, we shipped 67,474 Harley-Davidson motorcycles, which is only 500 units higher than our guidance of 67,000 units.

The average selling price of Harley-Davidson motorcycles was up 7.7 percent in the third quarter compared to a year ago quarter.

The primary driver of increase was a 3.4 percent price increase on the 2003 model year motorcycles.

Additional contributors to the increase were: number one, a higher mix of big

units.

When the

is included in the big twins, the big twins make up 80.8 percent of the total mix, versus 77.4 percent last year.

Big twin revenue per unit is considerably higher than

revenue per unit, and therefore, it has a big impact.

And also, the mix of units sold in the U.S. versus international was 81.1 percent this quarter, versus 79.6 percent in 2001's third quarter.

The average U.S. price per unit has a higher selling price than the international units.

And as mentioned in the press release, we have raised the calendar year 2002 production goal to 263,000 Harley-Davidson motorcycles.

This represents a 12.2 percent increase in production over 2001.

This increase is the result of continued strong demand for our products, and ongoing capacity increases in our plants, as well as our supplier network.

Talking about parts and accessories -- going on to parts and accessories in general merchandise.

Parts and accessories

a strong quarter with sales of 199.7 million, up 32.3 percent over 2001's third quarter.

As mentioned in the press release, both new and limited edition 100th anniversary accessories, as well as continued strong Harley-Davidson motorcycle demand helped drive this performance.

In fact, when you back out the 100th anniversary specific products, which accounted for approximately 21 million, the P and A growth rate is still 18 percent.

It's somewhat misleading to eliminate all the 100th anniversary sales for this comparison, because some of those sales would have occurred anyway.

For example, if someone needed a replacement air cleaner cover, and they chose one that is

as a 100th anniversary item, the fact is they would have bought that item anyway, and it's not an incremental sale.

General merchandise sales for the third quarter were 83.1 million, up 88.5 percent over last year.

Just like parts and accessories, the 100th anniversary commemorative products contributed greatly to the strong quarter.

Likewise, we back out the 25 million in anniversary specific items, the growth rate would still be 32 percent for the quarter.

The same comment I made for P and A about not excluding all the 100th anniversary sales is also true for general merchandise.

Now, this quarter was the initial wave of 100th anniversary products.

There still will be additional waves in the upcoming quarters, but not of the magnitude that we've seen in this quarter.

Historically, there's always been a bump up in P and A and MotorClothes sales in our anniversary years, and we expected to bump up this anniversary year.

But we can also say that we were pleasantly surprised by the excitement and demand for 100th Anniversary products.

Now, there'll always be fluctuations quarter-to-quarter

general merchandise growth rates.

And in the next few quarters, we will benefit from the sales commemorating the 100th.

But over the longer term continue to expect sustainable growth rate for

revenues to be slightly higher and Harley-Davidson's Motorcycle unit growth rate and over the longer term, general merchandise is expected to grow slower than the Motorcycle unit growth rate.

Moving on to Buell Motorcycles, we shipped 3,173 motorcycles of which 1,240 were the Buell Blast which compares favorably to the 961 shipped last year.

We also shipped 1,933 units of the new XB9R Firebolt, which compares to 1,878 Buell

last year.

And we started shipping the newest Buell offering, the XB9S Lightning, in October.

It will be available later in the third quarter for overseas markets.

Gross margin was 34.9 percent, slightly higher than last year's 34.5.

Margin was helped by a greater percentage U.S. shipments, as I mentioned earlier in the discussion of revenue.

and general merchandise margins on the 100th Anniversary product are better than typical

and general merchandise margins.

Thirdly, worldwide price increase of 2003 models are somewhat higher than our historic price increases.

Moving on, operating margin for the Motorcycle segment was 19.6 percent compared to 18.0 percent in 2001.

Operating expenses did increase 22.8 percent, which is considerably less than the 31.8 percent increase in revenue.

This consequently had a favorable impact on operating margins.

As we've discussed before, the nature of our operating expenses means they won't necessarily move in line with revenues.

