Harley-Davidson Inc (HOG) 2003 Q2 法說會逐字稿

Good morning, Ladies and gentlemen, and welcome to the Harley-Davidson teleconference.

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

It's now my pleasure to turn the floor over to your host, Mr. James Ziemer.

Mr. Ziemer, the floor is yours.

Thank you.

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

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

Please dial 973-341-3080 and enter pin number 3803453 and the pound sign.

The recording will be available through July 24th.

It's also being webcast live on our website at www.harley-davidson.com.

The webcast will be available for replay throughout the next few weeks before being placed on the investor relations portion of the website.

In compliance with regulation FD, I will make the following statements.

The 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.

Let me start the conference call with a review of the [ Indiscernible ] Harley Davidson reports second quarter record -- In fact, it's a record for any quarter for all of our hundred-year history.

Furthermore, as Jeff Bleustein, our Chairman and CEO said, our US networks sold more motorcycles in this quarter than any other quarter.

In April, we told that you U.S. retail sales were down about 3.2% for the first quarter of 2003 compared to last year.

Or about 1500 motorcycles.

At that time, we predicted that spring would come and, sure enough, it has with strong second quarter retail sales of Harley-Davidson motorcycles.

The 14% increase that our US dealers indicates that demand for Harley-Davidson motorcycles remains strong.

At the same time, dealer inventories declined across the U.S. as the sales accelerated during the quarter.

Additionally in the first half of the year, Harley-Davidson retail sales outperformed the industry in the U.S., Europe, and Japan.

As is our typical approach, I will spend a few minutes discussing some of the highlights of the quarter.

And then I'll take some questions.

Some of the more significant financial highlights of the second quarter on a year-over-year basis include Harley-Davidson units 76,025, up 16% over last year.

Revenue was $1.22 billion, up nearly 22%.

Gross profit of $433 million is up 32%.

Net income of $202 million was up 40%.

And earnings per share of 66 cents were up 40%.

Getting into the details, I'll start out with the motorcycles and related products segment.

Revenue for Harley-Davidson motorcycles was $955.4 million.

This resulted in an 8.4% increase in average revenue per unit for Harley-Davidson motorcycles from the second quarter compared with last year.

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

Another significant contributor to the increase on the revenue per unit was the mix of motorcycles.

We define this mix as families of motorcycles, models within a motorcycle family, and geographic location.

Family mix reflects the reduced proportion of sports and motorcycles, which declined from 20.3% in the second quarter 2002 to 18.2%.

Sportsters are our lowest-priced family Harley-Davidson motorcycles.

Also, domestic shipments increased as a percent of total shipments in the second quarter of 80.1% in 2002 to 80.5% in 2003.

And revenue also benefited from features like special anniversary two-tone paint.

Finally, revenue benefited by $17 million due to favorable foreign currency exchange rates compared with last year.

Turning to P&A, and general merchandise, as we expected, parts and accessories benefited the sale from sales of 100th anniversary product, delivering a strong quarter of revenue of 204.2 million, up 29%, over 2002 second quarter.

General merchandise revenue for the second quarter is 43.7 million, down 14.9% from last year.

Revenue related to the hundredth anniversary general merchandise products in 2002 totaled $52 million.

In 2003, revenue for these products is expected to be approximately 9 million, nearly all of which was recognized in the first quarter.

Looking at the longer-term, we continue to expect the growth rates for general merchandise to be lower than the motorcycle unit growth rate, and we continue to expect the growth rate for parts and accessories to be slightly higher than the motorcycle unit growth rate.

Moving on to Beull motorcycles, we shipped 1,942 Beull motorcycles in the second quarter of 2003 of which 1804 were XB9 series of sport motorcycles.

This compares to 2006 drill twins shipped in the second quarter of 2002.

Two days ago here in Las Vegas, we introduced two new fuel products through our worldwide network.

They're the XB12 series motorcycles, which will begin shipping in late July.

Both models are parred by a new 1200 CC engine putting out 103 horsepower.

Retail pricing for both of the 12 series models will be $10,995 while the existing 9 series is priced at $9,195.

We believe both the 12 and the 9 series are competitively priced.

For full details, go to our Beull website or see your Beull dealer.

Looking at the margins, gross margin of 36.4% compared to last year's 33.5%.

The higher gross margin was driven by a number of factors.

Price increases on U.S. 100th anniversary 2003 models averaged 3.4% and more than offset the increased cost of the model year features.

Example of these features include some of the unique cosmetics, such as striping, and engine badging.

