Harley-Davidson Inc (HOG) 2007 Q4 法說會逐字稿

Good morning.

My name is Elsa.

I will be your conference operator today.

I would like to welcome everyone to the Harley-Davidson fourth quarter and year-end 2007 earnings conference call.

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

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

(OPERATOR INSTRUCTIONS) Thank you.

It is now my pleasure to turn the floor over to your host, Amy Giuffre, Director of Investor Relations.

Ma'am, you may begin your conference.

Thank you, Elsa.

Good morning everyone, and welcome to Harley-Davidson's fourth quarter 2007 conference call.

Over the course of the next hour we will comment on our fourth quarter and full-year financial performance, worldwide retail sales of Harley-Davidson motorcycles, and other thoughts about our business, and our outlook for 2008.

Harley-Davidson's CFO Tom Bergmann will speak to you in a moment, regarding Harley-Davidson motorcycle and related products financial results.

Tom will also speak to you about the financial results of our Financial Services segment, as we are in the process of identifying a new CFO at Harley-Davidson Financial Services.

Following Tom, Sy Naqvi, President of Harley-Davidson Financial Services will share his thoughts on HDFS.

Jim Ziemer will wrap up our prepared comments with his perspective on the business, and our outlook for 2008.

We will then open the phone lines for questions.

Before we begin, I would like to remind new call is being recorded.

A replay will be available after 11:00 a.m.

Central Time this morning.

Please dial 706-645-9291, and enter PIN number 29424918#.

The record willing be available through February 1st.

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 Relation section on the Harley-Davidson website.

Our comments will include forward-looking statements, that are subject to risks that could cause actual results to be materially different.

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

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

Now I would like to turn the call over to the CFO of Harley-Davidson, Inc., Tom Bergmann.

Thanks, Amy.

Good morning, everyone.

For those of you who haven't had a chance to meet Amy, or weren't on the call last quarter, Amy is our new Director of Investor Relations at Harley-Davidson.

Mark Van Genderen is turning his talents to his new job as Managing Director for Latin America.

Let's get started with a brief overview of the fourth quarter.

As you can see in this morning's release, we implemented our previously announced plan to reduce wholesale motorcycle shipments during the quarter, which resulted in lower shipments, revenue, and earnings for the fourth quarter of 2007, compared to the fourth quarter of 2006.

Specifically, revenue for the quarter was $1.39 billion, or down 7.7% compared to the year-ago quarter.

Net income was $186.1 million, a decrease of 26.3%.

Diluted earnings per share were $0.78, or down 19.6%.

In addition, during the quarter the Company bought back 3.2 million shares of our common stock at a cost of $153.3 million.

This brought total share repurchase activity for 2007 to 20.4 million shares at a total cost of $1.153 billion.

Now turning to the fourth quarter of 2007 results for the motorcycles and related product segment compared to the fourth quarter of 2006, wholesale Harley-Davidson motorcycle shipments were 81,206 units, a decrease of 12.5%.

Domestic shipments of 59,092 units for the quarter, were down 20.7% from the fourth quarter of 2006.

This shipment volume represented 72.8% of the total volume shipped to our worldwide dealers, down from 80.2% a year ago.

International shipments of 22,114 units were up 20.5% compared to the same quarter last year.

International shipments grew to 27.2% of our total worldwide fourth quarter shipment volume, compared to 19.8% in the fourth quarter of 2006.

For the full year, domestic shipments represented 73.1% of the total shipments, down from 78.2% in the same period last year.

International shipments for the full year grew to 26.9% of the mix, up from 21.8% in 2006.

We anticipate ongoing strong retail growth in our international markets, and we continue to expect that on an annual basis, our international shipment growth rate will continue to increase faster than our domestic shipment growth rate.

So for the full year of 2007, we shipped 330,619 Harley-Davidson motorcycles, compared to 349,196 in 2006, or a decrease of 5.3%.

Looking at shipment mix in the fourth quarter, touring volume was 35.9%, compared to 35.0% in 2006.

Custom shipment volume representing our Softail, Dyna, and VRSC motorcycles was 43.0%, compared to 48.1% for the fourth quarter of 2006.

And Sportster motorcycle mix was 21.1% of the total mix for the fourth quarter of 2007, compared to 16.9% during the fourth quarter last year.

And for the full year of 2007, touring motorcycles represented 34.5% of the mix, compared to 35.3% in 2006.

Custom motorcycle shipments decreased from 46.2% to 43.7% for the full year.

And Sportster shipments for the full year increased from 18.5% in 2006, to 21.8% in 2007.

While mix is ultimately derived from customer demand, we will continue to manage the mix, and carefully balance shipments, among the Touring, Custom, and Sportster families.

We will continue to deliver innovative Touring products to fortify our leading model family, and reinvest in Custom, with products such as the new Rocker, Rocker C, and the just introduced Cross Bones.

Our investment in Sportster will continue to support our youth and new customer outreach initiatives.

Now turning to the fourth quarter financial results for the motorcycles and related product segment, revenue from Harley-Davidson motorcycles was $1.12 billion, or down 8.6% compared to last year's fourth quarter.

Average revenue per unit increased by $590, or 4.5% from the year-ago period.

This increase was primarily due to increased model year pricing, favorable foreign currency exchange rates, and favorable mix within families, primarily driven by 105th Anniversary models.

