Harley-Davidson Inc (HOG) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Harley-Davidson first-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, Chief Financial Officer and Vice President, Mr. Jim Ziemer.

Sir, you may begin.

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

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

Please dial 973-341-3080 and enter PIN number 4594639 and the pound key.

The recording will be available through April 21.

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 in this call.

Now onto the quarter.

Clearly, this was a strong quarter in several ways.

First, we grew earnings per share over 11 percent.

This double-digit growth is even more impressive when you consider that the first quarter of 2003 was 56 percent higher than the first quarter of 2002.

Put another way, our two-year compound annual growth rate for the first-quarter EPS is nearly 32 percent.

Second, this was a great quarter in terms of U.S. dealer retail performance.

Our U.S. dealer's retailed 13 percent more Harley-Davidson motorcycles in this first quarter than in last year's first quarter.

In fact, our U.S. dealers sold more motorcycles in this first quarter than in any other first quarter.

We believe the strong first quarter is evidence that Harley-Davidson is alive and well as we move into our second century.

Third, I would like to point out that we repurchased 7.8 million shares of Harley-Davidson stock during the quarter.

The $4 million we spent was the largest cash outlay we've ever made for share repurchases.

Now on to the highlights of our first-quarter performance.

Harley-Davidson wholesale shipments -- 74,090 units, up nearly 5 percent.

Total revenue, up 1.17 billion, was up nearly 5 percent.

Net income, 204.6 million, was up 10 percent and was our biggest quarter ever.

Earnings per share were 68 cents, and they were up 11 percent.

And free cash flow was $296 million.

This was a great quarter.

Now let me discuss some of the additional highlights of the quarter, beginning with motorcycles and related products segment. 74,090 motorcycles we shipped in the quarter resulted in motorcycle revenue of 918.8 million.

Average revenue per unit of 12,401 stayed nearly constant with last year's first quarter of 12,414 per unit.

The following factors influenced the average revenue per unit.

Foreign currency had a $17 million favorable impact on revenue from motorcycle sales.

This was offset by the 2004 model year pricing, which lowered average wholesale and suggested retail pricing to our dealers and riders.

This pricing was a result of eliminating some of the special feature and premium pricing that were associated with the 100th anniversary motorcycles.

Third, we also increased the percentage of Sportster shipments, our lowest-priced motorcycles.

Over the next several years, we expect the proportion of Sportsters in the mix to increase to approximately 20 to 25 percent.

This is the same mix percent that we delivered throughout most of the mid- and late 1990s to the early 2000s.

For the first quarter, our mix of Sportster motorcycles was 21.4 percent versus 18.6 percent in 2003.

The Sportster is our most popular motorcycle for the first-time Harley-Davidson buyers.

As you know, for the 2004 model year, we completely redesigned the Sportster family and are very happy with the strong reception it has received from the media, our dealers, and our riders.

Turning to parts and accessories and general merchandise, P&A and general merchandise have tough first-quarter revenue comparisons with last year, which contain revenue from unique 100th anniversary products.

P&A revenue in the first quarter of 2004 was up 5.8 percent with revenue of 169 million.

After excluding 13.9 million in unique anniversary revenue from last year's first quarter, P&A grew at 15.9 percent.

General merchandise revenue for the first quarter was 54 million, down 3.7 percent compared to last year's first quarter.

Excluding the 8.3 million in revenue related to the 100th anniversary products last year, general merchandise was up 12.7 percent this quarter.

Looking at margins -- gross margin was 37.8 percent compared to last year's 36.2 percent.

As we mentioned in the press release, gross margin was positively impacted by foreign currency exchange and operational efficiencies in the plants.

Foreign currency contributed about $10 million to gross profit.

Please note, because of hedging, impact of foreign currency is not as great on gross profit as it is on revenue.

As many of you know, even though steel and aluminum are very prominent components of our motorcycles, they are a fairly small part of our cost of goods sold.

These raw material purchases of these metals make up less than 5 percent of our motorcycle cost of goods sold.