We also benefited from a favorable motorcycle model mix, and featured an option mix, which we mentioned in our revenue comments.

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

This amounted to approximately $10 million and was largely related to the euro.

Moving on to operating margin for the motorcycle segment. 21.9% compared to 18.3% in 2002.

Increase was largely driven by higher gross margin, which was up 290 basis points.

Additionally, operating expenses increased 16% while revenue increased 22%.

As we discussed before, some of our operating expenses are closely tied to revenue, while operating expenses -- while other operating expenses are determined by business strategy and, therefore, our operating expenses won't move in tandem with revenue.

Now turning to our financial services segment.

Harley-Davidson financial services had another great quarter with an operating income of 44.5 million, up 20% over last year's second quarter.

HDFS benefited significantly from strong loan originations, outstanding execution of its second quarter securitization, and the low-interest environment.

The size and securitization in the second quarter of 2003 was smaller than in the second quarter of 2002.

Because we went to the market in both first and second quarters of 2003 versus only going to the market once in the first half of 2002.

The size of our transactions in the second quarter of 2003 was $425 million versus $586 million in the second quarter 2002.

The combined total for the loans sold in the first half of 2003 was $975 million and the combined total for the first half of 2002 was $679 million.

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

Thus, we'll be going to market two more times this year.

As you read in the press release, spread in the second 2003 -- second quarter 2003 transaction was very strong as the interest rate market continued to work in our favor.

Some additional highlights for HDFS.

HDFS retail market share, which we define as the percent of total new Harley-Davidson motorcycle sold in the U.S. that are financed by HDFS remain in the mid-30% range consistent with prior year.

At the end of the second quarter, retail delinquencies on a managed basis, defined as greater than 30 days delinquent was 4.0%, compared to 3.2% the same time last year.

Both of these numbers are within the range of historical experience.

This tracks with the comments during the previous two conference calls when we told you that we were seeing an increase in delinquencies.

In the big picture, 4% is a manageable level of delinquencies.

Annual -- annualized credit losses on a managed portfolio basis were up slightly 75 basis points, versus 68 basis points last year in a difficult economy, losses remain manageable for three primary reasons.

Number one, continue the benefit from the better credit quality of the portfolio since the performance pricing program was implemented in 2001.

Two, we benefit from the strong collateral value of Harley-Davidson motorcycles.

And three, it's a continued emphasis on collection efforts.

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

While we believe credit losses will be up slightly in the second half of 2003, when compared to the second half of 2002, we're confident that losses will remain at or below a hundred basis points.

Based on the strong first half, and a stable interest rate environment, we're expecting that HDFS operating income will grow approximately 40% for 2003.

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

Looking at the balance sheet and cash flow statements, we finished the quarter with nearly $1.2 billion in cash and marketable securities.

Up from $727 million in the year-ago quarter.

This helped the increase and interest income which was 6.4 million or approximately 2 million higher than last year's second quarter.

Finance receivables were up only 6% since year-end 2002.

Our inventories were down 5.3% versus year-end.

This is an outstanding performance relative to a 22% increase in revenues.

Depreciation expense was 95 million for the first six months.

We're still expecting depreciation to be slightly more than 2, 200 million in 2003.

Capital expenditures were 82.6 million through six months.

And we're maintaining our guidance of between 270 and 300 million for the full year.

Long-term liabilities increased by 67 million.

Primarily as a result of the change in pension plan discount rate, 6.5% from 7.25%.

Switching to production, favorable operations performance in the second quarter enabled us to ship approximately 600 more units than our target.

As a result, we have added these units to our previously-stated target and now our full-year target is 290,600 Harley-Davidson motorcycles in 2003.

In the third quarter of 2003, we're planning for the start -- we're planning to start the assembly operations in a new plant in New York.

We expect inefficiencies from training and startup costs as we transition hundreds of employees from the existing plant to the new plant.

Our daily production rates, softails in the third quarter moving lower than that in the second quarter due to the gradual ramp-up of production in the new factory.

This will result in a leaner mix of softails for the -- a leaner mix of softails for the quarter.

Another important note is that the third-quarter target, 67,500 Harley-Davidson motorcycles, will result in a comparison that is level with the 67,474 units shipped in last year's third quarter.

Now, I will review the heavy weight motorcycle market, which we define as all motorcycles with an engine displacement greater than 650 cubic centimeters.

After a difficult spring plagued by poor weather throughout the United States, the industry is clearly rebounding from a weak first quarter.

Our dealers’ retail sales are up 14% for the quarter, and their inventories are down as we continue to drive excitement in the motorcycle market.

