Harley-Davidson Inc (HOG) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Harley-Davidson Fourth 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 floor over to your host to Mr. Jim Ziemer.

Sir, you may begin.

Thanks, Holly.

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

We'd like to remind you, this call is being recorded and a replay will be available after 11:00 a.m. central standard time this morning.

Please dial 973-321-1020 and enter pin number 3660205 followed by the pound key.

A recording will be available through January 28th.

It is also being webcast live on our website at Harley-Davidson.com.

The webcast will be available for replay throughout the next several weeks before being archived on the investor relations portion of our web site.

In compliance with regulation FD, I would like to make the following statement: This call will include forward-looking statements that are subject to risks that could cause actual results to be materially different.

Those risks include, among others, matters we have noted in our latest earnings we lease and filings with the S.E.C.

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

The fourth quarter was a great quarter and as the press release stated, we achieved records for revenue and income, but more importantly, it was our 17th consecutive year of record revenue and income.

Highlights of the year include records for Harley-Davidson units, 263,653 units, up 12.5% over last year.

Revenue, 4.1 billion, up 20.1%.

Gross profit, 1.4 billion, up 23.0% and net income, 580 million, up 32.5%.

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

Some of the more significant financial highlights of the quarter on the year-over-year basis include Harley-Davidson units, 65,970, up 3.8% over last year and slightly higher than our guidance of 65,300.

This is quite an accomplishment when you realize that our fiscal calendar had four fewer workdays than last year's fourth quarter.

Our revenue, 1.03 billion, up 13.3%.

Gross profit, 370 million, up 18.5%.

And net income, 161 million, up 27.5%.

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

We did manage to work an additional overtime equivalent day which took our planned 57 days to 58 equivalent days of motorcycle assembly.

The average revenue per unit for Harley-Davidson motorcycles was up 7.6% in the fourth quarter, compared to a year ago quarter.

The primary driver of that increase was the 3.4% increase on a 2003 model year motorcycles.

Another significant contributor to the increase was the product mix.

And the largest single contributor to the product mix was the addition of the V-Rod to our product lineup, which is priced similar to the high end of the big twin range.

This resulted in sports in the mix going from 21.5% last year to 19.0% this year.

This means that the higher revenue big twins and V-Rods went from a 78.5% of the total units in the fourth quarter 2001 to 81% in the fourth quarter of 2002.

P&A and general merchandise.

Historically, there's always been a bump up in P&A and motor part sales around our anniversary celebration, for example for our 90th and 95th anniversaries. 100th anniversary is no different and we expect a bump for this anniversary.

Most of these anniversary sales have already occurred in 2002 and in the first quarter of 2003, we expect to see some benefit from sales commemorating the 100th anniversary, but the effect will be significantly lower than what we've sold in the back half of 2002.

Parts and accessories had a strong quarter with sales, 129.9 million, up 16.6% over 2001 fourth quarter.

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

When you back out the 100th anniversary-specific products, which accounted for approximately 12.7 million, a possible conclusion would be that the P&A growth way was only 5.4%.

However it would be misleading to eliminate all the 100th anniversary sales for this comparison because some of the sales would have occurred anyway.

For example, someone needed a windshield, they may choose one that is badged as a 100th anniversary item instead of the traditional design.

For the year P&A revenues were 629 million, up 23.5% over last year's 509 million.

If you back out all the 100th anniversary sales which were about 34 million, our growth rate would still have been 16.8%.

General merchandise sales for the fourth quarter of 54.8 million, up 15.4% over last year.

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

Likewise, if we backed out the 12.5 million in anniversary-specific items, the growth rate would have actually declined for the quarter.

Again, we believe some portion of the sales of 100th anniversary items would have occurred regardless of the anniversary.

We also believe that 88% increase in general merchandise that we experienced in the third quarter of '02 contained a pull-forward of some of the normal fourth-quarter sales.

General merchandise had a terrific year with sales of 231 million, up 41% over 2001.

Even if you pull up all the 100th anniversary sales of approximately 49 million, total revenue is still 182 million dollars or up 11% over 2001 for general merchandise.

That's still a very good year for general merchandise.

While we don't give quarterly guidance for P&A and general merchandise, we need to point out that general merchandise revenues for 2003 are likely to be flat to down when compared to the strong performance of 2002.