With that said, our suppliers have been experiencing some cost pressure on steel and aluminum, but so far, we have been effective in managing those situations.

This is a great example of our philosophy of mutually beneficial relationships and our resulting strong supplier relationships.

Moving on, operating margin for the motorcycle segment in this quarter was 22.9 percent compared to 21.5 percent in 2003.

The operating margin improvement was driven by our improved gross margin.

I would like to point out that SG&A expenses during the quarter were 3 million higher due to foreign currency.

Now, turning to our Financial Services segment -- Harley-Davidson Financial Services delivered a great quarter with operating income of 15.3 million, up 16.2 percent over last year's first quarter.

HDFS benefited from continued success in both its finance and insurance businesses.

HDFS retail market share, which we define as the percent of total new Harley-Davidson motorcycles sold in the U.S. that are financed by HDFS, was approximately 38 percent for all new Harley-Davidsons sold in the U.S. in the first quarter.

This is above prior year's first-quarter market share, but virtually equal with the level it achieved in the fourth quarter of 2003.

Now some additional highlights for HDFS, including (ph) -- the size of the securitization in the first quarter of 2004 was larger than in the first quarter of 2003.

But the 25.2 million gain was somewhat lower than the gain in 2003, due to the current interest rate environment.

As we stated in the release, 4 percent gain as a percent of loans that we sold in the first quarter is at the high end of our expected 3-to-4-percent range.

At the end of the first quarter, retail delinquencies on a managed basis, defined as greater than 30 days delinquent, were 3.4 percent, compared to 4.4 percent at the same time last year.

We are pleased with the strong performance.

Annualized credit losses on a managed portfolio basis were 77 basis points, which is lower than last year's 84 basis points.

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

And there our three primary reasons why we have been able to keep losses low.

First, we continue to benefit from strong credit quality in the portfolio, as about 75 percent of the borrowers are A and B credits.

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

And third, our continued emphasis on collection efforts.

Moving on to cash and cash flow -- we finished the quarter with 1.1 billion in cash and marketable securities, up from 890 million at this time last year, but down from 1.3 billion at the end of the year 2003.

We generated nearly 300 million in free cash flow during the quarter, which we define as cash from operations less CapEx and dividends.

With available cash, we spent 404 million repurchasing 7.8 million shares of Harley-Davidson stock.

We had capital expenditures of 31 million for the quarter, and still expect 2004 capital spending to be in the range of 250 to $300 million.

Depreciation expense was $51 million for the quarter, and for the year, we expect depreciation to be 215 million.

Moving on, our shipment target for the quarter was 74,000 Harley-Davidson motorcycles, and we achieved that.

To achieve our target of 317 Harley-Davidson motorcycles for 2004, we plan to ship 82,000 units for the second quarter, 80,500 units in the third quarter, and 80,500 units for the fourth quarter.

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

For 2004, we are off to a strong start in the U.S., our largest market, where our dealers registered 13 percent more retail sales in this quarter compared to last year's first quarter.

Now, let me point out that the first-quarter U.S. retail sales, 54,200, and U.S. dealer wholesale shipments of 59,700 units resulted in an increase in the U.S. dealer network inventories.

This is our plan.

Harley-Davidson builds motorcycles on an even production schedule.

Dealer inventories generally go up in the fourth and first quarters.

This enables the dealers to have product available during the spring and summer months of the second and third quarters.

This is our plan, and our operating philosophy.

And it has been that way for many years.

Many analysts who have followed the company for a while are aware of this, but I thought it was important to point out.

Retail sales in Europe remained even with last year's first quarter.

And retail sales in Japan were down, but only about 200 units.

That results in a 10-percent shortfall to last year's first-quarter retail performance.

We believe that 2004 will be another record year for Harley-Davidson and another chapter in our history of sustained growth.