Revenues from Parts and Accessories was $165.2 million, for the quarter, or a decrease of 7.8% from the year-ago quarter, primarily due to lower motorcycle retail sales.

For the full year, Parts and Accessories revenue was $868.3 million, an increase of 0.7% compared to 2006.

P&A revenue was up slightly for the year, due to strong parts sales and growing international P&A business.

General merchandise had another great quarter, with revenue of $73.4 million, an increase of 4%, or $2.8 million.

For the full year, general merchandise revenue was $305.4 million, an increase of 10.1% compared to 2006.

Several factors contributed to the increase, including international growth, especially in Europe, strong 105th Anniversary general merchandise product sales in the second half of the year, and an overall increase of women's apparel sales.

Now turning to margin, gross margin for the quarter was 35.7% of revenue, down from 38.0% in the fourth quarter of 2006.

During the quarter, there were a number of factors that negatively affected margin, including the allocation of fixed cost of fewer units, increased model content, and raw material surcharges.

Operating margin was 18.1% in the fourth quarter of 2007, down from 22.5% in the fourth quarter of 2006, as higher product development and marketing spend, drove higher year-over-year operating expenses on lower revenue.

Okay, now let's turn to the retail environment.

On a worldwide basis, retail sales of Harley-Davidson motorcycles by our dealers were down 6.1% for the quarter, compared to a year ago.

In the U.S., retail sales of new Harley-Davidson motorcycles decreased 14.2% in the fourth quarter of 2007, compared to the same period in 2006.

Overall, the U.S.

651-plus cc motorcycle market decreased 9.0% in the fourth quarter.

For the full year of 2007, worldwide retail sales decreased 1.8%.

Retail sales of Harley-Davidson motorcycles by our U.S.

dealers were down 6.2%, while the overall 651-plus cc motorcycle market decreased 5.0% in 2007.

Outside of the U.S., our dealers impressive overall growth continues, with fourth quarter retail sales increasing 17.4%.

Europe was once again strong, with a year-over-year sales increase of 10.9%.

Japan was up 4.5%.

Canada was up 45.9%, or 605 units, primarily due to better product availability during the quarter.

The remaining 45 or so countries where our motorcycles are sold, were up a collective 28.6% for the quarter.

So for the full year of 2007, retail sales of Harley-Davidson motorcycles in our international markets were up 13.7%.

To drive further growth in 2008, we will continue to invest in international marketing, product, and dealer support activities.

Now, I will review the results of Harley-Davidson Financial Services for the fourth quarter and full year, then I will turn it over to Sy Naqvi, President of HDFS, who will share his perspective on the business, and several customer and operational initiatives.

Harley-Davidson Financial Services delivered fourth quarter operating income of $38.6 million, a decrease of $9.1 million, or 19.1% compared to last year's fourth quarter.

This decrease is primarily due to a $6.4 million write-down of our retained securitization interest during the quarter, and an increase in the allowance for credit losses, partially offset by an increase in net interest income.

2007 was a challenging year for the consumer credit industry, which experienced increased credit losses and delinquent loans.

HDFS was no exception, with the 30-day delinquency rate for managed retail motorcycle loans increasing to 6.15% at the end of the fourth quarter, compared to 5.18% at the end of the fourth quarter of 2006.

Annualized credit losses on managed retail loans totaled 1.91% for 2007, compared to 1.41% for 2006.

The increase in credit losses was driven by a higher incidence of loss, primarily due to the increase in delinquent accounts, and continued pressure on recovery values for repossessed motorcycles.

In the later part of the year, recovery values on Harley-Davidson motorcycles appeared to have stabilized.

The write-down of our retained securitization interest resulted from our normal quarterly review and evaluation of the assumptions, used to value our retained securitization interest.

Due to the unfavorable trends in delinquencies, and credit losses on our retail motorcycle loans, HDFS recognized an impairment loss of $6.4 million on several retained securitization interests in the fourth quarter of 2007.

For the year, HDFS originated $3.0 billion in retail motorcycle loans, an increase of 8% over 2006.

Its retail market share in the United States related to new Harley-Davidson motorcycles grew to approximately 55% in 2007, compared to approximately 49% in 2006.

The dealer loyalty program performance network, which rewards dealers for doing more business with HDFS in our wholesale, retail, and insurance products, continues to be very popular, and has been a significant factor in driving this market share growth.

In addition, the motor company sponsored 'Stick It To The Man' promotional campaign, which ran during the last two months of the 2007 model year, also contributed to the market share increase.

The capital market, which HDFS relies on to fund its portfolio growth, experienced significant volatility over the later half of 2007.

In 2007, HDFS securitized $2.5 billion in retail motorcycle loans, issued $400 million in unsecured notes, and continued issuing unsecured commercial paper.

Currently HDFS plans to securitize its retail motorcycle portfolio in 2008, but we will continue to evaluate various funding alternatives, and will adjust our plans as necessary, based on market conditions.

Gains on securitization transactions in 2008 are expected to be lower than historical results, until the current capital market conditions normalize.

While market conditions are changing almost daily, based on what we know at this point, we expect our first quarter securitization gain to be approximately breakeven.

Now with that, I will turn it over to Sy, President of HDFS who will discuss his perspective on the business, and several customer and operational initiatives.

Thank you Tom, and good morning.

