Harley-Davidson Inc (HOG) 2003 Q3 法說會逐字稿

Good morning and welcome to the Harley-Davidson quarterly 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 introduce your host for today's call, Mr. James Ziemer.

Sir, you may begin.

Thank you.

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

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

Please dial 973-341-3080 and enter the pin number, 4186426 and the pound sign.

The recording will be available through October 22.

The results are being webcast live on our website at www.harley-davidson.com.

The web cast will be available for replay throughout the next several weeks, before being archived on our Investor Relations portion of our website.

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

This call will include forward-looking statements that are subject to risks.

It 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 information in this call.

Now, let me start the call.

In the press release, Jeff Bleustein, our Chairman and CEO, told you our goal was to ship 67,500 motorcycles and we're proud to have accomplished this.

In fact, we also equalled last year's third quarter revenue of 1.1 billion and last year was up 32% over the prior year.

We did all of this in a quarter in which we introduced a completely redesigned Sportster family, and the rest of our new 2004 models.

We started up our new factory in York, Pennsylvania.

We overcame the temporary effects of hurricane Isabel and we celebrated with our customers and the world during our 100th Anniversary celebration.

Furthermore, our U.S. dealer network retailed more motorcycles in this quarter than in any other quarter in our history.

In the quarter, our U.S. dealers retailed nearly 67,000 motorcycles, a 27.6% increase over the year ago quarter.

I'll spend a few minutes discussing some of the highlights of the quarter before I take questions.

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

Revenue for Harley-Davidson motorcycles was 844.3 million.

This resulted in a 1.4% increase in the average revenue per unit for Harley-Davidson motorcycles in the third quarter compared with last year.

The primary driver of this increase was favorable foreign exchange of nearly 10 million dollars.

After adjusting for this, the average selling price is flat on a year-over-year basis.

Due to the extended model year of '03's only 25% of the quarter shipments were model year '04's, which are priced lower than the anniversary bikes by a little less than 1%.

Let me remind you that we were able to lower our costs with the old floor models when we removed the anniversary cosmetic content.

Turning to P&A, parts and accessories and general merchandise.

Our third quarter 2003 parts and accessories and general merchandise revenues have a tough comparison with strong anniversary revenues in 2002.

Parts and accessories revenue in the third quarter of 2003 was up 4.3%, with revenue of 207.8 million above 2002's revenue, which was up 32% versus 2001.

After removing $21 million, 21.3 million, in anniversary revenue from last year's third quarter, P&A grows at 15.8%.

General merchandise revenue for the third quarter, 2003, is 16.5 million, down 27.2 million compared to last year's third quarter.

Last year's third quarter was up 88.5% versus 2001.

Excluding the $35 million in revenue related to the 100th Anniversary products last year, general merchandise was up 3.5% compared to this quarter, compared to last year.

Moving on to Buell motorcycles.

We shipped 2,481 Buell motorcycles in the third quarter of 2003, compared to 3,173 in 2002.

Most of the 2003 shipments were the XB series sport motorcycles.

There was a significant mix shift in XB twins in the third quarter.

A supplier issues kept Buell from producing a greater number of single cylinder Blast Motorcycles.

Looking at margins, gross margin was 35.6% compared to last year's 34.9%.

The higher gross margin was driven primarily by the 10 million in foreign exchange I'd mentioned earlier.

Although there are many shifts in motorcycle family mix, the net result had very little impact on margins, same is true for location mix.

Moving on.

Operating margin for the motorcycle segment in this quarter was 21.3% compared to 19.6% in 2002.

The increase was driven by a combination of improved gross margin and a decrease in operating expenses in the quarter, compared with last year's third quarter operating expenses.

Spending for the 100th Anniversary open road tour, and other activities associated with the 100th, was heavy in the third quarter of 2002.

In fact, driving operating expenses to be 15.4% of revenue last year.

All in all there were a lot of 100th Anniversary activities in the third quarter of '03.

The expenses of these activities were offset by ticket sales, sponsorships, royalties and other revenue-generating activities.

Therefore, 100th Anniversary activities in the third quarter of '03 had no impact on operating expenses.

Now, turning to our financial services segment.

Harley-Davidson Financial Services [INAUDIBLE] another great quarter, operating income of 46.2 million up 56% over last year's third quarter.

HDFS benefited significantly from strong loan originations, outstanding execution of the third quarter securitization and the lower interest rate environment.

Size of the securitization in the third quarter of 2003 was larger than in the third quarter of 2002.

In fact, it was $475 million versus $390 million in the prior year and the percentage gain on a securitization was a little better, at 4.6% this year, versus 4.36% last year.

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

Thus, we'll be going to market in October with the securitization of about 300 million and we expect that gain will be in the range of 3-4%.

Some additional highlights for HDFS.

HDFS retail market share, which we defined as percent of total new Harley-Davidson motorcycles sold in the U.S., they're financed based HDFS grew a little bit above its historical mid 30% range and is in the upper 30% range for all new Harley-Davidson sold in the U.S.

