Harley-Davidson Inc (HOG) 2008 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Harley-Davidson first quarter 2008 earnings conference call.

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

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

(OPERATOR INSTRUCTIONS ) It is now my pleasure to turn it over to your host, Amy Giuffre, Director of Investor Relations.

Ma'am, you may begin your conference.

Thank you, and good morning, everyone.

Welcome to Harley-Davidson's first quarter 2008 conference call.

Over the next hour, Harley-Davidson's CEO, Jim Ziemer, will speak to you about actions we are taking to address the U.S.

economic environment and the outlook for our business.

Jim be followed by CFO, Tom Bergmann, who will share the financial results for the quarter.

Then Saiyid Naqvi, President of Harley-Davidson Financial Services, will talk about the performance of that business unit.

Jim Ziemer will share some closing thoughts and open the phone lines for questions.

Before we begin, please note that this call is being webcast live on harley-davidson.com, and will be available for replay throughout the next several weeks before being archived.

It can also be accessed until April 24 by calling 706-645-9291, PIN number 39966333 #.

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 filing with the SEC.

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

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

Thank you, Amy.

Good morning, and thank you for calling in today.

As you have read in our press release, Harley-Davidson has made some significant changes to our outlook for 2008.

Now, I want to open the call today by talking about them.

I believe there are four key things that underlie these actions.

First, the economic slowdown has affected Harley-Davidson along with many other businesses and sectors, and there's no sign of when things may turn around.

Second, in light of the disappointing trend at retail in the U.S., and certainly about the future of the economy, we're moving to position the Company for a business environment that we expect to continue to be challenging.

Third, Harley-Davidson remains profitable and is fortunate to be dealing with the current economic environment from a position of financial strength.

And fourth, and perhaps the most important, Harley-Davidson has always managed the business for the long-term, and we will continue to do so.

So let me talk about the first two of these, the challenging environment and our actions.

Then I'll come back at the end of the call to cover the other two points.

The U.S.

economy continues to make this a very challenging environment for us as it does for any other businesses and sectors.

In the first quarter, the impact of the economic slowdown was felt most acutely at retail, as our U.S.

dealers new motorcycle sales declined 12.8% compared to a year ago, and the rest of the heavyweight industry declined even more.

From my vantage point, it is unclear when the U.S.

economy will recover.

As a result, we have taken important steps to significantly reduce our shipments for the rest of this calendar year and to reduce our workforce.

We now plan to ship 23,000 to 27,000 fewer Harley-Davidson motorcycles in 2008 than we did in 2007.

This action supports our commitment to ship fewer Harley-Davidson motorcycles to our worldwide dealer network than we expect them to sell at retail.

The shipment reduction be l be achieved through temporary plant shutdowns and adjusted daily production rates, resulting in a decrease of about 370 unionized employees.

We also will be reducing the non-production workforce by about 360 jobs.

These actions are critical to position our business for an environment we expect will continue to be challenging.

In light of our actions and the uncertain environment going forward, the Company now expects full-year 2008 EPS to decline 15 to 20% compared to last year, resulting in an EPS between $3.00, $3.18.

This guidance include charge of $20 million to $25 million to implement the workforce reduction.

Beginning in 2009, we expect an ongoing annual benefit of $35 million to $40 million as a result of this work force reduction.

This supersedes all prior guidance and earnings per share, and all other measures.

These decisions on shipments and workforce reductions weren't easy to make by any stretch of the imagination, especially since the employees who will be affected are valued members of the Harley-Davidson family.

But I believe that these decisions are the right ones for the long-term interest of all of our stakeholders, during what we expect to be a continued tough retail environment in the U.S.

throughout 2008.

I'll be back later in the call with some additional perspectives on today's announcements and the direction of the business.

Now, let me turn the call over to our CFO, Tom Bergmann, who will discuss our financial results.

Thank you, Jim.

Good morning, everyone.

I will get into the numbers in a moment, but first I want to reiterate Jim's comments that the tough U.S.

economic environment continues to be challenge for Harley-Davidson.

The actions we announced this morning are necessary steps to ensure we are protecting our premium brand and maintaining our strong financial position for the long-term.

However, it wasn't all bad news for the quarter.

A few highlights include international retail sales continued strong growth up nearly 17%.

We completed $100 million of share repurchases.

We had a successful introduction of the new Softail Cross Bones model and the ratification of a new labor agreement with our Wisconsin unions approximately two weeks ago.

With that, let me now turn to the first quarter of 2008, and the results for the Motorcycles and Related Products segment compared to the first quarter of 2007.

I'll start by looking at our dealer's worldwide retail performance.

Before I begin, please note that in the retail sales tables included in the release this morning, we are providing a new format that more closely reflects our sales organization and strategic plan.

We will now report retail sales for our four major sales regions, North America, Europe including the Middle East Africa, Asia-Pacific and Latin America.

On a worldwide basis, retail sales of Harley-Davidson motorcycles by our dealers were down 5.6% for the quarter compared to a year ago.

