Harley-Davidson Inc (HOG) 2003 Q4 法說會逐字稿

Good morning ladies and gentlemen.

Welcome to the Harley-Davidson fourth quarter earnings release teleconference.

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

It is now my pleasure to turn the floor over to your host, Mr. Jim Ziemer.

Sir, you may begin.

Thank you, Holly.

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

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

Please dial 973-341-3080 and enter the PIN number 4394322 and the pound key.

The recording will be available through January 28th.

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

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

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

This call will include forward-looking statements that are subject to risks that could cause actual results to be materially different.

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

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

I will begin with the headline of our press announcement.

Harley-Davidson reports record fourth quarter and our 18th consecutive record year.

Clearly, this was a great year for us.

In fact, each of the past 18 years has been better than the last.

We have been successful in growing demand for all of our products and services throughout a wide range of economic conditions over a stretch of years.

Sure, it has not escaped your attention.

Our press release subheading announced an annual goal of 400,000 motorcycles by 2007.

Later on, Jeff Bleustein, our Chairman and Chief Executive Officer, will join us on the conference call to discuss why we are confident this goal is attainable.

But before we talk about the long-range direction we envision, I would like to discuss this past quarter and some of the 2003 highlights.

For the full year 2003, we posted the following -- Harley-Davidson units, 291,147 (ph), up just over 10 percent; revenue of 4.6 billion, up nearly 13 percent; net income, 761 million, up 30 percent; earnings-per-share of $2.50, up 31 percent; free cash flow, nearly $650 million, up 57 percent.

This is great performance.

Now for the fourth quarter.

Harley-Davidson units -- 77,056, up almost 17 percent; revenue, 1.16 billion, up nearly 13 percent; net income, 182 million, up 21 percent and earnings-per-share, 60 cents, up 22 percent.

Let's discuss some of the additional highlights of the quarter, beginning with motorcycles and related products segment.

The 77,056 motorcycles that we shipped in the quarter resulted in motorcycle revenue of 945 million.

And an (ph) average revenue per unit decreased 1.3 (ph) percent for the quarter compared with last year's fourth quarter.

As I told you during third quarter conference call, there were two factors that contributed to this change in revenue per unit; that was motorcycle mix and pricing.

Let me discuss those in a little more detail.

First, increasing the proportion of Sportster motorcycles and the shipment mix is part of our continuing strategy to bring new people into the Harley-Davidson family and grow our customer base.

Actual Sportster mix rose to nearly 22 percent from 19 percent in the year-ago quarter, fourth quarter.

For the longer term, proportion of Sportsters in the mix is expected to be approximately 20-25 percent.

The other significant factor affecting average revenue per unit was pricing.

Wholesale prices were decreased on the '04 model year motorcycles to reflect the elimination of 100th anniversary special features.

This resulted in a year-over-year average price decrease of less than 1 percent.

Turning to P&A and general merchandise.

P&A and general merchandise have tough fourth quarter revenue comparisons with last year.

This comparison was also aided by the strong anniversary revenues in 2002.

P&A revenue in the fourth quarter of 2003 was up 8.5 percent with revenue of 141 million.

After removing the 12.7 million anniversary revenue from last year's fourth quarter, P&A grew at 20.3 percent.

General merchandise revenue for the fourth quarter was 51 million, down 7.4 percent, compared to last year’s fourth quarter.

Excluding the 12.5 million revenue related to the 100th anniversary products last year, general merchandise was up 20 percent last quarter.

Looking at the margins, gross margin was 35.9 percent compared to last year's 36.1 percent.

As we mentioned in the press release, gross margin was negatively impacted by a higher proportion of Sportster shipments and higher manufacturing costs, but positively impacted by favorable foreign currency exchange.

In the third quarter conference call, we went to great lengths to discuss the increasing Sportster mix and the challenges in manufacturing for the fourth quarter of 2003.

We believe manufacturing performed quite well introducing the new '04 models and in managing the startup of the new assembly plant in York, Pennsylvania.

In terms of foreign currency, we had a positive comparison to 2002's fourth quarter of about $9 million.

Moving on, operating margin for the motorcycles segment in this quarter was 21.5 percent compared to 20.7 percent in 2002.

This is basically a result of SG&A not growing as fast as revenue.

Fourth quarter SG&A spending was up only 6.2 percent on revenue, which was up 12.8 percent.

This trend is consistent with the total year 2003 where SG&A was up 6.7 percent and revenue was up 13.0 percent.

Now turning to our financial services segment.

Harley-Davidson Financial Services (indiscernible) another great quarter with operating income 33.8 million, up 33 percent over last year's fourth quarter.