At the end of the third quarter, retail delinguencies on a managed basis, find it's greater in 30 day delinquent, 3.93% compared to 3.88 the same time last year.

Both these numbers are in the range of our historical experience.

Annualized credit losses on a managed performance basis were slightly up at 73 basis points versus 68 bases points last year in a difficult economy.

Losses remain manageable for three primary reasons.

First, we continue to benefit from strong credit quality in the portfolio, as about 50% of the borrowers are A-credits.

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

And, there is also the continued emphasis on collection efforts.

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

Being of the year, we said that we were confident losses would remain at below 100 basis points for 2003.

Based on the strength of the motorcycle market and a stable interest rate environment, we're expecting that HDFS operating income will grow approximately 55% for the total year 2003.

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

Looking at the balance street and cash flow statement.

We finished the quarter with nearly 1.4 billion in cash and marketable securities on hand, up from $847 million in a year ago quarter.

Additionally, total finance receivables are up 5.1% since 12-31-02.

Company inventories are down 3% for the year in 2002.

This is an outstanding performance relative to a 13% increase in year-to-date revenues.

Capital expenditures were $124.4 million through nine months.

We are updating our guidance and capital spending for 2003 to be approximately $250 million.

Our expectations for 2004 capital expending are in the range of $270 to $300 million.

Depreciation expense was $146 million for the first 9 months and we're still expecting depreciation to be approximately 200 million in 2003.

Our target and shipment for the quarter, 67,500 Harley-Davidson motorcycles and we achieve that.

This quarter presented some unusual challenges, but our employees and suppliers did a great job in the launch of the new motorcycles and the new factory in York, Pennsylvania.

As you read in the press release we raised our 2003 target to 291,000 units which is 10.4% increase for the full year 2003.

This means our goal is to ship 77,000 units in the fourth quarter which will be a record for any quarter in our history.

To achieve our plan includes additional overtime in the factories during the fourth quarter.

We're also establishing a goal of 317,000 Harley-Davidson motorcycles for 2004.

This breaks down into 74,000 units for the first quarter, 82,000 units for the second quarter, and 161,000 units for the back half of the year.

Turning to retail data.

I like to review the heavy weight motorcycle market which we define as all motorcycles with an ended displacement greater than 650 cubic centimeters.

In the last conference call we said that Harley-Davidson retail sales in the third quarter would be strong because of the extended 2003 model year, and continued strong demand for our 100th Anniversary motorcycle model.

In fact, our U.S. retail sales were up 27.6%, while the dealers in Europe experienced a 23% increase and our dealers in Japan achieved a 22% increase during the third quarter.

Compared to the industry, which is up in the U.S. and down slightly in Europe and Japan, Harley-Davidson retail sales are up in all of these markets.

Now, I'd like to give you some perspective on our operations for the fourth quarter, 2003.

There are many complex dynamics that will effect the fourth quarter performance.

Before I discuss them with you, I'd like to make two major points.

First, we expect that the fourth quarter will, again, have record revenue.

This will be driven by shipping a target of 77,000 Harley-Davidson units.

Second, we expect an earnings growth rate of approximately 15% when compared to the fourth quarter of 2002.

Now, let me tell you about the dynamics that we're facing in the fourth quarter.

Sportsters.

As I told you during the second quarter conference call, Sportsters are going to become a greater percent of our motorcycle shipments.

Sportster mix in the fourth quarter will probably be in the low 20s.

Long-term, the mix will return to historical levels of approximately 20 to 25%.

Building this sportster mix is part of our strategy to attract newcomers to the Harley-Davidson family and grow our customer base.

Second, there's a new Softail factory in York.

Our new plant just opened in September and we expect that the learning curve will continue well into 2004, as we gain experience and knowledge with the plant.

The start-up time frame is similar to what we experienced with the start-up of the Kansas City plant back in 1998.

Third, there is the model year change-over.

New model startups at Harley-Davidson typically last at least three months and until this year, they were always contained in the third quarter.

But, because of the extended '03 model year, the '04 model year just began in September, and we'll be working through start-up issues into the 4th quarter.

Fourthly, we got motorcycle pricing.

I like to remind you that the 4th quarter will contain three full months of '04 model year pricing which is slightly lower than the model year '03. '04 model year pricing is due to the elimination of 100th Anniversary content.

Number five.

The anniversary part and accessories and general merchandise.

For the fourth quarter we want to remind you that parts and accessories and general merchandise will not have the benefits of approximately 25 million in 100th Anniversary product revenue that occurred in the fourth quarter of 2002.

Finally, I want to talk about margins.

Third quarter this year benefited from foreign currency exchange.

We don't expect fourth quarter margins to benefit from foreign currency due to the timing of purchase and natural hedges.

So, in summary, for all of the reasons that I've just mentioned, and because of the fact we expect to ship 77,000 motorcycle units, we expect record quarter revenue in the fourth quarter, record fourth quarter earnings and fourth quarter earnings gross of approximately 15%.

