Harley-Davidson Inc (HOG) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the Harley-Davidson first quarter 2003 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, Mr. Jim Ziemer.

Sir, you may begin.

Thank you.

Welcome to Harley-Davidson's first quarter conference call.

I would like to remind you that this call is being recorded and a replay will be available after 11 a.m., central time this morning.

Please dial 973-341-3080 and enter pin number 3803439, followed by the pound key.

Recording will be available through April 23rd.

It is also being web cast live on our web site at harley-davidson.com.

The web cast 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 will 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 release and filings with the SEC.

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

Now, I'll start up with the conference call.

First quarter was a great quarter, and as the press release stated, we achieved records for revenue and income.

We are pleased to be executing so successfully in a difficult environment.

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

Some of the more significant financial highlights of the first quarter on the year over year basis include, (inaudible) units, 70,608, up 9.2% over last year, revenue, $1.11b, up 20%, gross profit, $403m, up 27.8%, net income, $186.2m, up 55 .2%, and earnings per share, 61 cents , up 56.4%.

Getting to the details, I'll start with the motorcycles and related product segment.

Revenue for Harley-Davidson motorcycles was $876.5m.

This resulted in a 7.3% increase in the average revenue per unit for the Harley Davidson motorcycles in the first quarter, compared with last year.

The primary driver of this was the 3.4% price increase on 2003, 100th Anniversary model motorcycles.

Another significant contributor that increased revenue per unit was a mix between motorcycle families.

The V-Rod was a big contributor, as higher revenue V-Rods became a bigger percentage of the mix, going from 4.9% to 6.9% of the shipments.

Model mix within the motorcycle families was a positive contributor, as customers asked for the higher end motorcycles as they ordered 100th Anniversary bikes, such as the Electro Glide ultra, versus an Electro Glide Classic.

Revenue also benefited from a feature mix that takes into account additional features like fuel injection, versus carburetor for engines on certain models.

Going to P&A and general merchandise, in the last conference call, we said that we expected some 100th Anniversary benefit for both P & A and general merchandise in the first quarter.

That, in fact did happen.

Parts and accessories delivered a strong quarter with revenue of $159.8m, up 21.9% over 2002's first quarter.

When you back out the 100th anniversary specific products, which accounted for approximately $13.9m, a possible conclusion would be that P&A growth rate was 11.3%.

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

For example, if somebody needed a derby cover, they might choose one that has a badge for 100th anniversary, instead of traditional design.

General merchandise revenue for the first quarter was $56.5m, up 33.6% over last year.

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

Likewise, if you back out the $8.3m in anniversary specific items, the growth rate would have been 14.2%.

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

While we don't give quarterly guidance for P&A and general merchandise, we need to point out that both product lines will face tough comparisons later this year as the third and fourth quarters 2002 both had significant 100th anniversary revenue in them.

While we do expect some additional anniversary orders for P&A in the second quarter, general merchandise is unlikely to have any significant new anniversary shipments.

This information is consistent with what we've told you in the last conference call.

As a result, general merchandise revenues are likely to be lower for the remainder of 2003, when compared with the strong performance in the last 9 months of 2002.

Looking at the longer term, we continue to expect sustainable growth rate for general merchandise to be lower than the motorcycle unit growth rate.

And for the longer term P&A outlook, we continue to expect sustainable growth rate to be slightly higher than Harley-Davidson's motorcycle unit growth rate.

Moving on to Buell motorcycles, we shipped 2,941 motorcycles in the first quarter of 2003, of which, 2,356 were Buell XB series sport motorcycles.

This compares to 429 Buell Big Twins shipped in first quarter of 2002.

Buell Big Twins were considerably lower in the first quarter of 2002, because we were just ramping up the new XB series of motorcycles.

Looking at margins, gross margin was 36.2% and higher than last year’s 34.0%.

The higher gross margin was driven by U.S. price increases on the 100th anniversary 2003 models, which as a mentioned before, were 3.4%.

It more than offset increased costs of the (inaudible).

An example of these cost drivers are some of the unique cosmetics, such as paint, striping, (inaudible) engine badging.