In addition to getting to know our employees, since joining HDFS in February of last year, my principal focus has been on understanding the need of Harley-Davidson dealers and customers.

The dealers are our primary clients, and as such, their satisfaction is paramount to the success of our business.

I have been impressed with their passion for the brand and loyalty to Harley-Davidson, but most of all, I have been impressed with their commitment to improving the customer experience.

As I met with dealers, two key themes emerged.

They want a better overall experience for their retail customers, and they want us to make it easier to do business with HDFS.

To address these issues, we had to shift our focus and become more customer centric.

This involves taking a fresh look at all of our customer related processes and systems, and changing the way we work with the dealers.

To do this, we piloted a new operational structure in the third quarter of 2007.

This new structure, which was implemented on January 2nd, is designed to improve our decision-making process, and enhance service levels by utilizing cross-functional teams to deliver retail loan and insurance products.

Under this new structure dealers work closely with dedicated teams, who can help fulfill all of their retail financing and insurance needs.

We also introduced a new loan origination system, which simplifies and streamlines the loan application and decision-making process, and generates faster credit decisions.

Now this customer-centric model is already making a difference for the dealers.

And the additional improvements that are planned for 2008, will strengthen our relationship with them even further.

Also in 2007 we made changes to our underwriting and loss mitigation activities, to adapt to the volatile market conditions.

In terms of loss mitigation, we increased the effectiveness of our early stage collections, by more closely aligning our systems with those of our outside vendor.

This has resulted in a marked improvement in collections.

We also added resources to focus on later stage delinquencies and collections, and enhanced our policies and procedures for the repossession of collateral on defaulted loans.

Additionally, we are currently in the process of outsourcing the resolution of bankrupt accounts to a firm that specializes in that area.

Now turning to the underwriting side, we also took several actions to adjust credit standards.

Specifically, we tightened loan to value ratios for certain credit tiers, and added staffing to focus on the performance of the portfolio itself.

We also strengthened our underwriting rigor in the subprime part of our portfolio, which remains steady in 2007, at between 25 and 28% of our retail managed receivables.

Finally, in the fourth quarter, we hired a new Senior Credit Officer, to oversee our credit and risk management functions.

While we expect these changes to strengthen the future performance of our portfolio, these are challenging times in the consumer credit industry.

Therefore, we anticipate higher credit losses and delinquencies in 2008.

But I would like to add that despite the challenges we faced in 2007, HDFS generated $212.2 million in operating income for the full year, compared to $210.7 million for the full year of 2006.

HDFS has a strong business model which I believe still has much untapped potential.

I am confident that our high quality products, dedicated employees, and a loyal dealer base, will continue to provide unique value to Harley-Davidson.

With that, the I will turn it back over to you, Tom.

Great, thank you, Sy.

Now let's take a look at some consolidated financial results.

The Company's fourth quarter effective income tax rate was 35.5%, compared to 35.1% in the same quarter last year.

Fourth quarter 2006 effective tax rate was lower, primarily due to the retroactive reinstatement of the Federal research and development tax credit.

The effective income tax rate for the full year of 2007 was 35.5%, compared to 35.8% in 2006.

So all-in-all, net income was $186.1 million in the fourth quarter, down 26.3%, or $66.3 million from the same period last year.

Diluted earnings per share for the fourth quarter were $0.78, a decrease of 19.6% from the year-ago period.

Moving on to cash flow, the Company had another strong year of cash flow generation, operating cash flow for the full year was $798.1 million, this compares to $761.8 million in 2006.

For the full year of 2007, depreciation was $204.2 million, and capital expenditures were $242.1 million.

The increase in capital spending was primarily driven by investments in the Harley-Davidson Museum, and the expansion of the Milwaukee powertrain manufacturing facility.

This compares to $214 million in depreciation, and $219.6 million in capital expenditures for the same period in 2006.

In 2008, capital expenditures are expected to be between 240 and $260 million, which is primarily driven by an increased investment in our manufacturing capabilities and product program activities.

And now I will turn it over to Jim Ziemer, who will provide his perspective on the business and our outlook for 2008.

Thanks, Tom.

As you have heard, and seen our results this morning, the weak U.S.

economy made 2007 a challenging year for Harley-Davidson.

The bright spot in 2007 performance is our growth in the markets outside the U.S.

At 17.4% fourth quarter growth was on top of nearly a 30% growth in the fourth quarter in 2006.

Here at home, the picture is very different.

Consumer confidence is low, and housing and credit issues persist.

All this adds up to a weak retail sales environment for major discretionary purchases, including our motorcycles.

While a year like this is not a pleasure for me as CEO, I am convinced that we are taking the right actions under the circumstances, to ensure the long-term success of Harley-Davidson.

For 105 years the Harley-Davidson brand has represented the ultimate in personal expression.

It is among the most admired brands in the world, and protecting it is one of my highest priorities.

That is why early last year we made an important commitment to our worldwide dealer network.

We told them that the Company would ship fewer motorcycles than we anticipated they would sell at retail during 2007.

And based on how the U.S.

economy was shaping up by late summer, we had to act to help keep our commitment.

And therefore, we had a temporary shutdown of our production facilities in the fourth quarter.

Worldwide dealer inventories are lower today than they were a year ago.

But some dealers are still experiencing uncomfortable inventory levels.

