Harley-Davidson Inc (HOG) 2008 Q2 法說會逐字稿

Good morning,my name is Brie, and I'll be your conference operator today.

At this time, I would like to welcome everyone to the Harley Davidson Second 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 INSTRUCTORS) Thank you.

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

Ma'am, you may speak direct.

Ma'am, you may begin your conference.

Thanks, Brie.

Good morning everyone, and welcome to Harley Davidson's Second Quarter 2008 Conference Call.

Today, we will comment on our second quarter financial performance, Harley Davidson Motorcycle retail sales, the actions we took last quarter in response to the U.S.

economy, and other talks about our business.

Tom Bergmann, Harley Davidson Inc, CFO will not be participating on the call today as he iss attending a funeral so we've adjusted the structure of the call slightly.

As usual, CEO Jim Ziemer will provide comments on the business, and today he will share the financial results for the Second Quarter.

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

Then, Jim will share the consolidated financials, the outlook for the business and some closing thoughts.

Harley Davidson Inc, Vice President, Treasurer, and Acting HDSF CFO, Perry Glassgow and Vice President and Controller John Olin will participate in the Q&A portion of today's call.

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 July 24 by calling 706-645-9291, pin number 50429408 pound.

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

Those risks include among others matters we have noted in our latest Earnings Release and filings with the SEC.

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

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

Jim?

Good morning.

Thanks for calling in today.

I believe there are three key points to keep in mind about the year so far and the road ahead.

First, although the economy continues to make this a very tough operating environment in the US, we believe Harley Davidson is positioned itself appropriately to deal with this environment, based on what we know today.

Second, we continue to see strength in international retail sales, and we believe the international markets will continue to play a growing role in the overall picture for Harley Davidson.

And, third, Harley Davidson has always managed a business for the long-term and will continue to do so.

So, let me talk about each of these starting with with the current economic environment and what Harley Davidson is doing to deal with it.

We're now more than halfway through 2008.

The US economic climate continues to be challenging to put it mildly.

And, there's unclear when the economy or consumer confidence might start turning around.

Looking back on April 17 announcement, to reduce motorcycle shipments, I'm more convinced than ever that we made the right call.

A majority of the non-shipment reduction took place during the quarter.

We accomplished this, we shut down our plantsfor an average of 15 days .As you know, our April decision to reduce shipments honors our committment to ship fewer Harley Davidson Motorcycles to our dealers worldwide than we anticipate we will sell in 2008.

This action has done much to position the Company and the dealer networks for the current climate.

While inventories vary from dealer-to-dealer, in general, they're at an appropriate level as we head into the 2009 mild year next week.

I want to acknowledge our dealers and give them credit for everything they're doing to sell Harley Davidson and Buell motorcycles and fulfill the dreams of the customers in today's economy.

Over the years, we worked closely with them to make sure they're the best in the industry, and we will continue to do so as we navigate the current uncertain roads.

Related to the shipment reduction, the workforce reduction action plan also announced on April 17th was finalized during the quarter.

The targeted reduction in the 730 positions will be achieved through a combination of voluntary retirements, elimination of some contract workers, employee terminations, layoffs and attrition.

We came in under the expected $20 to $25 million implementation charges.

According a one-time charge of $11.5 million.

As a result of the workforce reduction, we still expect an ongoing annual benefit of $35 to $40 million starting in 2009.

As we said, the decision to reduce shipments with the impact on the workforce has been difficult for everyone at the Company.

However, I believe these actions were 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 US throughout 2008.

Now let's turn to my second key point, international sales.

Where once again, our dealers put up strong retail numbers growing 11.2% for the quarter.

Our international growth is the result of the Company's strategic focus and global markets.

In June, European dealers sold the first XR 1200 units to customers who eagerly anticipated the race inspired motorcycle.

Dealer motorcycle sales in Latin America were up 67%, largely driven by the soaring retail sales in Brazil.

The same time, we're keeping a close eye on the health of our international markets for possible changes in economic conditions, just as we do in the US.

We'll continue to manage each market in which we do business appropriately.

Going forward, Harley Davidson will continue its investments in the international markets to drive future growth in support of our long-term strategy.

As last Friday's announcement over plan to acquire MV Agusta Group is the prime example of this global strategy in action.

This acquisition represents an attractive and strategic opportunity to complement our Harley-Davidson motorcycle families of presence and footprint in Europe and deepen our credibility and penetration into Performance Motorcycles this represents over 70% of the European market.

It's also a prime example of our long-term focus.

As we do not expect the acquisition to have an immediate impact on the overall HDI business.

Which brings me to my third and final key point.

Harley-Davidson always managed the business for the long-term.

We will continue to do so.

I know that's something I repeat frequently, and, in the current economy, it's more important than ever to keep in mind.

