Harley-Davidson Inc (HOG) 2006 Q1 法說會逐字稿

Good morning.

My name is Toni and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Harley-Davidson first quarter earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

It is now my pleasure to turn the floor over to your host, Mark Van Genderen, Director of Investor Relations.

Sir, you may begin your conference.

Thank you.

Good morning and welcome to Harley-Davidson's first quarter 2006 conference call.

Over the course of the next hour or so, we will provide comments on our performance for the first quarter of 2006, discuss our outlook for the rest of this year and the longer-term and answer your questions.

Harley-Davidson's CEO, Jim Ziemer, will speak to you in a moment, followed by Tom Bergmann who recently joined Harley-Davidson as CFO.

Tom will discuss first quarter of 2006 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 will wrap up our prepared comments, sharing his thoughts on the quarter, the year, and beyond.

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 o'clock A. M. Central time this morning.

Please dial 973-341-3080 and enter PIN number 718-2671 followed by the pound sign.

The recording will be available through April 19th.

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.

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 in the obligation to update information in this call.

Now, I would like to turn the call over to the CEO and President of Harley-Davidson Inc., Jim Ziemer.

Good morning.

After I was named CEO of the Company in April of 2005, we spent a fair amount of time searching for the right candidate to be Harley-Davidson's Chief Financial Officer.

It took a little bit longer than we originally anticipated, but it certainly paid off as we hired Tom Bergmann last month.

Tom comes to us with a wealth of experience, having spent time in leadership positions with the St. Paul companies, Honeywell, Sears Roebuck & Co., and Johnson & Johnson.

Most recently, Tom was Chief Executive Officer of USF Corporation.

He has a track record and a skill set that is an excellent complement to the leadership capabilities we already have in the organization.

In addition to Tom's extensive professional background, his activities outside of work are certainly a fit with Harley-Davidson.

He's an outdoor enthusiast, having competed in a number of Ironman triathlons and, as we say in the business, he has oil and gas in his veins.

He is an accomplished pilot and the owner of a brand new Harley-Davidson Softail Deluxe.

We are excited to have him join the leadership team at Harley-Davidson.

I will be back in a few minutes to give my thoughts on the quarter, the year, and our business in general.

And now, I'd like to turn it over to Tom Bergmann.

Thanks, Jim.

And it's been a great ride so far since my first day with the Company at the beginning of March.

I'm excited to be a Harley-Davidson and to be part of the management team.

In my first 30 days, I have already had the opportunity to visit several Harley-Davidson facilities and dealerships and also attend Daytona Bike Week to interact with customers.

I'm off to a fast start and look forward to continuing my immersion into Harley-Davidson and getting out and meeting more employees, suppliers, customers, dealers, and investors.

As we look at the first quarter, the Company once again achieved record revenue, net income, and earnings per share in a year-over-year comparison.

Retail sales of our motorcycles were also up compared to last year.

Here are some of the highlights compared to the first quarter of 2005.

Revenue for the quarter was $1.2 billion, up 4.0%.

Net income for the quarter was $234.6 million, up 3.2%.

Earnings per share were $0.86, up 11.7%.

Worldwide retail sales of our motorcycles totaled 71,490 units, up roughly 7%.

And we bought back 2.1 million shares of our common stock at a cost of $107.1 million.

All in all, the first quarter of 2006 was a very solid start to the year.

Turning specifically to our Motorcycles and Related Products segment, Harley-Davidson motorcycle shipments in the quarter grew 3.6% to 79,506 units while revenue from motorcycles was up 3% to $1.01 billion.

In support of our international dealers' strong retail growth, international shipments in the first quarter of 2006 were 19,236 units, up 21.4% compared to the same period in 2005.

Shipments to our domestic dealers in the first quarter of 2006 were 60,270 units.

Looking at mix, the percentage of Touring motorcycles shipped in the quarter was 34.6% this year compared to 32.6% in last year's first quarter.

This reflects the strong acceptance of our 2006 Touring models, including our all-new Street Glide model.

Sportsters represented 20.3% of motorcycle shipments for the quarter compared to 22.6% in last year's first quarter.

Custom shipments remain relatively flat at 45%.

The Dyna family, with its new 6-speed transmission and other great features introduced for the 2006 model year, represented a slightly larger percent of the custom mix than in the first quarter of 2005.

Parts and accessories and general merchandise delivered positive results in the quarter as well.

General merchandise, with quarterly sales of $68.6 million, was up 15.3% or $9.1 million over last year's first quarter.

Parts and accessories revenue was 182.9 million, up 3.4% or $6 million compared to the same quarter of last year.