In our international markets, we're further encouraged by performance of both Europe and Japan.

A 2.4 increase in Europe, strengthened across the region, and a 7.6% gain in Japan through June.

Summing up the retail situation around the world, industry is flat in the U.S. and down slightly in Europe and Japan while Harley-Davidson retail sales are up in all major markets.

Our hundredth anniversary global birthday party is still underway.

In June, we took the open-road tour to Barcelona with tens of thousands of motorcycle enthusiasts and the general public joined in the celebration.

By any measure, the hundredth anniversary so far has been a huge success.

Two days, over 300,000 people have attended our open-road tour events.

Another measure of success of our outreach to potential customers is our multimedia exposure with 850 million media impressions.

Put this in perspective: This is more than twice the number we reached during the entire 95th anniversary, and we haven't begun the cross-country rides home in August and the big celebration in Milwaukee.

Let me give some comments on the [Indiscernible] Over 6,000 dealers and dealer staff from all our dealerships from around the world have traveled to Las Vegas this week to attend our annual new model announcement meeting.

Our dealers are really pumped up about what they have seen at the meeting.

They recognize in addition to the completely redesigned sportster family, we have left no model untouched in the 2004 model-year lineup.

We have unveiled eight new or completely redesigned Harley-Davidson and Beull motorcycles.

Over 900 new parts and accessories and announced the host of a new motor closed products.

In total, this is the biggest new product launch in the company's history.

Now, I would like to give you perspective on the operations for the second half of 2003.

In a press release from July 14 in today's financial release, we refer to our completely redesigned sportster family.

While I'm not going to give -- going to discuss specific changes, I can tell you that our dealers are excited, as we are, about these models.

Sportster family has been in production for nearly 50 years and serves as an important role in our product strategy.

As we stated in the release, we believe the significant -- significance of the changes will continue to be a very, very important in bringing new and younger customers into the Harley-Davidson family.

As a result, you will see an increase in the percentage of sportsters produced in the back half of the year that will carry over into 2004.

Once production of the new sportster motorcycle has stabilized, we anticipate that the sportster production will account for more than 20% of the total motorcycles produced.

This will have an impact on gross margin in the fourth quarter and going forward.

Although our motorcycle prices will not be available until the end of August, I can tell you that the average revenue per unit for a model year '04 motorcycle will be slightly lower than the model year '03 motorcycles.

This is primarily due to changes in product mix and elimination of special features and pricing associated with our hundredth anniversary motorcycles.

Additional revenue and margin benefit from the hundredth anniversary P&A general merchandise also were on a peer in the third and fourth quarters.

And lastly in the third and fourth quarters, we'll be ramping up a new plant in Pennsylvania and we'll experience startup costs, as well as production inefficiencies.

All of this is a saying that many things have lined up positively in the first half to result in it 33.6% gross margin.

And many of these benefits won't be repeated in the second half of 2003.

Now, before I move into the question-and-answer portion of the call, I would like to address a few comments that we have been hearing these last few months.

First topic will be dealer inventories.

The fact is dealer inventories are down through the first six months of this year.

In the second quarter, they're down over 11,000 units and down approximately 2,000 units since the end of 2002.

Another topic a concern about demand for V-Rods and sportsters.

In the first 18 months of retail sales -- --I've got interference on this call.

I'll start over.

Another topic is a concern about demand for V-Rods and sportsters.

In the first 18 months of retail sales, our dealers retailed more V-Rod motorcycles than the Fat Boy, Dina, Heritage Softail Classic or Road King motorcycles during their first 18 months.

And today, these models are among our best selling and most popular models.

There were some extreme pricing payments being paid when the V-Rod was first introduced.

The reality is the V-Rod motorcycle retail pricing is now starting to stabilize as this product defines its niche in the marketplace.

Then there were comments on sportster motorcycles.

Sportster motorcycles have always been a more seasonal product.

The fact that we ran promotions doesn't indicate the demand for sportsters is soft.

The reality is that we have been preparing for the introduction of the now redesigned sportster motorcycles, and we're helping our dealers reduced inventories anticipation of these new products.

The topic that also received media attention was the issue of 0% financing on V-Rods.

There have been no company 0% financing for any of our products this year.

We have a no down payment or sometimes called zero down payment program for qualified customers.

This program was designed to create more traffic and bring customers into the dealership, and we believe it was successful.

In closing, well actually -- to end my comments, I would like to state that we're pleased with the strong financial results in our second quarter.

