Harley-Davidson Inc (HOG) 2006 Q4 法說會逐字稿

Good morning.

My name is Melissa, and I will be your conference operator today.

At this time I would like to welcome everyone to the Harley-Davidson fourth 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, DIrector of Investor Relations.

Sir, you may begin your conference.

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

Over the course of the next hour we will provide comments on our fourth quarter and full year performance, Harley-Davidson motorcycle retail sales and inventory at our dealerships, guidance, and key areas of focus that will drive long-term 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 highlights of the quarter and the year.

Tom will be followed by Larry Hund CFO and Acting Chief Operating Officer of Harley-Davidson Financial Services who will talk about the performance of that business unit.

Jim Ziemer will wrap up sharing his comments on the quarter, the year, our current motorcycle retail environment and outlook for the future.

We will then open up the phone lines for questions.

Before we begin I would like to remind you 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 8248524, followed by the pound sign.

The recording will be available through January 25.

It is also being webcast live on www.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 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 Incorporated, Jim Ziemer.

Good morning.

Welcome to our fourth quarter and year-end conference call.

If you've had a chance to see our press release this morning, you know that Harley-Davidson had a good quarter, highlighted by growth in fourth quarter revenue, shipments, net income, and earnings per share.

Worldwide retail sales of Harley-Davidson motorcycles were up 6.4% for the quarter, driven by strong international retail sales.

For the full year, 2006 was another solid year for the Company as well.

Shipments of Harley-Davidson motorcycles increased 6.1%, and worldwide retail sales of Harley-Davidson motorcycles increased 8.5%.

To put retail sales growth in perspective, this growth rate was roughly equal to the retail sales growth rate experienced in 2003, the year we celebrated our 100th anniversary.

Our total year performance was also solid, with revenue, net income, and earnings per share all increasing compared to the prior year.

This type of performance is only possible with exceptional employees, suppliers, customers, and the best dealer network in the world.

I sincerely thank them for their hard work and commitment to our success.

As I looked at 2007 and beyond, our challenges is to make sure that the company and all these stakeholders, as well as our investors, continue to enjoy success.

I will discuss my thoughts on the business later in this call, but first I'd like to turn the call over to Tom who will discuss in more detail the financial performance of the quarter and the year.

Thanks, Jim.

Good morning, everyone.

As we look at the fourth quarter, we are pleased with the financial results and the excitement that our 2007 model year products have generated worldwide.

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

First, revenue was $1.50 billion, up 11.9%.

Net income was $252.4 million, up 9.7%.

Earnings per share were $0.97, up 15.5%.

Worldwide retail sales of Harley-Davidson motorcycles totaled 57,335 units, up 6.4% from the year-ago period.

And we bought back 2.1 million shares of our common stock at a cost of $151 million.

Let me turn specifically to our motorcycles and related product segment.

Wholesale Harley-Davidson motorcycle shipments in the quarter grew 6.0% to 92,848 units, while revenue from motorcycles was up 12.5% to $1.22 billion.

Average revenue per Harley-Davidson motorcycle increased approximately $750 compared to the fourth quarter of last year, primarily due to mix between families, which I will discuss more in a minute.

Wholesale shipments of Harley-Davidson motorcycles to our U.S. dealers were 74,492 units.

This shipment volume is virtually flat with the 74,383 units shipped in the same period of 2005.

International shipments of Harley-Davidson motorcycles for the fourth quarter were 18,356 units, up 39% compared to the same period in 2005.

For the full year of 2006, international shipments grew 21.5% compared to a U.S. shipment growth rate of 2.5%.

This resulted in international shipments representing 21.8% of total wholesale shipments compared to 19% in 2005.

This year-over-year increase in international shipments, as a percentage of total shipments, is consistent with our expectation that international growth will continue to outpace domestic shipment growth.

Now looking at product mix, on a quarter to quarter basis, both Custom and Touring motorcycles increased as a percentage of shipments during the fourth quarter while Sportster model shipments decreased.

The percentage of Touring motorcycles shipped in the quarter increased to 35.0% compared to 33.2% in last year's fourth quarter.

Custom motorcycle shipments for the quarter were 48.0% compared to 43.7% in last year's fourth quarter.

This increase in custom mix was driven in part by an increase in our CVO, or Custom Vehicle Operations shipment.

CVO motorcycles are limited production Harley-Davidson motorcycles enhanced with parts and accessories resulting in a very high-end custom motorcycle.

The increase in the shipments of these CVO motorcycles in the fourth quarter, a higher Touring mix, and year-over-year pricing, were the primary drivers of the revenue per unit increase the Company experienced in the fourth quarter compared to the same period in 2005.