Looking at the longer term, we continue to expect sustainable growth rate for P&A revenue to be slightly higher in 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 3,131 motorcycles in the fourth quarter of 2002 of which 2,519 were the new Buell XB series of sport motorcycles.

This compares to 1,208 Buell Big Twins shift in the fourth quarter of 2001.

We started shipping the newest Buell offering, XB-9s Lightning in October, which should result in adequate dealer inventories in the spring of the 2003 selling season both in the U.S. and internationally.

Let me comment on margins.

Gross margin was 36.1% and higher than last year's 34.5% for the quarter.

Margin was driven by, number one, the average U.S. price increases on 2003 models, which were 3.4%, more than offset the increased cost of the model year.

Two, we had product family and feature mix that contributed to the gross margin this quarter, and three, some of the favorable gross margin was due to foreign exchange rates and most of this was largely due to the effects of the Euro.

There was also some offsets to the above-mentioned positive contributors.

These were negative international versus domestic mix and higher cost due to health care and pension expenses.

Moving on, the operating margin for the motorcycle segment was 20.7% compared to 18.6% in 2001.

Improvement was largely driven by the gross margin increase.

Operating expenses increased 9.2% which is less than the 13.3% increase in revenue.

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

Rather, they will be driven by the needs of the business.

Now turning to our financial services segment.

Harley-Davidson Financial Services had another great quarter with operating income of 25.4 million, up 8.4 million over last year's fourth quarter.

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

Remember, H.D.F.S. derives over 95% of its income from the motorcycle business.

H.D.F.S. continues to have great year-over-year comparisons, especially for long originations, resulting in the total year market share gain on new motorcycle lending, market share to around 35% from 30% in 2001.

During the third quarter, earnings announcement, we mentioned that H.D.F.S. sold 210 million in retail motorcycle loans in the fourth quarter.

The gain on that securitzation was 12.7 million.

Resulting percentage gain was higher than the historical gain in sale.

Many factors, including falling interest rates and above-market pricing on these contracts contributed to this gain.

We plan to securitize approximately 500 million in retail motorcycle loans in the next few weeks and expect the gain to be around 4%.

This is less than our last securitzation because we lowered our retail lending rates in the fourth quarter in this competitive rate market.

H.D.F.S. annualized credit losses on a managed portfolio basis were 72 basis points at year-end down from 84 basis points last year.

Although this would seem counter-intuitive in a difficult economy, losses remain low due to better credit quality before performance pricing was implemented in 2001, the strong collateral value of Harley-Davidson motorcycles, and our continued emphasis on collection efforts.

At the end of the fourth quarter, retail delinquencies on a managed basis, as defined as greater than 30 days delinquent, are tracking at 5.1%, up slightly from 4.9 at the same time last year.

Historically, we have sold retail motorcycle loans through asset-backed securitizations in the second, third, and fourth quarters of each calendar year. 2003 we're changing the approach to the securitzation market.

As previously communicated, we plan to complete -- plan to complete fourth securitzation transactions in 2003.

In order to better match funding requirements, H.D.F.S. will now go to the securitzation market in each quarter in 2003.

We expect H.D.F.S. to post another strong year in 2003 but it's unlikely to go up to 60-70% which it did in 2001 and 2002.

We experienced a declining interest rate environment in both of these years, which enhanced the returns when we went to the securitzation market.

We are expecting H.D.F.S. will grow at approximately 20% for 2003.

We believe we continue to gain some market share but that interest rates will probably only stay at same level or go up.

In the longer term, we expect H.D.F.S. to grow at a slightly higher rate than their motorcycle growth rate.

On the other income and expense line, other expenses of 9.9 million or 6.1 million higher than the prior year.

This is primarily due to cost revisions related to environmental remediation activities at our York facility.

Moving on, Harley-Davidson, Inc., corporate expenses for the fourth quarter were 3 million in line with last year's 2.9 million of expense.

Interest income was 5 million, approximately 1.6 million higher than last year's fourth quarter due to higher cash and marketable securities balances compared with 2001.

Some additional information on the quarter.

Appreciation expense for the quarter was 44.1 million which brings the full year to 175.8 million which is in line with our previous announced guidance.

And we are expecting depreciation to be slightly more than 200 million in 2003.