As Jim mentioned, retail sales of new Harley-Davidson motorcycles in the U.S.

decreased 12.8% in the first quarter of 2008 compared to the same period in 2007.

Overall, the U.S.

651 plus CC motorcycle market decreased 14.0% in the first quarter.

Outside of the U.S., our dealer's growth continued as first quarter retail sales increased 16.8% compared to the same quarter last year.

Retail sales of Harley-Davidson motorcycles in Canada were up 31.1%, the Europe region was up 7.8%, the Asia-Pacific region was up 19.5%, and the Latin America region was up 53.3%.

Now looking at wholesale shipments for the quarter.

Worldwide Harley-Davidson motorcycle shipments were 71,868 units, an increase of 6.1% over the first quarter of 2007.

Please note that shipments in the first quarter of 2007 were affected by a strike at Harley-Davidson's manufacturing facilities in York, Pennsylvania that resulted in approximately four weeks of lost production.

Domestic shipments of 47,826 units for the quarter were down 1.9% from the first quarter of 2007.

This shipment volume represented 66.5% of the total volumes shipped to worldwide dealers, down from 71.9% a year ago.

International shipments of 24,042 units were up 26.4% compared to the same quarter last year.

International shipments increased to 33.5% of our total worldwide first quarter shipment volume compared to 28.1% in the first quarter of 2007.

For the second quarter of 2008, we expect to ship between 76,000 and 80,000 Harley-Davidson motorcycles.

This is approximately 15,000 to 19,000 units fewer than the second quarter of 2007 as we begin to implement the shipment reduction we announced this morning.

Many of you asked me about inventory levels at Harley-Davidson dealerships in the U.S.

At the end of the first quarter 2008, our U.S.

dealers had lower inventory than one year ago, and we believe we are taking the right steps to carefully manage the supply of motorcycles to our dealers.

Today, based on the retail outlook for the U.S., we made the difficult decision to reduce wholesale shipments.

This action is intended to strike a balance between the need for our dealers to have appropriate inventory levels to meet retail demand as they enter the busiest selling part of the year while at the same time ensuring they exit the model year with an appropriate amount of carry-over inventory.

As I said before, gauging the right level of shipments is not an exact science, but we are working together with our dealers to continually improve our balance between supply and customer demand.

However, as we begin to implement the shipment reduction during the second quarter, we realize this may result in some inconvenience to our dealers and customers, and we are working to minimize any possible disruptions.

Looking forward, the new allocation system we introduced last year to the dealer network is an important tool that in time will ultimately provide more flexibility and enable us to do a better job of having the right motorcycles in the right market at the right time.

Looking at mix, the mix between motorcycle families and within motorcycle families is ultimately driven by customer demand and in the short-term mix can vary widely by quarter due to a variety of factors.

This quarter is no exception as year-over-year mix changes were affected by last year's strike in York, Pennsylvania where our Touring and Softail motorcycles are assembled.

Touring volume was 36.8% in the first quarter of 2008 compared to 32.2% in 2007.

Custom shipment volume representing our Softail, Dyna and VRSC motorcycles was 40.5% in the first quarter of 2008 compared to 45.4% for the first quarter of 2007.

And Sportster motorcycle mix was 22.8% of the total mix for the first quarter of 2008 compared to 22.4% during the first quarter of last year.

We continue to manage mix carefully and balance shipments between our major motorcycle families based on forecasted customer demand.

Our product investments in Touring continue to be market-leading, and our latest introductions in the Custom segment, Rocker C and Cross Bones are hot sellers as customers are eager to ride these new models this spring.

Sportster continues to be an important source of new customers.

Nearly three-quarters of Sportster owners are new to the Harley-Davidson brand.

Additionally, Sportster customers are extremely brand-loyal as over 90% who plan to purchase another motorcycle in the future, aspire to purchase another Harley-Davidson motorcycle.

Now turning to revenue, revenue from Harley-Davidson motorcycles was $1.02 billion, up 14.1% from the first quarter of 2007.

Average revenue per Harley-Davidson unit increased $997 or 7.6% from the year-ago quarter.

This increase can be primarily attributed to favorable mix and favorable foreign exchange rates.

Revenue from parts and accessories was $181.9 million for the quarter which was down 3.3% over the year-ago quarter.

This decline is primarily attributable to the decrease in new motorcycle retail sales in the U.S.

To help support P&A demand, a website tool that allows customers to select accessories and install them on a virtual motorcycle was updated this quarter to include all available Harley-Davidson models.

Consumer use of that tool is up over 200% compared to last year.

General merchandise revenue was strong at $84 million, an increase of 10.4%, or $7.9 million.

Our general merchandise group has done a great job of enhancing the Harley-Davidson experience for new customer groups, particularly for women and international riders.

Let's take a look at margins.

Gross margin in the quarter was 36.4% of revenue, up from 35.9% in the first quarter of 2007.

This increase can be primarily attributed to favorable mix and favorable foreign exchange rates.

Also, margins in the first quarter of 2007 were affected by the York strike last year and margin benefits were partially offset by additional product and manufacturing costs.

Operating margin for the first quarter of 2008 held steady at 20%, the same as the first quarter of 2007.

