Harley-Davidson Inc (HOG) 2006 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Harley-Davidson third quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] Thank you.

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

Sir, you may begin your conference.

Thank you.

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

Over the course of the next hour we will provide comments on our third quarter performance, on Harley-Davidson motorcycle retail sales at our dealerships, on guidance, and on sustainable growth.

Harley-Davidson's CEO Jim Ziemer will speak to you in a moment, followed by CFO Tom Bergmann who will share the financial and retail highlights of the quarter.

Tom will be followed by Larry Hund, CFO and acting 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 and our outlook for the future.

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 7865066 followed by the pound sign.

The record willing be available through October 19.

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 section 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 any 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.

Thanks, Mark.

Good morning and welcome to our third quarter conference call.

If you had a chance to see our press release this morning you know that Harley-Davidson had a very good quarter, highlighted by record third quarter revenue, wholesale shipments, net income, and earnings per share.

Our dealers were successful as well with worldwide retail sales of Harley-Davidson motorcycles up almost 9% for the quarter.

This retail performance is notable given that 2005 third quarter retail sales were up over 12%.

These strong retail sales are certainly a testament that our products, our close to the customer activities and our outreach strategies are having an impact in the dealer showrooms around the world.

I'll address our growth and business model later in the call.

But first I'd like to turn the call over to Tom who will share in more detail the financial and retail performance of the quarter as well as our thoughts on company guidance.

Thanks, Jim.

Good morning, everyone.

As we look at the third quarter, we are very pleased with the financial results for the quarter and the retail performance posted by the Harley-Davidson dealer network worldwide.

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

Revenue for the quarter was $1.64 billion, up 14.3%.

Net income for the quarter was $312.7 million, up 18%.

Earnings per share were $1.20, up 25%.

Worldwide retail sales of Harley-Davidson motorcycles totaled 89,700 units up 8.9% from the year-ago period.

And we bought back 7.4 million shares of our common stock at a cost of $411.4 million.

Turning specifically to our motorcycles and related product segment, wholesale Harley-Davidson motorcycle shipments in the quarter grew 10.8% to 97,046 units, while revenue from motorcycles was up 16.5%, to $1.29 billion.

Average revenue for Harley-Davidson unit increased approximately $650 from the second quarter, primarily due to mix between families, which I'll discuss in a minute.

International shipments of Harley-Davidson motorcycles were 16,648 units, up 8.6% compared to the same period in 2005.

Wholesale shipments to our domestic dealers were 80,398 units compared to 72,249 units, or up 11.3% from the same period of 2005.

So for the third quarter, international shipments represented 17.1% of total wholesale shipment.

For the first nine months of 2006, international shipments represented 22.5% of total wholesale shipments.

Looking at product mix, touring motorcycles increased as a total percentage of shipments during the third quarter while custom and Sportster model shipments decreased slightly.

The percentage of Touring motorcycles shipped in the quarter increased to 37.1% compared to 33.4% in last year's third quarter.

Sportsters represented 17.4% of motorcycle shipments for the quarter compared to 19.8% last year.

And custom shipments for the quarter were 45.4% compared to 46.5% in last year's third quarter.

The mix changes were planned based on our anticipation of particularly strong early demand for the 2007 Touring models.

However, Touring mix in the fourth quarter is expected to return to the 33 to 35% range.

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

General merchandise with third quarter sales of $71.3 million was up 10.5% or $6.7 million over last year's third quarter.

Parts and accessories revenue was 248.4 million, up 7.5% or $17.3 million compared to the same quarter last year.

Now let's turn to margins for the quarter.

You'll notice that gross margins are 39.9%, up from 39.2% in the same period in 2005.

During the quarter, the largest margin drivers were mix changes and new model year pricing which more than offset continued raw material surcharges.

As we previously -- as we've previously stated, the Company expected continued raw material surcharges, given the current price of steel, aluminum, and other materials.

In the third quarter of 2006, these surcharges totaled approximately $13.4 million, compared to approximately $9.6 million in the third quarter of 2005.

So for the first nine months of the year, we incurred roughly $34 million in raw material surcharges compared to approximately $27 million for the same period in 2005.

Provided raw material prices remain at their current levels, we anticipate that total raw material surcharges for the year will be approximately 30% higher than the $36 million we experienced for the full year of 2005.

Operating margin in the third quarter of 2006 increased to 26.5% from 25.6% in the year-ago quarter.

The quarterly operating margin increase was driven primarily by gross margin expansion, combined with operating expenses decreasing as a percentage of revenue.

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

This increase was due to the expiration of the Federal Research and Development tax credit as of December 31, 2005.

Assuming the retroactive reinstatement of this tax credit, the Company expects its full-year effective tax rate in 2006 will be 35.5%.

Net income for the third quarter was $312.7 million, an increase of $47.8 million, or 18% compared to the third quarter of 2005.

Diluted earnings per share for the third quarter were $1.20, a 25% increase calculated on a weighted average share base of $261.229 million compared to 275.460 million in the year-ago quarter.

The Company experienced strong operating cash flow for the first nine months of 2006 with operating cash flow of $1.29 billion.

For the same period, capital expenditures were $137.5 million, and depreciation was $164.7 million.

For the full year, we now expect capital expenditures in the range of 225 to $250 million.

