Harley-Davidson Inc (HOG) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Harley-Davidson third 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.

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

I'd like to remind you that this call is being recorded and a replay will be available after 11 a.m.

Central Standard Time this morning.

Please dial (973)341-3080 and enter the pin number, 5189173, and the pound sign.

The recording will be available through October 20.

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 this information in this call.

Now I will recap the earnings release.

Here are some highlights of our strong third quarter.

Harley-Davidson wholesale shipments 80,578 units, were up over 19%.

Total revenue, 1.3 billion, up nearly 15%.

Net income, 229 million, up almost 21%.

Free cash flow for the quarter, 273 million.

And earnings per share, 77 cents, up 24% over last year.

We believe these results speak for themselves.

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

As I mentioned, this quarter were you shipped 80,578 Harley-Davidson motorcycles, or a 19.4% increase in unit shipments.

This large quarter over quarter increase is primarily due to the comparison of York operations this year versus last year.

We are currently up and running at normal production pace this year, while last year at this time, we were still in a ramp up mode at our Softail plant.

Overall, Harley-Davidson unit shipments resulted in motorcycle revenue of 997 million.

This represents an 18% increase over last year's revenue.

Average revenue per unit of $12,368, was down about 1.2% from last year's third quarter of $12,515 per unit.

The following factors contributed to the lower average revenue per unit: High demand for completely redesigned Sportster family supported our increase in the Sportster mix from 19.8 last year to 23.5%.

This increase is consistent with our plans to keep Sportster mix between 20 and 25%.

As a result, Touring bikes went from 31.2% to 27.1%.

This change in the motorcycle family mix more than offset the positive impact of foreign exchange on the revenue per units, on revenue per motorcycle unit.

Turning to parts and accessories and general merchandise.

P&A revenue in the third quarter of 2004 was 224 million, up 8% versus last year.

General merchandise revenue for the third quarter was 61.4 million, up 1.4% compared to last year's third quarter.

These growth rates are still impacted by difficult comparisons over the last two years caused by the 100th anniversary.

As such, we are comfortable with the underlying growth rates for P&A and general merchandise.

Looking at the margins, gross margin was 38% compared to last year's 35.6%.

As we mentioned in the press release, gross margin was positively impacted by foreign currency exchange rates and the impact of our York Softail factory, now fully operational versus ramping up last year.

To give you some additional clarity, number one, foreign currency added approximately $8 million to gross profit in the third quarter.

And, number two, last year's impact of the Softail start up and the reduced levels of production cost us approximately $10 million in lost efficiency.

We all know that prices in the metal markets continue to increase.

To date, these increases have had a minimal impact on margins as our suppliers have managed most of the risk.

We expect to experience a 3 to $4 million increase in metal surcharges during the fourth quarter.

Now moving down the income statement.

Operating margin improvement was driven by our gross margin improvement.

As we mentioned in the second quarter conference call, operating expenses would be higher in the second half of the year compared with operating expenses in the first half of the year, which is a more -- is more typical of the Company's operations.

Third quarter operating expenses increased from the levels experienced in the first half, and were 14.5% of revenue this quarter.

Now let me spend some time with the Financial Services segment.

Harley-Davidson Financial Services delivered another great quarter with operating income of $50 million, up 8.4% over last year's third quarter.

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

Our third quarter securitization of 625 million in retail motorcycle loans generated a gain of 13.8 million.

The gain as a percentage of receivables was lower than prior transactions, due to the increased dealer participation fees and rising market interest rates.

Increased competition in the motorcycle retail lending market has led us to increase the amount we pay our dealers for originating motorcycle retail loans, and this has lowered our gain percentage.

As we stated in the release, this gain of 2.2% is in the range of 200 to 250 basis points that we expect for securitization gains in the current competitive market and interest rate environment.

HDFS's year-to-date 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, was approximately 40%.

This is well above last year's nine-month year-to-date market share of approximately 38%.

Some additional highlights for HDFS include the following: Retail delinquencies on a managed basis at the end of the quarter remained low at 3.92% versus 3.93% at the same time last year.

Annualized credit losses on a managed portfolio basis were 69 basis points, which is lower than last year's 73 basis points.

As we've 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.

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

Number two, we continue to benefit from the strong collateral value of Harley-Davidson motorcycles and, lastly, there is a continuing emphasis that we place on collections.

I should take this opportunity to mention to you that we are not planning to securitize retail receivables in the fourth quarter of this year.

The 625 million securitization was completed in late in September, leaves us with a smaller amount of retail loans in the pipeline as we start the fourth quarter.