We also benefited from a favorable mix of product features, and a favorable model mix within the motorcycle families.

And finally, another significant contributor to increase was gains from foreign currency exchange versus last year.

This amounted to approximately $8m and was largely related to the euro.

But there was some benefit from the yen and Australian dollar.

I just gave you a lot of information on gross margins.

This information helps explain the great quarter we just had.

But before you get carried away with your models, let me talk about the second half of 2003.

When we introduced the 2004 model year motorcycles, we will not have the benefit of the special 100th anniversary pricing in the motorcycles, some of the P&A and general merchandise offering.

Additional revenue uplift from the 100th anniversary P&A and general merchandise won't be there.

Also the second half of the years, it would be reasonable to assume that the favorable variance in foreign currency exchange will be small.

And lastly, in the third and fourth quarters, we will be bringing on a new plant in York, Pennsylvania.

We'll experience start up costs and in inefficiencies.

I'll talk more about this later on in this conference call.

All this is to say that many things wind up positively during the first quarter, to result in a 36.2% gross margin.

And much of that won't be repeat repeated in the second half of 2003.

Moving on, property margin for the motorcycle segment was 21.5% compared to 18.7% in 2002.

The 280 basis points increase was largely driven by higher gross margin.

Additionally, although operating expenses increased 15%, it was more than the 20% increase in revenue.

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

Rather, they'll 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 $43.4m, up $31m from last year's first quarter.

HDFS benefited significantly from its first quarter securitization.

The size of the securitization was larger than the typical bundle of loan originations for a 3-month period, as we had almost five months to build the loan pool.

This brought the deal size to $550m, which surpassed the $500m that we originally projected during the fourth quarter conference call.

During that call, we also indicated that the spread would be approximately 400 basis points.

The fact is, we also benefited from a better than expected interest rate environment, that allowed us to realize a higher interest spread on the deal in about 480 basis points.

As previously communicated, we plan to complete forced securitization transactions in 2003.

By going to the market more often we will be able to better match funding requirements with our originations.

Some additional HDFS highlights.

Our retail market share, which, defined as the percent of total, new Harley-Davidson motorcycles sold in the U.S., that are financed by HDFS, remained in the mid-30s percentage range, which is consistent with the prior year.

At the end of the first quarter, retail delinquencies on a managed basis defined as greater than 30 days delinquent, were 4.4% up 3.5% at the same time last year.

This tracks with our comments during the year-end conference call, when I told you we were seeing a moderate increase in delinquencies.

Annualized credit losses on a managed portfolio basis were up only slightly at 84 basis points, versus 76 basis points last year.

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

As we mentioned in the past, our goal is to keep our managed credit losses at our below 100 basis points.

We believe we'll be successful in achieving this goal, which is impressive in the challenging economic environment.

We expect HDFS to post another strong year in 2003, but it's unlikely it's going to go at 60% to 70% which it did in 2001 and 2002.

Both of those years experienced declining (ph) interest rates, which allowed a benefit when we went to the securitization market.

Instead, we expect HDFS will grow approximately 25% for 2003.

Now, expectations of approximately 25% growth for the year suggests a very good year for HDFS.

The quarter to quarter comparisons will be difficult.

Changing our securitization pattern to a securitization in each of the four quarters has resulted in an unusually large first quarter, and that suggests that HDFS will show a modestly negative comparison for the remainder of 2003, versus 2002.

We anticipate a reduction in spread on securitizations as our expected volume rates will increase and we experience continued competitive pressure in the financial services environment.

For the longer term, we expect HDFS to grow at a slightly higher rate than our motorcycle unit growth rate.

Going back to Harley-Davidson, Inc. and further details, we finished the quarter with $890m in cash and marketable (ph) securities on hand, up from $580m in a year ago quarter.

This led to a strong increase in interest income, which was $6m or approximately $3.7m higher than last year's first quarter.

And although our first quarter cash balance was lower, this was offset by significant higher marketable securities balances, compared with 2002 and therefore led to higher interest income earned.

With minimal returns and cash in this environment, any small changes enhancing our return is meaningful.

Some additional information in the quarter, we generated more than $311m in cash from operations.