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

I would now like to open this phone for some questions.

Thank you, Ladies and gentlemen, the floor is now open for your questions and comments.

If you have a question or comment, please press the numbers 1 followed by 4 on your touch-tone telephone at this time.

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

Questions will be taken in the order received.

We do ask all participants to please remove the handset for optimal sound quality.

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

Please go ahead, sir.

Morning, Jim.

Congratulations.

Thank you, David.

Would you comment on the new model in the VRSC family, whatever details you can provide and also, you know, the timing of the initial production there, would that affect production plans for the V-Rod.

On the -- our new model announcement meeting we have held this week, we showed the dealers the models, but we're not introducing any of the models to the public until late August.

So other than the press information, the -- there is no more information that we're giving out.

As for -- we're not going to comment on the timing of productions that newer model did have some impact on our second quarter sales of V-Rods.

As we're anticipating the new models are.

Another issue, your model year is ending two months later than usual this year.

What impact do you think that has had or could have on retail activity at the dealer level and is that having any impact on the allocation of bonus bikes?

As we mentioned in the press release year-to-date, we have had an outstanding retail season.

In fact, retail inventories are going down.

We do have, as you mentioned, 14 months model year which will go through July and August.

And that has a great impact as we watched the retail sales because typically we will not be shipping out new models until August from the dealers we will be working on, you know, minimal inventory in the month of July.

Now, they have current-year production, hundredth anniversary models that they will be able to retail in July and August and give them some strong retail months.

I won't comment on the allocation of motorcycles.

There is -- we have allowed, made some allowances in the allocation formula for the differences in this model year so it's not adversely affecting our dealer's allocation.

Thank you.

You're welcome.

Thank you, your next question can is coming from Tim Conder of A.G.

Edwards & Sons, Inc..

Please go ahead, sir.

Thank you and congratulations, Jim and crew.

Thank you, Tim.

Appreciate it.

A couple of items here, Jim.

As it relates to the York plant ramp-up, would you term that ramp-up on, plan ahead of schedule, behind plan, and once you do get that going, maybe sort of comment on the types of efficiencies you anticipate having the two separate lines.

That's question number one.

Question number two is gross margin.

Do you anticipate that being up collectively on a year-over-year basis?

Okay, the York plant ramp-up is on schedule.

Our current schedule, I mean the reality is that we have moved up the York plant build -- Originally several years ago, we had that scheduled for 2004, and now we're putting it up and running in 2003, so in that term from where it was originally conceived as ahead of schedule.

From where we have been giving guidance for the streets, for the last four quarters we have not changed our guidance for the second half of 2003 because our York plant addition has been on schedule, remains on schedule and we're quite confident in that.

Though it's very complex as we mentioned in this -- my commentary, we'll be transitioning hundreds of employees and retraining with new processes, but we're on schedule.

Pipes and efficiencies, when you split the plants, you take some of the complexity out, and one plant can focus on touring bicycles, one plant can focus on softails.

When you take complexity out, redo it, you increase the quality and reduce costs.

I won't go into the specifics.

There are new processes there also. , I don't know if I answered all your questions.

Yeah, but I guess it's fair to say that as that ramps, then you should get some decent margin pickup from that.

Over time, there is no time we have -- no doubt we have designed the plants to get the efficiencies.

The last comment was on gross profit, year-over-year, 2000, although we actually work for the whole income statement, our gross margin for 2003 will be better than 2002 on a total-year basis.

Okay, and finally, Jim, one last question.

Given the rather paltry dividend that you guys pay, and the build in cash and evidently over the last several years, no big use for it other than share repurchase and Cap Ex, but cash continues to build.

Any thoughts about acceleration of the dividend rate?

We continue to look at the environment, our cash -- point out both the press release and my commentary has grown.

Everybody can measure the dividend in their own way so -- but I mean we will continue to look at the environment in terms of all aspects of use of cash and make those evaluations as a goal.

But as we said all along, we'll continue to invest in the business, grow the business organically, and we have the other opportunities of repurchasing stock and dividends.

There has been no change.

If there is a change we will certainly announce it.

Great.

Thank you.

Thank you, your next question is coming from Felicia Kantor of Lehman Brothers.

Please go ahead.

Good morning, guys.

Good quarter.

Morning.

Thank you.

I have a couple of questions for you.

Just quickly touching on the mix you mentioned with the softails that was going to be a temporary change.

Just making sure or just confirming that was just for the third quarter.

And then I'm also wondering with the sportsters becoming a larger part of the mix, you know, what is the -- once the softails return to more normalized part what, other lines expense will that be.

