Harley-Davidson Inc (HOG) 2007 Q1 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the first quarter 2007 earnings conference call for Harley-Davidson Incorporated.

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

After the speakers' remarks there will be a question-and-answer period.

(OPERATOR INSTRUCTIONS) Thank you.

It is now my pleasure to turn the floor to your host, Mr.

Mark Van Genderen, Director of Investor Relations.

Sir, you may begin your conference.

Thank you.

Good morning and welcome to Harley-Davidson's first quarter 2007 conference call.

Over the course of the next hour we'll comment on our first quarter performance, Harley-Davidson motorcycle retail sales, the impact of the strike at our manufacturing facility in York, Pennsylvania, financial guidance and key areas of focus that we believe will drive long term sustainable growth.

Harley-Davidson 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 outlook for the rest of the year.

Tom will be followed by Larry Hund, CFO 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 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 8595077 followed by the pound sign.

The recording will be available through April 26th.

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 relation section of the Harley-Davidson website.

Our comments today 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'd like to turn the call over to the CEO and President of Harley-Davidson Inc., Jim Ziemer.

Good morning.

Thank you for calling in today.

Most of you have been in close contact with our business during the past couple months and you know that Harley-Davidson had a very challenging quarter.

The three week strike in York actually turned into four weeks of lost production.

Between time off for discussions and voting and the time it took to get the plant up and running again.

This work stoppage had an adverse impact on revenue growth as well as EPS growth for the first quarter.

On the other hand, first quarter earnings we ultimately delivered, were only possible because of the extraordinary work that our employees did to resume production because of the strong results delivered by Harley-Davidson Financial Services in the challenging consumer credit environment.

Tom Bergmann will give you all the specifics on the quarter and our future outlook for the full year in just a moment.

As many of you know, we are approaching negotiations with the rest of our manufacturing plants within the next 12 months.

As was the situation with negotiations with the employees in York, escalating healthcare costs will be central to the conversations we have.

We will begin negotiating a new contract with our Kansas City union this summer and the [INAUDIBLE] of the August 1st contract expiration deadline.

And contracts expire for our Wisconsin operations next spring.

Strikes are never good.

No one wins in a strike.

And anyone who thinks otherwise doesn't understand very much about Harley-Davidson and the degree to which our relationships with all our stakeholders are such an important part of our success in the marketplace.

Our goal with the upcoming negotiations is to reach agreements that are fair to employees, but which are also in the best long-term interest of the Company's health and prosperity.

Since we are well-known for collaborating with our employees, you may be wondering whether the strike in York has detracted from that strength.

Frankly, the relationship was strained, but at the same time, the strength of the relationship is what gets us through the tough situations like this.

Just like any other family, we have our disagreements from time to time, but because we all know it was important to find a mutually beneficial set of terms to agree to, we kept talking.

Thankfully, the strike is behind us .

Fortunately for all of us, it was a temporary event.

From time to time, the Company will be faced with difficult crossroads.

And we will choose the direction that is best for the future despite some short-term pain.

As a rule, we're going to continue to run Harley-Davidson for the long haul, keeping our long-term business outlook as the primary focus.

Later I'll come back to talk to you on that topic.

Now, here's Tom to talk -- to tell you about the financial impact of the strike, our dealers retail sales for the quarter and other financial

Thanks, Jim.

Good morning everyone.

As you would expect, the first quarter is primarily a story of the strike's impact on the business.

We are not happy with the financial results, but as Jim said, they are to be expected with four weeks of lost production at our largest manufacturing facility.

Revenue for the quarter was $1.17 billion,.

down 8.3% compared to the year ago quarter.

Net income was also down at $192.3 million, a decrease of 18%.

Earnings per share were $0.74, or down 14%.

The Company bought back 870,000 shares of our common stock at a cost of $61.2 million during the quarter.

Now, let me turn to the first quarter of 2007 results for the motorcycles and related products segment compared to the first quarter of 2006.

Wholesale Harley-Davidson motorcycle shipments were 67,761 units, a decrease of 14.8%, but approximately 1,800 units higher than the guidance we outlined at the end of the strike.

Our ability to exceed our shipment guidance for the quarter was due to the commendable efforts of our employees and suppliers to get production started again as quickly as possible.

Shipment mix in this quarter was slightly different than what we had originally planned for as a result of the strike.

Touring volume was 32.2% of the mix for the first quarter of 2007 compared to 34.6 in the first quarter of 2006.

First quarter 2007 custom shipment volume, representing our soft tail, Dyna, and VRSC motorcycles was 45.4%, compared to 45.0% in the first quarter of 2006.

And finally Sportster motorcycle mix was 22.4% of the total mix for the quarter, compared to 20.3% during the first quarter of last year.

Domestic shipments of 48,740 units for the quarter were down 19.1% from the first quarter of 2006.

This shipment volume represented 71.9% of the total volume shipped to dealers down from 75.8% from a year ago.

International shipments of 19,021 units were virtually flat with the 19,236 shipped in the same quarter last year.

