Harley-Davidson Inc (HOG) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to the Harley-Davidson 4th quarter 2004 earnings release teleconference.

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

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

Sir, you may begin.

Thank you, Holly.

Good morning and welcome to Harley-Davidson 4th quarter conference call.

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

Please dial (973) 341-3080 and enter the pin number 5527085 and the pound sign.

The recording will be available through January 27th.

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'll 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've noted in our latest earnings release and filings with the SEC.

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

And now, I'll recap the earnings release.

Tag line on the earnings release says: This is Harley-Davidson 's 19th consecutive record year.

And let me review the highlights of that year.

Harley-Davidson wholesale shipments, 317,289 units, up 9 percent.

Total revenue, $5.02 billion, up 8.5 percent.

That's the first time we've hit the $5 billion in revenue.

Motorcycle revenue, 3.93 billion.

Up 8.5 percent.

Parts and accessories, 782 million, up 9.7 percent.

General merchandise, 224 million, up 5.8 percent.

And gross margin, 37.9 percent, up 1.9 points.

Financial services operating income, 189 million, up, 12.3 percent.

Net income, $890 million, up almost 17 percent.

Earnings per share, $3.00 even.

Up 20 percent.

And dividends paid of $0.40.5 per share, more then doubling what we paid in 2003.

Now, let me spend some time discussing results of the strong 4th quarter.

It, too, was a record 4th quarter.

We had Harley-Davidson wholesale shipments, 80,587 units up 4.6 percent.

Total revenue, 1.22 billion, up 5.4 percent.

Net income, 209 million, up 14.5 percent.

And earnings per share of $0.71, up 18.3 percent.

Let me discuss some of the additional highlights of the quarter, beginning with motorcycle and related product segment.

As I mentioned, this quarter we shipped 80,587 Harley-Davidson motorcycles or a 4.6 percent increase in unit shipments.

While this percent may seem smaller than is typical, I would remind you in last year's 4th quarter, we had a unit shipment increase of 16.8 percent.

So if you look at the two-year compound rate of growth, the annualized rate is really 10.5 percent.

Overall, Harley-Davidson unit shipments resulted in motorcycle revenue of 993 million, this represents a 5 percent increase over last year's revenue in the motorcycle.

Turning to P&A and general merchandise, P&A revenue in the 4th quarter of 2004 was 158 million, up 12 percent versus last year.

General merchandise revenue for the 4th quarter was 55 million, up 8.2 percent compared to last year's 4th quarter.

Looking at the margins.

Gross margin was 37.8 percent, compared to last year's 35.9 percent.

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

To give you some additional clarity, we've been continuing to improve our operations across the facilities within our supply chain.

Included in this has been a full year of operation for our new factory for Softail Motorcycles in York, Pennsylvania.

This facility started up in the 3rd quarter of 2003, and was still experiencing ramp-up costs during the 4th quarter of 2003.

Foreign currency added approximately 14 million to the gross profit in the 4th quarter over the same period in 2003.

This is primarily due to the strong Euro.

We all know that prices in the metal markets have increased significantly during the last year.

In general, these increases have had a minimal impact on Harley-Davidson margins as our suppliers have managed most of the risk.

However, we mentioned during the 3rd quarter conference call we might experience a 3 to 4 million increase in metal surcharges during the 4th quarter.

We experienced this and some as the surcharges were about $6 million.

Now this is an item we'll continue to monitor in 2005.

Moving down the income statement, operating margin improvement was driven by our gross margin improvement.

Fourth quarter operating expenses increased at a rate of 7.9 percent and revenue up 5.4.

While SG&A grew faster than revenue in the quarter, this was not the case for the full year as the full year expenses of $710 million were up 6.2 percent on revenue that was up 8.5 percent.

Now, turning to the financial services segment.

Harley-Davidson Financial Services had another great quarter with operating income of 39 million, up 16 percent over last year's 4th quarter.

Even though we did not execute a 4th quarter securitization, as we did in the 4th quarter of 2003, HDFS benefited from continued success in both its finance and insurance businesses as well as positive foreign currency exchange.

In addition, the Company had higher income on investment and retained securitization interest as the portfolio continues to perform better than anticipated.

For the 1st quarter of 2005, we expect to have a securitization and that will be larger than the 625 million we securitized in the 1st quarter of 2004.

HDFS's year-to-date retail market share, which we define at the percent of total new Harley-Davidson motorcycle sold in the U.S, that are financed by HDFS, was approximately 40 percent, this is above last year's four-year market share of approximately 38 percent.

In reviewing the HDFS credit portfolio, we continue to be pleased with the performance.

Retail delinquencies on a managed basis at the end of the year were lower than the prior year at 4.33 percent versus 4.57 percent last year.

Annualized credit losses net of recoveries on managed portfolio basis were 81 basis points.

This is within the five-year range of 72 to 87 basis points.

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

Moving on to cash and cash flow.