Capital expenditures for the fourth quarter were 141 million bringing the four-year total to 324 million slightly higher than our guidance of 300 million, mainly due to the timing expenditures.

As previously announced, capital investments for 2003 expected to be in the range of 270-300 million.

Looking at the balance sheet, we finished the quarter with 796 million in cash and markable securities on hand, up 161 million from the year end 2001.

As we mentioned in the press release, we supported a growth of 324 million in capital investments, have brought back 54 million in stock, paid 31 million in dividends which contributed 150 million to our pension plans, all while maintaining a strong balance sheet.

Switching over to production, as we've mentioned before, scheduled production days for 2002 by quarter were somewhat difference than 2001, especially in the fourth quarter.

Fourth quarter was scheduled for 57 days before we worked an additional overtime equivalent day to make it 58.

Prior year's fourth quarter had 62 equivalent days of production which makes the comparisons between 2001 and 2002 fourth quarters difficult.

Even in the light of the third -- even in the light of the third year of the U.S. recession and other economic indicators, we remain cautiously optimistic about our continued strong demand.

We are therefore maintaining our 2003 Harley-Davidson motorcycle target of 289,000 units.

We expect to ship those 289,000 according to the following distribution by quarter.

First quarter, 70,000.

Second quarter, 75,000.

Third quarter, 67,500, and for the fourth quarter, 76,500.

Now, this guidance results in a difficult comparison on the third quarter of 2003 motorcycle shipments.

This is the result of the 3000 units built in the second quarter 2002 which carried over into the third quarter of 2002.

This effect, while combined with the later model year changeover for 2004 year model motorcycles and the transition to the new plant in York results in our target being similar to what we shipped in the third quarter of 2002.

The initial stages, startup of the new plant are planned in the third quarter this year and will affect hundreds of employees as they learn new jobs, processes and systems.

Now let me review the heavyweight motorcycle market which we defined as all motorcycles with end of displacement greater than 650 CCs.

The strong retail sales we experienced throughout 2002 are certainly at the heart of our optimism for 2003.

Retail sales of new heavyweight motorcycles were strong for the year as evidenced by the 12.2% growth for the industry in the U.S.

Our Harley-Davidson retail sales were even stronger as registrations were up 18.3%.

While market share gains are not a primary goal, 2002 marks the first time since 1999 that we've increased our market share in the U.S.

We also experienced growth in our other major markets with Europe up over 7%, Japan up just under 6%.

Although heavyweight motorcycle industry data is only available through November, it looks like we will again gain a modest share in Europe and Japan.

We are proud of this performance in the markets where soft economic conditions make it very challenging to grow.

Give a pension plan update. 2002 reduced our underfunded pension position by contributing the 154 million dollars to our pension plans.

Earlier in the year we also reduced our expected return on planned assets from 10.5 to 8.5 to adjust to conditions in the market.

As we continue to review pension plan assumptions, we've recently made the decision to reduce our discount rate to 7.25 from 8.0%.

We believe these adjustments are responsible actions to make light of the current environment.

Talking about V-Rod.

V-Rod has been a tremendous success for our dealers, our customers and us.

In 2002 it was our best-selling single model in Europe and among our top sellers in the U.S. in just its first year out.

It's received recognition from both domestic and international motorcycle press and we are very excited about the level of enthusiasm it has generated.

Give an update on the open-road tour.

We've concluded the 2002 portion of our open-road in late October.

Over the course of the year we had five North American stops.

We had over 150,000 attendees, and our research indicates about half these people were nonriders.

We've had excellent media coverage as measured by Impressions.

With more coverage in six months for our 100th anniversary than we had for the entire year, leading to our 95th anniversary and we're still eight months away from the big party.

Open-road tour is going to be growing overseas for the next several months with stops in Australia, Japan, Germany, and Spain before coming back to Milwaukee.

Let me close by stating we're proud of the financial results of the fourth quarter.

They are the results of our employees, our suppliers working very hard, improving our driver success, our drivers being excited about the new products and services, a strong brand, worldwide demand for heavyweight motorcycles that continues to grow, strong relationships for all our stakeholders and experienced management team supported by empowered employees.

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

Now I'll turn it over for Q&A.

Holly?

Thank you, sir.

The floor is now open for questions.

If you do have a question or a comment, please press the numbers 1 followed by 4 on your touch tone phone.