As a result, we will wait until the first quarter of 2005 to go back to the securitization market.

As you may already know, larger securitizations allow us better leverage transaction cost, as well attract certain larger investors.

Therefore, we anticipate fourth quarter HDFS operating income to be consistent with 2003's fourth quarter operating income.

Furthermore, we are maintaining our long-term guidance of HDFS operating income growth rate that is slightly higher than our motorcycle unit growth rate.

Let me move on to cash and cash flow.

We started the year at 1.3 billion in cash and marketable securities, and now we're at 1.5 billion.

This increase in cash is accomplished with some of the following highlights: We had 760 million in free cash flow during the first 9 months.

We define free cash flow as cash from operations less capital expenditures and less dividends.

Our capital expenditures were 110 million for the first nine months.

We now expect full year 2004 capital spending to be in the range of 200 to 225 million.

Depreciation expense for 9 months was 161 million.

For the year we expect approximately 250 -- excuse me, 215 million in depreciation.

We spent $91 million during the quarter, repurchasing 1.55 million shares of Harley-Davidson stock.

For 9 months year-to-date, we have repurchased 10.6 million shares at a cost of 564 million.

Moving on.

Our shipment target for the quarter was 80,500 Harley-Davidson motorcycles and we achieved that.

We expect to meet our target of 317,000 Harley-Davidson motorcycles for 2004 by shipping an additional 80,500 units in the fourth quarter.

We have established a target of 339,000 Harley-Davidson motorcycles for 2005, which is a 7% increase over our 2004 target and in line with our previously stated guidance of 7 to 9% unit growth.

We believe this unit -- we believe this growth rate is prudent based on U.S. retail demand for our motorcycles, but tempered by the challenging international marketplace.

Turning to the retail data, I'd like to review our performance in the worldwide head weight motorcycle market.

We define a head weight motorcycle as having engine displacement greater than 650 cubic centimeters.

Retail sales in the U.S. increased 7.1% for the first nine months of this year.

As Jeff mentioned in the press release, our U.S. dealer network retained -- excuse me, retailed 9.8% fewer Harley-Davidson motorcycles than they retailed in 2003's 3rd quarter when they set an all time record retailing 27% more Harley-Davidson motorcycles than in 2002.

Furthermore, there is no doubt that the hurricane season and its aftermath had an impact on our customers and our dealers in the Southeast.

Although the continuing impact of weather related issues on retail activity is difficult to access, we plan to implement some limited incentive programs.

These programs will be offered in selected markets that were affected by the adverse weather and are designed to bring customers back to the dealerships during the fall and early winter months.

Turning to our international markets, we have seen strength in the following markets: Canada, France, United Kingdom, Spain, and Italy.

But this has been offset by weakness at retail in Germany and Japan.

As many of you know who follow us, Germany is the largest head weight motorcycle market in Europe, and therefore has a big impact on the European results.

The current softness of the German motorcycle market has been attributed to the weak German economy.

Retail sales in Japan were down, but only about 850 units as the entire head weight motorcycle industry is down slightly through August.

Last year's anniversary celebration provided us with tough comps for 2004.

However, we believe that the impact of legislation that takes effect in 2005 regarding two up [ph] motorcycle riding will help the head weight motorcycle market grow in Japan in the future.

To wrap up, 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 strengths in the following areas: Our passionate and hard working employees; our exciting new products, including new 2005 motorcycles; a focused long-term strategy to create demand; an aggressive plan to achieve high levels of quality and productivity; the best motorcycle dealer network in the world; the strong balance sheet and strong free cash flow; and a world-class brand that is admired and respected around the world.

When you combine all these business advantages and experienced management team, we have confidence in our long-range objective to satisfy demand for 400,000 Harley-Davidson motorcycles in 2007, and to deliver an annual earnings growth rate in the mid-teens.

I will now open up this call for questions.

[Caller Instructions].

Our first question is coming from Felicia Hendrix of Lehman Brothers.

Hi.

Good morning, guys.

Just a quick question, actually, Jim, on something that you just touched upon and that was your reiteration of your target for 2007 of 400,000 bikes.

To get to this target, it implies about an 8.5% unit growth rate in '06 and '07, given the guidance you've given for '05.

So, I'm wondering to what extent in that forecast are you assuming a return to strength in the international markets as you did comment that your guidance for next year did take some of that weakness into consideration?

And then talking about your international business, what are you doing if anything with your dealers in Germany and Japan to perhaps stimulate sales?

And then I'm wondering if you can just touch upon the legislation in Japan that you mentioned.

