Harley-Davidson Inc (HOG) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your Harley-Davidson fourth quarter earnings conference call. [OPERATOR INSTRUCTIONS] It is now my pleasure to turn the floor over to your host, Mark Van Genderen, Director of Investor Relations.

Sir, the floor is yours.

Thank you.

Good morning, everyone, and welcome to Harley-Davidson's fourth quarter 2005 conference call.

Over the course of the next hour or so we will provide comments on our record 2005 fourth quarter and full-year performance as well as discuss our strategy for 2006.

Jim Brostowitz, Vice President, Treasurer, and acting CFO will discuss our 2005 financial and retail results.

He will be followed by Donna Zarcone, the President and Chief Operating Officer of Harley-Davidson Financial Services who will talk about the performance of that business unit.

Jim Ziemer, the President and CEO of Harley-Davidson Incorporated, will wrap up the prepared comments sharing thoughts on 2005, his perspectives on current market conditions and insights on 2006.

We will then open up the phone lines for questions.

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

Please dial 973-341-3080 and enter pin number 6849872 followed by the pound sign.

The recording will be available through January 26.

It is also being webcast live on 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 securities laws and regulations I will make the following statement.

This call will include forward-looking statements that are subject to risks that could cause actual results to be materially different.

Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC.

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

Now I would like to turn it over to Harley-Davidson's Treasurer and acting CFO, Jim Brostowitz.

Thanks, Mark, and good morning.

As we reported in our press release this morning, Harley-Davidson had a very strong performance in 2005.

For the 20th consecutive year we set records in terms of revenue, net income, and earnings per share, and retail sales of our motorcycles at Harley-Davidson dealerships worldwide set a record as well, surpassing 300,000 motorcycles for the first time in our history.

You may have noticed the statement on our press release that reads, selected financial data reported in the text of this press release is presented on the basis described in stock option accounting section.

I will discuss that shortly, but I'd like first to cover our financial performance for 2005.

Here are some of the highlights.

Compared to 2004, revenue for the year was 5.34 billion, up 6.5%.

Net income for the year was 959.6 million, up 7.8%.

Earnings per share were $3.41, up 13.7%.

And worldwide retail sales were 317,169 units, up over 6%.

So all in all, 2005 was yet another record breaking year for the Company.

Like the full year, our 2005 fourth quarter performance was also very strong.

Compared to the fourth quarter of 2004, revenue for the quarter was $1.34 billion, up 9.9%.

Net income for the quarter was 230 million, up 10.1%.

And earnings per share were $0.84, up 18.3%.

Now, turning specifically to our motorcycles and related product segment.

Wholesale shipments in the quarter grew 8.7% to 87,588 units, while revenue from motorcycles was up 9.6% to $1.09 billion.

Touring family mix for the quarter was 33.2% this year compared to 31.1% last year.

We had originally anticipated that touring mix to be slightly lower than 33% in the fourth quarter.

Touring production was revised slightly upwards to reflect strong dealer orders.

With the introduction of the Sportster 1200L in November our Sportster mix for the fourth quarter of 2005 was 23.1% compared to 21.7% in the fourth quarter of 2004.

Both P&A and general merchandise delivered solid results in the quarter, and for the year as well.

General merchandise with quarterly sales of $60.5 million was up 10.2% over last year's fourth quarter.

For the full year of 2005, general merchandise revenue totaled 247.9 million, a 10.8% increase year-over-year comparison.

Parts and accessories revenue was 169.9 million, up 7.6% compared to the same quarter last year.

For the year, parts and accessories revenue was $815.7 million, up 4.4% compared to the year-over -- compared to year-over-year motorcycle shipment growth of 3.7%.

Over time, we continued to expect P&A revenue growth to continue to be slightly higher than our motorcycle shipment growth.

And general merchandise revenue growth to be lower than our motorcycle shipment growth.

You've noticed that gross margins are 80 -- excuse me, 38.3%, up 50 basis points in a quarter-over-quarter comparison.

For the year, gross margins are 38.2% compared to 37.9% in 2004.

As we've expected and previously stated, we continued to experience raw material surcharges with an increase of 3.1 million over the fourth quarter of 2004.

The improvement in our gross margin in the fourth quarter drove an operating margin of 23.4%.

For an increase of 40 basis points compared to the fourth quarter of 2004.

For the year, operating margins were 24.3% in 2005 compared to 23.7% in 2004.

Net income for the fourth quarter of 2005 was 230 million, an increase of 21.0 million or 10.1% compared to the fourth quarter of 2004.

Earnings per share for the fourth quarter of 2005 were $0.84, an 18.3% increase compared to the year-ago quarter.

For the full year of 2005, net income was up 69.8 million, totaling 959.6 million, for a 7.8% increase over 2004. 2005 earnings per share were $3.41, up $0.41, or 13.7% compared to 2004.