The Company also continues to believe that share repurchases are a good use of cash and an efficient way to return value to our shareholders.

During the quarter, we repurchased 7.4 million shares for a total of $411.4 million.

For the first nine months of 2006, we have repurchased 17.2 million shares of stock for $911 million, at an average cost of $52.95 a share.

On October 11, 2006, Harley-Davidson's Board of directors authorized a new share repurchase program for up to 20 million additional shares.

With that, I'd now like to turn to the current retail environment.

Third quarter is the period when our new models start arriving in the dealer's showroom, and it is an initial success gauge for the model year.

We are pleased with what we see so far.

Our worldwide dealer network retailed 89,700 new motorcycles in the third quarter of 2006.

This represents an 8.9% increase compared to the third quarter of 2005, which, as Jim mentioned, was itself a very strong quarter for motorcycle retail sales.

In the U.S., Harley-Davidson motorcycle retail sales increased 6.7% during the third quarter of 2006 compared to the same period in 2005.

Retail sales of Harley-Davidson motorcycles in our international markets continued their momentum.

Total international growth for the third quarter 2006 was 18.7%.

Europe experienced 9.9% growth in the third quarter, Japan experienced growth of 13.7%, and the Canadian market increased 30.2%.

All other international markets grew at a combined rate of 35.4%.

As I mentioned on the last call, we continue to be excited about our international growth.

It is evident that a number of foundational strategies we have been implementing over the last several years are really starting to take hold.

These include improvements to our dealer base, enhanced marketing programs, and more efficient distribution of our motorcycles worldwide.

Now let me spend a minute on dealer inventory levels.

As you can calculate, based on the information we provide, our worldwide retail sales have increased by approximately 25,000 units over the past 12 months.

During the same time period, dealer inventories have increased by only 3,500 units to support this increased retail growth.

As we continue to grow, it only makes sense that dealer inventory levels will increase to some extent to support our dealers increasing motorcycle sales.

We remain comfortable with the overall number and retail pricing of motorcycles at the dealerships.

With that, let's look at full-year shipment guidance for 2006.

We have slightly revised our wholesale motorcycle shipment guidance narrowing it to between 349,000 to 351,000 units.

The 256,348 Harley-Davidson motorcycles shipped through the end of the third quarter equates to a fourth quarter shipment range of approximately 92,600 to 94,600 units.

Now, let me turn specifically to guidance.

Over the past several months, we have taken a careful look at our guidance practices.

Our review has included industry comparisons, our historical practices, and discussions with many of our long-term shareholders.

As a result of this review, here is our outlook and an overview of the guidance information we will and will not be providing as we go forward.

Let's start with what we will provide.

First, we believe that we will continue to grow revenue and that our international shipments will grow at a faster rate than U.S. shipments.

Our opportunities for growth remain strong and will be driven by our focus on providing our customers around the world with a continuous stream of exciting new motorcycles surrounded by a unique Harley-Davidson experience.

Jim will talk more about all the opportunities we have in just a few minutes.

Second, we expect that we will continue to expand margin.

Our strong brand and legendary product combined with our manufacturing expertise and focus on operational excellence position us to continue to drive a net income growth rate in excess of the revenue growth rate.

Third, we will continue to provide our annual capital expenditure expectation.

The Harley-Davidson business model generates significant amounts of cash, allowing us to invest in the business, fund our future growth opportunities, and return value to shareholders.

With our opportunities to grow revenue, expand margins, and generate significant amounts of cash, we believe the Company will continue to deliver earnings per share growth of 11 to 17% annually through 2009.

We will also continue to provide shipment guidance for the next quarter since quarterly shipment volumes can vary widely based on a number of factors.

The relationship between last quarter's shipment and this quarter's shipment, due to model year launch timing, is a perfect example of the potential variability that can occur.

During each quarterly conference call, we will provide a range of expected shipments for the next quarter.

For example, today we are giving you the expected shipment range for the fourth quarter of 2006.

Going forward, we will no longer be providing annual shipment guidance.

We will also be discontinuing the practice of providing guidance on growth rates for parts and accessories, general merchandise, and Harley-Davidson Financial Services.

We believe our new guidance simplifies our messages to shareholders, allows us to be more responsive to the retail marketplace, and puts the primary focus on long-term sustainable earnings.

So to summarize, we expect that revenue will continue to grow with international shipments growing faster than domestic shipments, net income will continue to grow faster than revenue, EPS will continue to grow 11 to 17% annually between 2006 and 2009.

Now that we have covered the motorcycle segment financials, retail sales, and guidance, I'd like to turn it over to Larry Hund to discuss the Harley-Davidson Financial Services results for the third quarter.

Thanks, Tom.

Harley-Davidson Financial Services delivered third quarter operating income of $55.2 million, an increase of $7.6 million, or 16% compared to last year's third quarter.

This increase is primarily due to higher net interest income and a higher securitization gain compared to the prior year.

Retail market share for HDFS in the United States related to new Harley-Davidson motorcycles grew to approximately 48.5% for the first nine months of 2006, compared to 45% for both the first nine months and full year of 2005.

Our $800 million third quarter securitization resulted in a gain of $12.8 million, or 1.6% of receivables sold.