Now, let me comment on the 100th Anniversary.

As you may know, Harley-Davidson's 100th Anniversary activities wrapped up during this quarter after a year-long, worldwide celebration spanning four continents.

Because of the design of the centennial celebration was unprecedented and it is very difficult to thoroughly assess and quantify the impact.

There's simply no other comparable mega events of any kind to benchmark anywhere.

On the other hand, we believe the data we amassed and accrued indicates that is we've hit a homerun.

Let me refresh your memory on the business objectives for the 100th.

They were: Number One, to celebrate this once in a lifetime milestone occasion with the Harley-Davidson family and friends.

Two, to reach out to new customers and to raise $5 million for Muscular Dystrophy Association, our long-time partner.

So, how did we do?

Well, in terms of the open road tour events, attended estimates range from 250,000 to 250,000 people.

These are enthusiasts and members of the general public who participated directly in the tour events around the world and were treated to a unique Harley experience.

Number of visitors to the grand finale events in Milwaukee this past August were judged by many to be in that same range, making the total active participation in the entire set of anniversary activities easily in excess of a half million people and in addition, there were tens of thousands of people, who just came to hang out in the cities we visited.

Drawing the ride home routes, just watched the incredible parade in Milwaukee.

All in all we submit to the existing relationships with our customer, with the current rider community and we also sparked the dream of Harley-Davidson ownership in many, many more people for years to come.

Through an extremely successful media relations efforts, we extended experience with the Harley-Davidson 100th Anniversary experience to millions more, in fact, billions.

The medium impressions related to our 95th anniversary only five years earlier, palled by comparison.

In fact, the 100th Anniversary media coverage was triple the 95th, before we even finished the open road tour circuit this past June and by the end of the 200th activities, we clocked 2.6 billion impressions.

So what does that mean?

It means that our messages reached an audience roughly equivalent to 19 times the entire Super Bowl audience.

This is an incredible exposure for the Harley-Davidson brand and our products.

And the frosting on the cake of the 100th Anniversary was the final tally in the Muscular Dystrophy fundraising.

Through the relentless efforts of the Harley-Davidson customers, dealers, employees and suppliers our goal to raise $5 million for MDA became the reality in the form of a check of $7.3 million, a 46% over achievement of our goal.

We are very fortunate.

We've asked ourselves many times, what other company but Harley-Davidson could command such attention and evoke such emotion with the centennial celebration?

The 100th Anniversary, Harley-Davidson was an absolutely unforgettable experience for customers and customers to-be that took brand building, fulfilling dreams and igniting new dreams to new heights.

Let me close by stating that we are pleased with the strong financial results of the third quarter.

They are the results of our driver success, which are exciting new products and services, a strong brand, strong relationships with all of our stakeholders and experienced management team supported by powered employees.

I guess, before I open it up, I have to make two corrections on my commentary.

I said that general merchandise, 100th Anniversary -- excuse me.

Oh, yeah, make a comment on the attendance at the 100th Anniversary was between 250,000 and 300,000 people, I think I might have said 250,000 to 250,000.

The range is 250,000-300,000.

And, also, on general merchandise, when I was commenting on the exclusion of 100th Anniversary products in the quarter, it's 25 million, it's not 35 million.

With those corrections I'll open the conference call up to questions, Stephanie.

Thank you the floor is now open for questions.

If you do have a question, 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 they are received.

And we do ask that while posing your question you please pick up your handset to insure proper sound quality.

Once again if, you do have a question at this time, please press the numbers 1, followed by 4 on your touchtone telephone.

Please hold the line while we poll for questions.

The first question today is coming from Tim Conder of A. G. Edwards.

Sir, please pose your questions.

Thank you.

Jim, congratulations, first of all.

Thanks, Tim.

Couple of questions here.

Related to gross margin, could you just comment, do you believe you'll have quarterly year-over-year progression in gross margins in '04.

And, then, on the York plant, will you be getting production out of that in the fourth quarter and, then, when would you anticipate that being near fully ramped up?

Our goal is backward order.

The York plant right now, for Softails, the new Softail family, is producing all of our Softails.

We've completed the transition.

As I mentioned in the conference call, start up of new plants, whether we look at Kansas City or even the new engine plant in 1998 in Menominee Falls in Wisconsin, it takes a while.

We'll be going through a learning curve that will go into the early parts of next year, it's always hard to predict those things, but there's no doubt it will carry us through '03 and 'well into '04.

As for gross margins we've always talked about that we have many drivers proving our gross margin as we grow our volume, as we continue to get the benefits from the new processes, machineries, also over time, via the new Softail plant.

That's our new processes and machines, and once we get through the learning curve, continue to gain efficiencies, working with our employees on a going forward basis and then again by reaching with our suppliers, that volume will continue to go up with long-term relationship.

Gross margin will continue to grow over time but we don't like to focus just on the gross margin line, we'll continue to grow the bottom line, faster than revenue over time.