For the full year of 2006, Touring motorcycles represented 35.4% of the mix for the year, compared to 33.5% in 2005.

Custom motorcycles mix increased from 45.2% to 46.3% for the year.

Shipments of Sportster motorcycles, which tend to be more seasonal at retail, represented 16.9% of motorcycle shipments for the quarter compared to 23.1% last year.

If you recall, the particularly strong mix of Sportsters in the fourth quarter of 2005 was a result of the launch of the Sportster - 1200 low during that quarter.

Sportster mix for the full year decreased from 21.3% in 2005 to 18.5% in 2006.

Now, turning to Parts and Accessories and General Merchandise, Parts and Accessories and General Merchandise delivered positive results in the quarter as well.

General Merchandise had fourth quarter revenue of $70.6 million, up 16.7%, or $10.1 million over last year's fourth quarter on strong apparel sales.

Parts and Accessory revenue was $179.2 million, up 5.5%, or $9.3 million compared to the same quarter last year.

For the full year, general merchandise revenue was $277.5 million, a 12.0% increase over 2005, and Parts and Accessories recorded revenue of $862.3 million, a 5.7% increase.

Now let's turn to margin.

You will notice that growth margins for the quarter were 38.0%, down from 38.3% in the same period in 2005.

During the quarter, factors that negatively impacted margins were higher manufacturing costs, primarily driven by higher raw material charges.

The company experienced increases in material surcharges of $6.1 million compared to the fourth quarter of 2005.

Gross margin for the full year increased to 38.5% from 38.2% in 2005.

This increase was driven by higher pricing, a richer product mix, and favorable foreign currency exchange rates.

Manufacturing costs were adversely impacted by higher material surcharges, which were up $13 million compared to 2005.

Operating margins in the fourth quarter of 2006 decreased to 22.8% from 23.4% in the year-ago quarter.

For the full year of 2006, operating margins increased to 24.4% from 24.3% compared to the prior year.

Operating margin growth in 2006 was affected by higher warranty costs for both the quarter and on a full-year basis.

The majority of the warranty cost increase was driven by two factors: First, during the year, we gained increased visibility of second-year warranty expense with our two-year warranty, which was introduced with the 2004 model year.

Based on higher actual claims, we have adjusted our second-year warranty reserves for the motorcycles affected, which are primarily 2004, 2005, and 2006 models.

Second, we announced a number of product programs to address customer concerns and promote customer satisfaction.

With a repurchase rate of 90%, we are determined to keep our riders happy.

Looking forward to 2007, we expect warranty expense to be less than it was in 2006.

Turning to the tax rate for a moment, you will notice that the Company's fourth quarter effective income tax rate was 35.1%, compared to 35.5% in the same quarter of last year.

This decrease was primarily due to the recognition of the federal research and development tax credit reinstatement.

The Company's full-year effective tax rate in 2006 was 35.8%, compared to 35.5% for the full year of 2005.

This increase can be primarily attributable to a relatively smaller benefit of the research and development tax credit and slightly higher state income taxes.

Net income for the fourth quarter was $252.4 million, an increase of $22.4 million, or 9.7% compared to the fourth quarter of 2005.

Diluted earnings per share for the fourth quarter were $0.97, a 15.5% increase, calculated on a weighted average share base of 259.2 million shares, compared to 274.8 million shares in the year-ago quarter.

For the full year, net income was $1.04 billion in 2006, an increase of 8.7% over the prior year.

Diluted earnings per share were $3.93 for the same period.

A 15.2% increase compared to 2005.

The Company experienced strong operating cash flow in 2006 with operating cash flow of $762 million.

This compares to $963 million in 2005.

This decrease can primarily be attributed to HDFS completing only three securitization transactions in 2006, compared to four in 2005.

For the full year of 2006, depreciation was $214 million, and capital expenditures were $220 million.

In 2007, we expect capital expenditures in the range of 300 million to $325 million.

This anticipated increase compared to 2006 is primarily a result of expenditures related to our recently announced powertrain facility expansion plans in Milwaukee and the construction of the 130,000-square-foot Harley-Davidson museum and restaurant, which are scheduled to open next year.

We continue to believe that share repurchases are good use of cash and an efficient way to return value to our shareholders.

During the quarter, the company continued its share repurchase activity, repurchasing 2.1 million shares for $151 million.

For the full year of 2006, the Company repurchased 19.3 million shares of its common stock for a total cost of $1.06 billion. 2006 represents the second year in a row the Company has repurchased over $1 billion of its common stock.

As of December 31st, 2006, there were 22.8 million shares remaining on two board-approved share repurchase authorizations.

An additional board-approved authorization is also in place to offset option exercises.