As you probably have noticed we did not include a statement of cash flows in the press release.

Currently, the SEC is reviewing the presentation of cash flows of companies with captive finance subsidiaries.

After many years of consistent industry practice, SEC is now questioning this presentation.

Harley-Davidson and many other companies will be having a dialogue with the SEC and we will issue a cash flow statement when this all plays out.

If a change is required, several lines in the cash flow statement may change, but the increase in cash will not change.

We started the year at $1.3 billion in cash and marketable securities and at the end of the year we'll have 1.6 billion.

This 300 million increase in cash was accomplished even after the following: Capital expenditures of 213 million were well within the range of 200 to 225 million that we have been expecting.

Shares repurchased for the full year were 10.6 million shares at a cost of 564 million.

Our dividend payout was 119 million.

We increased the quarterly payout from $0.08 per share at the beginning of the year to $0.12.5 per share at the end of the year.

Our track record of increasing dividends is not new, as we've increased our dividend payout every year for the last 12 years.

Additional information, depreciation expense for the year was 214 million in line with our guidance of -- excuse me, our depreciation expense was 214 million along with the guidance of 215 million.

For 2005, we expect capital expenditures to be in the range of 225 to 275 million and depreciation to be approximately 220 million.

Moving on, our shipment target for the quarter was 80,500 Harley-Davidson motorcycles and we achieved that as well as achieving our annual target of 317,000 motorcycles for the year.

We reiterated our target of 339,000 Harley-Davidson motorcycles for 2005.

Which is about 7 percent over the 317,000 units we shipped in 2004.

We believe this growth rate is prudent based on the strong U.S. retail demand for motorcycles but tempered by a challenging international marketplace.

The 2005 shipments are expected to be 77,000 units in the 1st quarter and 87,000 units in the 2nd quarter.

This leaves 175,000 motorcycles to be shipped in the 2nd half of the year.

Turning to the retail data, I like to review our performance in the worldwide heavyweight motorcycle market.

We define heavyweight motorcycles having the engine displacement greater than 650 cubic centimeters.

Harley-Davidson retail sales for the U.S. increased 7.1 percent for the year.

Fourth quarter grew at a rate just under 7 percent.

As we have consistently mentioned through our calls, investor meetings and other commentary, we're attempting to narrow the gap between supply and demand.

The best way to narrow a gap is to increase product availability.

This improved availability will provide a greater variety of products, better choices for the customer and help to lower the price payments, lower MSRP charges by some of our dealers.

All these should lead to increased customer satisfaction.

Over the course of any given year we offer many different promotional activities and programs.

These programs are aimed at bringing new customers into the family or at strengthening relationships with existing customers.

We recently launched an exciting new program targeted to our most loyal customers.

This loyalty program rewards existing Hogg members with thousands of dollars in parts and accessories if they purchase any qualifying Harley-Davidson motorcycle during the first two months of 2005.

By incentivising Hogg members to purchase new motorcycles during the slower winter days, our dealers should be able to be more effectively manage the businesses.

This will result in sales and service staff spending more time with customers, also resulting in a better experience.

We had international retail growth of 14 percent in the quarter.

This was driven primarily by Japan, Canada, Australia and Latin America.

We're very encouraged by the strong 4th quarter performance of our dealers in many international markets.

While international retail sales were down to three quarters, we saw marked improvement in the final quarter.

This resulted in a total year retail sales increase of 1.5 percent.

Although our retail sales are up in Italy, France and the U.K., and these are the number two, three and fourth largest heavyweight motorcycle markets the Europe, Europe has been a challenging market this year for Harley-Davidson.

We've seen a noticeable drop in retail sales in Germany for Harley-Davidson motorcycles and the heavyweight motorcycle industry.

Without the impact of Germany, which is the largest heavyweight motorcycle market in Europe, our European sales would have been positive for both the quarter and the year.

As Jeff mentioned in the press release, the strong Euro has given us the opportunity to take some pricing actions in Europe in order to strengthen our market position.

As many of you know, we sell most of our motorcycles in Europe to our dealers in Euros.

We've taken this opportunity to reduce prices on selected motorcycle families across the European market.

Retails in -- retail sales in Japan were very strong during the quarter as we gained customers from targeted marketing efforts. 2005 we expect leverage offer of success in the 4th quarter and look forward to the positive effects of the change in the law regarding tandem riding.

The riding law is changing to allow two people to ride tandem on a motorcycle on the highways beginning later this spring.

Finally, as you noticed in the press release, we'll start expensing stock options as we discussed before, we've been waiting for definitive guidance on expensive stock options.

FASB has provided that guidance in December of 2004.

The expense for 2004 would have been 22.5 million and we don't see that changing a lot in 2005.

To wrap up, 2004 has been 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: A world-class brand that is admired and respected around the world.

Passionate and hard-working employees.

Proven management team.

Exciting new products, focused long-term strategy to create demand.

The best motorcycle dealer network in the world, the strong balance sheet with significant cash flow.