These international shipments represent 28.1% of our total first quarter shipment volume compared to 24.2% in the first quarter of 2006.

As we've previously stated, we expect that our international shipment growth rate will continue to grow at a faster rate than our domestic shipment growth rate to support our anticipated strong retail growth.

Looking at the second quarter, we anticipate shipments of between 94,000 and 97,000 Harley-Davidson motorcycles.

This compares to 79,796 units in the second quarter of 2006.

So, combining actual first quarter 2007 shipments with anticipated second quarter shipments, you arrive at a shipment growth rate of between 1.5% and 3.4% for the first half of 2007, despite the strike at our York facility.

This expected increase in shipments in the first half of the year is primarily due to two things and they will both have an impact on shipments in the second half of this year.

First, as I previously mentioned, due to the strike we are planning on adding a week of 2007 model year shipments compared to 2006 model year shipments in last year's second quarter and secondly, Harley-Davidson's fiscal calendar for the year has one additional week of production in the first half of 2007 and one less week in the second half of 2007.

So, the net result is two fewer weeks of 2008 model year shipments in the second half of this year compared to 2007 model year shipments in the second half of last year.

Since we are on the topic of shipments, let me also take a moment to talk about inventory at Harley-Davidson dealerships.

Typically our dealers build inventory during the first quarter.

However, because of the strike, dealers' inventories are down at the end of the first quarter compared to the beginning of the quarter.

And we know that second quarter retail sales traditionally further deplete dealer inventory levels.

We want to make sure that our dealers have enough motorcycle inventory during the upcoming spring selling season and some dealers have voiced concern that they don't believe they'll have enough 2007 model year motorcycles.

However, at the same time it is imperative that our dealer network as a whole does not have too much motorcycle inventory as we transition into the new model year and we are again announcing the new models to our dealers and to the public in early July.

So, when stepping back and taking into account all the strike related implications on production, our supply chain, dealer inventory levels, and model year timing, we believe that our second quarter shipment plan strikes the appropriate supply/demand balance for the remainder of the 2007 model year.

Okay, now turning to the financials for the motorcycles and related products segment.

Revenue from Harley-Davidson motorcycles was $891.5 million, down 11.6% from the first quarter of 2006.

Despite an overall mix of more Sportsters and fewer Touring motorcycles compared to last years first quarter, average revenue per Harley-Davidson unit increased $472, or 3.7% from the year ago quarter.

This increase can be primarily attributed to a few factors.

First, the year-over-year impact of slightly higher model year pricing and a favorable currency benefits.

Second an increase of VRSC shipments in the quarter and in particular the Night Rod special.

And third a shift within the touring family during the quarter to higher priced models.

Turning to parts and accessories and general merchandise.

They both delivered positive results in the first quarter.

Parts and accessories revenue was $188.2 million for the quarter, which is up 2.9% over the year ago quarter.

This group continues to focus on how Harley-Davidson customers can personalize their motorcycle to make them uniquely their own and enhance their customer experience.

General merchandise revenue was also strong at $76.1 million, an increase of 11.0% or $7.6 million.

Our dealers have been very receptive to the spring motor clothes line, which shipped during the first quarter, and new additions to the core motor clothes line in both leather and riding gear helped to drive this increase as well.

Now let's take a look at margins.

Gross margin in the quarter was 35.9% compared to 38.4% in the first quarter of 2006.

This decrease can be primarily attributed to significant manufacturing efficiencies, as a result of a strike, and unfavorable material surcharges of $10.3 million in the quarter compared to the first quarter of 2006.

Operating margin was down from 24.3% in the first quarter of 2006 to 20.0% in the first quarter of 2007.

A slight increase in SG&A expenses during the quarter combined with lower revenue drove this increase.

For the tax rate, the Company's first quarter effective income tax rate was 35.5% compared to 36.0% in the same quarter last year.

The decrease here primarily reflects the reinstatement of the federal research and development tax credit.

So all in all, diluted earnings per share for the first quarter were were $0.74, or a decrease of 14% from the year ago period.

All right, now looking at how all this impacts our financial guidance for the future.

As I previously outlined at our February 28th analyst meeting, as a result of the strike, we expect that earnings per share for the full year of 2007 will grow between 4% and 6%.

This expectation is based on moderate revenue growth, a lower operating margin, and the benefits of strong free cash flow.

As we look out further, specifically to 2008 and 2009, we believe that we will continue to grow revenue and at international Harley-Davidson motorcycle shipments will grow at a faster rate than U.S.

shipments.

We expect that we will continue to expand our operating margins, and we believe that the Company will continue to deliver earnings per share growth of 11% to 17% in 2008 and 2009.

As I previously mentioned, by lowering our 2000 EPS growth rate to 4% to 6% as a result of the strike, we understand that we have expectedly lowered our expected EPS range for 2008.

While we recognize this 2008 EPS growth rate may potentially be conservative, we believe it is appropriate until we get later into the year and have an also have an opportunity to do further detailed planning for 2008.

