Harley-Davidson Inc (HOG) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Harley-Davidson's earning release for the first quarter of 2005 conference call. (OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to your host, Jim Ziemer.

Sir, the floor is yours.

Thank you.

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

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

Please dial 973-341-3080 and enter the PIN number 5842711 followed by the pound key.

The recording will be available through April 20th.

It is 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 the Harley-Davidson website.

In compliance with Regulation FD, I will make the following statements.

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 the information in this call.

Many of you have probably seen a press release this morning with two headlines -- Harley-Davidson is reporting record first quarter, and at the same time, moderating 2005 motorcycle shipment forecast.

While I will cover both of these in detail, I would like to first provide you with three key takeaways regarding our production forecast decision.

First, Harley-Davidson will continue to grow in 2005, and in fact, we anticipate another record year.

Second, this change in shipment guidance is a precaution to keep demand in excess of supply.

And as a result, our growth in 2005 won't be as fast as we had originally planned.

And third, we see no reason to change our long-term prospects for 7 to 9% annual motorcycle shipment growth, driving a mid-teens earnings growth.

I will spend more time discussing this change in shipment guidance later in the call, but first I would like to share the financial results of another record quarter.

So let me review the highlights.

Harley-Davidson wholesale shipments were 76,716 units, up 3.5%.

Total revenue, 1.24 billion, was up 6.0%.

Motorcycle revenue, 979 million, was up 6.5%.

Parts and accessories revenue of 177 million was up 4.6%.

General merchandise, 59.5 million, was up 9.3%.

Financial services operating income was 53.6 million, up 6.5%.

Net income, 227.2 million, was up 11.0%.

And earnings per share, $0.77, was up 13.2%.

Motorcycle revenue grew at 6.5% versus 3.5% increase in wholesale shipments in the quarter.

Average revenue per units, 12,401, was up 2.9%.

The higher revenue per units is attributed to a higher touring mix, which was 32.6% this quarter, compared to 29% last year.

Looking at gross margins, you notice there was virtually no change in gross margin for the quarter at 37.6% compared to last year's 37.8%.

Gross margin was negatively impacted by higher material costs, primarily metal surcharges.

While metal comprises only about 5% of our total cost of goods sold, surcharges accounted for approximately an increase in the cost of approximately $8 million in the first quarter of 2005.

If metal prices stay at the current levels, we would expect to see similar charges during the balance of the year.

Gross margin benefited from $5 million favorable foreign currency exchange, primarily due to the euro.

The quarterly operating margin improvement more than offset the slight decrease in the gross margin.

Operating margin was 24.2% for the quarter, compared to 22.9% in the first quarter last year.

This improvement can largely be attributed to a reduction in the operating expenses versus last year, lower losses attributed to fixed asset disposals versus last year, and the timing of certain expenses versus last year.

Turning to our financial services segment, Harley-Davidson Financial Services delivered another solid quarter with operating income of 53.6 million, up 6.5% over last year's first quarter.

Our 730 million first quarter securitization resulted in income of 19.2 million, but was less than the 25.2 million received from the first quarter securitization last year.

This reduction in quarterly securitization revenue was due to a new dealer participation program introduced in May of 2004, as well as lower margins due to the rising interest rate market.

Given the current interest rate environment, management's guidance for securitization gains is now 1.7, 2.5% as a percent of loans sold.

This is a change from our previous stated guidance, 2.0 to 2.5%.

In the current quarter, HDFS benefited from continued strength in prior securitization performance and success with their financing products.

This was evidenced by a retail market share that continues to strengthen at 43% of all new Harley-Davidson motorcycles sold by the US dealer network compared to 38% a year-ago quarter.

HDFS had annualized credit losses in the first quarter 1.07% compared to 0.77% the first quarter of the 2004.

This increase was due to the combination of higher incidence of losses and lower recovery rates on repossessed motorcycles.

We traditionally see a slightly higher incidence of loss in the winter months, and this year was no exception.

Another dynamic that occurs during the winter months is the thinner market for wholesaling repossessed motorcycles.

As you will remember, HDFS auctions the bikes it repossesses to the dealer network.

As the dealers carry higher new bike inventories, it can dampen the prices of repossessed bikes during their auction process.

Historically, credit losses decrease during the riding season, and therefore HDFS is maintaining its credit loss target of 1% or less on managed receivables.

From a delinquency standpoint, the portfolio continued to perform well with 30-day delinquencies of 3.4% being identical to the first quarter of 2004.

For 2005 HDFS operating income is expected to be slightly lower than that achieved in 2004, primarily due to a highly competitive marketplace and the increasing interest rate environment.