For those of you taking a close look at our balance sheet at the end of 2006, you will notice a change to long-term assets, post retirement healthcare benefits, and other long-term liabilities and shareholders equity.

These changes between the third and fourth quarters of 2006 are the result of the requirement to adopt FAS 158, a new accounting standard for pension and post retirement plans as of December 31st, 2006.

This new accounting standard requires companies to recognize their total retirement plan liabilities in their balance sheet.

As a result of adopting this new accounting standard, retirement liabilities of $410 million were recorded with a corresponding charge to equity, net of tax, totaling $254 million.

Now, turning to shipments, for 2007, as I look forward, our 2007 forecast calls for annual retail sales of Harley-Davidson motorcycles in 2007 to be equal to or greater than our annual worldwide wholesale shipments in 2007.

So to be clear, on a worldwide basis, we anticipate that retail inventory at our dealerships will be flat or slightly lower at the end of 2007 compared to the end of 2006.

Looking specifically at shipments for the first quarter of 2007, we plan on shipping between 82,000 and 84,000 Harley-Davidson motorcycles.

This compares to 79,506 units shipped in the first quarter of 2006.

Now that we have covered the motorcycle segment financials and shipment guidance, I will turn it over to Larry Hund to discuss the Harley-Davidson Financial Services results for the fourth quarter.

Thanks, Tom.

Harley-Davidson Financial Services is delivered fourth quarter operating income of $47.6 million, an increase of $8.2 million, or 20.7%, compared to last year's fourth quarter.

This increase is primarily due to higher wholesale and retail net interest income.

HDFS is the heavyweight motorcycle finance market leader in the U.S.

And in 2006 our retail market share in the United States related to new Harley-Davidson motorcycles grew to approximately 48.5% compared to 45% for 2005.

First, this increase reflects the high level of service that HDFS continues to provide to Harley-Davidson dealers and riders.

HDFS significantly enhanced its web-based credit application and now receives the majority of credit applications electronically.

In addition, our capabilities to make automated credit decisions have dramatically increased.

The benefit to our dealers and customers is that the vast majority of credit decisions are made in less than 15 minutes, getting current and potential riders on Harley-Davidson motorcycles faster than ever before.

Furthermore, in an increasingly competitive lending environment, HDFS continues to develop innovative financing programs that meet the needs of our dealers and riders.

Turning to portfolio quality, the 30-day delinquency rate for managed retail motorcycle loans at the end of the fourth quarter was 5.18%, compared to 4.83% for the fourth quarter of 2005.

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

We believe the increase in the delinquency rate is consistent with delinquencies for other types of consumer debt.

As a result of this increase, HDFS has increased its collection resources and enhanced its abilities to locate past-due borrowers.

Losses on managed retail motorcycle loans for 2006 totaled 1.41% compared to 1.29% in 2005.

This increase in 2006 reflects continued pressure on recovery values for repossessed motorcycles.

To be expected, given more availability of new Harley-Davidson motorcycles in the marketplace and the high-value changes made to the 2007 models.

Looking ahead to 2007, we believe that HDFS is taking the right steps to manage through this challenging and competitive consumer finance environment.

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 moments giving you my perspective on the past year, the current retail environment, and the challenges and opportunities we face looking forward.

As I evaluate 2006, we demonstrated once again that we are a strong and growing company.

We delivered our plan for Harley-Davidson motorcycle shipments as wholesale shipments to our worldwide dealer network increased by 6.1% in 2006.

This compares to 3.7% shipment growth in 2005.

At our dealerships around the world, retail sales of Harley-Davidson motorcycles increased 8.5% in 2006, compared to 6.2% growth rate in 2005, and a 6.0% growth rate in 2004.

In the U.S., retail sales grew 5.9% during 2006, and retail sales grew 18.6% in our international markets for the year.

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

Our financial results for the year were solid as well, continuing a long track record of revenue, margins, and earnings growth.

The past year was not without its challenges.

We continued to work with our dealers to fine-tune our allocation system for new motorcycles, in order to improve our ability to have the right motorcycles in the right dealerships at the right time.

As Tom mentioned, warranty expenses were atypical for this past year.

Once again, we experienced higher raw material surcharges.

But even with those challenges, we continued to grow value by satisfying customers and delivering great financial performance.

As we look to 2007, we will continue to work closely with our dealers to collectively grow our business.

First, let's look at retail sales.

We expect that the U.S. retail sales of Harley-Davidson motorcycles will continue to grow, and that our international markets will grow at a faster rate than the U.S. market.

In the U.S., our retail sales growth rate was 5.9% in 2006.

Continued growth will come from a combination of our core riders, competitive riders, and a currently underserved population of Harley-Davidson prospects and dreamers, including minorities, young adults, and women.