For comparison, in the third quarter of 2005, we sold $650 million in retail motorcycle loans and recognized a gain of $9.2 million or 1.4% of receivables sold.

The 30-day delinquency rate for managed retail motorcycle loans at the end of the third quarter was 4.46%, up from 4.07% at the end of the third quarter in 2005.

Losses on managed retail motorcycle loans for the first nine months of 2006 totaled 1.18% on an annualized basis compared to 1.16% for the same period in 2005.

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

Thank you, Larry.

Now I'd like to spend a few minutes giving you my perspective on the third quarter and how we continue to build on the strength of our financial performance, our strong motorcycle product line, and the unique ownership experience that makes Harley-Davidson so distinctive.

During the third quarter, we successfully launched the most extensive new product introduction in our history including four new models in addition of an all new Twin Cam 96 engine with the 6-speed transmissions on the majority of our 38 models.

We delivered our planned worldwide motorcycle shipments, produced great financial results.

Our dealerships started receiving the new motorcycles just days after they were introduced in July, and the worldwide motorcycle market has reacted very positively.

The worldwide dealer network posted a very strong third quarter by achieving an 8.9% increase in unit sales over last year's outstanding results.

When I think about our track record over the past 20 years, this quarter's strong financial performance is like so many others.

We continue to strengthen the brand to grow value by satisfying our customers and delivering great performance.

As I look forward -- as I look to the future of this business, I believe we are well positioned to continue this track record of great performance.

I would now like to spend a few minutes talking about three strengths that I believe will continue to sustain Harley-Davidson's long-term growth and create value for shareholders.

Three strengths are, market leadership, operational excellence, cash generation.

First, let's talk about our market leadership.

We are the leader of the heavyweight motorcycle industry with over 30% worldwide market share and over 45% market share in the U.S.

We have one of the world's most admired brands.

We have a great track record of providing cool and exciting products and an exceptional ownership experience.

And while U.S. sales for heavyweight motorcycles has settled into a single-digit growth rate, we still see plenty of opportunities for growth in the U.S. and internationally.

You've heard me say we will continue to lead and define the heavyweight motorcycle market with new products and services designed to appeal to different riders.

The past two years alone we have introduced ten new models, significantly enhanced every one of the motorcycles in our lineup.

It's not just about the product.

Harley-Davidson provides a unique lifestyle with organized rides and rallies.

Hog club membership and all the MotorClothes and accessories to help our customers personalize their experience.

The dealer network is second to none.

To many of our customers the dealerships have become their second home.

A center of activity related to their passion for the brand.

We are aggressively inviting new riders into the Harley-Davidson family.

As you've heard me say many times, we're putting more focus and resources on our outreach activities to women, young adults, and minorities, because we know we currently underserve those segments.

And as our customers soon learn, riding and owning a Harley-Davidson motorcycle is incredibly addictive.

Internationally, we see plenty of opportunity for growth.

We have a proven track record in Japan, Australia, and Canada, where we have the number one market share position in those countries.

This may surprise you.

We sell our motorcycles in more than 60 countries around the world.

Many of them emerging markets for Harley-Davidson.

This demonstrates that our brand translates well in many different cultures.

But our legendary brand, premium products, and the experience we create for our customers is only part of the story.

Operational excellence is also key.

Let's take a moment to talk about it.

Over the past 20 years, Harley-Davidson has increased its manufacturing capacity, capabilities substantially.

The Company is a recognized leader in the American manufacturing industry.

If you've been to one of our facilities for a factory tour, you have no doubt seen this firsthand.

Our focus on operational excellence is visible throughout Harley-Davidson.

Our employees and suppliers have been relentless in the support -- in the pursuit of process improvements and innovation.

We have made considerable strides in manufacturing efficiencies and automation.

And we still see more opportunities for improvement.

It's not only in manufacturing.

We are driving operational excellence across the entire organization, including supply-chain management, distribution, information systems, finance, and human resources to name a few.

And as you are well aware, Harley-Davidson has consistently improved margins for more than a decade.

This margin improvement has been driven by many factors, including the benefits of increased production, our designing costs on the product whenever we come out with a new product, the process, our leveraging the capabilities of our suppliers, all the capital investments in capacity, quality, efficiency, we take the opportunity to bring in the best state-of-the-art of equipment, with product mix we have the opportunity to change that with motorcycle families and between motorcycle families.

Also with working with all our employees as business partners, and there is some pricing that goes on for features.

All these factors have contributed to our margin improvement for more than a decade.

We believe they will continue to drive margin improvement in the future.

Finally, I'd like to spend a moment on free cash flow.

This is a great business.

It generates significant amounts of cash.

Cash gives us the resources to invest in our business.

In fact, we have been able to invest 1.2 billion in capital expenditures the past five years, all self-funded.

Not only have we funded our organic growth, but as I look back over the past three years, we have purchased roughly 51 million shares for common stock for a total of 2.5 billion.

This repurchase program is indicative of our longstanding confidence in the future performance of the Company.

And yesterday the Board of Directors approved a new share repurchase authorization of 20 million shares in addition to 2.8 million shares remaining on the current authorization and in addition to the authorization we had to offset the dilution caused by the exercise of stock options.

Our strong free cash flow has allowed us to significantly increase our dividend.

In fact, our dividend per share is up over 400% in just the last three years.