Our confidence is fueled by our strength in the following areas -- our passionate and hard-working employees, our exciting products, our focused long-term strategy to grow value and strength in the brand, a strong balance sheet and strong free cash flow, brick-and-mortar facilities we can leverage over the next several years, and a world-class brand that has recently been cited by Forbes Magazine in a study by consultant CoreBrand as one of corporate America's top 25 brands in a survey of 1,000 companies.

When you combine all these ingredients with an experienced management team, we think you will agree with us we will achieve 400,000-unit demand in 2007, and an earnings growth rate in the mid-teens for the foreseeable future.

I would like to now open up the phone call for questions.

Holly?

(OPERATOR INSTRUCTIONS).

Felicia Kantor, Lehman Brothers.

I know I am allowed one question, so I am going to control myself this time.

I have a question on -- it relates to gross margins and foreign exchange.

So Jim, so you broke out the impact of foreign exchange on gross margin.

So if I adjust that, I get gross margins of about 36.9 percent.

And then if you adjust last year, you get -- that's versus 35.9 percent, so it looks like a nice, about 100-basis points improvement.

Just wondering if you could talk about where that is coming from.

Can we assume that's all coming from York?

Is it coming across the board?

And then also, how should we think about margins backing out of FX for the rest of the year?

And then also, I'm going to sneak in a quick one.

Do you expect the Board to give you authorization for a new buyback program?

On gross margin -- we had a great quarter, and gross margin improved considerably.

As you pointed out, some of that was due to -- and we pointed out in the press release -- to foreign exchange, but even when you adjust for that, we had a great quarter.

It's coming from many aspects of the business.

There's not one single driver.

We look at -- yes, York has -- the new softail plant at the York facility has come online.

And it's doing well.

But it is all the plants.

The original plant at York, the touring plant, now that we have moved softails out, is operating well.

And so is the Kansas City plant and all of our supporting facilities.

We are doing a good job, especially in a controlled growth environment.

It's both a good sign from our suppliers and our employees that are doing a good job as well as working with our suppliers.

The suppliers are doing very well in working in this type of an environment.

So I think, you know, it's very difficult to answer the question of where it's coming from.

It's coming from all aspects of the business.

We see this looking forward -- to continue to do quite well and have a favorable comparison with last year.

We will have some foreign exchange in the second quarter, but as you look past that, then you have also got what we may do or may not do in terms of pricing, particularly in foreign markets, where we have picked up the benefit of foreign exchange.

We may have to look at that closely as we come out with the new '05 model year.

So there's many components to that.

It's not just the cost.

And we haven't come out with pricing yet.

So it would be too early to talk about the back half of the year.

But there's no doubt that the cost components of gross margin are doing quite well.

As for your question on the authorization -- during the quarter, as we mentioned, we purchased 7.8 million shares, which was the remainder of our existing authorization to repurchase shares on an opportunistic basis.

We will discuss this at the next board meeting, which will be on April 24, which is the same time as the annual meeting.

And all I can say is that will be a discussion item.

Thank you.

Next question.

Shalini Aggarwal, Merrill Lynch.

I know you're focusing on bringing in the non-traditional riders to the Harley family.

Can you just specify what some of your initiatives are to bring in kind of the non-traditional, non-core Harley rider?

We focus on keeping our existing riders, as well as bringing in new riders to Harley-Davidson.

And when we do that, we do that through, number one, keeping the existing riders through our rallies, events, through our great dealer network.

It's through the H.O.G. clubs and our fly-and-ride programs.

When we look at new riders, we look at the Sportster, the redesigned Sportster.

So we bring it in through (ph) products, and making that a more appealing product.

Better than 70 percent of the purchasers of Sportsters are new to the Harley-Davidson family.

So that was an important entree into bringing new customers in.

It's Rider's Edge, our riders' educational program that we offer through the dealers, sanctioned by the Motorcycle Safety Foundation.

That program, I should mention, is figured (ph) by the dealers.

More than 40 percent of the participants are females.

You compare that to 10 percent of our current customers are females and 35 percent of the participants are generally under the age of 35.

