Harley-Davidson Inc (HOG) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, welcome to Harley-Davidson's second quarter earnings 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, to Mr. Jim Ziemer.

Sir, you may begin.

Thank you.

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

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

Please dial 973-341-3080 and enter the pin number 4869787 and the pound key.

The recording will be available through July 20th.

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, both 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.

And now I'll recap the earnings release.

Clearly this was a strong quarter in many ways.

This was our first ever quarter in which Harley-Davidson motorcycle sales were greater than $1 billion.

This helped lead us to an earnings growth rate of 25.8%.

This is even more impressive when you consider that the second quarter of 2003 was a quarter where we grew earnings by more than 40% over the prior year.

Put another way, our two-year compound annual growth rate for second quarter EPS is nearly 32%.

Our U.S. dealers retailed nearly 19% more Harley-Davidson motorcycles in this second quarter than in last year's second quarter and in fact our U.S. dealers retailed more motorcycles in this quarter than any other quarter in the history of the Company.

Now on to the highlights of our second quarter performance.

Harley-Davidson wholesale shipments 82,034 units up nearly 8%, total revenue 1.33 billion, up nearly 9%, net income 247.2 million, up 22% and our biggest quarter ever.

Fully diluted EPS 83 cents, up 25%.

This was a great quarter and it supports our belief that our business is strong and sustainable.

Let's discuss some additional highlights of the quarter and I'll begin with the motorcycles and related products segment.

The 82,034 motorcycles that we shipped in the quarter resulted in motorcycle revenue of 1.02 billion.

Average revenue per unit of $12,437 is down 1% from last year's second quarter of approximately $12,567 a unit.

The following factors contributed to the lower average revenue per unit.

Number one, 2004 model year pricing lowered average wholesale pricing to our dealers by less than 1% versus the 2003 pricing.

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

Two, there was a higher level of international sales, which results in a lower selling price due to favorable pricing to our distributors in certain markets.

In fact, international shipments made up 20.6% of shipments versus 18.5% in 2003.

And lastly, we also increased the percentage of Sportster shipments to 21.4%, up from 18.4% in the second quarter last year.

Looking to the last six months of 2004, U.S. wholesale price increases for the 2005 model year motorcycles will generally range from 0 to 2% above prior year prices with an average increase of approximately 0.5%.

Now, the specific model by model prices will be announced tomorrow at our dealer meeting in San Diego.

Turning to parts and accessories and general merchandise.

Parts and accessories and general merchandise both (inaudible) very strong quarters.

P&A revenue in the second quarter of 2004 was up 12.7%, with revenue of $230 million.

General merchandise revenue for the second quarter was 53 million, up 21.5% compared to last year's second quarter.

Looking at margins.

Gross margin was 37.9% compared to last year's 36.4%.

As we mentioned in the press release, gross margin was positively impacted by operational efficiencies in our factories that generally occur at the end of a model year.

Looking forward to the back half of the year, gross margin in the second half of the year will not be as high as experienced in the first half of the year.

This is primarily for two reasons.

Our third and fourth quarters will not benefit from the same efficiencies that we experienced in the first and second quarters of the year as they related to the 2004 model year and, number two, there's always additional costs associated with the start-up of new model -- of a new model year.

Moving now to the income statement.

Almost half of the operating margin improvement was driven by a gross margin improvement.

Another major factor was the timing of some marketing related expenses.

In 2003, marketing, advertising, and some program costs were accelerated into the second quarter to support the 100th anniversary activities. 2004 operating expenses will be higher in the second half of the year, which is more typical of the Company's operations.

I would like to point out that foreign exchange had a minimal impact on the second quarter.

The net impact of changes in foreign currency exchange rates contributed approximately $3 million to the higher operating profit.

Now turning to our financial services segment.

Harley-Davidson Financial Services delivered another great quarter with operating income of $49 million, up 10.2% over the last year's second quarter.

