Harley-Davidson Inc (HOG) 2008 Q4 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the fourth 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.

Ms.

Amy Giuffre, Director of Investor Relations, you may begin your conference.

Thank you very much, Stephanie, and good morning, everyone.

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

We are speaking with you today from Washington, DC, where our dealers from around the world are gathered for the biannual Harley-Davidson business meeting.

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

Harley-Davidson's CFO and interim President of Harley-Davidson Financial Services, Tom Bergmann, will share the financial results for the fourth quarter.

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 Harley-Davidson.com, and will be available for replay throughout the next several weeks before archived.

It can also be accessed until January 30th by calling 706-645-9291, or 800-642-1687 in the US.

The pin number is 78326907#.

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 this information in this call.

Now, I'll turn the call over to CEO of Harley-Davidson, Inc., Jim Ziemer.

Jim?

Good morning.

Thank you for calling in.

Today we announced three pieces of news-- our 2008 results, our expectations for 2009, which includes a reduction in shipments in the range of 10 to 13%, and our three-part strategy to deal with the current environment, which includes workforce reductions to address the slowdown in volume.

To state the obvious, we are in very challenging times and Harley-Davidson is not immune to the current economic conditions.

But while our 2008 revenue, net income and EPS declined, we remained profitable, and I want to acknowledge the efforts of everyone in the Harley-Davidson family of employees, dealers and suppliers.

They are working hard to make the most out of a difficult business climate.

Entering 2009, the Company must continue to responsibly manage the business in one of the most difficult economic periods in decades.

But Harley-Davidson has a strong core business, anchored by a uniquely powerful brand.

We have a clear strategy to not only deal with the current economic conditions, but also strengthen our long-term operations and financial results.

And we are executing that strategy with confidence and conviction.

Our strategy is focused on three critical areas.

Investing in the Harley-Davidson brand, getting our cost structure right, and obtaining funding for HDFS to help our dealers sell motorcycles and our retail customers to buy them.

Let's look at each of these elements, starting with investing in the brand.

We all know that consumer demand is the lifeblood of our Company.

Investment is critical that we continue to stimulate demand in this economy.

To do so, we're going to continue to invest in the long-term health of the brand globally.

We know that great brands require consistent support, through both the good times and the bad.

Yes, we'll focus even more on making sure that we're allocating our marketing spend and product development spend in the most effective way.

But overall, you can count on us to be committed to strongly supporting the brand.

We're going to show great discipline in protecting the value of the brand.

Our Ride Free Sportster motorcycle tradeup program, for instance, is a great example of how we take actions that trigger consumer purchases in ways that actually build the brand.

The second part of our three-pronged strategy is to get the cost structure of the business right.

To not only address the volume reductions caused by the recession, but also to make sure our operations are properly structured for long-term competitiveness.

Last year, we prudently reduced our production levels in response to the falling economy.

The result was lower dealer inventories.

We're going to show similar discipline this year.

And again this year, we're implementing a volume reduction in the light of economic conditions.

As a result of the motorcycle volume reduction, and also as part of our strategy to improve our cost structure, the Company plans to consolidate our two engine and transmission plants in the Milwaukee area into our facility in Menomonie Falls, Wisconsin.

To consolidate paint and frame operations into one facility at our York, Pennsylvania campus.

To close our distribution facility in Franklin, Wisconsin and consolidate parts and accessories and general merchandise distribution through a third party.

And discontinue the domestic transportation fleet.

These planned changes will result in the elimination of about 1100 jobs over 2009 and 2010.

Obviously, these will be difficult actions, but we believe it is critical to create an environment that allows us to operate as a strong employer over the long-term future.

Moving on to the third element of the strategy, we continue to work intensely on obtaining funding for the lending activities of HDFS.

It goes without saying that this is highly important.

We have various options that we are working on, and Tom will walk you through those momentarily.

That's our three-pronged strategy for addressing the current environment and strengthening our long-term operations and financial results.

Invest in the brand, get the cost structure right, and obtain funding for HDFS.

There's already been a tremendous amount of effort behind each part of these strategies.

And I appreciate the great determination that I've seen from the Harley-Davidson team.

Now, let me turn it over to Tom, and I'll be back later in the call to share some final thoughts.

Great.

Thanks, Jim.

Good morning, everyone.

Our planned volume reduction and restructuring actions are clearly an important part of the strategy we are undertaking to manage through the economic environment.

The objectives of our strategy are to reduce excess capacity, focus on our core business operations, and take a step toward a fundamental adjustment to our cost structure.

Our current fixed cost structure, which I've talked to many of you about, is too high, especially in this environment.

When these restructuring activities are fully implemented, we expect to be a stronger, more focused operation, with a lower ongoing cost structure.

Let me give you some details around the motorcycle volume reduction and our planned restructuring actions.

There are four main components to the restructuring plan.

First, we plan to close our Capital Drive powertrain facility and consolidate powertrain operation into our Pilgrim Road facility, just outside of Milwaukee.