And our average demographics -- 17 percent of our customers are under the age of 35.

So there's more people outside of our typical demographics that are taking that course.

And that is helped by our Buell Blast that is part of that course.

So we are doing many different things to bring in that rider.

We're trying to leverage off a lot of the favorable exposure we got from the 100th anniversary, where there were just hundreds of thousands, if not millions of people that witnessed the mystique of Harley-Davidson, going to events, seeing news broadcasts on TV last year.

We continue to leverage that each spring.

We've done this for many springs in a row, and some advertising on some select cable channels for reinforcing that message that it's a very affordable product.

We just came out with a commercial that was out through a lot of the NCAA basketball games on showing the affordability of a Sportster -- now is the time to go out and buy one.

So there's many different programs that we do on an ongoing basis.

Thanks for the question.

Next.

David Cumberland, Robert W. Baird.

Jim, can you talk about the performance of the different families within the growth in retail registrations, including the Sportster family?

You've just discussed that to some extent -- related to that, do you feel like the Sportster has benefited -- sellthrough has benefited from your TV advertising there?

And about how long will that TV campaign run?

Okay, David.

We don't give breakdowns on our retail sales.

Retail sales -- there's some seasonality by different families.

That would be especially true on the V-Rod or performance custom motorcycle.

The performance characteristics make it more of a seasonal product.

And Sportster typically -- as I mentioned before in the last phone call, the Sportster appeals to many new riders to the sport.

Typically, that happens when the weather warms up.

And they get excited and want to get into the sport of motorcycling, so it's a little bit more seasonal.

That being said, on the Sportster -- with the redesigned Sportster, Sportster sales have been very strong since we came out in late September within the new, completely redesigned Sportster.

So it's been doing well since September.

There's no doubt that commercial -- it's brought more people into the dealership, but that is really the idea, is first getting people to realize that not all Harley-Davidsons cost $20,000, and that's not just the Sportster.

So it gets them into the dealerships, and we have found that true for the last several years as we have had various different commercials.

And so it's kind of hard to determine whether the continued strong Sportster retail is the result of the redesigned Sportster or the commercials.

I would say that a lot has to do with the new product.

The advertising, I think, was done -- we typically do those for short durations, and I think that was pretty much for March and April, early April.

So I believe that those commercials are done.

Now, at the same time, we do co-op advertising with our dealers.

They have the ability to continue to run these commercials with their own tag line on there.

That helps them determine what's very effective in their own markets.

Next question?

Robin Farley, UBS Warburg.

I have two questions.

One is -- it looks like you have no current repurchase authorization.

I wonder if you can talk a little bit about Q1 and the significant share repurchase.

Does this signal a different strategy, or was that really a one-time event?

I mean, aside from not having a specific authorization, can you just talk a little bit about your approach to what you're going to -- does this change our view, or should it change our view of what you're going to do with cash on the balance sheet?

And then my second question is, with model year '05 starting this July, you mention that model year price increases for '04 did not increase because of not having the anniversary year decals and things.

But that sounds like there's no reason that '05 should not show a normal model year increase.

Can you just can you just clarify that?

Thanks, Robin.

In terms of repurchase authorization as being different, last year -- 2003 in the fourth quarter, we went into the authorization.

Starting in the fourth quarter, we had 9.4 million shares authorized, and we used 1.6 million shares of that authorization to repurchase shares.

So it is not a change unique to 2004.

We had started buying shares on an opportunistic basis last year, did to a greater extent than we had for many years, and continued that in the first quarter.

So that was not really a different strategy.

It may be different than we had -- prior to the fourth quarter of 2003.

As we go forward, as I mentioned on the previous question, we will go to the Board and have a discussion on getting additional authorizations and cash, as we always do.

And until we have the discussion -- like I said, we will have a discussion with the Board.

And that's just between management and the Board.

I can't say what the recommendation would be.

As for the question on pricing, until we -- number one, on pricing for 2004s versus 2003, in 2003 there was much more than the decals.