For the longer term, the Company expects the HDFS operating income growth rate to be slightly higher than the Company's motorcycle unit growth rate.

Cash flow.

The Company has changed its classification of wholesale loan activity in the statement of cash flows at end of 2004.

We did that in the 10-K.

Cash flows related to net changes in wholesale finance receivables, which were previously included in investing activities, are now classified as operating cash flows.

Both 2005 and 2004 data appear in this new format.

Aside from the change in format, the two most noteworthy items are the funding of post-retirement health care and our share repurchase activity.

In the quarter, we funded post-retirement health care trust with 102.3 million.

The voluntary contribution allows tax-free growth of this investment.

We also used cash to repurchase 2.9 million shares of stock in the first quarter at a cost of 176 million.

You may recall during the conference call in January I mentioned we would be expensing stock options in 2005 for the entire year.

In the first quarter of 2005, this expense was $7 million.

The entire year's expense will be in line with the $23 million guidance we gave in January.

We expect the timing of the expense to break down as follows -- approximately $6 million in the second quarter; $5 million in the third quarter; and $5 million in the fourth quarter of this year.

Let's turn to our retail performance in the first quarter.

To clarify, we define the heavyweight motorcycle segment as any displacement greater than 651+cc.

Worldwide retail sales of Harley-Davidson motorcycles increased 2.8% in the first quarter of 2005 compared to a year-ago quarter.

This growth was the result of success in the international marketplace, particularly in Europe.

The combination of our three exciting new models launched in January and our European pricing initiative helped to drive an increase of more than 20% year-over-year sales.

As a reminder, the three new models we introduced in January were the Sportster 883R, the new Street Rod, and the 15th Anniversary Fat Boy.

Pricing activity I mentioned was a price reduction on about 40% of our models sold in Europe.

Price reductions ranged between 2 and 9%.

The European market as a whole through February, which is the data we most recently -- we have right now, was relatively flat.

Our sales were up in Japan more than 10% for the first three months of this year, and our sales in Canada were up 8% during the same time period.

We're very pleased with the quarterly performance of our international markets versus last year.

Quarterly retail sales in the United States, however, were down approximately 1% and fell short of our expectations.

First-quarter sales in the US have been traditionally poor indicators of annual sales.

An example -- 2002 first-quarter sales were up 22.3%; 2003 first-quarter sales were down 3.4% in a year -- full-year that was up 8.9; last year, 2004, first-quarter sales were up 12.8% in a year that finished up 6.9%.

So to sum up, first-quarter retail sales did not meet our expectations.

This brings me to the next topic, our change in guidance.

Let's talk about supply and demand for Harley-Davidson motorcycles.

We have often commented that narrowing the gap between supply and demand has been our goal.

Today, many indicators continue to show the gap remains.

Even in these past winter months, used motorcycle prices are comparable to the same period last year.

There are still waiting lists for a number of our models.

Our motorcycles are generally selling at or above MSRP.

And dealers are still in allocation.

And as we have been telling you for years, spring always comes; just look out the window.

On the other hand, the supply and demand equation is a delicate one.

It's definitely an art as much as it is a science.

We know it is important for our long-term success to get the balance right.

That is why our US sales results in the first quarter have caused us to take the precautionary measure of reducing our 2005 shipment plans.

We're less than three months away from the end of the 2005 model year.

We do not want to take the chance that there will be more units in inventory at the end of the model year than appropriate.

We believe this action is proactive, and admittedly conservative.

But the decision will help us maintain the gap between supply and demand so it continues to benefit all our stakeholders.

Specifically, we're adjusting our guidance for 2005 planned shipments to 329,000 units from the previous forecast of 339,000 units.

This means we will ship roughly 12,000 units more in 2005 than the 317,000 motorcycles we shipped in 2004.

Even after this adjustment, our business will continue to grow in 2005.

We anticipate this new shipment schedule will result in a 5 to 8% earnings growth, delivering Harley-Davidson's 20th consecutive record year.

The Company believes that this 10,000 unit deduction will occur almost entirely in the second quarter.

It will involve reducing planned production of the 2005 model year motorcycles.

Revised quarterly shipments are expected to be 77,000 units in the second quarter, 87,500 units in the third quarter, and 87,500 units in the fourth quarter.

This will impact the comparison of the second quarter last year, which shipped 82,000 units.

Earnings in the second quarter this year will probably be lower than the second quarter of last year, primarily due to the inefficiencies related to the disruption in production.