Depreciation expense for the quarter was $45.9m and we're expecting depreciation to be slightly more than $200m in 2003, versus $176m in 2002.

Capital expenditures for the first quarter were $41.8m and we're maintaining our guidance of $270m to $300m for the full year.

Inventories were down 1.7% since year end 2002, and up about 16.8% since last year’s first quarter.

This is still good performance when considering that revenues are up 20% in a year to year comparison.

Switching over to production, (inaudible) operations performance in the first quarter enabled us to ship approximately 600 more units than our target.

We're building on the success and adding 400 more units to our second quarter schedule, which will bring the four-year target to 290,000 Harley-Davidson motorcycles for 2003.

We expect to ship those 290,000 units according to the following distribution.

First quarter was 700,608.

Second quarter, target is now 75,400 units, third quarter, 67,500 units.

And the fourth quarter 76,500 units for the fourth quarter.

The third quarter target of 67,500 units is even with 2002's third quarter shipments, because of the new plant coming on line and the later start up of the 2004 model year motorcycles.

As I mentioned earlier, in the third quarter of 2003, we were planning to start up our assembly operations at the new plant in York, as we transition the hundreds of employees from the existing plant to the new plant, there will be training and startup costs along with many in inefficiencies.

We expect the ramp up to continue into the fourth quarter.

Now I'll review the headway (ph) motorcycle market, which we defined as all motorcycles with engine displacement greater than 650 cubic centimeters.

Last year's mild winter, and the 20-plus% growth in retail sales created difficult comparisons for the headway motorcycle market this year.

In fact, our independent U.S. dealer network retailed 3.2% fewer motorcycles in the U.S. this past first quarter.

As we stated in the press release, we believe that the long and unusually harsh winter has caused some customers to delay accepting their Harley-Davidson motorcycles.

Based on monitoring of the U.S. retail market and talking with our dealers, we're confident that the demand for Harley-Davidson motorcycles remains strong.

No one likes a negative comparison, but realistically, the first quarter retail sales, because of seasonality and a small number of unit sales, is a first quarter comparisons, a first quarter comparison subject to fluctuations.

In fact, first quarter retail sales only represent about 15% to 20% of our dealer's annual retail sales.

To put it in perspective, it would have taken only about 1600 more units to generate a break- break-even comparison with 2002, or about a day and a half of retail activity.

In the international markets, we are encouraged by the retail results in both Europe and Japan.

Our dealers are experiencing a 15.7% increase in Europe, with strength across most of the region, and a 12.9% gain in Japan through March.

Now, it's our 100th anniversary, so I've got to talk about the Open Road Tour.

We kicked off the 2003 portion of our Open Road Tour in March in Sidney, Australia, and it was well attended.

I invite you to go to our web site and take a look at some of the festivities.

Our next stop is Japan on April 26th and 27th.

We know the crowd will be very enthusiastic.

We'll also be traveling to Barcelona, Spain in late June and to Hamburg, Germany in mid-July, as we wind up the overseas portion of our open road tour.

We will then have the cross-country rides in late August, bringing everybody to Milwaukee during the last week of August for the big celebration.

Let me close by stating we're pleased with the financial results of the first quarter. (inaudible) results of the Harley-Davidson's drivers of success.

They are the exciting new products and services, our strong brand, our strong relationships with all of our stakeholders, and the experienced management team supported by empowered employees.

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

And I'll now turn it back over to Holly to open it up for Q & A.

Thank you, sir.

The floor is now open for questions.

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

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

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

Once again, that's 1, followed by 4.

Please hold while we poll for questions.

Thank you, our first questions comes from David Cumberland of Robert W. Baird.

Good morning, Jim.

Good morning.

Could you elaborate on weather as an issue in Q1, is this something you saw in certain markets and maybe in certain seasonal models?

And if you could also comment on the comment you just made about customers possibly delaying their acceptance of motorcycles.

Okay.

In terms of markets and looking at the weather, we actually went through and then did an analysis state by state, looking at the retail sales and obviously when we're down, only 3% and as I mentioned, it's just a matter of 1600 units, some markets are up and some markets are down.

It's close to a break-even.