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

Our second quarter securitization of 626 million in retail motorcycle loans generated a gain of $19 million, a gain as a percentage of receivables sold was lower than recent transactions due to increased competition and rising market interest rates which are creating tighter -- tighter margins on the securitizations.

The enhanced dealer participation mentioned in the press release was launched mid-way through the second quarter, so we won't see the full impact of that change until the third quarter.

Over the last several quarters, a number of regional institutions have come into the market and payed greater participation rates -- participation fees to Harley-Davidson dealers for originating motorcycle loans.

HDFS responded to this competitive threat by increasing its payments to its dealers for loan originations.

While this has had a narrowing effect on the securitization margins, HDFS is pleased with the initial dealer response to this change.

Now, as a result, we expect future gains on sales securitizations to be in the range of 200 to 250 basis points in this current environment.

This would result in HDFS earnings for the second half of 2004 being approximately equal to the second half of 2003.

HDFS retail market share, which we define as a percent of total new Harley-Davidson motorcycles sold in the U.S., they're financed by HDFS, was approximately 38% for all new Harley-Davidsons sold in the U.S. in the second quarter.

This is slightly above the prior year's second quarter market share of approximately 37%.

Some additional highlights for HDFS include the following: At the end of the second quarter retail delinquencies, on a managed basis, find it's greater than 30 days delinquent were 3.5% compared to 4.0% at the same time last year.

Annualized credit losses on a managed portfolio basis were 63 basis points, which is lower than last year's 75 basis points.

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

There are three primary reasons why we've been able to accomplish that.

One, we continue to benefit from the strong credit quality in the portfolio, as over 70% of the borrowers are A and B credits.

We continue to benefit from the strong collateral value of Harley-Davidson motorcycles, and three, our emphasis on collections.

Standard and Poor's recently provided third party validation of the strong performance of our portfolio by raising the credit rating of subordinated tranches of 6 of our securitizations issued between 2000 and 2001.

The rating upgrades ranged from an A positive to a AAA.

To finish the commentary on HDFS, we are maintaining our long term guidance of HDFS operating income growth rate slightly higher than our motorcycle unit growth rate.

Moving an to cash and cash flow.

We started the year at 1.3 billion in cash and marketable securities and we're still there midway through 2004.

We generated over $490 million in free cash flow during the first six months and we define free cash flow as cash generated from operations less capital expenditures and dividends.

We have capital expenditures of 64 million for the first six months and we still expect full year 2004 capital spending to be in the range of 250 million to $300 million.

Depreciation expense for six months was a 105 million.

For the year, we expect approximately 215 million depreciation.

During the quarter we spent $69 million repurchasing 1.3 million shares of Harley-Davidson stock.

For the year we've repurchased 9.1 million shares at cost of $473 million.

Moving on.

Our shipment target for the quarter was 82,000 units of Harley-Davidson motorcycles and we achieved that.

We still expect to ship our target of 317,000 Harley-Davidson motorcycles for 2004 with 850,000 units in the third quarter and 800 -- excuse me, let me back up.

We still expect to ship our target of 317,000 Harley-Davidson motorcycles for 2004 with 80,500 units in the third quarter and 80,500 units for the fourth quarter.

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 greater than 650 cubic centimeters.

For the quarter our U.S. dealers experienced an 18.8% increase in retail sales.

This brings the 6 month year-to-date retail increase of 16.5% over 2003.

In fact, retail sales have exceeded wholesale shipments by over 16,000 units in the first 6 months of 2004 in the U.S.

Turning to our international markets.

Retail sales were up in Europe, but only by about a hundred units.

Retail sales in Japan were down, but only about 400 units.

Our retail sales in these areas are tracking to the industry sales in these heavyweight motorcycle markets.

Now, although we typically don't talk a lot about Canada in these press releases, I would like to mention that retail sales have been particularly strong this year and up approximately 20% or about 1300 units over last year's first half.