When you combine all these business advantages we think you'll understand why we have confidence in our objectives to deliver an annual earnings growth rate in the mid-teens and to satisfy demand for 400,000 Harley-Davidson motorcycles in 2007.

Holly, I'll now open up this for questions.

Thank you, sir. (Caller Instructions) Our first question is from Felicia Hendrix of Lehman Brothers.

Good morning, guys and Holly, if you could keep the line open, that would be great.

First, just wanted to congratulate Jeff on his retirement and Jim, on your promotion.

Maybe you can update us on who is going to fill your shoes.

And than also, you talked about the metal surcharge in '05?

I'm wondering if you could help us how to think about model that in.

And you might have mentioned this.

If you did I'll go back and look.

You don't need to walk through it.

But if you could just tell us the effects and impact on gross margins in the quarter.

And then just bigger picture, in addition to the price reductions in Europe that you talked about.

I'm wondering if you're seeing in the market that they night need some new product.

Obviously a few years ago the V-Rod really stimulated sales there.

I'm wondering what are your thoughts are for time of any new product and particularly, any new additions to the V-Rod family.

Thanks, Felicia.

Thanks for that congratulations, Jeff is not on the phone but I'm sure he sends his congratulations.

Have not named a successor for the CFO yet, but that will be coming shortly.

On the metal surcharge, metals continue to go up when we thought that maybe they were going down so our guidance originally for the 4th quarter was the 3 to $4 million and it came in at 6.

Our feeling is, metals can't get much higher but we'll have to see.

At some point in time these are cycles and these prices will bring in additional capacity.

We'll have to monitor that.

Your guess is as good as mine of what the metal prices will do.

We've seen steel coming down but they're still at very high.

Aluminum did keep on increasing during the quarter and that was a certainly a driver of our surcharges greater then we expected.

I think that if metal prices continue at these high levels we'll probably see surcharges comparable to what we saw in this quarter.

On the foreign exchange impact and gross margins I did mention that that was $14 million on our gross margin for the quarter.

As for our product in Europe, there's no doubt that product does have an impact on Europe.

We've seen that with the V-Rod and a disproportionate allocation of our V-Rod.

You go to Europe it's very popular, the performance custom combination has been received quite well.

In fact, it's our best-selling motorcycle model in Europe.

We've also seen it in Buell.

Buell has taken a while to take hold, but our Buell sales up in the quarter were up, actually for the years were up 50 percent.

That's not a big number, but there's no doubt that Europe does respond to products.

I can't talk about what's in our product line.

I can just tell you that it is very exciting and we have a pipeline of new, exciting products and we do know that Europe does respond to different products.

Okay, thanks.

Thank you.

Thank you.

Our next question is coming from Robin Farley of UBS.

Thank you, operator and if you could keep the line open while the question is being answered.

Thanks.

Two questions, one is, I guess, it doesn't look like you did any of the opportunistic share repurchase during the 1st and 4th quarter, I was wondering if you could comment on that.

And also, looking at the long-term goal you've reiterated your guidance, your goal, looking out to 2007 and kept '05 at a 7 percent increase, and I guess that implies that shipments will reaccelerate in '06 and '07 to the tune of 8.5 to 9 percent in each of those years.

I guess I'd love more color on what you think the drivers will be for that reacceleration.

I mean obviously, Europe would be one of them.

But Europe would have to be up double digits to drive that kind of increase in your shipments overall so I wonder if you could give more color on that.

Number one, on the share repurchase, I'll point out as I did in the commentary and we did in the press release, we did repurchased 10.6 million shares during the year, which is an all-time high for any time in our history.

We do have outstanding authorization of 20 million shares that we will continue to exercise on an opportunistic basis.

It doesn't mean that we'll do it quarter to quarter.

We'll continue to exercise that authorization, but it doesn't necessarily happen from quarter to quarter.

We did do -- over half billion dollars in share repurchases for the year, so it was a lot.

For the long-term goal as you point out, we've said all along, we see a core growth rate of 7 to 9 percent this year.

I mean, in 2005.

We've given guidance for 7 percent growth.

Last year was 9 percent so, again, upper end, lower-end of the range, as you pointed out, to get to -- excuse me for a second -- someone will get that -- as you pointed out, our growth rate would have to be greater then 7 percent to make the 400,000 target.

And that is true.

There's many things that stimulate demand and it's -- it goes from our events and rallies and other services whether it be fly and rides and things like that.

But it also goes back to kind of the previous question on products.

I certainly can't go into what our product offerings or what's in our product development pipeline but I can say that we have a very, again, exciting product lineup coming up and we do believe that that will certainly continue to stimulate our demand, which is been been growing every single year for the last 19 years.

If I could just elaborate on that question.

When you look at Harley versus the overall market, US and international sales it looks like Harley actually lagged overall market sales when you look at U.S. and international markets combined.

