Harley-Davidson Inc (HOG) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Harley-Davidson second-quarter 2005 earnings release conference call.

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

It is now my pleasure to introduce Jim Ziemer, Chief Executive Officer of Harley-Davidson.

Sir, the floor is yours.

Thank you.

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

I'd 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 6186419 and the #.

The recording will be available through July 20th.

It is also being webcast live on our website at Harley-Davidson.com.

The webcast will be available for replay throughout the next several weeks before being archived on the Investor Relations portion of the Harley-Davidson website.

Compliance with securities laws and regulations, I would like to make the following statement.

This call will include forward-looking statements that are subject to risk 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.

Given our change in guidance after the first quarter I am sure that many of you are interested to hear the results of the second quarter.

Let me start by saying that even with the impact of a reduction in motorcycle shipments for the second quarter we set all-time quarterly records in terms of retail sales, revenue and earnings per share.

Our motorcycle shipments were consistent with the revised shipment guidance.

Let me cover some of the highlights.

Specifically we successfully shipped just over 77,000 units for the quarter.

Second, our dealer's retail, a record 114,000 motorcycles through our worldwide dealer network in the second quarter, a 5.9% increase over year ago period.

And if you will recall, second-quarter 2004 had been our previous record quarter for worldwide sales and were up 16% for the same period -- excuse me -- which was up 16% for the same period in 2003.

To do the calculation for you, retail inventory levels decreased by roughly 37,000 units during the quarter, and 31,000 of that reduction was in the United States.

Even with lower motorcycle shipments than originally planned, we had record revenue of 1.33 billion for the quarter.

Our sizable cash position combined with an attractive share price allowed us to repurchase 17.7 million shares in the quarter.

This repurchase combined with our second-quarter net income provided record quarterly earnings per share of $0.84.

Before I continue I am sure that many of you are aware that shareholder complaints have been filed against the Company after the April 13th revision or its motorcycle shipment guidance.

While I cannot comment on the specifics of the cases, I can tell you that we believe the losses are without merit.

We plan to respond appropriately.

While it is unfortunate that time and resources will be consumed that could otherwise be spent more productively, I assure you that our primary focus as managers remains on the Company's business.

In addition, two days ago we were advised by the SEC that it is inquiring into matters relating to certain claims made in these shareholder's complaints.

As indicated in our form 8-K filed yesterday, we are cooperating with the SEC.

Turning to our motorcycle and related product segment performance, while wholesale Harley-Davidson motorcycle shipments for the quarter were down by approximately 5000 units, or 6% compared to a year ago, motorcycle revenue decreased just 1.4%.

Revenue per unit increased 4.9% from $12,437 to $12,045 in a quarter over quarter comparison.

The higher revenue per unit is primarily due to a higher proportion of touring bikes, which was 34.3% this year compared to 30.5% last year.

The majority of the 10,000 units we took out of our plan in the second quarter were Dynas, Sportsters and V-rod.

I'd also like to mention that inadvertently on the revenue and shipment data schedule attached to the press release we did leave out fuel units, wholesale units for the quarter.

They were 3,067 compared to 2,718 units last year in the same quarter.

Turning to P&A, and general merchandise, they both delivered solid results in the quarter.

Parts and accessories revenue was 237.8 million, up 3.3% compared to same quarter last year.

And general merchandise with quarterly sales of 63.4 million was up 10.3 million or 19.5% over last year's second quarter.

General merchandise experienced significant growth and its seasonal increase was due to growth in seasonal productline.

I have been corrected here on my statement about revenue per unit.

Revenue per unit went from $12,437, 13,045.

I believe I had said a different number before that.

So that is a correction.

Margins.

You notice that margins, that gross margins are down slightly for the quarter to quarter from 37.9% to 37.5%.

As I mentioned in the first quarter conference call expected downward pressure on gross margins in the second quarter due to the reduction in expected wholesale motorcycle shipments.

While the negative impact and the shipment change gross margins was offset by a stronger product mix and by working with our unions and suppliers to minimize inefficiencies, we did continue to see raw material prices impact gross margin.

In fact, in the second quarter we experienced material surcharges of just under $9 million.

I also mentioned in the first quarter conference call that operating expenses for the first three months were lower than the previous year based in part on the retiming of certain expenses.

This, in part, drove operating expenses as a percent of sales slightly higher in the second quarter compared to the same period last year.

On the year-to-date basis operating expenses as a percent of sales are lower for the same period in 2004.

To summarize, the slightly lower gross margins, slightly higher operating expenses in the quarter resulted in operating margins of 24.0% compared to 25.2% in the second quarter of 2004.

Turning to our financial services segment, Harley-Davidson Financial Services delivered another solid quarter with operating income of 51 million, up 4.1% over last year's second quarter.

The retail market share for HDFS grew to approximately 42% the first half of 2005 compared to 39% for the same period last year.

Our 735 million second-quarter securitization resulted in income of $14 million.