To remove yourself from the queue, please dial the pound sign.

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

Once again, ladies and gentlemen, that is 1 followed by 4.

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

Please go ahead with your question.

Hi.

Good morning.

Good morning.

And good quarter.

I have a couple of questions for you.

First, Jim, when you were talking about the securitzation that we're going to see on the next few weeks, you did mention that one of the reasons why it's going to be less is because of lower retail lending rates and I'm just wondering if that's really from, you know, year-over-year comparison given the higher level, the higher mix of higher credit business.

And then the next question I do have is on the balance sheet, just regarding your inventory levels.

If you could adjust that just in the past several years, revenues have been growing faster than inventories or even declining so this year they are at parity.

I was wondering if you could explain what has changed.

You did mention with the production, cautious optimism driven by the economy, wondering if your maintenance of the current level was coming from anything else that's making you cautious.

Thank you.

Okay.

On the securitizations for the first quarter, as I mentioned in the conference call, it is due to more competitive rates in the market.

We are happy with our 35% market share but we want -- as the market becomes more competitive, we don't want to give that up what we earned already.

So it is almost entirely due to the lowering of the competitive rates.

You talked about inventory levels and that we have been able to increase inventory at a lower rate than our revenue increases.

Right now-and inventories we're very happy with.

If I just look at the increase from September to December, the increase in inventory in the past, the quarter inventories are only up 2, 2.5%.

Inventories do have some buildup at the end of the year, some 100th anniversary product, as we get ready for our dealer meeting in January.

So maybe it's a little higher because the 100th anniversary but right in line from where we had planned it, and again, with revenue up double digits for the year, and inventory right in line with that, we're very happy.

On production, cautious optimism.

I would think that any company in this current economic environment, especially as well as we've done, two years of a recession going into a third year, we're going to be cautiously optimistic.

We are very, obviously, optimistic about the retail sales rate, retail sales up 18.3% in the U.S.

Same time, you know, we've always said we're recession resistant, not recession proof.

Looking further out in the year, the reality is we don't -- our new plant at York is not coming online until the last half -- bottom portion -- last portion of the year, and therefore, we are somewhat capacity-constrained so the ability to move up production is rather limited.

Thank you.

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

My congratulations, Jim, also on a great year.

Thanks, Tim.

A couple of items and Felicia touched on them.

H.D.F.S., our conversations with dealers indicated you lowered the rates in mid December from 7 to 6% at the wholesale level but they are saying that's not driving any additional incremental demand.

Is that just your comment on that statement of what we're hearing from the dealers.

Obviously, rates are going to differ depending on many different things.

Rates, depending on the credit quality of the customer, rates that depend on if a bundle financing with extended warranty and other services we offer.

So rates go all over the place.

Over average, we probably reduced it a percent.

The reality is we're talking 6, 7, even higher percentage increase.

Obviously, that's not going to drive your business.

You can see other businesses are -- have to go to 0% financing.

Ours is based on the demand and excitement of our product, of our demand of the dealers of the 100th anniversary.

It's certainly not on lower interest rates.

Thank you.

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

Please go ahead with your question.

Thank you.

I actually have several questions.

Maybe, Jim, you could touch a little bit more on the production philosophy.

Typically, it's been how much you could produce rather than what the market was, and now there's a little different flavor, possibly.

Also, could you talk a little bit more flavor regarding the gross margin, possibly give us some idea of how important the strength in the Euro was, and maybe talk a little bit about how important 100th anniversary P&A and general merchandise were to the gross margin and what that might suggest about the gross margin going forward.

And then in connection with the pension at this point what is your underfunded status?

I think it was 192 at the end of last year, and also could you talk about in '02, what do your pension costs through the P&L were compared with the previous year, and what do you expect that to look like in '03?

I think you've already mentioned that the discount rate would cost you about $9 million based upon what you had previously said.

Okay, Mike.

You -- I would expect a series of questions, so you didn't disappoint me.

And you can help me through if I've missed anything when we finish up here.

On production, on cautiousness, I mean, number one as I commented to the previous question, looking forward, any company in a third year of a recession looking forward is going to be cautious.

At the same time, we need to balance it against our great optimism because retail sales were up in the U.S. 18.3%.

It's a balance.