As we did our analysis state by state, pluses and minuses, we compared that to the weather patterns that we've all seen on TV this past three months, whether it be the storms on the east coast or 90 years of great storms in Denver.

There's a great correlation in those markets where we have negative retail comparisons to the significantly harsh winter.

As we look at models, Sportster is by far a very seasonal product.

We've always said that 50% of our customers every year are existing customers, and 50% are new to the franchise.

Many of those people, especially people who are new to motorcycling are coming in on the Sportster.

People coming in who are new to the sport typically come in on great summer months.

So the Sportster is a seasonal product so we've seen that impact on Sportsters as well as some different markets.

Thank you.

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

Thank you.

I guess a couple of questions.

Maybe following on that, the -- we're told in a channel checks also that many of the dealers are believing that the V-Rod is a seasonal product.

And there are a couple issues and maybe you can talk to on the one hand, some dealers are having difficulty selling them, but generally where they are selling them, they are selling them to non-Harley riders, which would seem to be in line with where you want to go.

So maybe you can update us if it's unfolding the way you thought.

Maybe it's just quickly comment on the Springer and T sports, following up on your auto mix within families, if the mix is such that these are just being squeezed out?

And then, in terms of your guidance on production and warning about the third quarter, I’m kind of curious.

Your guidance suggests that third quarter production on a daily basis will decline from the second quarter, which suggests that the ramp-up start startup will affect ongoing operations and maybe you can, Jim, comment on that as well.

Okay, Mike.

As usual, you have not disappointed me with numerous questions.

Let's see if I can answer them and if I miss them, we'll follow up on it.

On V-Rod, as we mentioned before, V-Rod was an exceptionally well accepted motorcycle.

Last year, it was our number one motorcycle seller in Europe and number five or six in the U.S., which is the first time a new motorcycle model that has come out that's been quite that successful.

Last year when it first came out, being on the cover of every motorcycle magazine, these things were clearing the floors at the same time they hit those.

This year, because of the seasonality in the motorcycle market, there are some V-Rods on the floor and maybe going from a 0 to some, equates to some seasonality, but there will always be seasonality.

It's too early to tell if this has the same seasonality as any other product, because last year's basis is no models on the floor.

You commented on difficulty in selling.

Last year, again, with all of the front page of motorcycle magazines combined with the shortage of all of this model, it was not hard to sell these things.

I mean, people were coming in and putting significant premiums on the motorcycle.

This year, many dealers cannot charge the significant premium over MSRP (ph) like they did last year, but all indications are that they are selling above MSRP.

As to who is buying these, and does it hit our target customers, there's no doubt that our target customer had a broad range.

We knew that existing Harley-Davidson customers who wanted Harley-Davidson but want wanted more power would be attracted to this model.

It is a performance custom motorcycle.

We also knew it would be attractive to people that said that existing Harleys did not have enough when we bring them into the franchise.

This is also true for the European market.

We're also seeing some riders, but it's too early to get a clear indication of the demographics.

But it's definitely--we want to get more current riders of the motorcycle into the V-Rod.

I'll get back to model mix.

I didn't understand the question.

I'll continue to go down.

On the guidance for the third quarter production, I want to again point out that our guidance for that production shows a difficult comp last year.

And we have (inaudible) number of workdays.

The thing is, again, we're bringing in a new plant on board at York.

We're taking the Softail line out of the existing factory and bringing the tour line and putting the Softail line in the new plant.

There is going to be a transition.

We'll be ramping up production.

As we do that, we will not be producing at the same line rate as we did when we were on the old Softail line.

We'll be going up a learning curve.

There'll be training.

And that, in fact, is a reality.

That's why our guidance on production -- and the reason why that target is out there.

Now, I'll go back and ask you what I missed.

Just the -- we understand or you are discontinuing or you said you are discontinuing the Springer and the T-Sport and wondering if that follows the comment, Jim, you made earlier about mix within families--that if these were just sort of squeezed out because of demand for Road Kings and Fat Boys and less -- and much less demand for these, or is there something else involved?

We always look at the market and how models are selling.

Each model adds complexity to manufacturing so there is a certain buying that you really need.

You mentioned squeeze out versus like Road King.