But that is less than the 19.3 million received in the second quarter of 2004 securitization.

This reduction in quarterly securitization revenue was a result of an enhanced (technical difficulty) program for dealers introduced in May of 2004 and lower margins due to the rising interest rate and the competitive environment.

This 1.8% gain as a percent of loans sold falls within our previous stated guidance of 1.7 to 2.5.

In the current rising interest rate environment pressure from competitors forces us to raise retail interest rates less than our borrowing rates increase, causing margins to contract.

As a result we see securitization gains in the near future between 1.3, 2.0% of bonds sold.

HDFS had annualized credit losses in the second quarter of 0.89% compared to 0.63% in second quarter 2004.

This increase is a result of lower recovery rates and higher incidence of loss.

We expected that used motorcycle prices would decrease as the gap between supply and demand for new Harley-Davidson motorcycles narrowed.

Our recovery rates are affected by the decrease in used bike values when we repossess and sell these bikes through our dealer network at auction.

As previously stated, management's annualized credit loss target is 1% or less.

Also, as previously stated, 2005 Harley-Davidson Financial Services operating income is expected to be slightly lower than that achieved in 2004 primarily due to the highly competitive marketplace and the increasing interest rate environment.

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

Let's turn to the worldwide retail performance in the quarter.

To clarify, motorcycles in the heavyweight motorcycle segment of the market have an engine displacement greater than 650 cc.

Our worldwide dealer network retailed over 114,000 Harley-Davidson motorcycles in the second quarter of 2005, the most retailed in any quarter in our history.

Our dealers experienced year-over-year gains in all of our major markets.

Europe was up over 23%.

Japan and Canada were up over 10%.

And the rest of the international markets were up over 17%.

In the U.S. we saw an increase of 3.2% over the same quarter last year.

And as you recall, second quarter 2004 was a record, as well, up almost 19% U.S.

You have often heard me say that one of the ways we can drive demand is by introducing great new products and services.

In 10 days we are launching 2006 motorcycles at our summer dealer meeting.

As many of you know, we are very guarded about our new product launches.

Even within the walls of Harley-Davidson.

But as CEO I'm very familiar with these motorcycles, and I can tell you that I am excited about what I see.

I know there have been a lot of questions regarding our long-term 7 to 9% wholesale motorcycle unit growth rate.

Given our first quarter announcement, I can understand why these questions have arisen.

Let me talk about it.

I have often stated we are working to narrow the gap between supply and demand, and this is just as much an art as it is a science.

Given the importance of this dynamic to our stakeholders, we will continue to monitor this relationship closely.

For example, we look at new and used retail sales information from Harley-Davidson Financial Services.

On average new bikes are still selling at MSRP or slightly above.

And our information shows that used bikes are maintaining high values as well, selling at average right around their original MSRP.

This supports the belief that demand exceeds supply.

Our confidence in the future is also supported by our many opportunities, and the products and services we have in our plants excites both current and new customers.

Although we have had exceptional growth since 1986, we have tapped only a fraction of potential customers.

In fact, our current annualized sales rate in the United States represents just one in every 625 people between the ages of 25 and 65.

This age group purchases the majority of our motorcycles.

If we look at the demographic trends over the fifteen years we see that 25 to 34-year-age group will increase by about 7 million and grow to approximately 47 million people.

The 35 to 54-year-age group is going to remain huge at about 80 million people.

And the 55 to 64-year-old age group will increase by about 14 million to approximately 44 million people.

This fact, combined with the people staying active much longer in life, makes this a very attractive group to continue to sell to.

All in all these demographic trends certainly look promising.

In addition, our female ridership continues to grow as well.

Currently at about 10% of our sales, up from about 2% 15 years ago.

We expect to see more and more women joining the family as we support this initiative with the appropriate products, programs, and rider education courses.

And we see significant growth opportunities internationally, both in our established markets like Europe and Japan and developing markets like Russia and China.

An indicator of these opportunities is our international H.O.G. club membership.

While we only sell our bikes in about 60 countries, there are H.O.G. chapters in over 115 countries.

This demonstrates a real brand affinity.

Now on the other hand, there is no doubt we have work to do in our distribution channels outside North America.

But that work has already started and will provide real benefits in years to come.

Let me talk about the exciting products.

New products play a large part in the future growth of the company.

And while I can't talk about the specific motorcycles or the features, I can assure you that our product plans are the result of the best marketing, sales and engineering minds in the business.

When we look at our customer base we can segment them into three broad categories, existing Harley Owners who buy approximately half our new motorcycles, competitive brand owners who purchase about 25% of our motorcycles, people new to the sport who buy roughly 25% of our motorcycles.

It is with these riders in mind that our product plan looks out a number of years and every new motorcycle model project a demographic and regional sales target.

We see the best market feedback from our customers at rallies like Daytona and Sturgis where literally hundreds of thousands of customers love to tell us their dream.