The same time, we are limited by our production and how fast the new facility would come up in York, Pennsylvania.

Until that comes up, we're rather capacity constrained, so I wouldn't put too much into that cautious optimism.

We're basically at capacity, and our upside is really balanced-- we always look at as many attributes throughout the year of process increases, increases in bottle next with our suppliers, but the big item is the new plant at York at the end of the year.

So I wouldn't put too much into that.

On margins, there are many different things that drove margin.

I've got to say they are all favorable, and so it's kind of hard to go down the list and go through all of them.

On the Euro, or foreign exchange, which was almost entirely driven by the Euro, in the year-over-year comparison, the Euro actually added about $6 million to this quarter's gross margin.

Your question on P&A and general merchandise, on the 100th anniversary, there's no doubt that the 100th anniversary items for both P&A and better merchandise have better margins.

They are not the top three contributors but they did have a favorable impact on the gross margin.

We'll had an impact next year, as most of our 100th anniversary sales will occur in the general merchandise and P&A in the first quarter.

Also, on 2002 pension costs, you are right on the $9 million of additional expense next year, attributed to the increase in discount rate.

At the same time, with the increase in assets, we'll have some more income-generating assets.

I don't have the total difference in front of me, but at the end of the day there will be something less than the total $9 million.

And we can get back to you with that later.

Thank you.

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

Please go ahead with your question.

Congratulations and good morning, Jim.

Thank you.

Good morning.

A couple of questions.

Can you comment on recent pricing on new and used bikes on a year-over-year basis and second, what is the planned geographic mix of shipments for first half of '03 or the rest of the '03 model year and how does the slower industry growth overseas affect your near-term plans?

Thank you.

Okay.

On pricing, as I've mentioned conference call after conference call, we monitor the markets through many different ways.

We have some great timely information from our financial subsidiary that gives us an indication in just weeks of what the market is doing in terms of pricing on new models, and in terms of used models.

On year-over-year comparisons, and I'm comparing this past quarter with last year's past quarter, our pricing is very much in line with what it was.

In fact, new bike pricing may be somewhat stronger.

But used bike prices are right in line on a comparable basis fourth quarter to fourth quarter.

There is always seasonality on new and used bike pricing.

You can't compare July when the floor traffic is you can't get into the front door of a dealer, versus slower traffic in January when the snow's flying.

That does have an impact on a January-to-July comparison but on a December-to-December comparison it is a very good comparison.

Geographic mix, as we've noted, our geographic mix, U.S. versus international, has gotten stronger over the last several years, stronger on the U.S. side.

That should pretty much hold, be very close to the current mix of 2002.

We should experience it.

Quarter to quarter there will be fluctuations but on total year there's not a lot of expected change in 2003 versus 2002.

I think I got your questions.

Thank you.

Our next question is coming from Carol Buyers of R.B.C.

Capital Markets.

Please go ahead.

Good afternoon and congratulations.

I was wondering, can you provide us with quarterly registration data for the fourth quarter for Harley-Davidson in the industry in the U.S.?

Last quarter included the September number.

It's hard to back into.

Okay.

If you call Pat later on we can get you the September year to date, and 12 months year to date obviously is already here.

So that's not a problem.

I don't have that in front of me.

And did you have another question?

Yes.

I had two other ones.

One, can you elaborate on the cost associated with the environmental remediation, and then second, can you help me better understand why pension expenses and cost of goods sold?

Great.

On the -- talking about the other expense on the P&L and the revision to our cost estimates on environmental remediation out of the York plant, and that's been -- the remediation of that particular site has been in our 10K and 10Qs for -- since we've been a public company.

But as we have gone back and updated the cost estimates, that has changed, and I believe that is an additional -- between 5-6 million dollars.

I don't have the exact figure in front of me but it's between 5 and 6 million dollars.

The second question, Carol...

In cost of goods sold.

Oh.

Pension costs and cost of goods sold.

More than half your employees, probably two-thirds of your employees are in cost of goods sold and therefore the costs associated with manufacturing that motorcycle, whether it be the labor costs or the medical costs or the pension costs, would follow that human resource cost.

So that portion of the pension cost, not all the pension cost but the pension cost associated with those employees will show up in the cost of goods sold just as the salaries do.

Thank you.

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

Please go ahead with your question.

Thanks.