Our dividend payout ratio has increased significantly during that time period as well.

What a great business.

So in summary, I want to say that the worldwide demand of our motorcycles and the Harley-Davidson experience remains excellent, and it will continue to drive year-over-year revenue growth.

Number two, we will continue to improve our margins through the benefits of increasing production, through engineering, working with our suppliers, using our capital expenditures for great processes and technology, working with our employees as business partners, adjusting the mix of our product offerings.

And, number three, our ability to generate cash will allow us to reinvest in the business and return significant cash to the shareholders.

For all these reasons, plus others, we believe that Harley-Davidson EPS will grow in the range of 11 to 17% through 2009.

This earnings growth will be driven by solid revenue growth, margin improvement, and the benefits of strong free cash flow.

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

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

Good morning and congratulations.

Good morning, David.

Thank you.

First, on dealer inventory, Tom noted you're comfortable with the number of bikes.

How do you feel about the amount of 2006 models remaining at the dealers?

Do you see the need for Harley to support any promotions to help dealers sell through these bikes?

As we look at the dealer inventories, we are comfortable with the dealer inventories and the mix of inventories.

There's no doubt that as you come out with new, great products, like the Twin Cam 96 engine, and the -- coupled with the -- mated with the 6-speed transmission, that has an impact on our prior year model year product, but we are comfortable with the current levels of our motorcycles.

Then on the product mix, could the mix of Sportsters remain lower year-over-year since the changes in model year '07 are more expensive on the Big Twins than the Sportsters?

Well, there's no doubt that mix is always a opportunity.

As we came out with the Twin Cam engine and the 6-speed transmission on all the Big Twins, that was a leap forward.

Took us, the Big Twin lineup to a new level, and a new demand for whether it be new customers, competitive bike riders or existing customers, reason to trade up.

That created more of an emphasis to increase that mix and we'll continue an emphasis to increase that mix and we'll continue to monitor that and be responsive to the market as we read our customer demand.

So that's to be seen, but there's no doubt initially that with this great -- although all models got changed and the Sportsters got fuel injection, at the same time the big changes were the engine and transmission.

Therefore, the mix was more tilted, and at the end of the day it does add up to be 100%.

So when Big Twins go up, Sportsters have to come down.

Thank you.

Thank you.

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

A couple questions.

First, on your long-term shipment guidance.

I can understand why you guys would eliminate doing that maybe into '09 and '010 but I don't understand really why you wouldn't at least give us some sort of read into next year, because it does feel like to me on the margin that you might be less comfortable with your shipment guidance going into next year.

Is this the case?

Then I guess secondly are you guys hearing anything from dealers specifically on upgrade cycles?

Is more of the retail sales now from existing customers upgrading it, or is it continuing to be new customers that are driving the majority of the sales?

Number one, on guidance, there's no doubt with the current retail sales that we've seen with the introduction of the '07s we are really confident of what we came out with in the new product offerings.

So I mean, our trend of going to away from guidance is not because of a lack of comfort.

On the contrary, we are really comfortable.

At the same time, we are trying to focus on the marketplace, and at the same time, being responsive to the shareholders and saying we believe that this company is going to generate 11 to 17% earnings growth, which at the end of the day is what you're really interested in -- what the shareholders are really interested in.

So we've got, as I pointed out and Tom pointed out, a lot of growth opportunities, coupled with the fact that we have got a great business model, whether it be the products or the experiences of the great dealer network, certainly does not show any lack of confidence in the current year.

How about for '07?

On '07?

I mean, again, with the retail sales that we have right now, again, we have got great confidence for '07, and at the same time, as Tom said, we've done a thorough research of current practices in the industry as well as talking to our shareholders, and they expressed that there is a concern that when you give such detailed shipment guidance, that can lead a management team to do the wrong things, in the short term.

And certainly we want to say that we have got a great business model.

We're going to deliver on the bottom line, and that starts with the top line.

I mean, revenue drives earnings growth.

We are very confident in our ability to grow revenue with our opportunities and what we have right now.

It's just that we don't want to be boxed in on a quarter by quarter basis of what we're going to do on shipment.

Okay.

Then signs of any upgrade cycle?

Well, right now we do survey our customers on -- and asking those questions, have you owned a current Harley-Davidson, et cetera, et cetera.

We're very early into the selling season.

We don't have those surveys back, but we can give you updates on future calls.

Okay.

Thanks a lot.

Thank you.

Thank you.

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

Thank you.

Let me also offer my congratulations for the whole team there.

Thank you, Tim.

A couple of things, gentlemen, and first of all, maybe a little bit of housekeeping for Tom, and, Tom, I apologize if I missed this.

Did you give any commentary as to how much 4X benefited either the revenue line or the overall margins in the quarter?

No, I didn't, but I can give you those numbers now, Tim.

Basically on the revenue line it was a $2.6 million positive impact, on the EBIT line it was just under $2 million.

Okay.

Great.

And then, Jim, I think it was maybe alluded to earlier, but if you could give additional color here, how much, during the quarter of your retail sales, were noncurrent models given the fact that you have changed your turn and earn practices to whereby I guess any non current models basically have to be retailed by the end of October for the dealers to get a credit on the turn and earn allocation formula for an '08 model?

So how much of your retail sales were '07s, I guess, in the quarter?