And if that isn't enough, our top 160 senior leaders in the Company and at least two customer events a year and in many cases more.

Furthermore, each year close to 1000 additional Harley-Davidson employees work at motorcycle events, spending time with current and potential customers.

So as we look to the future, we see plenty of potential new and competitive riders with whom to share the Harley-Davidson experience.

We also have the most loyal current customers in the world and a targeted product plan that will keep them excited and purchasing new motorcycles and related products for years to come.

Now let me talk about how we enhance shareholder value in the quarter.

At our annual shareholders meeting held Saturday, April 30th we announced we will be increasing our quarterly dividend to $0.16 per share, an increase of 28%.

That follows significant increases in the dividend in both 2003, 2004.

The Company also repurchased 17.7 million shares of its common stock at a cost of approximately 840 million during the second quarter of 2005.

This is in addition to 2.9 million shares purchased by the Company in the first quarter.

Now 600,000 shares of the repurchase activity in the first half of 2005 is to offset the option dilution with the remaining 20 million shares repurchased exhausted an outstanding 20 million share authorization by the Board.

So as a reminder, we currently have two share authorizations outstanding.

First is an ongoing authorization to offset option exercise, and the second is a new 20 million share authorization approved by the Board of directors in April of 2005.

On the topic of guidance, for the full year we are on course to ship our target of 329,000 Harley-Davidson motorcycles which will yield a shipment growth rate of 3.7%.

We expect wholesale shipments of 87,500 units in both the third and the fourth quarters of 2005.

Again in the first quarter, we set expectations that total year wholesale shipments would drive earnings per share growth of 5 to 8% for the year.

Given the number of shares we've repurchased during the first half of the year, 2005 earnings per share growth is now anticipated to be in the 10 to 13% range.

Harley-Davidson's longer-term guidance remains at a 7% to 9% annual growth in motorcycle unit shipments, supporting an earnings growth per share in the midteens.

So to wrap up, we had a very successful second quarter.

We are on track to deliver our 20th consecutive record year.

Our confidence in the future is fueled by our strengths in the following areas -- our world-class brand that is admired and respected around the world, our passionate hard-working employees, proven management team, strategically developed product plan, the best motorcycle dealer network in the world, a strong balance sheet with significant cash flow and a focused long-term commitment to manage the relationship between supply and demand.

With that, I will open it up for questions.

(OPERATOR INSTRUCTIONS) David Cumberland, Robert W. Baird.

In Q2 how did the retail sales compare to the Company's plan both for the U.S. and over all of your markets?

You know, David, we don't do retail sales forecast, but I can say as we put in the press release that obviously our international markets, all international markets had a great performance compared to last year.

And the U.S. was big against the very tough performance of last year, which was up almost 19% in the quarter.

We more than beat that.

We were up more than 3%, so we had a very tough comparison, not only for the quarter but for the six months, and we are ahead of that.

And as we look at the back half of the year, I think we have a much easier comparison for the last six months of the year.

So we are very encouraged by how our retail sales have performed versus a very tough comparison to last year.

Thank you.

Robin Farley, UBS.

Operator if you could keep the line open after I ask the question just in case I need to clarify something.

I have a question and also a clarification.

Jim you talked about inventory being down and you gave a number.

Are you talking about just normal inventory down seasonally from June to March like it is every year, or were you actually talking about June versus June of the prior year?

I just want to clarify that.

And then in terms of share repurchase, I guess the activity during the quarter is part of that obviously would be in response to the stock price movement in April, but I guess what kind of level would you lead us to expect going forward?

Would you expect this kind of level going forward on an annual basis or is this kind of a onetime in response to current stock levels?

And then lastly I don't know if you can just comment on Harley's retail sales in the U.S. specifically relative to the industry's retail sales.

On the clarification on inventory, I was talking about our activity in the second quarter, so basically we have brought down retail inventories worldwide 37,000 units from March 31 to June 30, if that helps you with that clarification.

So it's not a year-over-year decline, okay, yes I just want to clarify that.

It is the activity from the second quarter show that again that if you get lost -- some people get lost sometimes in looking at percents that there wasn't a big difference in wholesale shipments in that retail inventory.

The retail sales were up 3%, but there was a big reduction in inventory.

So you've got to look at the two different basis was the point we're trying to make.

On your second question, (indiscernible) I think I missed it.

Could you repeat that?

Share repurchase and what your plans may be going forward.

There is no doubt that we had a significant share repurchase this quarter.

We had started out the year, the first quarter we purchased almost 3 million shares.

That's when it was at $60 a share.

Obviously when the share price fell it was a good buy at 60 and certainly a good buy at these current levels.

And we were aggressively in the market this quarter.

We don't go out and project what we're going to do in the repurchase forward and repurchase shares but we still have an outstanding authorization at management's discretion, and we will continue to look at that.

And third question?

Was just in the U.S.

Harley's retail sales growth versus the industry.

The industry came in a little bit higher.