Others have shortages on certain models or colors.

Over time, we expect our new allocation system will address these issues.

But because I believe protecting our brand is so important, because many of our U.S.

dealers are uncertain about the current state of the economy, we recently recommitted to the dealer network that we will once again ship fewer motorcycles in 2008, than we expect them to sell.

And regardless of the economic conditions in the U.S., we have an exciting agenda of activities planned for our customers around the world during 2008, along with some surprising product news to share with them this spring as well.

At the Winter Dealer Meeting this week in San Antonio, we treated our worldwide dealers to a preview of what is in store.

We introduced them to another one-of-a-kind new motorcycle for the customers to enjoy.

It is called Cross Bones.

It is in addition to a collection of bikes we call Dark Custom.

A Dark Custom model is characterized by defiant looks, chopped custom creativity, and raw finishes.

The Dark Custom soulmate to the Cross Bones include Nightster, Night Train, the Night Rod Special, and the Street Bob.

We have also revved up the dealer's passion for riding, with a closer look at our incredible plans for the 105th Anniversary celebration, including 105 scheduled motorcycle rides, that will end in Milwaukee on Labor Day weekend, to see an unbeatable lineup of 50 bands over three days, capped off by none other than Bruce Springsteen and the E Street Band.

This summer also marks the Grand Opening of the Harley-Davidson Museum, which will be the ultimate gathering place for motorcycles for years to come.

Early in the call hearing from both Tom and Sy about the U.S.

economic challenges, the motor company and HDFS are preparing for in 2008.

Given the current business environment, we will be cautious about how we proceed into 2008.

Beginning with the first quarter, we plan to ship in the range of 68,000 to 72,000 Harley-Davidson motorcycles.

That compares to 67,761 units in 2007.

For the full year, we also expect moderate revenue growth, lower operating margins, and a diluted earnings per share growth rate of 4 to 7% compared to 2007.

We will closely monitor the retail environment, and regularly assess our wholesale shipment throughout the year.

I have absolute faith that when the U.S.

economy rebounds, as it always has, we will be extremely well-positioned to capture future growth opportunities.

Until that time, we will continue to take the necessary actions to protect our brand.

In addition, we will continue to invest in areas that will drive our business forward, including development of international markets, product development, marketing, and the development of our people.

So all-in-all, I am keeping the faith through this unsettling U.S.

economy, because we have a lot going for us.

My faith rests comfortably on the fact that our brand is so powerful, that millions of people aspire to own a Harley-Davidson some day.

And our continuous stream of new products will get even better at the model year introduction in July.

Demand for Harley-Davidson motorcycles continues to grow in our international markets, and there continues to be a lot of opportunity to grow outside of the U.S.

The Company continues to generate tremendous earnings, which results in significant cash, that will be reinvested in the business, or returned to shareholders via share repurchase and dividends.

With that, I would now like to open up the phone lines for questions.

Elsa.

Thank you.

The floor is now open for questions.

(OPERATOR INSTRUCTIONS)

Our first question is coming from Tim Conder with Wachovia.

Please go ahead.

Thank you operator.

Couple of questions.

Amy, congratulations.

Same thing to Mark.

Jim or Tom, whoever wants to address this, can you maybe talk about what level you would feel comfortable on cash on the balance sheet, and where we are going with this, is would you burn the cash levels down more to accelerate your share repurchase?

It just appears that it is going to be difficult to get there on the production side, given the current state of the overall global market.

And then maybe in relation to the cash question, with HDFS, in December you issued $400 million in debt.

Was that a timing issue, or are you anticipating, given your comments, Tom, in the credit markets, that will you keep more on the balance sheet, so to speak, with the securitizations, at least in the near term, given the state of the credit markets?

Thanks, Tim.

It is Tom.

Good morning.

Couple questions.

On the first one regarding share repurchase and cash on the balance sheet, clearly we have been very aggressive over the last several years on buying back our shares, and last year was no exception with buying back over $1.1 billion.

So clearly we feel that the shares are undervalued at these levels, and are committed throughout 2008 to continue our share repurchase activity.

We ended the year with under $500 million of cash on the balance sheet, and I think we will continue to look at what is the right capital structure for the Company, and the right amount of cash on the balance sheet.

There is an ongoing dialogue that Jim and I have, along with other management members, as well as the Board, but at this point in time I think we have got an appropriate balance sheet, but we will continue to have ongoing dialogue regarding the cash balance.

Looking at HDFS, and the issuance of $400 million of medium term notes in the fourth quarter, it is really part of hang longer term capital market strategy, about diversifying our funding sources in the capital market, and making sure we have significant financial flexibility in all of the different ways we can fund our business.

So at that point in time in the fourth quarter, we opted to do an non-secured MTN transaction, which from a pricing perspective was more attractive than the securitization market.

As we go forward, the securitization market will be our primary vehicle for financing HDFS, but we will continue to look at other sources of financing such as MTNs, and commercial paper programs, and other vehicles as well.

So I think you can look for us over time to diversify that funding source.

Okay.

And then one last question here.

You continue to see some growth in the operating expenses.

More holistically I guess, whether it is on the gross margin side or through operating expenses, any point or anything that you guys have looked at, as to what your negative operating leverage could be, say if production is down a percent or two or whatever, because obviously the Company hasn't been here in its past history, but again you are doing the right thing in the near term for the business on a long-term basis.