SG&A was slightly higher due to international spending, warranty and product development costs which resulted in flat operating margin for the quarter.

Now, I'll turn and I'll review our Financial Services segment results for the first quarter.

Harley-Davidson Financial Services delivered first quarter operating income of $34.9 million, a decrease of $24 million or 40.8% compared to last year's first quarter.

This decrease is primarily due to a reduction in income from securitization.

As most of you are aware, the first quarter was a challenging time in the securitization market.

In the first quarter of 2008, HDFS sold $540 million of retail motorcycle loans.

As part of the transaction, HDFS retained $54 million of the subordinate securities on its balance sheet and recognized a loss totaling $5.4 million.

This compares to an $800 million securitization transaction with a gain of $13 million during last year's first quarter.

The loss in the first quarter of 2008 was driven by increased securitization funding costs due to capital market volatility and expectation of higher credit losses compared to historical trends.

I will now turn it over to Saiyid who will comment on HDFS' operations and portfolio performance.

Thank you, Tom, and good morning.

During the first quarter, economic conditions continued to be challenging for all consumer lenders, including Harley-Davidson Financial Services.

HDFS originated $518 million in retail motorcycle loans in the first quarter of 2008 compared to $630 million in the first quarter of 2007.

HDFS maintained its retail market share on new motorcycles sold in the U.S.

at 51.4% for the first quarter of 2008 compared to 51.3% for the first quarter of 2007.

In terms of credit performance, the 30-plus-day delinquency rate for managed retail motorcycle loans was 4.78% at the end of the first quarter of 2008 compared to 4.08% at the end of the first quarter of 2007.

Consistent with seasonal trends over the past several years, delinquencies declined from the fourth quarter of 2007 to the first quarter of 2008.

Credit losses on managed retail motorcycle loans were 2.71% for the first quarter of 2008 compared to 2.28% for the same period last year.

As I noted last quarter, we have taken a number of steps to improve the performance of our retail loan portfolio.

We continue to enhance our underwriting criteria for new originations.

In February, we implemented several changes, including adjusting our loan-to-value ratios downward for many of the subprime categories.

On the loan servicing side, we took actions to further reinforce our collection in loss mitigation activities.

We allocated more resources for in-house collection efforts and increased the number of collection calls made during the evening hours and weekends.

In addition, we expanded outsourcing of both the early-stage delinquent loans and accounts in bankrupt status to firms specializing in those activities.

In the coming months, we will continue to evaluate our underwriting policies and collection practices, and we will make changes as necessary.

Even in this tough credit environment, we are maintaining our commitment to dealers and their customers to lend across a broad credit spectrum.

During the quarter, the percentage of subprime loans outstanding remained within our historical range of 25 to 30% of managed retail loan receivables.

Clearly, today's economic environment has created challenges for HDFS as it has for most consumer lenders.

We believe we are taking the right actions to meet those challenges, but still expect credit losses and delinquencies to exceed 2007 levels.

I'm confident that HDFS continues to have a strong business model which positions us to optimize opportunities for future growth.

With that, I'll turn it back to you, Tom.

Great.

Thank you, Saiyid.

The debt capital markets which HDFS relies on to fund its portfolio growth continued to experience significant turmoil.

HDFS continues to evaluate various options, including securitization to fund its anticipated future originations.

Based on market conditions, HDFS will adjust funding plans as necessary, but I believe it has sufficient financial flexibility and market access to fund the business through the various debt capital markets.

As I mentioned earlier, HDFS has already completed a first quarter securitization transaction.

In addition, HDFS entered in to a new $300 million short-term committed credit facility during the first quarter to provide additional liquidity for its unsecured commercial paper program.

With the new facility, HDFS can now issue up to $1.7 billion in unsecured commercial paper.

HDFS's balance sheet remains well capitalized with approximately $900 million of equity and strong balance sheet ratios.

Now shifting gears to Harley-Davidson, Inc.'s consolidated financial results.

In the first quarter, our operating cash flow was $146.8 million.

This compares to $519.6 million in the first quarter of 2007.

This decrease was primarily driven by HDFS's smaller first quarter securitization transaction in 2008 compared to 2007, I referred to earlier.

For the first quarter of 2008, depreciation was $49.7 million and capital expenditures were $43.2 million.

For the full year of 2008, we now expect capital expenditures in the range of $235 million to $250 million compared to our previous guidance of $240 million to $260 million.

Turning to our share repurchases for the quarter, the Company repurchased 2.6 million shares for $100.1 million compared to 870,000 shares for $61.3 million in the first quarter of last year.

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 continue to opportunistically repurchase shares when we believe they are undervalued and when we have available free cash flow.

As of March 30, 2008, there were 236.5 million shares of common stock outstanding and 20.5 million shares remaining on two board-approved share repurchase authorizations.

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

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

This increase was due to the expiration of the federal research and development tax credit as of December 31, 2007.

Assuming the retroactive reinstatement of this tax credit, the Company expects its full-year effective tax rate in 2008 will be 35.5%.