And then finally, you guys have been meeting with many dealers this week, I'm wondering what they're saying about their markets, if they have any concerns?

Obviously your business is solid, but I wanted to see if anybody is saying anything specific about their markets.

And then your comments about the strength of the V-Rod.

In our surveys, we've got the latest that is seen in some markets, but definitely acknowledging there are some dealers out there who are having challenges for whatever reason.

And I'm wondering if you're working at all those dealers, perhaps in terms of educating them, how to reach out to, perhaps, different markets so their sales will be more robust as well.

You know, I mentioned in the conference call here that softails as we ramp down the old line and we start to ramp-up the new line, this is really no different than what we did in Kansas City in 1998.

The total mix does come -- a portion of softails, excuse me, a portion of softails does come down in the third quarter.

This should be back to normal fourth quarter or in the fourth quarter.

I guess I didn't understand on the -- you're talking about the lines.

Well, if the sportster, so with the softails being more normalized percentage or returning back, just a blip when your plant opens, and then with your sportsters becoming closer to 20% of the mix, obviously you have the touring bikes and the V-Rod, something has to be adjusted.

I'm wondering what that would be.

The sportsters, as mentioned, will, you know, will approach -- will go to the low 20% mix over time.

Back to kind of a historical level.

That will come out of kind of a blended mix across all the product lines.

Obviously, it all adds up to 100% at the end of the day, but there is no one specific line we're taking that out of.

You asked about the dealers as, as I commented and I probably didn't emphasize it enough, the dealers are really pumped.

I mean they're having a great year.

They're excited about the new products.

As for their market, again, they're in great position for the next several months and they have logged the new parts coming up.

I didn't catch the last question talking about education or whatever.

Well, just, you mean, you mentioned and you should talked -- had talked about the V-Rod and how strong it is, and clearly we're seeing that at a lot of dealers.

But there are dealers who are expressing some concerns and I'm wondering with our assessment, and this is our assessment, that perhaps they're not reaching out to their target markets like the other dealers who are more successful are, and I'm wondering if you're working with these guys.

You have pretty extensive Harley-Davidson university and some other things, if you're working with these guys to help improve their sales there.

There is no doubt the V-Rod is certainly a new product in every which way, a new product, still Harley-Davidson.

Many dealers have been extremely successful.

We're no longer getting the -- many of the dealers are no longer getting the extreme premiums that were being charged last year when it was short supply.

There is a lot of knowledge sharing that goes on at these dealer meetings in terms of what it takes to be successful in a market and what it takes to be -- to get new customers in, so that's another reason why these are so powerful, these meetings.

And with the new V-Rod, new member of the V-Rod family, are V-Rod's still, can we see they're going to still be 5 to 7% of the mix?

Yes, that's not going to change.

Okay.

Thank you.

Thank you, our next question is coming from Tony Gikas of U.S.

Bancorp Piper Jaffray.

Please go ahead.

My congratulations as well, guys.

A couple of questions.

You talked about the eight new motorcycle introductions.

How does that break down between the lines?

Is there an elimination of any models sort of, what's the net new bike at for the year, and then secondly, just as you're talking to the dealers this year in retrospect was the 14-month anniversary year, you know, too long and were the colors and varieties of bikes and colors in line with your expectations.

And then sort of an add-on to that, could you characterize what you believe the pent up demand for the 2004 models might be at this point.

On the new models and, again, until we introduce to the public we're going to be rather vague.

We did come out with two new Beull models, the 1200 series.

Those were two initial adds.

Other than that, sportsters were redesigned.

So, not going to give anymore flavor to that.

I think that kind of puts it in perspective.

There is no elimination of any lines or anything.

On 14-month celebration, 14-month model year, which was coordinated with the 14-month celebration and having the model year go right up until our big celebration across country rides to Milwaukee.

That is a long period of time, but we have got some great media exposure for 14 months, building demand for the future years.

Colors, colors were limited for their model year, but we're trying to, again, have a way to meet the demand for special 100th anniversary products.

We look at 2004, again.

Great excitement about the -- all the models still.

Virtually every model was and the sport -- redone, and the sportster line completely redone.

As always, we assume with the current demand with our pricing there are still premiums being charged in the current model year and used by prices being very strong, that we still have great demand for current model year, and it's actually going to accelerate with the demand we created this year with our exciting 2004 models.

Okay, thank you.

You're welcome.

Let me break in for a second.

