Harley-Davidson Inc (HOG) 2008 Q3 法說會逐字稿

Good morning.

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

At this time, I'd like to welcome everyone to the Harley-Davidson's third 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 session.

(OPERATOR INSTRUCTIONS) Thank you.

I would like to turn the call over to Amy Giuffre, you may begin your conference.

Thank you, Patrick, and good morning, everyone.

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

Today Harley-Davidson's CEO, Jim Ziemer will provide his thoughts on the current global economy and outlook for our business.

CFO Thomas Bergmann will share the financial results for the third quarter and the President of Harley-Davidson financial services, Sy Naqvi, will talk about the performance of that business unit.

At the close of our prepared comments we will open the call for questions.

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

It will also be accessed until October 23rd by calling 706-645-9291 or 800-642-1687, in the US.

The pin number is 64882373$.

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

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

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

Now I'd like to introduce the CEO and President of Harley-Davidson, Inc., Jim Ziemer.

Good morning.

Thanks for calling in today.

State the obvious, no doubt these are difficult economic times in the US and globally.

Every business is feeling some impact.

Harley-Davidson continues to be fortunate through operating in the current environment from a position of strength.

I can assure you that everyone in the organization is working hard and smart to produce results.

While we can't control the external forces that work in the economy in the credit market, underlining causes Harley-Davidson is extremely focused on appropriately managing the many aspects of the business we do control.

Let me start off by thanking our employees and dealers and suppliers, I look at our third quarter results, the only thing that's gone on in the market since the end of September, I believe there are three key factors to keep in mind.

First, although the economic turmoil in the US to increase extent in the international markets makes this a very tough business environment we believe we are positioned Harley-Davidson appropriately for current conditions.

We're on track with our business plan for the year.

Second, during these turbulent times in the credit market we've been able to maintain Harley-Davidson financial services position as a stable consistent source financing for dealers and consumers.

No small feat, it reflects the underlying strength of the HDFS business model as well as the broadest capability of the motor company in Harley-Davidson Inc.

Third, while Harley-Davidson's business in certain international markets is also under some pressure due to the global economic downturn, we believe that the international markets will continue to play a growing role in the overall picture for Harley-Davidson.

Before I turn it over to Tom, let me also reiterate something you hear me say often, Harley-Davidson has always managed the business for the long term, and we will can continue to do so.

As a company continues to navigate the current business environment, we believe a long-term focus is more important than ever before for the brand.

So with that as the background in context, I will hand it off to Tom for the financials, and I will be back a bit later in the call.

Great.

Thanks, Jim, good morning, everyone.

I want to take a moment to reiterate Jim's comments that while the current economic environment is challenging we continue to take the necessary steps to ensure we are maintaining the our strong financial position and protecting our premium brand for the long term.

As I road back to Milwaukee from Bend, Oregon, to celebrate the 105th anniversary, it occurred day after day, mile after mile just how powerful the Harley-Davidson brand really is.

Riders from around the world joined our group as we rode towards Milwaukee, experiencing the Harley-Davidson brotherhood as we pulled into Milwaukee to join thousands of other riders was powerful and emotional.

There is no question in my mind that only Harley-Davidson can offer the once in a lifetime experiences and solidify deep emotional connections to a brand.

Now here are a few thoughts before jumping into the financial details.

Worldwide retail sales and dealer inventory are in line with expectations.

The decision we made in April to reduce shipments is playing out well and has proven to be the right course of action.

Second, and I will be more specific later, HDFS management continues to do a good job managing through a difficult credit and capital market environment.

Year to date HDFS has generated over $100 million of operating income demonstrating that even in the market conditions it has a solid business model.

Furthermore, we have put considerable time and energy into developing alternative funding plans for HDFS that give me a high degree of confidence that we will have adequate financial flexibility and liquidity to fund HDFS through 2009.

Third, we are taking a realistic view that the near term global economic environment will be challenging for our business and the worldwide motorcycle market growth may slow somewhat in the near term.

We will continue to make the appropriate decisions to manage through the current environment, while continuing to invest in those activities that will strengthen the brand and support our long-term growth potential.

With that let me now turn to the third quarter 2008 results for the motorcycles and related product segment compared to the third quarter 2007.

First let's take a look at retail sales.

Our 2009 model year products started shipping into all markets during the third quarter.

Overall the response has been very positive.

Our industry leading Touring family features a complete redesigned chasse, customers impressed when they experience the new level of comfort and responsiveness.

TriGlide, our new three-wheel motorcycle has also been very strongly received.

Many dealers have already taken deposits on their expected annual allotment and dealers tell us demand is high.

We believe TriGlide is meeting the strategic objectives to keep riders riding longer and bringing in new customers who are not comfortable with a traditional two wheel motorcycle.

Feed back on the new v ride muscle has been positive.

Last we can we launched a campaign that will give the new V-Rod Muscle has also been very positive.

Last week we launched a campaign that will give the new V-Rod Muscle a lot of exposure among to target audience and beyond.

It features Sports Illustrated and Victoria's Secret model Marisa Miller.

So far the campaign is getting a lot of attention and plenty of hits to the behind the scenes video on YouTube.

You should check it out.

Now looking at our dealer's retail performance.

On a worldwide basis retail sales of Harley-Davidson motorcycles were down 9.6% for the quarter compared to a year ago.

Retail sales of new Harley-Davidson motorcycles in the US decreased 15.5%, in the third quarter of 2008 compared to the same period in 2007.

Over all, the US 651 plus cc motorcycle market decreased 3.1%.

In the third quarter.

To understand our performance relative to the US heavyweight motorcycle market in the third quarter, you need to keep two factors in mind.

One, the stick it to the man financing promotion that ran during June of July of last year, making year-over-year comparisons more difficult.

And second, the Japanese manufactures were still busy implementing lower financing offers and more extreme promotional activities than last year.

These tactics appeared to drive unit sales in the US industry this quarter particularly of noncurrent model year product.

The percentage of noncurrent model year motorcycles sold by Japanese manufacturers was up considerably compared to last year.