It looks like that was pretty consistently higher over each of the three months like it wasn't just a one month driving that comparison.

And I guess we saw similarly in Q1 as well the industry numbers being a little better than Harley and I wondered if you could comment on that.

If we look at the retail sales growth in the quarter there is not a big difference between Harley-Davidson and the industry.

I'm actually turning to -- actually if I look at six months is probably a better basis (inaudible) going from.

Our sales in the U.S. were up on a year-to-date basis 1.6 and the industry in the U.S. was up 2.7.

Not a big change; some of that change is due to the difference in sport bikes versus touring and custom bikes.

But again, I think that overall it is not a big change at 1.6, 2.7 tracking to the industry.

There are some other things, promotions significant pricing promotions going on in the competition that doesn't make those numbers quite comparable.

Okay, great.

Thank you.

Tim Conder, A. G. Edwards.

Jim, we are hearing that HDFS recently shifted their tiering from a stratifying the customers from a four-tier system to a seven-tier system.

Could you elaborate on that a little bit and any other changes that they incorporated during the quarter?

And then related to foreign exchange and somewhat driving your international sales, could you talk about the benefit there that may have had, foreign exchange in the quarter to the income statement both on a sales, gross margin or an EPS basis?

And then is the price cuts that you did, is that what is continuing to drive Europe despite the slow economies over there?

And finally, option expenses in the second quarter.

How much did you recognize for option expense in the quarter?

Okay, on HDFS, that was a pretty broadbased question, but we have gone from where we were looking at the customer in kind of four tiers.

Kind of calling it ABC and D. Whereas the marketplace was really looking at seven tiers.

Just taking the same group and dividing it a little finer.

That was causing a lot of noise in the marketplace.

It's hard for people to compare.

So we went and went to the seven tier base.

There is really nothing more than slicing and dicing the same customer base but a little finer so that there is more choices.

On interest rates there is not the big step function in interest rates on the various consumers, where one may fall into a different category because we have such broad-based fans.

On foreign exchange, foreign exchange was basically very minimal in the quarter.

Our natural hedges and the (indiscernible) purchases related to Japan versus the sales in Japan were pretty well neutral on the euro.

Our comparison versus last year where the euro was relative to the U.S. dollar, where our hedges are, result in a very small difference between the (indiscernible) foreign exchange, for the year was -- excuse me -- for the quarter was very minimal.

You asked about great success we're having in retail sales in Europe.

That is being driven by many things.

I talked earlier in the beginning of the conference call that we've been doing some rationalization of the dealer network.

That will continue.

Significant things in the German dealer network.

We've come up with some new products.

We came up with some products in the January timeframe this year at the winter dealer meeting, and we did some price cuts earlier in the year I think in January.

About 40% of our productline between 2 to 9% trying to adjust to changes in the euro versus the dollar that occurred over the last year because we do price in the European market in euros, not the UK obviously, but in the rest of the European market.

We have not changed those prices and yet there was obviously a big difference in the euro/dollar relationship.

People getting on the Internet could see that the prices were adjusting otherwise, and we were just responding.

The combination of products, distribution and some pricing changes I think have shown that we're during the right things in Europe, but certainly not just price cuts.

On option expenses, as we pointed out in the first quarter, we are expensing our stock options and restricted stock that shows up in the income statement for a little more than a charge of $5 million for the quarter.

And Jim, just to clarify in Europe the success you've seen year-to-date again is despite what is going on in some of the larger economies that are important over there right, Germany and France.

How do you see that going forward here?

Do you feel like you have now sort of hit the right buttons and it is starting to click pretty well, or are you still cautious on the balance of the year given the economic situation over there?

We will always be cautious given the economics.

There is swings in the economies especially in some of the countries in Europe, and in particular Germany has some more dramatic swings.

They are probably one of the biggest suffering economies there are in Europe.

But at the same time as you point out we're doing significantly better than the rest of heavyweight motorcycle market.

We are always cautious, but again I think that we are putting the right things together in terms of monitoring the market and foreign exchange and what it does to customers' perceptions.

I think we are definitely addressing some of the product needs so we can do that a lot more, and we're just in the beginning phases of rationalizing the dealer network.

So there's a lot more opportunity, but we will always be cautious.

Thank you.

Bill Lerner, Prudential.

Question on HDFS.

And ultimately just on the credit quality, I suppose.

Clearly you have picked up a nice amount of market share in the quarter, more than I can remember in the recent past.

And your credit loss is obviously within your comfort level or higher, a bit higher.

So that I guess begs the question are you going after lower -- in a way I'd rather not say it, but are you going after lower credit quality, and is that helping you grow the business?

Or is it market share for some other reason because your dealer training is working incrementally and so forth?

As you point out, we have picked up some market share, but we have consistently I believe picked up market share for the last five years, going from maybe less than 20% market share four years ago to the current levels (indiscernible) so we doubled our market share in the last four or five years.