Over time, we expect the P&A revenue growth rate to continue to be slightly higher than our motorcycle shipment growth rate, and the general merchandise revenue growth rate to be lower than our motorcycle shipment growth rate.

Now, let's turn to margins for the quarter.

You'll notice gross margins are 38.4%, up 80 basis points in a quarter over quarter comparison.

This is primarily due to the positive impact of foreign currency and pricing of the 2006 models.

As we previously stated, the Company expected raw material surcharges to continue in the first quarter.

These surcharges totaled approximately $8.3 million.

However, given that we experienced material surcharges of $8 million in the first quarter of last year, material surcharges did not have a significant impact on gross margin.

Operating margins in the first quarter of 2006 were relatively flat at 24.3%.

Among the factors that impacted operating margins this quarter was additional warranty expense related to higher than anticipated second-year experience on two-year warranties.

Turning to the tax rate, you'll notice that the Company's first-quarter effective income tax rate is 36.0% compared to 35.5% in the same quarter of last year.

This increase was due to the expiration of the federal research and development tax credit as of December 31st, 2005.

The Company expects its annual tax rate effective tax rate in 2006 to be 35.5%, assuming the retroactive reinstatement of this tax credit.

Net income for the first quarter was $234.6 million, an increase of $7.3 million or 3.2% compared to the first quarter of 2005.

Earnings per share for the quarter were $0.86, an 11.7% increase compared to the year ago quarter.

Now, I would like to address the retail sales of new Harley-Davidson motorcycles.

The worldwide Harley-Davidson dealer network retailed 71,490 new motorcycles in the first quarter of 2006, which is a 6.9% increase compared to the first quarter of 2005.

Harley-Davidson motorcycle retail sales grew 5.8% in the U.S. during the first quarter of 2006 compared to the same period in 2005.

Also, our new motorcycles continue to sell on average slightly above MSRP.

This retail growth and retail pricing are good indicators that our 2006 model year motorcycles are creating excitement at our dealerships.

In our international market, Europe experienced 6.6% growth in the first quarter, Japan experienced growth of 16.3% and the Canadian market decreased 7.1%.

All other international markets grew at a combined rate of 34.4%.

Total international growth for the first quarter 2006 was 11.6%.

Finally, let's look at our second quarter production and shipment plan.

We are planning on shipping 78,000 motorcycles in the second quarter.

This is an increase of 1.1% compared to the second quarter of 2005.

In addition to these 78,000 shipments, we plan on producing an additional 13,000 motorcycles in the second quarter that will be 2007 models.

These 2007 motorcycles will be shipped to dealers early in the third quarter to support the introduction of the 2007 models on July 14th.

This is a change from 2005 when our product introduction was later in July and our second quarter production and shipments were virtually identical.

To reiterate, 78,000 motorcycles, all 2006 models, will be shipped to dealers in the second quarter of 2006.

Shipments in the third quarter of 2006, however, will also include 13,000 2007 model year units produced in June.

Now that we have covered the motorcycle segment and second quarter shipments, I would like to turn it over to Donna Zarcone to discuss the Harley-Davidson Financial Services results for the first quarter.

Thanks, Tom.

Harley-Davidson Financial Services delivered first quarter operating income of $51.6 million, a decrease of $1.9 million or 3.6% compared to last year's first quarter.

Our $730 million first-quarter securitization resulted in an income of $8.6 million.

This is a 1.2% gain as a percentage of loans sold and falls within our previously stated 2006 first quarter guidance of 1 to 1.4%.

This gain compares to a $19.2 million or 2.6% gain on the securitization in the first quarter of 2005.

While both of these securitizations were $730 million, the lower gain on sale for the 2006 first-quarter securitization can be attributed to the rising interest rate environment, lower recovery values for repossessed motorcycles, and competitive market pressures.

Despite these competitive market pressures, retail market share for HDFS in the United States related to the new Harley-Davidson motorcycles grew to approximately 46% in the first quarter of 2006 compared to 43% for the first quarter of 2005, and roughly 45% for the full year of 2005.

Losses on managed retail motorcycle loans for the first quarter totaled 1.48% on an annualized basis compared to 1.38% for the first quarter of 2005.

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

The increase in 2006 reflects continued pressure on recovery values for repossessed motorcycles as well as a somewhat higher incidence of loss.

The thirty-day delinquency rate for managed retail motorcycle loans at the end of the first quarter was 3.69% compared to 3.60% for the first quarter of 2005.

Now 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 growth rate.

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

Thanks, Donna.

At this time, I would like to share my observations about the current market conditions in the United States, some comments about a number of key marketing initiatives we have in place, then I will discuss our international markets and the outlook for the total business in 2006 and beyond.