For example, 50% of one manufacturers sales in the quarter were prior model year motorcycles.

Our international dealers growth continued as retail sales increased 11.3% in the third quarter compared to the same quarter last year.

This double digit increase was driven by a 12.4% increase in retail sales of Harley-Davidson motorcycles in Canada, a 17.5% increase in the Asia Pacific region and a 41.6% growth in the Latin America region.

In the Europe region, retail sales up 2.9%.

Now there is a lot going on in the European market.

While we continue to see weakness in the UK and Spain we still saw strong performance in many of the remaining European countries including France and Germany.

However, during the latter part of the third quarter, we did start seeing slowing in a few additional European countries such as Switzerland and Italy.

While we remain pleased with the implementation of the international growth strategies and confident that our international growth will continue, we do expect the growth rate to slow as overall global economic conditions deteriorate.

Now looking at wholesale motorcycle shipments for the quarter.

Worldwide Harley-Davidson motorcycle shipments were 74,704 units, which was a decrease of 11,831 units or 13.7% from the third quarter of 2007, and within our shipment guidance of 74,000 to 78,000 units.

Domestic shipments of 49,953 units for the quarter were down 24% from the third quarter of 2007.

The domestic shipment volume represented 67% of the total volume shipped to worldwide dealers down from 76% a year ago.

International shipments of 24,751 units, were up 19.1% compared to the same quarter last year.

International shipments increased to 33% of our total worldwide third quarter shipments volume compared to 24% in the third quarter of 2007.

For the full year of 2008, we had narrowed our shipment expectations to between 303,500 and 306,000 from a prior range of 303,500 and 307,500 motorcycles.

As we enter the fourth quarter we are pleased that the over all level of inventory in the US dealer network is significantly lower than a year ago and we believe is appropriate in these uncertain times.

However, we still have a lot of work to do to improve our US allocation system in order to deliver the right motorcycle to the right dealer at the right time.

We are continuing to work with our dealer network to improve this system.

In our major international markets we are also comfortable with motorcycle inventory levels.

Based on the potential slow down we expect in some international markets we will continue to monitor inventory levels closely and be prepared to take action to maintain appropriate inventory levels.

Now let's turn to mix.

Touring volume was 32.1% of total shipments in the third quarter of 2008, compared to 32.9% in 2007.

Custom shipment volume representing our Softtail, Dyna and VRSC motorcycles was 45.9% in the third quarter 2008, compared to 45.6% for the third quarter 2007.

And Sportster motorcycle mix was 21.9% of the mix for the third quarter 2008 compared to 21.5% during the third quarter last year.

Going forward, to the extent our customer base changes, we will accommodate the preferences and balance the mix between our motorcycle families according to their needs.

Now turning to revenue, revenue from Harley-Davidson motorcycles was $1.05 billion down 11.1% from the third quarter 2007.

This decrease was a result of 11,831 fewer units shipped, and was partially offset by a $402 or 2.9% increase in average revenue for Harley-Davidson unit from the year ago quarter.

The increase in average revenue per unit can be attributed to favorable impact of currency.

Revenue from parts and accessories $259 million for the quarter, which was up 3% or $7.5 million over the year ago quarter.

This increase was largely driven by increased sales of genuine parts specifically consumables such as oil and tires.

General merchandise revenue for the third quarter of 2008 was $84 million, an increase of 1%, or $800,000 compared to the third quarter of 2007.

Let's take a look at growth and operating margins.

Growth margin in the quarter was 34.0% of revenue, down from 38.4% in the third quarter of 2007.

During the quarter there were a number of factors that negatively affected growth margin.

The primary drivers increased product cost and allocation of fixed cost over 11,831 fewer units.

Operating margin for the third quarter of 2008 decreased to 16.4% from 23.2% during the third quarter of 2007.

Operating margin for the third quarter of 2008 was impacted by the one time $16.6 million expense related to the value of acquired end process research and development at MV Agusta.

Now turning to HDFS, before I review the Harley Davidson financial services segment results for the third quarter, let me give you a little more detail around my perspective and opening comments regarding HDFS.

Our priority at HDFS during these stormy times is to continue to balance availability of credit to qualified customers to facilitate the sale of motorcycles while delivering appropriate returns and profitability.

HDFS is doing well amidst the turmoil in the current market.

I said all year that profitability would be under pressure, but even in this environment, HDFS produced over $100 million of operating income for the first nine months, which is really a reflection of the strength of the business model and the excellent job the team at HDFS is doing.

Next, I would like to spend a few minutes discussing HDFS's funding needs and our plans to ensure we obtain all the necessary liquidity and financial flexibility we need at HDFS to fund their ongoing operations in the most cost effective manner.

In addition to cash on hand at HDFS today, we presently have over $700 million of availability under our $1.9 billion committed credit facility to support their funding needs.

During the fourth quarter of 2008 we are targeting in additional $300 million to $500 million of funding for HDFS through the debt capital markets.

The fourth quarter funding needs includes the repayment of $400 million of medium term notes that mature in December of this year.

Our primary funding during the fourth quarter is to access the unsecured debt capital markets, however, given the unprecedented volatility in the markets we have prudently planned several funding alternatives.

Our first alternative is to fund HDFS through the commercial paper market.

HDFS has continued to access the commercial paper market throughout all this volatility and we expect continued access.

However, if for whatever reason the commercial paper market would not be available, we have the committed bank credit facility in place that we can utilize if needed.

We are also working on establishing an asset backed commercial paper facility, to supplement our existing unsecured commercial paper program, which we expect will provide us with another funding source.

Again, these are just back up plans in the event we are not able to access the medium term market during the fourth quarter or early first quarter of 2009.

Looking at 2009, we estimate HDFS funding needs to be approximately $1.5 billion for the full year.

Our primary funding pass in 2009 will be a combination of the unsecured term debt and the asset backed securitization market depending on market conditions.

However if these funding paths are unavailable we developed contingency plans that will provide HDFS with the necessary liquidity to fund its operations.