In response to a, I think it was Tim Conder's question about gross margin, I want to make this perfectly clear. 2003 margins will be better total year than 2002 margin and it says I said here, I made reference to 2004.

If I did, I did not mean to.

Again, my comparison was 2003 to 2002.

Next question.

Thank you, our next question is coming from Carole Buyers of RBC Capital Markets.

Please go ahead.

Hi, good afternoon and congratulations.

Thank you, Carole.

Am I assuming -- am I assuming you'll comment on '04 guidance next quarter?

That is pretty safe.

What dictates our guidances, we need to announce the products to our customers and provide prices to our dealers, which we have not yet, and once we do that, it's our practice then to give guidance on the next model year.

Got it just to get clarity on the dealer inventory, you mentioned units were down 2000 since '02, 2000.

Since December of '02.

Help me understand this.

If the first six months, production's up 12%, and retail growth is 6% is it fair to assume that just the latter part of the year, demand was outshipping production?

Is that why that's the case?

Well, number one, you know, in a short period of time, whether we're measuring months, quarters, six months, whatever the case, we're measuring two different basis.

Okay.

You can see that a better than 6% increase in retail sales greatly was -- was greater than the number of wholesale shipments, which were actually in the U.S., up 14%.

But it's two different bases.

There is a timing of retail sales does not coincide with the timing of wholesale sales.

So we're putting a percent on it.

Now, obviously, on a total-year basis it does change.

But on a six-month basis, we're comparing apples and oranges.

Inventories, year-over-year, if you have the same turn rate on your motorcycle -- on your dealer inventories and units go up, your inventories will always go up year-over-year.

But, you know, in a small month.

Okay.

And then just one final question, just pricing trends at retail, both in the new-and-used market.

Can you make any comments on what is happening there recently?

We always compare the seasonality in any pricing, and we compare this current period of time with the same period of time last year.

We see no significant difference with the exception of V-Rods.

V-Rods had a big premium place on them than last year.

And at the same period of time -- and just for a time I have -- premiums are much less.

The pricing is more normal as I mentioned in the conference call.

You're talking about the V-Rods.

Yes, the rest of the pricing as we said, there is -- I got interrupted.

I'm at a hotel here and somebody came in the door.

I apologize.

That's okay.

So I lost my train of thought.

On the rest of the models, we have very comparable pricing on new and used motorcycles.

This year.

Last year, there has not been a significant change.

When you were at the deal -- when you were at the dealer show talking with dealers, are you seeing -- if you looked at the base of dealers today and looked at who is selling at MSRP, versus who is selling at market, what is the mix like today, and has that changed?

Could you repeat that.

Sorry.

That's okay.

If -- and you may not have an exact number, but more of a general sense of the mix between an MSRP dealer versus a premium dealer.

What is the breakdown of your current dealership in the U.S. today?

That's always an impossible one.

I mean --

Or are there general trends changing, or are dealers saying they're becoming more of an MSRP dealer, are they becoming a premium-price dealer, what is the direction of the trends within the dealerships.

I would say that, you know, it's not go -- there's not been a big directional change there.

If anything, there may be slightly more MSRP dealers.

But the reality is the definition of MSRP.

It's easy when one talks about an absolute dollar amount.

But when you start talking about adding additional accessories or adjusting the trade-in value that is coming in, suggesting that your MSRP dealer and actually what you have done is adjusted the trade-in value, it's very hard -- in fact, it's impossible to track that.

Right.

So this is kind of a gut check.

It's -- there hasn't been a big change, directionally maybe a few more MSRP dealers.

Thanks, Jim.

You're welcome.

Thank you, our next question is coming from Michael Millman of Salomon Smith Barney.

Please go ahead.

Thank you.

Jim, could you give us some idea of -- on dealer sales the sales made to previous Harley owners to -- coming off competition and new buyers and show us -- give us the difference between Harley bikes generally, the V-Rod and what your goal for this distribution for the V-Rod is.

Mike, we do not have, you know, current data this year for that, but we do have about 15 years of data as we track this after each year.

And very consistently our existing customers typically make up 50% of our sales and our sales people new to the franchise, that could be either off of competition, competitive miles or just new to the sport that makes up dealer 50%.

That's been consistent for 50 -- for 15 years.

Don't anticipate that changing a lot, or if any at all.

We don't have the data for all three and, therefore, -- and certainly not model-by-model basis.

So you see that same 50/50 for the V-Rod, that's your goal?

I can say that for last year, or over time, we expected the V-Rod will bring in more new people to Harley as a percent versus existing.

Is that differ -- you see that differing in the U.S. versus international?