You've talked about that for awhile, I'm assuming that has to do with the tandem riding and when that might come in and what kind of effect that might have.

Thanks, Felicia.

The 400,000 units, again, we've said that 400,000 units for 2007 is our still our target, and it's well within the range if we grow, as you mentioned, between 7 to 9% from here to 2007 we will achieve the 400,000 units.

So again that's well within the range.

And international, on a temporary basis -- we can't control the economy.

So we are tempering our enthusiasm for demand, tempered by what's going on in the international market.

Long-term we believe that the international market will resume its growth rates.

We're assuming a normal growth rate in international, both in our major markets whether it be Canada, Japan, Europe, and some of our other Asia-Pacific markets.

As for stimulating -- and those economies, especially Germany where you've got a rough economy, basically you need to work with the dealers to make sure that they can weather the storm, and not stuff units down that they don't need at the moment, so it's working with those dealers to make sure that they can remain -- weather the storm is probably a better way -- through this rough economic time.

We are doing some programs to help them, but it's mainly so that they can weather the storm, which is, in Germany, at least, our largest market, is due at a weak economy.

In Japan, I made the comment, and I used the phrase up right two up riding, and thanks for bringing it back.

Two up riding, referring to is tandem riding, as you pointed out, in Japan.

Right now for the freeways and interstates, Japanese riders of motorcycles are not allowed to have more than one person on a motorcycle.

So, typically for riding events and rallies and if you want to go out in the country, to get there one person would ride the motorcycle out and the companion would take a train or something out.

We think that that is inhibiting some of the excitement and enthusiasm behind the lifestyle of motorcycling, and once enacted that two up riding or tandem riding is allowed, that that will add some excitement to the entire head weight motorcycle market.

Next question.

Thank you.

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

Good morning, Jim.

Good morning.

Can you comment on any new steps you might be planning to help dealers combat seasonality in colder weather markets in the up coming months?

A question on what to do, number one, I don't think the seasons have changed anything, but in terms of, as we look at the markets we are adjusting some of our allocations systems to make sure that on a colder month basis that we have some more units in the South where previously we were allocating kind of an equal basis whether the dealers were in the North or South.

That created an unequal distribution versus retail sales.

So we are trying to build that into our allocation formula and allow for that.

Allow for the fact that there is riding 12 months of the year in many of our Southern markets.

I think that's probably the biggest thing we are doing is recognizing that.

Thanks.

And a couple of margin questions.

You mentioned surcharges in Q4.

Is it possible you'll see more of those beyond Q4?

Right now as I mentioned in the opening of the conference call, we are expecting 3 to $4 million in the metal market -- surcharges related to metal markets.

Right now it is a surcharge.

It depends on what the market does.

We will be locking in on some of our purchase orders and that during the next 3, 4 months, and it's going to depend certainly on what the metal markets are doing.

That is pretty hard to forecast.

There is no doubt that there is a -- if the metal markets stay at the current levels that that could be an ongoing charge that is built in.

We'll have to wait and see.

And last question, you mentioned the foreign exchange benefit to gross profit.

In some past calls, you've commented on the impact of foreign exchange on your operating expenses, causing them to be higher.

Do you have a figure on that for this quarter?

Yes, David.

Foreign exchange, as I mentioned, we did have a benefit this quarter, approximately on gross margin of about $8 million.

Adversely, we have operations both wholly owned operations in Europe and Japan, in which case our expenses go higher.

That impact for the quarter was about $2 million.

Additional expenses in operating expenses to cover foreign exchange.

Therefore, the impact on operating profit was a net of about $6 million.

Great.

Thank you, Jim.

Thanks, David.

Thank you.

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

Thanks.

And if you could, Operator, leave the line open if I need to clarify a question.

Thanks.

Just wanted to clarify a couple of things in terms of your forward guidance.

And you mentioned in the release that the decline in retail sales was as expected, I don't recall that being given as guidance for the quarter.

So I wanted to just clarify before going forward a couple of things.

One is, you mentioned that HDFS would be back to -- or would not do securitization in the fourth quarter.

Are you going back to now doing that 3 times a year rather than 4 times a year?

In other words, is there going to be less liquidity do you think going forward?

I have 2 or 3 other questions about forward guidance as well.

Retail sales, we don't forecast retail sales so you are correct.

We didn't give any guidance on what retail sales would be.

As anybody looking at the retail sales, and as we commented last year in the third quarter, last year's third quarter was the largest quarter ever in the history of Harley-Davidson for retail sales in the U.S.

Typically our large quarters for any year are in the second quarter.