So I think we have consistently done that through different initiatives, through addressing the market place, being more competitive, increasing our dealer participation fees, adjusting interest rates and as I pointed out in the conference call before we started out, was that watching our competitors sometimes when they don't increase their rates and adjustment to the interest rate environment, we may not also.

So we are being more responsive and therefore not driving the customers away, increasing our market share.

As you pointed out and we pointed out in the press release, our losses are higher than they were at this same time last year, both first quarter and second quarter.

That has been driven more by lower proceeds on the repossessions and subsequent auctioning it off to the dealer network.

As we have increased availability of new motorcycles and we've seen a change in prices closer to MSRP that has had a slight change on our used bike prices; but still our used bikes are selling very close to what their original MSRP.

But the losses again are driven primarily by they lower recoveries on the repossessions.

There is some -- and we pointed it out in the press release -- higher incidence, but that seems to be not an increase in the credit -- we look at our credit quality and the portfolio that we have it has remained pretty much the same.

There has not been a major change switch from our old designation of A to B credit (inaudible) less than that.

That's real helpful.

Thanks, Jim.

Karen Colter (ph) of Wyatt Fawcett Research.

Hello, it is (indiscernible) Lewis from Wayne Fawcett Research.

My question, Jim, has to do with the age of your riders, at least in my town it tends to be trending more and more toward the geezers.

What do you do for -- what is Harley-Davidson doing to -- as long as you are looking at demographics to get younger people involved?

Watch who you call a geezer.

Present company included.

Okay.

There is no doubt that, as I mentioned in the conference call, that half our sales -- retail sales (technical current customers.

Just on that basis there half our customer base -- its a very loyal customer base -- the repurchase percent is over 90%, and they stick with us, and so half our customer base continues to get age.

That is the good news.

I would rather not look at the alternative.

On the other side --.

That won't go on forever.

The good news is, and I pointed out people stay active much longer.

People don't fall off their motorcycles at the age 55 -- in fact they have more discretionary income and more time to enjoy their motorcycle.

And on the other side to address your question, and number one we look at our average demographics -- our average age is not quite 46, which is higher and it continues to go up a little bit.

But if I look at the last five years our average age has gone up about 1.4%.

So definitely it has not increased a half year for every single year which you would expect the past year.

Customers are gaining a year you would think it would go up two and a half years if we weren't offsetting that.

And we are.

We're offsetting it with attracting newer customers with products like the redesigned Sportster, first of all.

Coming out with the V-rod -- in fact our average age, the lowest average age of our customer is probably on the V-rod.

So we up doing some things and programs; also as we come out with as I mentioned riders education programs offer by our dealer network.

We have approximately 100 dealers offering that course.

35% of the participants in that course are under the age of 35.

Our customer base, about 15% of our customer base is under the age of 35.

So it says that we can attract, if we give appropriate product and give them a way to increase their confidence and learn to ride safely.

Between programs and products, we are bringing a younger customer base in.

And the good news is as I pointed out, the age group of 55 to 65 is a pretty good age group because they continue to buy Harley-Davidsons.

Felicia Hendrix, Lehman Brothers.

Thank you, if you can keep the line open that would be great.

Jim, just a couple of quick questions -- some reconciliations really.

One is I just wanted to understand with the credit loss increases and one of the reasons that you attribute that to is the recovery rate and you talked about that last quarter, too.

I thought in your preamble you had mentioned that used bike prices were rather stable kind of at MSRP levels.

So I'm just wondering why you would see the decline in the recovery rates.

And then getting into the other part of it with the higher incidence of loss, you just mentioned that is pretty much stable, or staying stable.

And I just wanted to verify that that you are not seeing further deterioration in what used to be called your C&D credits and your lower credit levels.

And then my final question does get to your outlook because if you look at inventory levels year-over-year they are higher.

And anyone who is talking to dealers is finding more MSRP dealers out there.

We are all finding higher inventory levels, and also I think a lot of folks would agree that when you talk to the larger dealers a lot of them are saying that they are nervous about the business if the unit growth rates keep up at the projected levels.

So I'm just wondering if you can reconcile what we are seeing, and what others are seeing at the dealer level with your outlook.

Okay, you covered a lot of territory.

On our recovery rates at HDFS versus used bikes, I made the comment on used bikes still being very close to what they originally paid for it.

The reality is that used bikes used to sell for more than original MSRP.

That has come down.

In fact, year-over-year used bikes are down about 5% in round numbers.

And so that has come down slightly.

It still puts them very close, depending on the model and the year, at what was originally paid for.

What the dealers on the recovery rates from HDFS, they auction the bikes to the dealers.

It's a different market.

I'm not talking about the retail market;

I'm talking about selling to the dealers.

As they look at higher inventories, they are paying less for some of these bikes because of lower prices on their bikes, both new and used, though not significantly different.

It has a bigger impact on what we are recovering from dealers at auction.

So there is a difference, what we see dealers selling used bikes at versus what they are paying for bikes off the auction.