I've actually got three questions.

One is looking at the production per day in the fourth quarter, it was sequentially a little bit lower than Q3 and that hasn't been the case previously.

If you could talk a little bit about that production-per-day figure going down.

Also, can you give some guidance for '03 on big twin production versus sportsters, and lastly, what should we expect to see in terms of remediation in the other expense line going forward?

Okay.

I'm trying to look at some notes quick, Robin.

I think that when you look at the fourth quarter versus the third quarter in 2002, as I mentioned in describing a comparison of the third quarter of 2003 versus 2002, I mentioned that in 2002 the third quarter had 3,000 units extra that came out of the second quarter.

That was because of the model year cutoff.

We held the units until we had a dealer meeting in July then shipped those out.

That 3,000 units, if you keep those in the third quarter numbers and don't adjust it, just divide by the number of days, the production rate seems artificially higher than your fourth quarter.

If you pull those out sequentially, you do have an increased third quarter to fourth quarter.

On the question of B-twin mix going forward, I think that now that we've got a four-year experience with the V-Rod, in our product line mix, I think what we see now pretty closely approximates what we're going to experience in 2003 as a mix.

I don't have the exact percentage.

It will be finished the year-at but it's going to pretty well approximate that.

There's not going to be a big change.

Your third question was again?

What we can expect going forward with remediation expenses.

Oh, remediation, yes.

Basically, we've reflected in the 10Q and 10K our remediation expected expenditures of the whole site and typically that's on a going-forward basis for 10 years.

We just recently for the first time in many years got a revision in the cost.

I don't expect that there's going to be a change.

That could change but I mean, there's nothing that we've anticipated right now.

Once again, to ask a question, please dial the numbers 1 followed by 4 on your touch tone phone at this time.

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

Please go ahead were your question.

Good morning, gentlemen.

Fine quarter.

Good morning.

Thank you.

A question for you.

I missed the very first part of the call.

I apologize if I missed any of this but I wanted to see if the slightly higher levels of inventory was associated with the 100th anniversary product, P&A or general merchandise, and my second question was regarding the V-Rod.

In some of our channel checks, it repeatedly came up as a bike that was maybe cooling off from last year's levels.

Now, obviously, when you had demand last year and greater production this year you're going to see some of that but the impression I got was it was a little below what expectations had been and I wanted to see if that was in fact you all's experience and go from there.

Thanks.

Okay.

On the inventory question, did respond to that, no problem.

I mean, the reality is inventories are up about 2.5%.

Quarter over quarter.

Third quarter versus fourth quarter, but specifically to answer your question, there is some 100th anniversary general merchandise product at the end of the year.

That's getting ready for our January winter dealer meeting that we have so we have another phased launch of general merchandise product that will go out in the first quarter and in fact we acknowledged that in the conference call saying that we should have some benefit of some higher general merchandise than normal in the first quarter due to this.

So there is some inventory 100th anniversary general merchandise in the pipeline but it's at planned levels, not a concern at all.

On the V-Rod, we first came out with V-Rod, obviously, it hit all the magazine covers, quite popular, and not only could you not find one but you could not find one without paying some exorbitant price, $6-7,000, somewhere, MSRP, which is not a good thing.

We said it was not a good thing.

Our objective was to get up and then run production so we can get the market forces planed so that -- right now, maybe half our dealers charge more than MSRP.

We would not like them in the long run to over charge one product and this would become part of the standard mix and how they allocate their products within their own market, this would be part of their own product mix.

I think we've seen that.

When you talk about expectations, it was our expectations that we would limit it to the market somewhat less than what the demand was.

Again, that's a philosophy on all Harley-Davidson products and it is still in the high demand.

I also mentioned that the V-Rod in the U.S. in its first year out -- we've got 28 models, and it's in one of our top-selling models in all the U.S., and in fact, in Europe it's our number-one selling model and that's the first year out.

So I mean, V-Rod is doing very well and meeting our expectation.

Thank you.

Our next question is coming from Dean Gianocos of J.P. Morgan.

Please go ahead.

Hi.

Good quarter.

Just a couple of questions.

First, production going forward, you said your capacity constrained.

Does that mean we can expect after the 10% in 2003 that it may ramp back up to a higher level?

And then secondly, any thought to raising the dividend moving forward if you do stick with the lower production number than normal?