Looking at long-term guidance, this adjustment may prevent us from attaining our previous goal of 400,000 units by 2007.

However, we see no reason to change our long-term unit projections of 7 to 9% annually based on just three winter months' sales data.

Similarly, we're not changing our projection of mid-teens annual earnings growth other than for this year.

So to wrap up, the first quarter for 2005 was another record year.

We anticipate another record year in 2005 as Harley-Davidson continues to grow, just not as fast as originally planned.

We're taking a precautionary measure by moderating our 2005 shipment schedule to maintain demand in excess of supply.

And based on all of our indicators, we see continued 7 to 9% unit growth, mid-teens earnings growth after this year.

Our confidence is fueled by our strengths in the following areas -- a world-class brand that is admired and respected around the world; passionate, hard-working employees; a proven management team; exciting new products; the best motorcycle dealer network in the world; and a strong balance sheet with significant cash flow.

I will now open up this conference call for questions.

(OPERATOR INSTRUCTIONS) David Cumberland, Robert Baird.

Can you comment on Harley's expectation for retail sales growth for the full-year; if not an exact number, perhaps a range of the growth you're expecting for retail sales?

We don't make forecasts on retail sales.

But as evidenced in the press release and the opening of the conference call, we are confident in the growth of our market and Harley-Davidson motorcycle sales.

Right now we're making this adjustment just as a precaution to guard against retail sales hitting what they need to hit before we get to the end of the 2005 model year.

But we still have great confidence for retail sales environment for '05.

It is just that we have to moderate our wholesale shipments this year.

Would you expect retail sales growth to be somewhat above the shipment growth of 4% for the full-year?

Yes we would.

Again, we have great confidence in the market from all the indicators, and that the market will continue to grow.

And we believe that this being a precautionary measure, and with the confidence we have that retail sales will probably exceed our wholesale shipments.

And then one other topic.

On gross margin you mentioned the surcharges possibly throughout the year.

Would you expect gross margin for the year to be comparable to the first quarter, meaning on a year-over-year basis roughly flat?

And then perhaps if you could comment on the longer-term gross margin opportunity?

I will answer it in reverse order.

Our margin -- I'm going to operating margin, because there's different parts of the income statement that we would rather not comment on specifically.

But we're going to grow, again, earnings faster than our revenue.

We have done that for 20 years.

We will continue to do that.

We've got great drivers of our improvement in margin, buying being one; continuing to work with our employees as we continue to work with our suppliers. 60% of our cost of goods sold is purchased parts and working with suppliers.

As they benefit from our capacity increases and they benefit from our long-term relationships as we continue to focus on coming out with new products and designing some costs out.

As we continue -- it's a capital-intensive business.

And as we add capital, those machines are more efficient, better processes, better quality, and helps add to the efficiencies.

All those things have been drivers also.

Operating expenses don't necessarily grow at the same rate of revenue.

Historically they have not.

And that adds to the operating margin.

So all those things will continue to drive, as well as new products, our improvement in margins.

As we look at 2005, again I would not focus on gross margins.

There's going to be some changes in the income statement as we work in shutting -- as we work in adjusting some of our production during the second quarter.

And that will result in some disruptions, as well as maybe some changes in mix.

I'd rather focus on our guidance, on our earnings, which, again, is between and earnings growth of 5 to 8%.

Robin Farley, UBS.

I have two questions.

First is, I guess your -- what you've seen in Q1 in terms of retail sell-throughs leading you to change the '05 outlook, but not this longer-term rate.

I guess, why not reset expectations?

Why keep that high 7 to 9% long-term rate out there if you're resetting the '05 expectation?

That's a good question.

It gives me another opportunity to get the point across that this change in guidance is a precaution to keep demand in excess of supply in the short period of time that as we come out with the '05 model -- as we finish off the '05 models, we have short period of time before we get to the end of the model year.

It's hard to know based on seasonality when spring does kick in, and whether you catch up in the second quarter, third quarter.

We still have great confidence in the growth of the motorcycle business of 7 to 9.

But we're adjusting a model year.

And fortunately, as we adjust that model year, that's going to affect the total year.

Tim Cantor, A.G. Edwards.

A couple of items here.

Can you talk about again given, I think what investors would term as disappointment here in the near-term, action that you have to take to maintain your supply-demand gap?

Can you talk about what your plans are in the near-term to continue and accelerate the share repo program that you have in place and remind us again when your window opens?

And then related to your cash flow, give us an update on your D&A and your CapEx.

I would characterize this as being a very -- as we put in the press release, a very -- prudent move.