Earnings per share grew faster than revenue as a result of the Company's repurchase of 21.4 million shares of stock in 2005.

Now let me talk about stock option accounting.

As most of you are aware, Harley-Davidson chose to early adopt the change in accounting for stock option awards as of the beginning of 2005.

Through 2005 we had accounted for these option awards as equity investments.

We recently became aware that under current GAAP, these awards should have been treated as liability due to certain cash settlement provisions in our stock option plan.

However, on January 16, 2006, the FASB issued a draft staff position for public comment requiring the equity method of accounting for options awards with terms similar to ours.

We have therefore not restated our financial results to reflect the liability method, since doing so would require us to restate the restatement once the FASB staff position is finalized.

Please see the stock option accounting section of the press release for further details.

Now let's look at retail sales of new Harley-Davidson motorcycles.

The worldwide Harley-Davidson dealer network retailed 317,169 motorcycles in 2005, or a 6.2% increase compared to 2004.

In the fourth quarter, worldwide retail sales increased 3% versus the prior year's fourth quarter.

In the U.S., motorcycle retail sales were 4.2% for the full year of 2005 compared to 2004.

More importantly, U.S. retail sales were 7.3% in the last six months of 2005.

Compared to 1.3% in the first six months of the year.

This is a good indicator that the changes we made to our existing motorcycles for the 2006 model year, as well as the new models we added to our lineup are creating excitement at our dealerships.

Internationally, new Harley-Davidson retail unit sales grew 15% in 2005 compared to the prior year.

Over that same period, Europe -- excuse me, Europe experienced growth of 19.9%.

Japan experienced growth of 11.1%, and Canada grew at 4.1%.

All other markets, while only a small percentage of our total sales, grew at a 19.4% rate.

Now that we've covered the motorcycle segment, I'd like to turn it over to Donna Zarcone to discuss the Harley-Davidson Financial Services 2005 fourth quarter and full year results.

Thanks, Jim.

Harley-Davidson Financial Services delivered fourth quarter operating income of $39.5 million, up 0.7% from last year's fourth quarter.

For the full year 2005, HDFS operating income $191.6 million, a 1.6% increase over 2004.

The retail market share for HDFS in the United States for new Harley-Davidson and Buell motorcycles grew to approximately 45% in 2005 compared to roughly 40% for the previous year.

Our $325 million fourth quarter securitization resulted in income of $4.2 million.

This 1.3% gain as a percentage of loans sold falls within our previously stated guidance of 1 to 1.1%.

We expect the securitization gains in the first quarter of 2006 to be within this range.

HDFS explains retail loan losses for the year which totaled 1.29% of managed retail loans compared to 0.98% in 2004.

Managed retail loans include both those which we keep as well as those which we sell through securitization.

These higher year-over-year managed retail loan losses are primarily a result of lower recovery rates of repossessed motorcycles and a higher incidence of loss.

To refresh your memory, when a motorcycle is repossessed, it is sold to dealers at auction.

These recovery rate values have declined over time consistent with the definite decrease we have seen in used prices.

This is not surprising given that new motorcycle selling prices have come down from their large premiums and are more in line with MSRP.

The delinquency rate for managed retail loans at the end of 2005 was 4.6% compared to 4.3% in 2004.

Looking forward over the long term, the HDFS operating income growth rate is expected to be slightly higher than the Company's wholesale motorcycle shipment rate.

With that, I'll turn it over to Jim Ziemer, President and CEO of Harley-Davidson, Inc.

Thanks, Donna, and thanks also to Jim Brostowitz and Mark Van Genderen for joining me on the call today.

At this time I'd like to share my insights regarding the current market dynamics and the Harley-Davidson dealer network.

This will include some issues you have told us are on your minds, as well as my views for the coming year.

As you know, new products are an important driver of growth.

Let's begin with the product.

Our confidence in the strength of our 2006 product line of motorcycles is very high.

To refresh your memory [AUDIO DIFFICULTIES] I apologize for any interference we have here.

To refresh your memory, we introduced seven entirely new motorcycles for the 2006 model year, bringing the total to 36 models.

They include a new Sportster 1200 Low just launched in November.

All told, we have had -- excuse me.

We have a larger stable of motorcycles than ever before to appeal to a much wider group of potential customers.

First-timers, women, competitive brand owners, and we have compelling reasons for current customers to trade up.

The new Street Glide is creating a lot of buzz as it reaffirms Harley-Davidson's leadership position in the custom motorcycle market.

The show stopping Dyna Street Bob has an incredible street savvy look no one else can offer.

Now it comes with a new six-speed transmission which, by the way, comes across the whole line of Dynas.

We also have made several significant ergonomic changes so that people of smaller stature can ride the bike of their dreams more comfortably.

Frankly, this is an opportunity we haven't given a lot of attention.

Now we're moving in the right direction.