The 430,000 square foot Capital Drive facility will continue to manufacture Sportster and fuel power trains through the second half of this year.

At that time, we plan to integrate these activities into our newer 868,000 square foot Pilgrim Road facility.

The second component of our restructuring is the planned consolidation of certain operations at our York, Pennsylvania manufacturing campus.

We plan to consolidate the York paint and frame operations for our Touring and Softail families into the existing Softail operations on that site in order to improve efficiencies.

Third, we plan to consolidate our parts and accessories and general merchandise distribution and warehousing.

Currently, P&A distribution is managed through a Company-owned facility in Franklin, Wisconsin, and general merchandise is handled through a third party firm.

By the end of the year, our objective is to close our P&A facility in Franklin, and turn distribution over to a third party logistics provider who will ultimately manage our combined P&A and general merchandise distribution from two strategically located facilities in the United States.

By combining and redesigning these two operations, we expect to gain significant efficiencies as well as improved service levels through our dealers.

The fourth key component is the planned discontinuation of our US long-haul trucking operation, which is staffed with salaried drivers.

This operation primarily transports components between our manufacturing facilities and represents less than 20% of the Company's transportation activities.

These transportation operations will be assumed by a third party.

As a result of lower production volumes, the restructuring actions and SG&A cost reduction efforts, we plan to eliminate approximately 1,100 positions over the next two years.

Of that total, approximately 800 will be hourly production positions, and about 300 will be non-production, primarily salaried positions.

Approximately 800 positions, 500 hourly production and 300 non-production, of the total 1,100, will be eliminated in 2009.

All but approximately 100 of these reductions will occur in the first half of the year.

We anticipate the remaining 300 hourly production jobs will be needed through 2010.

We believe costs associated with the restructuring activities will be incurred over the next two years, and will total approximately 110 to $140 million.

Of these charges, we expect that approximately 75% will be cash and 25% will be non-cash.

We expect to incur between 80 and $100 million of these costs in 2009, with 30 to $40 million during the first quarter.

The remaining restructuring costs, between 30 and $40 million, are expected to be incurred in 2010.

We believe the cost savings of these activities will be between 10 and $20 million in 2009, and increase to 30 to $50 million in 2010.

Upon completion of the restructuring plan, we expect the ongoing annual benefit of our restructuring activities will be between 60 and $70 million beginning in 2011.

We will provide quarterly updates as we implement these actions through 2009 and 2010.

As we look forward to a very uncertain and unpredictable global economy in 2009, the Company has decided not to provide earnings per share guidance at this time.

However, we will provide full year and quarterly shipment guidance, full year gross margin expectations, and planned capital expenditures as follows.

We plan to ship between 264,000 and 273,000 Harley-Davidson motorcycles in 2009, which represents a 10 to 13% reduction versus last year.

In the first quarter of 2009, we expect to ship between 74,000 to 78,000 Harley-Davidson motorcycles, which is an increase over the first quarter of 2007.

Even though we expect to begin implementing restructuring activities in 2009, we still anticipate a decrease in gross margins.

For the full year of 2009, we expect gross margins to be between 30.5% and 31.5%.

There are three primary drivers of the expected gross margin decline.

One, fixed costs will be allocated over at least 30,000 fewer units.

Two, planned motorcycle shipment mix with overall lower margins compared to 2008.

And three, negative impact from foreign currency exchange rates, compared to 2008.

Finally, we are reducing our capital expenditures in 2009 and expect to spend between 180 and $200 million.

In addition to these base business capital expenditures, we expect to incur between 10 to $20 million of capital expenditures on the implementation of our restructuring plan in 2009.

Now, let's go back to the fourth quarter and full year 2008 results for the motorcycles and related products segment.

Starting with worldwide retail sales.

In 2008, worldwide retail sales of Harley-Davidson motorcycles were down 13.1% for the fourth quarter, compared to a year ago.

For the full year, worldwide retail sales were down 7.1%.

In the US, fourth quarter 2008 retail sales of new Harley-Davidson motorcycles decreased 19.6%, compared to the same period in 2007.

Overall, the US 651 plus CC motorcycle market decreased 25.5% in the fourth quarter.

For the full year of 2008, retail sales of Harley-Davidson motorcycles by our US dealers were down 13% while the overall US 651 plus CC motorcycle market decreased 7.0%.

For the full year, Harley-Davidson lost 3.2 points of market share.

However, during the fourth quarter, we gained 3.9 points of market share.

In addition, used Harley-Davidson motorcycle sales continued to increase and were up 8.6% in the US through November 2008.

As we expected, our international dealers' fourth quarter retail sales growth slowed and increased 0.7%.

During the quarter, the Europe region was up 3.4%.

The Latin America region was up 28.0%.

Canada was up 1.4%.

And the Asia-Pacific region was down 8.9%.

Asia-Pacific region dealer retail sales were impacted by the earlier availability of new model year product into Japan.