Would it be fair to say, though, that we can expect from the year-over-year gross margin progress in the second half of '04 for sure, but what about the first half given mix and the ramp, which, all together, sounds like they're going a little bit better than anticipated.

We're not going to comment on gross margin or parts of -- we did give great detail in the fourth quarter because there were so many dynamics going on.

On the going fourth basis to pick apart the P&L on a quarter by quarter basis we'd rather not.

Again, to answer your question, gross margin will continue to improve and earnings, more importantly, will continue to grow.

Okay.

And, then, lastly, Jim, in '04, could you give us the production days by quarter?

On production days, because we are running into more complexity, we're going to steer away from that.

We feel giving the units actually gives you the answer.

I'll give you a little insight.

York and Kansas City are two assembly 0plants and Kansas City now, at it continues to grow families, number one, Sportsters will grow a little faster than the total unit rate of the whole company, therefore, the mix is going to grow.

More importantly, over time, we've added the V-Rod and dina along with the Sportsters and we now make a larger percent of our total assembly production.

Kansas City has different work days each quarter than York, because of the contract, different contracts for different locations.

Because of different working schedules, we can start coming out with the equivalent days and we'd just rather stay away from that and we think that given the expected shipments gives you much better insight than explaining what's going on on a plant by plant basis.

Okay.

Great, thank you.

You're welcome.

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

Sir, pose your question.

Good morning, Jim.

Could you please comment on new and used by pricing on a year-over-year basis, late in the '03 model year on the new bikes and early stages on the '04's?

New and old bike prices, number one, just on '04 models, we just produced those in September, and they really don't get off to the dealer network until the latter part of September, by the time you get through shipping and everything else, and time the dealers uncreate those, the data is minimal on the '04's.

As for what we see in the market on new bike prices, we're still carrying premiums over MSRP on new bikes in a comparable period this year versus last year and on used bikes, we still seem very strong used bike prices on all of the bikes, two, three, four years back.

There may be if you go far enough back and get in to the evolution of motorcycles 5, 6 years ago they may not have the same strength of the current tweak cam 88's but our bikes have maintained their values many, many years.

In looking forward to Q-4, is TV advertising planned for later this year to help sustain the marketing momentum?

I don't really know what the marketing programs are.

There's no doubt that over the next year, that we will leverage the benefits and the millions, if not billions, of people that we've created these impressions with and continue to bring new people in to the franchise.

As for the specifics, I really don't know the answer to that, but, characteristically we've not done any TV advertising in the fourth quarter.

And then last question on HDFS, could you comment on the current interest rate hedging approach?

Thanks.

Over the last several years, a little background, it was pretty evident that interest rates were declining, we had not, during those period of times, anticipating taking interest rates.

Now we're in an interest rate that's flat to going up to just plain volatile.

We're hedging most of our contracts every couple of weeks, to minimize any exposure that we may have in case interest rates go up.

And, I think that that's going to be a practice for a long period of time now.

I don't see interest rating going any lower.

Thank you and well-done on the quarter.

Thanks a lot, David.

The next question is coming from Carole Buyers of RBC Capital.

Please pose your question.

Hi, good morning, gentlemen.

Just a few questions.

First, I wanted to get clarification on Cap Ex and wondering why does the fourth quarter have a $15 million in CapEx versus the previous quarter and why would you spend more in '04?

That's my first question.

Okay.

Cap Ex.

I mean, questions somewhat related to, we've spent, basically, have of what we've given you guidance on for '03.

We spent about $125 million and we're looking at $250 million for the year.

Characteristically, our capital has come in and some of it is coincident with model year start-ups and that's future model year start-ups as you got to get machines in and test those out.

So, fourth quarters are always high.

We've always got different machines coming in.

There's always engineering -- basically, on a historic basis, 75% of our capital is manufacturing.

The rest is made up of engineering, IS and some other tooling programs for, maybe, parts and accessories.

There's those things that drive that.

I won't go in to specifics.

But, where is York reflected in -- so is York primarily going to be in the fourth quarter?

No, I'd say, not having the detail in front of me, we've paid for, out of the York plant, there always is delay as you prove up machines and processes.

I won't say that we've paid for all of York but we've substantially paid for most of the York facility.

There are always many activities going on as we continue to do other things in all of the plants.

But to answer your question, most of York has been gone through the capital expenditure process.

Okay.

There's a lot of things, again, going forward basis as we continue to grow our capacity in different parts of the business.

There are always capital needs and some of this is timing.

As we had looked at this year, in fact, we had given guidance previously of $275 to $300 million.

Some of that is things that have just timing wise has gone into '04.

So really, if the timing wouldn't have occurred '04 would actually have been down if we would actually spent the $300 million this year.

It's really timing between the years, not so much that '04 is increasing over '03.

Okay.

Then just as a follow-up question, I was wondering if you could give us a sense of production units going into the international market,specifically in Europe and Japan versus growth at retail in those markets?

We haven't changed our allocation between the international domestic markets to a great deal.

Okay.

It's just going to be around 18% or so.

I don't see that changing this year or next year

Okay.

a great deal.