Tomorrow, in San Diego, we will be introducing our entire lineup of 2005 model year motorcycles to our worldwide dealer network.

In conjunction with this announcement, we'll be updating our Harley-Davidson website with product details, features and pricing.

The dealer meeting is a big event for Harley-Davidson as we will have over 6,000 attendees from around the world who will participate in this event.

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

Our confidence is fueled by our strengths in the the following areas: Our passion and hard-working employees, our exciting products including the new 2005 models being introduced tomorrow, a focused long-term strategy, a strong balance sheet and strong free cash flow, and a word-class brand that is admired and respected around the world.

When you combine all of those strategic advantages with an experienced management team, we have confidence in our long range objective, to satisfy demand, perform a 1000 Harley-Davidson motorcycles in 2007 and to deliver an annual earnings growth rate in the mid-teens.

With that, I will now open up the call for questions.

Thank you, sir.

The floor is now open for questions.

If you do have a question, please press star, one on your touchtone phone.

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

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

Also, please limit yourself to one question in order to allow the maximum amount of callers to ask their question.

Once again, that is star, 1 to ask a question.

Our first question is come from Felicia Kantor of Lehman Brothers.

Hi, Jim, good morning.

Good morning.

I just have a question for you on the retail registrations that you just commented on?

Yes

I'm wondering with Europe, the industry data being -- coming from May and you guys reporting June, and then in Japan, also having that month difference, and then just looking at the numbers, it looks like, you know, the industry -- you can't really compare them, but it looks like the industry is doing better than you guys are.

If we had the June data, would it look more even?

I mean what's going on in Europe and Japan, and then just also on that you did mention Canada, you really haven't talked about it before,so I'm wondering, you know, what's going there on that things are so strong.

In the international market the reason we off -- we put in May industry data is because that's all that's available.

There is a time delay in getting the market data from any of the international markets, in fact, I'll jump to Canada for a second.

Canada only gives their industry data on an annual basis and that's why for comparability purposes we have not before commented on Canada, but to get a full flavor of the international markets, yes, we are -- Europe and Japan on a unit basis are virtually even with last year, percentage basis a little different, but Canada is up fairly significantly in the units.

Canada, again, we have basically the number one market share in the U.S., Canada, Australia and Japan, so a lot of the markets where we have no known market share and that the economies are doing well, we are doing well.

I would say, then, that being my kickoff, I think Europe and Japan are really a reflection of the economies in the international markets.

Europe in particular.

Europe, obviously it's not one market.

There's many different countries there.

Germany is by far the largest heavyweight motorcycle market in Europe.

That market is the one that's down for the industry, as well as for us, and we are doing well in the next three larger markets, but they are significantly smaller than Germany.

Those markets being the UK, France, and Italy.

We're doing fine in those markets, but Germany has a, you know, on a percentage basis, a bigger impact and that's why it's kind of a negative comparison.

Japan, this is the second year that the heavyweight motorcycle market has been down.

Last year we were up in a down market and right now we're kind of going with the market.

But, again, it's some smaller change in small numbers.

When we compare market-to-market, Canada actually is about the same size market for us as is Japan, but typically don't comment on it because we don't have the comparable industry data.

Thank you.

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

Great, thanks.

And operator, if you could keep the line open while they're answering just in case I need to clarify something.

I had a question, then also wanted to just clarify the comment you were just making about Europe and Japan.

I guess with the dollar as weak as it relative to last year, wouldn't -- one would have expected , maybe, that Harley would perform better then the market overall in Europe and Japan.

What would you attribute it to that that's not the case.

In Europe, you know, we keep the pricing in the local currencies so that there is not that up and down impact of foreign currency, so the market they're looking at is pricing relative to what they've seen versus prior years and therefore we will track closer to the economy.

Again, also, we have a smaller market share, so it's not like we are the dominant player.

Okay.