Now going back to the first quarter results, operating cash flow for the quarter was $520 million.

This compares to $366 million in the first quarter of 2006.

This increase was primarily driven by two factors.

First, with lower quarter-over-quarter motorcycle shipments to our U.S.

dealers, wholesale finance origins atypically decreasing during the quarter.

And second, the securitization transaction conducted by HDFS in the first quarter of 2007 was $70 million larger than the transaction completed in the first quarter of 2006.

For the first quarter of 2007, our depreciation was $51 million and our capital expenditures were $41 million.

For the full year of 2007, we continue to expect capital expenditures in the range of $300 to $325 million.

Expenditures related to the expansion of our big twin power train facility and the construction of the Harley-Davidson museum are the primary drivers of this increase in capital spending compared to the last several years.

Now, turning to our share repurchases for the quarter.

Our window to purchase shares was significantly shortened during the quarter as a result of the strike and therefore the Company only repurchased 870,000 shares for $61.2 million.

We believe share repurchases continue to be a good use of cash and an efficient way to return value to shareholders.

Our strategy is to opportunistically repurchase shares when we believe they are undervalued in the market based on the future outlook for the Company.

And now that the strike is behind us, we intend to resume our share repurchase activity given our current share price.

As of April 1st, 2007, there were 21.9 million shares remaining on two board approved share repurchase authorizations and there's also an additional board authorization in place to offset option exercises.

On April 1st 2007, the Company had 257.5 million shares of common stock outstanding.

Finally, before returning to retail sales comments for the quarter, along with other public companies, Harley-Davidson was required to adopt financial accounting standards board interpretation number 48, titled 'Accounting for uncertainty in income taxes' which became effective on January 1st of this year.

This adoption resulted in a minor decrease to shareholders equity of $16.1 million.

Now, let me wrap up by talking about the retail environment.

On a worldwide basis, retail sales of Harley-Davidson motorcycles were down 1.3% for the quarter compared to a year ago, or about 1,000 units.

In the U.S., retail sales of new Harley-Davidson motorcycles decreased 5.9% in the first quarter of 2007 compared to the same period in 2006.

While a decrease in sales is never desired, we are keeping this in perspective.

You know, first, looking back over the past several years, our first quarter retail sales of Harley-Davidson motorcycles have not been a leading indicator for annual retail sale.

And second, keep in mind that first quarter retail sales in the U.S.

the last few years have averaged about 17% of total worldwide sales for the entire year.

In talking with our U.S.

dealers, they have noted that rougher weather in January and February of this year, compared to last year, hampered year-over-year retail sales growth.

More importantly, they remain optimistic and are fired up about the start of the riding season.

Dealers and customers are excited about our 2007 model year changes we introduced last summer and we looked forward to a second quarter, which is traditionally our largest retail sales quarter of the year.

Taking a look outside the U.S.

Our belief that international will grow faster than the U.S.

continues to be proven out.

International retail sales for the first quarter grew 16.5%.

This is the 10th quarter in a row where international sales have grown at a double digit pace.

Europe was again particularly strong with year-over-year sales increases of 25.7%.

Canada was up 14%.

Japan was down 7.7%, but just to put it in perspective, this was about 190 units.

And the remaining 45 or so countries where our motorcycles are sold were up a collective 16.7%.

This growth is evidence that our investments in international markets are continuing to pay off.

Okay, with that, I'll turn it over to Larry Hund to discuss the Harley-Davidson Financial Services results for the first quarter.

Thanks, Tom.

Harley-Davidson Financial Services delivered first quarter operating income of $58.9 million, an increase of $7.3 million, or 14.2% compared to last year's first quarter.

This increase is primarily due to higher wholesale and retail net interest income and an increase in fee income from securitization servicing and credit card licensing fees.

In the first quarter of 2007, our retail market share in the United States, related to new Harley-Davidson motorcycles, grew to approximately 51%.

This compares to 47% for the first quarter of 2006 and 48.5% for the full year in 2006.

This first quarter market share continues to demonstrate that in an increasingly competitive lending environment, HDFS continues to develop innovative financing programs that meet the needs of our dealers and riders.

For example, in the first quarter of 2007, HDFS introduced a significantly enhanced dealer loyalty program called Performance Network.

This program rewards dealers for doing more business with HDFS across our wholesale, retail, and insurance businesses.

Very favorable dealer response to this program, combined with continued efficient and effective customer service helped drive the growth in market share and earnings in the first quarter.

In the first quarter of 2007, HDFS sold $800 million of retail motorcycle loans through securitization and realized a gain of $13 million.

This gain is $4.4 million higher than the gain of $8.6 million recorded on the securitization of $730 million of retail motorcycle loans in the first quarter of 2006.

The gain, as a percentage of loans sold, increased to 1.63% for the first quarter 2007 securitization from 1.18% for the first quarter 2006 securitization due to increases in lending rates and a more favorable market interest rate environment.

As you know, HDFS is operating in a more challenging consumer credit environment.