It could change a percent, but that's all I'm talking about.

Okay.

Thanks a lot.

You're welcome.

The next question is coming from Robin Farley of UBS.

Please pose your question.

Thanks.

The first question is can you give us a sense of how much lead time you need if you're going to change your production mix a little bit between, say, Sportsters and Softail or really from any bike family to another.

How much lead time do you need to switch that mix?

The lead time within families, since each family now is based on a separate production line, is something that we have to do, happen, maybe, in the supplier network or maybe on our support department.

Typically, the lead time, I mean, the bottle neck is not assembly, there's always different things we can do on the assembly, although sometimes increasing assembly line or even decreasing it would result in the balancing, but balancing means that you change the work stations and the people involved.

The big thing is in the support department and the suppliers and lead times can go out, sometimes, more than a year and change it.

So, we do have plans on the mix.

Those can change from quarter to quarter.

But, on an annual basis they don't change significantly.

Now mix within a family, as you change the different bikes coming down a one-set line, can change and there's more flexibility in that.

Okay, great.

And, can you, also, I know you said only about 25% of the bikes shipped in the quarter were model year '04, do you have a figure for what the average revenue per bike was just for the model year '04?

And I understand the model year price is down about 1% but the revenue for the bike could be different, depending on the mix a little bit and I'm wondering if you could comment on just the model year '04 that was shipped in the quarter.

The York [INAUDIBLE] could be a change in mix, I really had not looked at the average price by model years, but we could look at that.

If you want to give a follow-up call.

Okay.

But, you did say, for overall, for the quarter the average selling price was flat?

Once you exclude the foreign exchange, exactly.

Okay.

And then last question is, it looks like you have this ongoing supplier issue with the Buell blast.

I was wondering if you could just comment in if that's ongoing today or when that might get resolved?

We don't comment on our suppliers,that those are always sensitive issues.

That current supplier issue is still an issue.

It is a international supplier and, therefore, it's more difficult to deal with it.

But, we see that coming to a head in the near future.

Not necessarily in the fourth quarter, though?

We should resolve that shortly.

All right, thank you.

The next question is coming from Bryan Knoepp of Midwest Research.

Please pose your question.

Thanks, I have a couple that were already asked.

But here's one.

You talked about the model year '04 shipment mix, about 25% of the shipments in the quarter of '04.

Any indication as to what percentage of retail sales were '04, or would it be very minimal since it's the dealers?

It's fairly minimal, Bryan.

As mentioned earlier, that started production after Labor Day, once those get down the line, crated, slipped to the dealer, uncrated, there's not a lot that really are in the retail market.

I don't know the exact number but it's fairly minimal.

Okay.

Can you talk to when York is fully ramped up what level of units would you characterize your capacity being?

Is it just simply the 317,000 units that is your goal for next year, or could it be more than that, could capacity actually be higher than that?

To give you a little background, Bryan, our guidance is always based on trying to give everybody an 80% confidence that we're going to hit or maybe beat those numbers and there's always a 20% chance that we'll miss that number.

That was kind of evidence in this quarter where we're right on our guidance.

So it's not always an exceed.

As we look at everything, and partially in line with the question beforehand, we need to look at all of the biomix whether it's our support areas, paint, chrome, forming gear shaft, whatever the case may be, suppliers, those are all potential bottlenecks.There's many parts that go into a motorcycle, so as you currently look at it, our capacity constraints, we have 80% confidence that 317 for next year is a very good guidance.

As we continue to go through and work with the suppliers and work internally, we'll give updates.

Certainly, no reflection on our demand.

Our demand, especially after the 100th Anniversary, is extremely strong.

So we are talking about looking at our capacity constraints.

Okay.

And last one, could you sort of -can talk sort of in some order of magnitude as to what the launch costs were in the third quarter for York.

Less than $5 million more than $5 million?

Something like that?

Because that we ramped on on the old line and we solely ramped up on the new line and learning curve, those are hard to identify.

But, I can say that you can definitely measure the launch across in the millions of dollars.

I won't get closer, but it's multiple millions, not hundreds of thousands.

So, it's a big number.

Okay.

Great, that's all I had, thank you.

Thanks Bryan.

The next question from Dean Gianoukos of J. P. Morgan.

Please pose your question.

Just a couple .

First, I don't know if I heard you right, did you say, of the bikes sold, you're financing in the high 30%?

That is correct.

So, of the bikes sold in the U.S. through our dealers, of those bikes, in the high 30% range, HDFS is financing those bikes, of the total bikes sold.

So what percentage is it of bikes financed?

And, then, maybe, could you comment, have you guys done any work internally.

And, sort of come up with what you think a ceiling would be and what kind of share is maximum share or how high you think can you go?

Of financing, it is a difficult percent to try to get a handle on.

We can only do it from a gut feeling.

And the reality is when a customer comes in the front door and they have $10,000 in their pocket, we really can't tell if they got that money from a home equity loan or if it was under the mattress.