Now turning to the Financial Services segment, Harley-Davidson Financial Services

another great quarter with operating income of 29.7 million - up 13.4 million over last year's third quarter.

Subsidiary continues to benefit from strong Harley-Davidson retail sales.

Remember, HDFS derives over 95 percent of its income from Harley-Davidson Motorcycle business which creates the opportunity for dealers to offer these competitive finance and insurance products for both new and used motorcycles.

HDFS continues to have strong loan originations resulting in a market share of new motorcycle lending around 35 percent year-to-date.

HDFS sold 390 million of retail motorcycle loans in the third quarter and recognized a gain of $17 million.

The resulting percentage gain of 4.36 is a little higher than the 3.7 percent we recorded in the second quarter

.

It's significantly higher than the traditional three to three-and-a-half percent gain on the sale of retail loans.

I'd like to point out the gain on new

as a percentage of receivables sold was higher than originally planned as interest rates in the one-to-three-year timeframe have stayed at all-time lows, thus reducing our cost of financing for

transactions.

credit losses on its managed portfolio are 68 basis points after nine months, down from 82 basis points last year.

Although this would seem counterintuitive in a difficult economy, losses remain low due to the better credit quality of the portfolio since

Performance Pricing was implemented in 2001, also the strong collateral value of Harley-Davidson motorcycles and our continued emphasis on collection efforts.

At the end of the third quarter, retail delinquencies on a managed basis, defined as greater than 30 days delinquent, are tracking at approximately 3.9 percent, down from 4.4 percent at the same time last year.

The press release reported that 210 million of

in the third quarter was so early in the fourth quarter.

In fact, that was during the first week of October.

This is the remainder of that 600 million

we announced in the third quarter.

We will record approximately $9 million of gain on that $210 million

in the fourth quarter.

Based on the strong third quarter, we're raising our earnings guidance on

to 55 to 60 percent higher than last year's performance.

Historically, we

retail motorcycle loans through

in the second, third and fourth quarters of each calendar year.

For 2003 we're changing our approach to our

market--to the

market to better match our funding needs.

As a result, we're not going to go out to the

market in the fourth quarter of 2002.

Instead, beginning in the first quarter of 2003, we plan to go to market with an

in every quarter.

This means we'll complete four

transactions in 2003.

now has the

volume to be able to go to market four times a year.

This will allow

to better manage its warehouse and receivables and gives us some consistent visibility in the $700 billion

market.

Now,

should post another strong year in 2003, which is why we announced the guidance of approximately 20 percent for

operating income growth.

In the longer term, we expect

to grow at a slightly higher rate than a motorcycle unit growth rate.

Moving on, Harley-Davidson's corporate expenses for the third quarter, 2.4 million, even with last year's 2.4 of expense.

Interest income was 4.9 million, approximately 400 thousand higher than last year's third quarter due to higher cash and marketable securities balances compared to 2001.

Some additional information on the quarter; depreciation expense for the quarter was 44.2 million, which brings the nine month year to date, 131.7 million.

The estimate for the year is still approximately 175 million.

Capital expenditures for the third quarter were 60.2 million and brings the nine month year to date total, 182.7 million.

Capital expenditures--capital investments for 2002 are still expected to be in the range of 270 to 300 million and we expect to invest approximately the same amount in 2003.

Looking at the balance sheets: we finished the quarter with 847 million in cash and

securities on hand.

Up approximately 290 million the over year end 2001.

Year to date, we supported our internal growth,

183 million in capital investments, bought back 66 million in stock, paid off 30 million in dividends, contributed

million to our pension claims, and still managed to increase our cash balances.

Switching over to productions.

As we mentioned before, scheduled production days for 2002 by quarter were somewhat different than 2001, especially in the fourth quarter, which is scheduled for 57 days.

Last year's fourth quarter had 63 three total days of production.

This makes comparisons between 2001 and 2002 fourth quarter a bit difficult.

For the remainder of the year of 2002, we plan to ship a little over 65,000 units for the fourth quarter, bringing total year shipments to approximately 263 units -- 263,000 units.