On quality stability, I said that credit quality of our portfolio is materially the same as it has been for the last several years, although incidents within some of those lower categories have increased.

On inventory, we have said all along for many years now that we had an environment where dealers were charging way above MSRP, customers were on waiting lists, not getting the bikes they wanted, even being treated not very friendly.

And that is not a great business environment sustaining a growing business model.

We said we had to change that, and by change that, the only way to change it was to increase the availability of motorcycles.

Even before that, inventories have always grown because dealer base has not grown.

We've got 600 dealers out there, and they go from 30,000 units to almost 300,000 units in the U.S.

Their bikes per dealer increased, besides the fact they had too few bikes before.

So we said we were going to increase the number of bikes.

We said we wanted to get the bikes priced close to the MSRP, and its okay for a very scarce bike to go over, but the reality is we have MSRP there for a reason, and that's what we'd like to see the customer pay.

That has been our intent, and we are very close to getting there.

As for talking to the dealers, we talked to the dealers.

We probably have the best communication line to the dealers on real-time data, whether it is talking on the phone, talking in person, talking at dealer advisory council, talking at the winter dealer meetings, our district managers, whatever.

And there is no doubt if we'd go back to historic growth levels, the dealers would be -- it depends on who you talk to the dealers.

Some dealers are very aggressive, and as we mentioned before, even when we did the 10,000 unit reduction, there were dealers that were already sold out of '05.

So I think the dealer network, there is always different levels of aggressiveness inside, but there are differences.

Okay.

Then just finally, you had mentioned at the beginning -- and I agree, I think it's a shame and a waste of resources, everything that is going on with the lawsuits and the SEC now.

I am wondering, can you just kind of give us what you think you might have to -- what you might spend on all of this?

There is no way to speculate that at the moment.

Is it tens of millions, a hundred -- you don't know?

We haven't even been served with the lawsuit yet.

We are just aware of what is on the Internet like everybody else, and the SEC is just applying for some information, which is really --.

Okay, thanks a lot.

Tony Gikas of Piper Jaffray.

Good morning, guys.

A couple quick questions for you.

International shipments during the quarter were 24% of total bike shipments.

Correct me if I'm wrong, that is the highest that you have ever seen.

What was the underlying driver there?

Was this higher shipments of custom motorcycles or V-rods?

What are the future trends there?

Is that sustainable?

And second question, as the seasonality trends of the business become more prevalent, should we expect that manufacturing and shipments will become more seasonal as well?

Yes, international did make up close to 24% of our shipments.

That is definitely not the highest it has ever been.

Ten years ago, 30% of our business was international on a quarter-in, quarter-out basis.

So it is not the highest.

It may be the highest in recent history, and I would go back on that.

We certainly have had the retail activity to support this increase and wholesale shipments.

Your question being on the mix, I don't have that in front of me.

But V-rods are more popular in Europe.

I can't tell you if they are more popular there this year versus last year, but there is a little difference in the market dynamics.

Sportsters and V-rods are just more popular and have a higher mix in Europe.

I can't tell you off the top of my head if that changed in the past six months, but I don't think so.

Again, it goes back to some of the products we've been coming out with, whether it be all of the products, Softail Deluxe, Sportster Rogue, Street Rod, etc.

So its product, rationalization to the dealer network and adjusting to what's going on in foreign exchange.

I think we're doing the right things, and we're doing those things not just in Europe but all the markets.

I think that, again, and we said this before, that when the used market was very hot back in the late '90s and early 2000's we had to keep all our growth in U.S. and couldn't grow the international market.

So it didn't do any good to do a lot of things for the international markets.

Now we are back to a more normalized growth worldwide, we can spend more time, effort and activities growing those great opportunities.

You had asked about a seasonal pattern.

We build on a even basis with the exception being as we break through some bottlenecks either at our supplier and internally, that will go up.

We certainly do not plan to number one, either hold inventory or number two, take our production levels up and down to whether it is winter or summer.

So dealer inventories, unless we figure out a way to sell motorcycles at the same pace when it is 20 below as it is 100 degrees outside, dealer inventories will grow in the winter time.

And we will continue to monitor that with the dealers to keep that within a comfortable range and at the same thing maintaining demand and excess supply.

Just a quick follow-up on the competition.

Recently you lost a little bit of share here in the U.S., but what are the dynamics with your competition in the marketplace?

I mean, who is taking share in the market right now?

Are there specific products that you guys see that we may not be as visible to us that are taking share here in the U.S. or abroad.

Like I mentioned earlier there is a slight difference between what we've done in the market versus the total market; we are up 1.6, the market is up 2.7.

Not a big difference.

I can say that Suzuki has gained some market share the first six months during the year.

That is probably the only significant player;

Honda in fact has lost market share.

I don't have the detail.

I do know some of that is performance bikes and some of that is new products that they come out with.

But we can get you further detail later on.