And it looks like the first time -- there have been years in the last ten years when that happened when Harley's production wasn't as great as the overall market growth.

But in this case, it looks like -- I guess, what would you attribute the difference to this year?

I don't have the total worldwide numbers here, but with the U.S, which is the biggest market in the world, growing at the same rate that we grew at, and our growth rate was positive and many of the other countries like Japan have negative growth rate.

I don't know if we went down.

I won't dispute that but we'd have to get back to that.

I don't think we have -- we went down during the year.

I just hadn't copied down questions so I lost track of that.

What was it, again, Robin?

Based on the markets you reported and the release that it had looked like Harley's growth was not as much as the overall markets with all the markets combined and I was just wondering if you felt there was anything particular affecting that and how that might change over the next 12 months?

The biggest thing in all -- I mean, we were -- even in the U.S. market and when you go to Europe, as I point out, Germany was the largest market.

I mean in total in Europe, we performed so far we can see because we only have industry data through November, it looks like we were down and the industry was rather flat, that was driven by Germany where we actually declined more than the industry did as far as we can see, and that, I think, has something to do with the bad economy in Germany and how that affects our higher-priced products.

I think we will bear a bigger brunt in Germany than some of the other manufacturers.

I think that although not a robust year, I think comparing 2004 against the anniversary year we did rather well .

And then, one last clarification on your color on share repurchase.

Should we think about it going forward as, you said, what you had done in the first three quarters was a lot and that was maybe one of the reasons you didn't do more in Q4.

Should we think of that as roughly what we can expect Harley to do on an annual basis or is it more driven by your share price was in the 4th Quarter?

As any decent CFO I would always say our shares are undervalued, especially if I compare the premiums for the same performance we used to command versus -- we still have the double digit earnings growth and generating cash and we've been growing for 19 consecutive years driving the market.

I believe that we have an undervalued stock.

We will look at many different things as we look at repurchasing shares, there is no doubt that this year we were part of the record of 10 million repurchases.

As we go forward, we haven't set out any guidance of what we're going to repurchase but we do have a nice authorization and we will exercising against that.

We just haven't given guidance to what extent on an annual basis.

Okay.

Thank you.

You're welcome.

Thank you.

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

Good morning, Jim, two questions.

First, you mentioned increased bike availability resulting in lower premiums at dealers in some cases, what was the approximate change in retail pricing for new bikes on a year-over-year basis either during Q4 or during 2004 as a whole?

Second question: What was the foreign exchange impact on operating expenses in Q4?

Okay.

By the way, good morning, David.

Increased bike availability, we've pointed out, as I did in the commentary up front of the phone call, that our desire have has been to narrow the gap between supply and demand, our inventories -- the motorcycle availability was not sufficient.

Dealers were taking advantage of this and that's not a good model of customer satisfaction and therefore, not a sustained growth model for any business.

We've been increasing bike availability and that is gone through and created some of those good things, many more customers can walk in.

They don't have to wait 18 months.

They have much better chance of getting the product that they want.

Maybe even in the color that they want.

Looking at the retail prices, we monitored that off information we get from HDFS.

As an average, on the new bikes, our new bikes are still selling above MSRP on average.

Our philosophy would be that we like most bikes to be sold at close to MSRP and we do understand when there's a bike that's in very hot demand, as there may be a premium attached to that.

As for the used bikes, our used bikes are still selling for very close to what they were originally purchased for many years out.

Just looking at some data yesterday.

We don't disclose the exact premiums.

It has come down somewhat.

So even though I mention that there is an average premium being charged that is down from prior years but not a lot.

For operating expenses and foreign exchange, we had negative, a negative impact with foreign exchange on those operating expenses in our subsidiaries holding on to subsidiaries outside the U.S. and that impact is for about $2 million on the negative side in operating expenses during the quarter.

Next question?

Thank you, our next question is coming from Ed Aaron of RBC Capital Markets.

Thanks, good morning.

I've got a couple of questions.

I'm under the impression that retail growth actually accelerated as the quarter progressed.

Is that a fair statement as far as the U.S. business goes?

And if so, what do you think is behind that?

And then, secondly, Jim, just with your transition into the CEO, I was hoping you could elaborate what your near-term and longer-term goals.

On retail growth, and we don't go -- we don't think there's a very good measure out there on measuring retail growth from month to month.

It compares on comparability of last year to this year, the number of holidays, everything else, so it's very hard to comment and we don't comment on which month was better than other months during the quarter in retail growth.

We just had a good quarter during the month -- the 4th quarter.

As for your second question, I'll just remind you, I'm still the CFO.

I still have a CEO, the boss, who's going to be here through April 30th at the end of year shareholder meeting.

Number one.

Number two, is that our growth objectives have been put together by the full management team, those will happen to change when we change to CEO That's been driving the business for a long period of time.

I must remind you that we've had successful finances for a long time.

Jeff is not being -- he is retiring, he's not being replaced.

The best management succession is taking over now.