And then your guidance about margins in the second half, I understand relative to the first half you're saying margins won't be as strong, but you would still guide that margins would be up on a year-over-year basis in the second half, is that correct?

Yes, margins typically, if you look at -- there is some noise in the data as we look at the 2003 pricing over the 14 month model year, but typically the impact of introducing a new model, the start-ups, margins go down and you lose those efficiencies of working on the 2004 model, at the end of the model year you get a lot of efficiencies.

Those go away.

So I mentioned in the press release and the conference call is margins do go down, but actually when we compare them to last year, they do go up.

Thank you.

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

Good morning, Jim, and congratulations.

Thanks, Dave.

On Sportsters, might those be more of the mix in Q3 than they were in the first half due to the early release and another question on the Sportsters.

Of the 1200C model seems most popular within the family, will the '05 model year emphasize that model more than the '04 model year did?

Number one, your comment on the earlier release of Sportsters and let me give a little background to all the listeners.

We released the old -- typically new models go out right after the dealer meeting.

So our dealer meeting is starting tomorrow.

We would typical, in the middle of July, release the new model year.

This year the redesigned Sportster coming out last year, it was a very hot model, some of our dealers reporting that they would be running out of inventory before we got to the dealer meeting.

We responded with letting out the Sportsters starting June 28th, which by the way is in our fiscal third quarter.

Our second quarter ended on June 27th, so in the U.S. market none of those '05s got out to the market in the second quarter.

So, therefore, that does not skew the mix that you were referring to of Sportsters being a higher mix.

Production that we would experience in the third quarter does go to the market in the third quarter and that mix stays the same.

You had a question on the 1200s.

There's no doubt that the 1200s are a very popular model, especially the 1200C, but we've been recognizing that all along and that should not be a significant change in our mix between the 1200s and 83s versus the '04 models.

Thank you.

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

Hi, good morning, gentlemen.

I was wondering if you could -- when you look at the retail sales if you could maybe breakout those -- the specific months and did you -- and if you can't, could you just comment whether you saw any specific weakness in the month of June.

As we spoke before, consistently for years that retail data really on a month to month basis lacks a lot of comparability for different things that go on, different cutoffs, different number of weekends, holidays maybe ending up, so month to month data is really -- lacks the comparability.

We've said it to the outside world.

We really have to when we look at retail data, almost look at it on a day by day basis.

And when I say day, I mean Saturdays with Saturdays and stuff like that, so I wouldn't comment on the monthly data, though we have very good retail data internally as we look forward on what's going on, but comparability lacks.

June, we had a, just entirely we had a very strong second quarter and that would be the best way to put it.

Okay.

And then when you look at the strength in the market, I guess, I was surprised that you didn't -- you're not raising prices greater than the average point 0.5%.

Can you comment on what went into that decision and can you also comment on commodity prices?

There is no doubt that we have pricing leverage.

There's evidence by dealers in charging above MSRP.

I mean, I know of no other product third year into recession where dealers are charging above MSRP on a product that costs an average of over $10,000.

And, in fact, on the new vehicles that are -- that are going for more than their original MSRP.

So, there is no doubt that we have pricing leverage.

At the same time, this is a balance.

We're trying to grow the business for the next hundred years.

It's a balance with the customers and the dealers.

Not all of the dealers charge above MSRP, so we're, you know, we're not trying to get every last dime out of the customers, we're trying to run this business for the long run, and that's the reason for our pricing strategy.

Also, looking at the competition, not trying to have a big gap between where we are in the competition.

The last thing we ever want to do is run into a position where the automobile companies have run into where you end up discounting your product.

So, our pricing strategy has always been conservative, has always been less than inflation, and we're going to maintain that.

As for commodity prices, there's no doubt that commodity prices, especially in terms of steel and aluminum and nickel, have gone up over the last 6 or so months.

We have long-term relationships with our suppliers.