One such contingency plan is monetizing HDFS's wholesale loan portfolio to provide additional liquidity if the need arises.

Again, these are only contingency plans at this point.

And beyond these contingency plans other funding alternatives include the utilization of cash from the motorcycle segment or the Harley-Davidson, Inc., balance sheet.

I emphasize we do not at this time plan to utilize motor company cash or the Harley-Davidson Inc., balance sheet, but given the current unprecedented tumultuous times in the debt capital market we need to be prudent and consider all possible scenarios.

So to wrap up the funding discussion I feel as comfortable as possible under the circumstances knowing we have several alternatives and spent a lot of time and energy developing solid contingency plans in the event conditions worsen in the capital markets.

With that, let me now review HDFS's financial results for the third quarter.

Harley-Davidson financial services delivered third quarter operating income of $35.6 million, a decrease of $13.9 million or 28% compared to last year's third quarter.

This decrease is primarily due to lower securitization income, and the write down of finance receivables held for sale to fair value.

Lower securitization income, resulted from the fact of last year's results benefited from a $782 million securitization transaction, which generated a $3.5 million securitization gain, compared to no securitization transaction or corresponding gain in the third quarter of 2008.

For receivables held for sale, HDFS completes a discounted cash flow analysis each quarter to determine the held through value of the held for sale portfolio.

The third quarter discounted cash flow analysis resulted in a fair value lower than the carrying value and therefore required a $9.4 million write down.

This third quarter write down was primarily due to the significant volatility and widening of credit spreads resulting in higher estimated costs of financing at the end of the third quarter relative to prior periods.

With that, I would now like to invite Sy to provide his insight on HDFS's operations and portfolio performance.

Thank you, Tom.

And good morning.

As Tom and Jim both mentioned, at HDFS we are focused on ensuring that we navigate through these turbulent waters.

Tom outlined the solid funding plan we have in place for HDFS, so I'm going the spend the next few minutes on our operating results and the actions we are taking to address the current market environment.

For the first nine months of 2008, HDFS originated $2.4 billion in retail motorcycle loans compared to $2.6 billion during the first nine months of 2007.

HDFS's retail market share for new motorcycles sold in the US was 54.1% for the first nine months of 2008 compared to 56.3% in the prior year period.

Now if you exclude the impact of the stick it to the man promotion that ran during June and July of 2007, HDFS's market share actually increased by a little over 1%.

As Tom mentioned, we continue to balance the need to provide credit to qualified customers to facilitate the sales of motorcycles with the need to maintain appropriate returns and profitability.

With this in mind we taken several actions throughout 2008 with just underwriting standards to today's market conditions, and we continue to adjust our underwriting criteria as warranted.

As a result the overall quality of portfolio remains high with approximately 70% to 75% of our portfolio classified as prime, which is consistent with our historical split between prime and sub prime.

In addition, to the underwriting changes we have made, we have also implemented retail price increase that went into effect in October.

The price increase reflects the increase in cost of financing and take into account the credit risk associated with today's economic realities.

We feel this increase appropriately balances the inherent trade off between credit availability to support motorcycle sales and profitability of HDFS.

Now in terms of credit performance, the 30% plus delinquency rate for managed motorcycle loans was 5.6% compared to 4.9% at the end of the third quarter 2007.

The new currency rates continue to reflect the financial pressures on US consumers.

We believe our experience is in line with that of others in the financial services industry.

Analyzed credit losses and managed retail motorcycle loans were 1.97% for the first nine months of 2008, compared to 1.65% for the same period in 2007.

Year over year increase in losses was driven by a higher incidents of loss primarily due to the year-over-year delinquencies.

On the positive side, improved values on Harley-Davidson motorcycles partially offset the higher in incidents of loss.

In fact our recovery levels in the third quarter were at levels last seen back in 2005.

We continue to improve our loan origination and collections capabilities in the third quarter.

Recently we hired a new VP of Operations who has over 20 years of financial services experience.

We've also added collection staff to reduce the number accounts for collector and improve the effectiveness of our collections efforts overall.

And finally just this week we announced our plan to open an additional collection facility in Chicago land area to mitigate future losses.

Over all HDFS continues to solidify its relationship with the Harley-Davidson dealer network.

Even in these difficult economic conditions, HDFS remains committed to providing a full range of financial services to our dealers.

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

However HDFS continues to take appropriate actions and manage the business to make credit available while remaining profitable.

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

Thank you, Sy.

Now I will get back to the numbers and review Harley-Davidson Inc.'s consolidated financial results.

Cash in marketable securities totaled $504.9 million as of September 28th, 2008.

Cash used by operations was $221.2 million during the first nine months of 2008 compared to $1.37 billion of cash provided during the first nine months of 2007.

This decrease in cash flow from operations of $1.59 billion was primarily the result of net proceeds from securitization, being $2.02 billion less than in the same period in 2007.

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

While HDFS's decision fund through commercial paper medium term notes does have an impact on operating cash flow, it does not impact the overall cash flows of the company.

Cash flows related to HDFS borrowing activity which are included in financing cash flows were $1.44 billion high in the first nine months of 2008 than in the same period last year.

During the first nine months of 2008, depreciation was $154.4 million and capital expenditures $153.7 million.

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

Turning to our share repurchases for the quarter, we've said we would not leverage Harley-Davidson balance sheet to repurchase shares and would only repurchase shares with available free cash flow.

During the third quarter we repurchased 2.5 million shares for $100.1 million compared to 9.7 million shares for $509 million during the third quarter of last year.

Because of the extreme volatility in the credit markets during the last few weeks and in keeping with our conservative management of the balance sheet, we do not plan to repurchase shares during the fourth quarter until HDFS has successfully executed a capital market transaction and obtained additional financial flexibility.

As of September 28th, 2008, there were 232.8 million shares of common stock outstanding and 16.7 million shares remaining on a board approved share repurchase authorization, an additional board approved authorization is in place to offset option exercises.

Our third quarter effective income tax rate was 38.2%, compared to 35.5% in the same quarter last year.