So let's talk about the U.S. marketplace.

As I review the first quarter, I'm generally comfortable with the market dynamics I'm seeing, including overall level of motorcycle inventory in the U.S. dealer network.

I am pleased that our dealers delivered nearly 6% retail growth in the quarter.

Our data indicates that on average, new Harley-Davidson motorcycles continue to sell at slightly above MSRP.

And at the same time, the prices of our used motorcycles also strong.

As we begin the 2006 riding season, we have a growing number of initiatives in place to help us become even closer to our customers.

As you know, our relationship with our customers distinguishes us from our competitors.

Therefore, 2006 will have a much stronger presence -- executives, employees, and products at both motorcycling and non motorcycling events.

Our plan is to double our participation in more than 125 consumer events throughout country.

We're also more than doubling the number of dealer events and open houses that we will be supporting with our fleets of demonstration motorcycles.

By the end of the year, over 200 Company leaders will have represented the Motor Company at events, spending time with customers and prospective riders around the world.

In addition to the events, Harley-Davidson services continue to gain momentum.

In 2005, over 22,000 students learned to ride at our dealerships through the Rider's Edge program, which is over a 20% increase from 2004.

We are planning a similar level of growth for 2006 as well. 40% of the people who take Rider's Edge are women, which may be one of the reasons we have seen our sales of new motorcycles to women increase to over 11% in 2005.

Last year, Harley-Davidson authorized rentals booked more than 250,000 rental days, and many of those rentals remains were made to people who were new to Harley-Davidson.

We anticipate even higher rental bookings in 2006, giving prospective customers a chance to try riding a new Harley-Davidson and giving current riders and opportunity for an extended test ride on their next Harley-Davidson purchase.

Another [marketing] activity we are really fired up about is our involvement with the National Hot Rod Association.

We compete in and sponsor the NHRA Pro Stock drag races. 2006 is our first full year as the official motorcycle of NHRA, and we have won one top honors in this series for the last two years running.

This race series is a great opportunity for us to imprint the Harley-Davidson brand on more than 2.2 million fans in a total of 23 races throughout the summer, and many millions more watch the events on television.

To take full advantage of our involvement in the NHRA, this year we developed a customer experience at the drag strip like no other.

Potential customers can drag race each other on a simulator that uses actual Harley-Davidson motorcycles.

You should really see it for yourself.

At Harley-Davidson, we excel at creating new, exciting experiences for our customers.

In addition, this year, we've added many new marketing efforts that are focused on expanding the ways we introduce the Harley-Davidson -- introduce Harley-Davidson to potential riders.

And the growth opportunities are not limited to the United States.

Our international markets continued the 2005 momentum, growing 11.6% in the first quarter of 2006.

This is on top of the over 21% growth we experienced in the first quarter of 2005.

Europe continues to be a strong growth area for us, with retail sales of Harley-Davidson motorcycles up over 6.6% compare to last year's first quarter.

And that is on top of more than 20% growth we experienced in the first quarter of last year.

Other international markets certainly worthy of mentioning are Asia-Pacific and Latin America.

We grew at both double-digit rates -- we grew at double-digit rates in both these regions in 2005, with many of the countries within these regions showing significant growth.

Granted, these are small volumes at this point, but we see good, long-term potential.

A lot of attention has been focused on our business plans for China.

Undoubtedly, you heard we recently announced the opening of our first dealership.

In fact, last Saturday was the first day it was open to the public and they had a great turnout. [From] the comments customers expressed to the media, there is little doubt that Harley-Davidson experience [and] the products translate well in China.

This is a great first step for Harley-Davidson in China, but I would not factor the motorcycle sales in China into your models just yet.

It is a good example of our intent to continue to grow not just in United States, but also internationally, in both our existing international markets and new ones as well.

In fact, I believe that international sales will continue to grow at a rate faster than our U.S. growth rate.

Bottom line, retail sales in the first quarter got us off to a good start for the year, both in the U.S. and abroad.

We also beefed up our marketing plan for 2006 to include many new initiatives that help us reinforce our market leadership and expand our customer base significantly.

And our 2006 model year motorcycles continue to generate a great deal of excitement in the marketplace.

So, as I look to the future, I'd like to share my thoughts on shipments and earnings growth.

For the full year of 2006, our wholesale motorcycle shipment target remains between 348,000 and 352,000 Harley-Davidson units.

Our year-over-year growth between 5.8 and 7.0%.

We believe that the prospects for retail growth remain strong to promote our wholesale unit growth rate in the range of 5 to 9% annually, and an annual EPS growth rate of 11 to 17%.