We've also set 2003 Harley-Davidson motorcycle target of 289,000 units.

Production work days for 2003 are scheduled to be: in the first quarter, 62 days; in the second quarter, 63 days; in the third quarter, 59 days; and fourth quarter, 58 days.

We plan to ship 69,500 units in the first quarter, approximately 75,000 units in the second quarter, and 134,500 units in the back of 2003.

Now, we'll provided additional guidance of quarters three and four at a future date.

Now let me review the heavier motorcycle market, which we define as all motorcycles with an engine displacement greater than 650 cubic centimeters.

U.S.

Harley-Davidson retail sales of new motorcycles remained strong through nine months as evidenced by the 19.1 percent growth in the U.S.

We are also experiencing growth in other -- our other major markets: Europe up 8.0 percent;

Japan up 13.9 percent.

Overall, the heavier industry data is only available through August.

It is obvious we have gained share and have experienced strong U.S. market.

European markets were up slightly through August, performing fairly well even though many of the economies of the various countries are still soft.

The heavy industry

Japan through August and it appears we are continuing to grow all market share.

Other news -- regarding the port lockouts on the West coast.

We had been preparing for this possibility since Spring.

Our purchasing and supply management people worked on alternatives such as shipping methods, different ports, inventory management and sourcing that ensure a consistent and steady supply.

Now, along we've incurred and will incur some increased costs.

We appear to be on schedule and we will likely keep all of our major operations running through the aftermath of the work stoppage.

tour -- we completed

tour stops in four cities in North America and attendance was well over 150,000 people.

Approximately 50 percent of attendees have been non-riders and we estimate 70 million

impression tonews:news:

national coverage.

On a national side, coverage has included CNN, Good Morning America, the Today Show, and many others.

Kick off of our 100th anniversary has given us a great start to the activities of the next year.

Our next stop is in October 25 through 26th down at the Texas Motor Speedway, just south -- excuse me -- just north of Fort Worth.

In conclusion, we're proud of the financial results of our third quarter, mainly the results of our employees, our dealers and our suppliers working very hard to

our drivers to success.

The drivers, again, are our exciting new products and services, our strong brand, worldwide demand for

motorcycles that continues to grow, a strong relationship with all our stakeholders, and the experienced management team supported by empowered employees.

These drivers will continue to support our success in the future.

Thank you, and at this time I'd like to open up the call to any questions.

Thank you, sir.

The floor is now open for questions.

If you do have a question or a comment, please press the numbers one, followed by four on your touchtone phone.

If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key.

We do ask that while you pose your question that you please pick up the handset to provide optimum sound quality.

Once again, that is one, followed by four on your touchtone phone.

Our first question is coming from Felicia Kantor of Lehman Brothers.

Please go ahead with your question or comment.

Good morning, guys.

Good morning.

Impressive results.

I was most impressed by your global market share gains, and I have just a question regarding that.

You know, obviously some of that has to do with the 100th anniversary, but really, if you look at the broader motorcycle market, I'm wondering what Harley's doing that your competition isn't, and if you think some of the trends that we're seeing among your competitors -- if you think that would ever catch up to Harley.

And then, also, in Europe the gains -- I'm wondering how much you're attributing to the

.

As you recall at your analyst meeting,

did highlight the strength of the

there.

And I'm just wondering, you know, what else besides, obviously, the 100th anniversary is driving gains in Europe.

And then, just briefly, I wonder if you can give us an update on what's going on at your York expansion.

Thanks.

Thanks, Felicia.

I mean, as for the U.S. markets, as we've said -- you know, with almost 50 percent market share -- we are driving that market.

We're meeting and defining the

market.

And so, the competition is doing many things, but they're copying what we've put out there.

So, we are the genuine article -- the real McCoy.

They are the copycat.

We continue to bring out a lifestyle supported by the H.O.G. clubs, supported by one of the greatest dealer networks out there, the anniversary events, other events, rides -- supported by Harley-Davidson Financial Services, and that benefit

to the customer, the dealers.