Managing the business for the long-term is part and parcel of maintaining the premium brand experience.

We have strong fundamentals and are fortunate to be given with the current climate from a sound financial position.

Economic downturn in US will end, and, when it does, Harley-Davidson intends to be well positioned to capture future growth opportunities.

I will say more about this later.

Now, I will discuss our financial results for the second quarter of 2008 for the Motorcycles and the Related Products segment compared to the second quarter of 2007.

I will start by looking at our yearly retail performance.

Worldwide basis retail sales of Harley-Davidson Motorcycles by our dealers are down 3.6% for the quarter compared to a year ago.

Retail sales of new Harley-Davidson Motorcycles in the US decreased 8.7% in the second quarter of 2008 compared to the same period in 2007.

Overall, US 651 CC plus market motorcycle market increased 0.8% in the second quarter.

To understand our US dealer retail sales performance in the second quarter, remember that a year ago retail sales were significantly aided by the Stick-It to-the-Man financing promotion that we offered from late May through the end of July last year.

This promotion was initiated to reduce model year -- '07 model year inventory resulting from the disappointing start to the calendar year 2007 retail sales.

At that time, we stated that financing promotions would not play a significant role in selling our motorcycles in the future.

This year in April, we reduced production to address the US retail situation.

I believe this was the best way to protect the brand and manage the business for the long-term.

While we have not repeated the year ago financing promotion, our competitors have been busy, implementing low financing offers and other promotional activities to sell both new and old model year motorcycles.

These promotional devices have appeared to drive unit sales in US industry this quarter.

As I mentioned earlier, our international dealers continue to grow.

Second retail sales increased 11.2% compared to the same quarter last year.

Retail sales for Harley-Davidson motorcycles in Canada were up 8.7%.

Europe region was up 9.0%.

In Asia-Pacific region was up 7.3%.

And, the Latin America region was up 67.1%.

Now, looking at the wholesale motorcycle shipments for the quarter, worldwide Harley Motorcycle shipments were 80,326 units, which was a decrease of 15.6% from the second quarter 2007.

But, Slightly exceeded our quarter two shipment guidance 76 to 80,000 units.

Domestic shipments of 51,449 units for the quarter were down 24.3% from the second quarter of 2007, reflecting the impact of the shipment reduction we announced on April 17.

The domestic shipment volume represented 64.1% of the total volume shipped in the worldwide dealers down from 71.4% a year ago.

International shipments of 28,877 units were up 6.3% compared to the same quarter last year.

International shipments increased to 35.9% over a total worldwide second quarter shipment volume compared to 28.6% in second quarter of 2007.

From the third quarter 2008, we expect ship between 74,000 and 78,000 Harley-Davidson Motorcycles.

In the full year 2008, we still plan to ship between 303 -- about 303,500 units -- 307,500 units Harley-Davidson Motorcycles.

As you know, I have committed to ship motorcycles and respect our dealers will sell at retail in 2008.

Last quarter based on the retail outlook for the US, we made the difficult decision to reduce wholesale shipments.

This action was intended to strike a balance between the need for dealers to have appropriate inventory levels to meet retail demand as they entered the busiest selling part of the year while at the same time ensure that the exit model year was an appropriate amount of material over inventory.

The end of the second quarter of 2008, US dealer network generally had lower inventory than one year ago.

I believe our dealers current inventory levels currently position them to begin selling model year '09 motorcycles that will be introduced next week.

Now, let's turn to mix.

As we anticipated, shipment mix was disrupted by the shipment reduction during the second quarter.

Touring volume was 31.4% of the total shipments in the second quarter of 2008.

That compares to 36.3% in 2007.

Custom shipping volume representing Softail, Dyna, VRSC -- that's our V-Rod, Liquid-quo motorcycles -- was 52.2% in the second quarter of 2008 compared to 41.1% for the second quarter of 2007.

And, the Sportster Motorcycle mix was 16.4% with total mix for the second quarter of 2008 compared to 22.1% during the second quarter last year.

Custom was up for the quarter as a result of shipments of our two new Softail models, the Rocker and the Cross Bones.

Additionally shipments of and demand for the Dyna family increased as result of the flat bottom model and selective MSRP adjustments at the beginning of the model year last year.

We will continue to balance shipments between our major motorcycle families based on forecasted customer demand.

Now, turning to revenue.

Revenue from Harley-Davidson Motorcycles was $1.19 billion, down 5.3% from the second quarter of 2007.

Average revenue for Harley-Davidson unit increased $1,594 to 12.1% from the year ago quarter.

This increase can be primarily attributed with the favorable mix, favorable foreign exchange rates, increased pricing and the absence of spending associated with the second quarter 2007 Stick-It-to-the-Man financing promotion.

(inaudible), Parts and Accessories was $265.7 million for the quarter, which is up 0.9% over a year ago quarter.