HDFS benefited significantly from continued success in its core businesses of finance and insurance.

HDFS retail market share, which we define as a percent of total new Harley-Davidson motorcycles sold in the U.S. that are financed by HDFS, grew slightly above its historical mid-30s range and is approximately 38 percent for all new Harley-Davidsons sold in the US.

Some additional highlights for HDFS include the following -- size of the securitization in the fourth quarter of 2003 was larger than that of the fourth quarter in 2002.

In fact, it was 300 million versus 210 million in the prior year.

The gain on the securitization was 11.4 million, or 3.8 percent of loans sold during the quarter.

At the end of the fourth quarter, retail delinquencies on a managed basis defined as greater than 30 days delinquent, or 4.57 percent, down compared to 5.14 percent at the same time last year.

These levels are within the range of our historical experience.

Annualized credit losses on a managed portfolio basis were up slightly at 85 basis points versus 72 basis points last year.

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

Some of this confident stems from the fact that our loss rates are well within our historical five-year range of 72-90 basis points for credit losses.

There are three primary reasons we've been able to keep credit losses below 100 basis points.

We continue to benefit from the strong credit quality in the portfolio as about 50 percent of our borrowers are A credits.

We benefit from the strong collateral value of Harley-Davidson motorcycles, and our continued emphasis on collection efforts continues to help.

For the full year, HDFS generated operating income of 168 million, or 61 percent above prior year.

While we are pleased with this impressive performance, we want to point out that during the last three years, HDFS benefited from a favorable interest rate environment.

As we move into 2004, most forecasts call for an increasing interest rate environment, which should result in a return to lower securitization gains.

In 2004, we expect HDFS securitization gains to be in the range of 3-4 percent of loans sold.

For the more normal interest rate environment, we believe that HDFS operating income will grow at a rate that is slightly higher than the motorcycle unit growth rate for the foreseeable future.

Now let me comment on our tax rate.

For the fourth quarter, the Company increased its income tax rate to 35.5 percent from the 34.5 percent rate used for the first nine months of the year.

Federal rates have not changed.

Instead, our changing in rates was made as a result of our ever-increasing pretax income that reduces the relative impact of the permanent tax credits.

The tax rate for 2004 is expected to remain at 35.5 percent.

Looking at the balance sheet and uses of cash, we've finished the year with nearly 1.3 billion in cash and marketable securities, up from 800 million on December 31, 2002.

During the fourth quarter, cash declined $100 million, primarily due to a cash contribution of $180 million to our pension plans and the repurchase of nearly 1.6 million shares of our stock during the quarter at a cost of 73 million.

Additionally, Company inventories are down about 5 percent from year-end 2002.

This is outstanding performance relative to our 13 percent increase in year-to-date revenues.

Moving on to cash flow.

We had capital expenditures of 227 million for the year.

This is a little but less than our previous guidance, but lower (ph) expenditures are mostly a timing issue and will occur in 2004.

That being said, our expectations for 2004 capital spending are still in the range of 270-300 million.

Depreciation expense was 197 million, and for 2004 we expect depreciation expense to be 225 million.

Finally, we generated free cash flow of nearly 650 million for 2003.

Many of you have asked what we intend to do with the cash.

I can assure you we're going to take a prudent and calculated approach.

Our priorities have not changed, and I will remind you of what they are.

Number one -- organic growth through reinvestment in our core business of motorcycles and related products and services.

Two -- we have always said our Board of Directors will conduct ongoing reviews of our dividend policy.

Evidence of this was illustrated by the fourth quarter approval to increase the dividend.

Next, we have two authorizations to execute share repurchase.

As I mentioned before, we bought back 1.6 million shares during the quarter against a 9.4 million share authorization.

We also repurchased 700,000 shares throughout the balance of the year to offset the dilution caused by the exercise of stock options.

We will continue to review the merits of repurchasing our shares.

Moving on, our shipment target for the quarter was 77,000 Harley-Davidson motorcycles, and we achieved that.

This quarter presented some of the same challenges we encountered in the third quarter with our later than normal model year changeover and with the new plant startup.

We maintained our target of 317,000 motorcycles for 2004.

This breaks down to 74,000 units for the first quarter, 82,000 units for the second quarter and 150,000 units -- 161,000 units for the back half of the year.

Shipments in the third and fourth quarters are expected to be approximately equal.

Turning to retail data.

I would like to review our performance in the heavyweight motorcycle market, which we define as all motorcycles with an engine displacement of greater than 650 cubic centimeters.

During 2003, we outperformed our competitors in all our major markets -- United States, Europe and Japan.

For the total year, our retail sales grew faster than industry in all of these markets.

Our U.S. dealer network experienced some modest decline in retail sales during the fourth quarter.