Again, it is even with Suzuki gaining some market share, we're talking about Suzuki is up maybe 5000 units on a market that has sold 300, just shy of 300,000 units year-to-date.

So it is not any big swing.

Okay.

Thanks.

David Anders, Merrill Lynch.

Jim, could you talk a little bit about the Sportster?

It looks like it declined this quarter, and if you're targeting that as your entry-level -- for entry-level riders -- what does that say about finding younger riders?

In the Sportsters, as I also mentioned in the conference call this quarter, as we were taking out the 10,000 units, working with our suppliers and working with our unions see that between our power plants and our final assemblies which was the best way to take out the 10,000 units, most of that occurred at Kansas City.

That is where the Sportster is produced and it had a significant impact on sportsters as well as some of the other bikes.

All of the other -- your Dynas and V-rods and sportsters, not just sportsters went down.

And your touring bikes went up.

That is what we produced and that's what we shipped.

Long-term you're right, we redesigned the Sportster.

We will continue to ship on a normal quarter basis 20% or so of our production will be sportsters again.

You point out 35% of the buyers are sportsters are new to Harley-Davidson, either new to the sport or coming off from competitive brands.

That is important, but again as you compare it to -- even with that reduction, we are very comparable to what our mix was last year.

Not a significant decline.

One last quick question.

What is the minimum level of cash you need to run Harley-Davidson?

We don't have a target that we give out as a minimum amount of cash, but I think you and many people we've talked to, there is no doubt that we are conservative.

We've come from some leaner days, and we always want some cash to weather any storms that may come our way.

And plus we want to keep some cash for flexibility to be able to execute any opportunities that may come down the way.

But I think that we certainly have that amount of cash in place to accomplish both those things.

That is why, again, we exercised our flexibility and took the opportunity to buy back almost $1 billion -- actually $1 billion worth of stock in the first six months of the year.

So we do need some.

We have not specified the amount.

But I think that, as you looked at the first quarter cash reserves that we had enough to go out in the market and take advantage of the opportunity that was in front of us.

Okay.

Thank you.

Dean Gianoukos, J.P. Morgan.

Good quarter.

I was just wondering if you could clarify one thing.

You keep saying that demand is exceeding supply.

And I just don't understand how you get there.

I think at this point probably everybody feels there is inventory out there now and agrees on that.

I am confused if there is inventory out there and quite a bit how you get to the conclusion that demand is exceeding supply.

And if you could just say what you're using to get to that conclusion, that would be great.

Thanks.

Thanks, Dean.

I mean I said it earlier in the conference call, I will go back to because obviously it is a good point.

When we look at our motorcycles out there, and as we measure the data, and it is an art as much as a science in looking at all the data, one of the things -- some of the things we spend a lot of time looking at is the sales prices of new and used motorcycles.

It is our opinion that when any product that a significantly priced discretionary item, something that costs between $6500 and $20,000 when it is selling consistently at or above adjusted retail price, suggests that demand exceeds supply.

And more so when the used product sells for very close to what it was originally purchased for several years prior, that it maintains its value I can't think of any other discretionary product that does that.

So we look at it we are saying that when those things are occurring demand exceeds supply, and that is what supports our belief.

Jim Rosenberger (ph), Bernstein investments.

Jim, actually two things.

The first one I was wondering whether you felt that weather had any influence on the retail takeaway during the quarter.

And secondly in terms of your 7 to 9% guidance, do you expect that the U.S. shipments will be in line with inside that range or that it will be something less?

And if so what would that range be?

Weather always has an impact on retail sales positive and negative.

I think all in all for the quarter it was somewhat neutral.

Spring did come somewhat late, but I think we had a great quarter in that again last year was up 19%, or almost 19%, and we exceeded that and in fact we are up more than 3%.

So I think all in all we typically, in the second and third quarters, weather doesn't play too much of a factor.

It's always something but I think it kind of averages out.

On the 7 to 9% we have not forecasted retail, retailers are subject to many different things out there.

So by quarter by quarter, whenever we don't forecast retail.

I do think that the international markets are growing at quite a rate, and I think that what we're doing there certainly exceeds what is going on in the U.S.

That is part of the equation.

Ed Aaron, RBC Capital Markets.

Actually have a few questions.

First I was hoping you can elaborate on the general merchandise growth.

Was quite a bit better than we've seen recently, just wanted to get a little bit of color on what is behind that.

Second, could you maybe talk about the outlook for pricing on new bikes?

I know that used bike prices have been holding up, but at the same time they are declining somewhat.

And I'm just wondering if that's going to affect your ability to increase prices on new bikes at the same rate that you have been historically.

And then third, you talked about the mix of where your future sales are likely to come from between existing owners, owners of competitive products, competitors product and new buyers.

Could you just compare that mix with what you've seen just on average in the business over the last ten years or so?

Certainly.

On general merchandise, general merchandise basically we had some seasonal product that came out in the quarter; the new introduction and timing of some that anyone (indiscernible) get shipped.