Regarding past due accounts, the 30-day delinquency rate for managed retail motorcycle loans at the end of the first quarter was 4.08% compared to 3.69% for the first quarter of 2006.

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 trends in delinquencies for other types of consumer debt.

At the analyst meeting on February 28th, we provided information that HDFS expects higher credit losses in 2007 due to lower recovery values on repossessed motorcycles and a higher incidence of loss resulting from increased delinquencies.

Consistent with that information, credit losses on managed retail motorcycle loans increased in the first quarter of 2007 compared to 2006.

Losses totaled 2.28% on an annualized basis compared to 1.48% for the first quarter of 2006.

The increased first quarter losses are due to continued pressure on recovery values for repossessed 2006 and earlier motorcycles, which has become more pronounced since the introduction of the 2007 models, as well as a higher incidence of loss primarily driven by the increase in delinquent accounts.

As most of you know, HDFS evaluates the assumptions used to value investments and retain securitization interests each quarter.

Given the increasing trends in delinquencies and losses on retail motorcycle loans, this review of assumptions in the first quarter of 2007 resulted in HDFS recognizing an impairment loss of $3.5 million on several investments in retained securitization interests.

This amount was recorded as a reduction in income from securitizations in the first quarter.

Let me take a minute to discuss the actions HDFS is taking to manage portfolio quality in this challenging credit environment.

First, we continue to evaluate and adjust our underwriting and pricing on an ongoing basis to make sure we are appropriately balancing risk and return in all credit tiers.

Second, we have upgraded experience and depth of management on our collections team.

Third, we have hired additional portfolio management staff and outsourced a portion of the early stage collection activity to reduce the number of past due accounts being handled by each collector.

And fourth, we have strengthened capabilities in the areas of fraud management and remarketing of repossessed motorcycles.

We know this is a more difficult credit environment and we believe we are taking appropriate steps to manage through it.

In closing, let me say that HDFS continues to have a sound business model.

This is evidenced by our growth in market share, continued strong margins and solid growth in operating income in the first quarter of 2007.

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

Thanks, Larry.

While I have this opportunity, I want to thank Larry for the leadership that you have provided for HDFS for the past several quarters.

During that time, I've developed a great appreciation for your knowledge of the business and your strong commitment to its success.

Now that Cy Nachy (ph) is on board as president, I'm sure the two of you will make a great team as you move the HDFS business forward together.

This quarter HDFS once again demonstrated why it is such a good business with strong market positions in finance and insurance.

While these are currently challenging times in consumer lending, the business once again delivers very strong results while making appropriate changes to manage the business.

And the unique retail information that HDFS provides the motor company remains invaluable.

Now, let's talk about the current events so I can share a few highlights before I turn the phone lines over for questions.

As we've told you in previous calls, the Company's putting a greater emphasis on expanding our visibility and consumer events to even further solidify our close connection with our customers.

In addition, during 2007, our plans call for an official presence at more motor enthusiast events than ever before.

Events that attract non-motorcycle rider and motorcycle riders alike.

For many of the events we have targeted for the season, Harley-Davidson will be creating a brand new attraction by.

bringing our fleets of new 2007 demo bikes along.

We have found that nothing compares to the experience of a demo ride taken at the customer's own pace.

Demo's allow our current customers, as well as those dreaming of owning a Harley an opportunity to try whatever bike they like, or tow, or three for that matter.

It's a real strapping experience.

Demo rides are undeniably the best way to understand the dramatic improvements to the '07s, like the power full twin cam 96 engine and the new 6-speed transmission in the 2007 line.

Once again, this year we are also increasing the number of weekend events that are supported with participation of company leaders.

Motor company President Jim McCaslin said that expectation two years ago that the top 150 people in the Company travel to a minimum of two weekend events a year to ride with customers.

This gives Company representatives a chance to talk with customers about their bikes and hear their customer personal stories about the people they've met and the places they've seen on the road.

It creates a personal bond between our leaders and a customer that often grows into a friendship.

As you can imagine, very little arm twisting is required for this duty.

I know from personal experience, this is a fantastic way to inhale a strong dose of what our business is about.

It's a great way for our leaders to understand the pulse of the marketplace and to demonstrate their own commitment to the lifestyle we all enjoy together.

In March, we had greater than ever presence at Daytona Bike Week.

Because Daytona is one of the largest annual gatherings of motorcycle enthusiasts in the U.S., in addition to the Company leaders, we sent a few hundred employees to interact with customers.

Every year all employees have the opportunity to volunteer to attend motorcycle events and represent the Company.

We've had an official presence in Daytona for as long as I can remember.

In fact, this was my 22nd time in Daytona.

As always, it was energizing to be there and be able to ride again for the first time this season.

This year the customer event group redesigned our 60,000 square foot indoor show and created a more dynamic experience for outdoor activities at our exciting annual ride-in motorcycle show.

All of those improvements paid off with attendance at our product shows increasing more than 50% over last year.

And the interest for riding our Harley imperial demo bikes was outstanding.