We had -- a lot of content was special content, was added to the 100th anniversary of motorcycle and very, very exclusive paint jobs as well as special badging on the engine and decals and cloisonne on the side of the tank to make them very unique and very expensive.

When that was not brought forward to '04, we adjusted pricing, as the customer would expect so, and still maintained a very good margin.

In fact, as evidenced, probably enhanced the margin.

As for a pricing strategy, until we announce our pricing to the dealers, we don't pre-empt that.

So that discussion will occur with the dealers prior to us announcing what the pricing is.

Thank you.

Next question?

Tony Gikas, Piper Jaffray.

A couple questions on HDFS.

Where do you think your share can go?

It sounds like you have about 38-percent share currently in the borrowers.

As the interest rate environment starts to creep a little higher, you have a pretty well-educated consumer.

Do they start shopping around more?

Does that business become more competitive?

Do you view that as a risk factor?

Thanks, Tony.

As for HDFS share, we're very happy.

Last two or three years, we have almost doubled share to now 38 percent.

We've said before that we believe we can continue to grow, but we've certainly got the greater portion of the growth behind us.

If we look at unaided market share through other captured finance companies, that can be in the low 40s; and we think that over time, we can get there.

When you talk about an interest rate environment changing -- and in this case, it's certainly not, probably not going to go lower -- as it increases, that same cost of capital -- our competitors will have the same issues.

So we believe, although we are not the lowest-priced competitor, we will be competitive.

And we do not believe that interest rates increasing will be an issue on our maintaining, much less increasing, our market share.

Thank you.

Timothy Conder, A.G. Edwards.

First of all, gentlemen, congratulations on a great quarter.

I wanted to ask a couple questions, Jim, here.

What is your comfort level -- sort of the minimum level of cash?

And then, in relation to that -- a lot's been talked about reloading the repo (ph).

But also, you did increase the dividend in December.

And we're kind of coming up on the normal time when you address the dividend.

Any commentary you would want to offer there?

And then, second question is supply/demand.

Five or six years ago, you had a stated intent of narrowing supply/demand, and the market went kind of very strongly.

You lost a little share; you have gained some in the last couple of years.

Where are you now versus five to six years ago with supply/demand gap?

And are you at the point to where you still see it narrowing further, or are you kind of comfortable as to where that gap is?

Thanks for the congratulations, Tim;

I appreciate that.

It was a great quarter.

As for cash, we have always said that we are a conservative company.

And excess cash has always been somewhat of a strange concept.

But as evident over the last six months, we've used to some of that cash to both increase the dividend and a lot of cash to repurchase shares of stock between last year's fourth quarter and, most definitely, the $400 million this first quarter.

So I think that we are certainly comfortable with the current cash level, and in fact have been willing to use that cash to increase the value to our shareholders.

We will continue to have discussions on our cash levels and what to do with that with the Board, especially in terms of dividends.

You pointed that we doubled our dividend in December of '03.

We are coming onto the annual meeting on April 24, when we typically announce an increase in the dividend.

Again, that will be a discussion with the Board and will be determined that morning before we go out to the shareholders later that morning.

So we will have that discussion.

But I think that there's no doubt that we are comfortable with the level of cash, and we have been using that to increase value for the shareholders.

In terms of supply and demand -- as you mentioned, several years ago, the U.S. market was really hot, and it was increasing over 20 percent for several years.

And in that position, we're only willing to grow so much, and we lost some share.

We gained back some share last year.

And on a going-forward basis, our stated goal -- number one, with the market being as hot as it was and us losing share, it gave the dealers a lever over our customers where the market pricing that was going on was becoming very aggressive.

There is large premiums being charged by many of our dealers to the customer, and over a long period of time, that's not good.

So we have a stated philosophy of narrowing the gap between supply and demand -- never (ph) closing it.

It is great to have a demand exceed supply.

There's no doubt we are certainly there.

We're passed the third year of recession, and our products on an average are still being sold at a premium to MSRP.