Can you give rough percentages, or however you want to answer the question.

No, we don't split our retail sales out between models nor model years.

Again, referring back to a previous question, we're quite comfortable where our mix is in model years, and we don't -- other than that don't give out what the mix was on retail sales.

Okay.

And then another question, somewhat of a follow-up on mix, so you're just basically saying you're going to, more so than I think in the past you've been -- you've kind of pre planned how -- what a range of mix would be on Sportsters, 20 to 25%.

Do you still see Sportsters in that range, or could that become a little more fluid here and let the customers drive the model mix a little bit more?

I certainly would not want to be constrained to a 20 to 25%, especially coming out from a quarter which was less than 20%.

Again, with this substantial change in the Big Twin makeup of engines and transmissions, we obviously couldn't forecast that for the world.

Now that we've come out with that, we will monitor what's going on -- I've got an echo here -- but we will monitor what's going on in terms of the marketplace and try to be responsive.

We can't be totally responsive.

We have different models coming out of different factories, but we will try to be responsive as much as we can.

If that means that Sportsters will go under a previously range that we gave of 20 to 25, we'll do that.

Okay.

Then, finally, just a clarification on CapEx.

Does that include, your CapEx number include the purchase of the Australian facility, the Wheel facility, and roughly how much was that?

Tim, it's Tom.

No, we don't -- one, we're not disclosing the amount, the terms of that acquisition of the new cast alloy wasn't disclosed and it would not be in that capital number.

It would not be?

Correct.

Getting back to the Sportster question, a little clarification, as we respond to the market, we will do that in the short-term range.

In the long-term range, Sportsters are key to growing the business.

So the 80% of our buyers historically have been new to Harley-Davidson.

It is key to getting them in.

So don't get the impression that although we've gone below the 20% mark, that that is a long-term strategy.

When we were responding to the newest in the market we don't want the market to get superheated looking for Big Twins and get back to the position where dealers are charging significantly over MSRP.

So we're trying to manage this new product, but over the long term, a significant portion of our Sportsters will be produced so that we can continue to bring new customers into the market.

I just don't want to leave the wrong impression.

We are managing the demand right now.

At the same time, not losing track of the fact that Sportsters are where the new customers come in.

Great.

Thank you, Jim.

Appreciate it.

Thank you.

Our next question is coming from Robin Farley of UBS.

Thanks.

I wanted to just get some clarification on the unit guidance.

I can certainly understand wanting to maintain flexibility, but in addition to not giving that forward year guidance, your previous unit guidance also included this long-term range of 5 to 9%, and that was certainly a very wide range that provided a lot of flexibility in terms of falling into that range, and it seems like you're often not endorsing that long-term unit guidance any more, either.

Is that -- I wonder if you can give us some color on that.

Operator, if you could keep my line open, I have a follow-up question as well.

Again, in lines to the other question I was answering, kind of along the same terms, we are quite confident in what we see in the market and quite confident with our dealer network and our product offerings and our marketing outreaches.

This does not suggest that we're less confident in opportunities to grow the business, just that we don't want to be constrained on a short-term basis, being a year in our books short term is a year, on one particular range.

Neither does many of our shareholders.

Therefore -- so we're going to go away from shipment guidance, and at the end of the day say we are about earning -- generating earnings growth of 11 to 17%.

I realize going forward we won't be getting that unit guidance, but I wonder if could you comment on your thoughts on the 5 to 9% long-term unit guidance?

Again, our comment is that we have great confidence in growing our units both domestically and internationally, and in the near term, I see international growing faster than domestically, but as for being boxed in for a range, we now want to get away from that.

Robin, it's Tom.

The part of this change too, it to get the focus where I think it needs to be and get it on our long-term sustainable earnings growth.

And as Jim said, we feel very good about our revenue growth opportunities, our ability to improve margins, all the benefits that come along with strong free cash flow.

And this will help focus investors where I think they need to be on what's the long-term sustainable earnings growth of this company and the cash generation of it.

That's the other key messaging that we want to deliver with our new change in guidance.

Okay.

And then my follow-up question is also in terms of margins.

And I realize over time your margins have gone up, helped by a lot of the factors you talked about, but it looks like the mix shift here, the big increase in touring, helped a lot on the margin side, and when you contrast that with Q2, when the touring mix wasn't as high, and there wasn't really that margin growth in Q2.

It's tough to know what all the components are, I mean, for us to know.

You obviously know.

But to help us sort of when we're looking to Q4 you mentioned that touring mix would be in that 33 to 35% range again.

If it's 33%, which would be the same as in Q4 last year, are you -- would you still expect margins to be up -- to be up measurably even without an increase in the touring mix?

We certainly don't want to get boxed into quarter by quarter margins, especially gross margins, but we are sending the signal that, number one, you are correct, that the touring mix did have -- we had a great benefit in the third quarter from the touring mix change.

There was obviously a lot of things we overcame, whether it be metal surcharges or start-ups as -- those things as we introduced a new model.

We just wanted to point out that some of that benefit does go away when we return back to maybe a more traditional mix of touring bikes.

So I think directionally that we're saying that the margin would go down from the third quarter.

We're not saying where it's going to but it's going to be lower than the third quarter, and that was kind of the signal we were trying to give on that mix.