Obviously, the 100th anniversary created a lot of excitement.

A, it would be, it's just a difficult comparison, really impossible to expect that retail sales would have been at that same level absent another anniversary celebration this year.

So, I guess that expect is as we expected, and I think as I've seen other analyst reports that there is an expectation that it be a difficult comparison, so.

That was where we were coming from on retail sales and the difficulty in the comparison.

I mean, 27% increase in any one quarter is a large amount.

On securitizations, I mentioned in the beginning of the conference call we now have a securitization in the fourth quarter.

That does not -- and a big driver of that being that our securitization, we went to market for securitization in the third quarter at the end of the third quarter, which does not give us much of a pipeline of retail contracts for the fourth quarter.

We are going to run the business to make sure that we leverage the fixed cost and we have a good reception in the marketplace under our market conditions.

So to really forecast we're going to do a securitization every quarter, every third quarter, actually would be very difficult.

I do remember that we came out this year saying it was our intent to do 4 securitizations, but you have to offer different forces in the market and when you do these securitizations in the pipeline.

Responding to the last part of your question on securitizations, it is certainly not due to liquidity concerns.

In fact we have increased our credit lines.

So liquidity is not an issue.

It's, again, it's the size of the securitization as well as existing market conditions.

And then in terms of your forward guidance on expenses, you mentioned supplier costs in the fourth quarter.

When you said that may continue, would that be in the same range of about 3 to 4 million a quarter?

And then also you mentioned incentives, that you might try some targeted incentive programs in specific markets.

Could you give a little color on what that is, just so we can factor that into where expenses may be?

As for metal, metal surcharges will show up in the gross margin.

They're part of cost of goods sold, and is, again, like my comment previously impossible to second guess where the metal markets are going.

Again, if they stay at the high levels, we can expect surcharges to continue next year.

It all depends on where the metal markets go.

We are subject to that.

They are at all time levels -- high levels and one would hope that they would go down.

If they stay up there will be additional charges.

As for incentives and some additional color, we have not announced what the programs and what we are going to do in those markets to generate some more enthusiasm in those weather-affected areas, which is basically -- we are talking about the southeastern part of the United States.

There's probably a 8 state region right there that we are commenting on.

Not ready, we are just giving everybody a heads up that there may be something that comes out in talking to dealers, we have some programs to -- again, I mean, retail sales as we looked at retail sales, we're down lower than average in that area of the country, whereas in the beginning of the year, the first 7 months, they were running ahead of our average retail sales.

So there's no doubt that there was a big impact down there, and we want to jump start that momentum that we had earlier in the year with some of those programs.

It's not going to greatly play into, as you do your model, into expenses.

There are some things we typically do and we'll trade some programs.

I think the guidance that we had said before that expenses will be higher in the back half of the year than the first half of the year is pretty good.

We are not looking at big expensive programs.

So you're talking about targeting incentives just to those -- the 8 states in the southeast?

And then would that be across all bike models or just certain bike families?

Again, since we haven't announced these programs, I can't go into the detail.

But we are talking about to address the whole market, and obviously, there could be, we can go different ways to draw, to create floor traffic.

I can't go into what the program would be because we are still looking at those.

Thank you.

You're welcome.

Thank you.

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

Thanks and good morning.

First question is, I was wondering, can you help clarify the whole international retail growth?

Because you mentioned that it was weak due to the economies, yet I calculate that the industry was up 10% in the quarter.

I know you mentioned Japan, maybe a further clarification on that would help me better understand why the loss of market share in Europe.

Okay.

Number one, it's pretty hard to calculate the impact of the industry in the quarter because we've only got 8 months year-to-date data.

But the industry -- we do believe that the industry from our data had a pretty bad September.

So we'll see what happens actually in the quarter.

When you talk about Japan, we have been for the past several years beating a negative trend.

Japan's industry has been declining for several years, and we've been gaining market share.

Right now there are tough comps with last year shows a negative comparison.

I think when the year is done, we'll have a fairly decent year, and then again, we're looking forward to the change in regulations next year governing the tandem riding.

In Europe, again, there's a lot of incentives going on by our other industry partners, particularly on the performance bike segment.

So a lot of this -- a lot, I mean there's not a lot of increase, but the increase that we see in Europe is driven by model year end incentives, particularly on performance bikes and not in the cruiser bike market.

Okay.

And then my second question was interest income was down greatly.

What was going on within that line item?

What was that again?

I missed that, Carol?

Interest income was down year over year pretty significantly, was there anything one time in nature to cause that?