You have often heard me talk about the increased resources we have allocated to the new rider outreach, and we will not let up on the throttle in 2007.

As the riding season begins in earnest, Harley-Davidson employees and our dealers will be sponsoring or attending more rides, rallies, and nonmotorcycling events than at any point in time in our history.

Furthermore, we believe that our emphasis on the international market development and fulfilling demand in these markets holds tremendous untapped potential.

The growth rates in our major international markets over the past couple of years confirm these strategies are already paying off.

For Harley-Davidson, retail motorcycle sales drive wholesale shipments.

In these wholesale shipments in turn drive company growth.

As Tom mentioned, 2007, we expect the number of Harley-Davidson motorcycles sold at retail to be equal or greater than the number of wholesale motorcycle shipments to dealers.

Let me also take a moment to talk about inventory.

Dealers' motorcycle inventories increased during the fourth and first quarters.

The support the heavy spring retail sales.

Then, during the peak selling season, retail inventories are reduced to the lowest point just prior to the introduction of each new model year.

You can see that our dealers' inventory grew this past fourth quarter.

And we expect it to grow further in the first quarter, again, to prepare our dealers for the motorcycle sales volume that occurs every spring.

We have also talked repeatedly over the past several years that our goal has been to improve the customer experience by reducing wait times and by bringing selling prices closer to the MSRP.

While this has been successful, it has resulted in more seasonality in our dealer sales patterns during the winter months.

As a result, our U.S. dealers' retail sales growth continues to be concentrated in the second and third quarters.

Over the past three years, the percentage of our new motorcycles sold between April and September has increased from approximately 60% to 63%.

While getting the inventory in the right place at the right time has been challenging, we have made inroads through changes in our allocation system.

But it's still not where we need to be.

Furthermore, the motor company recently increased the amount of wholesale floor plan subsidies it provides its dealers.

Going forward, we will continue to work with our dealers to help them manage and adjust to this more seasonal nature of their business.

Let's take a look at pricing.

I mentioned earlier, one of our goals has been to bring retail selling prices of new Harley-Davidson motorcycles closer to MSRP.

After looking at our data, I can tell you we are very close to where we want to be.

On average, it it appears our dealers are selling 2007 models at or slightly above MSRP.

And our data does suggest that dealers are discounting a few remaining new 2006 models in inventory.

This should not be surprising, given the significant changes made to the 2007 model year.

Coupled with the relatively small price increases we placed on these models.

We've also seen a moderate decline in the prices of our used motorcycles in the marketplace.

This, again, is the function of exceptional value we added to the 2007 models with main mall price increase in MSRP.

Now I'd discuss the retail environment, including inventory at dealerships and the selling prices of our motorcycles.

I want to spend a few minutes reviewing my thoughts on the three strengths that I previously outlined, which I believe will continue to sustain Harley-Davidson's long-term growth and create value for the shareholders as we look to the future.

These three strengths are market leadership, operational excellence, and cash generation.

First, let me talk about market leadership.

For 2006, the data available indicates we have gained market share in all of our major markets, defined as heavyweight motorcycles with engine displacements greater than 650cc.

This includes the United States, Canada, Europe, Japan and Australia.

Retail sales also increased in many of approximately 45 additional countries where our motorcycles are sold.

And in addition, in 2006, we also opened full-service dealerships in China and Thailand.

We continue to be the leader of the heavyweight motorcycle industry with more than 49% annual market share in the U.S. and more than 30% annual market share worldwide.

As we mentioned earlier, we still see plenty of opportunities for growth here in the U.S. and internationally.

We will continue to lead and define the heavyweight motorcycle market with exceptional new products and services designed to appeal to different riders.

In addition to our world-famous motorcycles, there are other important factors that drive our market leadership.

Harley-Davidson provides a unique experience beyond the motorcycles themselves, with organized rides, rallies, and member in HOG, that's Harley-Davidson Owners Group, which has more than a million members worldwide.

An extensive line of Parts and Accessories, MotorClothes apparel, and services, like rentals, organized tours, and our riders edge learn to ride program.

Motorcycling is about individuality, and nobody gives riders the options for expressing themselves like Harley-Davidson.

In the Harley-Davidson dealer network, roughly 1300 strong worldwide is our partner in fulfilling the high quality ownership experience expected of a premium brand.

The second strength you have heard me talk about before is operational excellence.

Our focus on operational excellence will continue to be extremely important throughout the Company in 2007.

We have come a long way of integrating manufacturing efficiencies and automation into our operations.

But we also see many more opportunities for improvement. 2007, we will continue our internal focus on designing costs out of the product, and on investing in quality and efficiency and working with our employees and suppliers as business partners.