That's probably the simplest we could do it, was say that the mix is not going to be as rich as it was in the third quarter.

Great.

Thank you.

Thanks.

Thank you.

Our next question is coming from Thomas Crowley of Putnam Investments.

Mr. Crowley, your line is live.

Please check to see if your line is muted.

Tom, we don't hear anything.

We'll move on to the next question coming from Bob Simonson of William Blair.

Good morning.

Tom, you mentioned the strength in Europe and you talked about three factors, the dealer base, the marketing programs you have instituted, and improved distribution.

Could you amplify a little bit on them?

For instance, on the dealer base, what are the number of dealers now versus a year ago?

And what might they be next year?

Is that still a growing number?

I'll take that, Bob.

This is Jim Ziemer.

Hopefully you're not hearing the same echo I'm hearing here.

But basically, again, with the dealers we have gone through a program over the last, oh, at least two years, trying to rationalize the dealer network.

As we looked at it, we had too many dealers selling too few bikes.

The best way to look at that we did the same thing in the U.S. 25 years ago, is whittle down the number of dealers and brought in some better business spend, better capitalized, relocated some of those in the cities.

Our best jobs we did, this was in the U.K. and in Germany, two of our larger markets, and that has boded well, as you can imagine, with better locations, better capitalization, better business people.

And that actually, in Germany, I know reduced the total number of dealers down by about 25%.

First we backed it off almost 50%.

And it didn't happen in one day.

It happened over a period of time.

So you wouldn't have seen a drop of 50%, but over time we changed out the dealers about 50%, then brought in some new dealers.

Net-net we were down about 25%.

About a year, year and a half ago we probably had about 400 dealers in Europe.

Not quite sure of the number of dealers right now.

We can get back to you.

It is less than 400.

Greatly increased our sales.

So we have been able to sell more products with fewer dealers so that they are more profitable, so they can reinvest in the business and do those things that we can continue to grow that market.

Is that rationalization process pretty much done now?

Would you need to grow the number of dealers from this point forward, or is it still ongoing process?

No, it's an ongoing process.

We obviously attack the larger markets first, but we'll be doing this in many of the markets.

Other things we do, is we purchased Italy and Spain.

They were independent distributors.

We bought those out.

They were being operated for the benefit of their owner, which is not in the long-term best benefit for ourselves.

We have found that when we take over many of these -- this is not 100% of the case -- but a lot of cases, when we take over ownership of a country and start operating it for the long-term benefit of the motor company, we have some great results.

We have seen that happen in Spain and Italy and some other markets.

So some of it is taking over the independent distributors, some is rationalizing the dealer network, but this is ongoing.

We are certainly not there yet, and I don't see that the number of dealers changing significantly for awhile in Europe.

Okay.

And then just to simply beat the dead horse one more time on the guidance, ask it one way differently, can you achieve your 11 to 17% ongoing guidance on earnings if implicitly internally you did not grow your production 5 to 9%?

I mean, as we looked at it, we said that certainly have the ability to grow our earnings based on growing revenue, growing earnings faster than revenue.

If something comes up, we always have the ability to fall back and augment that with some share repurchase but we think we have a very great business model that can generate earnings in that range, and -- but if things occur out of our control, we can help augment that and make sure that we can continue to deliver within that range of 11 to 17.

Very good.

Thanks a lot.

I mean, basically, last year our shipments were up 3.7% and our EPS was up just shy of 14%.

Right.

Very good.

Thank you.

Thank you.

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

Nice job on the quarter.

Thank you, Ed.

Couple questions for you.

First of all, the -- one of the factors you mentioned for having margin improvement this quarter was the new model year pricing which I was a little bit surprised to hear just because, I mean, you added a lot more content to the new bikes and the price increases weren't that different from what you have done in the past, and I would also assume that you maybe had some kind of transition inefficiencies associated with this particular model year changeover.

Can you just help me understand that a little better?

Well, we did not say we didn't have some challenges.

Like I pointed out before and Tom pointed out, with metal surcharges, and we didn't talk a lot about it, because when you've got a great quarter like this you don't spend too much time on the negatives, but there's no doubt that there's start-up issues.

I don't want to undersell it, our manufacturing guys and our suppliers did some monumental, and our engineers did some monumental jobs starting up all new power trains and 6-speed transmissions across the Big Twin line, which is basically 80% of our product line.

There were inefficiencies there were over time that occurred, but with the mix change, complemented with a modest price, as you point out, about a 1.1% price increase, that enabled to us get a very good quarter, and -- but that does not say that we didn't have some start-up issues and over time, and metal surcharges and other challenges.

So those did exist.

It's just that we thought with the limitation of the time we have on the phone call, talking about positive results, we focused on the positive.

There's no doubt that there's always some challenges.

And that doesn't just happen in the third quarter.

There are always challenges.

But our -- we had a very good launch of new products.

Okay.

Great.

Thanks.

Also, when you look at the product cycles going forward this year you introduced a new engine which I think was the first time you had done that in seven or eight years.

Do you see the product cycle as getting shorter going forward than they have been historically?

Shorter and longer are all relative terms, but prior to the Twin Cam 88 it had been about 13 years before we came out with a new powertrain.