So all in all, net income was $187.6 million in the first quarter, down 2.5% or $4.7 million from the same period last year.

Diluted earnings per share for the first quarter were $0.79, an increase of 6.8% from the year-ago period.

With that, I'll now turn it back over to Jim for some additional comments.

Thanks, Tom.

As I mentioned at the top of the call, I believe there are four key things to remember about the current situation.

Earlier I talked about the first two of these, the challenging environment and our actions to deal it with.

Now, let's turn our focus to the other two.

Harley-Davidson remains profitable and is fortunate to be dealing with the current economic environment from a position of financial strength.

Perhaps most important, Harley-Davidson has always managed the business for the long-term, and we will continue to do so.

When it comes to managing business for the long-term, we have one of the most admired brands in the world.

One of my highest priorities is to keep it that way.

Our business and our dealers' businesses are built on being good stewards of the brand.

Sometimes that means we have to make a tough call for today, based on what is good for the business longer-term.

Protecting the brand is why we're committed -- why we committed back in January to ship fewer Harley-Davidson motorcycles to our dealers this year than we expect they will sell at retail on a worldwide basis.

It is why we're acting now, early in the year, to make good on that commitment as we continue to experience a difficult U.S.

economy.

Shifting gears to the second key take-away, we're fortunate to be dealing with the current economy from a position of financial strength and our actions are designed to maintain that position of strength.

Our ability to generate cash enables us to reinvest in the business as well as return value to shareholders through share repurchases and dividends.

New products are the life blood of this business.

Regardless of the economy, customers expect -- no, they require, a constant stream of exciting new products, such as the Rocker C and the Cross Bones.

Investing in product development will continue to be a priority.

The economic downturn will end.

And when it does, we want to make sure we haven't lost time or momentum in our product-development efforts.

We intend to be well-positioned to capture future growth opportunities.

We also continue to invest strongly in our international markets and we see the results at retail.

As you have already heard, retail sales internationally continue to be a bright spot for Harley-Davidson.

We are upbeat about our prospects in our international markets.

One final note on our financial strength, based on our longer-term outlook, we continue to believe we are undervalued at our current share price.

We have strong fundamentals, and I believe continued growth opportunities once the economy gets back on track.

Which brings me to all the great things going on at Harley-Davidson.

A lot of things already underway this year, and there's a lot more to look forward to.

Just over a month ago, we were in Florida for a great Daytona bike week.

One of the highlights was our Get Down to Daytona contest.

Where six female riders won the opportunity to ride to Daytona with Karen Davidson, great granddaughter of one of the founders.

The contest generated more than 17 million media impressions.

Looking ahead to the summer, excitement continues to build for the opening of the Harley-Davidson Museum and for our 105th anniversary celebration where we expect thousands of motorcycles to ride to Milwaukee.

Ticket sales for the 105th have been strong.

This past Monday, an hour after the tickets to Bruce Springsteen and the E-street Band concert during the 105th went on sale, we has sold 20,000 tickets.

We believe the Museum and the 105th will be great draws for current customers and prospects alike.

Both of these events are seeing strong international interest as well.

These are just a few examples of how Harley-Davidson experiences are exciting for customers today and will be for the next 105 years.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Tim Conder of Wachovia.

Please go ahead.

Thank you.

First of all, gentlemen, we're hearing things from the dealers that your new allocation program, plus what you're doing, the restraining production, while painful in the near term, they do appreciate it and it is the right thing to do.

Just a couple of things, the 4X benefit, Tom, in the quarter either on sales or EBITDA basis?

The also any clarity on the material surcharges?

Then the warranties, if you could give us additional color on the higher warranty expenses?

Sure, Tim.

On the FX front, first on a revenue basis, we had a currency benefit of about $45 million during the first quarter.

On an operating income or EBITD basis, right about $19 million.

So that quantifies for you the FX benefits during the quarter.

On the material surcharge front, we -- we're virtually flat on raw material surcharges, so no significant impact during the first quarter.

However, with the recent spike-up in aluminum and steel and many of the precious metals, we still are anticipating that we will have a negative impact on commodity prices for the full year of 2008.

But for the first quarter, really minimal impact.

On the warranty side, we had a little higher activity which partially attributed to the higher SG&A cost,.

But, again, it wasn't the major driver of higher SG&A.

The SG&A major drivers, was one of three things.

Really, the major drivers were higher investment into some international activities on the marketing and dealer development side.

Also, some additional investment in to our product development activities.

Then the third piece of it was just a little higher warranty activity.

Okay.

Okay.

Then to circle back to your comments regarding -- well, Jim yours, given you view the shares as currently undervalued.

Then, you continue to look at doing share repurchase, but balancing that versus cash needs.

How do you -- how do you see that now, as far as keeping that flexibility on the balance sheet, should the credit markets remain tight?

How do you see that tradeoff right now?

Yes.

Thanks for the question, Tim.

Clearly we -- at these values, and given the prospects we have for the business, we continue to view the shares as undervalued.

But we do take a conservative philosophy to the balance sheet in making sure we maintain significant liquidity and financial flexibility which really shows through times like this.