Jeff Bleustein mentioned in our press release that is difficult to draw meaningful conclusion from comparison of retail sales between the fourth quarters of this year and last year.

In the fourth quarter of 2002, retail sales were 15 percent over the prior year’s fourth quarter, driven by the urgency to buy 100th anniversary motorcycles prior to the celebrations.

This, along with the plan for a later introduction of our '04 models in 2003's fourth quarter created two very different selling environments.

This, we believe a meaningful comparison between the quarters is difficult.

We believe that 2004 will be another strong year for Harley-Davidson due to current dealer competence, the momentum from 100th anniversary and improving economic indicators.

Speaking of the 100th, we're confident that the 100th anniversary introduced our brand to hundreds of thousands of Harley-Davidson dreamers.

This has poised us for sustained motorcycle growth.

To demonstrate our long-range confidence, we are establishing a target of 400,000 motorcycles per year in 2007.

I would like to invite Jeff Bleustein to join us now to share his perspective on this goal and our rationale.

Thank you Jim, and good morning.

This is Jeff Bleustein and I would like to thank all of you for your interest in Harley-Davidson.

I have joined the conference call this morning because as Harley-Davidson concludes its 100th year in business and sets out on its second century, I would like to share with you my perspective of the past two decades and a vision of the road ahead.

Harley-Davidson focuses primarily on the heavyweight segment of the motorcycle market, and in this segment, during the past decade, the U.S. market where we do approximately 80 percent of our business has been the fastest-growing major market in the world.

In the year 2000, the U.S. overtook Europe as the largest market for heavyweight motorcycle sales and has maintained that position every since.

From the time Harley-Davidson became a public company in 1986 and until about 1990, Harley-Davidson motorcycle unit retail sales in the U.S. grew at an average rate of 10.3 percent per year.

We believe that the underlying core growth rate for Harley-Davidson unit sales or equivalently unit demand during that period was somewhere in the 7-9 percent range, building on a much longer term trend in the enthusiast segment of the market.

Our core growth rate was driven by the growing awareness of motorcycling as a socially acceptable sport and the trend towards more active lifestyles for people of all ages.

During this time period, Harley-Davidson was able to grow faster than the core rate because we were gaining market share from our competitors.

They were still reeling from the damage done during the Honda-Yamaha battle for worldwide market share domination and the resulting drop in the U.S. motorcycle market.

Harley-Davidson made rapid progress in both unit volume and market share until we ran into capacity limitations in our factories.

Completing our paint facility in York, Pennsylvania allowed as to increase production again and we were able to keep our annual unit growth rate at an average of 8.9 percent through the early 1990s.

The stock market bubble and the associated wealth effect during the mid and late 1990s continued to fuel a heated-up unit growth rate, averaging 17.1 percent per year.

For the past three years, we believe that the difference between the average unit growth rate of 13.6 percent and the underlying core growth rate was primarily driven by the excitement leading up to Harley-Davidson's 100th anniversary.

The high level of unit growth rates throughout this 18-year period required several factory expansions.

This allowed Harley-Davidson the opportunity to thoroughly modernize its plants and to improve productivity, quality and manufacturing margins.

And these margins coupled with a strong demand for our products which permitted regular price increases provided a compound earnings growth rate of 35.6 percent through this period.

Even discounting the first five years of this 18-year period when we were starting from a very low earnings base, the compound annual growth rate earnings growth rate was 25.8 percent.

With all of these expansions, we were attempting to narrow the gap that had developed between demand for our product and our capacity to supply that demand.

However, the hot retail market, coupled with our cautious approach to expansion which focused on preserving product quality and in using our capital wisely kept that goal of narrowing the gap very elusive.

This resulted in elevated prices for our products in the marketplace and limited the ability of some customers to afford a new Harley-Davidson motorcycle.

During the same 18 years, the Company's core unit growth rate was further secured by bringing exciting new motorcycle products to the market on a regular basis, by developing our dealer network, enhancing the experience of motorcycling for our customers through our worldwide Hot Club (ph), which now (indiscernible) more than 850,000 members and by introducing major events and rallies to add to the enjoyment of the sport.

Although my comments so far have been based on analysis of U.S. sales data, the important conclusion relating to the core unit growth rate applies to Harley-Davidson on a worldwide basis.

Although the heavyweight motorcycle unit growth rates in the European and Asia-Pacific regions have been generally lower than those in the U.S., Harley-Davidson has been able to grow at a faster rate by taking market share from our competitors.

Our opportunities in the international marketplace are attractive going forward as well since we have invested heavily over the past 10 years and developing the management and infrastructure to continue to grow our unit sales and these markets at close to the core unit growth rate in the U.S.