We've got all these additional things that the competition can't match, so we are driving, in particular, the market in the U.S., and it's obvious -- evidenced by the industry that's growing by 12 percent, but we're reading that with a 19 percent growth.

When you look at Europe, that industry is a little better than flat.

I mean the economies in Europe -- especially when you look at Germany, which is the largest market, not the greatest.

At the same time, we came out at the end of the meeting to

Motorcycle Mart, we came out with the

, which is doing quite well in Europe.

We have a fairly strong mix of

in Europe, and as

has indicated in the past, acceptance is very good.

If you would take out the

from that -- and I don't think that you really can -- but if you take it out, we'd be performing somewhere along the lines of what the market's doing.

But, the market has kind of been overshadowed by the economies.

But again, you can't take out the

.

That's something that we're doing and will continue to do.

As for the York plant, that is on schedule.

Bringing, you know, everybody up to date, we've said that that will be introduction late next year with this additional plant in York

it's being built at the same site as our current plant.

Hopefully that answers your questions.

Thank you.

Our next question is coming from David Cumberland of Robert W. Baird.

Please go ahead with your question or comment.

Good morning, Jim, and congratulations.

Good morning, David.

Thanks.

On the

and merchandise, what type of sell-through have dealers seen recently in those segments?

Did the high level of ordering in Q3 possibly pull forward some business from Q4?

I mean, you know, as I said in the commentary, you know, 100th Anniversary products, as any Anniversary product, we'll get that out, you know, up front so that the dealers can stock it - show it to the customers.

So our wholesale shipments will be somewhat front-end loaded.

You won't see the same type of waves in the next couple quarters.

But the sell-through as we've been measuring - not all the dealers are on our system - but, has been quite well and it is selling through at a very good pace.

So, but the other side of that coin is we're not going to have on a wholesale basis same type of sales recorded at least not of the magnitude of the third quarter.

Answer your question?

Thank you.

Our next question is coming from Greg Salchow of Raymond James.

Please go ahead with your question.

Good morning.

Good morning.

I was wondering if you could give us some idea of what the mix of the Anniversary Edition bikes was in the quarter.

The reality is that all the bikes are Anniversary editions.

Some come in two tones - silver and black, some are a vivid black, gunmetal blue.

There's a red and white version.

But at the end of the day, they're all badged as 100th Anniversary motorcycles for this year.

That includes the

.

Thank you.

Our next question is coming Joe Yurman of Bear Stearns.

Hey, guys, nice job in a really tough environment.

Thanks, Joe.

I appreciate it.

Couple questions - we took our numbers up last night on the HDFS based upon some of your guidance -

20 percent year-over-year growth '02 on '03.

And I'm wondering, other than the fact that you're now going to do securitizations in every quarter, what's your interest rate outlook?

And particularly, how does the positive carry of that business factor into those estimates?

And secondly, as we did some of our channel checks, we talked to some of the dealers and on the Buell side of the business, they think that they are having a tougher time selling bikes

compares to some of the zero-zero-zero programs of the Japanese manufacturers and if you have any plans to instill stuff like that.

As for HDFS, you know, commented we've had three great quarters.

With the impact of not doing a securitization in the fourth quarter, we gave some pretty good guidance for total year 2002, and that enables us to do the four securitizations next year.

It just spreads it out and we now have the critical mass to do that and it gives us stability to better fund that business.

We don't really speculate on the interest rates.

I think the interest rates - we're going to have a hard time going much lower.

Obviously the upside - the probability of going up is much greater than going down.

So we hedge when we're in this kind of environment - hedge forward.

Having a shorter durations on

will help us manage our interest rates and we're priced with the market.

So I think that we're always trying to protect ourselves from any change in interest rates.

In the past year and a half we have benefited from declining interest rates and where most things were more normal, we were--or more probable, we benefited from them as they went down, but now we're in this

environment we'll do more hedging.

As for Buell, Buell's a much, you know, smaller part of the business, I mean compared--what we sell through, you know, nine months either as two businesses.