We're targeting still to maintain a cash-positive balance sheet at a ink level, so basically somewhere in the neighborhood of $300 million, plus or minus $100 million or so for seasonal working capital needs.

But the great thing is even the strength of this business model will still produce some free excess free cash flow, and as we do that we'll have the opportunity to buy shares back.

So Tom, you are saying that $300 million at the ink level, again you're looking at that as being the free cash flow generated and then you go from there?

No.

Let me clarify, Tim.

The $300 million is really a targeted cash balance on a consolidated financial basis.

Okay.

To maintain a cash-positive balance sheet.

As you look at pluses and minuses on cash flow throughout the year with different seasonal needs, that number can very $100 million or so up or down, but that's a targeted, consolidated cash number.

Okay.

Great.

Final question, Europe, you guys were up 4.5% but the market up almost 20%.

Any -- can you kind of talk us through the differences there?

Again, you were going against a difficult comparison overall, but the wide variance between what happened with Harley in the market, and again, I know it's only on two months here.

Yes.

Again, I think that's an important point.

Internationally including Europe, we continue to have good momentum in the marketplace.

If you look at the first two months of the year, we think there's some anomalies in there.

The market was up significantly.

While we still do expect growth in the overall European marketplace, we don't think it will be as significant as it was in the first couple of months for a variety of factors.

But the good news is I think we continue to feel well-positioned.

You're right, we have for over three years now, had strong double-digit growth in the European marketplace.

But given what Michael [VanDerstand] and the team are doing over there, we feel good that through the product changes we're making and the other dealer activities and the marketing programs, that we're still well-positioned to have strong growth in Europe this year.

Was it bike availability maybe, Tom?

Because your receivables were up pretty high, too.

Were there some things shipped internationally very late there in the quarter?

Yes, it is.

There's a couple things.

The inventory levels that were up -- and that primarily relates to having bikes on the water and bikes in our international markets to support that growth.

So if you look at our on balance sheet inventory, a lot of that increase is due to supporting that strong international growth.

The change in receivables that you mentioned, is actually due to part of a process we went through of looking at ways to streamline our operations and improve some of them.

At the beginning of the year, we ended up transferring in the neighborhood of $100 million of receivables from Harley-Davidson Financial Services in Europe to Harley-Davidson Motor Company in Europe.

Those are wholesale receivables from our European dealers, and we're now going to manage those receivables out of the Motor Company organization in Europe.

Those used to be reported on a different line in the balance sheet, so it's really just a switching of lines in the balance sheet, causing that receivable increase.

But we did have some delays in product getting to Europe to your point.

That's what drove the inventory increase.

Great.

Thank you.

I just want to respond, going back a couple questions ago on your comment on -- and my comment, Jerry, on the undervalued of Harley-Davidson stock.

I mean, if I look at it again, kind of wrapping up, we're growing internationally, double-digit and have been doing that for years.

U.S.

market in a very difficult economic climate, we have gained market share.

Tracking our used bike sales, they are at an all-time high.

There's demand for our product, just that it's a difficult economic climate.

We have got a great brand.

As Tom has been commenting, we generate a lot of cash.

All said, we are a great company and certainly undervalued the market.

Great.

Thank you, gentlemen, both of you.

Appreciate it.

Thanks, Tim.

Thank you.

Our next question comes from Ed Aaron, RBC Capital Markets.

Please go ahead.

Great.

Thanks for taking my questions.

First one up, one thing on HDFS and then I have another one after that.

There was another retailer with similar exposure to the asset-backed market that recently raised it's discount rate on it's retained securitization interest.

Did you consider make a change of this sort?

Are there any structural differences that would -- I guess warrant a different rate for you versus that other retailer?

Ed, it's Tom.

I'll take the question.

As I've said before, every quarter we need to go through with our normal process and evaluate all of the assumptions, including the discount rate on our securitization transaction.

So as part of our normal process, we go through and look at it every quarter, and make sure that it's within an appropriate or acceptable range.

So in the first quarter, it was no exception.

We went through the normal exercise, and went through the range, and determined that the 12% discount rate we use is well within that range.

There was no need to change it at this point in time.

So, yes, we did go through the exercise like we did every quarter.

Just something to point out just so you are aware of it, is that we won't discuss necessarily the dollar impact of changing the discount rate.

In general, a change in the discount rate would be reflected on the balance sheet through other comprehensive income and not through the income statement.

This happens, and it goes through OTI instead of the P&L because the change in the discount rate only represents a change in the timing of projected cash flows.

It's considered a temporary adjustment, rather than permanent adjustment.

Just want to point that out, while permanent adjustments go through the P&L, something like a discount rate change generally goes through OCI.

Okay, that's helpful.

Thanks for the clarity on that.

Another question on HDFS, does your current guidance factor in any additional impairment charges or anything kind of one-time in nature there?

Our guidance for HDFS includes, looking carefully at future delinquencies and credit-loss assumptions.

I won't comment specifically on any impairment losses.

But clearly, we have taken in account the trends we see in the business, the action Saiyid talked about, about trying to reduce delinquencies and credit losses.