With over 20 years of record results, the most loyal customers in the world, a great brand, and incredible opportunities for continued growth, Harley-Davidson is an exceptional Company.

I will now open up the line for questions.

(OPERATOR INSTRUCTIONS).

David Cumberland, Robert W. Baird.

Good morning.

On the Q2 guidance for shipments and production, is this a change in the internal plan from what Harley might have planned three months ago?

No, David, this is basically every model year lined up a little different.

We are saying that this model year may be -- couple of weeks different than the prior year, but it makes a significant difference on the quarter and we just wanted to point that out.

There has been some talk that we were going to reduce the quarter.

And the fact is we're actually producing at a very good rate to support our growth.

It's just that the quarter is only going to reflect the shipment of '06 model year.

And even though we're producing and getting ready for '07 model year, both shipments we held until we introduced a product in the third quarter.

That was extremely important to point out, but the reality is this is just the way we are approaching this model year.

And [while] -- are you planning to start the model year '07 transition earlier than usual?

There's many things that dictate when you start model years, whether it be machines, tooling, the particular products that you're bringing out.

It's no difference than several years ago, that we introduced Sportsters earlier than we introduced the model -- the rest of the model year.

There are just things that we can't talk about, as we don't talk about the new model year that we can't bring up, but there's always many things we have to balance as we look forward to when model years cut off.

And my last question also on this, Tom mentioned that dealers would be receiving the model year '07 by -- (indiscernible) the introduction of model year '07 would be earlier than model year '06.

Will dealers also get more model year '07 bikes once they start receiving them than the initial wave of model year '06 bikes last year?

Number one, just to clarify, we're -- dealers will not receive any '07s until they come back from the dealer meeting.

We always hold back our new product until the dealer meeting.

The dealer meeting is a little earlier than it was last year.

But -- so we don't ship those out.

That shipping is still staying in conjunction with the model year launch to the dealers that we'll have on July 14th.

But -- I'm jumping on Tom's commentary, that 13,000 '07s we produce in second quarter will go into the third quarter as well as the total third quarter production to '07, so I would say that there is going to be more than a typical number of shipments in the third quarter for the dealers to sell of '07, or the new model year.

Tim Conder, A.G. Edwards.

Thank you, operator.

A couple of questions;

Jim, just to continue on the point about the second quarter shipment numbers, is it fair to say that over the last two years here, you narrowed the supply demand gap to the levels that you -- that sounds like are somewhat ideal?

Just a little bit above MSRP.

And if there's any quarter as far as shipments that you're going to be a little cautious on, it will be the second quarter which is the end of the model year as far as shipping into the channel, because in a month or two those bikes would be old year model products.

And then if there's any quarter you may be a little more aggressive in shipping into the channel, it would be the third quarter at the beginning of new model year.

Relative to past historical normalized patterns, is that maybe how we should think of things going forward?

I wouldn't take this as a normal pattern.

I would say that second and third quarters are very important.

As we become -- as we increase the availability of product, there's no doubt that we are now experiencing greater seasonality.

And so the second and third quarters, the summer months in the northern part of the U.S., certainly will see more store sales occur in those two quarters, so both quarters are important.

There is that no doubt as we introduce new models, the significance in the new model does have a bearing on how many that we may want of the prior model year out there, creating obsolescence.

But -- so there is a balance between what we're putting out there as new and the significance of that new model, and weighing the fact that just both of these quarters are important because the northern part of the United States really doesn't participate in a total year retail sales to the same extent that the southern part of the United States does.

Okay.

Anything on the ASPs down slightly in the first quarter year-over-year?

Anything there?

And then also, for Donna.

Donna, could you give us your expectations for retail loan losses?

I think in the past you said around 100 basis points.

If you could maybe talk on that.

And then, what are you seeing in used prices kind of year-over-year and sequentially?

You mentioned somewhat of a -- the recovery cost pressures.

And then last question related for Donna also, any change in the mix, Donna, of your credits looking between A and B -- A, B, C, D type of credits on a year-over-year basis of your total customer pie?

No, average selling price, we see great compatibility between this past quarter and last year and the first quarter.

Obviously, there's some seasonality in our -- in the selling proposition, so we do compare like periods with like periods.

And as we look at the first quarter of '06 versus the first quarter of '05, it is very comparable on the new bikes and used bikes.

So I mean, I think part of that used bikes will aid in Donna's response [in] the question.

But I mean overall, over the last -- I'll put a bigger context.

As we've increased the availability of products, we've been able to reduce the prices of new bikes, and likewise used bike prices have come down, but the spread has remained fairly constant.

A little wider, but not significantly, so the spread has come down.