Last time we issued a release, what we did on the income statement is we combined 2 lines and as you note, investment income and other.

And the big word being other.

The big item in this quarter's line right there is we made a contribution to the Harley-Davidson Foundation of approximately $4 million.

That reduces your interest income.

So you take that out, you have some pretty comparable numbers.

That will actually -- explains it all.

Thanks.

You're welcome.

Thank you.

Our next question is coming from Tony Gikas of Piper Jaffray.

Good morning, guys.

A couple questions.

If you said this, I apologize, but what were the industry retail sales during the September quarter?

I wanted to know if you actually took some share there.

I can't imagine that was a particularly good number.

Second question, with the production increase of about 20% in the quarter and retail sales down 10, that would imply that there was some build of inventory at the dealership level.

Did that play into your decision to increase production next year by only 7%?

Or as you indicated on the call, was this largely just due to the international business?

And then I have a follow up.

It was our comparisons with last year in the third quarter and the excitement of the 100th anniversary, coupled with the fact that last year we had a model year that went for 14 months and therefore carried into September, versus this year where the model year 2005 started in July, creates some uncompare -- some data that's hard to compare.

If you really look at the data for 9 months, going from December through September, a bigger period of time.

Although on a percentage basis, retail increased 7.1% and wholesale increased 10%.

The reality is dealer inventories went down.

I mean, retail sales since retail sales is a larger number, even with a smaller percent increase, retail sales increased absolute units more than the wholesale shipments.

In fact retail sales were higher by over 10,000 units over wholesale shipments.

So dealer inventories for the first 9 months decreased from the beginning of the year.

Over a period of time, we've always said that dealer inventories will increase year over year comparisons, just because of the fact that if you take a larger wholesale shipment number and divide it by dealer number that doesn't really change, the units per dealer increase.

What we really look at is dealer turns and that's critical to us and we kind of have a range, a projection, and we're very comfortable with where the dealer inventories are right now.

As for your question on industry retail registrations for 3 months, I don't have that in front of me.

We can easily get that for you.

Okay.

So you said that on a 9-month basis, there wasn't a build in inventories, but it would appear that in the last few months there was a little bit of a build.

Did that play into your decision to increase production by only 7%?

No.

Absolutely not.

As we said in the conference call, and, again, like I said, third quarter, it's kind of a hard comparison, we are looking at we are on track for the nine months year-to-date where we expected to be.

As we said in the press release and I also mentioned in the beginning of the conference call, is that great enthusiasm for the U.S. -- demand in U.S., that is tempered by what is going on in the international markets, especially as that pertains to economies which we don't have a lot of control of.

So on a shorter term basis, the next year we've tempered our look at the worldwide market, but certainly that's not an indication of what we see for demand in the U.S.

Then do you expect sales at the dealership level to become more seasonal going forward?

I think someone stressed that a little bit earlier, but in the upper half of the U.S. we are not going to probably have to take delivery of bikes as much as we may have in previous years over the winter months.

Do you expect that to be the case, or not?

Number one, as we looked at historical data, we've not seen a great change in seasonality being that what percent of our bikes are retailed in a particular season.

Going forward as the numbers become larger and as the gap between supply and demand gets to a more comfortable level where dealers are not charging premiums over MSRP, some of that urgency to pick up the bike in the winter may not be there.

We are addressing that.

My answer to a previous question was by allocating some of the product during the year more to the South during the winter months, so that we can recognize that retail demand does not slow down in the South during the winter months.

And last question.

Weather patterns in the last 3 or 4 weeks here have been better.

Have you seen -- or been hearing from your dealer network that things have picked up a little bit in recent weeks?

We would not comment on the data besides what we put in the press release.

But I think that at least in the Midwest, I think we've experienced some great weather, and there's no doubt that we have constant contact with the dealers both through our dealer advisory counsel, with our district managers and the dealers have great confidence in the market.

Okay.

Thanks, guys.

You're welcome.

Thank you.

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

Thank you.

A couple of questions, Jim.

Just a follow on to the last question.

Our calculations indicate that it looks like the industry in the third quarter, retail registrations were down in the low single digits whereas you were down 9 and high change.

And that's in the U.S.

Any color there?

And then secondly, any comment on how the conversion of your original York facility, where you were making the Touring, how that was going?

Because I think you were scheduled to reconfigure those and maybe put the two lines into one.

How has that gone?

Are you complete with that conversion?

And then should that, I would think that should benefit your margins from that perspective alone going forward.

On the industry and the comment on the third quarter, thanks for doing the calculations.

I trust that those are correct.