But any comment from what your negative leverage factor would be?

On an operating leverage basis?

Tim, Jim Ziemer.

Basically looking at the Company, you need to talk about looking at where we are at right now.

A quick reminder.

Although 2007 is not exactly where we would have liked to have ended up, 2007 was the second highest retail year we have ever had in the history of Harley-Davidson.

So we are looking at this as, again, an economic cycle.

We will get through it.

We are investing quite heavily in the business in areas of engineering, product development, marketing, and people development.

And when this economy pulls out, we are going to be well-positioned to grow this Company quite well.

Now, you know, we are not going to speculate if this economy takes a bigger tank that it already is right now, but for the conditions we currently though we have positioned ourselves quite well.

Okay.

So again, at this point, you are going to continue to invest more as a short-term issue, and not looking at some more dramatic cost cuts, so to speak?

That is correct.

But as Tom pointed out in his commentary, we look at this on a regular basis, to make sure that we are continuing to get the signs from all of our markets, and the business in general.

Okay.

We will follow up with Amy and Tom later.

Thank you.

Thank you, Tim.

Thank you.

Our next question is coming from Craig Kennison with Robert W.

Baird.

Please go ahead.

Good morning everyone.

Couple questions.

Can you address how the allocation process has affect pricing in the marketplace at all?

Then also address your negotiation status with the Milwaukee union.

Thanks.

Sure.

Maybe I'll start off on the first one, allocation, and I will let Jim address the Milwaukee negotiation.

Just a little background.

We did introduce the new allocation system in the second half of 2007.

It has been overall very well-received by the dealers, and we are in the early stages of implementing it, but already seeing some positive early signs and getting good feedback from the dealers.

So I think it will take a little more time as we go through a full year, and cycle the allocation system to really optimize it, but clearly we are making good progress in working out closely with the dealers, and it is really helping us on a forward-looking basis, getting the right motorcycles in the right place at the right time.

So it is early, but we are pleased with it.

From a pricing standpoint in the marketplace, we still based on the data we see, pricing still remains solid on new motorcycles, with bikes on average selling at or slightly above MSRP.

With that I will let Jim talk about current negotiations.

Negotiations, a little background.

On March 31st, 2008, our current Wisconsin operations contract with our unions expires.

We are set to go into good faith negotiations between the Company and management.

It would not be wise to discuss what we are discussing, but we are looking for a mutually beneficial relationship, and a contract that benefits both parties.

At this time, we feel that we will be successful in accomplishing that.

If I could just follow up, your Q1 production guidance in some ways is almost flat with last year when you took a month off of production related to a prior strike.

Does the current guidance anticipate any work stoppage at all?

Thanks.

No, it does not, Craig.

We are just being cautious with the economic environment.

We just want to be cautious in our approach, and we have taken our production daily line rates down in light of that.

And we also have planned in the first quarter to have a significant amount of motorcycles being shipped to our international market.

So those bikes will be on the water, and will not be counted as shipments in the first quarter as well.

So it is really a combination of just being cautious with our production day rates, and then continuing to ship units off to our international markets.

Thank you.

Thank you.

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

Thank you.

Two topics, one is on the margins.

Looking at your first quarter versus fourth quarter, it seems, of 2007, you produced almost 20% more in the fourth quarter.

You did not have a strike, yet your margins were almost 200 basis points lower.

You mentioned the fixed cost absorption.

What are some of the other factors causing this drop-off within the year, and as we look forward, as we make our production assumptions, is 18% margin on the 80,000-unit production a reasonable assumption, or were there some unusual things happening in the fourth quarter?

If you look at the fourth quarter of the year, when we decided to take the units out in September, part of that process of taking the units out is, we did a temporary plant shutdown for a week or so at our manufacturing facilities after Thanksgiving, and that obviously impacted the volume, which impacted our fixed cost absorption.

In addition, during the quarter, we also had significant investment in new model content, as well as raw material surcharges continued to plague us in the quarter, and we recorded just over $6 million in raw material surcharges in the fourth quarter as well, so there were a number of factors that drove the margin decrease in the fourth quarter of 2007.

Looking forward, we have given guidance for 2008 that in-total operating margins will be down, and that is really a factor of several things, but as Jim mentioned previously, we are going to continue to invest in the business for the long term, so it will fuel our international growth, then when things turn here in the U.S.

we will be very well-positioned for it.

I see.

The other question is on the retail.

It seems there was some underperformance in the U.S.

for Harley, relative to the heavyweight as well as the overall on-highway.

What do you think drove that?

Going back to the quarter, the MIC data indicated there was a substantial drop-off in December.

Did you see that as well, and as you look into January, can you make any comments on what you are seeing?

No doubt, as we reported the numbers, retail sales for the fourth quarter that we were down quite a bit, a little bit more than the industry.

During the course of the quarter, I think as you look at MIC data that came out, there was a good indication that the quarter was trending downward, but I don't think with the U.S.

economy, and the consumer confidence being where it was, that that was totally unexpected as we went through the quarter, and since their products, number one, as we look at either the fourth quarter or the first quarter, those are the two smallest quarters in retail sales.

When small changes occur on small numbers there are some big percentages.