I don't think you can find any other product that you can say that.

So we are still in the situation where demand exceeds supply.

We plan to keep it that way.

And as we cited in the last conference call, looking out at growing the business, we look at a unit core growth rate of probably 7 to 9 percent when there is not any other external factors like stock market bubble and things like that.

So, going forward, assuming that external factors stay where they are, we really believe that we can keep demand in excess of supply by growing our production, shipments to our dealers, at a 7- to 9-percent rate.

I think that pretty well gives a good background and philosophy to answer your question.

Thanks for the question.

Next?

Bob Simonson, William Blair.

Two questions, please.

On the currency impact -- if I got it right, you said it was a plus of about 10 million to the gross profit, a minus 3 to your costs.

So that's a 7 net -- times the reciprocal of your tax rate is about $4.5 million -- or about a penny and a half.

Number one, did I do that right?

Number two, do you have some feel -- and I'm sure it changes every quarter -- how the foreign currency weightings are in terms of the pound or the euro or the yen?

First of all, Bob, on your math, I would say it's correct.

We did have a favorable impact gross margin level because gross margins were up so much.

We need to explain that.

It was about $10 million.

Our SG&A impact of our foreign subs and their increased costs due to foreign currency was up about 3 million.

The net of that on operating profit is about 7 million -- tax effect that -- you're right in line.

Basically, it comes out to approximately a penny and a half when you divide it by the number of shares outstanding.

So you're right on.

Going forward, trying to guess what foreign currency is going to do, what external happenings will have on foreign currency, whether it be events in Iraq, et cetera, that's impossible.

We do hedge going forward for a certain period of time.

More importantly, to hedge in for current model years so that we lock in prices so we feel fairly comfortable where we are through the second quarter.

It goes up-and-down -- those contracts are hedged on kind of a weekly basis.

We don't do it in one large bunch, so any particular contract -- and you have to match your hedging to contracts of orders and units -- they're kind of all over the map.

So it's kind of hard to give a flavor for that.

But in fact, if you look back when we did those hedges, the U.S. dollar was getting weaker.

But we're always happy to lock when we have pricing.

So we're not getting the full benefit of the weaker dollar, but we obviously did get some benefit.

So a long-winded answer.

It kind of goes back to my answer to the previous question on foreign currency.

Once you get past the second quarter, there's many different ingredients into the formula of gross margins.

Foreign exchange is one.

Pricing would be another one, which is affected by foreign currency.

Hopefully, that gave you some flavor and philosophy for what we do in that arena.

Next question?

Bill Lerner, Prudential Equity.

Hey, Jim, two questions.

One, do you expect P&A revenue growth to moderate going forward as Sportster becomes a greater percentage of the mix?

And then, secondly, can you just discuss generally why the ramp in CapEx for the balance of the year?

In P&A, we've got a great parts and accessories area that continues to come up with new and great ideas to help individuals make their own motorcycle, so that every motorcycle is even more of a custom motorcycle.

Sportsters, as a percent increase -- we don't really see a big change to the guidance we have given the external world, in that parts and accessories will grow faster than our unit growth rate.

And we still see that to be true, even as Sportsters become a bigger percent of our mix.

And I'll have to ask you to repeat question number two;

I didn't write it down.

No problem.

It's just -- can you just talk about the ramp in CapEx for the balance of the year? thanks.

Thanks.

On CapEx, historically, we do have a very good pattern of CapEx, in that it does ramp up every year.

In fact, if you look at the first six months of our CapEx spending, every year it is much less than half of the total projected year, even though we have had new plants come up, we have had expansion of our product development center.

A lot of it has to do with product development and new products coming out and the timing with the model year and rolling that forward.

So CapEx is going to ramp up.

There is pretty much no (ph) bricks-and-mortar projects.

We don't have a new facility going up.

Primarily, our CapEx is support and product development.

It's support -- IS (ph) projects and continued capacity expansion of the business.