This increase was largely driven by increased sales Genuine Parts, partially offset by lower Parts and Accessory sales.

General <merchandise revenue was $76.8 million, an increase of 5.6% or $4.1 million.

This increase is primarily driven to strong sale the Weathers, Riding Gear and Sportsware.

Let's take a look at gross and operating margins, which were adversely impacted by shipment reduction.

Gross margin in the quarter was 35.7% of revenue, down from 37.4% in the second quarter 2007.

During the quarter, there were a number of factor that negatively affected gross margin.

Primary drivers were the allocation of fixed costs over 15,000 per units and increased product class.

Operating margin for the second quarter 2008 decreased to 20.1% from 23.9% during the second quarter of 2007.

Operating margins were impacted by lower gross margins and increased SG&A spending on lower revenue.

Increase in SG&A spending includes the one-time charge of $11.5 million related to the special determination benefits for those employees who were eligible.

Also, international spending was higher.

Now, I'll review Harley-Davidson Financial Services segment results for the second quarter.

Harley-Davidson Financial Services earned a second quarter operating income of $37.1 million, a decrease of $28.1 million, or 43%, compared to last year's second quarter.

This decrease is primarily due to a $19.5 million reduction in securitization gain.

A $6.3 million write down of retained securitization interest and an increase in the provision for credit losses which was partially offset by an increase in net interest income.

Last year's second quarter results benefited from a $950 million securitization transaction, which generated $19.5 million securitization gain compared to no securitization gain in the second quarter of 2008.

During the quarter, HDFS elected to diversify its financing sources through the issuance of medium-term notes rather than access than securitization market.

HDFS issued $1 billion in ten year fixed rate unsecured medium-term notes in May of 2008, a transaction that was well received by investors.

In addition, yesterday HDI and HDFS entered into new bank credit facilities totaling $1.9 billion.

These facilities are made up of $950 million, 364-day and a $950 million, three-year facility, which replace existing bank credit facilities, which totaled $1.7 billion.

The debt capital markets remain challenging.

However, in the first six months of the year, HDFS accessed to securitization, term note and bank debt markets, and HDFS continues to believe these markets will remain available to them in future periods.

HDFS's balance sheet continue to be cap-wise with $900 million of equity and a strong balance sheet ratios.

Now, I will turn it over to Sy, who will HDFS's operations and portfolio performance.

Thank you, Jim, and good morning, everyone.

As Jim mentioned, our second quarter results were impacted by the decision to diversify our financing sources away from the securitization market as we continue to deal with the challenging economic conditions.

For the first six months of 2008, HDFS originated $1.6 billion in retail motorcycle loans, compared to $1.7 billion during the first six months of 2007.

HDFS's retail market share of new motorcycles sold in the US was 52.4% for the first six months of 2008 compared to 53.3% in the prior year period.

The decrease in market share is attributable to the Motor Company sponsored Stick-it-to-the-Man financing promotion which positively impacted HDFS's market share in the second quarter of 2007.

Partially offsetting the impact of the reduction in market share on HDFS volume was strong growth in the used bike financing activity.

In terms of credit performance, the 30-day -- the 30-plus day delinquency rate and managed retail motorcycle loans was 4.65% at the end of the second quarter of 2008 compared to 4.36% at the end of the second quarter of 2007.

Consistent with seasonal trends of the past several years, delinquencies declined on the first quarter of 2008.

While the year-over-year delinquencies rose in the quarter, we are encouraged by the slowing rate increase in this economic environment.

Analyze credit losses on managed retail motorcycle loans were 2.14% for the first six months of 2008 compared to 1.63% for the same period of 2007.

The year-over-year increase in losses was driven by a higher incidence of loss, primarily due to the higher year-over-year delinquencies.

However, including recovery values on used Harley-Davidson Motorcycles partially offset the higher incidence of loss.

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

Although still higher than we would like, the delinquency rates are improving as a result of the changes we have made in our collection and loss mitigation activities.

On the other hand, the changes enhancements we have made in our underwriting criteria will take longer to impact the performance, but we are confident those changes will result in improved performance in the future.

We are seeing improved portfolio trends we still expect credit loss in 2008 to exceed prior year levels.

During the second quarter, we increased our allowance for losses by $5.8 million due to our concerns over the ongoing weakness of the US economy.

In addition, our quarterly review and valuation of the assumptions used to value our retail securitization interests resulted in a write down this quarter.

Due to higher credit losses in certain 2005 and 2006 transactions, HDFS recognizes a $6.3 million permanent impairment loss during the second quarter of 2008.

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

The percentage of sub-prime loans outstanding remain within our historical 25% to 30% of managed retail loan receivables.

And, subprime delineation in the second quarter are at lower loan devalues deflecting a overall better credit portfolio for the new loans.