This increase was due primarily to the nondeductible in process research and development charge for the MV Agusta group and the expiration -- excuse me, of the federal research and tax credit as of December 31st, 2007.

Earlier this month, the federal research and development tax credit was reinstated retroactive to January 12, 2008 continuing through December 31, 2009.

We expect to 2008 full year effective income tax rate will be approximately 35.5%.

So all in all net income $166.5 million in the third quarter, down $98.4 million or 37.1% from the same period last year.

Diluted earnings per share for the quarter were $0.71, a decrease of 33.6% from the year ago period.

As I said earlier, we are in line with our expectations for the first nine months of the year, and based on our view of the remainder of the year, we have narrowed earnings per share guidance for the full year of 2008, to between $3 and $3.10 from our previous range of $3 to $3.18.

With that I will turn it back over the Jim for closing comments.

Thanks, Tom.

As I said in my opening comments, I believe there are three key perspectives to keep in mind when look at the year so far.

First we believe Harley-Davidson is positioned with the current environment of the economic difficulties in the US, the growing economic problems globally.

Second, HDFS remains a stable consistent source of financing for retail customers and dealers during these turbulent times in the credit market.

The priority will be for HDFS to continue balance of availability to credit to qualified customers, while maintaining appropriate returns of profitability.

And third, while our business in certain international markets is under increased economic pressure, we believe that the international markets will continue to play a growing role in the overall picture for Harley-Davidson.

(inaudible) HDFS, let me share some further thoughts on the current environment in the road ahead both in the US and internationally.

Key points to differentiation for Harley-Davidson are the plan of the business model.

As a company proactively navigated the current economy we believe a long-term strategic focus is more important than ever.

And a key part of that long-term focus is maintaining a premium brand position.

Earlier in the year when it became obvious that US economy was going nowhere fast, we adjusted by reducing shipments.

Keeping with my plans to ship fewer Harley-Davidson motorcycles to our dealers worldwide in 2008 and expect it will sell at retail.

We believe the shipment reduction changes objective, positioning the company and dealer network for the current climate.

As a result, many US dealers entered the 2009 model year with fewer carryover models.

In fact, new Harley-Davidson motorcycles in general are selling at or above MSRP.

And used bike prices are stable and continue the rise.

Some of our dealers continue to feel they are light on inventory, which suggests we may have been conservative on shipment.

It also suggests that the 2009 models have a lot of appeal.

Speaking of new products it goes without saying we continue to invest in product development and marketing.

New products are one of the most important keys to our future.

We also are continuing to deliver unparalleled customer experiences which are a real strategic advantage for Harley-Davidson.

105th anniversary celebration in late August was a huge success.

Just about every account was bigger and better and drew a larger crowd than the milestone 100th anniversary.

When you consider the incredible pressure on the consumer's discretionary dollar this summer as well as the uncertainty and certainty generated by the economic climate,the tremendous response to the event under scores the great appeal in the growing part of the Harley-Davidson brand.

This bodes well for the future.

Sure, our anniversary sells motorcycles parts and accessories and general merchandise, but even more important, anniversaries are great ways to build excitement and involvement with all that Harley-Davidson experience has to offer.

It builds the brand and plant seeds for the future.

When it comes to experiences, new Harley-Davidson museum opened in the third quarter and it's just fantastic.

Since I talked about the museum on the last call I won't go into detail today, other than to say it's a unbelievable experience that appeals to riders and nonriders alike.

On the international front, our strategic focus on global markets continues with investments in international markets that drive future growth.

Earlier this month, a third authorized Harley-Davidson dealership opened in mainland China.

In addition, Taiwan recently joined the Harley-Davidson family of international markets.

And we continue to pursue ways to enter the India market, this cites just a few examples of where Harley-Davidson is headed in the world.

Our acquisition of MV Agusta group which we completed in the third quarter is a prime example of a global strategy in action.

This acquisition expands our presence in Europe and deepens our credibility and penetration into performance motorcycles, which represent over 70% of the European market.

The time in acquisition stated our first priorities were to put a management team in place, restart production and we're off to a great start.

Most of the management team headed by Matt [Levitige] including (inaudible) and I'm also pleased to report that as of September 29th, MV Agusta group began producing motorcycles again.

Over the coming months, we will continue to work on the normalization of production and making progress on the MV Agusta product development front.

So we continue to be optimistic about our international growth potential and we remain confident that international growth for Harley-Davidson will outpace US growth going forward.

Let me wrap it up by coming back around to the economy.

Since there is no way of knowing whether consumer confidence -- when the consumer confidence in the economy will rebound, we'll continue to take what we believe is a measured approach to the marketplace.

As always, we are carefully monitoring the situation at retail around the globe to the US economy or consumer confidence starts to rebound or should start to deteriorate further in the US or international, we will respond appropriately.

Throughout our 105 year history, Harley-Davidson has been through many ups and downs, we're being realistic about the current disruption.

Same time, I've said it before and I'll say it again, sooner or later, the economy will turn around, and consumer confidence will return.

As we look down the road past the global economic disruptions, we are doing the right things to manage the business and we believe we will be well positioned to capture future growth.

With that, let's open it up for questions.

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

Your first question comes from the line of Ed Aaron from RBC Capital.

Thanks.

Good morning, everybody.

A couple of questions for you, first, I was hoping you could talk a little bit about further actions you might take to manage your cost structure.

I realize you made some changes earlier in the year, but your sales for 2008 aren't actually down that much from where they were in the 2006 peak year, and it seems like there is potential for the rate of decline to accelerate in 2009.

Just wanted to get a sense of further actions that you might need to consider to adjust to that and also what limitations you might have in your ability to cut down your cost structure.

And after that I have a couple of HDFS related questions for you.

On cost structure, we continue to have an ongoing program of operational excellence, looking at speed to market, quality and cost structure, throughout the organization, not just cost of goods sold.

I'm not going to go into specific actions we've taken, but it's a continuous program and process that's part of a strategic imperative that we have constant attention on in all aspects of the business, from our manufacturing operations right through our G&A operations, marketing and engineering is important thing on our plate and we'll continue to address those issues.