With the special factors of the stock market bubble and the 100th anniversary behind us and barring other extraordinary factors, we believe we will return towards our core unit growth rate for the foreseeable future.

We are confident that we can sustain this rate because our pace of new product introductions is faster than ever before and we have products like the Buell XPs, the V-Rod and the brand-new 2004 model year Sportster that will assist us in bringing in entirely new customers into the Harley-Davidson family.

Furthermore, we're making it easier for people to learn to ride and to own a motorcycle with programs such as Rider's Edge, authorized rentals and Harley-Davidson Financial Services.

With a return towards the core unit growth rate, the gap between supply and demand is finally beginning to narrow and retail prices in the marketplace should return closer to MSRP, making our products more affordable.

With this core unit growth rate of 7-9 percent, we also believe that we can sustain earnings growth rates in the mid-teens through productivity improvement in all areas of the business and earnings contributions from parts and accessories, general merchandise and financial services, all of which are experiencing the benefits of our large and growing base of customers.

With a solid balance sheet, return on equity averaging 25.2 percent over the past 10 years, demonstrated cash generating ability, modernized factories, a reliable stream of new products and services, our strong brand and the prospects of sustainable mid-teen annual growth rates and earnings, Harley-Davidson is a great investment now and for the future.

And now I will turn the call back to Jim Ziemer.

Thanks Jeff for that insight and historical perspective.

No doubt about it -- this is a strong press release.

We delivered a record quarter, a record year and in fact, a record 18 years.

We have now shared with you our motorcycle unit goal through 2007.

We have confidence that we can continue to create demand well in excess of our unit sales goal.

We've just completed 18 consecutive years of record revenue and record earnings and we continue to have confidence that our business can achieve an earnings growth rate in the mid-teens for the foreseeable future.

I cannot think of another company that has kind of a story of sustained growth and future prospects.

With that, I will now open it up for questions.

Holly, could you please do that?

(Operator Instructions).

Felicia Kantor, Lehman Brothers.

Good morning.

Just touching upon what Jeff just finished talking about, the core unit growth of 7-9 percent, coupled with your guidance for sustainable earnings growth in the mid-teens, I was just wondering, given the core unit growth up to 7 and to 9 (ph) percent, how do you get to the mid-teens growth?

Should we look for eventually some kind of impact to -- beneficial impact to gross margins as growing that or something else?

And just wondering as well, given the capacity - or the inventory actually of the '03 Sportsters and V-Rods that is currently out there, just wondering how long you think it might take to work through the dealer network, and is this inventory at all hampering dealers from selling their '04 bikes or getting them to lower or causing them to lower their allocations?

And then just housekeeping, Jim, you might have mentioned this, but in the 1.6 million shares you brought back, was that all to offset option dilution?

Jim, let me handle the first part -- I think that was three questions Felicia.

I always try to follow the rules and (indiscernible).

Sorry.

We believe that the earnings growth in the mid-teens is sustainable.

As I mentioned before, it's through productivity, continued productivity, improvement in all areas of the business, and that affects our spending and obviously, the margins.

And also by continued growth in the parts of our business that are really playing into the large customer base and that is out there and has been growing by huge amounts every year, and those are parts and accessories and the MotorClothes and collectibles, which you call general merchandise and financial services and other services that we deliver, all operating into a much larger base of customers.

All of those things put together we think can generate that earnings growth in the mid-teens.

This is not all about motorcycles.

Motorcycles are important and we're going to keep increasing our production to meet the demand, but there are other parts of our business that will contribute as well as improved productivity in all areas of our business.

Jim, why don't you handle two and three.

I will give you a little historical perspective, my turn on the gross margin.

We have been increasing opening margins every single year for just about since the start.

That has been driven by many things, but our operating margin has been growing more than 25 percent, our unit growth has averaged over those 18 years 13 percent.

So we have demonstrated we can grow earnings through many different things, and that has been as we leverage our plants and the machines, as we continue to partner with our employees and unions, as greater than 55 percent of our cost of goods sold, our purchased parts, so as we continue to leverage with our suppliers, the benefits they get from volume and the benefits we get from volume, all of those things continue to help us.

And as we continue to come up with new products and designs and cost savings in those, we just got done completing a doubling of our product development center.

So there's many different drivers.

All of those reinforce the productivity portion, and then Jeff talked about as we continue to grow the other parts of our business.

So we have many different drivers that give us great confidence that we will continue to grow earnings faster than revenue.

As for the other two questions, on the XLs and V-Rods, we did end the '03 model year with -- there was approximately a little more than 5000 '03 Sportsters and V-Rods in dealer inventories.