And then as you point out, seven years later we come out with another powertrain, if you don't count V-Rod, and I'd be remiss if I didn't count it, but V-Rod, our liquid cool engine, came out in 2002, so certainly we are looking at, as we gained volume, you can certainly spread our engineering costs over more units.

We can afford to come out and increase margins.

At the same time, shorten that product lifecycle up because we're attracting more customers and we need more and different products.

There's no doubt, and as I pointed out in my discussion, in order to lead and define the heavyweight motorcycle market, because we can't stand still, if we continue to come out with the same product too long, the competition is out there copying us.

Pretty soon we'll all look alike.

So we need to got out there and continue to come out with new and exciting things all the time so that the competition is always two years behind us.

Long-winded answer, but, yes, over time, certainly that introduction cycle has shortened, and we're going to continue to come out with new and exciting products.

The industry growth for the heavyweight category was, I think, flat this quarter, which is a pretty significant deceleration of what we saw in the second quarter and it would imply that, excluding Harley-Davidson, industry sales were down in the quarter.

Do you think that a tougher consumer environment, generally speaking, is having more of an impact on spending in the category?

Then just one more question following up on that, maybe for Tom.

You did put more of a duration on your 11 to 17% earnings growth, saying it's through 2009.

In other words I don't think you had said that in the past.

Is there any particular reason why you chose 2009 as the -- as kind of -- I guess maybe a cut-off date as to how much visibility you have out there?

What was the first question, again, Ed?

The industry sales having slowed down this quarter.

All right.

Obviously we're not going to comment on industry.

We had a great quarter.

We were up worldwide 8.9%, and whatever kind of economic environment you want to call this, again, this is something that people want, they aspire to and dream about, and we certainly have not in the last, 10, 15 years been able to draw a correlation between Harley-Davidson sales and any employment, unemployment, interest rate, oil prices, anything else.

There isn't a correlation.

So I'm not sure about the rest of the industry, but we're not just selling the product.

We are selling an experience.

We have got a great dealer network.

Which is the destination, we have the rallies, and event, the great brand, the HOG club.

All those things that make us different, not just selling a product, and I think that maybe that's why when the industry gets into a tougher period of time, we continue to grow.

And so I think this is a great example of one of those times, but it's kind of hard to comment on the industry.

I know we're doing the right things, the right programs, with the right dealer network, and paying dividends.

On the second question, on the 11 to 17% annual EPS growth through 2009, the messaging there is in our previous guidance we basically said for the longer term, so putting the definitive time period on of going out to 2009 was just to provide some clarity on our guidance message.

So we're not leaving for the longer term up to interpretation.

Before Tom's point, interpretation could be forever, when you say long term.

We're just saying, hey, a good line of sight -- and I don't know of too many companies having a line of sight of three years, but a line of sight say for the next three years, we have got a great comfort level.

In that case we're probably out of the norm with three years guidance.

I don't think there's anybody out there with guidance that can be attributed to for a longer term than that.

Just trying to put it in a box.

Thank you.

Our next question is coming from Greg Badishkanian of Citigroup.

Please go ahead.

Great.

Thank you.

You mentioned that from international perspective there's several initiatives that drove the very strong growth in the quarter.

As you talk to dealers do you also notice a benefit from new products or maybe just a change in the overall consumer preference for the Harley style type of American bikes, or are there some other trends in the consumer that are driving the sales as well?

It's everything.

There's no doubt that we have responded to the European market with some of the products that are more conducive to their riding styles.

V-Rod is a good example.

A liquid-cooled motorcycle that is a cross between a custom motorcycle and a performance motorcycle.

The riding styles in Europe are more aggressive. 75% of the bikes sold in Europe are performance bikes, which kind of includes our cruisers and touring bikes and the rest of the market.

So this suits the riding style and, in fact, 30% of the bikes, V-Rod, liquid-cooled bikes that we manufacture, go to Europe, where as Europe only accounts for 9 to 10% of our total sales.

Shows that when we respond to the market -- some of these product that responding to that market, again, when you relocate the dealers into same cities, better locations, better businessmen, and start promoting the product and now that they're selling more bikes, fewer dealers, they are more profitable, they can afford to do those things, to have their own rallies and events and promotes.

Then we just had some great media coverage with the new products we have been coming out with, in particular with the Twin Cam 96 and the 6-speed transmission.

Before, with the European market being predominantly performance bike market, anything other than a performance bike didn't any coverage.

Now they're beginning to realize, I think V-Rod kind of sucked the motorcycle press in, then they started riding some other Harley's, finding out that we have an acceptable product, even if it's not a V-Rod, even if it's a Softail or a touring bike.

With that positive coverage that has also benefited.

So it's kind of continued to gain momentum.

Thank you.

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

Good morning, guys.

My congratulations as well.

Thank you.

Couple questions.

Jim, you talked about share repurchase being used to augment some earnings growth.

Of that long-term guidance, could you just characterize for us what your expectations are for share repurchases over the next few years?

Second question, do you know -- have a recent or updated statistic for us on what percent of new bike purchases are tied to the sale of a used motorcycle, and with the new 96-cubic-inch engine and tranny in the market what are your expectations for used bike pricing, and could that have any impact on new product sales looking forward?

Well, back to share repurchase and share repurchase, we have never given any signals of what our forecast is on share repurchase.

We have been in the market for share repurchase on an opportunistic basis.