Clearly today's economic environment remains challenging for HDFS as it does for most companies in the financial services sector.

However, we continue to believe that we are taking the right actions to meet those challenges.

And, with that, I will turn it back to you, Jim.

Thank you, Sy.

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

Cash and marketable securities totaled $803.9 million as of June 29, 2008.

Cash used by operations is $39 million during the first six months of 2008 compared to $1.06 billion of cash provided during the first half of 2007.

This decrease in cash flow from operations was a result of net proceeds from the securitization being $1.27 billion less than the same period of 2007.

During the first half of 2008, HDFS funded a greater percentage of its business with proceeds from commercial paper and medium-term notes than it did in the same period last year.

While HDFS's decision to fund more of its business through commercial paper and medium-term notes does have an impact on operating cash flow.

It does not impact the overall cash flows for the Company.

Cash flows related to HDFS borrowing activity, which will be included in the financing cash flows for $1.4 billion higher in the first six months of 2008 than in the same period last year.

During, the first six months of 2008 depreciation was $102.6 million.

Capital expenditures were $99.6million.

The full year of 2008, we continue to expect capital expenditures to be between $235, $250 million.

Turning to our share repurchases for the quarter, the Company repurchased 1.3 million shares for 50 million compared to 6.7 million shares for 430 million in the second quarter of last year.

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

Our strategy is to continue to opportunistically repurchase shares while we believe there are undervalued and when we have available free cash flow.

As of June 29, 2008, there were 235.3 million shares of common stock outstanding and 19.3 million shares remaining on the board approved share repurchase authorization.

In additional board approved authorization is in place to offset option exercises.

In the second quarter effective income tax rate was 36.0% compared to 35.5% in the same quarter last year.

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

Assuming the retroactive reinstatement of this tax credit, we expect the full year effective income tax rate of 2008 to be 35.5%.

So all in all, net income was $222.8 million in the second quarter down $67.7 million, or 23.3%, from the same period last year.

Diluted earnings per share for the second quarter were $0.95, a decrease of 16.7% from a year ago quarter.

Considering our outlook for the remainder of 2008, combined with the performance of the first six months of the yea,r we continue to expect the earnings per share for the full year will be between $3.00 and $3.18.

So, before I wrap it up, keep in mind my three key points.

First, although the economy continues to make this a tough operating environment in the US , we believe Harley-Davidson has positioned itself appropriately to deal with this environment based on what we know today.

Second, we continue to see strength in international retail sales, and we believe the international markets will continue to play a growing role in the overall picture of Harley-Davidson.

And, third, Harley-Davidson have always managed the business for the long-term.

And, we will continue to do so.

We will continue to invest in the business and enhance the Harley-Davidson experience for current customers and continue to increase our initiatives to reach new customers.

Just last weekend, we celebrated the grand opening of the Harley-Davidson Museum.

I'm proud to say that everyone I talked to was absolutely blown away by the quality of the Museum experience.

The media coverage is flowing in.

Mostly glowing reports about the fact that the Museum is just as fascinating to those who don't know the first thing about a Harley as it is for those who can recite the technical specifications for a 1964 dual glide.

During the grand opening events, I took the next step on my own personal journey with Harley-Davidson by getting my first Crafts last Tattoo.

Next time I see you, I will show you the Harley-Davidson Barn Shield that's part of my right arm.

This coming Tuesday in Las Vegas, we unveil the 2009 Harley-Davidson product and Buell line to our worldwide dealer network.

The new model launch is always a highlight of every year for the company and the dealers.

And, then in another month, we will be in the thick of 105th Anniversary events.

We were expecting thousands upon thousands of Harley riders to celebrate in the open road and over the course of four days here in Milwaukee with great brands -- with great bands and a full slate of events.

Our anniversary celebration is also designed for outreach to new audiences like never before.

So, all in all, even though the US economy continues to be tough, there is a great air of excitement around Harley-Davidson these days.

With everything we have got for us, I continue to be confident about a long-term future in all of the great opportunities that lie ahead.

And, now, Sy, Perry and John will join me to open up the call

Thank you.

(OPERATOR INSTRUCTIONS) Our first question is coming from Craig Kennison from Robert Baird -- Robert W.

Baird.

Hi, good morning.

Nice quarter.

I was also going to get a tattoo, but I'll stop there --

I was asking for volunteers by the way, Craig.

We had the government.

We had the mayor.

We had the county exec, and I challenged them all.

I almost got them over the line but not quite.

I'm sure you will keep working at it.

Question now on dealer inventory.

It dropped in the US to 51 bites per dealer according to our map.

There is a 71 last year.

Couple questions there.

First of all, are you seeing a correlation to price?

In other words, are you seeing price improve in the channel?