So, at the end of the day, we feel that, maybe, 70% of the bikes sold in the Harley-Davidson dealerships are financed in some way or form or some extent.

Therefore, it says that we have greater than 50% of the financing that's going on in financing Harley-Davidson motorcycles.

As for what is the potential for that?

We look at automobile companies when they finance their cars and there is no enhancement, just on a going-forward basis, that's typically in the low 40% range.

And, then, we think that, maybe, over time, that could be a target.

But, not next year.

Okay.

And, then, can you talk about what kind of factors you considered when you decided to go with the production growth rate that you did?

Again, it kind of in line with the last question, we're looking at all the capacity constraints, the new model launch.

We're looking at, particularly, bringing up the new Softail family.

We're looking at the capacity constraints, because, I mean, the reality is, 317,000 units, we're not at the current production rate to yield 317,000 units.

It says that we'll be breaking through bottlenecks and those bottlenecks can be either at the supplier.

We have over 700 suppliers.

In fact, more than 50% of the [ INDISCERNIBLE ] gets sold as purchased parts.

And then internally, as we look at many of the support operations as we go through those bottlenecks, how successful when that happens, the timing, getting machines in.

Those are all factors in trying to get us to 80% confidence that we'll deliver that ability to produce.

Again, it is not a demand concern.

We're very confident in demand as evidenced from talking to our dealers from whatever our bikes are sold at, at retail, what new bikes going for, it is extremely evident that we have very strong demand.

So you actually would have grown faster, if you could?

Good question!

I mean, the other constraint is as we balance the whole system, we also look at the dealers, and I should have mentioned that, because, your question was enhanced over the last one.

The dealers have to service the customers.

And we will always look at the dealers as they continue to grow their facilities and service the customers.

When we get a Harley-Davidson customer, there's a 90% repurchase intent, they're going to stay with the family.

So we've got a customer for lifetime.

So not only do you have customers you sold to last year, you got them for life, plus the new customers you're acquiring this year.

The dealers have to have the ability to service those customers through the HOG club, through the service capabilities and their facilities.

We look at that, too.

And, your question, would we increased?

We will always look at that on an on-going basis and ask ourselves the question, with all the factors we balanced together, we're saying that 317 with 80% confidence is a good target.

Okay, thanks.

Good quarter.

Thanks, DEAN.

The next question is coming from Bob Simonson of William Blair.

Please pose your question.

Good morning.

Question on the financing, can you share what the sensitivity of the income could be with a hypothetical 50 or 100 basis point move in interest rates.

And the second parts of that one is, unless I missed it, I don't think you gave, Jim, an outlook or an estimate for financial income percentage change in '04, other than saying, long-term it would be more than the production in a year, which, next year, is going to be up 9% and I have a second question.

Okay.

We hate to talk about hypotheticals but at the same time, if we ignore what happened in the past and interest rates were up 50 basis points.

You can apply that to the new receivable contracts, which we generated so far this year, and the securitization, I talked about it in the fourth quarter, 300 million, all totaled, that would add up with the 1.5 billion in the first part of the year it's 1.8 billion.

You apply 50 bases points to that and you could get an indication of what, if the interest rates would be favorable or unfavorable, magically, the history going forward, what implications that could have.

As for guidance in HDFS, you're correct, we gave guidance for this year, and for the long term, I think that guidance long-term is pretty good.

We've certainly benefited, HDFS has certainly benefited over the last several years from declining interest rates and that has enhanced our spread that we've experienced.

A more normal spread would be in the 3-4% range, rather than the 4 plus range that we experienced in last year, which was much higher than that.

So, I think that looking at a 3 - 4% range, compounded with gaining a little market share, their earnings will grow slightly faster than the unit rate that we've given guidance on for the fourth quarter of next year -- excuse me, for 2004.

I'm sorry.

But it doesn't sound like it would be up in the range of the 20s that you started out with for this year?

Not at all.

I mean, interest rates would have to decline again.

Even if they did, we're not expecting that, we're hedging in on the current rates and, therefore, would not get the benefit, even if the interest rates declined.

So, that's not in the cards.

Okay.

Second question is on V-Rods.

The shipments were down in the third quarter, did those shipments include any of the new models and could you just give us an update on the family?

On the V-Rod family, as you know and as we handed in our announcement in late August, we added one model per family and so now we truly have two members of the family and easier to call it a family.

In the third quarter getting ready for the new model in reduction, we did reduce production down on the V-Rods getting ready for the new model and that also had the impact on nine months year-to-date.

The new model that we came out with, there's some cosmetic difference, it does sell at retail for about a thousand dollars less than the first V-Rods, the A model we came out with, this is the B-model and about a thousand dollars less at retail.

We didn't ship any of those prior to our introduction in September.

Some could have been retailed, but as I mentioned before, fourth quarter retail of '04 models in the third quarter were minimal.

And do you have any new or different marketing plans?

For the V-Rod going forward?

In the near term, next one, two, three quarters.

Number one, V-Rod, just give me a two second commercial.