We look at the Buells--right now we're not--or we wouldn't

what our marketing plans would be, but you're right.

The competitors have offered zero percent financing and we have not because we believe we have a good product at a good price and it won't sell through.

It is a seasonal product and once we get to the winter months, they will move slower.

Thank you.

Our next question is coming from Michael Millman of Salomon Smith Barney.

Please go ahead with your question or comment.

Hi, it's

for Michael Millman.

I was wondering if you could talk a little bit about the youth bikes market and the prices, if they're holding up.

And if they differ from an anniversary year, then what would be a typical non-anniversary year?

Yes, we have used,

, the used bike market through the great information we get from

and all the retail contracts that come through this and we have very

and quick information feedback, basically every two weeks on what's going on in the market.

We've seen no change in the used bike market over a year to year comparison and, in fact, if you compare this to the latter part of last year after 9/11, the used bike market is probably even stronger and we've not seen any differences when we compared to anniversary years.

In fact, our dealers--many of our dealers are--would be anxious to get more used bikes on their floors, but because the used bike market is so strong, customers are choosing to sell them on their own, which is another evidence of a very good market.

We checked back and we've seen that products that are four or five years old are still selling for the same price that they were purchased back for in '98 and '97.

So it's still a very strong market.

Thank you.

Our next question is coming from Tim Conder of A.G. Edwards.

Please go ahead with your question or comment.

Gentlemen, congratulations on just a stellar quarter.

Thanks, Tim.

A couple of more items to follow up on Felicia's question on York.

Jim, you said the latter part of '03, are we talking late third quarter, early fourth quarter, late fourth quarter, on York?

Right now, we're kind of looking as too--you know, over a year away from this, so it's too early to pin down the month, which is almost where you're going.

We're looking at the fourth quarter next year and I think this is a pretty good target.

OK.

And then, overtime, Jim, just to maybe housekeeping, there, third quarter this year versus third quarter last year.

And then in the fourth quarter, if I remember right, last year you had some equivalent overtime days.

Could there be a possibility of some days this fourth quarter given the less normal days that'll be worked?

Overtime?

I don't have my

book in front of me, but I tell you that overtime this third quarter was at 24 percent, comparison to last year.

Last year, I don't believe--I believe it was in the area of about 19 percent but we can't confirm that.

So overtime is slightly higher as we've come up with this anniversary paint scheme, which is, you know, the most exotic in the industry.

It takes a little bit more work to get it out and it's caused a little more overtime, but as evidenced by our numbers, we're doing a very good job in production.

So, I think that answers your overtime question.

As for -- yes, last year we had some extra equipment days.

In fact, I think the total days were like 61 days or so last year compared to 57 this year.

It's because of the complexity of the anniversary year we really don't see any upside in the first 67 days.

In fact,

of 60 just

in our overtime last year for the third quarter was 18 percent.

So, that's gives you background on that.

So, overtime is up.

And

complexity of the

which occurs in all the plants that we're looking at -- in answer to your other question.

And we'll

see that upside, that we've experienced last year.

Thank you.

Our next question is coming from Carole Buyers of RBC Capital Markets.

Please go ahead with your question or comment.

Hi, good morning gentlemen.

Let me add my congratulations as well.

Just two questions: are channel techs this quarter?

They build very strong demand for cruises and touring yet mixed for

series.

Are you seeing any evidence that the entry level biker is being more impacted by the economy than say the cruising and touring riders?

That's my first question.

I have one more.

Yes,

-- and every

holds the market differently -- we are still seeing trends that are as high or higher than the same time last year.

And we're looking at the whole quarter.

So, I mean, demand is -- we look at that by dealer, by market place and we've not seen any weakening in that demand.

Have some of them talked about a

or selling cycle?

I mean, is there a certain season for

that are stronger than others?

I mean, you kind of pointed out initially you asked about some of the entry level people.

A lot of your people

the

are going to, you know, be more seasonal.

They're going to come in during the summer months when people are

the

for awhile.

It's not a seasonal purchase.