For some time we have said we wanted to increase the availability of motorcycles at our dealerships.

Our goal has been to improve the customer experience by reducing wait lines, by bringing selling prices closer to the MSRP.

With increased availability our dealers in the north have experienced more seasonality in the sales patterns.

Customers generally prefer to buy their motorcycles during the riding season, not in the dead of winter.

In fact, during 2005, our U.S. dealers retail sales growth was concentrated in the second and third quarters.

Combined year-over-year growth during those quarters was 8.4% while the combined retail growth in the first and fourth quarters was only 2.9%.

Getting the inventory in the right place at the time right time has been challenging, although we've made inroads by making changes within our allocation system.

However, we have not found a short-term silver bullet solution.

There are dealers who have more inventory than ever before.

At the same time there are also areas in the South where inventory remains extremely tight, especially within certain product families.

Dealers in more seasonally affected climates tend to be reluctant to give up bikes because they don't want to run out of inventory in the spring.

Obviously, we plan on selling more motorcycles in the spring and summer than ever before.

Excuse me. [AUDIO DIFFICULTIES] To that end, we're putting more sales and marketing initiatives in place.

We're casting a wider net for new enthusiasts, driving brand aspiration, knocking down barriers, and motivating immediate action.

Our plans reach out further than ever before to women, Hispanics, African Americans, and younger males in addition to those often thought of as our traditional customers.

As an example, this year we'll be reaching 25 million active women through meeting publications to make our brand more visible to them.

To reach a very large African-American audience we are participating in the nationally acclaimed Tom Joiner show on radio and the web.

We continue to use a variety of media to target our potential customers.

On television, the NCAA March madness basketball tournament has shown to be very effective in reaching our perspective groups and continues in our plans for 2006.

All these efforts will capitalize on our strong brand and invite a larger and more diverse audience to join us in the Harley-Davidson experience.

Capturing more qualified sales leads for our dealers is fundamental to our sales and marketing plans in 2006.

Whenever feasible, our advertising contains a call to action to generate those leads.

Our research shows that nine out of ten of our new customers access the web, so we'll be adding significantly to our on-line advertising in 2006.

In the past, Harley-Davidson has been successful and are close to our customer activities.

Without a doubt this is a strategic advantage for Harley-Davidson.

In fact, there are almost one million dues paying members of HOG, the Harley Owners Group.

As we grow, we feel it's important to reinforce the magic of that special bond we have with our riders.

To do so we have recently created a new department focused exclusively on customer relationships.

It is this group's sole mission to understand the needs and desires of our customers and to actively engage in listening with them.

Our branded services adds significantly to the unparalleled experience we offer our customers.

In particular the Riders Edge new riders course which is unique in the industry has established a track record by helping prospects to make their dream of riding a Harley-Davidson a reality.

In 2005 enrollments grew 21%.

Over 22,000 people were trained at 117 of our dealerships.

Since its inception only five years ago, Riders Edge has trained over 70,000 students.

Approximately 40% are women, and over 30% are under the age of 35.

More than 70% of those enrolled are new to our dealerships, and within 15 months of completing the class, 70% of them will own a motorcycle.

Our Harley-Davidson authorized rental program continues to expand as well.

This year, we had our one millionth rental day since the program's inception in 2000.

Studies show that rentals often become an extended demo ride for someone who is deciding which model to purchase.

Last year retail sales of Harley-Davidson motorcycles grew much faster in the second half of the year compared to the first half of the year.

As we look ahead, I'm encouraged by the sales trend.

Our 2006 product line is the strongest and deepest it's ever been.

And although I can't say much, I can tell you this about 2007 model year.

The products we will introduce through our worldwide dealer network this July in San Diego will once again show that our years of investment in the product development are paying big dividends.

So all in all, Harley-Davidson's record results, strong financial health, and planned growth make us an exceptional company.

Our wholesale motorcycle shipment target for this year remains between 348,000 and 352,000 units.

We anticipate that this unit growth between 5.8 and 7.0% will drive EPS growth of between 11 and 17%.

We believe the prospects for retail growth remain strong beyond 2006 and support a wholesale unit growth rate in the range of 5 to 9% annually.

And an EPS growth rate between 11 and 17%.

So to wrap it up, 2005 was very successful, delivering our 20th consecutive record year and just as importantly, the Harley-Davidson family is well positioned for continued growth 2006 and beyond.

With that, I'll now open it up for questions.

Thank you. [OPERATOR INSTRUCTIONS] Your first question is coming from David Cumberland of Robert W. Baird.

Please go ahead.

Good morning, everyone.

A couple of questions.

On the Dyna recall, do you think the recall had much impact on sales, either in terms of supply or demand, and could the Dyna family be more of the mix than it was in the second half going forward in the first half if the sell-through supports that?

Good morning, David.