Traditionally, new model year motorcycles arrive in Japan during the fourth quarter.

However, in 2008, they arrived during the third quarter, thus driving sales up 23.3% for the third quarter of 2008.

For the full year 2008, retail sales of Harley-Davidson motorcycles in our international markets were up 10.3%.

The fourth straight year of double-digit international retail sales increases.

For the full year, the Europe region was up 6.5%, Latin America region up 47%, Canada was up 11.7%, and the Asia-Pacific region was up 7.7%.

Based on our expectation of continued economic weakness in many international markets, and recent trends in our business, we expect a modest decline in overall international retail sales in 2009.

Worldwide wholesale shipments of Harley-Davidson motorcycles were 76,581 units for the fourth quarter.

For the full year of 2008, we shipped 303,479 Harley-Davidson motorcycles, compared to 330,619 in 2007, or a decrease of 8.2%.

For the full year, domestic shipments represented 68% of total shipments, down from 73.1% compared to the same period last year.

International shipments for the full year grew to 32% of total shipments, up from 26.9% in 2007.

The significant increase in international shipments was driven by strong international retail demand during 2008.

Looking at our inventory levels at year-end, in the US, dealer network inventory on December 31st, 2008 was over 12,000 units lower than one year ago.

As we have demonstrated, we are managing overall production and shipments to attempt to ensure the appropriate levels of inventory in the US in order to protect the brand, the overall health of our business, and our dealers' businesses.

Growth in overall international inventory has been increasing moderately to support ongoing retail sales growth and new market development.

Based on our expectation of a modest decrease in international retail sales for 2009, we will closely monitor inventory levels and adjust our shipment plans accordingly.

Now let's look at motorcycle family shipment mix in the fourth quarter.

Touring was 34.2%, compared to 35.9% of the shipment mix in 2007.

Custom, representing our Softail, Dyna and VRSC motorcycles was 46.5% compared to 43.0% in the fourth quarter of 2007.

And Sportster motorcycles were 19.3% of the total shipment mix for the fourth quarter 2007, compared to 21.1% during the fourth quarter last year.

And for the full year of 2008, Touring motorcycles represented 33.6% of the mix, compared to 34.5% in 2007, custom motorcycle shipments increased from 43.7% to 46.4% of the mix for the full year.

And Sportster motorcycle shipments for the full year decreased from 21.8% in 2007 to 20.0% of the total shipment mix in 2008.

As I previously mentioned, we expect a lower margin shipment mix in 2009.

In this environment, we expect consumers will be more value conscious and demand for Sportster motorcycles will be relatively higher than other families for 2009.

Now, turning to fourth quarter and full year financials for the motorcycle and related products segment.

Revenue from Harley-Davidson motorcycles was $1.02 billion, down 8.5% from the fourth quarter of 2007.

This decrease was a result of 4,625 fewer units shipped and a decrease in the average revenue per unit of $414.

Average revenue per unit fell in the fourth quarter as a result of unfavorable foreign currency exchange rates, a lower revenue shipment mix, and the recording of estimated costs for the Sportster motorcycle tradeup program.

Harley-Davidson motorcycle revenue for the full year was $4.28 billion, down 3.8% compared to last year's $4.45 billion.

Revenue from parts and accessories was $152 million for the quarter, or a decrease of 7.9% from the year-ago quarter.

For the full year, parts and accessories revenue was $859 million, a decrease of 1.1% compared to 2007.

P&A revenue was down slightly for the year, primarily due to lower new Harley-Davidson motorcycle retail sales.

Accessory sales are generally correlated with new bike sales and also decreased in 2008.

However, parts sales growth is driven by the -- parts sales grew and that growth is driven by the increasing number of Harley-Davidson motorcycles on the road and the number of miles these motorcycles are ridden.

General merchandise revenue for the quarter was $69 million, a decrease of 6.0% or $4.4 million.

For the full year, general merchandise revenue was $314 million, an increase of 2.8% compared to 2007.

Several factors contributed to the increase, including strong international sales, especially in Canada and Europe.

Taking a look at margin, gross margin in the quarter was 31.6% of revenue, down from 35.7% in the fourth quarter of 2007.

During the quarter, there were two primary drivers that impacted gross margin.

The first was the change in motorcycle mix during this year's fourth quarter, compared to last year's fourth quarter.

In Q4 2007, mix included 105th anniversary models, special editions that were rich in content and priced to reflect the added features.

The second major impact to gross margin was the recording of the estimated cost associated with the Sportster motorcycle tradeup program.

Operating margin for the fourth quarter 2008 decreased to 12.0% from 18.1% during the fourth quarter of 2007, reflecting the impact of lower revenue in the fourth quarter of 2008, compared to the year-ago period.

For the full year, gross margin was 34.5%, compared to 36.9% in 2007.