Some of the cost structures, some of these great enhancements that we've seen, that we've added to our products that we designed a pro line with some new models and the V-Rod Muscle and some other products and so we continue to focus on the products, we certainly in this climate virtually didn't have a price increase on average going into the '09 model year.

So with some of the commodity prices in the middle, prices plus some future changes, compression on the margin as well as some of the actions to (inaudible) production (inaudible).

We plan to address those as we continue to go further.

Okay.

Then moving over to HDFS, a few questions there.

First, could you give us an order of magnitude of the retail price increases that you're putting in affect?

Second, I realize it's a moving target, but do you have a sense of what the current rates on any incremental debt borrowing to fund those loans?

And then third, as far as future funding needs are concerned you mentioned $1.5 billion in '09.

That seems like a low number relative to what it's been historically.

Finally, and I apologize for all the question, but just finally, can you address the business strategy of buying back stock in light of certainty in the capital markets and funding needs for HDFS?

Let me take the first one on the price increase.

We have a pricing structure that is tied to the credit profile of the customer.

So we don't have one number to give out in terms of what the amount of price increase is, because it depends on whether the customer is a tier one or tier seven customer.

Having said that, our price increase has been in the range of 50 to 100 basis points depending on the customer's profile.

With that Tom, do you want to take the other one?

Yes, looking at funding needs for 2009 and going forward from here, Ed, we -- based on our forecast for growth next year in the US marketplace and the funding needs for HDFS, it's approximately that $1.5 billion.

One thing to remember is we don't have any debt coming due next year compared to $400 million of notes that we have coming due in this December.

That's probably the best forecast we have at this point in time given our outlook for next year.

Regarding share repurchase, as you know we've been very good users of capital and returning capital to shareholders and have run a share repurchase program but we also believe fundamentally in running a conservative balance sheet and that conservative financial philosophy really goes throughout the company.

In times like this and given the turmoil in the capital markets and it's in everybody's best interest that we wait and hold back on the share repurchase program until after HDFS executes another capital markets transaction.

At this point in time, we are just going to hold back in this capital market environment, but we are committed long term to continue to return money to shareholders and we think share repurchases is a good way to do it.

Your next question comes from the line of Craig Kennison from Robert W.

Baird.

Good morning.

Thanks for taking the call.

Following up on Ed's question on the cost of funds, I know you raised your prices for consumer loans, but how does that compare to the increase in your cost of funds?

Yes.

Craig, it's Tom.

It's you look at cost of funding for the year, it's actually pretty interesting.

Everybody knows about what is happening in credit spreads and the volatility in the marketplace, but you've got to also remember a lot of the base rates have gone down significantly.

So overall we have not seen a dramatic increase in our cost of funding given the trade off between those two elements.

So clearly we expect cost of funding to continue to go up as we look forward, and that's really part of the proactive management that Sy and his team are doing at HDFS, that we needed to take the pricing action both to reflect the credit performance in the portfolio as well as slightly higher cost in funding as well as anticipated higher cost of funding going forward.

Okay.

Thank you.

Also following up on the $1.5 billion question from Ed.

Is that a net number, net of outflows as loans and inflows from payments or is is that a gross number?

That's a net number, that would be the net cash flow in need for HDFS for 2009.

Okay.

And then lastly with respect to your inventory status and your shipment plans this year, as you said you plan to ship fewer than you sell at retail, would you expect to ship more or less in line with retail for the next 12 months, or would you like to add or deplete inventory?

Thanks.

Right now, this is Jim, again we are well positioned for this year to ship fewer units than get sold at the dealer's retail.

In next 12 months, uncertain economic climate we are certainly keeping track with what is going on market by market.

We will have to see what really comes out right now.

Right now we are with the current environment we are comfortable with the current inventory levels.

Thanks again.

Your next question comes from the line of Robin Farley from UBS.

Hey, thanks.

I just wanted to clarify some of the numbers you were going through looking at HDFS, and what their funding needs might be.

Just return to the $1.5 billion in funding that you mentioned for '09.

Over the last couple of years you securitized about $2.5 billion and I think maybe that's probably the question others are getting at too, why $1.5 billion not $2.5 billion if that -- because of either a rejection or shipments of sales or reduction in funds that HDFS would provide for those sales?

Yes.

Looking at the $1.5 billion net cash flow needs, we take the whole business of HDFS into account, so you can't just look at the retail part of the business, you've got to look at also what is happening in the wholesale business and what is happening with dealer inventories and the wholesale financing needs of the business, as well as the other business operations at HDFS run as well as the cash generated from ongoing operations.

So we feel pretty good based on our outlook for 2009 and going through and looking at all the different cash flow needs as well as the cash inflows for HDFS, that $1.5 billion is going to be right in the ballpark of what we need next year.

Is that assuming that you securitize or monetize in some way the $1 billion plus of wholesale receivables on your balance sheet, is that assumption in that $1.5 billion.

Securitization is a financing activity, so it's separate.

This is just looking at the net cash flow needed to fund the new business originations of HDFS, obviously less the collections we anticipate to come in as well as all the other operating cash flow items.

It doesn't address how we decide to finance HDFS.

Okay.

And then that $1.5 billion, you've got the $400 million during the Q4.

I guess what I want to essentially roughly what the funding GAAP is at this point your financing needs and then we look at cash in the credit facility available just to get a sense of what kind of funding you would be looking to do in the medium term market.

(inaudible) you mentioned, but what do you see as the funding back to that you have going into the fourth quarter?

Just to reiterate my comments and clarify them for you is, we said in the fourth quarter our plan is to access the unsecured debt capital markets for $300 million to $500 million, that's our primary path.

That amount includes the repayment of the $400 million of MPNs that are due in September.

So that's our all in cash flow need for the fourth quarter.

Our primary path again is to access the unsecured debt markets.

Currently we have about $700 million of unutilized capacity on the bank credit facility.

We can issue additional commercial paper under that bank credit line that is a good and another alternative for us to fund HDFS through the fourth quarter.