I mean, Springer is a Softail.

It is on a different line.

The Road King is in the touring bike line.

The T-Sport is in the Dyna line which is in Kansas City.

Those are not related to the Road King.

When we talk about mix within families, it is what is happening within the Softail family, what is happening within the Dyna Glide family or what is happening in the Touring bike family.

And I'm not going to get into all of the pluses and minuses about the models, but that's what I'm talking about.

Within Dynas, within Sportsters, etc., not cross families, which was your example.

Thank you.

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

I have a couple of questions.

Jim, you gave us some, temporary comments on margins, so we didn't get carried away.

Do you expect to see some kind of increase in gross margins in the second half?

My next question is, I was wondering if you could give any guidance or thoughts on the size of your next securitization?

Typically you to do one in April.

I don't know if you are going to do that again in that time frame.

And also, just wanted to touch upon the demand versus weather question in a different way.

Now that the weather has improved in a lot of these regions, I'm wondering if you are hearing from the dealers that you are seeing a pickup.

Obviously the war may have initially slowed foot traffic, but I'm wondering if you are seeing a pickup commensurate with the improvement in weather?

On margins, we had the all-time highest margin quarter ever in the first quarter, and they were temporary remarks.

I was trying to give reasons why we had such a greater great quarter.

And then also, those things that will not be evident in the second half of the year.

That being said, margins would be lower in the second half than they were in the first quarter.

Because first quarter was just everything lined up right and the 100th anniversary year.

You have the general merchandise, the P & A, the pricing, mix.

We had everything going and then that would not be the case on second half.

As for securitizations I don't have it in front of me.

You are correct.

We're going to have a security securitization in the second quarter.

The act size and timing, I don't have, we could get back to you on that one.

And as for weather, we're not going to give interim updates, other than quarters on retail sales.

But we're quite confident in our measures and our communications with the dealers, which are always ongoing.

What the floor traffic is, and what the bikes are being sold at, which gives us great indications that when bikes are selling at a premium, that it is really the weather.

And the pickup of the motorcycles and the dealers have deposits on the motorcycles, it is really the weather--when it's snowing outside, people aren't going to pick the motorcycles up.

So we're quite confident that those are all consistent.

As for the war, there's no doubt if somebody is not going to pick up their motorcycle because it's snowing or raining outside.

They may be watching CNN and the war, but I don't think that's a big factor.

Thank you.

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

Good afternoon.

I had two questions.

I was wondering if you could give us more specifics on the V-Rod in Europe?

What kind of mix versus the U.S.?

And can you provide us with your advertising spending this quarter versus last year?

Those are some new questions, Carole.

I don't have the split for the quarter on V-Rods, and typically we don't give that out by market.

But I mean, I think we're looking at a similar split split-out, with about 30% of our V-Rod production going to Europe an annual basis.

As for a quarterly basis, I don’t know what it was.

As for advertising and a year over year -- you actually asked the dollar amount of advertising.

Number one, I don't know that, but we do advertising in everything we do.

I think the advertising spending was certainly in line with a typical year.

As you said, in total, our SG&A did not increase as fast as revenue.

And we're still conducting the road tours and you might have seen some of the TV advertising on the commercial with the V-Rod going across the bridge and the sailboat going underneath, again emphasizing our 100th anniversary.

We've done TV advertising early in the year to again bring out some more recognition of the brands for several years in a row.

So, I think that -- and the comparative basis of the relative system, I just don't have the absolute dollars in front of me.

Thank you.

Our next question is coming from Tim Conder of AG Edwards.

Thank you.

Congratulations on the quarter.

Good morning, Tim, thank you.

A couple of questions, Jim, housekeeping here.

Over time in the first quarter, relative to a year ago?

And then, your foreign exchange sounds like, we will have some additional benefit going forward.

Can you comment on any hedging that you've done?

And then on the production, do you anticipate building any extra units in the second quarter?

Keeping those in inventory, ahead of the transition to the '04 models?

And also the change over there at York in the third quarter?

Okay, overtime, I don't have the schedule in front of me.

I can tell you since you keep it up, overtime for the first quarter of '03 was 18%, and I don't have the comparison in front of me, but I'm sure you do since you tracked it so well.