So -- I don't expect there to be too many changes, we're going to have the same goals and objectives.

Thank you.

Thanks, Ed.

Thank you, our next question is coming from Tony Gikas of Piper Jaffray.

Good morning, guys.

A couple of quick questions for you.

Could you just give us your feedback on dealer level inventories, as they appear to be fairly high at the moment?

If you have the data, what the number of bikes per dealer is right now?

Also, what were the price reductions in Europe?

Could you characterize the level of the pricing change?

Okay.

Dealer inventory, we don't give out the dealer inventory, but I mean there's no doubt dealer inventories are higher than they were this time last year, and that is been intentional.

It's been an intentional plan.

We've been very vocal on that for a long period of time.

The dealer inventories were not sufficient to cover the demand, which caused a power imbalance in the dealership and there were some charges to the customer and not creating a lot of good satisfaction between how that allocation process went.

The only way to address that, the best way I should say to address that, is through creating more product availability.

We've been doing that for the last several years.

Also, number -- the other part is, we have a fixed number of dealers, and that's -- the dealers are about 650.

The outlets are about a little more then 700 outlets and when the number of bikes increases year after year, 19 years, the average bikes per dealer will increase every single year.

So, not only does the average go up, but where we were at was far too low.

Would you say the inventory levels are then, within your expectations?

What they would be at this point?

Yes, they are.

I mean we monitor dealer inventory internally.

We've got a good system of we track the bike once it leaves the factory.

We have a warranty registration system.

It's just a small item so we can tell what bike is what color, what model, at what dealer.

We track that and we have expectations of what that should be.

And we're within our expectations of the dealer inventories.

Like I said, it's been a plan to increase dealer inventories and we're within our expectations.

On your question on Europe, the prices.

Now, the price as I mentioned in the start of the phone call, the price adjustments downward adjustments were on selected models.

Were not on every model.

And then, it depended.

The average price adjustment, depending on the model could be anywhere from 2 to 9 percent, so certainly not as much as the Euro has strength strengthened versus the dollar but it is an adjustment.

Okay, Just a couple other quick follow-ups.

Any update for us on China or other emerging markets?

And what level of promotional activity are you seeing at the dealership level other then directly through Harley-Davidson?

China, the status of that has not changed.

We are working with a partner there on trying to gain knowledge on a distribution system in China and how would be the best way to go into China.

But we're a long way off from having any meaningful number of shipments going to China or we've had none and we still understanding that market.

So there really isn't any update.

What was the second question, Tony?

Any other promotional activity at the dealer level?

Has that been--

I mean, we always have -- I mean, the dealers, again, as I mentioned, we have one of the best dealer networks I can think of.

They monitor their own markets and they do what's necessary.

They have promotions and they even have barbecues and that's been true for the last 100 years.

They try to generate traffic and they obviously have many more events during the summertime when they can include riding in the events.

It becomes more difficult in the winter when you can't ride to your Harley-Davidson dealer unless you're in the south.

Dealers have that promotion.

Some dealers will use HDFS to come up with some of their own individual financing programs.

But it depends on the dealer.

We've always had co-op advertising with the dealer so the dealer can choose that route.

We help them out with a standardized radio spot or TV spot as maybe you've seen on TV for different events.

But that is always ongoing and that's why they're a great dealer network.

Thanks, guys.

You're welcome.

Thank you.

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

Thank you, operator and Jim.

First of all, congratulations.

A couple of questions here.

A little housekeeping back to the earlier metals price question.

Just refresh us on the metal prices as a percent of your cost of goods sold.

And how much have you locked in for '05 of your needs on metals?

And then, the other question is dealing with the dealer inventories.

Obviously, you lost a little share in in the 4th quarter.

Can you talk about how your shipping patterns are versus typical retail sales in the U.S. and, then, relative to Europe?

Because obviously there's a timing issue between when you ship it and when the actual sale occurs and it's probably influenced by seasonality.

If you could kind of just walk through that and of your shipments in the 4th quarter, was there a larger percentage year-over-year shipping international?

Finally as it relates to the international markets you would think that the stronger Euro would give the European customer more purchasing power.

I'm wondering more behind some of your selected price cuts in Europe, if it's more so from competitors being very aggressive on price in the important markets like Germany where things are weak?

Boy, you really know how to sling them, Tim.

Thanks for the congratulations.

On the metal prices, again, metal prices we had thought they hit a peak and they continued to go up and just recently, very recently, steel has come down a little bit.

Hopefully that will continue and aluminum will continue to go up.

The big purchases are steel and aluminum.

You look at the metal content of your cost of goods sold and when you look at a motorcycle you look at, wow, look at all the metal between the tanks and fenders and the engine and frame.

The reality is only about -- less then 5 percent of cost of goods sold is actually in cost of metal.

So, metal prices do go up and they do have an impact but it's not -- it's minimal compared to the total cost.

The real cost of the motorcycle is the value added that comes from both internally and our suppliers.