At the same time, we continue to look at this, we talk to our dealers and their confidence, and although fourth quarter did trend down during the quarter, and was the lowest quarter versus prior year of any of our four quarters, I think that we still have confidence in where we are with the current guidance.

We are not going to, on the second part of your question, we don't give mid-quarter guidance on retail sales.

Okay, thank you.

Thank you.

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

Please go ahead.

Thanks.

Good morning.

Couple of questions.

First, you said recently that your guidance for '08 sort of operated under the assumption that the 2008 economic environment would be similar to 2007.

Since you didn't change your guidance, is that still your assumption, or are you now planning for a weaker economy in the U.S., but feel better about your international business?

Then I have another question after that.

We made announcement and we took out production, and we took a very cautious approach, and we are looking at the signs.

Obviously when we made that decision, we were looking at a very dismal August we were coming off of, so we had a pretty dreadful view of the fourth quarter, and I think we addressed it.

So for our view of the current state of affairs based on August last year, which had some, was a very down quarter, I think was very appropriate, and we are still consistent with that approach.

I think the way we look based on that data, and that was on some pretty disappointing August retail sales, I think that we are still consistently in that range of retail sales that we were looking at, and the same time that being said, I think Tom said many times in his discussion here, that we will continue to look at all the data to make sure that things are changing.

We will make the appropriate adjustments.

I would just add on, Ed, I think Jim has got it.

There is no doubt, we think 2008 is going to be a challenging year for us, and for the industry.

When we put the guidance out, things probably the indications have gotten a little, have deteriorated a little further, so it is going to be a challenging year, but as Jim said, our guidance was built around a cautious approach to the year, and we are going to look it at the environment very closely and watch it, and we will make the appropriate changes if we need to at any point in time.

But the good thing is the international business, as you mentioned, continues to do very well, and we continue to be very pleased with the progress we are making in the market, and it continue to deliver strong results, and we see that continuing in 2008, and as Jim mentioned in his comments earlier, we also have the 105th Anniversary going on this year, which is going to draw a lot of media attention, and do a lot of brand building activity.

A lot of outreach activities going on.

So 2008 is a big year for the Company, and we think that could help also support the guidance we have out there for the year.

So all-in-all, we are pretty excited around some of the marketing initiatives we have, and all the activity around the 105th Anniversary this year.

No doubt we have more marketing activities than anybody I can imagine with the 105th and the new products, and the entertainment and Museum all opening up.

We have got a lots of things that we've put in place for this year.

Great.

Thank you.

Can you elaborate a little bit on your current access to the securitization market?

Are you able to securitize receivables right now, and if so, do you think you would have access to all the traunches?

Yes, Ed, it is Tom.

In HDFS as you know has been in the securitization market since the mid-1990s, and has a very solid track record, and a very solid name in the market.

We did a transaction in the third quarter last year in difficult market conditions.

We do have access to the securitization market.

I am comfortable we could go into that market, and access it at this point in time.

Clearly the cost of accessing the market has gone up, not only for us, but for all issuers.

So it is not really a matter of access, it is really a question of the cost, and is that the most efficient way to support the growth at HDFS.

Regarding the different classes and fixed versus floating, that really is changing a lot based on market conditions, and what is in the market.

So how we ultimately structure a transaction would really depend on feedback from investors, and what the real current market conditions are.

So we are obviously watching it closely, and we will make a decision here in the first quarter, how we are going to go about funding the business.

But just to be clear on your guidance for breakeven gain on sale assumptions, that is assuming the current mark conditions, basically if you went and securitized all of the traunches today, that you think you could be at breakeven?

I think that is right.

As you know, in any securitization transaction, there are a lot of variables, and a lot of factors that move around the up-front gain you record, but based on what we know today and our assumptions, we think we could access the market at a breakeven rate.

One more quick one if I could.

You mentioned plans to ship fewer bikes than your dealers sell.

Can you give us some order of magnitude on what that spread will look like?

Is it it 1,000 fewer, or 10,000 fewer?

We are not going to give guidance on what the inventory level is, but I think that we look at that, and we put some cushion in that number as evidenced by our retail significantly exceeding our wholesale last year, but we are not going to give guidance on that gap.

Okay.

Thanks, guys.

Thank you.

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

Please go ahead.

Good morning.

Two questions.

A quick follow-up on the securitization gains.

Obviously the third quarter securitization gain was as a percentage of the receivables about as low as we have seen in recent memory.

But that was impacted by two different factors, not just the cost of getting that securitization done, but also lower than normal rates being given to borrowers.

So as you look at this first quarter breakeven gain, is it mainly the cost of getting it done, or is it also that you are having some unusually low borrowing rates that you are giving out, due to some of the promotions that you have going on?

There are a couple of factors, James that drive that gain.

Clearly as I mentioned, the cost of accessing the securitization markets have gone up, and then as well, if you look on our side of it, there still are some lower rate promo loans that would be part of the securitization transactions that would be included in this securitization, as well as our higher assumptions on credit losses compared to history.

We have also at this point in time, have a higher credit loss assumption.

So when you take those three factors into account, that pretty much puts the basis for our guidance, around the gain in the securitization transaction we are contemplating.

And so the costs associated with getting this thing done, the interest rates that investors will accept, that has actually gotten worse since the August securitization?

Yes, pricing has gone up.

Even from the August time period.

Again not only for us, but for the entire market.

Okay.