International, I don't know if we have that tracking.

I can say that the V-Rod has been our best-selling motorcycle last year in Europe.

And it appears it's going to be that way also this year.

So it's been very, very successful and exciting.

I just don't know what the tracking is or if we have the tracking on existing customers versus new to Harley-Davidson.

That's something that we can get from you?

We will follow up on it, Mike.

Great.

Thank you, Jim.

You're welcome.

Thank you, our next question is coming from Robin Farley of UBS Warburg.

Please go ahead.

Great, thanks.

I have a question here clarifying inventory.

You mentioned in the release the second quarter shipments were up -- or sales were up more than shipments, but seasonally, that's always the case, right?

The second quarter is the biggest quarter of the year for seasonal reasons at the consumer level.

But, I guess the confusion is when you look in the quarter at -- your shipments growing 18%, retail sales growing 14 and also year-to-date, your shipments growing 14% but retail sales only up 6%.

The question, I guess, is not what is inventory now relative to December 30, because seasonally, it would almost be impossible for that to be higher, but inventory versus last year.

Can you estimate the increase on the dealer inventory versus last year?

Inventory -- we don't count on inventory from the dealers.

I can tell you that dealer inventories this time at the end of June are higher than last year, but as mentioned earlier in the conference call, we have -- the first time ever, we have the current-year model year that goes on past June, exists for July and August.

Any other year, July there would be no new products going to the dealerships and they would be selling off of their inventories.

Right now, we have a current supply that we need to furnish to the customers for the next two months of the current model year.

So that has to be higher.

That was higher by plan, not a good comparison.

It's higher, we expect it to be higher, in-line with our expectations.

What kind of pickup in sales at the retail level do you think you need to see in July and August to clear the inventory that is there now?

We don't give a forecast to that but as mentioned, not only do we have higher inventories, our expectations will be for a higher retail sales than prior years, especially in July.

Not so much a forecast, but literally you're knowing what your inventories are right now.

Well, actually, I guess you won't give it.

The other question I wanted to clarify is are you still offering the 0% down payment through the finance arm on the V-Rod.

Is that offer still going on now?

The program refers to is 0 down or no down payment on V-Rods.

Again, that was to track some customers.

No, that's not being offered right now.

Thank you.

Any further questions?

Thank you, our next question is coming from Dean Gianoukos of J.P. Morgan.

Please go ahead.

Hi, two questions.

When we look at the sportster, you have decreased that as a percentage of total bike units for five years in a row.

Now you're deciding to move it up.

Can you talk about why you did that?

Secondly, we have talked a lot about weather this year, and weather has never come up in the past.

Why do you think weather was so much more of an important factor this year?

Obviously the weather is bad, but the weather's been bad in the past, too, and you hadn't seen an impact.

You can tell us why you think weather was more of an issue this year than in the past.

Thank you.

As we grow our volumes, we're factory constrained and the factories are the ones who have dictated the production.

Also, as we have added new models that has an impact on our mix, especially in the past 18 months when is we added the V-Rod.

We add the V-Rod as a whole new family with implications on total mix and total.

We did not question family-by-family and focused on sportsters but the reality is the V-Rod had impact on all of those, including the sportsters.

Sportsters have come down as we go on our volumes, based on the capability over factories.

On weather, yes.

I mean no one likes to point at weather, but when you look at last year when winter virtually ended at the end of January and we had a spike of over 20% increase in retail sales, you compare it to 2003 or -- weather significantly impacted the United States and particularly some regions, which we had looked at state-by-state and looked at weather maps, records, against those weather maps and also versus plus/minus changes in a retail sales.

There was a close correlation.

There has to be some kind of explanation on retail sales being virtually flat with the prior year, so we looked at the big year last year and this year, 100th anniversary, it was logical.

I think that as we mentioned in our previous conference calls that we're confident the dealer is confident that spring would come.

I think it does prove that weather is a factor.

We also talked to the dealers, and virtually when weather bad, it's raining and snowing outside, people aren't picking up their motorcycles, so we think that that was a very good reason.

You are right, weather changes, but we have -- we had a consistent pattern favorable last year but not favorable this year.

Okay, thanks.

Good quarter.

Thank you.

Thank you, our next question is coming from Joe Yurman of Bear Stearns.

Please go ahead.

Nice job, guys.

Thanks a lot, Joe.

A lot of my questions have been answered.

But a couple I still have.