As new bikes have come down -- the spread has stayed the same, rather; as new bikes have come down, used bikes have come down.

To answer some of your questions, first off, we don't give guidance on retail loan losses specifically, but I can tell you that we are working aggressively to bring that number down and/or at least maintain where we are at, because this is an area where we are increasing staffing, we are benchmarking best practices.

We're looking at -- we've brought in new leadership in that area and we are aggressively managing our portfolio.

Now, with regards to your reference to the 100 basis points, that was what we previously had talked about in terms of overall losses, not specific to just retail loans.

That was to the entire portfolio as a whole.

So it's a little apples to oranges if you are comparing the 100 basis points to the number we quoted today, which was the 1.48% for retail loans only the first quarter of 2006.

And in regards to used prices year-over-year, Jim just commented on that; it's relatively comparable.

However, we do see seasonality within the used prices.

And so, what we're seeing there is that as the premium has come down from new bikes, we've seen a likewise reduction in the value of used bikes and that's what impacting our overall loss rate.

And it becomes more pronounced when you're in the winter months, the winter and early spring before we get into the full riding season.

So that's also an impact.

And I think your last question was -- was there a change in mix of credits, and no; the composition in terms of our credits are pretty stable as well in terms of our higher rated credits versus our more credit challenged customers.

So we can continue to see a strong mix that we still see about 75% of our credits that are in the higher tier categories I have talked about in the past.

Bob Simonson, William Blair.

Good morning.

I see where the corporate expense came down about $2.5 million year-over-year.

Can you talk a little bit to that line item?

Was it anything special?

And how -- is that a sustainable trend?

And how should we think about that for the rest of the year?

Bob, last year, there was a onetime expense for when our then-current CEO announced his retirement.

And at the same time last year, we started expensing stock options.

So there was an acceleration of some of those stock options which resulted in the higher expense.

So last year was actually a higher number than typical.

The number we're looking at in 2006 is more of a typical expense.

Does that answer the question?

Robin Farley, UBS.

I have two or three questions.

And operator, if you could keep my line open, just -- I am going to start with the first question and then go to the other two.

Looking at the guidance here on production and shipments, I think this is the first time in the last 5 or 10 years where there has been such a big difference in what you produced in a quarter and what you're going to ship in Q2.

[There's] always a couple hundred bikes, but with that -- holding that production [bit] to ship into the second half, I guess it seems like that means that for your full year guidance to stay the same that you'd have to ship in the second half -- looks like a 9 to 11% increase, which seems like a big year-over-year increase in the second half.

I wonder if you could talk about being comfortable with that big of an increase in the second half.

And then also, I wonder if you could give the third quarter specific number for Q3.

In the past, you have usually given that by now.

I just wonder if we could have your Q3 production and shipment number now.

And operator, if you could keep the line open I have a few other questions.

Robin, in addressing that change in the timing again, with the production in the second quarter of 13,000 2007s, [nobody] knows until we announce the product and then [all three] -- that 13,000 gets added onto what our normal production would be.

The reality is the back half of the year shipments are higher because of the 13,000 units, which would drive the percent increase full year.

Again, our guidance is still 5.8 to 7% make increase in wholesale shipments.

And the timing is a little different, but the reality is we're talking weeks.

Whether you ship those -- if those would have been '06s and shipped in the last part of June or shipped in the first part of July, you are just talking about when the quarter cuts off.

So although it may look like it's a dramatic increase, it's just a shifting by a couple of weeks 13,000 units.

And again, we thought it was important to point out.

As for guidance, we're trying to get away from quarterly guidance for every quarter.

We do feel it's important, though, to give the next quarter.

Especially when quarters like this next quarter are significantly different than the normal, it would be unfair to have expectations being set without some basis.

So we have given guidance on the second quarter because of how unusual it is, but we are going to try -- we are going to continue to give total year guidance.

We're trying to get away from every single quarter guidance for the balance of the year, so we will not be giving third quarter guidance in -- for the next three months.

Okay great.

And two other questions.

One is for HDFS, it looks like the reserves as a percent of your receivables has been declining, and we don't have it for this quarter yet.

I guess that will be in the full filing.

But I wonder if you could talk about the issue of the reserve for receivables moving down.

Particularly since loan loss rates have been moving up a little, we maybe would expect to see that reserve increasing rather than decrease.

I wonder if you could talk about that.

You want me to comment on that before we do the filing, Jim and --

Yes.

Well, the reserve does change relative to what our mix of our portfolio is, and that is relative to what percentage is wholesale and what percentage is retail.

And we do have that change throughout the year as we go through the seasonal differences we have.

Right now, we're carrying more wholesale receivables than we have been in prior quarters.