Number one, you are right that the inventory -- average inventories at the dealers in the US significantly dropped.

I won't comment on your math.

It significantly dropped.

And, as we watch it, our thing, again, is to make sure that in a challenging economic environment that we have lower inventories.

That was our goal.

So that the dealers that deal with the market forces, and it does reflect in the prices.

I mean, on the average new bike sales are hovering at or above MSRP on average.

Now, that's average Maybe some below that and some above that.

But, the average is at or above.

And, new bike sales are very robust.

And, then could you comment on the new allocation process and the role that's playing in pricing as well?

New allocation process has been out there for nine months.

Unfortunately we've disrupted it twice with a shut down in production both in December and one in June.

That causes as this is formula driven it causes disrupts in the formulas.

With that being said, we are in a better position than we were last year.

But -- and, that's total the dealer inventory.

The disruption has occurred on a dealer by dealer basis.

Some dealers have more appropriate levels of inventories.

Actually, some dealers are short on different models.

So, as this thing plays out, we have -- we'll appropriately positioned for the current economy.

This will work its way out, and we will be better positioned as we go forward.

And relative to average selling prices at the wholesale level, they were up 12%.

I know a lot of that is mixed.

But, would you expect reversal on that trend as the mix shifts back to a normal level, or may -- might we see average selling prices much higher this year?

Although we don't forecast it, there is no doubt that as I said in my commentary, we did disrupt the normal shipment pattern/ And, there was a skewing as both attributed to the shut down as well as we are trying to get new models out there, Cross Bones and the Rocker which came out in January.

So, they weren't in dealer inventory at all.

Both those things did skew greatly in spite of the mix, and I expect it to come back closer to historical levels as we go forward.

But, you wouldn't necessarily expect meaningful drop in that metric to offset the meaningful gain in the second quarter?

I expect a drop, and we probably are mincing words if it's meaningful.

But, it will drop quite a bit.

Okay.

Thank you.

Thank you.

Thank you.

Our next question is coming from Tim Conder of Wachovia.

Thank you.

And, again, good execution in a difficult environment, Jim.

Thanks, Tim.

A couple of items here.

Little more color on the margins.

Jim, you commented about the severance and how that impacted the overall operating margin there and the overhead absorption and talked about mix.

Was there also an inventory parts reserve that you took in the quarter?

Seems like I remember you commenting on that in your last call.

And, then also you alluded to some higher input costs.

What were those year-over-year material surcharges in the quarter?

Okay, several things.

Pretty much the tone of my preamble here.

As for inventory, whenever you cut off production earlier than expected you're going to have some obsolescence.

It was minimal.

So, that was not a big impact on the quarter.

But, there is always some adjustments in the reserves for parts.

As -- you may have more than you need as you cut off production.

But, that was not a material or big number.

For surcharges in the quarter when I compare surcharges this year versus last year, in the quarter surcharges were about $2.3 million higher than they were last year.

Okay.

Material, when I was talking about material, I'm looking at product content, future changes year-over-year.

And, to always have those, but that contributed a significant increase in the cost average cost of the motorcycle, especially in some of the models that we had a greater percentage mix on.

We maybe talk later on what the number was.

But, that the two primary drivers were, again, the 15,000 fair units on overhead.

That's a had a significant -- the biggest impact of anything.

There's many drivers, and I look at the year-over-year comparison of features on the motorcycle than that drove some significant product cost increases.

So, we are talking about mainly future changes year-over-year.

Okay.

Okay.

And, regarding HDFS and your ability on the balance sheet, if the securitization market remains closed, what do you view is the Company's capacity to bring loans and keep those on the balance sheet as you did in the second quarter?

I mean, how far given cash flow and access to the markets, how long can you go without maybe impairing the credit rating of now only on HDFS, but Harley-Davidson Corp as well?

I going to let Sy take that question.

Well, we particularly look at our production numbers.

One of the reasons that I went out and secured additional liquidity was to not be subject just to the Securities Market.

We feel comfortable that we have the capacity to certainly go through this year and potentially the next year.

But, the Security Market is still available to us.

We just don't particularly like the spread that it's commanding.

So, we really are not concerned about the liquidity issue per say because we can always go to Security Market plus we have any liquidity and get for next year.

Okay.

So, basically I'm hearing you right, you are fine if at least this year maybe through early next year without going to the Securities Market and without impairing the credit rating?

Yes.

Okay.

And, along that line, Sy, and the new bank line that you guys mentioned here, is there anything at the end of the quarter drawn on that line?

Now, I will let Perry respond to that.

Yes, typically drawn facilities there that will support our Canadian international operations in prior years --

Okay.

But that's primarily what we used it for.

Primarily the liquidity facilities (inaudible) paper program.

Okay, what's the balance on that, Perry?