Again, I can't over emphasize, we had a 100th anniversary where retail sales were up 27% last year.

The industry did not have that.

The industry was not up 27% last year.

So they had an easy comparison.

We have a rough comparison.

So for us to be down only 9% I think says that we had a lot of strength this year and that demand continues strong.

And the industry is, you know -- we continue to lead the industry and drive the industry and grow the industry.

I think when you get into what drove those comparisons, you come away with that conclusion.

You asked about the Touring bike line, a little background for all the listeners.

In the third quarter, we have two Touring bike lines at York, and we combined those two.

We mated those two during the quarter.

There's no doubt that that process did have an impact on our mix.

As we commented that Sportster mix, as we have planned, went up, well, everything adds up to 100%, so something else has to go down.

In this case, it was primarily Touring bikes, the case being that during that mating process we lost some production.

That was planned and that's what attributed to that.

That mating of those two lines is done.

There is a learning curve as we changed the processes there.

The reason why we did the combination was to drive quality, reduce -- and reduce working capital.

We have said all along, in fact we had said in the last conference call, the primary driver was not for cost reduction.

It was to simplify that particular plant, increase the quality and reduce working capital.

So I would not build anything meaningful in your model, Tim.

Okay.

And then lastly, Jim, just more of a little housekeeping item.

What's your finished goods inventory at the end of the quarter here?

Dollars?

Yeah, just as part of the overall inventory number.

I don't have that in front of us.

In fact, I can comment, although the information is not right in front of me.

Basically, the inventory is slightly higher than this same period last year.

Big drivers there are, number one, we've acquired some foreign distributors between this time last year and now.

We've acquired Spain and Switzerland.

So now that inventory is showing up on our books rather than on the independents' inventory.

And we've commented probably for the last four quarters in Europe market by market we've changed the way we grow the market, and we're building some inventory so that we can support the dealers in Europe.

European dealers are typically smaller so they can't carry a very wide range of product.

So to give them the ability to have a full range of product and colors to choose from, we've warehoused some of these units, in which case, their inventories go down, ours go up slightly, so our finished goods inventory worldwide is up somewhat, but -- and which is in our total inventory number, which is in the press release and the total inventory did go up somewhat.

I'm hesitating, some information brought in to me, I'm trying to see if -- finished goods inventory is basically $86 million compared to the same period of time last year, at shy of $66 million.

Great.

Thank you very much.

You're welcome.

Thank you.

Our next question is coming from Joe Hovorka of Raymond James.

Thank you.

You have a unit growth rate for -- of 7% for 2005, and then an earnings per share growth target of mid-teens.

Can you tell me how you reconcile those two?

Are unit prices expected to go up or down next year, margins up or down, share repurchases and so on?

As you probably well know and you've followed our history for last 18 years and we've said that this year's a record year, so I can almost include that in it, that we have growing earnings faster than revenue without exception early single year.

Much of that has been done through margin expansion.

That's been driven by many different aspects.

It's a combination of currently right now 60% of our cost of goods sold, plus or minus a little bit, is purchased parts and working with our suppliers as they get the benefits of unit growth and that certainty that they are able to plan their capacity expansion and plan their innovations.

That benefit we share.

So we've been working with the suppliers.

It is a capital intensive business, the motorcycle business.

The good news is it keeps out a lot of competition.

Another positive side is as we continue to add capital, we can bring new capital in to change our processes, increase our quality, our quality goes up, cost goes down.

That is one of the drivers.

Our great relationship with our unions and our employees certainly helps in giving us flexibility to continue to grow, and when we grow the business, we gain volume, and we get their hearts and minds involved in what's good for the business and come up with better processes to do things.

As I mentioned, the volume and also our continued emphasis on engineering.

We've doubled and redoubled the size of our R&D facilities over the last 10 years.

That is a good source of not only adding new and exciting products to the marketplace, but also in designing cost outs.

We have many drivers of increasing our margin as well as volume. nd then dropping down on the income statement or your model, operating expenses don't grow and haven't grown as fast as the revenue.

Therefore, we have the leverage there of improving margins.

So you go through the whole business model, and we've got many drivers and improvement of earnings that continue to work for us and will continue to work in the future.

Thank you.

You're welcome.

Next question.

Thank you.

Our next question is coming from Dean Gianoukos of JP Morgan.

Just a few questions.

The first one is on the incentives.

You talk about 8 states in the Southeast, I think.

There are also plenty of dealers in the Northeast and the Midwest, as you guys know, because you know your dealers better than I do, who are sitting on 20 or 30 bikes and are getting a little itchy and have thrown barbecues and everything else and -- you know, a little worried heading into the winter.