All that's factors and more have contributed to margin improvement during the past decade, and we believe they will continue to do so in the future.

Finally, this business generates significant amounts of cash.

Other than the debts that HDFS incurs to operate its lending facilities, Harley-Davidson is debt-free.

This strong free cash flow has allowed us to fund organic growth and has allowed us to significantly increase shareholder value.

First, we paid out -- excuse me.

We paid out $213 million in dividends in 2006, an increase of 22.5% compared to 2005.

In fact, we have increased the dividend every year since 1993.

Second, this cash flow gives us the ability to repurchase shares of our common stock.

As I lack back over the past five years, we have purchased over 57 million shares of our common stock for a total of just shy of $3 billion. 40 million of these shares have been repurchased in just the last two years alone.

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

This certainly is a great business.

So in summary, we believe that the worldwide demand for our motorcycles in the Harley-Davidson experience remains strong and will continue to drive year-over-year revenue growth.

Our world-class products and manufacturing capabilities will continue to deliver margin improvements.

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

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

We expect solid revenue growth, margin improvement, and the benefits of strong free cash flow will drive this earnings growth.

And now, I will open it up for questions.

Thank you. [OPERATOR INSTRUCTIONS].

Your first question is coming from Tim Conder with A.G. Edwards.

Thank you.

First of all, congratulations on a very good year, gentlemen.

Thank you.

Couple things.

Tom, could you clarify, in relation to your margin comments, a couple of things?

The dollars that you cited, I think the $6 million, the $13 million on material surcharge, those are incremental year-over-year surcharges and not the totals?

That's right, Tim.

That's the incremental year-over-year increase in raw material surcharges.

Okay.

And then from a ForEx perspective, you said there was a benefit.

Could you give us either dollar benefit to sales, gross margin operating both for the quarter and the year.

Then on the warranty could you give us a little bit of color as far as magnitude in the quarter?

I know it's been an issue throughout the year but I think you guys had commented in the past that you thought you kind of had that behind you at the end of the third quarter.

I know you said that here again, that it should be down year-over-year, but just maybe a little additional color on that.

Sure, Tim.

So on the first question you asked about currency, in the quarter we had a positive impact of about $6 million on company EBIT from a foreign exchange gain.

Regarding warranty, clearly we're disappointed with the warranty performance during the quarter, and as I mentioned, it really came from a couple major items.

As we've taken a closer look and gotten more experience with that second-year warranty that we introduced in 2004, and based on that additional experience and looking at the claims coming in, we increased the reserves on that.

To quantify it for you, quarter over quarter -- or year-over-year, you're probably looking at about a $40 million increase in warranty for the year.

So last year, you were running about $37, 38 million, this year it's about $79 million.

When I look at warranty, it is a big increase for the year, but our focus in warranty now, it's more than just making sure the motorcycle is running well.

It's really about keeping customers satisfied and happy and focusing on that customer experience.

And we have been a lot more proactive this year in going out and really addressing warranty on a broader base and dealing with it on a customer satisfaction issue as well.

Okay.

And, Tom of that incremental $40 million in warranty, how much was that guesstimate related to the, quote unquote, catch-up over the past several years?

We really won't break it out any further than that.

The increase is just over $40 million year-over-year.

Okay.

And then one other question here.

Substantial amount of stock issuance in the quarter.

I guess that's the majority of options being exercised.

Virtually the amount for the whole year almost.

And just to clarify, on your share repo related to the options, that's on an annualized basis, not necessarily on a quarterly basis, correct?

Can you repeat the second part of the question?

Two share repurchase authorizations.

One to return capital to the shareholders, one to offset stock option issuance.

And in the quarter you had substantial amount of stock option issuance in the quarter, I think about $115 million.

So I mean, when you made the comment before, you're going to offset all the options, that's on an annualized basis, not necessarily a quarterly basis, is that correct?

Okay, Tim, first on the share repurchase, we actually have three authorizations outstanding still.

There's the two approved by the board just as opportunistic share repurchase.

That equals the 22.8 million shares.

Then we also have the additional authorization to offset any option dilution.

So there's actually three of those in play.

Correct.

And as for issuance of shares, that was just option exercises during the quarter.

For the year it's primarily during the quarter that that occurred.

Okay.

Thank you, gentlemen.

Thanks, Tim.

Thank you.

Your next question is coming from Craig Kennison with Robert W. Baird.

Good morning, gentlemen.

First question has to do with your tremendous growth internationally what.

What do you think explains that growth of 29% versus the flat U.S. market?

I mean, every market is certainly unique, and there's no doubt that the U.S. experienced double-digit growth back in the mid and late 90s and early 2000s, and with that we virtually had to -- "ignore" is a bit harsh, but we did not pay significant attention to our international markets.