Then we can go into some of the other funding alternatives.

But bottom line is we've got plenty of alternatives to fund the business of HDFS through the fourth quarter of this year and into 2009.

And then as we look at the full year of 2009, it is our expectation that they will need about $1.5 billion.

And again our plan at this point in time depending on how the markets unfold is either to do a combination of asset-backed issuances or unsecured debt issuances before we go into some of our back up contingency plans around monetizing the whole sale loan portfolio or other activities.

Okay.

Great.

Thanks.

And then just one final question unrelated to HDFS.

You commented that the allocation in the US -- the dealer allocation systems needs some more changes to get the price where they need to be.

Can you give just a little more color on what changes you are making in that system?

What we said earlier is that as we experience the great 2009 model year, we have experienced in some areas that we were probably right on some models in different areas of the country.

In which case there was a combination of great demand and in some cases where the allocation system probably is not working as well as we would like, we are working on those areas around both in terms of our mix and in terms of looking at how we distribute our product in a better basis.

But in total our inventory is about where we need to be.

We do have to focus on the regional allocation of both on the seasonal needs as well as regional.

Can you give color on the allocation system, changes you're making to it?

It's not just the allocation system, it's what we look at in the formulas as we forecast our future demand.

Okay.

Thank you.

Your next question comes from the line of Tim Conder from Wachovia.

Thank you.

And good execution ongoing here in a challenging environment.

Couple of items, you touched on this in some of your prepared comments, but if you could remind us the how the sales track July, August and September on the year-over-year basis at retail.

I know there was a stick it to the man comp that you had in July, you said that things in September fell off, if you could give us bit more color on the monthly year-over-year as it tracked through the quarter.

Secondly, this has been touched on a couple of different way, give us range of the rates that are charged to consumers, I know it varies by credit here, maybe you want to say the rates that are available for consumers for the top four tiers at HDFS.

And then finally if you could give us color on where you would view as an inflection point as far as where you would feel, hey, we need to cut back a little more on production.

Looking at that from a perspective of trailing 12 months shipments compared to trailing 12 months retail sales on a global basis, where would do you feel comfortable, maybe it's a question, Jim, for you, of that spread, where do you feel comfortable of the GAAP in that spread?

All right.

Three questions, I will start with the first one, Tim, in retail sales.

During the quarter, yes, generally we don't speak to activity month to month during the quarter.

I did mention in my comments about the stick it to the man promotion because that was a major driver of sales during July of 2007.

It was a difficult comp for the month of July for us, which obviously is part of our third quarter results.

So that's about all I had to say regarding US retail sales.

Looking at international sales and particular in Europe, Europe again overall where we are happy with the execution as a team is carrying out there.

We did see -- we still see strong performance in my of the big markets.

I reiterated what we've seen all year that the UK and Spain has been challenging markets for us, we did see slow down in last part of the third quarter and a couple of other bigger markets such as Italy or Switzerland, but there are other markets showing strong performance in the European region.

But I just wanted to caution that in the later part of the quarter we did see a slow down in parts of Europe that we hadn't seen earlier in the year.

Okay.

I will take the question on the wholesale shipment rate versus retail sales.

Number one it depends on market by market, certainly depends on demand.

It has to do with mix also, depends on what the mix of products is out there.

At the end of the day, we are going to look at dealer inventory, we are going to look at the average sales price is versus MSRP, because at the end of the day what we are trying to guard the brand.

The brand is the biggest thing -- we have a premium brand, we are going to make sure we don't encourage wrong behaviors.

We may err from time to time on the conservative side, there are signs maybe we did that and the results that came in the third quarter.

That is okay.

Again, the big driving what we are looking for is protecting the brand, and we certainly did that.

A little more demand is always a good thing.

So there's not a exact science but as we looked at, two years ago I made the statement that in 2007, that retail sales would exceed wholesale shipments, because as we were looking at the market, we were looking at comparison of what bikes are selling versus MSRP, we were concerned.

This year was the economic climate we were going to we said it was not a good idea to have inventories grow.

And so it all depends on as we look at demand as we see mix and as we see economy.

Certainly right now the economy gives everybody concern and certainly no one knows we are at the bottom yet or not.

So we are going to be conservative going forward.

As we look at market by market we are in good positions for what we see.

This is Sy.

I will take the question on the rates.

I will give you a range that we post, but keep in mind that the dealers can add to that rate.

Our range for the best customer is about 7% all the way up to 22% on the sub prime.

That's our range between 7% and 22%.

But if you look at the rates that may be available to consumers from one market to another it will depend on what the dealer adds to that.

We generally allow them to add to the rates in the lower tiers.

We don't allow them in the top tier.

These rates reflect the incremental 50 to 100 basis points that you commented on earlier?

Yes.

That range is pretty close to that, yes.

Okay.

Okay.

And Jim, just to clarify on your answer, as you said you look at many different factors, but if you kind of had to say okay I would like a GAAP of is it 5%, where you do you start to lose sleep at night to where you're saying we don't have enough cushion if something happens we could get into a situation we don't want to be and trim back production?

Is there a range of a number, is it 4%, 5%, 8%, somewhere in that area?

There is no range.

Depends if you got a great economy or a economy that's uncertain.

If you have an uncertain economy we are going to look for cushion.

We look for cushion when we made the call in April this year.

And we are looking for cushion as we go forward.

If we were in a several years ago, it's a different story when you can't meet demand.

It all depends on where you're exceeded demand and demand comes in different indicators, whether it be price per unit or dealer profitability.

So we look at many things and there is no one magic number.

Okay.

Okay, great.

Thank you, gentlemen.

Your next question comes from the line of Dara Mohsenian from JPMorgan.

Good morning, guys.

Tom, can you tell what you say your assumptions are for originations and collections at HDFS in order to get the to that net $1.5 billion funding number?

Dara, yes, we don't give that kind of guidance down to the HDFS number, so, obviously we look at what's been happening in the business.

We look at market share, we are looking at future new motorcycle and used motorcycle sales expectations as we go into next year.