We ask for about -- locked in.

Most of our metal prices are locked in at our suppliers and we depend on them.

We lock in a price with the supplier and expect them to honor that until, you know, the pattern is become very long or there is actually, being detrimental to their financial health and then we'll look at that and look at that in terms of surcharges as evidenced in the 4th quarter.

Dealer inventory, talking about a lot of share in the 4th quarter.

We look at -- when we look at the 4th quarter, the industry really grew in performance segment and also, one of our competitors was clearing out an old model year and that spiked sales.

So I think that within our own segment we did very well.

When you compare seasonal patterns and you kind of jump between Europe and U.S, in the 4th quarter, our U.S. sales were higher than they were last year so international was down.

I don't know if that answers your question.

But jumping forward to Europe and purchasing power.

Most of our products in Europe we are sold to the consumer in the local currency Euros.

That price wasn't changing.

So it wasn't -- the person in European country the purchasing power only increases if somebody from outside the -- where the Euros are is decreasing the prices.

That's the only time the purchasing power actually increases.

Our case, there are, consumer has many choices and doesn't necessarily have to be motorcycle.

And they were, the product sourced outside of Europe were decreasing and we weren't responding so we have responded on several of our models to see what impact it does have.

Okay.

And in the -- 650 segment, Jim, just wanted to follow-up there on the 4th quarter.

It appears that segment grew 9 percent while you guys were up up not quite 7.

At retail.

So, again, is that back to what you said?

Is that more tilted in the 650 in that performance area?

I know I was broken up by CC, Tim, but, yes, in response to your question, I was saying that a lot of the growth performance bikes had a spike for whatever reason, in the 4th quarter.

In the U.S. and 650 CC in above segment.

And there is a particular competitor that was -- we were aware of that was clearing out some old model year product at some very aggressive prices which also helped spike the industry data.

Okay.

Thank you.

Thank you, Tim.

Thank you.

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

Good morning, Jim.

Good morning.

Question on going back to some of the other questions of what you ship and what the dealers sell domestically.

For the sake of argument, if the dealers sold 7 percent more this year and then 7 percent more next year, theoretically, as has been pointed out, that would probably trail, based on your current production goals, what you might be shipping to them in 2006.

It's -- can you talk about -- you and Jeff have consistently talked about narrowing the differential between what you ship and what supply versus what the real demand is.

If you go with some consistency above what they're selling or shipping in, that will take care of the problem, but what does it do to your expectations?

To your pricing flexibility?

We still have, you know, great pricing flexibility.

I think that when you look at the economy and, you know, we are a purchase that people don't need but they want.

You look at that and we're selling our product well -- we may be coming out of a recession but we've been selling this product, our dealers have, at MSRP or at a premium to MSRP.

And I think that says a lot to the pricing leverage.

Pricing leverage that we don't want to use, we don't want to drive a big gap between us and the competition.

The pricing leverage is there.

The pricing leverage is for the dealer and some of the dealers have chosen to use that.

It's one that we don't want to use and dealers do it on a market-by-market basis.

As we go forward, as I mentioned, it was our -- it is our intent to narrow that gap.

Never close that gap and, so, in our -- we're not a science -- we need to look at it not only in total, but we need to look at it by product family and we'll monitor that going forth.

I think that we're looking for a very good year in retail in 2005.

And that's about all I can say.

I mean, you can't continue to -- at some point in time retail sales sift through through a smaller number and have to exceed the wholesale shipments.

I don't believe you typically give this kind of guidance, but this year you have consistently, the share of your shipments that you -- that go domestically has been rising as a percent of the total.

International has been coming down.

Is that trend likely to continue, so that what you ship, if it's 7 percent this year, somewhat more than that would go to domestic dealers and something less than that to international?

Those changes happen slowly over time.

And it has changed.

No doubt.

If I look back ten years ago, maybe 70 percent of the shipments were U.S. and now, it's better than 80 percent, that's happened over the last ten years.

As we continue to grow, all our markets and absolute units you can not have a market go down to the dealers are continuing to be successful.

As we continue forward, you know, back in the late '90s, the U.S. market was extremely high.

It was growing at more then 20 percent, in fact, somebody else pointed out, we even in those hot market days, we lost market share because we were only willing to stretch our facilities and suppliers and dealers so far, and therefore, even though we we were growing at double digit rates we lost some market share.

It all depends on the markets.

It certainly will depend somewhat when we talk about the international markets, some of the new products we come out with.

Because they are sensitive.

New product offerings like the V-Rod and that's a balance, but it won't tip over in any one year.

We can have the hottest product in Europe and that is not going to change that market instantaneously.

We'll have to do that over time.

Right now, we're better then 80 percent U.S. and we'll be there for a while, depending on how the markets grow.

And congratulations to Pat on his new job.

I'll pass that on to Pat.

Thank you.

Thank you.

Thank you.

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

Thank you.

A couple of questions.