V-Rod has been our most successful new model introduction ever, in the history of Harley-Davidson.

Last year V-Rods were our number one selling motorcycle in Europe and last year in the U.S. it was like number 5 or number 6 best-selling motorcycles model for Harley-Davidson.

First year out.

We compare to any of our new model introductions, in fact, compared to the Fat Boy, which is, I think, by far the most successful, new model introduction, ever, and we outsold the first year-and-a-half out by a factor of over two over the first year introduction of Fat Boy.

It's been extremely popular and we think it continues to gain in popularity.

In fact, Europe only makes up about 9% of our sales.

In fact, about 30% of our V-Rods go to Europe.

It's extremely popular in Europe.

That popularity continues to gain and gets reinforced with the new V-Rod model.

I think that's quite a bit of promotion as is.

It needs more time in the market to continue to grow, but we're very satisfied with our success at this juncture.

Thank you very much, Jim.

Thanks.

the next question is coming from Bill Lerner of Prudential.

Please pose your question, sir.

Thanks, it's answered.

Thanks, Bill.

The next question is coming from Jay van Cleve of Loomis.

Please pose your questions, sir.

Hi, Jim, I hope to add my congratulations for a nice quarter.

Thanks, Jay.

Fun talking from the buy side rather then the sell side.

My question relates to the production guidance that you talked about, not to beat a dead horse, if I remember correctly in the past, when you had these other plant openings, there were efficiencies and it allowed you to raise that guidance as the year progressed.

What are the milestones and guidelines that you're going to be looking at to gauge what the production will be like as the year goes on, I guess?

What could we look for, or what are you looking for, that would allow you to raise that guidance?

As we look at productions going out, it's going to be not just on the new Softail family, it's on all of the families and motorcycles.

Obviously, the new Softail family is key, because as we look at that, as they continue to go up the learning curve, we will look at our quality measures.

We'll look at our overtime and our cost, but quality is definitely key.

Making sure that, again, as we redesigned a motorcycle or whatever, that quality continues to increase.

We just don't maintain a level, we continue to increase a level.

It's suppliers, it's internal processes, it's quality measures.

We don't report on quality measures so it's something we're going to look at, not something that you're going to be able to see.

As we look at those things, and those happen on an ongoing week in week out basis, we're continuing to review our guidance.

Again, it's also looking at our dealers and their ability to service the customer.

Up to now, we've continued to be capacity constraint and that's the way we look at, but I'm just mentioning that we do look at all our stakeholders and coming together with initial guidance.

Okay.

Great, well, it's good to know that it's not a demand issue.

Thanks.

You're welcome, Jay, thanks.

The next question is coming from Michael Millman of Millman Research.

Please pose your question, sir.

Thank you.

Maybe you could talk a little bit more about the long-term production.

This is the first time that I can recall that you're under 10%, and while you're moving away from daily rates, it's kind of all we have, it does looks like the '04 production on a daily rate for a full year is in line with the fourth quarter production rates so it doesn't seem to be including really any production increase.

Maybe you could also talk a little bit about revenues for '04.

With a lower price, does that suggest that revenues will be, in fact, below the level of shipments?

And then you talked about how demand is extremely strong, were you referring to '04 models in that comment?

Okay on your question on day rates.

Now, obviously, you must have more information than anybody else.

In the conference call I started out saying that in the fourth quarter we're going to work additional overtime to produce the 77,000 units.

You could not take our tradition work days from prior years in the fourth quarter and a divide it into 77,000 units because we're going to work overtime for many different reasons.

If nothing else to supply the dealer network.

Obviously, third quarter because of the new model start-up and because the new plant start-up, our production rate was down.

And, as we ramped down one Softail line, to ramp up the other one, probably the biggest driver of that.

As we try to get units out to the dealer network, our productions, as I mentioned, fourth quarter will be a record quarter for shipments.

That's going to be driven by overtime.

So, you can't just take it historical number of days and come up a day rate.

Can you give us an idea of how much overtime you're talking about?

Pardon?

Can you give us an idea of how much overtime you're talking about?

Right now, that time us going to be dependent on, again, the Softail plant getting up to it's learning curve, to whatever spot in the learning curve that we need to be.

So, to give the, again, to give the number, hours, and/or days, we thought it was just more meaningful to everybody to target units that we're shooting for.

Going on to my long-winded answer, actually to getting to '04, the production rate in '04, and I kind of commented on the last question, last two people ago, that we're not currently at the production rate that it will take us to get to 317,000 units guidance for '04.

We'll be breaking through bottlenecks.

That being said, it means we're not at the production rate in '04, and in fact, our '04 production rates are higher than our fourth quarter '03 on a daily bases.

So I just want to correct that assumption.

You had a question on '04 revenue.

Since the pricing for the '04 model year is less than '0 3's by less than 1%, there are other variables in this equation, there's parts and accessories and general merchandise and, then there's the '05 model year.

And it would be new models and anything else.

So, I would not comment on whether total revenue for '04 calendar year would be increasing faster than the units.