The balance of the availability at the end of the quarter was about a $1 billion if you add back cash as a whole.

So about $1 billion available?

Yes.

Okay.

And, two last questions.

One on HDFS also here.

Sy, you mentioned an increase in used percentage of your total loans.

What is the mix there of the during the quarter or ongoing basis of new versus used loans?

We, generally don't break it out that way.

But I would tell you that we had a approximately 10% increase in our new volume year-over-year from a financing standpoint.

Okay.

The trend in the used market is very strong.

HD values have been holding up.

In fact, used buy values have been going up in the last four months.

That's a very positive thing for the grand and our liquidity.

Yes, and we've heard many dealers looking for additional used inventory also.

And, finally, Jim, back to the quarter, how much did 4x contribute to the sales and the EBIT line in the quarter?

When we look at foreign exchange for the quarter on the revenue line, it was about $48 million.

And, for the EBIT line, it was approximately just shy of $20 million.

So, it was a strong quarter in the foreign exchange driven a lot by the Euro and secondarily by the Yen.

Okay, great.

Thank you all.

Thank you.

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

Thank you, good morning to a normal level.

Morning.

Just a couple questions.

I wanted to follow up on Craig's earlier question about mix.

You expect expectations to revert to a more normal level.

But, it seems, in the motorcycle market in general the trends are more favorable at lower price points.

I was wondering if first, if you would share that thought ,and second if you think that might cause the mix to revert somewhat below the historical mean as we go forward here?

My response to Craig, I said we had abnormal mix levels this quarter, and we would go closer to historical and say we would go back.

We will continue to monitor what's going on in the field.

And support the demand best we can based on balancing our factories and suppliers and try to get back that.

No doubt that as we go through this economic times in the US that as we see strengthen in used bike sales, that is a great indication there are price pressure out there.

As we seen that our competition has had success this quarter by their significant financing offers and rebate offers that there is some price sensitivity.

So, we will continue to look at that.

That will play itself out.

Not just mixed between the families, but it will play itself out within the models of within the families.

We will continue to watch that.

You may not see so much of a change driven by -- between families.

But, we may see the change play out in models within the family.

Okay.

Thank you.

And, then on HDFS, Tim had asked the question how much capacity there on the balance sheet to put additional loans on there.

When you look at similar businesses, what is an acceptable or normal leverage ratio for this type of business?

And then where do you stand today relative to that leverage ratio?

And then also just with respect to the cash from operations, and I know obviously keeping it glow on the balance sheet affected that number.

Could you give us some idea of what the cash from operations would have looked like on the year-over-year basis without that dynamic equation because I think the reach was only consolidated cash flow number?

Yes, I will let Sy take the first question.

And, I think it will capitalization (inaudible) We are always unique, and there is nothing exactly like our Company, whether it be the Motorcycle Company or the Finance Company.

But, I think we can give you a range, which would be a appropriate capitalization.

Well, as you know, we have this offer we have Wholesale products.

And have, certainly, the (inaudible) products.

So, When you look at leverage overall, I think it's 9 to 1 generally the pretty good number.

And, liquidity, despite the cash limit very respond to that aspect of it.

That we have.

And, I believe the cash was what would the cash flow look like if we had not secured -- if the securitization would have occurred in the first quarter.

If you ignore the securitization impact and the resale loan activity impact, the cash flow as a corporation would have been slightly lower than this time last year.

The easy answer to that question.

Thank you.

Cash flow might have changed.

But, Ed's question was basically, on operations line versus the financing line and that was significantly different, but I think my commentary said $1.3, $1.2 billion different.

It will be higher this year than it was last year.

Thank you.

Thank you.

Our next question is coming from Anthony Powell with Lehman Brothers.

Hi, guys.

Good job in the quarter.

Thank you.

The question is on restructuring charge.

It came is less than expected this quarter.

Do you expect any of that to be in the third quarter?

Or, is that it for the restructuring charges?

This is our best estimate of the restructuring charges.

We have a good feel for what it is, and we don't anticipate anything in future quarters.

And, you also mentioned that in Europe you are looking at macro environment as we do in the US What are your biggest markets in Europe by country, and what you see in the macro-economic outlook for those particular countries?

Our biggest countries in Europe would be the biggest one is Germany followed closely by Italy.

And then UK and France.

As we look at those -- and that's motorcycle markets for us.

And, which pretty much mirrors whether it's for the industry.

As we look at the economy, we see as everybody else reads UK and Spain are feeling some softness in various parts of their economic -- parts of their markets driven by different reasons.

And, we've seen some impact on us, not a direct relationship between what's going on in the economy and our sales.

Haven't seen anything in -- we have seen something in the UK and basically Spain a little bit.

But, other than that, the Western markets remain strong as indicated we are up 9% versus last year in the same quarter.

Still doing good.