Is there any chance that those incentives will move to other parts of the country?

And then just a quick follow up on that one before one more question, the incentives you are talking about putting in the Southeast, and then yet, you talked about shipping more bikes to the South this winter.

Maybe if you could reconcile that to try to -- you said you were going to do that to eliminate seasonality, but it sounds like at least part of the area you want to ship them maybe struggling already because of what you said, the hurricane.

And then my second question is, you talked about the first 9 months having less inventory than last year, but if you look at the fact that you built 20,000 of units of inventory in the fourth quarter, you're actually sitting on a lot more inventory as of the end of this third quarter than you were at the end of last third quarter, and it looks like you're over 20 bikes on average a dealer.

So when you look at that and then you talk about the weakness internationally, and clearly when you look at your production versus your registrations, you're building some inventory there as well.

Is there any chance -- or I guess the question is, how firm is this 7% growth rate?

Is there any chance would you bring that down if we see another 20,000 unit inventory build in this fourth quarter?

Thanks.

Obviously, you've got a premise which is different than ours and somewhat of an editorial.

But number one, I don't want to over emphasize the Southeast.

The Southeast was slightly less than our average retail sales.

Now we were going at a momentum that was slightly higher.

We're talking some small changes.

We want to continue that momentum that we were experiencing in the Southeast, but that was not a disaster.

What we're trying to do, again, is get some people into the dealerships.

You characterized growing inventories.

Inventories we have said all along from year to year will grow.

They will get higher.

We look at our dealer inventories.

We look at our turn rates.

Because dealer inventories will grow, we look at the turn rates.

We are comfortable with our turn rates.

We talk to our dealers and we get a different story.

Our dealers are very comfortable with the current levels of inventory, and confident in what they have.

When I talked about, again, the Southeast.

The Southeast was not off that far, we were just saying that that was an issue that we will be coming out with some programs so that we don't catch any of the analysts by surprise.

You talk about the 20,000 units this year versus last year.

Again, that goes back to the fact that inventories are higher and in particular, this year point in time versus last year is a hard one to compare, because of last year's big retail that occurred in the third quarter, 27% increase, brought the inventories down, and from that point of time they came back up.

I think that you're selectively taking your periods of time to do the increase in inventory.

We do manage -- watch inventory.

Dealers are comfortable and we are comfortable, and we have said that it is increasing, but will increase.

The 7% is firm, is what you're saying?

The 7 % -- I can't say, your question was any chance.

Now, things happen.

If Kerry gets elected and the world economy continues down the tube, I can't predict what's going to go on.

But with what we know today, our 7% is very firm.

Okay, but just, you know, you're saying I'm selectively choosing.

You would you agree then that at this point versus at this point last year you have more inventory on the floor and it's probably higher than the production growth rate is.

Would you agree with that?

Just so -- because you're making me sort of sound like I'm manipulating numbers, I'm really not.

I'm just looking this point in time versus last point in time last year, which I think is fair.

Dean, I apologize if it sounded like I was accusing you will of manipulating numbers.

I didn't mean to, and I apologize right here.

We've said that dealer inventory would be higher, especially when you compare the two periods of time, it's going to be higher.

So that is an absolute fact.

We have stated that year over year weather you look at 2004 or 2002 or 1999, inventory has grown at the dealers, and will continue to grow.

Okay.

Thanks.

You're welcome.

Thank you.

Our next question is coming from Michael Millman of Soleil Securities.

Thank you.

I also wanted to touch on some of the same topics.

Last year, could you tell us where there was a shortage of product in the South during the winter season, and sort of related to that with a change in your shipments, will that change your production schedules in any way, or the product mix on production in any way?

Also, could you talk about what do you expect the mix of domestic versus international shipments will be presumed, for '05, presumably the national will be down somewhat.

Then could you also -- this year, the second quarter U.S. retail registrations I believe were up 18%.

And sort of given sort of your comments, should we then expect that that is much above your growth rate and therefore should we expect that retail -- U.S. retail registrations in the second quarter of '05 should be down?

Thank you.

Okay, Mike. n winter shortage, depending on dealer to dealer, depends on what you would call a shortage, there's no doubt that some dealers are more aggressive, some dealers go out and have semi trailers looking for used bikes all over the country.

It does depend on dealer dealer.

Some dealers have enjoyed having that shortage, and it allows them to charge their premiums over MSRPs.

Dealers will manage their market.

On the production schedule, this is -- we have not changed, chased seasonality.

We did that 20 years ago.