It's easy -- we look at the Sportsters, we came out with a totally redesigned Sportster, extremely exciting, and that maybe hampered the sales of those.

And V-Rods, we have been getting that more into a balance.

But we're not talking much of an issue.

So your question was -- has this hampered '04s?

I don't think at all.

Going on to repurchase the shares, the 1.6 million shares was as I said in the conference call, all against our 9.4 million share authorization to buy shares on an opportunistic basis.

This was not to offset the dilution caused by the exercise of stock options.

Shalini Aggarwal, Merrill Lynch & Co.

Good morning.

I just had a question on weather.

Did you see that as an issue at all in Q4 in certain markets or models?

And how much of a factor if any did it play?

Thanks.

We hate using weather as the reason for retail sales I think going up or down.

Weather over the long run, it goes along seasonal patterns.

We did use weather as a reasoning for the softness in retail sales in the first quarter of 2003, but that was some extreme cases and we could across the country make a good case market by market.

There is no doubt that some of the weather has been cold, especially on the East Coast.

And in fact, the northwest coast has been kind of iced in.

But the reality is -- as we look at it, there is a big increase in 2002 with the excitement of the 100th anniversary bikes and the 15 percent increase in retail sales, versus this year where we did not really get the bikes, the '04 bikes into the market until October and later; it creates two different environments and then really attributes to the -- helps to understand why the comparison came out the way it did.

David Cumberland, Robert W. Baird.

Good morning.

In talking about the retail sales comparisons, you have cited a later start to the model year '04 shipments.

Can you elaborate on why the shift in timing would impact retail sales comparisons in Q4, and also comment further please on the dealer confidence that you cited?

A lot of that on the later start-up in October, the riding season is over.

Your natural (indiscernible) traffic is not getting excited and energized by the new models.

So we're not looking into a big decrease, but there was an impact from that on the '04 model, and it goes right into the riding season and the impact it has on your natural floor (ph) traffic.

I missed the second question.

If you can elaborate on the dealer confidence that you say and what indicators you're hearing and are looking at to give you confidence in a strong '04?

Several big ones.

Number one, we talk to the dealers all of the time.

In December, we had cross-country town hall meetings.

Our district managers are out there talking to the dealers every day.

As we monitor the retail prices on new and used motorcycles, on average, our bikes are still selling well above MSRP on average.

We have some dealers selling MSRP, some with a premium.

And as Jeff said, it has always been our long-term objective to get that closer.

But the fact is they're still selling at a premium.

I think the third year into recession, when you have a product that sells between 6000 and $20,000, it's selling at a premium, there pretty much is another indicator that the dealers are confident of their prospects.

So between communications, the retail sales and sell-through and the pricing, the fact that there is no dealers turning back their allocations are all real good indicators that the dealership's showing confidence.

I also say that we now have the dealers coming together this week and next week in Orlando for a typical winter dealer meeting.

We will get some more great feedback on what is going on in the individual markets.

But I can say that they are excited about the prospects.

Carol Buyers, RBC Capital Markets.

Good morning gentlemen.

I just have two quick questions for you.

I was wondering -- with our discussions with dealers, it seems that business has become more seasonal, just given that bikes are more readily available.

Is this something you're seeing and tracking?

And then second, I was just wondering if you could comment on the acceptance of the Sportster, the feedback you're hearing and whether or not this is attracting new buyers?

Seasonal, I already gone into talking about retail sales this year versus last year.

Dealers may be drawing a conclusion that they've gone more seasonal, but you're actually comparing the excitement of the 100th last year versus a more normal year this year and the late introduction.

There is no doubt there is seasonality to Harley-Davidson sales; there always has been, and that's for traffic and not picking up (ph) motorcycles when it is cold outside and snowing.

We have not seen any more seasonality or less seasonality.

It is a seasonal business and I think any conclusions that may have been drawn from any particular dealer really have to do with a comparison of the model years.

As for the Sportster, it has been accepted quite well.

In fact, we're extremely pleased.

Sportster, you talk about any of our products that may be more seasonal; 70 percent of our Sportster buyers are new to the family of Harley-Davidson, and that is again the reason why it is important to keep that strategy up and increase the Sportsters and increase the number of people coming into the Harley-Davidson family.

Those people are typically more impulse, they will typically come in during the riding season.

We've seen strong sales in Sportster all along.

We have had great write-ups in the motorcycle magazines and the dealers are quite pleased.

They said this is what we've been asking for for many years.

So it is been a very good success and we continue -- we hope -- we plan to continue to see this same success as we go forward.

Tony Gikas, Piper Jaffray.

Good morning guys and congratulations on another great year.

Two questions, first on Harley-Davidson Financial Services.