Then my second question, I was wondering if you could just flesh out a little bit more sort of how you have been able to remain so strong internationally, and I guess especially in the Canadian market, and where you expect that to go, when you look at some of the economies of some of countries that you do business in.

Are they correlated to the U.S.

market?

What you are seeing internationally, and whether or not we can expect that to continue?

I will answer that question.

On retail sales outside the U.S., we are strong in all the markets outside the U.S.

without exception, when you look at it on a total year basis.

Whether it be Canada or Europe or Australia or Japan and the markets of Latin America, that is driven by many different things.

Economies are doing well, certainly the weak dollar has contributed to some of that, but as we continue to build the distribution network, and we acquire some of our independent distributors over the last five, six years, we are doing things and rationalizing the dealer networks in many of the countries we sell into, we have acquired in the last year the Australian distributors.

We have just recently acquired the distributorship in Mexico, so we continue to take on that strategy, so that as we own the distribution network, we can operate that for the long term health of the business, and sell customers the experience that helps make us strong, and differentiates us from our competition, but it is many different things.

It is growing the dealer network, putting in dealers that continue this experience.

It is the weak dollar, many different variables that continue to drive our international growth.

But bottom line, I think it is a lot of the efforts that we start putting into the international markets, four, five six years ago, that are beginning to pay dividends now.

And so as you look forward to 2008 and as you grow your dealer network, do you expect that growth to continue at, above, or below sort of the 2007 pace?

It all depends on market by market.

If you look at Europe, as a percentage growth rate, that is a much more mature market.

The dealer growth rate there would not be as great, and I think Japan would be very similar growth rate of dealers in Europe, as we look at some of our other markets, they will grow at a very good rate.

As you have seen, as Tom commented, that markets besides the larger markets that had 29% growth rates, not only for the fourth quarter, but had 20% growth rates for the whole year.

And as we enter those markets, the growth rate of the dealers will be commensurate as we grow those markets.

Great, thanks, guys.

You are welcome.

Thank you.

Our next question is coming from Felicia Hendrix with Lehman Brothers.

Hi, guys.

My first question is, Tom, I wanted you to just clarify something that you said about the shipments in the first quarter.

You said that since the international bakes are going to be basically on a boat, they are not going to be considered part of your shipments in the first quarter, so what I am trying to get my arms around, is the majority of the unit guidance for the first quarter U.S.

shipments?

No, we will still have a significant amount of international shipments, but I was just highlighting the fact that we also, because of the strong growth, will have an increased number of units in transit over the quarter end this period.

But the major factor driving the first quarter shipment guidance really is just the lower production day rates, and the cautious view we are taking to the year.

Okay.

And then in the fourth quarter, your domestic shipments were down 20%, international was up 20%.

For the domestic kind of pattern, or maybe not the word pattern is not the correct word, but the down 20% in the fourth quarter, do you think that is the kind of rate we will see throughout '08?

Yes, I am not going to comment on specific rates, but you have got to be careful when you look at any quarter, and the mix between international and U.S.

It can vary quite significantly, depending on product availability, both here in the U.S., as well as where we need to put product to feed the growth in the international market.

So I would caution you to be careful looking at any one quarter, and drawing any conclusions.

On a long-term basis though, we have said that we expect our international shipment growth rate to grow faster than our domestic growth rate.

More importantly, as the allocation system in the U.S.

kicks in, that will get us closer to the mix we need, to adjust to the more seasonal nature, and so a lot of times, and also since we have the long supply chain, getting to Europe, we have to ship the bikes out a month, month and a half earlier, so those shipping patterns, seasonality mix issues, and then demand issues within market all drive that.

So there are many different factors.

So to come out and say that growth rate or decline will continue, it would be hard to forecast.

Okay.

Regarding your market share, you gave us the data of registrations, what you were down in the quarter what the market was down in the quarter.

Do you know what the number what the overall heavyweight market was down, excluding Harley?

What I am trying to figure out, are you guys losing market share?

It is Tom.

I don't have that specific number now.

We can get it it to you afterwards.

But for the full year our market share was down slightly relative to the entire industry, and at the end of the day, we really don't run the business specifically, or to focus on market share, so the important thing I think you look at, is by far we still continue to be a strong leader, or be the leader in the heavyweight motorcycle industry.

And if you look at the change in market over the last year it is pretty small.

Our market share TNTs to stay right around that 45 to 50% here in the U.S.

for a number of years.

In the international market, we continue to pick up market share.

Okay.

I mean, staying on top of what Tom said, though we don't run the business for market share, we will look at those things for indications, and as Tom said, I think we finished the year at 48 plus% of market share versus 49, I think we did lose, but I think it was less than 1% of market share.

So we have 3 times the market share of our #2 competitor, I think that is Honda at about 16%.

We continue to look at it, but we certainly have a very good percent of the U.S.

market.

Regarding your securitization write-down, can you specify which pools that might have driven that decision, which pools does it pertain to?

There were several pools, and they all related to 2004, 2005, 2006 securitization transactions.

Okay.

Thanks, Felicia.

We need to move on.

We have a couple more questions I would like to get to.

Our next question is coming from Robin Farley with UBS.

Please go ahead.

Thanks.

Just trying to understand your guidance better since your EPS guidance hasn't really changed from September-October, despite worsening sales in the fourth quarter.