The general merchandise had a great quarter in total.

There was some I said a new productline but I was just talking $10 million so it is not a big number, it is small change, and a small number, (indiscernible) reality is $10 million was not a big change in total.

On pricing, our pricing philosophy has always been price less than inflation.

We obviously, as evidenced by the dealers have a bigger pricing leverage but we've priced below inflation and lower margins in other parts of the business.

Our average price increase last year was about a half percent.

If you averaged it across the product lines that went from anywhere depending on the model from a zero to a 2% increase.

Talking about the used bikes, I mean pricing your bikes and increasing the new bikes helps price the used bike.

It makes it more attractive.

When you don't increase the prices, it actually has a bigger impact on the used bike prices.

So there is always -- the nuances if you increased the new bike price you have actually added value to the old product.

Talking about the mix of customers I broke it down to three demographic -- I broke it into three segments.

Approximately half our customers come from existing, half our sales come from existing customers.

And a fourth come from competitive bikes, and a fourth come from new to the sport.

That has just been for the last ten years.

So I was commenting on what we've experienced really, not so much a projection, although I think that projection does not change a lot going forward.

Joe Hovorka, Raymond James.

Just one question.

You talked about the, you've referenced it a couple times the average MSRP on the HDFS, or rather you are getting more on average above MSRP when you're looking at your HDFS sales.

Does that just include the sale of the bike or does that also include any kind of accessories that may be added onto the bike?

That is that maybe a $15,000 bike with $1,000 of accessories?

We are looking at data that is comparable for this year versus last year.

Each contract is written a little differently, but it is data that made the same way this quarter or this year versus last year.

So it is comparable data.

Greg Badishkanian, Smith Barney.

Just a quick question on you talk about the change in maybe consumer financing program that used to drive sales in 2Q of this year versus 2Q of last year.

And it seems just from talking to dealers that it is a little bit more promotional.

And if that is the case, is this a practice that you will expect to continue next year when you're trying to get rid of the '06 models, second quarter next year?

Our dealers have the ability to go out and go to HDFS or any other financial institution and buy some programs because each market is different.

That is why we have co-op advertising and dealers have their own rallies and events and barbecues and whatever the case.

So to adjust to the region.

So dealers do have the ability to have their promotions.

As for Harley-Davidson, I mean HDFS, Harley-Davidson Financial Services, did come out with a program part of June, and part of July to respond to the market because they were getting market pressures where they offered people with finance through them that were qualified buyers with certain credit quality, they got a zero down payment.

Because virtually as to zero cost to Harley-Davidson Financial Services because of the number one, the credit quality of customer and number two, because of the resale value of the used bikes.

So that was a promotion to increase market share for financial services.

Like I said, promotions -- dealers have the ability to put out promotions at any time depending on what their market may need.

Michael Millman, Soleil Securities.

That is Soleil Securities.

I guess a couple questions.

I guess sorry to beat a dead horse, but on inventory we calculate that the year-over-year U.S. inventory was up about 15 days, and typically the second half because seasonally the second half adds inventories, dealers would end up the year with maybe as much as 30 days additional inventory.

Could you talk about what you think is appropriate level of inventories for dealers, and are we getting close to that?

Also, could you give us the loan loss on the financial -- could you give us the loan loss rate just for the retail part of the portfolio?

And maybe also in this repo question if you could tell us year-over-year what the difference prices are?

Is it that 5%, or is it something different?

Thank you.

Mike, on the days sales obviously number one, we don't give out days sales.

I would comment on your calculation except for I think they are really wrong.

But we do look at dealer inventories, and because number one we said that they would increase just to number one as the business increases; number two is we needed the inventory to increase pressure on the dealer network so that there were, we had some market forces to reduce the premium pricing that was going on and the weight lists that were going on.

Between, as we looked at it our product launch in the exciting '06 models that we are coming out with and actually a very good comparison from last year, we are looking at -- we have projected inventory levels that we're looking at and we will continue to monitor but they certainly don't fit your model.

On the loan loss rate of retail portfolios segregated out I don't have that in front of me, Mike, but you can obviously call Mark VanGedrin (ph) back and get that information.

And on the repo question, could you repeat that?

An actual price for what you are getting on repo is year-over-year?

Again I don't have that one, Mike.

I can say, as I answered the other question, that prices that you receive on auctions are going to be less than you get in the retail market.

So that is more, a little bit more than we've seen on the retail market.

So it would be lower than that -- the decline would be more than the 5% that you cited?

Yes.

Thank you, Jim.

This does conclude our question-and-answer session.

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

I want to thank everybody for their 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 6186419 and the # key.

That is until July 20th or by accessing it on the Harley-Davidson website.

If you have any questions please contact the director of Investor Relations, Mark VanGedrin at 414-343-8002.

Thank you, and have a great day.

Thank you.

This does conclude today's teleconference.

You may now disconnect your lines, and have a wonderful day.