When commodity prices go down, we don't ask for rebates and when they go up we ask them to honor their commitments.

And when -- but, at the same time it is a mutually beneficial relationship.

We will look at, you know, when they make a business case for a surcharge, we will look at that, but we have not been greatly impacted by those commodity price surcharges.

There have been very few if -- that I know of that we have seen in the past.

In fact, when we look at just a little background, you look at the motorcycle and you see metal, metal, metal, but the reality is less than 5% of the cost of that motorcycle is really in metal cost.

Most of it is in value added and all the exotic paint and the machining and the other purchased parts.

Okay, thank you.

You're welcome.

Thank you.

Our next question is coming from Tim Conder of A.G. Edwards.

Thank you and congratulations, gentlemen, on another great quarter.

Thanks a lot, Tim, appreciate it.

Revisit the margin issue.

Yes, you do have some normal seasonality here, but when we were touring your new plant there in York, Pennsylvania, you mentioned that by the end of the third quarter you were going to take your old plant where you have the touring bikes and take the two lines there and collapse it down into one.

Plus, you also mentioned in the new plant your per minute station is about two minutes versus five on the old plant.

Should we see towards the end of the third quarter into the fourth quarter some of those gross margin efficiencies from those new -- from the new facility and then the remake of the old facility there start to become evident and then, more importantly, into '05.

There's no doubt that when we talk about margin, there's many components and many things that go into it, whether it be from outside suppliers changing processes, new model year changes, you know, even where we come out with just a new product, all the rest of the models in the model year lineup, there are many changes and that goes into our start-up costs where somebody, now, has been working on the job in the '02 -- '04 model year competitively for many, many months, it's now changed and there's a new process or new something else and that motorcycle has changed which creates -- you know, you loose that efficiency plus you've got some start-up issues.

One of those start-up issues you just pointed out is the combination of the two touring bike lines at York, Pennsylvania.

When you collapse those together, everything changes, the stations changes, the people are working on each station, their job descriptions or what they are required to do changes, there is disruption.

So that will -- yes, we're doing this to improve margins over the long run.

In the short term, there's going to be some additional start-up costs that I just didn't go into, but you've now brought it up and that is one of the start-up costs that we're talking about is the process change in the touring bike line.

So there's many things that go on.

When we talk about the Softail plant and bringing that on line and changing the number of minutes per station, we've been seeing that in the first and second quarter and it will continue to improve.

But, it's not like it's just going to jump out at us.

Those things change over time, so the reality is over all, I think some good guidances that some of the operating efficiencies, the experience of doing the model year at the end of the model year will go away as you start a new model year and you have some start-up costs.

But, again, so there is some fluctuations, there's some patterns within our -- across our cost line.

Okay.

And then you mentioned that there were some -- in the comparable year ago first half that you had some 100th anniversary expenses in SG&A.

Were there any of those expenses in SG&A in the third quarter of last year and then on HDFS, your dealer participation, with that going up will that also potentially help you gain a little bit more share?

On SG&A.

There's no doubt that, as I pointed out in the conference call, that there was a lot -- you know, we've often said that as different things come up, we will, like the 100th anniversary, we'll do some marketing for the 100th anniversary that we would have typically done in some other area.

So, we'll change where we spend it and also last year it changed to timing.

Most of that occurred in sponsoring some of the events in that -- in the second quarter and preparing for that big party in the third quarter.

There is some spending, but it's not a big deal.

I think the overall guidance that operating expenses are going to be higher in the last 6 months of 2004 versus 2003 is just some good guidance.

There's some spending, but it's not to the extent that I was trying to explain when I was going over the explanation of the second quarter.

And in commenting on the dealer participation fees paid, enhanced dealer participation fees paid by HDFS starting in the second quarter, midway through the second quarter, there's no doubt that number one, if we had not done that we probably would have lost market share, speculation but I think competitive forces, I think that's reasonable to expect.