So that is some of the composition.

But we always go through and take a look at our reserve, and look at our reserve relative to our charge-offs and make sure that we carry an appropriate amount of reserves and according with generally accepted accounting principles.

We believe we have.

The mix between wholesale and retail is certainly very sensitive to when we do a securitization, the timing of that, because then we saw off a lot of the retail.

So that timing does have an impact on the mix of total portfolio. (multiple speakers) Were you referring to, by the way, Robin, to the December balance or --

The only thing that is publicly available at the moment is when you looked at -- if -- we don't know what it is or I don't know what it is for Q1 though you do. (multiple speakers) Exactly.

Looking at the trends just over the last five years, which would adjust I guess for seasonality if we look at the same point in -- seasonally each of the last five years it's been coming down quite a bit.

And I guess since we will not have the opportunity to have a conference call what you do put out the Q1 number, just wondering -- to put in some kind of context what did decline, what's really been driving those declines every year and to put in context what we'll see in Q1.

I am [going] to comment a little bit on a five-year trend.

There is no doubt that when the economy was slowing down several years ago, we did get a bit conservative.

And as we've -- since we've -- business has been relatively short-lived and we didn't have experience over an economy that was slowing down we did get conservative.

Since that period of time, we've been adjusting the reserves to our experience level.

And I think that reflects better what really happened.

But we do believe the reserve level we have is appropriate for the quality of our portfolio, which is a very high-quality portfolio.

Great.

And --

Just another thing -- to Donna's point, the portfolio was not quite as high a quality five, six years ago as it is today.

Great.

And then the last question is just to clarify your comment on raw material surcharges.

You said the 8.3 in this year's quarter versus the 8 million in last year's quarter.

So is there not a significant impact on margins? (technical difficulty) When you say surcharge, is that 8.3 million -- do you mean a year-over-year increase or is the surcharge an increase on top of what you think of as normalized but which may or may not have been the prior year's number?

Surcharge is a -- surcharges you're paying over and above the purchase order for that particular procurement.

So last year, we paid over and above our purchase orders $8 million in surcharges, which if metal prices go down, those would go down.

And this year, again, it was around numbers, $8 million, so we are just saying that year-over-year we had $8 million of surcharges last year and $8 million this year.

And it's like for like.

David Anders, Merrill Lynch.

Two questions.

First, just circling back to the pricing question, because your mix relative to the first quarter of last year has shifted to favor the larger bikes over the Sportster.

And so that would generally lead me to believe that pricing should have been up instead of down 0.6%, if you could maybe give us a little more color on why that didn't occur.

And then number two, just -- I understand the second quarter guidance, the 78,000 units is versus 77,000 last year, and last year's second quarter that was a reduced number, but it's a clean number, right, as far as advanced sales of the model year and what not?

So neither Q2 this year nor last will have the forward year model year in it.

Correct?

Okay.

I'll answer I guess in reverse order.

On last year, yes; last year's second quarter we pulled out basically round numbers 10,000 units from what we previously had announced for the quarter.

And as far as I know, I have to go back, but for material purposes, that number was all -- last year was all '05s that we shipped out.

It was all '05s. [I can tell that] for certain.

I believe production was also all '05s, so there was not a -- for all intents and purposes, there was not any buildup of inventories of the next model year in the month -- in the second quarter.

So it's clean.

So you are comparing 77,000 units last year on a clean basis (multiple speakers) [year] term.

Okay.

On ASP, and maybe the prior question, I didn't -- the question was coming up with average selling prices was actually referring to your question;

I answered in terms of retail.

Let me answer it in terms of wholesale.

There's many things that impact average selling prices.

Mix definitely is one, but there's mix within families.

There's mix within models within families.

And we give out the mix of the custom bikes, which is approximately 45%.

Now, that mix [then changed but] realistically within there, that's made up of Softails, Dynas, V-Rods and some CVOs.

Within that, there is a significant switch, an increase in the Dyna production.

That has a lower selling price than the Softails, so that had an impact.

Also in our total number, there is some foreign exchange that actually on the revenue side reduced revenue.

On the gross margin side, increased it, and that was due to hedging.

But revenue, there was a reduction of revenue because of foreign exchange.

And also if you look at the mix, the mix of our international versus domestic is up.

And basically, I think last year we had about 79, what was it, about 21% international.

This quarter it's about 26% plus international.

Some of the international markets, they're independent distributors, they get a discount.

So there were some things that impacted -- many different things that impact the average revenue.

You are completely correct that Touring bikes up.

Sportsters offset that and there's other things that go on in between.

Ed Aaron, RBC Capital.

Good morning.

I wanted to ask a couple of questions.