This decrease was primarily driven by higher product costs, higher raw material costs, and the allocation of fixed costs over fewer units, partially offset by favorable foreign currency exchange rates, a more profitable shipment mix, and higher pricing.

Operating margin for the full year of 2008 was 17.3%, compared to 21.5% in 2007.

Let's move on to the Harley-Davidson financial services segment results for the fourth quarter and full year.

As the interim President of HDFS, I am confident in the strong leadership team and dedicated employees at HDFS and together we will manage the business effectively through this environment.

Our priorities for 2009 are to obtain additional funding, continue to make the appropriate underwriting and collection enhancements, and support the Harley-Davidson dealer network.

With that, I'll review HDFS's financial results for the quarter.

HDFS recorded an operating loss of $24.9 million for the fourth quarter, a decrease of $63.5 million compared to operating income of $38.6 million in the year-ago quarter.

The decrease is primarily due to a $28.4 million write-down of finance receivables held for sale to fair value, and a $35.1 million write-down of retained securitization interest.

The quarterly discounted cash flow analysis used to value the held for sale portfolio resulted in a fair value that was lower than the carrying value and therefore required a $28.4 million write-down.

Of the total, $13.6 million was due to higher projected credit losses and other adjustments, and $14.8 million was due to an increase in the discount rate used in the valuation model.

Given the current state of the credit market, where interest rates continue to trend higher than historical levels, we determined it was appropriate to increase the discount rate used in our valuation methodology from 12% to 18%.

In the retained securitization interest pool, our quarterly review and evaluation of the assumptions used to value the pool resulted in a $35.1 million write-down this quarter, $21.6 million of the charge was due to the change -- was due to the discount rate increase and $13.5 million was due to higher projected credit loss assumptions.

For the full year, HDFS operating income was $82.8 million, a 61.0% decrease from last year's $212.2 million.

Now I'll spend the next few minutes reviewing HDFS operating results and the actions we are taking to address the current market environment.

During 2008, we took several actions to adjust our underwriting and collections standards to mitigate the impact of a deteriorating US economy on our loan portfolio performance.

For the full year of 2008, HDFS originated $2.8 billion in retail motorcycle loans compared to $3.0 billion during the full year of 2007.

In 2008, approximately 75% to 80% of new originations were in the prime credit category, slightly higher than the overall managed retail portfolio composition at the end of 2008, which was 70% to 75% prime and 25% to 30% subprime.

HDFS's retail market share of new Harley-Davidson motorcycles sold in the US was 53.5% for the full year of 2008, compared to 54.7% in the prior year period.

In terms of credit performance, the 30 plus day delinquency rate for managed retail motorcycle loans as of December 31st, 2008 was 6.29%, compared to 6.15% as of December 31st, 2007.

That is only a 14 basis point increase over the last year, which reflects the focused efforts of the origination and collections teams at HDFS.

Annualized credit losses on managed retail motorcycle loans were 2.30% for the full year of 2008, compared to 1.92% in 2007.

The year-over-year increase in losses was driven primarily by a higher incidence of loss.

Notwithstanding the actions and improvements made to our underwriting and portfolio management activities in 2008, we expect higher retail credit losses in 2009, due to continued difficult economic conditions and expected rising unemployment.

Throughout 2009, we will continue to evaluate our underwriting criteria to balance the availability of credit with the appropriate returns on the portfolio.

Turning to funding for HDFS.

During last quarter's conference call, I explained specifically the options we had for repaying the $400 million of medium term notes that matured last December.

Those options included accessing the unsecured debt capital markets, utilizing our unsecured commercial paper program, and establishing an asset-backed commercial paper conduit facility.

We continued to access the commercial paper market throughout the quarter, including participation in the Fed's CPFS program.

By mid-December, it was clear that the unsecured term debt market was not accessible, so on December 12th we entered into a $500 million asset-backed commercial paper conduit facility.

The funds generated from this facility were primarily used to repay the medium term notes that matured in December.

Last quarter, I also estimated HDFS funding needs to be up to $1.5 billion for the full year of 2009.

Based on our updated volume scenarios and projections, we now believe HDFS's 2009 funding needs will be approximately $1 billion.

In addition to the funding alternatives I will discuss next, we will also be taking steps to focus our resources on our core business of retail and wholesale motorcycle lending.

For example, we recently made the decision to discontinue new loan originations for general aviation consumer aircraft.

To meet the remaining HDFS funding needs for 2009, we are pursuing three preferred paths.

The first is for HDFS or Harley-Davidson, Inc.

, to access the unsecured debt capital markets.

We continue to carefully monitor these markets for opportunities.

The second preferred path is to seek an increase -- is to seek to increase the $500 million asset backed commercial paper conduit facility we entered into in December and extend the term beyond the March 31st maturity date.

Expanding and extending this facility would supplement our existing unsecured commercial paper program.

And finally, we are working diligently to gain access to the asset-backed securitization market via the term asset-backed securities loan facility or TALP program.