On foreign exchange, we've seen the dollar get weaker over the past year, though we have locked in.

And we typically lock in 6 to 9 to 12 months ahead.

We're pretty well locked in for the balance of the year, but have locked in a rate that's significantly lower than the current exchange rate.

But when we have pricing, we try to lock in as far as we can, although there is a fairly big gap between what the euro was last year at this time, and even on a going-forward basis versus the 107 at that right now, we've locked in at a significantly lower rate, but it locks in at pricing.

As for production, and then building '03s--giving a little background, basically, we're announcing our '03s and shipping our '03s in September.

And we're going to start producing our '04s in September.

Let me get it straight, '04s in September.

When we cut off on a particular families of motorcycles or assembly lines, we would not get into that kind of a detail on the changeover, but as I mentioned on another message that when we switch over from the old Softail line to the new Softail line, there will be a transition.

We'll have a ramp up on that.

As for specific timing, it's going to be somewhere close to the end of August and for the most part for most of the line.

Thank you.

Our next question is coming from Dean Gianoukos of JP Morgan.

When you said 50% of the buyers are repeat Harley buyers, how many of those use a trade-in?

Secondly, the fact that there are some bikes on the floor, what do you think that sort of implies about the wait list?

You mentioned that you thought some of them were sold and tagged.

Or do you think all of the bikes on the floor are sold and tagged?

And then looking forward, any thought to a dividend, higher dividend?

Or can you give us any sense whether you are comfortable that you can start production growth in '04 at least at 10%?

Thanks.

Okay on trade-ins, on the question of trade-ins, number one, we have limited ability to track the trade-ins.

We only have information on those bikes that get financed through HDFS.

And also, the reality is, if a person sell the bike on their own or trades it in, it's kind of hard to tell.

So bottom line, we don't have that information, but we have tracked our buyers and 50% of our buyers are repeat buyers.

That is consistent for the last 15 years, and continues to be so through 2002.

As for bikes on the floor, we have said all along that motorcycles are a combination of bad weather and not being picked up.

If people don't want their warranty to kick in the middle of winter, they'll wait to pick up the bikes during a one-year warranty.

That kicks in on the retail sale.

Also Sportsters, the new customers will come to us through Sportsters.

That is a seasonal product.

I would expect that some of the bike on the floor that are not sold, and are Sportsters.

Some seasonality, some Sportsters, some that are sold and waiting for pickup.

As for dividends, there's some proposed legislation on dividends.

We'll see if and when that comes out, and then we'll have the appropriate discussions at the board level where that occurs.

And as for 2004, we've never commented on our production schedules prior to the second quarter conference call, and we will continue to do so.

Thank you.

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

Thanks.

I'm trying to get comfortable with the retail registration decline, because it looks like it's the first quarterly decline in about 10 years, just looking at the MIC data.

So can you give us a metric, even if you don't typically give out that much detail just to get comfortable with what looks like the first decline in such a long time?

Either what percent of bikes on the floor have deposits, in other words, what the growth would have been if the bikes had been picked up, which would kind of adjust for seasonality?

Or can you give us the sales in a state like California where the seasonality wouldn't be as much as an impact?

Just so we can get comfortable with -- not that's much.

It's only a day and a half of sales to break even with last year, but so that we would see the 10% increase carrying through on the dealer floor.

Obviously you've done more analysis than I have on the first quarter decline.

First quarter is down from last year and last year was a big year, up 20-plus%.

I don't know how many years that goes back and you say it's 10, so I'll take that.

Going back to the number of deposits, there is no way for the motor company to know what each individual dealer is doing in their market or in their franchise in collecting deposits and what size of deposit and what kind of waiting list they have.

Not to mention the customer really doesn't want to know, so we would kick in that retail sales.

There is some possible information that's not available.

As for sales, as I said earlier in the conference call, that we did do an analysis state by state of the pluses and minuses on retail sales versus last year's first quarter.

And we kind of overlaid the known weather patterns of this year, and we're quite satisfied that weather was doing it.

Just -- we did that and we're not going into that detail on the phone.

Thank you.