On the Dyna recall which happened in the fourth quarter, there's no doubt that there was a disruption, and units got to the field later in the fourth quarter than we had originally scheduled.

So I think that there was an impact on supply and therefore retail sales.

And obviously it would have had somewhat of an impact on the mix, not a major impact, as many of those units were made up by the end of the quarter.

Could Dynas be more of the mix in the first half than they were in second half of '05?

I don't think the mix is going to change substantially.

There's no doubt that we have an opportunity with the Dyna and the six-speed transmission, and certainly its great reception as we've seen.

It could be a bigger percent, but I don't think we're talking huge changes.

And then on a separate subject, international.

The international retail sales exceeded shipments lately in 2005.

Could that lead to a higher percentage of shipments in '06 versus '05 to international markets?

International did very well this year, as evidenced in all four quarters of our releases, particularly Europe, which led the way for the whole year, was up just shy of 20%.

We see -- the things that drove in that 2005 are still in place.

The improved dealer network, particularly in Europe, the products we've responded to that market.

We see greater growth in international markets continuing on in 2006.

In fact, in our first quarter guidance of 79,000 units, that is not a big increase over 2005 in the first quarter.

Some of that is in response to getting bikes to the European market early in the spring season, so that they have those.

Bikes that don't get to the dealer are not accounted for as shipments, so therefore that has an impact on that 79,000 unit guidance that we gave.

So good question.

Thanks, Dave.

Thank you.

Thank you.

Your next question is coming from Tim Conder of.

A G. Edwards.

Please go ahead.

Thank you.

Jim, just to follow-up on the comment there you just made, you're saying the greater international mix in the first quarter will or will not show up in the 79,000 unit shipments?

So if you could just clarify that.

The shipment to the international markets, I don't have a break out by the quarter, obviously, but our production is up more than our shipments, and if production is going to show up in our inventory responding to that market, so as a percent of shipments, I don't think there's going to be big change.

I think we will probably reflect that probably in the second quarter, not so much the first.

Okay.

And then back to the fourth quarter, could you break out, given that the euro was much stronger in the fourth quarter this year versus last year, maybe break out any foreign currency impact in the fourth quarter, and then the outlook for any metal surcharges looking into '06, and then more from a housekeeping item, just give us an update on your depreciation and CapEx outlook for '06 also.

On foreign currency, we did have an impact year-over-year comparison on the quarter, our foreign currency on the bottom line was about -- just shy of $8 million, in fourth quarter versus fourth quarter last year.

Metal surcharges, metal prices continue to be high.

This has been a long cycle.

Metal prices typically are cycle, this has been a long cycle.

If somebody could give me some insight into what's going on to next year I could probably give you better insight on the surcharges, but our surcharges remained high in the fourth quarter and until I have another forecast, we'll probably remain high going forward.

Could we assume maybe I think, Jim Brostowitz said it was about 3 million in the fourth quarter.

Can we maybe assume that run rate in the year-over-year quarters looking into '06?

Well, what Jim Brostowitz had referred to was the increased year-over-year surcharges was actually an absolute, a higher number but year-over-year increase was $3 million.

Again, until we really know what metal prices are going to do, it's kind of hard to forecast but I do believe that we're going to continue to see, because no one has told me the metal prices are going to go down.

Okay.

And Donna, if you could give us a little bit more color, I guess, on the delinquency trends and then I know you stated some numbers, but maybe give us a little bit of color about your expectations.

Should we see those delinquencies sort of hold and loan losses hold at the levels that we saw in '05, or would you expect any further up tick in those?

On the delinquency trends they're up slightly, the 4.6 versus the 4.3, and that's partially attributable to the increases in the bankruptcy filings that we saw enter in the third and fourth quarters with the change in the bankruptcy law.

So that we do think will stabilize.

But in terms of expectations for loan losses, the drivers behind the loan losses are the change in the collateral value and also the higher incidence of loss.

And so that we are still experiencing that declining value.

We think that that's stabilizing, but it's hard to predict at this point what that will be and really won't give a forecast on that.

One of the things that we are doing, though, is that in the incidents of loss that we see, we're experiencing higher complete loss on bikes.

In other words, we can't recover the bike.

We've found that to be partially due to some increases in fraud activity that we've seen.

I'm sure, Tim, you're aware of all the issues around identity theft.

Unfortunately the bad guys are getting better at what they're doing, so we've become more aggressive in terms of defending against that.

In fact, we just hired a fraud manager with a lot of experience, out of the credit card industry, to help us get equally sophisticated.

So we're doing that and we're looking at more sophistication in terms of our skip tracing methods so we can get at the collateral, and therefore get the recovery value.

Okay.

And, Jim, thanks for the additional access to the executives and one last question.

Any timing on naming of a permanent CFO?

I have found out that in the -- I have learned over the past that giving too much guidance has always put you in trouble, but it has certainly taken longer than I originally thought.