We are actively evaluating the program to further understand the details and learn how we may benefit from it.

Retail motorcycle loans have been included as eligible assets in the program.

However, exact details of the TALP program are not yet finalized.

The general expectation is that the program will be clarified in the next few weeks.

And as we announced in December of 2008, we filed the shelf registration statement with the SEC, which provides additional flexibility as needed.

So to wrap up my HDFS comments, we are working aggressively to obtain additional funding and to actively manage the portfolios in a challenge environment.

I expect 2009 to be another tough year, but believe we've got a strong team in place and are taking the appropriate steps to manage through it.

Now, to wrap up the remaining Harley-Davidson, Inc., consolidated financial results.

Cash and cash equivalents totaled $594 million as of December 31, 2008.

Cash used by operations was $685 million during the full year of 2008, compared to $798 million of cash provided during the full year of 2007.

This decrease in cash flows from operations of $1.48 billion was primarily the result of net proceeds from securitization being $2.0 billion less than the same period in 2007.

During 2008, HDFS funded a greater percentage of its business with proceeds from commercial paper and medium term notes than during 2007.

During the full year of 2008, capital expenditures were $232 million, and depreciation and amortization was $222 million.

Our fourth quarter effective income tax rate was 36.9%, compared to 35.5% in the same quarter last year.

The full year effective income tax rate was 36.7%, compared to 35.5% in 2007.

These increases were primarily related to tax implications of MV Agusta, which we acquired in August 2008.

So all in all, net income was $77.8 million in the fourth quarter, down $108.3 million or 58.2% from the same period last year.

Diluted earnings per share for the fourth quarter were $0.34, a decrease of 56.4% from the year-ago period.

Full year net income was $654.7 million, compared to $933.8 million in 2007.

Diluted earnings per share were $2.79, a decrease of 25.4%, compared to $3.74 in 2007.

With that, I'll turn it back over to Jim for some closing

Thanks, Tom.

To wrap it up today, we have laid out our strategy to deal with the recession and to strengthen our long-term operations and financial results by investing in the brand, getting the cost structure right, and obtaining funding for HDFS.

The reason we can execute on this three-part strategy is because Harley-Davidson is fundamentally resilient, with a solid foundation built on a set of unique assets.

We have a powerful brand, a strong brand is important in good economic times, but even more so in downturns.

In fact, a tough environment often accentuates the competitive advantages of a brand.

We have a distinctive experience.

That experience is built on a truly distinctive product.

The competition can try to copy our motorcycles, but they can never become the original.

Nor, can they replicate the richness of the complete Harley-Davidson experience.

We have a history of resilience.

We have faced other even more challenging times in our 106 years.

That allows us to maintain a great perspective in stressful times.

Our history instills a deep inner belief that we have a powerful durability.

It also has taught us great lessons about the boldness, decisiveness and passion required to emerge from the current economic climate, strongly positioned for the future, and we have a strong and experienced management team and it is highly focused on providing the leadership to see Harley-Davidson through the current environment and over the long-term.

That includes HDFS, where our CFO, Tom Bergmann, is serving as interim President.

Obviously, HDFS is a top priority for us and it's appropriate to have someone of Tom's skills engaged in the hands-on management of that business until a successor is named.

In terms of the CEO search at Harley-Davidson, Inc., the Board search process is on track.

Until that search process, full transition has been completed, I am committed to leading Harley-Davidson.

I joined Harley-Davidson 40 years ago, and it's personally very important to me that we manage our business through these challenging times in a way that will ensure we have a strong and growing Company 40 years from now.

Our strategy is designed to protect the long-term value of Harley Davidson, and I can assure you, our team is executing with a sense of urgency that is appropriate for this environment.

And on that note, I'll open it up for questions.

(Operator Instructions).

We'll pause for just a moment to compile the Q&A roster.

The first question is from Tim Conder from Wachovia.

Your line is open.

Thank you and thank you, gentlemen, for the detail that was provided so far.

A couple clarifications.

Tom, on the revised $1 billion needed by HDFS for funding, that I would anticipate excludes the $500 million in the commercial paper conduit facility that will be needed to be rolled over at the end of March?

Yeah, Tim, the decrease to $1 billion, that does exclude the rolling over of the conduit at the end of March, which we're currently working with a group of banks to go ahead and extend that and increase the size of that facility.

So it does exclude that amount.

Okay.

And some additional color maybe on the credit losses.

Are you seeing any years where those losses are continuing to trend higher versus other years?

I guess if you looked at the '05, '06, '07 and '08, can you kind of give us a little more color from that perspective?

Yeah, thanks for the question, Tim.

I think I'd start by saying we've been for the last, you know, year, plus now at HDFS continually looking at the portfolio and changing our underwriting standards and enhancing them across the entire portfolio and that's -- if you can go back and point to the fact we only had a 14 basis point increase in delinquencies, I think tells you a lot about the actions we've been taking on the underwriting side, as well as on the operations and collections side to improve the portfolio.