So,

being

an entry level motorcycle and

more of that.

That is it's going to have more of a seasonal selling pattern.

There's no doubt.

Then I have one more question for you, Jim, in the cash flow.

Can you break out the two items for the provision for credit losses and then the other noncash charges?

Indeed, I don't have the detail in front of me.

But if you call back, we can

that. operator: Thank you.

Our next question is coming from Gary Cooper of Bank of America.

Please go ahead with your question or comment.

Hi, guys, a couple of questions here.

Hi, Gary.

Speaking of Q4, specifically, last

you shipped something like 84 to 85 percent of the bikes in the U.S.

That's a little higher margin and you referenced the lower production days.

So is it fair to say, do you think, that we'll see less gross margin improvement in Q4?

Particularly as you are ramping up the

which I think are still are slightly lower gross margin at these production levels.

That's the first question.

Then the second question: on the securitization -- you, Harley has not done a securitization Q1, so as we look forward to next year, the gain, I guess, will be much greater in Q1 and probably more subdued in the rest of the quarter.

So could you give us some idea of what size you think these securitizations are in each quarter?

Will they be roughly the same?

Thanks.

OK.

On the margins -- yeah, the mix was heavier in the U.S. in the fourth quarter last year, and we'll probably be around the 80 percent this year, so it will be a little less than last year.

As for margin, we're not gonna comment on margins, but -- we won't comment on margins.

Securitizations -- this year fourth quarter without the -- we sold $210 million of receivables, so we'll have that portion of the gain, which I commented on earlier in the conference call that is approximately nine million.

That will be there.

It will not -- that will be there.

When we look at first quarter next year, you were correct.

Previously, we did not have a

securitization.

Last year in the first quarter, we did have a -- we did sell 90 million of our remaining securitizations from 2000, so there was some gain in securitization.

It will be higher, as we look at the first quarter.

And, you know, the dynamics next year with growth in H.D.F.S., along with spreading out the

securitizations, I think, you know, net-net, our securitizations will be the same size or maybe even a little larger for next year, quarter-by-quarter.

Thank you.

Our next question is coming from Burke Koonce of Merrill Lynch.

Please go ahead with your question or comment.

Good morning, gentlemen.

Most of my questions have been answered.

A great quarter, here.

Thanks, Burke.

I guess, well, now I'm down to sort of homework questions.

Could you give us an idea -- did you guys break out cap ex on what is maintenance versus what is sort of project cap ex?

We never have, and especially at the end year, we kind of give you an idea for a quarter basis.

It would certainly be rather difficult on a project by project.

Typically -- and it always is -- you know, we get into this philosophical discussion whether it's really -- you know, to replace something on a maintenance basis.

At the same time we'll look at putting in new processes at the same time.

So, what is new versus maintenance?

I would say that the maintenance portion is probably a third of our capital.

Not all of our capital is manufacturing.

You've got engineering.

You've got IS systems and other things that are in the capital base, so it's not all manufacturing.

Thank you.

Our next question is coming from Robin Farley of UBS Warburg.

Please go ahead with your question or comment.

Thanks.

Yes.

Two questions.

One is I just wanted to clarify when you were talking about production days early -- you said 57 in Q4.

Did you say that the Q3 production days -- was that in line with plan of the 59 days?

That's the first clarification.

And then, also, in terms of margins on the

-- and I know you don't want to talk about what it is specifically -- but could you talk about, or just give us a sense of the production level of the

you would get to before you would kind of hit what you think will be normal margins for

production?

OK.

In the third quarter, we had 59 -- we produced 59 days, which is the guidance we gave on, so that was to everybody's expectations.

And

we came so close to the 67,000 units that we guided on.

On margins -- as we have commented before, we're still in the ramp-up mode with an entirely new product, new parts, new employees, new processes.

And also, I mean, the engine is produced under a joint-venture agreement.

So this is a combination of a portion Harley-Davidson.

All these things are new issues and that we're continuing to go through as we ramp up.

We certainly are not there at where we would achieve our maximum margin improvement.