At the same time, we have the luxury of having a great management team and having Jim Brostowitz here who's been here shy of 20 years, acting CFO, and is doing a great job.

So we can take the time and find a person that's a good fit within the organization, which is extremely important.

Okay.

Thank you.

Thank you.

Your next question is coming from Greg Badishkanian of Citigroup.

Please go ahead.

Great.

Thank you.

Just a little bit of -- maybe you can provide a little bit of color from some dealers and customers just in terms of why the U.S. retail sales momentum that we saw when new products came out slowed down a little bit in the fourth quarter, and then maybe just sort of how you saw that retail sales progressing in the U.S. throughout the fourth quarter.

Did it decelerate, or did it accelerate?

Maybe a little color on that as well.

We've often said on anything finer than a quarterly breakout, you've got very -- comparisons between months, prior year versus current year, you've always got weekends and holidays that make it very incomparable, and different things that happen.

So we've chose not to give any monthly comparisons.

When I talked, I tried to, in the preamble of this conference call, give some insight into the more seasonality we are experiencing, especially in the north.

As we've increased our availability of product, which was to accomplish the goals of getting bikes priced closer to MSRP, and increasing availability so that customers could actually not sit on a waiting list, that's especially important to customers that are new to Harley-Davidson, whether they be new to the sport, or coming off of competitive bakes, they do have choices.

They don't wear the tattoo of Harley-Davidson on their shoulder already.

So it was extremely important to increase the availability.

When that happens, people's tendencies are not to pick up the motorcycle in the dead of winter in the north.

We have different seasonality in the south.

Pretty much 12 months of riding.

We haven't experienced that same thing.

So as we go forward, the point I was trying to make is, I believe in the first and fourth quarters we will continue to see our sales growth not in tune to what we're going to see in the second and third quarters.

In fact, we'll see higher sales growth rates in the second and third and lower in the first and fourth.

That's not surprising as we increase the availability of product, and people now have a choice of when to pick up that motorcycle.

So if that doesn't hold in the first quarter, at what point do you do a shipment cut?

What type of retail sales are you looking for in the first half of the year, such that you would be comfortable with your shipment guidance?

We've never, number one, done a retail sales forecast, and we'll continue to look at all the factors on the bikes and what's going on in the retail market to make that judgment.

Right now, as I said, we continue to look at the different retail activity that's going on in the south versus north to get our indications.

We'll continue to look at everything, our allocation, movement of the bikes, and measure it as we continue to go on.

It's going to be much more than just one factor.

Right.

Also, just as a follow-up, in terms of your 11 to 17% EPS growth guidance, how much of that would be share repurchases, would you say?

It's all going to depend on -- there is a range there based on the range of units but also is based on mix.

That's going to dictate a lot, but there's no doubt that with our strong earnings, coupled with our strong cash generation, that we're confident in the 17.

Some of that could be share repurchase.

It all depends.

What would the maximum net debt to total cap level that you'd be comfortable with, just so we get a sense of how much share repurchases you would be willing to make?

We would never go in and -- into the debt market to repurchase stock.

Okay.

Great.

Thank you very much.

Thank you.

Thank you.

Your next question is coming from Julia Crowell of Goldman Sachs.

Please go ahead.

Hi.

I just -- yesterday you had that article on the China dealership.

Just wondering if you're seeing anything in some of these international markets where you're expecting easing of motorcycle regulations that might make it easier for you guys to move into India and China in the near future?

Any of the international markets is always a challenge.

Just because you've got to build a relationship and get into a market that they're not familiar with you, you're not familiar with them.

China is going to be the same way.

I think that article did point out that there's a lot of barriers.

That's going to be long, long process.

In fact, we signed up a dealer that we will announce sometime early in 2006, but right now it's working on each market one at a time.

Right now we're truly concentrating on existing markets as well as trying to open up the new markets, but the new markets will be slow.

Okay, thanks.

Thank you.

Your next question is coming from Joseph Hovorka of Goldman Sachs.

Please go ahead.

Hi.

Actually, it's Raymond James.

You've restated your registration data for 2004 which has reduced the growth rate in '04 and then increased the growth rate in 2005.

Can you tell me two things, one, why the change, and what was the change?

That's it.

Yes, Joe.

A lot of that is really related to timing issues around when we received registrations.

If you look at the numbers that we're talking about, they're very, very small.

If you look at the U.S., sales of 250,000 bikes throughout the course of a year, it's basically, the numbers you're looking at are half a day's worth of sales.

So we want to provide the most accurate and up to date information that we have from our systems, so we'll continue to do that in the future.

And it's a pretty big number in Japan, though.

And if I did the calculation right, if we use the old numbers, you actually have a decline in registrations in the fourth quarter, as opposed to an increase.