The number of rides given was up over 25% from last year.

And typically riders try two or three different models.

At the same time, our interactive communication group provided daily coverage called Live from Daytona on our website, harley-davidson.com.

More than 100,000 unique visitors made their way to the online coverage, whetting the appetites of those who couldn't be there in person.

The Daytona coverage is still on-site and is worth a look.

It really makes you feel like you should be part of the action.

The experience we've created in Daytona is just one more distinction between Harley-Davidson and our competitors.

There's also exciting news to report from Riders Edge, Harley-Davidson's branded rider training.

Earlier this year we had a major breakthrough when the state of California approved the Riders Edge curriculum.

California is the largest motorcycle market in the United States.

Our dealers there have been waiting to be able to use this valuable sales tool for bringing more people into the sport.

If you recall, over 30% of the students who enroll in Riders Edge are under 35 years old and 40% are women.

These are two of our most prized new customer segments.

Speaking of riding, let's talk product for a moment.

As CEO, I believe I have an obligation to our customers and to our dealers to ensure a steady stream of new motorcycles, excite them year after year and stimulate the market.

In 2007 we introduced a remarkable new power train across most of the product lines along with seven new models.

Not bad for one year's work.

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

The biggest buzz in the market at the moment is about the VRSC Night Rod Special and the Soft Tail Custom.

And in January at our worldwide dealer meeting, we introduced another new motorcycle, the Nightster.

the dealers love this bike and it's clearly setting the bar higher for the Sportster family.

The Nightster has a really distinctive blacked-out profile, an aggressive look that appeals to younger prospects as well as to traditional Sportster enthusiasts.

This Sportster is creating a real sensation in the marketplace.

Products like these and our other 2007 models are how we read and define our position in the heavyweight motorcycle market.

They attract new customers, they convert competitive brand owners and they make our loyal riders want to trade up.

There are a lot of motorcycle companies in today's market, but only one genuine article.

We are the leader because nothing looks like a Harley, sounds like a Harley or feels like a Harley.

No one can match the experience we offer because it means riding with our customers and learning what works on the road with them.

Other brands have copied us, but when they put it all together, there's more than a little bit that is missing.

So what am I saying?

I'm talking about things like Daytona, Riders Edge, and our motorcycle product leadership, because they are great examples of the vitality of our business and they are illustrations of our potential for continued growth.

Our confidence in the future is fueled by the many things like these that differentiate Harley-Davidson in the marketplace along with a brand that is admired around the world, our passionate and dedicated employees and the best dealer network in the industry.

Now, I'd like to open up the call to questions.

Shawana?

(OPERATOR INSTRUCTIONS) We'll pause for a moment to compile the Q&A roster.

Our first question comes from Robin Farley with UBS.

Please go ahead.

Hi, thanks.

I just wanted to clarify a couple of things in your guidance.

When you talk about lower margins in '07, is that the case outside of the March quarter, or are you just giving that lower margin guidance because of the strike?

Just want to clarify whether that you expect that in future quarters.

And also, if you could talk about some of the factors leading you to be more conservative on '08?

You mentioned your guidance supplies a lower '08 guidance.

Can you just give us a little more color on whether that's sort of macro economic trends or specifically industry sales declines?

What's leading you to be more conservative?

Thanks.

Good morning, Robin, it's Tom.

I'll take both of those questions.

The first question was really on margins.

Is it for the quarter or for the full year?

We expect margin for the full year to be down as a result of the strike.

So I think that handles that question.

And regarding 2008, yes, we just think at this point in time, given that a lot of the year is still ahead of us and it's going to play out, we just think it's really the right thing to do is to take a conservative position at this point in time and later in the year as we get into our detailed planning and take a harder look at 2008, we'll make sure we update it at the appropriate time.

On margins, the question was really whether you expect margins to be up in the last three quarters of the year.

It sounds like you're saying, yes to that?

We don't give quarter by quarter guidance margin as you know, but on an annual basis, we expect for the full year we expect margin to be down.

And one other question, if I could, just in terms of HDFS, I guess I was surprised that your market share breaking into the 50% range here, especially given some of the reevaluations you're taking, of which pertains to securitizations, if your increased market share using other lenders be less aggressive or maybe you can give us some more specifics on what was driving your share up?

Sure, as I talked about in our remarks, I think the number one driver was our introduction of our enhanced dealer loyalty program.

We've gotten a very, very positive response from the dealer network on that.

The one thing I'd say about competition, there is still a lot of competition out there in the motorcycle lending space, whether that's from national lenders, regional lenders, and credit unions unions continue to be very aggressive as well.

So, we still see a tremendous amount of competition out there in the market.

In terms of, I guess the expense view for the performance network or the increase you described as for [INAUDIBLE] dealers, or for doing more, can you give a little sense of where that would show up in your P&Ls or ACFLs?

Sure, some o fit shows up in the net interest income line.

Okay.

Because some of it relates to different rates for say wholesale financing if you do more retail business with us.

And some of it shows up a little bit in the operating expense line.