Any new initiative at the retail or dealership level that might drive the penetration higher there?

Secondly, I think Jeff, you talked a little bit about the international opportunity.

Could you comment on any new international initiatives, any new territories that you might be moving into or areas that might see some (indiscernible) performance in the coming year?

Yes, about the new initiatives.

There is no new initiatives.

There may be a program from time to time on Buells and we had a small program on '03 Sportsters and V-Rods -- those are small programs.

As for initiatives, there been no initiative to drive the traffic at --.

HDFS has continued to gain market share within the dealer network, providing a great service that adds value to both the dealer and the customer.

And we are not in a -- trying to be price competitive; we're not the low-cost provider.

We provide a great service and that has been our philosophy and we plan to continue to keep it that way.

Let me address the other question.

If you permit mean, let me go back to comment on Carol's question.

In my years at Harley-Davidson, I have been through a lot of dealer introductions where we introduce new models.

And I think I can remember very few motorcycles that were greeted with more enthusiasm than this total redo of the Sportster by our dealer network.

The Sportster historically has a long history of Harley-Davidson.

There is a lot of aura about that motorcycle.

We have kept pretty close to its roots in terms of the concept of that motorcycle through many, many years.

And this is really, we have modified it from time to time and had different models.

But what we have done this time with the Sportster is really dramatic.

And it is the kind of thing that people have -- our customers had talked to dealers about, but they thought they would like to see in the Sportster.

Dealers have talked to us and we put all that stuff together and came up with a product that we think is just right on target for that market.

We have seen some enthusiastic response in the short time we had since -- after the introduction while there was still a riding season.

Dealers stay very enthusiastic about it and I think we're going to see that Sportster really catch on fire this spring.

So we're very bullish on that product.

As it relates to the other question about the international market, our emphasis in the last 10 years in that international market has been getting our blocking and tackling right and putting the basic infrastructure in place, management teams that are closer to the market, getting our parts supply and our service capability and our dealer stores and our geographical distribution within the markets that we're already in; we're getting all of that stuff right.

And although there is still work to do, I think we have gone a long way in being set in terms of the basic systems for those markets.

We have been somewhat limited in expanding beyond the markets we're already in because we have been with this huge gap between supply and demand and it has been very difficult to make the case for our dealers, not only in the U.S., but also in our -- the markets that we're already in in Europe over the last four or five years for opening up a brand-new market when we couldn't even supply our existing dealers or distributors with the products that they wanted.

But we foresee that as we're able to narrow the gap somewhat between supply and demand and our existing markets, that will free up our ability to move into some new markets.

And I see that as something that we will be doing as we go forward.

There are lots of places that we are not in or we're certainly not in the way we would like to be in yet, but these opportunities, we will be able to be more aggressive about as we go forward.

Tim Conder, A.G. Edwards.

Thank you.

As it relates to gross margins and then your production guidance.

On the gross margin side, Jim, can you maybe comment just in directional terms?

You talked about the average wholesale price being down, but your cost being down.

Looking at the 100th anniversary and the bikes overall, are you saying that your '04 margins are going to be higher versus '03?

In particular for the mix with the Sportsters on gross margin, are your margins on the '04 Sportsters versus '03 Sportsters higher?

That is the first part on the margins.

And then as it relates to your long-term production and EPS guidance, typically when you guys give production guidance, you always say -- give the 80 percent confidence and then you hope to exceed that.

How does that relate to those long-term goals?

On gross margin.

As you know Tim, we haven't given a lot of guidance on gross margin, but gross margin with all of the things in my previous answer and the leverage we have continuing to utilize our new facilities, machines and equipment processes, working with our supplies and employees, gross margins will grow.

That's the only way you can continue to grow earnings long-term faster than your revenue.

And so we have all of those things that we're working on.

Some have a greater impact this year versus next year, and some come in stair steps, but gross margins will continue to improve.

We talked about the Sportsters.

There's no doubt we've always said that Sportsters just by virtue of their lower price have a lower contribution to the bottom line.

And as the percent increases, that has an impact.

But as we design some of the cost out, as well as we continue to improve the rest of our processes, margin will improve.

Talking about long-term guidance and our confidence.

In fact, I was almost going to think you were going to go through short-term guidance, and this gives me great opportunity to talk about 2004's guidance a little bit.

Last year, we sort of got some pushback not changing our annual guidance, and that was really an absence of any long-term guidance.

People wanted to know, investors wanted to know what our confidence was in the current year, and that was being based on short-term guidance.

We have decided to focus -- we've always had a long-term approach to the business, thought we would give the outside world a little look into where we're going.

With that, I think that shows the confidence we don't have to do fine tuning on quarterly guidance of the annual target.