And Japan in the past, if you look at the source data that we've used, in the past we've used industry information from Japan where we actually get information from the government in terms of registrations.

As our systems are more refined and we can see through our dealer network what we're doing, we're actually using our own internal retail sales and warranty information.

In fact, if you use the same comparative number from last year from the Japanese government, you'd see the same type of growth that we showed this year using our information.

You're saying you get your Harley numbers, or you were getting your Harley numbers from the Japanese government as opposed to your registrations, and now you've changed to your registrations?

That's exactly correct.

Then would you restate the first three-quarters then?

Because there was no restatement in those quarters.

The first three-quarters at that time had actually used the information that we had.

The reason that we've looked at the fourth quarter information from the Japanese government was in terms of our market share.

But as we reviewed that information and realized that the best source of data for the full year is from our systems, we're going to continue reporting that on a quarterly and on a full-year basis for all of our markets.

So would you then go back and restate your first three-quarters for '04 as well?

Or no?

It's still under consideration.

Mark pointed out that there's not big changes.

We'll have to look to see if it's worth our time and effort.

We'll look at.

Fair enough.

Thanks.

Thank you.

Your next question is coming from Felicia Kantor-Hendrix of Lehman Brothers.

Please go ahead.

Hi, guys.

Happy new year.

A couple of questions for you.

One, is just, Jim, you had talked about the increased marketing efforts that you were going to employ to expand your target market, and I was wondering if that was in current marketing and advertising budgets or if we might see an increase there.

And then actually just to follow-up on Julia's question, can you actually give us what the number is for the fourth quarter of '04 for Harley U.S. retail registrations?

Because if I just plug it in based on the number you gave us for '04 and assume that the first three-quarters are the same, I get a very different growth rate than what you have given us.

And my final question is, Jim, at the end of your monologue you talked about -- you commented on sales for '06, and so the way I understand it is if the first quarter, we're looking at growth that's slightly below 3%, and then in the second quarter you not only face easy comps but you'll probably benefit also from the fact that now you'll have those international sales in that number, kind of shifting a little bit.

What I'm wondering is, the second half of the year you do face tough comps, but do you expect to grow units in the second half of the year higher than the approximately 8.7% growth rate you experienced in the second half of '05?

A lot of questions.

Anyway, I'll start out with a happy new year back.

Marketing efforts, there's no doubt, number one, talked about a lot of efforts and a lot of initiatives.

Some of those are more expensive, some of those are less.

At the end of the day, we'll be -- our budgets, as you refer to are higher for '06 than they definitely were in '05.

We don't break those down but we do have those allocated.

That's in our consideration as we give guidance for earnings, and for -- on our shipments.

They're all part of the same picture.

On retail sales, I'm going to defer to--.

Wait, can I just follow up?

Would that flow through -- like when I just think about modeling that would flow through in your -- would it flow through in the line of, I don't know, in your gross--?

Marketing would flow through in SG&A.

Okay.

We don't -- okay.

I know that.

We just break it out a different way.

That's fine.

But it is there, and we will continue to -- at the end of the day we'll continue to grow earnings faster than revenue, which is in our guidance, even after funding those new programs, new initiatives, as well as existing initiatives.

On sales, obviously the first quarter, 79,000 unit guidance is a small single digit number.

I forget exactly what it is in comparison to '04.

There's no doubt that the last nine months of -- it's '05, I guess.

The last nine months of the year certainly pick up, and we have a lot of confidence in the '07 model introduction.

Again, we're talking about wholesale shipments, and a lot of that is driven by that new model year of the '07s.

Again, the whole discussion is on wholesale.

I wasn't talking retail.

Felicia, it's Mark.

In terms of looking at the retail sales numbers, if you look through the end of 2004 in our press releases, we did not break out every unit that was sold worldwide.

We gave our major markets, based on the best information that we had, given the more interest in full retail sales, it's really at the beginning of this year that we've started providing complete worldwide either broken down by the larger countries as well as all other markets.

So if you look at the information now, 2005 to 2004 year-over-year, what we had stated in the press release, this morning, all that information is coming from our systems and it's the best available information that we have at the time.

Okay.

I just want to -- all I'm asking for is the absolute number for fourth quarter of '04.

I mean I can clearly take the 40 to 6.24 which you've calculated for '05, and then assume -- back into a fourth quarter number that's going to be 0.7%.

But the question is, you've given us a full number, your number of 243160 for '04, okay, if we assume that it was the fourth quarter that changed, if I just quickly back into that I get a totally different percentage change.

Do you just have handy or maybe off-line you can give me the fourth quarter absolute number for U.S.

Harley retail registrations?

Let's take a look at that off-line.

Okay.

Okay, that's it.

Thanks.

Thank you.

Thank you.

Your next question is coming from Ed Aaron of RBC Capital Markets.

Please go ahead.

Thanks.

Good morning, a couple of questions.