I'm not going to get into specific years and vintages of losses and so forth but I think it is interesting to note the improved delinquency performance and the other point that in 2008, if you look at our new originations, 75 to 80% of them were in the prime category, compared to overall the portfolio's been in that 70 to 75% category.

So clearly we're trying to balance credit quality while still making credit available for our riders.

And then last question on HDFS and then two other clarifications, TALF restrictions, you said that you're still studying that.

Any restrictions that you're aware of at this point that would place on the companies that are currently not either on HDFS or Harley-Davidson, Inc.?

Not aware of any restrictions, Tim.

I think if you go back last fall, we've been working together with many parties and we were successful in getting retail motorcycle loans included in it.

So I think that was a very good and important step forward.

It's really too early to tell exactly how that program may benefit us, but so far, given the success of having retail motorcycle loans included and giving dialogue, ongoing dialogue with our banking group and underwriters, we're still continuing to study it and hope -- and think it will be helpful in having us open up access back to the ABS market at some point.

Okay.

And then again, the last two clarifications here, gross margin guidance includes the restructuring charges or not?

And then clarification on the large increase in receivables and inventories on the balance sheet.

Restructuring charges will be on a separate line in the P&L, so restructuring charges will not be in the gross margin line.

Ultimately, as we realize the benefit from these restructuring activities, they show up in gross margin and SG&A.

But that does not include any restructuring charges in 2009.

The increase on the balance sheet of receivables and inventory, the receivables increase is primarily due to moving receivables from Harley-Davidson financial services in Europe over to Harley-Davidson Motor Company in Europe.

I've been talking about this every quarter, that before those receivables used to show up in held for investment.

Now they show up in accounts receivable, because of that movement.

We consolidated our collection activities there and it was a nice productivity benefit that we got by taking that action.

So it's really a shifting from one line to another line, what's causing that increase in receivables.

The increase in inventory is made up of a few things.

One is the acquisition of MV Agusta, as we're carrying about $25 million or so of additional inventory at MV Agusta.

And then the rest of it is related to the increase in some of the international markets as we're continuing to support the growth there.

So we've got a slight increase in the international markets, the MV Agusta, additional inventory accounts for most of those increases.

Great.

Thank you.

Next question is from Craig Kennison from Robert W.

Baird.

Your line is open.

Good morning, everyone.

First question is on Harley-Davidson.

It was a great business when the cost of capital was lower and capital was widely available.

With that fact seemingly changing, does it make sense long-term to be in that business or might you find a different way to structure your finance operations?

Well, Craig, I'd start by saying it still is a great business and we still generated $80 million some of operating profit this year.

Strong market share in low to mid-50%, very strong relationship with the Harley-Davidson dealer network.

So there's still a lot of great aspects of the HDFS business.

As well as the strategic value it brings to helping facilitate the sale of Harley-Davidson motorcycles.

So strategically I think it's an important asset.

Clearly, the reality of the capital markets and how access to funding and the cost of that funding has changed because of the events of the last few months, we anticipate that the cost of capital will be higher as we look forward in HDFS.

We're going to have to look carefully at how we can find ways to cost effectively access capital, how we can offset some of that increased cost with other operational savings or other ways to look at the business model.

So we'll need to continue to evaluate and look at all kinds of alternatives to see what makes sense going forward and how we can make sure we continue to get appropriate returns in that business going forward.

I guess the reason I ask the question is if you look at the stock, where it trades today, the market appears to ascribe a negative value, meaningfully negative value to HDFS, despite the fact that it is profitable and it does have $3 or $4 in book value per share.

What do you think the disparity is, or where could you be more transparent to help the market recognize that value?

And then the last question is, just maybe comment on your dividend plans.

Thanks.

Thanks, Craig.

I think the market will ultimately value a Company appropriately.

Right now, I think there's a lot of focus to your point on HDFS, but as we come through and successfully raise the funding we need, I think we'll get the appropriate valuation in the marketplace and that will sort itself out.

Regarding the dividend plans, as I've said for a number of months, we always review the dividend on an ongoing basis and we'll continue to review the dividend.

We did that in December and the Board of Directors, we decided to pay the December dividend.

We realized the dividend, it's a priority for many of our long-term shareholders and we continue to -- and we'll continue to evaluate paying that dividend as we go forward.

So we realize that we need to be prudent with our cash flows, and we'll continue to evaluate and look at it on an ongoing basis just like we've been doing for the last several months.

There's no doubt that looking at the market value of the Company, that we've certainly been beat up by the market but I don't think we're alone in that perspective.

I think the market has -- the companies that are listed on the stock exchange are listed, the value's gone down greatly in the last four, five, six months and although we will continue to look at our business model and see what makes sense, some of that does have to do with the capital markets and the fear they have.

Next question.

Next question is from James Hardiman from FTN Midwest.

Your line is open.

Good morning.

Couple of questions for you guys.