First I wanted to follow up on the seasonality questions, and we know that seasonality at the retail level has shifted more towards Q2 and Q3.

Your production growth has been more weighted toward Q3 and Q4, and I would think just intuitively that based on the increased seasonality at retail that your growth -- your production growth would be more weighted towards the first half of the year than the back half of the year.

Can you kind of help me clarify that?

Number one, the difference between production and shipments.

Our production is growing every quarter.

It's just what we ship out is going to be a little different.

Again, in response to previous answer, because we have to hold some '07s, basically we produce the last couple of days or a week or so of June.

It gets slipped into the third quarter or July, so it's again a matter of -- the dealers are going to see a matter of a couple of weeks' difference.

But for reporting purposes, it's going to fall in the quarters.

But our production is -- continues to grow quarter over quarter and -- from quarter to quarter, and dealers are going to see -- exception of several weeks in there, a pretty even flow of product.

And that is what is important.

Jim, even if you look at shipments and growth in shipments, it's still more weighted toward the second half of the year, both in '06 and was also the case in '05.

But if -- again, we aren't just talking about the timing of several weeks, so -- where we are splitting out the model here.

And dealers are using (technical difficulty) between April and September as being the critical time they're retailing their motorcycles.

And whether that bike comes in in June or July is not going to be a big factor.

Okay.

Great.

And then on the domestic versus international shipments, the mix definitely shifted more so towards international this year.

Should we kind of be (technical difficulty) percentage of international in Q1 and assume it's going to be similar for the full year?

No.

Number one, because of the delay it takes to 4 to 6 to 7 weeks to get through international markets, we have to ship those products out sooner.

So there is going to be a heavier weighting in the first quarter.

Yes, our total international will have a heavier weighting this year than last year, but not quite to the extreme that we've seen in the first quarter as were trying to [head out] the spring selling season.

Okay.

And then one last question, I don't know if you have the answer to it or not, but do you have a sense on average of what like a typical dealer's net profit margin is and how that might compare to a couple years ago?

I certainly have a sense.

We don't give that out though.

We follow -- [like I say] the dealers have a great profitability model.

They have a great business model.

They're all quite profitable.

But other than that, we don't give out what's going on in the dealer network.

Bob Simonson, William Blair.

Two.

One was a follow-up that I didn't get into the system the first time.

On the corporate expense line, you talked, Jim, about some changes in there, [you have] special ones in the first quarter.

The second quarter, dollar amount of that expense was not a whole lot different than the first quarter was and then it declined to about 50% in the third and fourth quarters.

I am just trying to figure out how that pattern might unfold this year.

Okay.

Again, going back over -- talking about 2005.

When that -- when Jeff Bleustein announced he was going to retire, you have to speed up the expensing of the stock options, but it -- until he retires.

It occurs in both the first and second quarter because he did not retire until April 30th last year.

So it's both a first and second quarter expense last year.

It doesn't all plop on one quarter.

And then it fell fairly sharply in the second half in dollars.

Is that -- is the current first quarter rate a good run rate for the rest of the year?

For all material purposes, I certainly have not looked at it in great detail, but it is -- we're talking about small changes, a very small number.

So I don't see it varying a lot, but --

Okay.

And the second question, you talked about participating in both customer and dealer events.

Is that a measurable difference in expenses this year versus last year or not?

We always look at the total pool -- what we are allocating to generating excitement.

And this is kind of a reallocation to things we were doing last year.

So I wouldn't see a significant something you could pick off in the future income statements that this is -- because we doubled our -- there is no doubt there's some expense and even capital that follows this, but this is just a reallocation of other [emphasis] that we had in prior periods.

Felicia Hendrix, Lehman Brothers.

Several questions for you.

One is -- one of the phenomenon or the main reason that [got] kind of -- you explained it was driving the kind of production shift is that you're moving the dealer meeting up a few weeks.

And I was just wondering if you could -- is there a reason that?

Is it just a scheduling thing?

Is it something we're going to see going forward?

Is it a strategic move?

Just wondering on that.

And then I do have a few follow-ups, so please keep my line open.

Like I say, just on talking about the topic of scheduling dealer times, we have a very big dealer event.

There's 6000 people that participate.

There's a limited number of places we can have this event over the United States and keep all the people together, so we have a very small selection of sites and we book these three, four, five years in advance.

So no, this is not a strategic; it's when we can get a place.

And we try to change the places.

We try to change the venue from East Coast, West Coast, and someplace central in the United States so the same dealers aren't always traveling as far every single year.

And that is basically the driver.

So as we think about next year, are you in a position where you would feel comfortable telling us if we'll see something later, earlier, same time so we can think about modeling out next year?