First, when you look back at last year and when you cut your production outlook for the year, how much did the level of dealer inventory contribute to that decision relative to other factors?

And the reason I ask that is that dealer inventories seem like they're up maybe 12,000 units or so worldwide compared to this time last year, so it's hard to envision a scenario where inventories won't be up versus last year's level at the end of the first quarter of this year.

Going back to last year, as we pointed out in the conference call, press release, any ensuing discussions thereafter, that was a precautionary move.

We were certainly disappointed by the first quarter retail sales in the U.S., which is where 80% of our sales occur, and basically looking forward said we really couldn't afford another disappointing quarter in the second quarter which would have had more inventory -- and I say would have, so it's precautionary -- if we would have had -- we're trying to think what are the scenarios, if we would have had more inventory in the pipeline that would not be good for bringing out the '06 model there.

So we made a precautionary decision on that.

It was based on, again, a disappointing sales trend, which was a negative comparison compared to the prior year.

Yes, you point out that if you add up worldwide retail sales versus worldwide wholesale shipments for 2005, worldwide inventories did increase somewhat, but again, the whole commentary for the last two years is that our inventory has been too low, and I know that it's hard to imagine, because there's probably no other business I can think of that has ever had that issue, but when products are being sold for more than MSRP for a decade, your inventory is too low.

We've been trying to increase inventory and have been accomplishing that and we are very close to selling our bikes on an average at MSRP.

There are some waiting lists, because there is allocation issues.

Over time we'll get over that and be able to fix the allocation system.

But, I mean, inventories have grown and their cost, but on a quarter by quarter basis especially in the wintertime you're going to see inventories grow.

You're going to see inventories grow in the fourth quarters and first quarters.

Jim, could you talk a little bit about, more about how you're going to go about managing your motorcycle allocations because it's clearly a different retail environment for your dealers compared to what it was a couple or three years ago.

Dealers seem to be responding in different ways, so how do you go about managing your allocation strategy to make sure that you keep the pricing integrity of your product intact?

Because clearly in an environment where availability is greater, it's easy to see scenarios where dealers might give a discount, slower moving products to make sure that they keep their full allocations and that could kind of be disruptive to the integrity of your product and brand.

No doubt that there is a scenario that says if we can't fix the allocation, that could occur.

At the same time, as we continue to look at that, there are some issues within state laws and federal laws on what changes we can make rapidly, but over time we will be able to adjust to those issues as well as issues you point out that dealers, once they get an allocation they really don't want to give it up, regardless of what's happening in their own market.

We need to continue to work through those issues.

We can work through those over a period of time, but it's going to take addressing some of those.

Okay.

Lastly, if I could, Jim, could you -- there's been a fair amount of chatter about the D&D warehouse issue.

Could you maybe clarify that for us, please?

Yes.

There was some chatter.

There is a warehouse that our dealers use that in the wintertime, as inventories grow in some locations have, say, a dealer in New York, real estate is very high-priced in New York.

To have a warehouse in New York is extremely expensive.

So dealers have used several dealers have used this D&D warehouse so that they have some room to warehouse their product in the wintertime.

We're talking about dealers in the north.

This is not a lot of bikes we're talking about.

This has been going on for over 20 years.

I mean, this is not something that has occurred -- this is, again, a winter issue, an issue with dealers that either don't have a warehouse or are in areas that are very expensive warehousing.

But we're not talking a lot of bikes, and it's all dealers.

It's a third-party warehouse, and we don't control it.

It's -- the bikes get shipped there on the dealer's direction.

Are you privy to exactly which bikes are in that warehouse at any given point in time?

We know most of that information because of those bikes are being floor planned through HDFS.

Okay.

Thank you.

Thank you.

Thank you.

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

Please go ahead.

Good morning.

Three questions.

Jim, you talked about option expense.

Do you have the number on the dollar value that went through the '05 income statement for option expense and what it would have been on a pro forma basis?

Or maybe that's not calculated yet, what it would have been, then the corresponding estimates for '06?

I'm going to let Jim Brostowitz handle it.

He's got the notes on that.

Sure.

For 2005, under the equity method, we've had $23 million worth of cost that went through the income statement this year.

For 2006, we -- I anticipate a similar number.

However, I will qualify that.

Our Board of Directors has a meeting in February where they typically grant additional stock option and restricted stock awards.

So it will depend on what moves they make at that meeting.

But they've been rather consistent in those grants, and you can read that history in our 10-K's and our overhang is very small compared to almost any other company.

I think part of your question was, I think maybe we had gone to the liability--.

If we went to the liability method--.

We actually would have had income for '05.

Yes.

Under the liability method, which I think is going to go away for us shortly, because the liability method really requires option grants to be revalued every quarter, based on current stock price, we would have actually had option income for 2005 of about $15 million.

15?

15.