I think we've comprehended, based on what we know we today in all the guidance we've given.

Okay.

Thanks.

Just finally, I guess just a broader question, but can you talk about other changes besides production and downsizing that you are making and contemplating just to adapt to today's business environment?

Are you changing your approach to advertising and marketing?

How are you thinking about promotional programs along the lines of "Stick it to the man last year"?

Then maybe even most importantly, how equipped do you think your dealer network is to adapt to this new business environment?

Because it is significantly different from what it was three or four years ago.

As we look -- this is Jim Ziemer.

As we look at the business, number one thing, again, is managing the business for the long-term.

As I said earlier, one of the big things there is managing the brand.

We're not going to go out there and overproduce and try to clear inventories through different means and promotional activities.

We are focused on, even as we adjust to this current economic environment, we are heavily investing in engineering and in marketing activities in all of our markets, so that we are well-positioned and prepared to participate when the economy comes back.

But as we continue to look at the business and look at the environment, we'll continue to reevaluate, as we always do, the things we are doing within the business, whether our core competencies.

That activity continues to go on.

The one thing we are not going to do is -- I mean, the one thing we are going to do, put it in a positive state.

is continue to invest in the marketing and the product development activities that we need to continue to grow this business.

Thank you.

Thank you.

Our next question comes from Robin Farley of UBS.

Ms.

Farly, your line is live.

Our next question comes from Felicia Hendrix from Lehman Brothers.

Please go ahead.

Thanks ---- on behalf of Felicia.

One quick question on your allocation system, how much impact will that have in the second half of the year versus general overall economic environment?

The allocation system that we have for North America is designed to respond to what is going on in a market-by-market and dealer-by-dealer basis.

Depending on what is going on within those regions, that allocation system, we'll respond to the retail activity, and -- within the region and market in the U.S.

The differences between now and obviously, we are currently reducing our shipment forecast, but that's in line with retail.

Then our allocation system would tell us that we need to be shipping less units.

Depending on how the economy goes, that allocation system by dealer will give us indications of how this should go down with that product.

Sort of a similar question, for -- what is your targets international sort of shipment -- shipment you're going to get this year in 2008?

What percent do you want to get up to?

We're going to continue to grow the businesses, especially international.

Obviously, international has become a bigger portion of the business, maybe a little faster than we anticipated the wrong way, because the U.S.

business has come down.

But we expect to continue for the foreseeable future to grow our international sales faster than our domestic sales.

Right.

Depending on what the --- how long this U.S.

economy stays where it's at, will kind of dictate what our mix between our shipments between our different markets.

Right.

You were at about at like 32% in the first quarter.

Now, the second and third quarter are more heavily weighted toward U.S.

typically.

Could you see it being at 30% for 2008?

Would that be a surprise to you or not?

I think the way to look at it, Anthony, last year we ended 2007 (inaudible) Last year we ended the year at just over 27% on the international business.

I think we anticipate that we're in a position to make sure we're at a higher percentage of that for the full-year of 2008.

Great.

So final question, I guess.

In the first quarter, did any of the families or models sell better at retail than others?

Some the families do worse at retail?

Was there sort of a mix in demand at retail for some of your bikes?

I mean, as we look at it, some bikes are more seasoned than other bikes.

Whenever you come out with an introduction of a new product, certainly that has an impact on the retail sales of our motorcycles.

As we look at it, we just came to market in the first quarter with the Rocker, Rocker Two, and then Cross Bones.

Definitely they were hits and they were moving quite quickly when they hit the dealer floor.

Our Dyna family has responded very well.

I think as I look at the products, those are probably the fastest movers off the dealer showrooms in the U.S.

right now.

All right.

Great.

Thanks.

Thank you, our next question comes from Hakan Ipekci.

Let's go to the next question.

Excuse me, our next question come from Patrick Archenblach of Goldman Sachs.

Please go ahead.

Hi, yes.

Can you hear me?

Yes.

We've got you, Pat.

Good morning.

Good morning.

I just wanted to see could you give us a sense of the cadence of U.S.

retail sales that's implied by your new shipment guidance?

Like in terms of percentage?

Well, Pat, what I can tell you is that we don't give specific retail sales forecast for the year.

Clearly, the action we have taken today I think reflects that we don't have a strong outlook for the U.S.

economic environment here in the U.S.

By taking out the production units that we have, and combining that with our commitment to ship less than we retail on a worldwide basis, I think you can make a pretty good approximation or you can estimate pretty well what our outlook is for the full year.

Okay.

I guess just on that, relating to the 13% decline we saw in Q1, what kind of impact do you attribute to just pure end-demand weakness?

What kind of impact would you attribute to tightening credit standards, just pushing a couple marginal borrowers out of the position of buying a bike?

Yes.

From our perspective, it's always something that we look closely at from a consolidated perspective, and also looking at it from a HDFS profitability perspective to make sure we'll being financially prudent and having the right underwriting standards to drive the right returns and profitability at HDFS.

We're also questioning and looking at a lot of analytics around, making sure we have that proper balance.