So, number one, we expect to offset what could have been lost market share and yes, we really think that with our mutual beneficial relationships with the dealer, the Affinity brand, and then being competitive will help us gain some additional market share.

That is definitely our hope.

Okay.

Thank you.

Once again, ladies and gentlemen, to ask a question, please press star, 1 on your touchtone phone at this time.

Our next question is coming from Dean Gianoukos of J.P. Morgan.

Hi, just a couple of quick questions.

First, you mentioned putting the Sportster out a little earlier.

In the past, if we go back four or five years, you used to have wait lists on pretty much all of your models and and you never moved, or I don't recall you back then moving production up like this, and I', wondering is this an effort to take some of the seasonality out of the business?

Maybe you can -- can you discussion what drove you to move production up this time?

Number one, we didn't move production up.

What we did is we --

Real estate, sorry.

We moved shipments up.

To put this is in context, we would have typically shipped these out tomorrow, which is the 15th, so basically we moved it up 2 weeks.

Now, 2 weeks is certainly not going to take seasonality.

But really what we are trying to do, the Sportster is the entry level vehicle to get into Harley-Davidson.

And last year, and the yeat before, it was the 100th anniversary, we sparked a lot of dreams with people that want to get in a Harley-Davidson and you want to nurture and cultivate those dreams and the best way to do it is to have some product out there.

So, as those people responding to all of the media impressions and the things that we did last year, the coming in and why have a lull in that?

So we discontinue that momentum, and sense the 100th anniversary doesn't come along that often, it's kind of hard to draw back on history to say that this is what we typically have done or not done.

This is really responding to all of these new dreamers.

Okay.

And secondly, I know you've left some of the dealers the option to offer zero down if they want to.

Is that something you're going to keep open?

The dealers have always had their option to go out and buy programs, whether it be for HDFS or somebody else.

It depends on -- we've always left dealers -- always know they market the best.

That goes along with, you know, our best way to advertise, typically, is call up advertising dealers that know the market best.

So, depending on their own market, they may have ways -- this may be a way to attract customers into the door, but, yes, I mean, again, they run their own programs, and it may be with or without HDFS.

Okay, thanks.

Good quarter.

Thank you.

Thank you.

Our next question is coming from Dick Henderson of Pershing LLC.

Yes, good morning, Jim.

Again, a really terrific quarter.

A question on the international.

I'm a little confused here.

Your exports were up 20% in the second quarter and up 13% for the first half and the markets were flat.

You made some comments about Canada and you made some about mix.

Could you put a little color?

Is the inventories rising and therefore exports kind of will grow more slowly in the future, which would enhance your domestic mix and margins?

Could you -- ?

We don't comment on dealer inventory, whether it be US, international markets, but really to get a good handle on, you know, to get to where you're going is you need to look at, and I don't it have in front of me, a model year's shipments.

We're trying to -- number one, European markets are more seasonal than U.S. markets, so as we try to recognize that shipping patterns do change, so a better way, like I said I don't it have in front of me, would be to look at our model year shipments including late last year.

I think you'll see that those were skinnied down and we've responded to getting the motorcycles closer to when they need it by increasing the shipments this year, so I think that we're in tune with the retail sales.

I think that's the best way I can answer that for you.

Okay.

Second question, a picky question.

On the line item investment income and other net up substantially, could you kind of break it down and give a little guidance going forward?

Thanks.

Investment income and other, typically in the past that was always interest income, expense and always it was two lines.

Since it's a very immaterial amount, we've put those together.

There's a combination of them -- I mean, guidance is very difficult on that one and it is an immaterial one.

Had a combination of returns on our cash and, you know, other things that go through that line, such as contributions to our foundation.

So it is very difficult to give any guidance, but I can say that it's -- you'll always maintain it -- it should always be a relatively small number unless interest rate market starts going to where we're getting 5% or greater on short-term interest, then I think with our interest -- with our cash balances, that number would become more meaningful.