So there is a lot of variables that go into the number.

But we have a whole obviously FP&A group, financial planning group, that spends a lot of time looking.

Based on our assessment of the marketplace and the visibility we have as best we can 2009 we are comfortable with the estimate of $1.5 billion.

Okay.

And then can you guys give us sense of US retail trends so far here in October, and if you seen a big incremental impact on the financial market dislocation and economic woes over the last few weeks here?

As we release earnings we give retail status through nine months and third quarter and not updates for the current financial period which is the fourth quarter right now.

Okay.

What about within the third quarter did you see any changes sequentially within the third quarter itself in terms of retail sales in the US?

As Tom commented before, there was a difficult comparison between this year and last year because stick it to the man.

I have to say that September came in maybe slightly disappointing in the international markets.

But as for the third quarter for US markets, we're pretty much right on forecast.

Within the international markets we saw a little bit of softening but didn't see any real surprises at the end of the third quarter in the US.

Okay.

Thanks.

Your next question comes from the line of Anthony Powell from Barclay's Capital.

Hey, guys, how is it going?

Good.

Couple of questions mainly on inventory.

Inventory increased in international markets by about 2,700 bikes, so what's your plan for inventory versus retail sales in international sales going forward?

Do you want to try to meet demand, do you want to ship fewer than retail?

What's your goal there?

Looking at inventory in the international markets, and I think Jim and I commented a little bit in the preambles, obviously inventory management is a very important aspect and one of our priorities because it has so much to do to maintain dealer profitability and maintain the premium positioning of the brand and so forth.

International are like the US market.

We look at the forecast of what we expect sales to be and we really work together with our international sales teams to make sure we are providing the appropriate amount.

There was a slight increase in international inventory, but as both Jim and I said, we are both comfortable with that and put it in perspective, the number of units of increase you're talking maybe a day or so of production.

So you're not talking that many units in the big picture.

So where -- we will keep a close eye given on what we seen in the international markets.

But at this point we are actually in good shape.

Okay.

And then just follow up on the US situation.

Looks like some dealers clearly wanted more bikes.

Is there a way to improve the dealer to dealer interaction in transferring bikes from certain regions to other regions because you -- by a way to help them move bikes to shipping coasts and other things?

It seems like you were leaving sales on the table with a lot of inventory policies there .

We have a active program that encourages dealers to ship between dealers both identifying where the units and models are as well as helping that process.

But the reality is typically when dealers get a product they want to keep the product.

They're not in a hurry to get rid of the product they have because they know they are going to sell it.

So that's is really the big issue not trying to accommodate or identify where it is, it's really a dealer's reluctance to give up the units where we run into a problem.

There is trading back and forth as dealers know they can help one another out.

When once customer -- they can help one customer get a bike sooner, but in the long run, it's kind of difficult because the dealers know they are going to sell the bike it's a matter of timing.

Right.

One HDFS question, so, you mentioned you need $300 million to $500 million in the coming quarter, then you say if you don't get that you could use your current credit facility.

So I'm guessing that you are going to try avoid using the facility at all in this quarter if you can get the financing, or is the financing that you're trying to seek on top of using your credit facility?

$300 million to $500 million we like to execute in the unsecured debt market during the fourth quarter if the market conditions didn't allow us or we decide not to go and execute in the unsecured debt market.

Our first -- our second preference would be to continue to issue commercial paper to fund that $300 million to $500 million need as I mentioned we continued to access the commercial paper program.

So ideally you wouldn't go back to the commercial paper market at all this quarter if you can avoid it.

We will continue to be active.

We have $700 million or so of commercial paper outstanding at this point in time at HDFS .

Like we always have, issue commercial paper as of one of our funding vehicles for HDFS .

We will continue whether or not we use the $300 million to $500 million capital market transaction we will still be using the commercial paper market.

And as I said we continued to have access to it and although it's early the new fed program looks like we may also be eligible for that program.

That even gives us higher degree of confidence that we have continued access to the commercial paper

Your next question comes from the line of James Hardiman from FTN Midwest.

Good morning.

Couple of brief questions here.

I know you guys are running short on time.

Not to belabor the inventory point, but pretty much every fourth quarter going back forever you built inventory a little bit.

You've shipped more bikes than sold at retail.

Year to date you shipped 40,000 fewer bikes.

Is there any reason to think this fourth quarter is going to be different than any of the other ones, meaning that you're not going to build some level of inventory in the channel in the fourth quarter?

Basically, we produce at an uneven keel.

We have a since North America makes up a substantial part of our business, it is seasonal.

We need to produce as we produce uneven keels our dealers are billing inventory so they can satisfy the spring and summer demand.

That will happen.

And although last year our year end inventory reduced from the prior during the part of fourth quarter, there is a increase, a natural increases as we continue to produce so we can keep our cost down and keep our quality up.

And that's why 20 years ago we went to that process of not trying to produce to the seasonality of the market, but produce at a even keel and then let the dealers accept the product, and that's well accepted.

Okay.

On the average revenue per motorcycle, that was up almost 3%.

You said currency was a big driver behind that.

How should we look at that going forward assuming that currency is going to turn if not against you at least neutral impact going forward?

Certainly given the fact that you're not raising prices on the bikes, should that number be flat, should it be down, what should we expect in terms of the number going forward?

Yes, James, a lot goes into the average revenue per unit as you know.

Currency is just one element as you mentioned, price is another one, mix between US and international mix between families, mix between models within families.

There is a whole bunch of variables that go into it.

So I think it will depend as we look into 2009 and look at we forecast customer demand will be throughout the various regions as well as by family and by models, that will have a big impact on what that average revenue per unit is.

But I can't give you specific guidance at this point in time on it.

Okay.

Fair enough.

And then two real quick questions on HDFS.

Sy, I'm not sure if you can give us maybe quarterly credit losses this year versus last year, obviously you give us year to date which is skewed given the fact that the numbers are really bad certainly during the first quarter.

How does this quarter in terms of credit loses compare to the year ago quarter if you have that information?

I think in the prepared remarks we gave you the two numbers.