For first quarter, I would tell you that the majority of the decrease in demand at the retail level is really just due to macro economic conditions in the U.S.

and the issues that we see around consumer confidence and home equity.

Possibly on the margin, there maybe be a motorcycle sale lost here or there from credit, but it's really from our perspective, I think we're doing a great job of balancing our underwriting criteria and making credit available.

We really view this as entirely due to macro economic conditions in the U.S.

Okay.

Great.

Thanks.

One last one.

I think I missed it.

Can you just repeat the amount of the charges that you are going to take based on some of the restructuring actions on the labor front?

And just give us a sense of the timing?

Are they all going to be in the second quarter?

Yes.

The amount that we have included in our full-year guidance is a charge of approximately $20 million to $25 million.

At this point, I anticipate recording that in the second quarter.

Okay.

Great.

Thanks a lot, guys.

Thank you.

Thank you.

Our next question comes from Tony Gikas of Piper Jaffray.

Please go ahead.

Good morning.

Thanks for taking my questions, guys.

Couple of questions, on the guidance change, you are take the EPS for the year towards the $3.00-level now.

We know what the change is to production.

Could you provide a little bit more direction or guidance on the changes with gross margin with Harley-Davidson Financial Services.

If you gave that guidance, I missed it.

I apologize.

Then, the impact from potential changes to share repurchases that you're factoring into that guidance.

As a part of that, do you feel like you have enough long-term visibility on the business to be buying back significant levels of stock at this point?

Then, a short follow-up.

All right.

Tony, I'll start.

We don't give any specific guidance around HDFS or specific gross or operating performance.

But if you look at the change in shipments and the change in EPS, the decrease in EPS is due to really several factors.

Clearly when you take out this amount of volume, we have some manufacturing inefficiencies.

The biggest piece of it just being the loss absorption of fixed costs.

We also have some obsolescence issues with some parts as we're going to take out a significant amount of units during the second quarter.

There a number of manufacturing inefficiencies that will clearly negatively impact gross margin throughout the year.

In addition into that guidance, we also have the workforce reduction charge that I just referred to of $20 million to $25 million that is in there as well, as well as some negative mix that we expect throughout the year.

So there's a number of things that are going in that drive that lower EPS guidance.

The final one is really anticipated lower share repurchase activity.

Given the expected lower cash flow from operations this year, while we're still anticipating share repurchase activity with excess free cash flow, it is obviously lower than what we initially anticipated going into the year.

Okay.

Then, do you hear from your dealers -- do customers ever trade down in the models?

Or do they just buy less frequently or perhaps delay their purchases?

There's no indication we have of trading down.

Really, clearly, I think what happens in this macro economic environment is we have seen strong used-bike sales.

I think we see more of customers moving into used bikes in this economic environment, instead of new which is actually over the long run good news.

As once we get them into the Harley-Davidson family, it will drive additional parts and accessories sales, general merchandise sales.

We'll come out with that new design or new technology that they'll ultimately trade up into a new motorcycle.

I think we're seeing the impact of the macro conditions here.

Probably not so much on trading down that or kind of scenario.

I think we're seeing it as a shift more to used-bike sales which over the long-run will --- I think will actually helps us.

Okay.

Then just two quick housekeeping changes --- questions.

What was the total headcount change or reduction, maybe is one way to ask it?

Then, did you give the HDFS share in the quarter?

Yes.

If you look at the headcount on the production front, it's 370.

On the non-production side, 360.

Okay.

The share was basically flat for HDFS at 51.3% or 51.4%.

Could you just quantify what the reduction to total headcount was in the firm?

I got the numbers 370 and 360, but.

Yes.

If you look again at the unionized employer hourly impact of 370, it is approximately 6.5% of that North American workforce.

If you look at the non-production workforce reduction of 360 positions, it's approximately 10% of our North American motorcycle operations.

Okay.

Thanks a lot, guys.

Thank you.

Our next question comes from Bob Simonson of William Blair.

Please go ahead.

Good morning.

Tom, one more question on the reserves.

Does that go through one line item?

Or does it get spread partly in the gross and partly in SG&A?

It will be partially in both, Bob.

Okay.

Why did you switch the receivables from HDFS Europe to the Motor Company?

Was that a function of capital markets in Europe or why?

It was really an opportunity for us.

As we look at some of our operational excellence initiatives and continuous improvement in looking at ways to make sure we have an efficient cost structure, we really saw that we had a duplication of effort in our European markets where we had similar activities going on within Harley-Davidson Financial Services Europe and Harley-Davidson Motor Company Europe.

This was an opportunity for us to move some of those activities and put them with an existing workforce and actually end up with SG&A and cost savings as a result of doing this.

Very good.

I don't know that you normally comment on this, but can you make any comment on U.S.

retail trends at the beginning of the quarter versus the end?

Yes.

Throughout the quarter, January and February started off slightly down, but we did see as we went in to March an acceleration of a decline in retail trends.

As we said in our January press release, we wanted to closely watch the quarter, so we continued to monitor it through January and February.