Barring that, it is a fairly small and insignificant number.

Okay, thanks

You're welcome.

Thank you.

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

Thank you.

Could -- in the third quarter your numbers suggest that shipments to dealers are going to be up about almost 20% year-over-year.

Could you talk, Jim, a little bit about what initiatives you have for the dealers -- to help the dealers to move this, or if this is part of the plan that you were just talking about to make sure that dealers have a lot more stock on the floor?

And maybe you can also talk about whether there's going to be an unusual number of Sportsters shipped.

In that connection, was -- did Sportsters make up an unusually large part of registrations, and can you comment on the V-rod that seems to have disappeared from your statistical tables this year -- this quarter.

There's no doubt that Sportsters, as we pointed out, were a very hot commodity as we continue to bring in new customers into the franchise and thus we moved up our retail shipments about -- our wholesale shipments, excuse me, to our dealers about two weeks more than normal, as I just commented on the last question.

So Sportsters were a little higher percent, again.

Sportsters in our wholesale make up a little more than 20%, and on the year-over-year basis, they would make 20% of retail.

They were a little higher than that and I don't have the number in front of me, Mike, but Sportsters, again, were a very hot item, especially in the second quarter.

The V-rod, we have typically combined our custom motorcycles on one line on our tables.

That is our Dyna family line, our soft tail line, and our custom performance bike, the V Rod.

Now, when we first came out with that, we broke it out so that it was a new family of motorcycles.

We've decided just to put together our custom and touring bikes and do like this.

This is consistent with the way that we prepared our 10-Q for the first quarter, so we did break this out on our press release in the first quarter, but we've decided for competitive reasons to combine this as much as possible and just call it custom motorcycles and that was the driver.

Also, it's a relatively small number in considering all the total of custom motorcycles, so it was also, again, not a material number.

Since I was answering your questions kind of in the backward order, I forget your first question.

It looks like that shipments to dealers are going to be up on the order of about 20%, they're up kind of something like 8% in the first -- in the second quarter, and I was wondering what -- if part of this is to make sure that there's more stock on the floor for dealers throughout the year, and to what extent do you have some initiative to help the dealers to both carry and to move this increased amount of product?

The reality is, Mike, what drives the biggest increase is that the way we divide our fiscal quarters up, there was just more production days this year versus last year, and I won't go into the number of production days, but, I mean, it's being driven by primarily production days than it is by a capacity increase, and so, I mean, year-over-year basis on selling days, the dealers will not see a 20% increase, there will be more normal increase, because this, again, is being driven by production days.

And, therefore, I mean, this is just responding on a normal basis, and there is no need for any particular special promotion, as you questioned.

Thank you, Jim.

You're welcome.

Thank you.

Our next question is coming from Bill Priebe of Geneva Capital Management.

Hi, Jim, congratulations.

Thanks.

V Rod, just back to that one more time, as the other gentleman pursued it.

Kind of looks like, you know, you're just kind of lumping it in as a special interest bike, and I've always been impressed by the design and the water-cooled engine, and a lot of -- a somewhat different approach.

Is this another way of saying that the demand and the response has not been all you'd expected it to be after you introduced it?

Good question, Bill.

No, not at all.

Again, going to how much competitive data you want to leave out, we've decided to put it in the table as a custom motorcycle as we do Dynas and Softail and so therefore, that's a predominance of our total motorcycle shipments.

But the V-rod has been a very successful motorcycle.

Initially, as we shipped it out, it was probably gobbled up because of the low quantities by a lot of our existing customers and those people that wanted the -- the more horsepower in a Harley, and they were paying considerably over MSRP.

As it came more into balance, we've been getting a full range of customers new to the family, younger customers, as well as the existing Harley-Davidson, so it covers a lot of breadth in that it's got the performance attributes, it's got a different dragster styling, it's got a lower saddle seat height, so it appeals to those customer that are more inseam impaired like myself.