Thanks.

On production, we do not historically give guidance for the next year, this case 2004, for our dealer meeting.

We'll remain consistent with that, and also, I mean, we'll always monitor to make sure demand exceeds supply.

We'll be conscious in what the market forces are but we'll be, as commented before, adding some additional capacity.

We always add it in steps, and typically if you follow, even as we added on the Kansas City facility in 1998, that we add to that in a stair step function consistent with our previous increases.

It was not a big monumental step.

We need to integrate all the suppliers and employees and the dealers on to our increases, so I would not expect a great big jump in -- or change in production because of that.

As for dividends, dividends are decide by the Board of Directors and they discuss this on a regular basis.

I could not comment further.

Thank you.

Our next question is a follow-upcoming from Felicia Cantor of Lehman Brothers.

Please go ahead.

Hi, Jim.

I have two quick questions and one gets back to this production level.

It looks like, though, you did raise your prior guidance for the first quarter, if I am looking at it correctly.

In the third quarter you said that first quarter '03 production was 69,500 so it looks like you raised that by about 500 units.

My question is if I had to assume your visibility's probably pretty good for that first quarter, and then just H.D.F.S., that $12 million gain on securitzation 12.7 million can you articulate what that might have been on an E.P.S. basis?

Thank you.

Okay.

On the production in the first quarter, Felicia, you're commenting that at the last conference call we said -- my notes, excuse me. -- was 69,500 now I've changed to 70,000.

You are correct.

But the greater visibility we're talking about is as we've seen, our production processes and our supplier and everything else that goes into production, we were able to change about 500 units.

If you wanted to break that down, that's just a couple units a day or even a half day's production.

Just better clarity.

It's going to be changes in the inventory levels, whatever.

It's not a big change but it is greater visibility to manufacturing.

We've got great visibility in the market already.

As for the gain on securitzation of 12.7 million dollars, on that second takedown of $210 million in the third quarter of securitzation, obviously, $12 million gain after taxes would equate to about 2 cents. 12.7 was a little higher than we would expect, but -- so I mean if we're talking about the difference over a typical 4% growth rather than this is closer to 6% growth, it's fairly minor.

It's a fraction of a penny.

Thank you.

Our next question is a follow-upcoming from Michael Millman of Salomon Smith Barney.

Please go ahead with your question.

Thank you.

On the capital expenditures, you increased about 25 million from your guidance.

You haven't changed your '03 numbers.

You said it was a timing difference.

Can you reconcile those numbers and where it went and what-will there be something -- some additional capacity come forward quicker?

Mike, on capital expenditures, number one, capital expenditures is for the whole company, although the majority of capital expenditures maybe two-thirds is for manufacturing.

There is also engineering and marketing capital expenditures that go in there.

It's not all manufacturing.

When we look at 2002 and we were $24 million over guidance, I mean, when you're looking at a $300 million budget and spreading it by the year, in fact, in this case $140 million in the last quarter, it doesn't take much to either run under that or run over that, we will look at the 2003 guidance and maybe or maybe not adjust that.

But the reality is, it sounds like you're probably adding 2002 and 2003 and saying the total goes up.

Does it equate to some additional capacity?

No.

Right now we need to look at the capital.

We constantly monitor that but this is not any planned additional capacity that we've not commented on.

Thank you.

Our next question is a follow-upcoming from Tim Conder of A.G. Edwards.

Please go ahead with your question.

Jim, with our overall product mix you talked a little bit for '03 we're hearing about a richer two-tone mix, especially in the first half of the year on the 100th anniversary.

Your thoughts on that and could that overall again skew the mix maybe a little more positive but still keep it in the same families?

Already in the -- even the start of the year, '03 although we're not producing as many as two-tones as we would have liked.

Our two-tone mix was heavier than it was previously.

We're now closer to -- we've increased the two-tone mix somewhat.

It's not a lot that would greatly affect your models, but there is some increase in the '03 anniversary models of two-tones from what we've experienced in the third quarter.

Thank you.

I would like to turn the floor back over to management for any closing comments.

Thank you, Holly.

I want to thank everybody for your time this morning.

Remember the replay of this conference call can be heard at 973-321-1020 until January 28th or by accessing it on our web site.

If you have any questions, please contact investor relations, Patrick 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.