But, there was a little softness in the UK.

Okay.

Great.

And just on the custom 52% number of this quarter.

I think a lot was driven by the new product.

Do you see an opportunity to grow your shipments of your newer bikes in the next few quarters?

Or do you want to get back to the more normalized mix of bikes?

Well, we've got -- as I mentioned also, we have a new model your announcement for Worldwide Dealer Meeting that comes up next Tuesday in Las Vegas.

(inaudible) 6000 of my closest friends and we have some exciting products.

Unfortunately timing of this call and that I can't tell you today what those products are.

But, that will have an impact on our mix also.

Okay.

So, as we come out with exciting products, that's always the case.

Great.

That's it.

Thanks.

Thank you.

Thank you.

Our next question is coming from Robin Farley of UBS.

Great.

Thanks.

I wanted to ask about HDFS, and I think it's a February analyst meeting you said you were comfortable having a $1 billion on the balance sheet to support the retail loans during securitization markets being more difficult.

And, I guess, your comments now about continuing to do that into early '09 is there -- it's going to be a higher dollar amount.

But, what is that dollar amount we should think of that you are willing to support, and then have I one or two questions after that.

I think I will let Sy take that for now, and then we'll entertain the rest of your questions.

I think in thinking out that is we create the ability to hold more loans on the balance sheet until we are comfortable -- more comfortable with the Securities Market.

And, I think that rough number would be about a $1.2 billion, $1.3 billion in that range that we'd be comfortable with.

But that's a moving number.

And, it's not something that we ready to move one way or the other.

Okay.

The good news is that we are financially strong whether at Inc.

or HDFS, and we have many options to deal with the market.

And as we look at what's going on in the Securitization Market as well is the ability to carry debt as Sy pointed out.

That will change time-to-time depending on what's going on in the environment.

Well, you lot of flexibility right now.

Well, I guess that kind of leads to my next question is when you look at historically your securitization that it was 25% to 30% alone toward the sub-prime bike buyers.

And is there a plan to keep making loans across the same credit quality basis, or is there a point where you say maybe it's 5 percentage points of those FICA scores that we won't know at the same rate.

And, I was wondering if you can give us your strategy there.

I'll give it to Sy again.

We have made several adjustments directed in my comments to my underwriting criteria.

Our commitment is to the dealer that we will continue to lend across a broad credit spectrum.

The changes that we have made are resulting in a better quality changes.

Not just in writing changes, but also some process changing that we have made, including things like verification (inaudible) on a (inaudible) basis, and so on.

So, we intend to continue to have that 25% to 30% gauge of sub-primes.

And, we also feel confident that the quality of that sub-prime lending is better.

So, what we are seeing is throughout our delinquency at this time.

And, at the end of day when we talk about sub-prime, it's matter of managing the risk and pricing appropriately.

And, it's very profitable business if it's managed right.

And, HDFS has done an outstanding job of doing that.

Okay.

I understand.

I wondered if that was tied to the decline in retail sales, whether if that was a result of tightening of the lowest.

But it sounds like that's not the case, and that's not the plan going forward.

Okay.

And, then --.

Good question.

But, no, I agree with your conclusion.

And, then just to clarify one other comment that Sy, you have made earlier.

You mentioned sales are doing very well, and I just kind of want to square with idea that in previous calls there is been discussions that the loan loss rates were higher because repo values were lower.

And, the bike would be repossessed and auctioned off to the dealer networks.

I just want square that with your comment with bike sales being positive, which means there are repo values are no longer down?

Let me just walk you through.

Well, first of all when you repossess a motorcycle, you don't fully recover the loan.

Typically, there's -- it's a loss anywhere from 30% to 35% of -- on the loan values.

Our repossessions -- we are looking at how to reinstate people on the terms of repossessing the bike.

Having said that on the used bike market, we have seen improvements in the value that they are getting for our repossessed bikes.

So, yes, our losses on a used bike basis are being favorably impacted by that trend.

So, we don't need as much as if it the climate continues in the way it was '07 and '06.

Okay, great.

Thank you.

Thank you.

Robin.

Thank you.

Our next question is coming from Patrick Archambault from Goldman Sachs.

Hi, good morning.

Good morning, Patrick.

I guess, I wanted to go back to the issue of market share that was touched on earlier.

Clearly, part of that was you guys attributed to fairly aggressive promotions by some competing bike manufacturers.

And, then, I guess would inventory constraints from the production reductions you guys had also have been potential driver of that share decline,and what other buckets might I be leaving out?

As we commented, our competition, I'm not going to talk too much about our competition.

As aggressively since kind of really on a year part of (inaudible) both of -- most of our larger competition aggressively buying the dealer rebates, customer rebates and well in financing, and the fact is that we gathered data a significant portion of their sales are all part of your models.