They were year to date, though, right?

I'm trying to figure out if the third quarter was worse than the third quarter last year.

Delinquencies over the point in time, it's not like a cumulative thing.

So when we talk about delinquency at the end of the quarter, it's a point in time situation.

We are 68 basis points higher at the end of September in '08 than we were in '07.

And so we certainly do provide quarter and delinquency numbers.

Amy can give you specifics the follow up.

But we are seeing a trend that is consistent with lots going on in the consumer market which is that delinquencies are up compared to last year.

The economy factor is also playing into it.

If you follow up with us we will get you the quarter credit losses.

And let's handle that as a follow up item.

And just one real quick question.

It sounds like going back to your analysts meeting a few months back, it seemed like I think you stated if you needed to get a securitization done, those markets were available to you.

It sounds like that's no longer the case.

And I'm assuming that even the term debt markets are not necessarily available to you right now.

When we talked back at the analyst meeting it seemed like your priority was really maximizing income and it just was too expensive to access those markets.

Have those priorities changed meaning, if you could get a securitization done now or access the term debt markets today, even if the rates weren't great, have your priorities shifted to the degree you might do that for the sake of liquidity?

I think a couple of comments.

I think one, since the beginning of the year clearly the asset backed market in particular has deteriorated, we all read the papers over the last few weeks all the debt term markets have deteriorated in performance.

Our number one priority is to make sure we can fund the business and have sufficient financial flexibility on liquidity.

The asset backed market is even more difficult compared to the beginning of the year.

And so that really we don't see that as a option here in the fourth quarter.

The unsecured debt market, spreads have widened up significantly for all issuers.

It is a more difficult market.

People are accessing it.

It varies at this point in time day-to-day on the tone in the marketplace.

Clearly the cost will be higher than recent history, but access to that market is really a day by day, week by week exercise that we are monitoring closely.

Okay.

Thanks.

Your next question from the line of Patrick Archambault from Goldman Sachs.

Hi, yes, just actually wanted to piggyback onto the most recent questions there.

First on residual values, I guess, Sy, you said that the managed losses while up because of higher delinquencies were mitigated somewhat by residual values which were holding in there.

I was wondering whether you could give us a little bit of an explanation why you think residual values are holding up.

It seems that given the where we are in the cycle and the demand environment, one would expect pricing to be softer.

That was my first question.

And then the second follow up would just be on FX.

Sorry if I missed this, could you tell us what FX was both from a revenue impact and the needed impact as well if possible?

Yes, this is Sy, let me take the first part of that.

One of the things that we have noticed this year is a very strong demand for used motorcycles driven a lot by foreigners coming in and buying product.

I think the weak dollar made it very attractive for people to come in and buy used motorcycles.

We've seen as I mentioned in my prepared statements that when we've done our auctions of used motorcycles we have gotten very good prices for them.

So that's been a big factor.

We don't know how long that's going to last.

But certainly that's been the case right from the start of this year and continues to be the case as recently as two weeks ago.

The other factor I would add onto that is used Harley-Davidson bike sales continued to be strong throughout 2008 on the year to date basis throughout the end of August, we're seeing used bike sales increase almost 10%.

So there is a very strong demand out there which is really good news, it tells you people are coming to Harley-Davidson, they love the brand, they want the lifestyle, they want the experience, but maybe in this economic environment they've opted for a used purchase.

But we're still seeing good used bike sales this year, which is also driving those residual values.

It may be driven by a combination of better gas mileage and also used bike doesn't cost as much as a new bike with the driving factors that helped drive that and the absence of the product in the market where some of the product is going back overseas as it's purchased by foreigners, you put those three factors together it's very reasonable that the prices firmed up if not increased.

And looking at foreign exchange the revenue impact for Q3 was $22 million positive and the EBIT impact was $14 million positive, Pat.

Okay.

So clearly that's a pretty huge margin on currency which sort of makes sense given that you produce in the US and sell in Europe where year on year currencies have still been a tail wind.

Could we expect something like a decremental margin on the opposite as we go into coming quarters the year actually starts being a head wind.

Clearly we benefited as the dollar weakened over the last several years both on the revenue and EBIT line.

So as it goes the other way, we've got to make sure we find ways to hedge it or manage that exposure.

But for example, we run an active 12 months, rolling hedging program.

So if I look out to 2009 we are probably 75% more hedged of our estimated exposures at a average rate that we've averaged here into over the last 12 months as we roll in hedges on a regular basis.

So it buys us a little bit of time, but longer term the right solution is to have a nice balance and a natural hedge of currency exposure, and that's part of growing internationally.

So that means potentially producing abroad at some point?

We've discussed manufacturing abroad at different levels.

First decision that always comes around is the brand and potential implications for the brand.

First part is always looking at the marketing research and what the customer would think of that.

We will not -- I don't ever see a day where we are going to introduce internationally and ship back into the US marketplace.

But there could be a point in time that we may manufacture in market for market in certain countries if it would make since but you got to get to the right scale and size to do that.

Great.

Thanks a lot, guys.

Your last question comes from the line of Bob Simonson from William Blair.

Thank you.

I will keep it to one question.

Jim, if gross domestic product, if GDP is down in the low single digits in the United States next year, and if it's similar to that in many European economies, can you grow your earnings next year?

It's going to depend on a lot of things, it depends on a mix, we will continue to do those things to grow the business and invest in the business, invest in the experiences and marketing, engineering.

It's a hard question.

We have been in the past been able to buck the trend.

Pretty severe economic turmoil right now that we are going through.

And obviously we had to go through a reduction in work force and then in production.

So it depends.

It's -- I'm not going to give you a straight yes or no answer.

But we will certainly look at trying to -- again it's protecting the brand and doing those things to make sure it's a great product and demand as we go forward.

Thanks for your thought.

Thank you.

Okay.

With that being the last question, thank you for your time this morning.

Appreciate your interest and your investment in Harley-Davidson.

Now I will turn it back over to Amy for some final logistics.

Thanks, Jim.

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This concludes today's conference call.

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