First, in terms of the reduction of shipments in 2009, how comfortable are you with current inventory levels that you're essentially going to be shipping in line with where you think retail will be.

The last couple of years you basically made the promise that you're going to ship fewer bikes into the channel than are sold out of the channel.

It doesn't sound like you're making that promise this year.

Is that because you feel pretty comfortable with where inventory levels are and those numbers will essentially be in line.

Or where do you stand with that.

As Tom mentioned earlier in the conference call, we did reduce inventories in the dealer network in the US by more than 12,000 units and we were comfortable with where we ended the year.

We'll continue to monitor that.

We also said during the conference call that we'll use and apply the same discipline that we applied in 2008 and if the markets so dictate and the economy remains soft or failing, we may take the actions to certainly reduce inventory but I don't see inventory increasing in our current look at the 2009 year.

Great.

And then on HDFS, just the timing of the write-downs, I mean, we've seen a few million here and there but nothing ever on this scale.

Tom, if you had sort of been in charge of HDFS all year long, do you think that some of these write-downs would have taken place a little earlier on or is this -- or did credit losses really get that much worse during the fourth quarter?

No, the credit losses we recorded, we do an evaluation, James, every single quarter and I'm involved in that valuation work.

So these losses that we recorded and the write-offs we recorded in the portfolio were appropriately booked during the fourth quarter.

I think it's really important to put it in perspective.

So if you take the write-off of the held for sale portfolio, and the retained interest, it totaled about $63.5 million.

And $36.4 million of that is due to the change in the discount rate from 12 to 18%.

So the bulk of the write-off is really due to the change in the discount rate.

The remaining $27 million is due as we looked across the portfolio and made adjustment to our credit loss assumptions.

Can you tell us anything about what type of wiggle room you have going forward?

Is there any -- obviously, the discount rates are completely out of your control, but is there any level of confidence that you can give us that at least on the credit loss portion of the write-downs that we won't see anything of this magnitude in 2009?

Well, as I said on the conference call, a couple of things.

I think we've been taking good underwriting actions and have been making good improvements in the portfolio.

The overall credit quality of it went up during 2008 and I think we're taking the prudent steps.

However, we are facing a lot of headwinds out there in the macro economy at the consumer level with rising unemployment levels.

So I do anticipate we'll still experience higher credit losses in 2009 and we're planning for that.

So I think we're doing the right things to appropriately manage the portfolio.

But just given all the macro concerns and conditions, I still think we'll end up with higher credit losses as we go forward.

So bottom line, is HDFS, obviously you're not going to give guidance on HDFS but presumably interest income is going to be up pretty meaningfully, the cost to fund that is going to be up pretty meaningfully, credit losses are going to be up.

When you look at 2009, do you think that's going to be up, down or flat, just generally?

Is the assumption that HDFS will see another down year in 2009?

You're right, we're not going to give any specific guidance around HDFS and we do have some of those headwinds around higher credit losses and higher financing costs coming at us.

Do put in perspective, we had a comp this year of securitization gains from the prior year that we will not have in 2008 since we did not record any gains on securitization during 2008.

We actually recorded a $5.4 million loss.

So we don't have any comp to overcome.

So there are some pluses and minuses as we look forward in the 2009 HDFS plan.

Great.

And then just one last question.

How much of the restructuring savings that you talk about, I think you said 10 to $20 million for 2009 in terms of restructuring actually benefits that you're seeing from that, how much of that is going to come on the gross margin line and how much is in SG&A and what else can you tell us about the puts and takes of SG&A during '09?

Yeah, the majority of that 10 to $20 million, a great majority of that will come through the SG&A line, as we implement the restructuring activities here in the first quarter and first half of the year.

Okay.

And I mean, ultimately, sort of sales aside, SG&A have been trending up on an absolute basis.

Do you think that you'll be able to get that under control and that we'll see even flat SG&A in '09?

I think if you look at was we've been doing on the SG&A front, last year in April we eliminated about 360 salaried jobs and have really been working diligently on reducing our SG&A cost in non-customer interfacing areas, so we're still continuing to make good investments in the marketing areas and in our international dealer development areas and so forth.

So this will be another opportunity for us to take costs out of SG&A.

I do think SG&A dollar spending in 2009 will be down versus 2008.

But we are going to continue to make some of these important investments as we're reaching out to new customers and investing in products and so forth.

But as a result of the strong actions we're taking here proactively, we should see a decrease in overall SG&A spending in 2009.

And again, as I pointed out earlier in the conference call, and Tom just said that we will continue to invest in marketing and in the brand, in product development, because we are a unique Company and when things come back, we should be on top of things.

So I mean, although we'll be controlling SG&A, I think the dollars spent per unit will be slightly higher in those particular areas.

Excellent.

Thanks, guys.

Next question is from Ed Aaron from RBC Capital Markets.

Your line is open.

Good morning, thanks for taking my questions.