We were trying to keep our production growth in the U.S. to not lose too much market share in the U.S.

Now we're back to more normalized growth.

We have been able to in the last several years, not just this year, but the last several years invest in these markets, whether it be working with the governments and looking at regulations in Europe.

In the case of Europe, we're acquiring some independent distributors, this year we also acquired our Australian distributors.

So we have been rationalizing the dealer networks, especially in Europe.

That's not one market, but in many countries.

And we first -- we started looking at our dealer network and weeding out some of the weaker dealers and bringing in some stronger dealers, better businessmen, better cap-wise, better located and larger dealers in major markets.

All those supported by some great products and some infrastructure changes have helped all of the markets.

And that's why we see great growth in Australia, Canada, Europe.

I mean, we have been able to support these markets, and these things that we have been putting in place have been over the last several years.

So, I mean, we saw great growth, double-digit growth in all our international markets last year.

We've seen it again this year.

This is the result of things that we have been putting in place in the last three, four years.

It just didn't suddenly happen.

Thank you.

Then with respect to the product mix, the strength in the CVO market in particular, is that mix sustainable, or do you think that might revert back to the norm soon?

Craig, quarter after quarter, mix changes for various reasons.

CVO in this quarter was very strong for various reasons.

I would think if you go back to 2007 you are going to go back to a more normal mix.

So, again, a lot of it varies just based on production schedules and so forth but I would expect some of that to normalize next year.

As Tom pointed out earlier on CVO, these are limited production bikes, so the absolute number we are going to produce in any one year is pretty much dictated at the beginning of the model year.

It's just that there are some changes in production schedules, as Tom pointed out, and that's really what dictates the differences between quarters.

The last question, dealers seem very satisfied with the model year 2007 introduction but they seem to wish you had raised prices a little more to give room on the '06 product.

Might you consider a more significant price increase when you look at the '08 model year?

We're not going to talk about pricing strategies before we talk to our dealers.

We wouldn't fuel any speculation.

There's no doubt that we've heard that from different dealers, that they wish there was a big price differentiation, but it's always a balancing of factors.

At the same time, you don't want to draw -- that's pricing against yourself on old model years.

At the same time you don't want to cause a big gap between you and your competition.

So it's a balancing act that we continually go through as we put together pricing strategies.

Those exercises we continue to do year in and year out.

Great.

Thank you very much.

Thank you.

Thank you.

Your next question is coming from Robin Farley with UBS.

I wonder if you could just provide a little more color.

When you look at the gross margins, I understand the higher material surcharges.

Even when you back that out, looks like margins would have been closer to flat.

I guess that's surprising given the Touring mix is so much higher, the Sportster mix is so much lower.

Seems like maybe there's something else impacting margins.

Robin, it's Tom.

Again, on any one quarter, as you look at changes in margins, whether it be operating or gross, in any one quarter a lot of different things can drive that, whether it it's mix or price or raw material charges or production issues or so forth.

So what I really focus on is looking on a full-year basis, our gross margin still improved 0.3, so we still had good gross margin improvement, still getting good manufacturing efficiencies out of our production facilities as we go to more automation and new paint technologies and a lot of capital investments we're making, we're still getting good payback and good efficiencies.

Work with our supplier base to continue to drive cost efficiencies and our relationship nature with our suppliers, now we integrate them into our design process, continues to pay off good benefit.

So overall, yeah, for the quarter I think we're a little disappointed but I think we still continue to make good gross margin improvement and we still see opportunities to improve gross margin as we look forward.

is there any sort of one or two things, because it looks like factors outside of the raw material surcharges maybe had a bigger negative impact, and maybe that was not just one item.

Obviously it wasn't just one item, but could you give us a sense of maybe what two or three other big items were year-over-year that weren't there last year?

Really, Robin, raw material surcharges make up the majority of it for the quarter, then again it's many things and a bunch of small things, pluses and minuses.

Okay.

I agree.

Then it looks like in about two weeks the union contract at the York plant expires.

Is there -- will we get some color on that, an extension of that or renewal before that expiration date, do you expect?

Robin, Jim Ziemer.

We're right in the middle of negotiations right now.

That contract does expire on February 2nd.

And because we're in negotiations, we could not comment on what those discussions are until there would be a vote and ratification.

All right.

Great.

Then the last question is, when you look at kind of percent of sales that -- where customers take you up on financing promotions, like the 0 down and some of the other financing promotions, can you quantify a little bit how that may have changed in '06 versus '05, just in terms of whether it's percent of sales is better taken up through the promotion or percent of contracts, something like that?

Robin this is Larry Hund.

I would say that has increased a little bit this year.