Great, thank you.

Thank you.

Our next question is coming from Hakan Ipekci with Merrill Lynch.

Please go ahead.

Thank you, a couple of questions.

One relating to that charge you've taken for HDFS, is that in the net unrealized gains section, or is it already in the income statement?

The other one is regarding retail sales, Harley sales were a little below the overall market.

Do you think -- what could be the drivers of that?

Could it be maybe used bike prices?

And finally, with respect to the inventory on both, there has been some rise, what's driving the increase?

Thank you.

Regarding your HDFS question, that $3.5 million charge is already in the income statement.

Okay, so the net unrealized gains is gone at this point or --?

The, well, as you know, we make adjustments to the assumptions for investments and retained securitization interest each quarter.

That $3.5 million ran through the income statement.

There also are adjustments that run through the balance sheet in other comprehensive income in the equity section.

Okay.

I'll take, Jim Ziemer, I'll take the retail sales question for the first quarter.

As I said in the press release, no one's happy with a negative retail sales comparison, at the same time, the first quarter, especially that being a very seasonal quarter for us in industry, only about 17% of our total retail sales occur in that quarter.

You can't really read a lot into that us versus the industry.

We got to say we are still leading the industry.

We have the number one market share.

We don't chase market share.

We certainly -- our biggest goal is to be the most profitable motorcycle manufacturer out there.

So we are very confident from everything we hear from the market, our dealers, and the customers that we are well positioned to do extremely well this year and that's what we're focused on.

And Hakan, it's Tom, I'll take your last question regarding inventory on our balance sheet.

There's actually a couple major reasons of why it's up in the quarter.

One of it is due to an increase in raw materials somewhere in the neighborhood of $35 to $40 million.

And this is probably due to the strike, too.

the materials kept coming in during the strike during that period.

So, part of it is just pur raw materials are work in process increase, and then the second part of it is we do have a lot of bikes currently on the water that have been shipped from our factories to our international destinations.

So as you know, those don't count as shipments until they go to the dealers.

So, with the strike we put a lot of bikes to get overseas that are in transit right now.

So that would be the other major component.

Okay, great, thank you very much

Thank you, our next question is coming from Craig Kennison with Robert W.

Baird.

Please go ahead.

Morning.

First question, just related to retail again, did the strike at all play a role in the perceived market share loss, it's just a little bit surprising given the dealer response to your model year 20097 lineup?

Again, we are [INAUDIBLE], first quarter doesn't indicate a lot.

I'll reflect back since I'm the old-timer here, back to 2003, our anniversary year.

Arguably one of the most popular retail sales years that we had.

That had a negative sales comparison in the first quarter, too, and our resail sales for the year were up 12%.

First quarter is certainly impacted by weather, although I can't say that we have a weather model to model what occurred.

Our feedback from a lot of dealers said that had an impact.

I'm not going to comment on what competition did in terms of their promotions willing that their inventory situations were, but again we're focused on information we're getting from the field on how we look forward on that.

Thanks.

And then with respect to the challenging credit environment you've discussed.

Are you seeing that have an impact at retail at all in terms of some customers lacking the availability of credit?

Craig, it's Tom, overall, I would say no we haven't.

I think HDFS is doing the -- taking the appropriate actions to making sure they're looking at their book and the profitability of their overall business and so I'm very comfortable with the actions we're taking.

I don't think we're seeing impact at retail yet and we'll continue to monitor that closely.

I think where we feel very good about the lineup we've got with the 2007s and the way we're positioned going into the spring selling season here, so I don't think we're seeing any retail really impact yet from any HDFS actions.

And then finally, I know you don't provide guidance specifically on financial service income, but can you give us a directional sense for whether you think in '07, based on your 4% to 6% EPS growth, do you expect an increase or decrease in financial service income?

Yes, by doing that, I'd be given guidance, so I'm not going to give you any direction on it, but as you can tell even in this tough environment, they delivered very strong financial results.

We're pleased with that business.

I think it just shows the strength of the business and the profitability of it.

I'm very confident they're going to manage throughout this year successfully.

Very good, thank you.

Thank you.

Our next question is coming from Tim Conder with A.G.

Edwards.

Please go ahead.

Thank you, a couple of items here.

Tom, could you maybe detail out the 4X benefit either on a revenue, gross margin, or EPS perspective in the quarter?

Also, what you mentioned regarding the one extra week in the front have of the year, one less week in the back have of the year the way your production schedule falls, could we see you adjust for that for your model year change over, again in context of trying to get caught up with the Touring and soft tails from the strike?

And then regarding the material surcharge, was any of that, was there any type of penalty related to the strike or was that just a year-over-year and then if you could give us the comparable on that?

Okay, several questions there.

Let's see if I got them all.

First one is some foreign exchange or currency impact for the quarter.

If you look at motorcycle revenue, we had about a $12 million favorable impact of currency on motorcycle revenue, and overall Company about a $9 million favorable currency impact on EBIT for the quarter.