And we're not give at what point we're at, but it's still a ways out yet.

Once again, if you do have a question or a comment, please press the numbers one, followed by four on your touch-tone phone.

Our next question is coming from Chris Cox of Goldman Sachs.

Please go ahead with your question or comment.

Hi, Jim.

Nice job.

Thanks, Chris.

Just a couple questions on Financial Services.

Can you give us a sense of how the provision for loan losses has changed year-over-year and whether this was part of the reason along with the lower interest rates that HDFS's expense line was down in Q3?

And then, could you give us an update - I guess you had mentioned in your - at your road show in February of this year that the overall credit quality of the portfolio had improved.

Can you just tell us where we stand now that performance pricing has been in place for over a year, and specifically I guess how the percentage of the C and D-rated loans has changed versus what it was last year?

On the provision for loan losses, I mean our provision on the balance sheet is about the same price where it was at the end of December versus at the end of December, so that provision has been rather constant as we've gotten pretty good experience in what goes on in a recession.

The actual expense that hits the income statement - I don't have the figures in front of me, but the provision expense is somewhat lower on HDFS through nine months versus last year.

And that was last year we were increasing the provision because we never - we've never been in a recessionary environment - did not know how the portfolio would perform obviously with the numbers I recited earlier in the preamble that we're quite pleased with our performance.

In fact,

receivables are actually having better performance in the recession.

And that goes to your second question on credit quality.

Our credit quality on our A-credits last year at the end of the year, A-credits were approximately 50 percent of the portfolio.

They're still 50 percent of the portfolio.

And although I don't have in front of me the exact

between C and Ds, that has not changed significantly - a couple percent.

Thank you.

Our next question is coming from Burke Koonce of Merrill Lynch.

Please go ahead with your question or comment.

Hi.

Sorry, I got cut off last time.

Sorry, Burke.

It's all right.

While we're talking about capital, given that you guys are - imagine quite a war chest there on the - on the balance sheet in the cash category, how do you - how do you think about maintaining your excellent returns on capital?

And, you know, how would you - how would you be deploying that?

I mean right now, I mean as you said, we've got a cash balance.

You classified it as quite a war chest.

Same time we look at it as

set a market

it's not all that large.

It gives us a great flexibility to be able to invest in organic projects, and flexibility if something would come along.

But the reality is it also serves as a great cushion to bumps in the road, especially if the economic bumps in the road.

So, it's some flexibility and cushion.

We don't see it as that large of an amount.

I mean we've - you know, your point we've maintained a return on equity of greater than 20 percent for the last 16 years.

We're well on our way again, as we continue with this great business, we

continued

we returned a greater than 20 percent for the foreseeable future.

So we don't see that as an issue, even as cash continues to build.

We will continue to look at share repurchases.

We've repurchased 1.1 million shares so far this year.

We do do dividends.

That is not the greatest thrust.

Thank you.

Our last question is coming from Chris Cox of Goldman Sachs.

Please go ahead with you question or comment.

Hi, Jim, just one last thing.

I got cut off.

The decline in loan losses, I guess look good and, not to get too much into the minutiae here, but can you give us a sense on how, if any, of the loan losses have changed for your older loans, I guess prior to the implementation of

?

Thanks.

Really don't know the answer to the question.

Sorry, Chris, we can probably look at it, but, I mean, total

, that's what we look at.

And most of our retail contracts, although written for up to seven years, are typically--they're gone in an average of four years.

So they're typically going off quite quickly so our loans are not that long.

And I'd be surprised if there'd be significant difference on performance.

Obviously, our loans that are on a short period of time are typically pre-payment and, therefore, you don't have an issue.

We could probably look at that as that being an important issue, but I don't have that.

Thank you.

That's the last question, Holly.

I want to thank everybody for your time this morning.

Remember that a taped replay of this conference call can be heard at 973-341-3080 until October 23rd, or by accessing on our Web site.

If you have any questions, please contact investor relations, Pat Davidson, at 414-343-8002.

Thanks again, and have a great day.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time and have a great day.