We've gone back to an even production schedule with steps of growth going forward, so we don't plan to be chasing seasonality and changing our production schedule up and down.

As for mix, as past -- I mean, Sportsters are going to go up.

From the current prior levels of low 20s, most recently last year, and now that we have a redesigned Sportster, it's going to be between 20 and 25%.

That would cause some change in mix someplace else.

Aside from the issues we had this is quarter in mating that FL lines, I think that will subtract from the other lines, not just Touring bikes, we see demand in all areas, it's trying to balance those.

I don't see a significant change in mix.

In the international market, I was jotting some notes down.

Oh, a mix question.

There's no doubt that I would think that our international mix as a percent of total would probably be slightly lower next year from what we currently see, that market would respond differently.

We would have to look at that, but right now we probably have a stronger domestic mix next year.

You had a question on this year's U.S. second quarter retail being up 18%, and I apologize, I don't remember the number, but going with your typically right, Mike, you have to look at that.

We don't predict retail sales as I commented earlier on the conference call.

But it is something to look at that there could be, there most certainly is a difficult comparison.

I'm not going to say it's going to be negative, because 18 is certainly not as high as 27.

I think 27 kind of jumps out at you. 18 still makes for a difficult comparison.

Thank you, Jim.

You're welcome.

Thank you.

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

Good morning.

Two questions.

Do you have -- I know it's premature here probably, but any general comment on your expectations for pricing next year on the models?

And I have a second question.

You are correct, Bob, it is premature.

We announce pricing to our dealers first before we go out and announce it to the rest of the world.

So we're probably nine months ahead of giving you an indication on that.

Okay.

And how high -- you noted that your share, that the finance subs' share of the contracts is now up about 40%.

How high do you think that can go without impairing the profitability of that by going after too much market share?

Right now we're trying to ward off some strong competition from mostly regional players right now, and that was our response for the increased dealer participation, that did in fact reward us in increased market share.

But at the same time, there was a penalty with a dent in profitability, especially in the margins.

We're not just chasing market share, but I think unaided market share now that we're where we're competitive, we are going to be in the low 40 percents, I mean unaided absent any other kind of program, that's kind of a ceiling.

So we're --

You are approaching the ceiling.

Is that correct?

We are approaching the ceiling.

We can grow but it's going to be slower.

So if it's going to grow faster than the bike business, it would not be not terribly materially faster unless you were willing to compromise the margin?

Yes, and since we are talking about, the growth we are talking about is on the operating margin, you've got two dynamics there.

So, we're saying it's going to be slightly higher than the motorcycle unit growth.

Thank you, Jim.

You're welcome.

Thanks, Bob.

Thank you.

Our next question is coming from Bob Centrilla [ph] of McKay Shields.

Hey, Jim.

Mike already answered my question.

Hey, super.

Nice hearing from you, Bob.

Thank you, our next question is coming from Richard Dalton of Atlantic Equities.

Hi, Jim.

I just had a question on your buy back in the quarter.

Can you tell me how much of that was part of your 20 million authorization?

And also, I've been looking at the cash position, and now it's obviously improved versus Q2, and you're [inaudible] your CapEx spend guidance for the full year.

So, can you just update us on your plans for use of the cash, whether it's more of the buy back going to come through, or maybe talk on how, if you're looking to buy more of your independent distributors in the international markets?

As for the authorizations, that -- the shares that we've bought back so far have been against the authorization for the offset of dilution caused by the exercise of stock options.

Therefore, the 20 million share authorization still is outstanding.

Cash, our uses of the cash, and our plans have not changed.

We will continue to invest in the business organically.

We will always need some buffer there in case times would get rough.

We are just a conservative company that way.

As we continue to look forward, we'll continue to look at share repurchase.

We'll continue to look at dividends and taxing policy, and, again, that may depend on who is in office or not, so we need to look at that over a longer period of time.

So our philosophy on the uses of cash has not changed.

When you ask about purchasing distributors in the international market, we have done that over the last several years.

We would not give out our philosophy that could impact, if we were continuing to do that, impact the sales price or a perspective distributor.

So we will look at that as an opportunity to better serve a market rather than an opportunity to grow earnings.

Okay.

Thanks very much.

You're welcome.

I would like to turn the floor back over to Mr. Ziemer for any closing comments.

Thank you, Holly.

I want to thank everybody for your time this morning.

Remember that a taped replay of this conference call can be heard, calling (973)341-3080 and entering the pin number, 5189173, with the pound sign.

That's until October 20, or by accessing in on our website.

If you have any questions, please contact Investor Relations, 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.