So the option accounting really makes it very hard for anybody to understand the operations.

You can have swings of $50 million in a quarter just through the option accounting, and that just doesn't lend to the understanding of a company's operations to the investor.

And to follow-up on one of the questions on advertising, what was it -- what was your advertising as a percent of sales in '05?

And is that a number, it sounds from the commentary that you made, Jim, that that will rise a little bit.

Do you have an estimate of how much that might go up in '06 versus '05?

The reality, I mean, we're doing a lot of initiatives, and in some of those rearranging what we spent in '05.

We did probably more TV advertising, as maybe you witnessed on some of the NFL games, than we had previously done.

We'll probably do a little less TV advertising and try some on the initiatives.

Total budget is going up, but hopefully I didn't scare you in my commentary.

We're trying a lot of things, and -- that we already, after looking at, we believe will be highly successful, but I mean, there is some rearrangement of where we've put our dollars in the past versus where we're going to put our dollars in '06.

So it's not a materially larger percent in '06 than '05?

Not as a percent.

Okay.

And just one last one.

Tim had asked you an estimate for '06 for depreciation and CapEx and you missed that one.

Tim didn't catch me.

I'm going to -- we can go back to Mark, but I'm going to think for this conference call that our depreciation is going to be in the range of about 225 million for '06, and our capital expenses, our current guidance is going to be between 250 and 275 million.

Thanks a lot.

You're welcome.

Thank you.

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

A couple questions.

Could you provide an update on the number of dealers that are utilizing the performance consulting programs that you offer?

Second question, dealers have been telling us that the changes to the allocation process that you've been talking about have been pretty slow in recent years.

Do you anticipate that we could see some material changes this year, or are those going to be -- continue to be small changes?

Then I have a couple of follow-ups.

On performance consulting, I don't know if that's a driving answer -- Mark can follow-up on that one.

I don't have the number off the top of my head.

It's a considerable number.

We have quite a few dealers and quite a few groups.

I'd just be guessing, but it's a rather large number.

On the allocation, as I spoke before, we do have some issues, we've made some changes, depending on the dealer, they had various effects, but we have a long way to go, as evidenced right now by tight inventory conditions, primarily in the south versus dealers obviously in the north, that because of the winter time, more bikes than they've had in the past.

We need to continue to work on that, to give a forecast would be premature at this time.

Okay.

Going back to the performance consulting program, then, I mean, is it 20% of the dealer base, or is it 50%?

And are the -- who are those dealers?

Are these the exceptional dealers, or perhaps the average or underperforming dealers?

We probably have, like I said, I'd only be guessing, as I went to a number, but in a range, probably anywhere from a third to a half of our dealers are performance consulting.

So this covers a wide range of high performing as well as those that want to become high performing.

So it's basically those dealers that really want to improve and those dealers coaching them on new methods and who are open to other things that are going on from other high performing dealers.

Do you know what the growth to HOG memberships was in 2005?

And in terms of used motorcycle pricing, according to the NADA appraisal guidelines, over the last three years, a two to three-year-old bike average selling price has come down by about 20% on a used motorcycle.

Do you view that as a material threat, or is that kind of in line with your expectations?

We don't follow the -- number one, on HOG, I don't have those statistics.

I would suspect that HOG membership is growing a little faster than our wholesale shipment growth but Mark can follow-up on that.

So anything I can give you will be guessing but it certainly has grown as we've hit that one million member mark.

On used bike pricing, as we've commented before, as we've gotten bikes, new bikes close to MSRP, and there is some substantial premiums of 1, 2, $3,000 s over MSRP.

As that has come down, so has the used bike prices.

As a percent, we follow some internal data.

Both some internal data we get through dealers as well as some great dealer data we get from HDFS.

Over three years it does not come up to 20% but certainly used bike prices have come down, but still best thing compared to cars, boats, anything else, any other competitive motorcycle, in fact, I don't care which one you put up there, but we've seen maybe over a year-over-year comparison, this year versus last year of 2 to 4% in used bikes.

What that accumulates over three years, I don't have handy.

But that's just between you and dealers, that's not actually consumer to consumer, correct?

That is correct.

All right.

Thank you.

Ladies and gentlemen, we have reached the end of our allotted time.

I'd like the turn the floor back over to the presenters for any closing remarks.

Thank you.

Thank everybody out there for your time this morning.

Appreciate your interest, support, and investment in Harley-Davidson.

I want to turn it over -- back over to Mark for some final logistics.

Thanks, Jim.

Remember that a taped replay of this conference call can be heard by calling 973-341-3080, and entering pin number 6849872 followed by the pound sign, until January 26, or by accessing it on the Harley-Davidson website.

If you have any questions, of course, please feel free to contact me at our office of Investor Relations, 414-343-8002.

Thanks again.

Have a great day.

Thank you.

That does conclude today's teleconference.

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