Our next question is coming from Corey Benjamin of Bear, Stearns.

A couple of balance sheet questions for you.

I was hoping you could provide the breakout of the inventory accounts, secondly the breakouts of accounts payable and accrued expenses.

Thirdly, I was looking at the accounts receivable line.

It looks like turns for the accounts receivable which I understand are generated through international dealer sales, increased during the first quarter.

I was wondering if that was a reversal of the timing issue you discussed of U.K. (ph) or whether there was something else at work there?

Finally, I was hoping you might be able to discuss the cash from operations and the large pickup we saw there.

Thanks.

Okay.

On inventory, this information will come out in the queue, but to give you some indication.

I won't go through the exact numbers.

As I mentioned on the conference call, total inventory was slightly down.

There is some pluses and minuses.

Finished goods inventory was somewhat up.

That was primarily in our units in transit and some of our foreign markets, but it was up like 10%.

Not a big number.

And that was offset by basically every other inventory category.

Again, there is just some small changes and small numbers.

I want to note that on finished goods inventory, last year in September, we went to a new method of going to market in the U.K.

We said that before where we've got essential warehouse and where we're allocating units onto the dealers so we can respond.

This is a pilot program, but we can respond to the dealers and their needs by model, by color, and be able to service the dealer so they don't have to carry such big inventories, because these are smaller dealers.

That is added to our inventory on a permanent basis of 6800 units per month.

We sell this at year-end.

We see that forever.

So, when I'm talking about a small increase, this is minimal.

Accounts payable accrued expenses--I don't have that in front of me.

I mean, the total balance as you did have in the press release of $654m versus $607m at the end of December, that has many items in there, including taxes payable, which I suspect is driving a good portion of that, and dealer holdbacks and things like that.

And you had asked the question on receivables?

Finance receivables net is - at $1050m versus $855m.

Part of that increase there is an increase last year, part of that million dollars is the European receivables that we took over last august.

Actually a better comparison is going from last March 2002 where it was $739m versus [a million-0-50].

This big increase here, $100 million basically, round numbers, is the European receivables.

And then as we've mentioned, (inaudible) units, they have gone up 10% in retail sales or slightly down.

Therefore wholesale inventories are up somewhat.

That would cause the change.

In fact, if you go down to finance receivables under long-term assets, the finance receivables have gone down from year end at $589m to $452m.

That is because of the timing of securitization, and securitizing a lot of the retail receivables.

In fact, that has a favorable comparison when you look at March the prior year.

As for cash from operations, there are pretty significant drivers of cash from operations.

Number one, it is the big increase in net income that attributes another $60+m to our cash from operations, and also our net changes from the current assets -- very favorable working capital changes which with is yielded from additional cash from operations.

Again, we focus very carefully on managing our working capital and have done a great job, if you look year after year, and this is consistent with that pattern.

Next question?

Thank you.

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

I was wondering if you could get an idea in terms of your unit production increase in the year.

I don't know if you have said this in past, but I'm looking for how much of this new growth goes to new dealers?

I guess I'm looking for, you know, how much production is going into a new channel versus something that we could sort of call same-store sales with your existing dealers?

And I've got one other question.

Basically, I mean, if you look at dealers, dealer network, we finished the year with 640 dealers in the U.S. dealer network, which is comparable to the year before.

So, that is a good basis of same-store sales. 20% of our product last year went outside of the U.S., and the dealer network in the Europe changed a little bit but not a lot.

So I think that we're talking about retail sales, we're really talking about same-store sales.

Okay, a question on the Sportster.

Is the zero money down program still in effect?

And if so, is that going to be in effect through April or what are we looking at on that front?

The zero money down on Sportsters because we've done an attainability study or trying to get people in -- the fact that they realize that all Harley's don't cost $20,000, the reality is, we've got a Sportster that ranging from $6,000 to $10,000.

That zero money down was originally for a 3 or 4 month period -- excuse me, 3 or 4 week period.

I misspoke there.

It may be a little longer, but it was for a short period of time, again, in the early part of the season.

I think it is still going on at this moment.

Thank you.

Our next question is coming from Joseph Hovorka at Raymond James.