There's no one particular thing driving it.

But we still feel very comfortable with the range of this year; it's 250 to $300 million of CapEx.

Thank you.

Michael Millman, Millman Research.

I guess it's sort of related.

Could you tell us, Jim, in the fourth quarter whether there was any or how much you had of assembly overtime?

And sort of related to that, taking your guidance for this year, particularly looking at the fourth-quarter guidance, if you extrapolate that based upon a daily basis, at least using the daily numbers that you had given us in the past, you come to about a 7-percent increase in 2005.

Or to put it another way, it looks like there's no increase in production in '05 if, indeed, a 7 percent is kind of your target.

Could you kind of talk about that issue?

Thanks, Mike.

On overtime, and you asked about the fourth quarter, I don't have my hands on what the fourth-quarter overtime is.

We've actually just made comments on it.

In the historical past, we had kind of given out percents.

But that's not a -- biggest driver of cost.

It is an indicator of how well the plants are operating or not operating.

I can say that the first-quarter overtime this quarter in 2004 was lower than the fourth quarter.

And as we continue -- I think it was -- which kind of supports the increased gross margin, not so much in terms of the expense of overtime; it just reflects how well the plants are operating.

And that's the biggest indicator.

I mean, that is an indicator of how efficient the plants are going.

So fourth quarter overtime was higher than the first quarter.

And fourth quarter, I believe, was one of our better quarters last year.

You talked about production and kind of alluding to daily production.

Because production days do change from quarter to quarter and year to year just because of the calendar -- we work on a fiscal basis; we don't work on a calendar basis -- and holidays end up in different time periods, that they are not comparable.

We have not given out the days in the quarter -- you are kind of guessing.

And they don't change significantly, but enough to really throw off daily production rates.

So I would not rely on that analysis.

But going more to the point on increases in production, increases in production are step-type issues.

As we go through, you will break through a bottleneck that may be keeping the softail line or touring line or whatever the case from increasing production.

When you break through that bottleneck -- and that could be a supplier bottleneck or it could be an internal bottleneck -- that gives you stair step increases.

They are never even.

They may happen the last day of a quarter or the first day of a month.

So it's really hard to tell, based on taking a macro approach, as you are.

Ed Harran (ph), RBC Capital Markets.

Just two questions.

First, I was hoping you could comment on retail trends throughout the quarter.

Is it fair to say that growth accelerated sharply in the month of March?

And if so, do you think that that would be an indication that the business has become more seasonal?

And second, I was hoping that you could comment a little bit about V-Rod.

Shipments were down pretty significantly on a year-over-year basis in the quarter.

So maybe you could elaborate on that and give us a sense of what we should expect going forward?

Okay.

On retail trends -- I can tell you without a doubt that March is a much more significant retail month of the first quarter than January and February.

That is historical pattern;

I can track back to whenever we started keeping records.

March will all -- I mean, it is a seasonal business.

And so as you get towards the summer months and as you get more Sportster riders or people come in, or they pick up the bikes that they previously ordered, that all has an impact.

So March is a much more seasonal month -- I mean is a bigger month than is January-February or is November or December.

That's just a fact of life, and considerably so.

That has been proven, like I said, probably for the last ten years is what I am aware of.

Your question on more seasonal -- like I said again, we have tracked the patterns from a quarterly basis in January, February, March, April, whatever the case may be.

There is sometimes an impact by weather -- that is different than seasonal.

Seasonal says that you have got winter in a certain set of months, and summer in a different set of months.

But the weather itself does have an impact.

As we said last year in the first quarter that there was a significant change in the general weather over the whole United States, and there was a great correlation between our retail sales and previous retail sales patterns.

So weather will have an impact.

As for seasonality, there may be some very minor changes, but they'd be hard to measure.

A case in point -- as we come out with V-Rod -- V-Rod is a performance custom bike.

The performance nature suggests performance bikes are more seasonal.

But those are some small changes to our product mix.

And also, Sportsters would maybe create more of a seasonal mix, but we really have not seen a big change.