It does a lot of great things.

In fact, on the V-rod, the first year out, sold 2.5 times more V-rods than our Fatboy, which is probably one of the more service motorcycles and he's still extremely popular.

So we are quite satisfied -- quite happy.

Satisfied is not even a good word, quite happy with the V-rod.

It's just that on the table it's just a matter of putting out information in a more succinct what matter.

Okay, thanks Jim.

Thank you,

Thank you.

Our next question is a followup coming from Tim Conder of A.G. Edward.

Thank you.

Jim, two things.

A clarification, your operating profit guidance for HDFS in the back half of the year, was that equal to the second half of '03 or comparable to the first half '04?

No, that was equal to the second half of '03, basically with the guidance of one, HDFS growing slightly faster than the motorcycle unit growth, and what we've already experienced, you could almost back into that number, I thought it would make it painfully obviously.

Okay, and one other clarification.

When a dealer chooses to do zero percent down payment, or zero percent interest, that, whether they do it with HDFS or another -- or another institution, that basically comes out of their profit if they want to do that, is that correct?

Or is there something else that they have to do?

Oh, there's no doubt.

It's all the dealers.

Again, it's what they, you know, think they need to drive their market.

They may do TV advertising that they co-oped, they may be doing events and rallies and bands or whatever, and they may do a kind of a come on type promotion that there is zero down and they will buy that down, it's all on their nickle.

Okay.

Thank you.

Thank you.

Our final question is a followup come from Robin Farley of UBS Warburg.

Thanks.

I just wanted to clarify, Jim, two comments that you made.

You were saying that this near 20% production increase in the third quarter, I don't know if I understood what you meant when you said it -- the dealers won't see it or won't feel it as a 20% increase.

If you could clarify that, and then also with the V-rod, you were talking about the introduction versus the Softail, but, I mean, the Softail production has increased every year.

It looks like just from Q1 -- the Q1numbers that you did break out that V-rod production was about half of what it was last year.

Is it -- can we assume that will be roughly the case for all of '04?

Okay.

On the clarification on the question asking about the 20% increase, again, 20% increase is year-over-year and is really driven by the production days.

Now, as the dealers see this, as they come in, its based on selling days, or what days their open, and they will see an increase and it's going to be more in the area, you know, of our growth rate.

And it doesn't come out to be 20% because that's dictated on -- depending on which plant is shutting down what period of time during the third quarter.

On V-rod, I was scribbling here.

I'm trying to read my own notes.

Oh, your question was on actually the amount of production.

Yes, the first quarter of this year on V-rods was lower than first quarter last year.

Basically, in coming out with -- number one, when the V-rod came out with all of the excitement, the magazine exposure, the media, I mentioned that many people were paying up on V-rods considerably, with -- you know, on the MSRP of $17,000, some people were paying $25,000, $30,000.

To respond to that, we needed to increase our production of V-rods and quickly ramped it up to kind of answer that big bubble out there.

At that point in time, as we addressed that we've evened off or kind of brought back the production level, so it is lower than 2003 to a more stable level until we bring out more members of the family.

V-rod will continue to grow, but right now, with only two members to that V-rod family, it really doesn't -- it's hard to support a family of motorcycles with two members.

That will grow when we come out with more -- more product in that family.

I can't obviously talk about our new products, but right now, to answer your question, 2004 versus 2003, V-rod production is down, but, again, 2003 was responding to the market.

Sir, do you have any closing comments?

Just want to say that I want to thank everybody for their time this morning.

Remember the taped replay of this conference call can be heard by calling 973-341-3080 and entering the pin number 4869787 with the pound key, until July 20th.

Or by accessing it on our website.

And if you have any questions, please contact Investors Relations, that's Pat Davidson, at 414-343-8002.

Thanks again and have a great day.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time, and have a great day.

Thank you.