And as put in the beginning of the conference call, it is cautious, it is conservative, and it is the right thing to do to balance all the interests of stakeholders and make sure that if we can't -- although we have confidence in the retail demand of the motorcycles, we can't pick the timing, again, as we have short window before the end of the model year.

We're just being cautious.

So that cautiousness says that we have a very prudent management team.

That being said, there may be some disappointment on Wall Street.

And as that relates to the share repurchase, we are -- as evidenced in the first quarter, we did repurchase just shy of 3 million shares.

And we will continue to repurchase shares for the year.

We've never given a forecast of how much or when, but I think that it's very safe to say that we will continue to repurchase for the balance of the year.

As for depreciation and CapEx, CapEx is probably going to be in the range -- it has not changed -- 225 to 275 million.

Again, our outlook on the future has not changed.

So we're going to continue to grow this business, and that growth is both in new products and better, more efficient machines.

Therefore, our CapEx guidance has not changed.

Depreciation, I do not have in front of me at the moment, Tim, but you can get an update later on from Mark Van Genderen.

Felicia Kantor Hendrix, Lehman Brothers.

I have a couple of questions.

And operator, if you could keep my line open.

First question is just if we can touch upon the credit loss that you saw in the first quarter.

And you did mention, and you've always talked about, how that number typically is under 1%.

But this time it kind of tweaked above that.

And I'm wondering if you can walk through again as to why you thought that was and why you're confident that that number will drift back down to under 1%.

And then my second question is, you discussed why you're confident in your long-term growth rate of 7 to 9%.

But you also said that in the quarter you were somewhat surprised by retail sales; that they fell short of expectations.

So I'm wondering how confident are you in terms gauging the ability -- or in terms of your ability to gauge demand.

Is there something internally that you're going to see change given the surprise that came from the retail sales number in the first quarter?

Let's see if I can remember some of those questions.

On HDFS credit losses, as referred to in the press release, they are 1.07% versus 0.77%.

Again, that was driven by two things -- higher incidence of losses, and that was concentrated in C and D credits, which we certainly priced for.

So that is not an issue.

It is just see C and D credits did have a higher incidence.

And then on our recovery rates.

The recovery rates -- this is a repossessed market.

They are auctioned off to the dealers typically in not one unit at a time, but bundles of units.

When the dealers have higher inventories, as we have stated that they have higher inventories and will have higher inventories each year, they need to balance bikes that they're buying versus the new bikes they have on the floor.

With lower demand that repo rate, recovery rate is just a little lower.

We think that as we get back to the summer months the combination of better recoveries on repossessed units and more people riding, that that traditionally has come down.

We think we're looking at a spike in the first quarter.

And so we're maintaining our target of 1% or less.

With the C and D credits, is there something that you're going to do to evaluate them?

How are you confident -- I understand the recovery rates, that part of it.

But with the C and D credits, is there something -- what makes you confident that you're not going to see that continue to deteriorate?

(indiscernible) continue to monitor that, number one.

And we do price for those -- we've been very fortunate to keep those low.

And we will continue to monitor it, but definitely it has not caused a profitability issue.

But we will monitor those trends.

Again, for this small period of time it's not that big of a change.

We characterize our -- we characterize in press release that we were disappointed in the retail sales for the first quarter.

Surprised we didn't say.

Surprise -- the winter months -- the first three months of the year are winter months and they do not predict what's going to go on for the year.

As I also mentioned in the beginning of the conference call, we have been positive to prior-year comparisons, negative (ph).

In fact, this year, when we look versus last year, last year was up almost 13%, which gives us a little rough comparison.

That being said, winter months, when spring starts kicking in it's really sensitive, whether it kicks in in the end of March or the beginning of April.

And so we know that there's sensitivity.

At the same time we cannot take the risk of what impact it may continue to have before we get to the end of the model year.

So we are disappointed, not surprised.

And everything indicates to us that demand still exceeds supply.

That's what gives us the confidence in our target of 7 to 9% long-term growth.

Okay, thanks.

Robin Farley, UBS.

I think the operator accidentally disconnected my line when I was asking the last question.

So, operator, I wonder if you could just keep the line open during the question being answered here.

The two questions I had, the other one was your comment about the operating margin, and you said the timing of certain expenses, and that's what offset the lower gross margin.

And so, I wonder if you could give a little more color on that so that we can understand whether the operating margin will continue to be better and also the gross margin, or if this was a shifting of expenses that enabled that to happen in this quarter but we will see better year-over-year in the rest of the quarters.

And then I do have another question, operator, if you could again keep the line open.