As you know, the landscape in motorcycle finance is very competitive, and many of our competitors are out there with certain promotional offerings.

Obviously we have promotional offerings to meet that competition, and in addition we have a program where dealers can pay to run their own promotion for customers.

So I would say it's up a little bit this year over where it was a year ago.

Any kind of ballpark on what that increase looks like?

A little bit tough to say.

Like I say, it tends to vary a little bit by season.

Probably a little bit more in the first and fourth quarters when you aren't in the middle of the main riding season, then obviously it goes down a little in the second and third quarters.

Even on a full year basis, I certainly wouldn't focus on just Q4, when the slower season may be more promotional, but on a full-year basis that would sort of factor that in, the increase, is it kind of 10% or 25%?

You know what, I don't have that at the present time.

It has not been that dramatic.

I would say promotions have been a factor in the marketplace for several years.

All right.

Thank you very much.

Thank you.

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

Good morning.

Good morning, Bob.

Is it possible to get a count at year-end '06 how many European dealers you have versus the year before?

In Europe, Bob, I believe we're right around 360 dealers or so.

Year-over-year, that's not a big change in numbers.

We really haven't changed the number of distribution points in Europe significantly over the last year.

It has come down, if you'd measure, say, 2003, but not significantly, because first to come down, we brought some back up, so maybe at one time three years ago we were at maybe closer to 400.

I don't have the exact number as Tom does but it's probably tip range of 360, 370.

How many dealers in the last year or two are different than what they were when you started your program of upgrading the dealership system?

In the last year, Bob, our dealer network in Europe has stabilized quite a bit.

As Jim said, if you go back a few years, I think there were a number of changes in markets, and it was part of the strategy that our European team ran really to upgrade the quality of the dealer network.

We have made a lot of changes in Europe to have a better product and stronger product and more relevant product for the European marketplace.

We have done a lot of work with our dealers and their capabilities, and a lot of the strength you're seeing in that European market just comes from that strategy of now working with our dealers over the last couple of years and getting the right profitability metrics and increasing the number of bakes that each dealer is selling and getting them to the right profitability level so they can invest appropriately in their business.

So at this point, we're more at a stabilized level in Europe as we look forward, and now it's just a matter of working with our dealers and continuing to improve their capabilities.

Along with the response to a similar question earlier is that it's not this double-digit growth is not responding to something we did last week.

It's something we have been putting in place for several years, and case in point almost to your question, I can't tell you about Europe, but in Germany, about two years ago, we probably changed out about 50% of the dealer network, and, you know, brought it down and added some.

So I mean, some countries -- by the way, Germany was our largest market in Europe, it's been quite significant.

Very good.

Tom, did you mention, or did I miss, did you give a projection for the tax rate this year?

No, I didn't give a projection looking forward, but, you know, it will be in the ballpark or substantially similar to where it was this year.

Okay.

And the last question, in The Wall Street Journal this morning there was an article about two-wheelers, not just for fun.

Makers pitch basic transportation.

Smaller bakes, does that market have some or any appeal for you?

What we have always concentrated on is being the most popular motorcycle company in the world.

If there is profit in a market, as we continue to get bigger, we'll look at it, but certainly in our past, when we were much smaller, small displacement, you need some real -- it's got to be big.

You've got to do it in volume You can't do it in small quantities.

So we'll continue to look at different things, but that's probably not high on the list at the moment.

Very good.

Thanks.

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

Thanks.

Good morning, everybody.

Couple questions for you.

First, I was a little bit surprised to see the Touring mix increase at the same time as the exports increase to such a great extent because I have always thought that the touring bakes were a much more popular bike in the U.S. than internationally.

Could you maybe give us a little bit of color around that?

As for touring bikes, touring bakes are slightly more popular in the U.S., but the difference between the two, each market is certainly different and unique.

And depending where you're going, but certainly the touring bike product line is popular in all our international markets, in particular, I mean, in Japan, which may be counter to what would you think, but it is certainly a status symbol, so they try to acquire -- or aspire to the best in any product.

Europe is a little lower in the touring bikes.

Europe, if you look at that market, that's more of a sport performance bike market, and therefore, their interest is not that high in touring, at least as not as high as in other countries.

But overall the differences we're talking about are not dramatic.

So our increase in international sales wouldn't have a dramatic impact on our touring bike sales.

The other thing, Ed, to take a look at, the U.S. market, touring market, is still one of the faster growing segments of the markets.

And if you think back to our 2007 model introduction with the bigger engine and six-speed transmission and the excitement around that, that also plays a role in the touring mix.

Great.

I also had a couple questions on the finance business.

I understand some of the things that you're doing internally to help grow that business and continue to gain share, but the growth rate for the quarter was surprisingly high, to me, anyway, considering that there wasn't a securitization and that the delinquencies and losses were up.