And your question on demand, and my response was, definitely that we're extremely confident in demand.

I mean, we had a fantastic third quarter, retail sales were up 27%.

An all-time high in retail sales volume in the third quarter, in fact dealer turns are higher then they've every been before.

We see that.

Now, again, '04 models, we just had minimal '04's retail.

It's kind of hard to measure that, but we see the same type of pricing pressure on that small sample of units that have gone through so far.

And that is, dealers are pricing, not all dealers, but dealers are market-pricing the '04's.

You say market-pricing, can you explain that a little bit?

Well, good clarification question.

They are charging more than MSRP and when demand exceeds supply, that's typically what happens in any product and you're right it could be construed both ways but in our case demand exceeds supply, that creates a pricing leverage for the dealer to be able to charge, if they're a market-pricer to charge more than MSRP.

The next question is from Anthony Gikas of U.S.

Bancorp Piper Jaffray.

Good morning, guys.

Most of my questions were answered, but maybe a couple of quick ones.

Could you characterize, and make it's early to tell, but the demand for the new Sportsters motorcycles that you're putting at retail right now.

Second question, are there currently any financing incentives through Harley-Davidson Financial Services and then the third question, Harley-Davidson Finance Services in Europe, are they experiencing similar trends as the division in the U.S.?

Maybe you could just characterize those successes with that group.

On the Excel, the only way to really measure that, again, would be from the dealer response and from the magazine write-ups, which are all extremely favorable and the dealers are really pumped to see what we've done with the Sportsters because everybody knows that brings the new customers, historically, 70% of our retail sales on Sportsters are to people that are new to the Harley-Davidson franchise.

And that's a combination of either people that are coming off competitive bikes or customers that are new to motorcycles within the last five years.

Now, Sportsters are a more seasonable product because it's driven by that 70% of the people are combination new to motorcycling and new to the sport.

They won't plan that purchase as much as the typical Harley-Davidson riders, so there's more seasonality to the Sportsters purchases.

But, our response to the dealers and magazines is tremendous.

On H, I'm getting all of these questions, HDFS in Europe.

HDFS just does the wholesale floor planning from the dealers right now, so there's -- I can't comment on retail Europe versus our retail on the U.S.

Your question was on are there any incentives through HDFS.

There are a couple Buell motorcycles, which are support motorcycles, have extreme seasonality.

Typically their selling season is from April to September and it's typical to have some type of promotion on sport performance motorcycles and there're a couple, I can't tell you off the top of my head, but there are some on Buells.

Okay.

Thanks, Jim.

Thanks, and great quarter.

Thank you.

The last question, today, is coming from Joe Yurman of Bear Stearns.

Please pose your question, sir.

Thanks for getting me in under the wire.

Couple of questions.

One, Jim, you guys have a high-class problem, you have over, about a billion foreign cash on the balance sheet and I'm just wondering, with a lot of your owners on the call today, how you think about dividends or how thinking about deploying that capital, as it's not earning it's cost of capital right now.

And secondly, maybe just a strategic question to the extent you could comment.

Are you looking opportunistically at building out the U.S. dealer network given the recent state of Indian.

Thanks.

First question was on cash.

As we mentioned, between cash and marketable securities we have 1.4 billion dollars on the balance sheet at the end of this quarter.

You call it a "high-class problem."

I don't know if it's problem or not, it certainly gives us a lot of flexibility and gives us the ability to continue to invest in the business, organically, as well as capital expenditures.

And the question of dividends, there's no doubt there's been changes in the way that the market may or may not look at dividends, with changes in the taxing and we'll continue to look at that landscape.

End of the day, that's determined by the board of directors to the extent that the market does look at dividends differently, it could have an impact and we will continue to look at that.

And, then, in terms of filling out the U.S. dealer network.

U.S. dealer network has been rather stable, 1986 we had 600 dealers in the U.S., currently, right now, it's a little more than 640 dealers.

So in the last 17 years it's not changed a lot.

The whole U.S. map is already allocated to U.S. dealers.

So we have to do reallocation of territories to add any dealer.

It's a difficult, long process, but we continue to do that.

We do not have trouble getting dealers for the U.S. dealer network.

We have hundreds of people, very well capitalized, highly qualified that would like to be Harley-Davidson dealers.

The fact is because it's such a great business, there's very little turnover.

There's some as people get older and retire but there's not a lot of that.

For augmenting the U.S. dealer network, we continue to do it the same way we've been doing it all along.

We do not have a hard time finding people that want to be dealers at all.

Great.

Thank you.

Thank you, Joe.

Mr. Ziemer, do you have any closing comments?

Thank you, everybody on the phone call, for your time this morning.

Remember that a taped replay of this conference call can be heard at 973-341-3080 until October 22, whereby accessing it on our website.

If you have any questions, please contact Investor Relations, Pat Davidson, 414-343-8002.

Thanks again and have a great day!

Thank you for your participation that does conclude this morning's teleconference, you may disconnect your lines at this time and have a great day.

Thank you.