Thanks.

Going back to (indiscernible) explanation on the operating expenses in fact were lowering 2005 than 2004.

One of the contributors was that last year we had substantial write-offs of some fixed assets that did not occur this year.

So that was the write-off last year.

It is not an expense this year, so it causes a bit of a difficult comparison.

Some of our operating expenses were a little lower as we continue to always focus on operational excellence, both in the manufacturing flow, as well as in the SG&A.

And then timing of some of our expenses.

There's always timing between certain expenses and between certain programs and the amount those programs may cost.

So some things that might have occurred last year in March will occur in April this year, and that's just the timing.

But overall, getting to the end, we're still looking at an earnings growth rate of 5 to 8% for the year.

So you're saying (indiscernible) expenses moves into later quarters that (indiscernible) the operating margin would not show the same improve we saw here Q1 if those expenses (multiple speakers)

Yes, operating margin obviously is a function of many things -- it's gross margin; it's cost; it's mix, it's a lot of things to get down to operating margin.

We're just saying that the end of the year, after we cover option expenses and after we cover the disruption in the second quarter for adjustments in production, we will still have an earnings growth rate of 5 to 8%.

The other questions that I was trying to clarify is just when you look out to this long-term growth rate, is there --?

I guess what would be the biggest factor that you would attribute this reacceleration that you expect next year?

Is it primarily going to come from something new in the product pipeline that we haven't seen yet that would move the growth rate from 4% back up to an average of 8%?

I guess what's the biggest factor you would attribute that reacceleration that you expect to?

Again, this adjustment in production is for making sure we don't run into too much carryover in units at the end of our 2005 model year.

It is cautious adjustment decision.

It is does not reflect negatively against our optimism of a 7 to 9%.

So it's not a reacceleration.

We really believe that we will continue to grow in the retail market 7 to 9%.

But at the same time, this year, as we make this cautious adjustment, it impacts our wholesale shipments.

Great.

Thank you.

David Anders, Merrill Lynch.

Jim, I'm a little confused still.

For the last couple of quarters, and when you guys were in New York, you said the inventory levels at the dealer were fine; you're comfortable with them.

And now you are obviously not comfortable with them.

I'm still trying to get my arms around kind of in management's guidance how do we think about what's changed.

I mean, did we just hit maximum inventory at the retail level last quarter, and now we have to pull it down?

Is that in essence just what you're telling us?

Not at all.

Going back, as I mentioned before, as we look at dealer inventories and we look at the dealer network many different ways, in talking to the dealers, talking to dealer advisory counsel, we monitor on a very frequent basis the retail sales price of the new motorcycles, the retail sales price of used motorcycles.

We do this through information we get from HDFS.

We talk to dealers and see how they're doing with their sell-through on models and what is (indiscernible) that's a harder process.

That's more anecdotal.

At the same time, we're, again, looking at the prices that the new bikes are being sold for; being sold for MSRP or above.

That suggests that demand exceeds supply.

This adjustment, again, is not to bring demand back ahead of supply.

We believe it's there.

In fact, demand exceeds supply.

We just don't want to get into position in the short-term on carryover units that that may happen.

We still believe that demand exceeds supply, and that the inventories at the end of the year, as well as at the end of the first quarter, are in good shape based on the resale sales trend, which I think is impacted by winter and weather.

We don't know when that's going to change, and that has an impact on a model year that will end in basically 2.5 months.

Let me ask it a different way then.

If demand exceeds supply, why would we need an adjustment right now?

Demand exceeds supply -- again, the adjustment is a timing issue.

We have a model year that is, again, 2.5, 3 months away, and we're looking (indiscernible) demand exceeds supply.

The model year is coming up.

We don't want too much carryover units.

We certainly believe that, again, demand is exceeding how we plan to furnish the market.

Thank you.

Bob Simonson, William Blair.

I have three questions, Jim.

First, I believe you gave some guidance for the full year for HDFS and I missed it.

Second, your corporate expense jumped from 4.5 to about 7.3 million.

Was there anything peculiar about that or particular about that?

And I guess the last question is, which is a follow-on to the other -- many of the other questions on your supply and demand, is that you have often talked about narrowing the gap between the two and the fact that that moves like a scale from weighing (ph) those two over against each other and the letters and e-mails you get from folks who are upset about them and wait so long (ph) and pay premiums.

If you were to get that down even further so that the gap was very small, do you believe your unit demand would be higher for bikes?

Bob, your connection was a bit crackly.

I think I picked up the question.

On the end I will ask you if I got right.