Then when we continued to watch it in to March and saw the increased decline in retail sales, that's when we got together and decided that -- on the actions that we announced today.

Thank you very much.

Thank you.

Our next question comes from James Hardiman of FTN Midwest Security.

Please go ahead.

Good morning.

Couple of brief questions for Tom or Saiyid on HDFS.

Can you comment at all on sort of where the securitization market stands today versus when you did your first quarter securitization?

Do you expect to complete any here in the second quarter?

Or sort of what are your expectations for the rest of the year in terms of getting those securitizations done?

Sure.

The securitization market continues to be challenging for a lot of issuers.

Obviously, we're continuing to monitor it closely.

As I mentioned in my prepared remarks, HDFS is doing a lot of work now in looking at evaluating all of our different funding alternatives, whether it is be the securitization market or the unsecured debt market, or the commercial paper program, or asset-backed warehousing facilities and so forth.

They've got a lot of options and a lot of flexibility, so they are going through and constantly staying on top of the marketplace.

We're looking for really what is the most effective way to fund that business throughout the rest of the year.

I really can't give you a clear answer whether or not it will include a securitization transaction or transactions or how much they would be, because it's really going to depend on how that market responds and reacts over the next several months and throughout the rest of the year.

The good news is, we've got plenty of alternatives and different markets we can go to.

Which one we go to will ultimately be determined by how the markets respond and what we think is the most effective way.

Okay.

Just real quick, in terms of the market share, I think you said it was 51%.

I guess that's flat year-over-year, but I think that's down a little bit from the -- I think it was 55% for the full year last year.

Is that just something seasonal?

Or are we seeing credit requirements for you guys a little bit higher than maybe some of your competitors?

How do we expect that to trend this year?

This is Saiyid.

Let me take that.

Last year, the full-year number was higher than 51.4%, driven largely by the "Stick it to the man" promotion in the summer.

We think that our share will probably not be as high this year, in spite of the fact that some of the competition has gone down in the last few months.

But we are steady year-over-year, and we are pretty optimistic that we'll continue to be in the 50s.

It's hard to predict exactly which -- what number we're going to hit.

Okay.

Great.

Just one final question, in terms of your guidance for the year, I think you said the reduction in shipments year-over-year is going to be anywhere between 23,000 and 27,000 shipments lower than last year.

Fifteen to 19 of that is coming out of the second quarter.

So it seems like the vast majority is going to be in the second quarter.

Obviously the third quarter is a big selling quarter for new products, and you also had some new products that last year were delayed somewhat.

I don't know if you can tell us anything even qualitatively about the production cuts in the back half of the year and how they play out.

We're not going through the quarter-by quarter production cuts, but I can give you some insight.

Dynamics between the U.S.

market and the international markets kind of caught some of those.

As the international markets pick up and mitigate some of the -- what happens is the output of -- taking some of the cuts in the U.S.

production.

So it's because the international market is going up and domestic market is down, that you can't do a one-for-one correlation there.

Fair enough.

Thanks.

Thank you.

Our next question comes from Steven Rees of J.P.

Morgan.

Please go ahead.

Hi.

Thanks.

Just wanted to ask about the overall pricing environment that you're seeing at retail?

Have you seen anything on the promotional side or discounting side that is worrisome to you at this point given the demand picture?

Steven, it's Tom.

Clearly, there's a lot of factors that go into the transaction at the dealer level when we start looking at promotional activities and MSRP and so forth so.

There a lot that goes into that overall transaction.

For example, sometimes there's accessories involved and general merchandise.

Sometimes there's scheduled maintenance involved, gas cards, and there's all other factors, not even to mention how you treat the trade-in value of a vehicle.

All in all, overall we still feel that while we don't make a blanket statement about selling prices, we do believe that many of our motorcycles out there in the dealer network are selling at our above MSRP.

But clearly, because of this lack of clarity in some of the transactions there probably are some that are selling out there below.

It obviously varies by dealer and by location, but overall we think our dealers are doing a nice job of managing through this environment and really doing the right outreach activities and marketing activities to maintain the premium status of the overall Harley-Davidson brand.

Okay.

Just my final question was you talked about, I think Jim talked about the used market being at record levels.

One of your initiatives at your analyst conference was just I guess encouraging more dealers to offer used products.

Can you talk about how many dealers or what percentage today in the U.S.

offers used products?

Where you think that will or should go over time?

All of our dealers sell our used products.

Some do a much better job than others.

Some go out and actually aggressively acquire used products.

While other ones -- their mainstay of the business is based on trade-ins.

But they're all doing our used products, some just doing a better job.

Okay.

Thanks.

Thank you.

I thank everybody for the time this morning.

Appreciate your interest and your investment in Harley-Davidson.

Now, I'll turn it back over to Amy for some final logistics.

Thanks, Jim.

If you would like to hear a replay of this conference, call 706-645-9201 and enter PIN number 399663333 # until April 24 or access the conference at harley-davidson.com.

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

Have a great day, everyone.

Thank you.

This concludes today's Harley-Davidson first quarter 2008 earnings conference call.

You may now disconnect and have a great day.