The Beull blast in terms of the number of units that was down pretty significantly on a year-over-year basis, and I'm not sure that you'll comment on this, but in a revamped sportster line, it -- is there any -- can we assume there could be some kind of entry level product, a single cylinder product in this new sportster family, maybe to replace the blast.

My second question is in terms of the open road tour kickoff kind of internationally, I was wondering if you could comment on the impact that that's had in some of the markets and in Sidney, Tokyo, and Barcelona on a year-over-year basis.

And then I want to make sure I heard you correct on the pricing for the '04s, Jim, that -- I guess ASPs will be down versus the anniversary year.

And housekeeping questions, sorry for all of these questions here, but in terms of inventory and the balance sheet as of the end of the second quarter, is there any prebuild of the '04 model year in that number and then finally, just a breakout of the accounts payable and accrued expenses?

Okay, see if I can look at these.

Beull blast.

You know, we don't -- Beull blast is a very small part of the business.

Beull by itself is only 2%.

When you start getting into the Beull blast obviously you're not going to put that in the press release.

There was a supplier problem that we did have during the second quarter, which attributed greatly to reduction in blasts.

More specifically, when you asked about future products, we don't comment on future products.

I can say that the blast peels and is for the entry-level customer, particularly to learn to buy.

Yeah.

The sportsters in the entry-level customer into the family of Harley-Davidson, so they're different than different customers.

As for Europe, I mean, we'll start with the U.S. and ORTs and everything else.

Pretty much have sold all the motorcycles for the hundredth anniversary, so I mean we're creating demand for next year in the ORT in the U.S.

In Europe, it may be a little different, and we're, you know, showing some very good results in both Europe and Japan, and we had an open-road tour event in Barcelona and Japan.

Japan was in April, and I think that would have an impact.

Barcelona just happened a couple of weeks ago, and I would be hard pressed to say that would have any impact.

We also had an event in July in Hamburg, Germany, but those things, you know, Hamburg hasn't happened yet and Barcelona just happened.

I think it created some great awareness but I don't think it sold any bikes.

And on every selling pressure, we talked about the combination of taking the premium off the hundredth anniversary -- I mean, background.

I mean with the hundredth anniversary bikes, our customers knew and expected there would be an extra premium placed on those.

Right.

Likewise, as we go to '04, we get out of the hundredth anniversary, the customers would expect that that premium to go away, why we're pulling that out.

If you combine that with changes in mix that we talked about, more specifically, greater percentage of sportsters, and the average selling price will not be as high as what it was in the '03 model year.

Okay.

Just a quick follow-up, Jim, I'm sorry.

Another question here.

For those of us who have the job of kind of filing quarterly, should we think a sportster as a percentage of the mix kind of like it was in '01, 21% and going forward, you know, do you see it as a number as it was in 1998, '99, when it was 23, 24%.

We're going start out, and it takes a lot to increase it even a percent.

Yeah.

We'll be in the very low 20s.

So it would be a while before we could get up to 24%.

So, when you're looking at something more recent, it's the low 20s.

Okay, thanks a lot.

And then, you had comment on the inventory and the balance sheet.

Yeah.

There is no '04s in the balance sheet.

And a split between accounts payable and liabilities, you could call in later on, we could get that for you.

Great, thanks a lot.

You're welcome.

We have time for one more question.

If there is any.

Thank you, our next and final question is coming from Bill Lerner of Prudential.

Thank you, sir.

What is your comfort level for HDFS bank as a percentage of total operating income?

I think it came in around 14.5% this quarter, a little bit higher than recent quarters.

Additionally, are there any costs to take out of HDFS.

Thanks.

Any finance business works on volume.

There is always efficiency with the gain, through information systems.

HDFS, as a percent of income, has benefited, I mean, HDFS benefited from the declining industry and environment and going forward, that's going to be more stable.

We have indicated in the press release that our expectations for HDFS for the total year would be a 40% or approximately 40% growth rate and, therefore, it would indicate that the back half of the year, certainly my finance goals, as much as the front half of the year.

That's going forward.

Therefore, I don't see that HDFS, you know, if it's going to stay in the low teens as a percent of total operating income.

Thanks a lot.

You're welcome.

I think we're going to wrap up now.

We're at 9:00 at the end of the call;

I want to thank you for your time this morning.

Remember that a taped replay of the conference call can be heard at 973-341-3080 until July 24th or by accessing it on our website.

If you have questions, contact investor relations, Pat Davidsson at 414-343-8002.

Thanks again and have a great day.

Thank you, Ladies and gentlemen this does conclude the Harley-Davidson teleconference.

You may disconnect your lines and have a wonderful day.