As for V-Rod, since we just mentioned V-Rod, if you look at the press release, there's a change in both percentage of mix as well as absolute units first quarter versus first quarter in V-Rods.

Go back in historical perspective, when we first announced the V-Rod and it gained all the magazine covers and gained great popularity, the dealers were pricing the motorcycle with outrageous premiums is a way to put it.

And to combat debt, we tried to accelerate our ramp-up rate to get the product out to the field to bring that into balance.

When a customer is offering the dealer $30,000 for a V-Rod, I guess it's hard to blame the dealer.

What you need to do is bring supply and demand in balance.

And that's what we attempted to do in 2002 and for the 100th anniversary.

Now that we have got past those and we have a limited number of models in the family, we've brought this back down to a more normal level until we have more members of the family.

So I think the level that you see in this press release as a percentage of mix is more like you can expect until we add some additional product members to that family.

I am not going to speculate on what our product development is, but I can say that the V-Rod family will continue to grow.

Diane Montague, Neuberger Berman.

Thank you so much for keeping your eye on the long-term.

A couple of quick questions on details in the first quarter.

Given the normal inventory build during the first quarter, what kind of comments can you give to us on the feedback you're getting from dealers?

You mentioned briefly a little bit about the MSRP pricing.

As appropriate, give us your feedback of what they are saying to you by family, if possible.

And second question, if you could just give us a couple of seconds on the decrease in units sold in Japan during the first quarter and what you might be doing to address that?

A lot of questions, Diane.

But first, responding to your first statement, we've been business for 100 years.

We plan to be in business for another 100 years.

Our focus has always been on the long-term and will always be there.

It's just the philosophy of the business.

In talking to the dealers, not only in talking to dealers but we also measure what's going on in the retail environment.

With Harley-Davidson Financial Services, we get a look at what the average retail contracts are going for by family, by region.

So we can get an idea of what's hot, what's not, if that is an issue, or if there's a certain section of the country, if there's more than (ph), whatever the case may be.

And so we always measure that.

There's no doubt that -- number one, as I said before, we are still very fortunate that, on the average, the dealers are charging a premium.

There's probably half the dealers out there that are market-pricing the motorcycles, and they're charging a premium -- third year, almost past the third year of a recession it's a pretty good statement to me.

It's certainly shows that demand exceeds supply.

On that premium, though, I think it would be fair to say that some of the premiums are not as high as they were, and that has been our intent all along to -- it's okay; we want to have demand exceed supply, but not so much where the dealers are, in fact, gauging the customer.

And it's okay to have a slight premium, especially on more scarce models and paint colors that are hard to get.

But the premium shouldn't be outrageous.

So there's no doubt that the premium has probably come down, in some cases.

And the dealers are still making a very good margin and profit plus what they are making on parts and accessories, service business and on some of the premiums that are charged.

So our feedback has been very positive from the dealers.

Again, between the district managers, who talk to the dealers on a monthly basis, we have dealer town halls where management goes out to different regions of the U.S. and has town hall meetings with the dealers twice a year.

We have dealer advisory councils meetings, I think, six times a year.

And we have a winter and the summer dealer meeting, where we get all of the worldwide dealers in.

So we have some very good process and -- get feedback on, so I think it's pretty accurate.

In Japan, as I commented in my preamble commentary, Japan -- talking about some small changes in some small numbers.

The units were down 200 units for the first three months.

It's really a small change; directionally (ph), we'll always keep our eye on even small changes.

But we are certainly not concerned with that small change, especially in the first three months in Japan.

Our international markets do show more seasonality than our domestic markets.

So right now, between shipment patterns and this being very small units, and in fact as we look at the total market in Japan, we only have the February data through Japan.

So right now we're working with not a lot of data and some small changes in some small numbers.

But we will keep our eye on it, Diane.

Thank you.

I think that is the end.

I want to thank everybody for your time this morning.

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

Thanks again, and have a great day.