If you look at last year, we came out in 2002 for 2003 guidance at 289,000 units; we finished the year at 291.

So I think our guidance is very close, it's very right on and it certainly is still within the ballpark of 80 percent confidence level.

Robin Farley, UBS.

Great, thanks.

I wanted to clarify one thing before my question.

In the release, you don't say there's Q4 decline, I just wanted to clarify.

We calculate it as a 7 percent decline, I just want to make sure that that's what you quantify it as.

And then a question about your long-term guidance.

It looks like it has been about six or seven years since you gave production guidance beyond just the forward 12 months.

And I wonder if you could give some color on -- is that a function of having more visibility and demand than you have had the last couple of years, or more visibility in your own production capabilities than in the last couple of years?

And also, does that rely on a certain industry growth level?

In terms of the retail comparisons, anybody can do the subtraction of nine months year-to-date to the total year-to-date retail sales, and your calculations are somewhat approaching -- I think it is actually 6.8 or something like that -- decline in retail sales.

And because that is not a good comparison, we went in and explained the difference.

But I think your math is approximately correct.

As for -- we talked about production guidance.

We were really emphasizing the fact that this is sales guidance.

We can produce, but our big focus, our long-term focus is in creating demand and having sales, supply in that demand somewhat less than that, real demand.

We never want to close that gap between supply and demand, we always want to leave a gap.

The gap we've had in the past has just been too large.

First of all, I think we have to add you to our archives department because of your profound knowledge of history.

I remember exactly the last time we gave that long-term guidance, but it probably would've been in the 96-97 timeframe and (multiple speakers) but we always think long-term.

We plan on a 10-year horizon because we need to give that kind of clarity to our people at Harley-Davidson so they can plan product development and manufacturing, capacity expansions and marketing programs and so forth, and we always update that on an annual basis.

But we have long-term guidance that we had issued really taking us up to our 100th anniversary, which was the guidance we had given in 1996-97.

What really happened is we achieved for the goals that we had set for ourselves a couple of years early, and we saw that coming and internally, we were still planning 10 years out, but we really did get into a mode we were kind of going year-to-year for the last couple of years with guidance.

And people were filling that vacuum up a longer-term view and there were a lot of speculations out there as to would Harley-Davidson fall off the cliff after the 100th anniversary;. would that be an impetus for a new range of growth.

There are a lot of hypotheses out in the marketplace.

And we said that we had a better look at the future we think from the data that we have and our analysis of both, what capacity we have available and the demand that is out there.

And we feel confident on both levels on the demand, on things we have in the pipeline that will continue to stimulate excitement out there, about the capacity that we have in place.

We've certainly been through a building, a new factory base where we think we have the space in place that will allow us to expand capacity through this time period by just adding some machinery, equipment and people.

We don't really need to build a lot of space in order to achieve those goals.

So we're confident on the production and we're confident on the demand and that is the basis on which we are trying to give you a longer-term projection of where we think we're going to be.

Bill Lerner, Prudential Securities.

Thanks guys.

Last quarter when you -- just to beat a dead horse one more time -- last quarter when you introduced '04 production guidance, you indicated it was limited by capacity, I believe.

So should we still conclude that if you can get more production out of existing facilities, production guidance would increase for '04?

And you said at the time if I recall that you did not think you could get to that 317,000 unit initial guidance at the rate, at the production rate at hand at the time.

So has that changed?

On the production guidance, it's 317.

There's no doubt we're continuing to work on bottlenecks within our manufacturing facilities as well as with our suppliers.

That is almost always a true statement whenever we give guidance for a year that -- current rate that we were at and we're still working on many different bottlenecks in the system to achieve the guidance that we're giving.

That remains to be true right now.

The first part of your question?

Just to give you a little bit of perspective on this.

We have guidance out there for 317,000 for next year.

If we do the 316 or 318, that is a blip on our way up to this next goal of 400,000.

A thousand units is less than a day's production.

So there are a lot of things that can occur that, even on an annual basis, that could change units by a small amount.

But I think the real key is, as opposed to -- we really would like to put that emphasis on what we're doing on a long-term basis and get off this what happened this week in the factory or next week or this quarter or next quarter.

And I think that is really a better way to look at where Harley-Davidson is going and our progress along that path.

Dean Gianoukos, J.P. Morgan.

I just have two questions.

First, when you look at the longer-term, you talked about a I think 7-9 percent industry growth rate.

I am wondering why, Jim, or Jeff, Jim said you still want to keep a gap between supply and demand -- why you would grow or what you are projecting for the market to grow (ph).

Wouldn't it make more sense to grow slower, pay out a big dividend, buy back stock, keep comfort in the market (indiscernible).