Your second question regarding the shipment and production calendar for the first half of the year versus second half of the year, there's a shift if you look at it, about two weeks.

So in the first half of the year, as we mentioned at the end of the strike, we were going to push out and do one extra week of 2007 model year production.

So we've added that week in order to make sure we get the appropriate amount of units into the field and then, because of shifting in our fiscal calendar, we also have an additional week in the first half of this year compared to the second half.

So it's really two weeks of shipment time when you look at it on a half year basis for the full year.

Regarding will we adjust in the second half of the year, we always can do that as we look at how the retail sales environment is.

And as you know retail drives wholesale so we'll be very focused on it.

At this point in time, we have our products and our programs in place.

But we'll continue to monitor the market and our own programs and we can always make that decision later.

On the raw materials surcharges, I really wouldn't say there's any strike impact in that number.

That is pretty much just the real increase that we incurred.

It was $10.3 million as I mentioned in my comments increase year-over-year and really came, I think, aluminum was one of the largest drivers of that increase.

Okay.

And then regarding HDFS, Larry, could you give us any stats on average loan to value, on new, used, how you're looking at that now versus a trend year-over-year or two years ago?

I'd say that's some detail we historically have not given out.

As I say, we continue to always take a look at our underwriting criteria on an ongoing basis.

We react to information we get in the market and then we make appropriate changes on that to appropriately balance risk and return on the portfolio.

Okay, thank you.

Thank you.

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

Please go ahead.

Great.

Thanks for taking my question.

I had a couple actually.

On the impairment charge in the HDFS, as far as the income statement versus the balance sheet charge.

I was under the impression that in order to have an income statement impairment charge all of the unrealized gains from the balance would have needed to be basically reversed.

Did that in fact happen?

What you have to remember is this is done on an individual transaction by transaction basis.

Not a cumulative basis.

So yes, your comment is correct, but it relates to each individual transaction, so you have to reverse any positive impact you had had on the balance sheet first for those individual deals and then obviously once you get to zero, anything beyond that would be recorded as an impairment that runs through the income statement.

Okay.

Would you expect additional impairments down the road or is that something you're prepared to comment on?

I'd say we have a process where we go through and we evaluate our assumptions each quarter, we make appropriate adjustments to those assumptions and obviously we record the impact of that and will continue to do that in future quarters.

Okay, I didn't hear commentary about average new bike pricing in the market.

Does your dealer feedback still suggest that the average bike is being sold at MSRP?

Jim Ziemer again.

It's one thing we look at all the time.

And some of it great information we do get from HDFS and some of the other systems that we have.

And as we look at the 2007 model year motorcycles, they are selling at or above MSRP on average.

And we're quite comfortable where we're at right now.

Okay, thank you very much.

Thank you.

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

Please go ahead.

Hi, good morning, guys.

A few questions this morning.

Historically sales have not been materially impacted by economic downturns just due to the favorable supply demand imbalance.

Do you see any exposure to U.S.

sales should the economy continue to slow over the course of the next year?

Second question, who did you lose market share to in the U.S.

during the quarter?

And then the third question, just a little bit more on expectations for increased provisions over at HDFS, maybe this is a question for Larry, but it appears you loosen credit standards beginning in '04 and '05, and then started tightening in late '06, wouldn't we expect a little bit higher provisions moving forward as the 2002 and 2003 pools run off and the effects of the 4, 5, and 6 pools become more of a factor?

Tony, I'll take the first question on the macro economics.

We feel for 20 years been trying to model , correlate anything in the economy, whether it be interest rates, unemployment, employment, housing starts, whatever, we've never found a correlation.

We've been somewhat recession resistant, we continue to monitor the market to make sure that is the case and in doing so we especially market the -- monitor the selling prices of our new products.

And at this point in time, we have not seen a correlation to the economy.

Biggest thing we've seen correlation to is in the winter months and in weather.

But other than that, it's not been a huge correlation.

We have always been able to increase our sales from year to year despite whatever's been going on in the economy.

Second question was on the in losing market share, we don't go in and comment on who is up an who was down on market share for the quarter or the

And then I think the final question, is for Larry relating to the provision.

Sure, and Tony what you have to remember on the provision or what I would call the allowance for credit losses that that's a number recorded on the balance sheet.

That relates to the held for investment receivables on our balance sheet, about 70% of those receivables on the balance sheet are wholesale, loans to dealers where we have virtually no credit losses and we think we evaluate that allowance every quarter.

We think we have actually a prudent allowance and our losses on the balance sheet last year were only about $5 million.

Okay, thanks guys.

Thanks, Tony

Thank you.

Our next question is from Michael Savner with Banc of America Securities.

Please go ahead.

Hi, good morning thanks.

Two questions if I could.

First, just so I have a better understanding of shipment declines in the first quarter.

Because I think overall it was down a little over 14%, but the U.S.

shipments were down 19%.

Given commentary that some of your dealers were concerned about not having enough inventory, can you tell us what discretion you had to manage where your shipments were going domestic versus international, make sure you had inventory in the right places and would it have been more, from a P&L perspective, more advantageous to put more of the inventory in the U.S.

or ist that not the case?