Could you maybe help me understand that a little bit better?

Well, as we said on the call, really that increase was driven by growth.

Obviously we had very strong retail market share.

Our retail market share for the year was 48.5%.

So while we didn't sell those receivables, obviously we had the benefit of the interest income from them being outstanding.

We also had growth in our wholesale receivables.

We had growth in the number of dealers using us for wholesale finance, you know, as well as the overall outstandings increasing.

So those were really the primary increases for the quarter.

Okay.

And then one last question, if I could.

To what extent do you think that the international sales are benefiting right now from a weaker dollar and on -- to kind of piggyback off that do you have any plans for any changes in pricing into international markets to maybe adjust for that?

We spent a lot of time looking at the exchange, as we had kind of mentioned, I think, two years ago we adjusted for change in Europe and the impact in the euro, and that, at that time, did have some positive impact.

We continue to look at pricing.

Some of our independent distributors do the same thing.

Our Canadian market, which is enjoying some decent double digit growth for the last two years has been adjusting prices as the Canadian dollar has changed versus the U.S. dollar, so we do look at those things both ourselves as well as our independent distributors as opportunities, and more importantly, to balance that value proposition with the customers.

Thank you.

Thank you.

Thank you.

Your next question is coming from Jeff Cooley with Fidelity Investments.

I'm sorry, my question has been answered.

Thank you.

Thanks, Jeff.

Thank you.

Your last question is coming from Hakan Ipekci with Merrill Lynch.

Thank you.

Two questions.

First, with respect to the $120 million investment in new engine factory, what's the timing on that, and can you quantify the increase in capacity in terms of engine production and should the CapEx be normalized after this investment?

And number two is, the heavyweight motorcycles registrations were down in the quarter in the U.S.

What do you think drove that, and then going into next year do you have any concerns about that?

Thank you.

On the new engine capacity increase, that project is being put on board right now, and 2007, it will have an impact, 2007 as well as 2008, so basically that expense will -- investment, excuse me, will be spread over 2007 and 2008.

It is a considerable expense, and to the tune of about $120 million.

Not going to give you the exact split, but it is spread between the two years.

And as we mentioned, Tom mentioned earlier, there is the impact of our museum that we are constructing in Milwaukee that we'll put on-stream sometime next year, which has a considerable impact.

So to get back to, I think, your question, our CapEx, as we see it right now, would come down in future years.

If there is a spike, as we look at it right now, being pushed by both the additional engine capacity and the museum.

We haven't talked about the capacity, but the capacity, as always, depends on -- we will put in a large footprint, then we will fuel that capacity by the machines and the people that we put on that.

So that's flexible capacity that we can add over a period of time.

Heavyweight registrations correction a little bit, as you phrased the question, our registrations did not come down in the fourth quarter.

They were not up a lot, but they were up.

No, I meant the U.S. overall market registrations were down.

Okay.

Excuse me.

There's no doubt that the U.S. market, in total, is seasonal, and it has, over time -- we drove the fourth and first quarter sales registration increases in prior years as we've become more seasonalized, the industry will fall through more.

The industry is primarily outside of -- Harley-Davidson has the majority of the touring custom bike market.

So the rest of the market is sport performance bikes.

They are very seasonal.

They are typically sold during the second and third quarters.

So that has an impact on the industry also.

But, I mean, the industry, in total, next part of your question, how do we see this going forward, number one, the industry was up 4.9% for the year.

We are up 5.9.

We see the industry -- ours, we feel that our growth is certainly going to be fueled by new engines and transmissions and the new models that we came out with in the second half of the year, and we think that we're going to lead that market and continue to drive that market.

So we see the industry also growing, but we see us driving the market.

So we're going to go faster.

Okay.

Great.

Thank you.

Thank you.

At this time, I would like to turn the floor back over to Mr. Ziemer for any closing remarks.

Okay.

Thank you, everybody, for your time this morning.

Appreciate your interest and your investment in Harley-Davidson, and now I'll turn it back over to Mark for some final logistics.

Thanks, Jim.

And before we conclude, Tom has one quick clarification from our prepared comments.

Tom?

Thanks, Mark.

Some of you may have noticed in our press release this morning underneath our cash flow section we, on the second line, we refer to cash flow from operations of 761.8.

In the press release there is a typo.

It says billion.

Clearly that should be million.

So just wanted to make that clarification while I had you on the line.

Thanks.

And remember that a taped delay replay of this conference call can be heard by calling 973-341-3080, and entering pin number 8248524 followed by the pound sign until January 25, 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 concludes today's Harley-Davidson conference call.

You may now disconnect.