And then my second question is -- for the last couple of years, last year, we talked about weather, this year it's shipping patterns.

It seems like 2-4 years ago, if you had shipped these bikes, there would have been such a large wait (ph), but people would have picked them up no matter what.

So given a lot of what is going on here, (technical difficulty) supply to starting to reach demand (ph)?

First on that 7-9 percent and then -- we're talking about 8 core growth (ph) for motorcycle demand versus we're giving guidance probably in the same range.

Basically, we need to bring the whole system close to a balance.

You're getting too far out of balance, the dealers continue to charge extreme prices above our MSRP, which causes dissatisfaction with the customer, so it is a delicate balance we're trying to bring.

We already have supply demand and supply.

If we can keep that balance and keep it there and match what the market is growing at, that's what we're trying to achieve.

I just want to say, and this is not an exact science.

I wish it were.

But estimating how big that gap is -- 10 years ago, the concept of a waiting list really made sense because dealers literally had waiting lists and you could see how many names are on it and a person could look up where their name was.

A lot of dealers have abandoned that over the years, except maybe a very short list of their best customers because they have not wanted to tell people come back and you don't have a chance of getting a motorcycle for the next six months.

They wanted the people coming in the store all of the time.

And so a lot of them went to a first-come first of kind of basis or who comes in with the most money gets the motorcycle.

So the concept of a waiting list is not something that we can count numbers on anymore.

So the gap between supply and demand is not something you can measure exactly.

We estimate it through a lot of information, pricing, the dealer orders, retail sales -- a lot of things help us to get some estimate of supply-demand.

We believe that we will be able to start narrowing that gap.

Maybe we have started already.

As I said, it's hard to pick a point in time because the date is not that exact.

But as we do narrow that gap, you are going to see -- if we narrow it in total, you're still going to have imperfections, or if you will, inequalities in distribution.

You may have some dealer that's buying four motorcycles, then one 50 miles away who has three more three on the floor.

So you are going to see some signs of differences in dealer inventories on the floor, dealer stories, and we listen to those too, because that give us a feeling as to are we getting closer or not.

We can't measure it perfectly, and our desire is to err on the side of keeping that demand greater than the supply.

But we have for years -- and those or you who have been following us and who have heard us talk, I think for the last seven or eight or maybe more years, I've always said that has been our objective, is to narrow that gap between demand and supply.

Because when you have that big a gap and you get excess pricing in the marketplace, it is not the right thing for customers.

And we have been trying to narrow that gap.

Holly, I will take one question and then we will call it quits.

Scott Barry, Credit Suisse First Boston.

Good morning.

It might be premature, but Jeff, maybe you could comment on how you envision the U.S. export shipment mix out there in 2007 versus the current 80/20?

And then the related question would be -- do you anticipate maintaining a static domestic dealer network at roughly 630 dealers or so and what your thoughts might be regarding their ability to handle the increased throughput in the out years on what may be less attractive per unit economics to the dealer, given this gradual narrowing of the retail and MSRP pricing?

Comes down to a few of them.

First of all, maybe I'll do it in reverse order.

The dealer is -- have -- make a very good profit if they sell at MSRP.

Some of them -- those who have been pricing at significantly above that and selling at those prices are making a greater profit than a good profit, okay?

So I think the economics are very attractive to dealers even selling it at MSRP.

So I'm not concern that this would become an unattractive business for our dealers.

In terms of the U.S. versus the international market, if you look over Harley-Davidson's history, that ratio has varied.

It has been probably as high as the 30 percent kind of range for international sales versus domestic to -- today, it has come closer to 20 percent international.

I think if you look out four or five years, I think it is going to be within that range.

It could be a little higher internationally than domestic.

A lot of that depends upon how things go on a worldwide basis.

But in terms of the political situation and the economic situation around the globe.

But we will respond as we have in the past to the marketplace.

And if some markets have a greater demand than others, then we will try to channel more motorcycles to those markets.

So hopefully, that answers that question.

We didn't fully answer the question before, and I think it was Scott's question related to dividends and share buybacks.

I think -- just look at what has happened in the last quarter.

Our Board voted to double our dividend quarterly dividend from what it had been, and we for the first time in many years have started to use that share buyback authorization that we have had from our Board for many years.

So that is what we have done.

And we will continue to update you when we do other things.

Gentlemen, do you have any closing comments?

Yes.

I'd just like to thank everybody for your time this morning.

Remember that a taped replay of this conference call can be heard by calling 973-341-3080, and entering the PIN number 439-4322 and the pound key.

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

Thanks again and have a great day.

Thank you.

That does conclude this teleconference.