Like I said, there's many things that drive the model year cutoff.

Some of those are new products, some of those are machines, and just many different things.

And at this point in time, we could not give you a heads up for what that would be.

Okay.

And then Jim, in your last call, you had talked about kind of addressing or looking -- evaluating your allocation program.

You didn't really talk about it this time, but I was wondering where you were in this -- in the process and if you are kind of using internal people to look at that or have hired external evaluators there.

There's no doubt our allocation system in the current market environment needs some adjusting, to say the least.

It does not react to changes in markets very quickly.

And as I mentioned on the last conference or maybe the last analyst meeting, we are certainly looking into this.

There will be some adjustments.

That is always one of those things that when you adjust these things, there are some winners and some losers.

So we have to be very carefully when we do these things because we're -- it has an impact, rippling impact through the whole dealer network.

So internally will be working with the dealers at the end of the day and there are going to be some changes made sometime this year.

I can't give the timing, but there will be some changes to our domestic allocation system sometime this year.

This calendar year?

Yes.

Okay.

And then finally, on an annual basis, you provide in your 10-K an annual report the wholesale finance receivables.

I was wondering maybe Donna this is a question for you -- if you could provide us that number on a -- what it was in the first quarter for this year versus last year.

We generally do not provide that at this point in time, so I'm not sure --

What was the question again?

If we could provide the wholesale finance receivables at the end of the first quarter.

Did I get that right, Felicia?

Yes.

So you just are -- there is no quarterly information you will give us publicly?

No.

Greg Badishkanian, Citigroup.

Mine relates to -- my question relates to international.

Promotionally, you seemed to have a very good impact last year when you implemented that.

What are the plans going forward for the next year, two years and what else is driving your growth internationally as well?

Internationally, there's a lot of things that come into play.

Number one, especially in European market, it's been addressing that market with some products that are certainly more conducive to the riding style of the Europeans.

And that goes into the liquid-cooled V-Rods, which there's more power, more aggressive riding.

Also, the dealer rationalization that we have been going through for the past several years as we -- and still have more to go yet as we have gone into the markets of UK and Germany and downsized those and backfilled those with some dealers that are larger, that are capitalized, better businessman, better locations.

In Europe, we're supporting that market with a small centralized warehouse which is ours, by the way, so that we can support small dealers, dealers that are 60 units or so that can't carry all the inventory.

If they have a retail sale, we can get there rather than losing that customer to somebody else.

And that helps that market.

Some of -- also in Europe, we've been acquiring some of our distributors -- Italy, Spain in the last couple of years where we can address that market for our own interest.

We can grow the market rather than the distributor growing it and doing what's right for the distributor.

We have been doing some similar things in other markets, in Australia and Brazil and Mexico.

And Japan just happens to be -- we've just got good formula.

We've grown absolute units the last twenty years in a row.

And that is in a market in the last five, six years that's been down.

Japan we just have a great response to the market, continue to grow.

Other areas we are doing some marketing programs, making the product, getting it out, getting rid of the myths that all these products cost more than $20,000 and they're scarce.

And just outreaching to people and doing some of the other infrastructure type things I mentioned.

Those things have been going on.

We couldn't do those really in the late '90s, early 2000s.

We didn't have the product to support the demand we were going to create, so now we're back to a more normalized growth.

We can continue those programs and grow those international markets.

How about promotionality in pricing?

How does that fit in?

Last year, we did do a small adjustment in pricing in the European market.

In the early part of the first quarter last year, we adjusted prices on about 40% of our product down about 2 to 9% recognizing that the relationship between the euro and the dollar changed considerably -- a lot more than 2 to 9%.

That had an impact, we believe.

Kind of hard to measure with all the things we're doing simultaneously, but so -- from time to time we'll look at markets, we'll look in foreign exchange and may adjust.

And we have been experiencing some favorable exchange and balance that out with creating some demand.

Are you implementing one this year?

Is that in the plans or -- just the onetime cut last year?

Last year was -- we had not -- the euro had gone from 80 to 130 and certainly had to recognize that there were some changes.

So when there's dramatic changes like that, we'll certainly look at that.

Haven't seen that in recent history.

At this time I would like to turn the floor back over to management for any further or closing remarks.

Thank you for your time this morning.

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

Now I will turn it 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 718-2671 followed by the pound sign until April 19, or by accessing it on the Harley-Davidson website.

If you have any questions, please contact me at Harley-Davidson's office of investor relations, 414-343-8002.

Thanks again.

Have a great day.

Thank you.

This does conclude today's teleconference.

Please disconnect your lines at this time.

Have a wonderful day.