And then the second question, I think people have been asking this a couple different ways, so I'll throw my hat in the ring also.

On HDFS, I think the body language that you gave during the analyst meeting a couple months ago was a more conservative outlook about the credit markets overall.

And so when we ask about the trajectory of profitability going forward, it feels as if it wouldn't take a lot of decline or slow down in growth to start bringing down that profitability as you're seeing delinquency rates across consumer move up, the impairment charges move higher.

So again, in some general way, can you tell us maybe what's changed in your view about HDFS and the trajectory of where you see the financing arm going?

Thanks.

All right Michael, it's Tom, I'll start with the first one and the split of shipments between international and domestic in the first quarter.

As you can understand I'm sure, with the strike and the interruption had had to shipment, we've done a lot of hard work here to try to distribute motorcycles to the markets where they're needed.

And as we looked and you saw and heard about our strong international growth, we had to get some of those bikes on the water, get them into the markets really to feed that strong growth that we're experiencing in all those international markets given the longer lead time it takes versus our U.S.

marketplace.

So we went through and balanced all of the constituencies and believed we've done the best job we can to get right bikes to the right place at the right time.

On the HDFS question --

Sure, I think regarding HDFS what I'd say you know take away is a balanced message which is to say we have very strong market positions in wholesale and retail finance and with some of our insurance programs and we're also managing through some challenges in the credit environment at this time.

I think we feel very good though about the things we're doing to address that and the market positions we have in the key businesses.

Okay, thanks.

Thank you.

Our final question is coming from James Hardiman with FTN Midwest Securities.

Please go ahead.

Good morning.

I had a quick question on HDFS and then a pricing question.

You sort of touched on the securitization gain and it being higher on a year-over-year basis, I was hoping you could just give us a little bit more color, certainly given the higher delinquencies and credit losses, why that gain as a percentage of the total principal would be higher on a year-over-year basis?

Sure.

Right the gain this year was 1.63%.

Last year was 1.18.

I think as we went through the year last year, we really tried to be disciplined as market rates increased in increasing our lending rates.

And if you notice as we went through the year, our securitization gains increased.

The securitization gain on the third quarter transaction in 2006, or the last one we did last year was 1.6%, which compares very favorably to the 1.63% gain on the first quarter this year.

The other thing to keep in mind is, in the first quarter last year you were still in a rising interest rate environment.

Now we're sort of in a more flat interest rate environment and we've gotten a little bit of benefit out of that.

Okay.

Just a quick follow-up on that.

You sort of talked about your lending and borrowing rates narrowing, that spread narrowing due to competition, is it, as you touched on, you're just being more disciplined or is that competition maybe subsiding a little bit?

I actually think it really has to do with more with our discipline.

We don't see -- we still see a lot of competition out there in the marketplace.

Okay, and then quick follow -- second question in terms of pricing.

Certainly surprised to see average prices up, I think you said, 3, 3.7%.

When you talk about the three reasons for that, obviously mix was a negative impact due to the strike, but the positive price factors, the higher pricing, the increase in the V-rods and shift in Touring towards higher price models.

Can you talk about moving forward, how many of those are still going to be around?

It certainly seems like at least in the second quarter those will continue to help pricing in that obviously we would expect mix to be much more positive in the second quarter, certainly on a quarter-over-quarter basis.

Yes, James, it's Tom, the 3.7%, just to make sure we characterized it right, it's not pricing, it's really the average revenue per unit which is a variety of a whole bunch of factors and pricing is just one piece of that.

As you go forward, we always have our model year pricing impact that effects average revenue per year.

As I mentioned, we also had some currency benefit in this quarter that rolled through it.

But, you also have mix between the different categories, between Touring, Custom and Sportsters, and well as the mix in between -- within those categories as well between -- within the different families.

There's a lot of factors that drive that average revenue.

I continue to expect average revenue to be higher on a year-over-year basis, but there's a lot of variables in any one quarter that go into it.

Is it at least fair to say that whereas the mix was a pretty big drag due to strike and your lower Touring shipments that that'll likely be a positive in the second quarter as you get those shipments out the door?

I'm not going to speak quarter-to-quarter, but clearly our Touring family was impacted by the strike.

And as I look at the full year and look at the strong growth at the overall Touring segment is incurring, I would expect on a full year our Touring percentage and mix to be higher on a full year basis than it was in the first quarter.

Great.

Thanks guys.

At this time I would now like to turn the floor back over to Mr.

Ziemer for any further remarks.

Thank you for your time this morning.

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

I'll now turn it back over to Mark for some final logistics.

Thanks Jim.

Remember that a taped replay of this conference call can be heard by calling 973-341-3080 and entering pin number 8595077 followed by the pound sign until April 26th or by accessing it on the Harley-Davidson website.

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

Thanks again and have a great day.

Thank you, this does conclude today's Harley-Davidson conference call.

You may all disconnect and have a great day.