You said you are going to ship fewer than you sell, but your moderate revenue growth guidance for '08, kind of implies that production would only be down kind of low-single digits at the worst, maybe even flat.

Am I interpreting that wrong?

I guess I am just trying to, if that is what you are anticipating that the sales environment would be kind of flat to maybe up slightly in '08, I guess I am just trying to make sense of that, versus the declines we saw in the fourth quarter.

And I have got one more clarification question.

I will handle that one first.

Robin, as we have talked about before several times, we really don't give any annual shipment or production guidance.

We have given the moderate revenue guidance.

As Jim and I said, clearly since we first gave the guidance in the September time period things have deteriorated slightly here in the U.S., and when we gave that guidance, we were taking some of those factors into account.

Clearly there is a lot that goes into the bottom line of delivering our EPS guidance, and that is really management's challenge this year, is to work through challenging economy here in the U.S., continue to grow our international business, allocate capital smartly, and the share repurchase activities, or other business initiatives to drive growth, and we are prepared to do that.

It is going to be a challenging year, but at this point in time with all the activities around the 105th and international, we are at this point in time comfortable with the guidance.

Okay.

So I guess the idea of moderate revenue growth, you are saying that you're comfortable you can get to that, even if production were going to be down more than 5%, I guess I am just trying to see if there is some other lever that I am not thinking of, that could get to you moderate revenue growth?

Robin, again we don't comment on production levels.

We have given moderate revenue growth.

You can run your own models but there are many levers that we have as I just mentioned, whether it is on the expense line, or other businesses or international growth, et cetera.

Okay.

Then the other clarification was just, I think that the opening comments, there was a comment about recovery value stabilizing in HDFS, I guess just given that new bike sales declines kind of worsened through the quarter, can you help us understand how you see the recovery value stabilizing?

Yes.

We clearly saw a trend in the latter part of 2007 of stabilizing used bike prices, and if you look at used bikes, used Harley-Davidson sales in 2007, they were very strong.

Some of our data from RL Polk and so forth, shows that through November used motorcycle sales were up over 8%.

So I think clearly the used market is very strong, which you would expect in this economic challenging time in the U.S.

as some people are opting for a used Harley instead of a new.

I think that strong used performance has a lot to do with the stabilization of used bike prices.

Thanks.

Thank you.

Our last question is coming from Bob Simonson with William Blair.

Please go ahead.

Thank you.

There is a lot of moving parts for the HDFS in the year ahead.

I recognize that.

But Jim or Tom, is your guidance for the corporation overall, is HDFS, in terms of income, within the boundaries that you have given?

Are you anticipating that they will have a better, or a more difficult comparison, versus the motor bike company?

We have taken the current economic environment into account when we looked at HDFS' financial plans for the year.

So clearly we have taken the environment they are operating in into account in our overall guidance for the corporation.

We know it is going to be a challenging year, and as Sy mentioned in his comments, we expect higher losses and higher delinquencies in 2008 to 2007, and we have incorporated that into the guidance.

On the positive side, you have seen HDFS continue to gain market share in the right way, through the performance networking program they had.

They have really done a nice job of bringing more dealer business into HDFS, as well as all the different customer initiatives and operational initiatives.

So they are operating in a very challenging environment, but at the same time the team down there is really making a lot of progress, on both customer service and operational efficiency.

So, yes, long story, but HDFS is included in our overall guidance.

But is it in-line with the performance of the bike company, or the manufacturing company, or is it assumed to be less?

We discontinued giving HDFS guidance as part of our overall guidance a year or so ago now.

So I am not going to comment, other than to say the business model is pretty solid as you saw.

They were able to deliver $212 million of Op income last year.

Last quick question.

Your CapEx last year and your estimate for this year, how much is the Museum in there, and if I subtract it out, what is kind of the going forward CapEx level in to the future?

Going forward, we gave our guidance of 240 to 260.

We spent about $40 million on the museum last year, and will spend another 20 to 25 or so in 2007.

So you can look at that as a one-time investment in CapEx.

But we do have still a significant investment in capital and some of our product development programs, and an expansion project in Milwaukee for our powertrain operations.

We have slowed that down, given the slow down in demand, but we will continue over the next several years to invest in that expansion plan.

So going forward, in 2008 again it is 240 to 260.

Beyond that, that is probably not a bad run rate to consider at this point in time.

The number minus the Museum spending, or just the aggregate of 250ish?

I would just say there is a lot of things depending on the growth model and the growth in international that we may have to invest in.

So we don't give specific guidance out beyond 2008, but I would think in the ballpark of where we are today going forward is not bad.

Thank you very much.

This is a capital intensive business, but at the same time we have outstanding returns on our capital that are world-class, and we look at those things, we continue to look at those things in growing the business.

A lot of that is product capital, as well as some of the manufacturing aspects, but I think we have done a fantastic job of getting a good return on our capital investment.

Thank you.

I think we are at the end.

Thank you everyone for your time this morning.

I appreciate your interest, and your investment in Harley-Davidson, and let me turn it back to Amy for some final logistics.

Thanks Tom.

Remember that a taped replay of this conference call will be heard by calling 706-645-6291, and entering PIN number 29424918# until February 1st, or by accessing it on Harley-Davidson's 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 everyone.

Thank you.

That does conclude today's Harley-Davidson conference call.

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