If I understood, Jim, you're possibly suggesting and I want you to clarify this -- that you are happy with the level of dealer inventories currently and, so, should we assume that there will be no -- roughly no change or no plan change in daily inventories at the end of next year with this year?

Also, maybe you can give us a little bit of margin guidance inasmuch as you can't keep assuming or -- maybe you can but we shouldn't -- that forex will continue to rise, on the other hand, there are some price declines in Europe and we assume that the Hogg promotion will have some effect on margins as well.

And then finally, regarding the Hogg promotion, is that a plan more to accelerate sales or do you expect that to bring in incremental sales?

Okay.

You cut out on dealer inventory a little bit there for whatever reason.

Could you repeat the dealer inventory question?

If I understood you, you indicated that at this point, the Company was comfortable with the level of dealer inventory in order to keep that dynamic tension between supply and demand.

And so the question is, should we, therefore, expect year-end '05 dealer inventory to be sort of flat with this year's inventory?

Or at least, as you had planned to have it that way?

You know, again, on dealer inventory and the reason why we've been trying to increase the availability of products so that we could increase customer satisfaction, we need to continue to measure it.

One of the measures will be the prices being charged by the dealers. .

As we go through and see what the impact has been of our actions we'll see.

I mean, there's good case to be made that there is sufficient room in the system to continue to grow the inventory a little bit.

I don't think it is going to be a lot but we're going to have to monitor the current situation, again, even in the wintertime, even with these higher levels of inventory, our average, there are premiums being charged on new motorcycles and it's not had much of an impact on used motorcycles.

We think as we narrow the gap, we would have a bigger impact but we've not experienced that.

We need to monitor over a longer period of time so I'm not going to forecast the dealer inventory level at the end of the year.

I think at this time what we see is certainly room for it to go up.

Yes?

And would you like to see at the time you want, that dealers that some dealers start to sell below MSRP?

I mean, when you're selling 300,000 units in the U.S, there may be a case where some units sell below MSRP.

That's not a desirable case.

It can happen and I mean in a perfect world all dealers would be alike and they would have all the same markets but some dealers are selling in the south in large markets.

Some dealers sell in the middle of Wyoming where it's not too large of a market.

So each dealer needs to handle its markets the way it's going.

There are changes within a market, economic changes where factories close down and then things happen and that allocation system has to follow-up on that.

But for the most part, we'd like to see most products sold close to MSRP.

And that's our philosophy.

On margin guidance, our margin guidance has basically been that we will continue to grow earnings faster than revenue which means margins have to grow.

There's no doubt that there are some dynamics both foreign exchange and metal surcharges that I can't predict what the metal market is going to do or even what the dollar is going to do.

We certainly look at all the experts and listen to all the experts and there is a wide range and we monitor that as we go along.

And we've been a very good company to be able to manage whatever comes at us and manage through the different parts of the income statement resulting in earnings growing faster then revenue.

On the Hogg promotion, the Hogg promotion has been a experiment for a short period of time to see if we can bring in some sales earlier.

I mean, the dealers are -- they have a great big demand in some short summer months and this minimizes the amount of time that the dealer can spend with the customer that they have to put parts and accessories on the bike and increase that total experience.

We can spread some of the demand out into the winter months.

Dealers can better optimize their dealerships, their sales and service people.

Customer can have a better experience.

This is seeing if we can have -- this is a targeted promotion, obviously.

We can aim this at Hogg members.

It is on just select motorcycles.

It's for -- our Hogg members are predominantly touring bike riders and this is promotion is for nontouring bike purchases.

So it is -- we're seeing what influence we can have on people with long-term bikes to buy something for their friends and family on the nontouring bike also bringing the sales into the winter months where the floor traffic and business is not as brisk as it is during the summer and we'll see how it is.

It's more trying to spread out your spike of sales that occur in the summer, more than anything else.

Jim, should we take from that that we would expect that registrations in the 1st quarter would be at a higher level year-over-year than they would be for the rest of the year?

Because last year you didn't have this program.

I wish we did have this program.

We always have different promotions and programs.

This one just happened to be highlighted by some analysts or so but we're running -- we spend hundreds of millions of dollars in activities that create demand all 12 months of the year.

And we're doing this in lieu of doing something else.

And that's really why, you know, you don't see it on the jumping out on the income statement because we have a lot of resources that we devote to this activity.

We have for a long period of time.

This is just one of the things we're trying versus other things we put in place so we'll measure the impact on the certificates that are cashed in.

But I don't know if we're going to see this in retails sales because it's in lieu of other activities we've had in place other years.

Thank you, Jim.

Your welcome.

Thank you.

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

Hi, just a couple of questions.

I understand you want to narrow the gap between supply and demand and it kind of looks like on retail inventories are doing that.

I guess the question is, is there any thought that doing that at a slower pace so you don't have to offer discounts?

And then secondly, maybe you can address that first.

Your question kind of goes on is there a possibility to manufacture our product at the same pace of retail demand.