So, they have a backlog in here.

Certainly incentive from your factory or company standpoint and start moving, and that contributes why some of your rebates are so aggressive in fact kind of over the top.

That means that is truly a fact that's not speculation.

We have thoroughly research that one.

On the side as we look at ours, and we certainly -- as we adjust up production based on the first quarter and did that in April, trying to get ready and set ourselves very well position ourselves in the current year -- model year as we enter into a new model year, there are some models that as sales trends were on coming out as we entered the summer season, we may have had some deals come out of (inaudible), or we did have some dealers that ran out of some models.

Overall, though, I don't think that there was a big impact on market share performance for the quarter.

Certainly, not having some dealerships we lost retail sales, and I think in the scheme of things it was not significant impact in market share.

And, not to get you to talk too much about your competitors, but is your sense that post these promos that they've worked through a lot of their excess inventory?

Or, is this kind of sort of a competitive pressure you would expect to persist for another quarter or two?

Yes, I wish I had that much good competitive information.

We've really struggled to get what a we have, and then through great resources we have been able to get that information.

But to know what their inventory position is -- we're that smart.

Information isn't that good.

I wish it was.

Okay.

And, I guess on raw materials you said that you did see a step up I think in surcharges of a couple million this quarter.

Can you just give us a little bit of a lay of the land of steel costs?

You are hearing in other industries that people have -- or some the steel companies are starting to layer on surcharges.

I mean, some of the them are asking $200 to $300 a ton sort of thing.

Can you give us a sense of how the contracts were if any of that might be forth coming in the back half, or maybe, I don't know, based on the steel you buy it may not even be the same thing?

We have a short answer, I'm going to give you to John Olin -- John Olin, our crack Vice President and Controller.

Hi, Patrick.

You are absolutely right.

Steel prices have been surging in the last several months, and we expect the surcharges that we pay to continue to rise until we will start to see that market mitigate.

Okay.

And, just for my understanding, is it mostly like hot rolled steel or kind of a blend -- what kind of -- what should we look at to sort of get a sense of where those could go when we're trying to track?

All I can think of for the entire steel market is rising across the complex.

We have all sorts of steel that go into the product that will be hot rolled or tubed or whatever.

I mean if look at the motorcycle, there is substantial amount of vinyl besides electronics and the tires.

I mean -- we have great motorcycles, but mostly metal.

The good news is that it makes up a small percentage of the total cost.

Total cost is the machining and that refinishing and the cosmetics that a -- and the engineering that have a bigger portion of the cost.

Metals are sufficient.

Okay.

Great.

Good job on the quarter.

Thanks a lot.

Hey, thanks a lot, Patrick.

Thank you.

Our final question will be coming from Tony Gikas from Piper Jaffray.

Hi, guys.

Thanks for taking my question.

Just wanted to follow up on SP, and how did international affect the (inaudible) 12% in the quarter?

And, then second question, just how taking share of the market right now, and you could characterize why and the competition is taking a share?

I would apologize, Tony.

But, I'm not sure where you are calling from, but it sounds like you are under water, and I really didn't pick up your question.

Can you try again?

I said I was wondering if you could comment on how international shipments, especially ESP, and who is taking share and why?

In international shipments, I mean, talking about the ESP and on our wholesale shipments?

You talk about -- I guess on international, certainly, different mix issues from market-to-market.

And, so depending on the market, our independent distributors get a discount and that affects -- adversely affects our ESP.

From our wholly-owned distributors, there is a positive impact, especially y when you include foreign exchange in there.

And, then there is a mix because mix will ship in the US certainly is not reflective in each market is certainly different.

So, markets are stronger in spaces.

And, some markets are stronger in customs.

Significantly so.

So, in total, and it depends on a mix of our sales, but stronger in the quarter.

Generically, I would have -- I think we have to study that question a little more deeper.

I don't really get you.

But, at the end of day, we will continue try to grow our international business faster than the domestic business.

Not just this year or last year, but that is where we are trying to push it.

We have great opportunities international markets.

So, if your question is driving to what impact does this have, the international as we go forward we will have a bigger portion of the business as we go forward.

And, we could probably follow up on any information on that.

Hopefully, I got your -- your question like I said, the background noise or whatever it is really, really difficult.

And, with that, kind of gone over our timeline.

I want to thank everyone for your time and appreciate your interest and your investment in Harley-Davidson.

I'm going to turn it back to Amy for some final logistics.

Thanks, Jim.

If you like to hear a replay of this conference, call 706-645-9291 and enter pin number 50429408-pound until July 24.

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If you have questions, please contact Harley-Davidson's Office of Investor Relations at 414-343-8002.

Have a great day, everyone.

Thank you.

That does conclude today's Harley-Davidson's Second Quarter 2008 Earnings Conference Call.

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