But I think the first question was on -- I did give guidance on HDFS operating income for 2005.

We said that HDFS operating income is expected to be slightly lower than was achieved in 2004.

That is primarily due to a highly competitive marketplace and the increasing interest rate market.

And we said that our long-term guidance did not change and that the Company expects HDFS operating income growth rate to be slightly higher than the Company's motorcycle unit growth rate beyond 2005.

So we only changed 2005.

On corporate expense, the increase that you see on the income statement, and I don't think I have it -- yes I do.

It went from 4.5 million to 7.3 million.

The biggest driver of that increase is as we expense stock options, a portion of that expensing occurred both in cost of goods sold, SG&A, corporate expenses.

The biggest driver of that increase is corporate expenses is now we are expensing stock options, a portion of that shows up in corporate.

Then, on your comment on we have said that we've been attempting for a long period of time to narrow the gap between supply and demand and that this was -- the gap is largely (indiscernible) was causing a lot of dissatisfaction with our customers in paying premium prices, maybe not being treated as well as they should be, and also long waiting lines.

There's no doubt in our mind that if we reduce the wait lines, get prices close to MSRR, having the dealers welcome the customers into the shop across the country, that's going to increase demand and be a much more favorable environment.

And that is the driver for narrowing the gap, again, but never closing again.

That's fine.

That was exactly the questions.

Tony Gikas, Piper Jaffray.

A few questions.

Have there been any changes to the dealer allocations that have been driven by the dealers over the past few months?

Second question, we've been -- in our channel checks that we continually do, which have been weak now for eight months, we continue to see that used pricing -- or excuse me, pricing on used motorcycles has declined about 10% over the past 12 months.

How much does that put pressure on new sales and on the pricing outlook in calendar '06?

And then third question would be, how much risk is there to Harley-Davidson Financial Services?

In an environment where interest rates are increasing, consumers are better educated on their financing options.

Maybe you could just touch on that a little bit more.

The question -- and I'm not quite sure I follow on the allocation by dealers.

We did -- Harley-Davidson did change somewhat or adjusted its allocation system of new products during the winter months, trying to slightly increase the allocation through the dealers in the (indiscernible) and we will read compensate for that in the summer months and adjust that compensation, that allocation, back to where it was intended to make all the dealers whole (ph).

From time to time, dealers may trade between dealers for certain models, if that's where you're going.

But other than that, I can't relate to the question.

On used bike prices, we have commented on a 10% -- or approximately 10% reduction used bike prices.

As we monitor the used bike prices, and we get great data for probably 50% of the bikes -- more than 50% of the bikes that are financed to the dealerships on new and used bikes.

And it suggests to us that used bike prices may be down from a comparable period last year 2 to 4%.

There's no doubt that used bike prices do fluctuate season to season and that winter month used bike prices are lower than they are summer months, and maybe that's what's driving the data.

So I can't really comment on it.

But as we do very good statistical data checks this year versus last year over the whole dealer network, it's a much more minor change than what you're indicating.

Talking about HDFS and as interest rates continue to rise and consumers are educated, it is a competitive market.

And We will continue to probably have to respond to that market.

And I think that is really the driver in our guidance where we gave that 2005 operating profit will not be as high as 2004 in HDFS, even though we've got a good start for the first quarter.

So I think we're going to be competitive out there; maybe not the lowest price provider, but we are going to be competitive.

And I think that's recognized in the current forecast.

Thanks.

Ed Aaron, RBC Capital Markets.

A couple of questions for you.

First, I wanted to ask a little bit about dealer inventory levels.

Could you give us some idea of how many new bikes are out there in the channel domestically currently?

And then I know the answer will obviously vary depending on the time of year, but could you maybe put that into some perspective of what you consider to be the ideal amount of dealer inventories?

And then secondly, on the finance business, you talk about it being -- expect it to be lower in 2005, but beyond 2005 that you expect it to grow faster than the overall business.

Just trying to get some comfort around that, because it doesn't strike me that the market will be becoming any less competitive, nor that interest rates will be coming down anytime soon.

So just trying to get some comfort with that line of thinking.

On dealer inventory, we don't give out what the dealer inventory is.

But as we look at dealer inventory, again, it is as we talk to the dealers, are the comfortable with it; as we looked the prices they're selling their product for, and obviously it's selling at MSRP or above, is a great indication that we still -- demand exceeds supply.

And that's what we're measuring dealer inventory to, is that demand continues to exceed supply.

There's no doubt that dealer inventory is higher this year versus last year.

That has been the case for the last 10 years as we continue to grow our business.