And we did that 20 years ago.

And it results in a very inefficient manufacture, it drives cost.

And it -- has a detrimental impact on quality.

So, what we're trying to do on this promotion is, number one, it does not discount the price of the motorcycle.

It does give it incentive for the Hogg member to come in and put some additional PA, parts and accessories, on the motorcycle.

But what we're trying to do, is, again, the reality is, we're going to have even or rather rising production continuously and the dealers sales pattern, there is some seasonality, there is a winter season in there where the floor traffic where people aren't riding motorcycles and the floor traffic goes down.

We're trying to spread that customer traffic out and we're seeing if this works, we don't know.

A follow-up, are you worried that as you continue to do more promotions in the winter months versus the summer, that people are going to wait to buy bikes?

I mean if a dealer likes his customers, he's probably going to tell people you're probably better off buying in the winter and are you worried that will somehow change the balance of sales?

That's always something that could happen.

We've targeted a very small audience, our Hogg members.

And we've never said this will be a repeatable program.

So the dealers would be hard-pressed to say to the HOgg members, wait next year.

We do this every year.

Again, as was pointed out, this is a first time program.

And we've not said that we would repeat it.

The dealers and the customer would be hard pressed to say that we're going to repeat this one.

Okay, thanks.

Your welcome.

Thank you.

Our next question is coming from Scott Barry of Credit Suisse First Boston.

Hey, Jim.

How you doing?

It's Ed Lowe for Scott.

Hey, Scott.

On the shipment targets for 2005, can you provide a breakdown between U.S. and international shipments?

And then secondarily, can you talk about the specific drivers behind the strength at HDFS during the quarter?

Thanks a lot.

As for the guidance for domestic versus international, I don't see a big change on the total year.

Obviously, there are changes from quarter to quarter, but for the total year there should not be a big change as I pointed out in answering a question earlier, our ability to change physically, the breakdown or allocation between domestic, international markets, is not great.

All the dealers and distributors need to get more bikes in each market.

You can allocate in a different percentage in the different markets but it's not going to have a big impact.

The fact is, over the last ten years we moved from domestic shipments from 70 percent to about 80 percent, it's taken approximately ten years to do that.

There is not going to be a big shift.

So when I say the allocation between domestic international this year, 2004, versus 2005, should not differ significantly.

Your second was, again, Scott?

Just wanted to -- can you talk about the specific drivers behind the strength over HDFS during the quarter?

HDFS as I pointed out, number one, didn't have the benefit of securitization, so the HDFS being up $5 million versus last year.

It's very good performance, that occurred in the retail segment where they've gained market share.

It occurred in wholesale as they've gained some market share there.

And as we've pointed out we've built dealer inventories are higher than they were this same time last year, so a combination between more product that we shipped, greater market share, some higher wholesale inventories, that's all contributed and as I also pointed out, the income and investment retained securitization interests has been better and it continues to be better as before it continued to perform better then our assumptions and that's been the case since we started the securitizations.

Great, thank you.

Your welcome.

Thank you, our final question will be coming from William Prevy of Geneva Capitol Management.

HI, everybody.

Hi, Jim.

A question on Buell.

Obviously, it's 2.5 percent of sales, but you've pointed out many times it's an essential part of, perhaps, your European strategy.

It seems to me we either you need new models or broader line or at some point, do you just fold it up and reduce the amount of time management has to spend on it?

Are you at a point where you have to go either way here?

Thanks, Bill.

On Buell, we did comment in the press release, we have a table on the revenue in the year.

It's not a big part, so that's why in a two-page press release you don't spend a lot of time on it.

Buell is significant to us.

There's a customer that rides performance bikes that would never come into a -- typically not come into a Harley-Davidson dealership.

By selling the Buell there and having it serviced there, we get a customer coming in that when they're ready to change their riding styles, Harley-Davidson will probably be their preference because they know what kind of company Harley-Davidson is and what the product and dealer represents.

We did very well.

And I mean, performance bike market is -- Europe is a predominantly a performance bike market. 70 plus percent of the bikes sold per year are performance bikes.

That's what Buell is.

We did quite well this year.

Our retail sales are up 50 percent in Europe and it's taken a while to get this.

We have a new product we came out with a year and a half ago.

The XB.

And it's beginning to catch on and doing quite well.

We're going to continue to monitor that but we're quite excited about its acceptance.

Okay, thanks.

Thanks, Bill.

I guess that's the end of the questions so I want to thank everybody for your time this morning.

Remember that a taped replay of this conference call can be heard by calling (973) 341-3080 entering the pin number, 5189173, with the pound sign until January 27th.

Or by accessing on our website.

If you have any questions, please contact Investor Relations Brad Davidson, or Mark Van Gendron who is going to be taking over for Pat, he's right now in the training room, who will be taking over shortly.

That phone number there is (414) 343-8002.

Thanks again and have a great day!

Thank you, this does conclude today's conference.

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