Whenever the market is unappreciated, and it's been awhile, so we've been in the market for a while, two years, unappreciated our share price, we've been in the market.

So it's kind of hard to forecast that, but to the extent that we've got good value and there's no doubt that as a CEO I think our stock price is significantly undervalued with our track record, our performance, our brand, our dealer network, and our opportunities to continue to grow.

So that being said, we will, as Tom pointed out, we'll continue to look at share repurchase as a way to enhance shareholder value.

We're not going to give a forecast on that, though.

On new bikes versus used bikes, I mean, there's no doubt, again, I pointed out before when you come out with a significantly enhanced new bike, which was basically three-quarters of our product line, or 80% of our product line when you talk about all the big twins with new engines and 6-speed transmissions that creates a seed value difference between the new product and used product.

We certainly did not increase the new product significantly, so when there's a value difference, the market, if you're not changing the new price, then the value of the old ones are reduced.

That is not any different than when we came out with the Twin Cam 88 or the Twin Cam 88 balance engine in '99 and 2000.

We saw the same thing.

It's just a great opportunity for people to get into the market.

We're seeing that happen.

The prior question was how many of those are trade-ups versus the new customers.

It's too early to tell.

We don't have that data.

But we see this as some great reasons for competitive bike riders.

People have been looking for a reason to get in the market, and certainly people to trade up to all the enhanced product we've came out with.

So we see it as a big opportunity.

There's no doubt that the value of the '06s has been changed somewhat.

Not dramatically.

We did not see a dramatic change in '99, 2000 with the new engines.

We don't plan to see a dramatic change and haven't seen one at the moment right now.

Thank you.

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

Hi.

Just two quick questions.

First of all, I didn't know if I heard you discuss why inventory was up on the balance sheet?

And then secondly, I'm just trying to get comfortable here.

I hope this question doesn't sound rude, because it's not meant to but I'm trying to get comfortable with the fact that in the past when we have gotten less information, it hasn't been a good thing.

If we think back about when we couldn't get the monthly industry registrations and then the Harley monthly industry registrations because you petitioned the MIC, it seems like that's really when the inventory started to build.

So I think there's probably a lot of people who, when you say now you're not going to give guidance that you used to give, will lead -- that will lead them to feel that that's because the guidance was going to get worse.

I'm just hoping you can say something to make people feel -- not feel that way.

Thanks.

Dean, a couple things.

On the balance sheet, the inventory question.

Inventory on the balance sheet is up for several reasons, including in August we brought in-house our Australian dealership, our Australian distributorships.

We picked up some inventory with that transaction.

Also, to feed our international strong retail growth, inventory in our international distribution channel is also up to account for part of that.

We have a little higher finished goods inventory in the U.S. as well.

Then we also in our MotorClothes division have higher inventory as we get ready for the seasonal period of the holidays.

So it's a combination of several things that caused the balance sheet increase in inventory.

I'll take the guidance question.

Again, if you went back in history on MIC going to a quarterly information, we had gone to the MIC and said monthly information is very hard to compare month to month because of a different number of days, and different holidays from year to year, and it was creating great volatility, especially for Harley-Davidson as a public company.

And they went to quarterly.

At the same time you alluded that to inventory.

We had said all along, we have never disguised it, but inventory will grow from year to year.

In fact, we said our objective back then was to continue to create some market pressure so we got closer to the MSRP.

So that was not a move to disguise current inventory.

We were straightforward saying we were attempting to grow inventory.

We do know that a lot of the analysts out there do do their own surveys.

The focus should be on retail sales.

That is what the surveys that the sell side analysts are doing focuses on.

That's what the business is based on.

Our focus should be on retail sales.

So at the end of the day, again, I think that coming off this quarter shows that, number one, going into this quarter, the first half of this year, latter part of the last year, it showed what benefit a great new product did, our '06 model year took off.

We showed that with this quarter, popularity of our current model year, we are doing the right things, in terms of the market, the dealer network, and outreach programs, and so, I mean, if we were coming out with a bad quarter, taking away guidance, I would say that there would be a concern.

We are coming out with a great quarter and we were limiting or taking away the focus on wholesale and putting the focus on the bottom line, sustainable earnings growth, where, at the end of the day that's what the shareholders are buying into, and that's the most important thing here, is what our major shareholders are looking at.

That's why our change is, and I think for the most part may make it a little more difficult for some of the sell side to create a model, but again, we will help on big swings on the next quarter, because I think that's where we see our greatest volatility.

If we're not trying to create volatility, that's the reason why back in -- several years ago MIC went from monthly to quarterly to reduce volatility.

We're not trying to create volatility.

We'd never want to do that.

That's why we'll do one month going out so that people are kind of with the same information.

But again the focus should be on the bottom line of the P&L, and also based on the fact that we are doing the right things, and we are leading, defining the motorcycle industry and certainly growing fast in the industry.

We have driven the growth for the last more than a decade.

We plan to continue to do.

So hopefully that gives you a little insight.

Thank you.

And with that, I want to thank everybody for your time on this phone call this morning.

I appreciate your interest and your investment, obviously, in Harley-Davidson.

I'll now turn this 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 7865066 followed by the pound sign until October 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, and have a great day.

Thank you.

This does conclude today's teleconference.

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