And the number of dealers do not change significantly.

Currently we have about 650 dealers in the US and 20 years ago we had 600 dealers.

So it has not changed significantly with that growth.

So as you spread many more units -- in fact, we had 600 dealers; we had 36,000 units.

And now we're talking about 300,000 units in the US, or a little less than that, spread over the same dealers.

That inventory is going to continue to grow.

So what we need to monitor, and we do monitor, is many different things and talking to the dealers, and that's where we get our comfort from.

On HDFS, again responding to the last question and this question, it is a competitive marketplace.

But when we talk about interest rate environment, we're talking about the rising interest rate market of the short-term interest rates.

That's where we're more sensitive to.

We don't believe that interest rates will go on forever.

And we're talking about the rise and reacting to that rise versus what the competition (indiscernible), that causes some pressure.

So I think the -- and at the same time, as we have lowered the base for 2004, we will have growth on that new lower base going forward.

Thank you.

Gregory Badishkanian, Smith Barney.

Could you tell us which models will be most impacted with the production adjustment?

Is it going to across the board or are there specific models you're targeting?

Right now -- we just came out with this decision.

We're now working with the sales and production plants, and that will be a balance of everything, of all the issues.

So that has not yet been determined.

What has been determined is our adjustment in production will occur in the second quarter, again on the '05 model year.

But the mix for that has not been determined yet.

Thank you.

Dean Gianoukos, J.P. Morgan.

First off I have to say, we always think it's a good rule that you're selling production growth given that we sort of calculated you have over 70 dealers -- 70 bikes per dealer in the US right now at retail.

And so, my question is -- I have two questions.

Longer run, when you look at market growth since 1970, heavyweight market growth has been about 4% and that is in and out of a couple of cycles.

What is it that makes you think you can grow 7 to 9?

Do you anticipate that you're going to continue to gain or do you think the market is in for another sort of above average (indiscernible) rate coming up?

And secondly, if you are going to grow 15% a year going forward and your projections are right, you'll probably generate 700 to 800 million of free cash a year.

And now that you're sitting on 1 billion 3 in cash, why would you not do a very, very, very productive (ph) share buy back?

If this is the case and you're going to grow that much (indiscernible) why would you not do a significant share buy back?

I don't know if you could hear that on your end, but there was a lot of noise on this end from your -- I'm trying to -- this is going to be I guess of what you said because I can only assume if we put you back I would have the same noise.

What I think I picked up is on the 7 to 9%, we looked at 7 to 9% and it is based on the last 20 years of both our growth and the industry growth.

And as we looked at it, we stripped out -- I mean, the industry and Harley-Davidson have actually grown faster than 7 to 9% over the last 20 years.

What we did is we stripped out the anomalies, and we've gone over this on several phone calls.

But we stripped out the anomalies that superheated the market, whether they be in our case some anniversary rides; we stripped out some bottlenecks that we got through a paint system; we certainly stripped out those years where a superheated stock market that I think had an impact on all factors of the economy, and looked at we had a core growth rate of 7 to 9% over the last 20 years.

And over that 20 years, our market share has not changed substantially.

We have been growing by a couple of tenths; a little faster, but not a lot faster, than the market.

This market, in fact, in the last -- since 1991, the heavyweight motorcycle market worldwide was 300,000 units in '91, which was 14 years ago.

Now it is over 900,000 units.

So it continues to grow.

Again, that was (indiscernible) we stripped out some of the anomalies.

We have great confidence that as good historical basis on why we will continue to grow and that it will grow, especially with as we continue as the number one player in many of our market, in the worldwide market, in the US market, we will drive this market, drive the excitement, drive the enthusiasm around motorcycling.

Harley-Davidson obviously (indiscernible) more market share, because it's not just the motorcycle, it's a lifestyle.

So we've got that going and we will continue to drive that market with exciting products and services.

As for the cash, it is a very successful business.

We do generate cash and have generated cash.

We've been using that cash in share repurchases.

We've been using that cash in increases in dividends, obviously supporting a capital-intensive business.

Cash has continued to grow, not as fast as if we just let it sit there.

So we're not sitting it there.

It is still growing.

We will look at, and as I mentioned earlier in the conference call, we plan to continue to make some share repurchases this year and ongoing.

We have an outstanding -- two outstanding authorizations, one to offset (ph) the exercise of stock options; but the other one, which you're talking about, is at management's discretion to go out and purchase shares.

We will continue to look at that.

We have just -- we have not made forecast of how much and when.

But certainly if you look at last year, we purchased 10 million shares, and so we have used that cash for share repurchase.