The finished goods number you said was up 10%, was this from year end or year over year?

That was from year end.

Could you give me the wholesale for the portfolio and the comparable number from last year?

I don't have in front of me the wholesale portfolio that's in the finance receivables, but that number has been fairly consistent approximately 80-plus% of that number is wholesale.

And then this year, as I mentioned before, that includes a $100 million European receivables which were not there last year, which would also increase our wholesale.

Thank you.

Our next question is coming from Joe Yurman of Bear, Stearns.

You've got a Bear, Stearns double-team this morning.

A question regarding the international sales, particularly if you look at your business relative to just the growth in Europe or Asia Pacific.

You know, you're clearly doing better.

And I'm just wondering, at what point international shipments begin to become a more meaningful part of total shipments as its still under 20%?

Is this an anniversary issue and you are trying to maximize demand in the U.S. and start to see that change a little bit?

To answer your question, Joe, it's not just an anniversary effect.

I mean the fact is over last five, six years, we've seen our U.S.-Mexico go from 70% to 80%.

So it's been the growth of the U.S. market.

In fact, Europe used to be the largest motorcycle market in the world.

U.S. overtook the European market three years ago because it is growing so fast.

And so with our philosophy of controlled growth, at the same time, trying to manage the market and when the market is growing faster than our production, our growth has been kind of reallocated to the U.S. market over the last five, six years.

We're trying to balance this.

It's all a matter of the market dynamics.

I mean, last year, we saw our market share grow for the first in the U.S., the first time in 3 years, although we're doing extremely well, the market was growing faster than we were and we lost market share in '99, 2000 and 2001, just by this reallocation process, we were able to grow market share, but more importantly, you know, take some of that lever away from the dealers who have been significantly market pricing the product.

We want to bring a market balance in there.

So we're going to look at trying to satisfy as many of the markets as possible, at the same time, maintaining our controlled growth philosophy.

Thank you.

Our next question is coming from Mark Dawson of Rainier Investment Management.

I have no question.

Thanks, Mark.

Our final question is a follow-up coming from Tim Conder of AG Edward.

Jim, two things here, can you just comment, circle back what you're seeing on premiums, MSRP and used bike prices and finally, any commentary that you would offer on your late January exercise of substantial amount of options?

Okay.

Like we said in the press release, as well as in the conference call, we look at many indicators out there, and the retail market.

They get covering what's going on.

One of those indicators are the premiums that are being charged for the -- our products at the dealer level.

We get that information from financial services.

Since they finance approximately 35% of those units sold, we've got a very good database.

Those premiums being charged are consistent with premiums that we've seen at the same time periods a year ago.

So we're very confident that the strong demand and then the premiums are right in line with what they were before.

And used bikes, I've seen much commentary come out in different analyst reports, and people have talked to dealers.

We've got to remember that, as we see used bike prices when we see year-over-year, same time period, used bike prices are very stable, but the reality is there is some seasonality in used bike prices in the winter.

Before traffic goes down or the snow outside, used bike prices will soften in the winter months.

If a question comes up are they council in December versus July, the answer will be yes.

When we look at used bike prices now versus the same time period last year, they are very comparable.

I mean, you look at the 1996 Sportster, it's it is selling for the same thing it was purchased for 7 years ago.

I think we've got great confidence in that.

As an update on my personal exercise of stock options in January, which was in the “Wall Street Journal”?

The "Wall Street Journal" can figure it out, I exercised stock options and held those because I felt that number one, with the stock at the low levels it is and with the great insight I had built over the last 30 years of being with the company, that I rather think the gain in the stock price will come and then pay Uncle Sam a 20% tax on capital games rather than a normal income level at 39-plus%, so I still have those stock options and everybody would know when I sold them, because it's public information.

Actually, I still have that stock, because I took the options, exercised them, paid all of the options taxes up front so I have the stock now.

Thank you for asking.

I guess that is the end of the questions, and the end of the conference call.

I want to thank everybody for their time this morning.

Remember that a tape replay of this conference call can be heard by dialing 973-341-3080 until April 23rd or by accessing it on our web site.

Any questions, please contact investor relations, which is 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.