Michael Millman, Soleil Securities.

That's Soleil.

I guess a couple of -- several questions.

You really haven't talked about what happened or what didn't happen in the first quarter.

If that was all weather, why hasn't it just deferred demand?

For example, in '03 I think your numbers that you gave earlier in your prepared remarks were in that US sales, retail sales, were down 3.4%, but you didn't change your guidance in that year.

But you have changed it this year.

Secondly, do you expect the dealer inventories to be up at year end?

And how much capacity do you think dealers have for increased inventory?

And thirdly, could you talk about any increase in dealerships for sale?

Thank you.

Your question was what happened in the first quarter?

Again, first quarter has never forecasted retail sales.

It is greatly impacted by severity of winter.

Actually, when spring kicks in, and sometimes it kicks in in March and sometimes it kicks in in April.

That being said, there could be something else.

And to make sure that that is not an issue -- I mean, that something else is continuing on for a short time in the second quarter, we're taking this precautionary measure to reduce the possibility of having an inappropriate amount of carryover product in '05.

We attribute it to it's always been -- and we've got a lot of experience -- that it is the weather.

There's no doubt that I think many of us have looked at the severity of weather in the Northeast, as well -- with all the snow, and as well as the West Coast.

But more so it's not so much that as it is when spring kicks in and when people can actually get on their motorcycles.

That is a bigger factor.

In talking to 2003, you referred to my comment where 2003 was down 3.4% and we didn't reduce guidance.

Also, that model year continued on through September.

We were not looking at just a 2.5 months before the end of the model year.

We had many more months continuing on the model year.

Plus it was our 100 Anniversary.

So the factors certainly were a lot different.

And asking about dealer inventories, we will always -- in kind of response to the previous question -- monitor dealer inventories in response to what the bikes are selling for new versus MSRP; what used bikes are selling for.

Dealer attitudes, that will be a bigger indicator rather than an absolute target.

We do believe that as we grow and we have confidence in the growth of 7 to 9%, dealer inventories will grow.

But we will always monitor that to make sure that those assumptions are correct.

Jay Van Cleave, Loomis.

I guess my question relates to -- I know you don't comment about new products, but is there something about next year and the following year's new models that gives you confidence to rise above the demand for this year?

Is it a problem with this year's model year and you have an ace up your sleeve that you're not able to talk about?

Again, Jay, thanks for the question.

The demand that we're looking at right now, we're reacting to we had flat retail sales in the first quarter, and we don't want to jeopardize the '05 model year, so we're making a precautionary move to that.

We still have confidence in overall demand.

Part two of your question actually is we continue to come up with new and exciting products.

We just expanded our product development center for the second expansion in recent history.

So we continue to come up with new and exciting products, both for -- like the V-Rod, Twin Cam 88, the Sportster L, everything else -- Sportster, the low Sportster.

So we continue to come up with new and exciting products.

I think it's reasonable to assume that we will continue to do this probably at a faster rate than we historically did before we were expanding the product development center.

Thank you.

Joe Hovorka, Raymond James.

A question on the annualized credit losses in the portfolio.

The uptick, the 30 basis points, can you kind of tell me what the split is?

What's the higher -- how much of it is higher incidence of loss and how much is actually lower recovery rates?

And then, if you could talk a little bit about what you're seeing in used bike prices through HDFS.

On the annualized credit losses, we're not getting -- the conference call is getting a bit long.

But in responding to the annualized credit losses, as we look at the two drivers that I mentioned -- we had mentioned both in the press release and in the conference call, incidence and the lower recovery is about half and half of the driver in the increase.

And what was the second part of the question, Joe?

Just the trend that you've seen in the used bike prices overall.

Yes, and I responded a little earlier on used bike prices that we've seen -- I mean, used bike prices are pretty much comparable.

If you get down to the real nitty gritty calculation, it's probably, depending on the bike, a 2 to 4% difference in the same period of time last year.

There may be differences when you compare it to differ periods of time, winter versus summer.

But if you compare this current first quarter with the first quarter last year, prices are pretty much comparable on used bikes that we see coming through HDFS.

Thanks.

With that, I want to thank everybody for your time this morning.

Remember that a taped replay of this conference call may be heard by calling 973-341-3080 and entering the PIN number 5842711 followed by the pound key -- that is until April 20th -- or by accessing it on the Harley-Davidson website.

If you have any questions, please contact the Director, Investor Relations, Mark Van Genderen.

His number is 414-343-8002.

Thanks and have a great day.

That does conclude today's teleconference.

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