I'm still trying to get my head around the HDFS funding plan, because you laid out three different priorities and so you have the TALP part which we don't really know about yet, the unsecured debt markets which seem like they're currently not open and then on the asset backed commercial paper line, I thought you said in response to Tim's question that if you rolled that, it wouldn't count against that $1 billion.

So I guess I'm trying to understand like how you have comfort that we're going to be able to get the financing that we need through the year and in the interim, until it becomes more clear, are there any adjustments that you might make in terms of willingness to make retail motorcycle loans?

Yes, good morning, Ed, thanks for the question.

As I said, we are working those three paths and as you know the capital markets are extremely volatile right now and we're going to continue to pursue along those three paths because we think it's in the best interest of our shareholders to work aggressively as we can on those three alternatives.

So that's where the primary focus is.

There is no doubt, we are being very prudent with the managing of in the.

If you look at the actions we're taking to focus our cash resources, the example I gave is that HDFS we had a small general aviation aircraft portfolio.

We decided to discontinue that to pool our cash and resources to support our dealers and retail loans at the motorcycle Company, we're reducing our capital expenditures next year and we can closely monitor the timing of some of those expenditures.

So we're doing -- I can assure you, we're doing a number of actions to make sure we're prudently managing our cash positions as we go forward here.

So I said those are preferred paths because that's really where I want to focus the efforts.

At the same time, we have filed the shelf registration in December that does give us additional options and additional flexibility to pursue other paths in the event that we need to.

Last quarter you talked about selling some of the wholesale receivables.

Why did that come out of the list?

We looked at the potential of doing that and there really wasn't a strong market appetite out there for any type of transaction in the wholesale receivable market or the price that it would be done at, wasn't attractive.

So I don't see that as one of the preferred routes at this point in time.

Okay.

Two last questions, if I could.

One, does the cash on the balance sheet, can that count substantially all of that count towards that $1 billion of funding needs, if need be?

And then secondly, with the restructuring plans that you announced today, would you have done anything different if you had a non-union workforce?

I guess the question is, did that -- does that affect any of the changes that you ended up making?

I'll handle the first one.

The cash on the balance sheet, there are a few hundred million dollars of that that is available to count against the funding plan.

So yeah, there is -- there are some resources there.

I'll answer the question on restructuring, and we would do it different if we had a non-union workforce, and the answer would be absolutely not.

We've got a great relationship, working relationship with the union and in fact, that relationship will get us through what we have to do in terms of consolidating the plants, both in Wisconsin, York, Pennsylvania and the activities of going to a third party provider on our distribution center.

So I mean, that relationship has gotten us through many tough times in the past.

We've been working with them currently right now, we'll continue to work with them and help solve some of these issues and get it done on time and efficiently and effectively as possible so that relationship is going to help us.

Thanks for the clarity, guys.

Thank you.

The last question is from Robin Farley from UBS.

Your line is open.

Great.

Thanks, I have a couple quick clarifications.

One is I think you said HDFS what market share of bikes sold that HDFS has for the full year.

Can you tell us what it was for Q4?

And I have a couple other clarifications as well.

Robin, I'll see if I can find it quick.

I only have a full year number here of 53.5%.

We may have to circle back with you.

I don't know if I have that right here with me.

Just wondering because obviously the market share increased in Q4 in terms of total sales.

I'm just wondering if that was related to the HDFS market share.

But I'll --

I don't remember the specific number, but there was nothing unusual in market share during the fourth quarter than previous quarters during 2008.

The other thing, I mean, there's two things, actually.

The first nine months of this year, much of our competition was heavily discounting prior year product that they had overproduced and they were giving ungodly rebates to the dealer, the customer and 0% financing to bowl through their prior year products and certainly had implications on market share during the first nine months.

Our product, although seasonal is less seasonal than a lot of our competition so we typically experience a stronger fourth quarter and market share gain in every single year.

Okay.

Great and then a couple other little clarifications.

One is I don't think you said what is the effective interest rate on the $500 million conduit.

I know it was in the filing, talked about different options and that there would be spreads on top of rates but what is your effective interest rate on that?

It's in the ballpark of about 6%.

Okay.

And then the -- I don't know if you said the dollar amount of aviation loans roughly that you did in the last year, just to get a sense of how much that potentially frees up?

It's about a $300 million portfolio with about $100 million or so of originations in a year.

Okay.

Great.

And the shipment increase in Q1, despite the full year being down, is that to sort of get ahead of maybe some disruption as you go through the restructuring?

Is that why Q1 is up?

Yeah, as we look at implementing it, this was the most -- as we looked at I implementing the shipment reduction for the full year, this was the most efficient way to go about it to make sure we have.

It's also up due to timing of some of the shipments into the international markets.

Actually, as you look at the first quarter, the first quarter is very similar in shipments to the fourth quarter.

Our production rate really doesn't change between the two quarters.

Okay.

Great.

And then do you -- you mentioned in your comments about used bike sales.

I think you said an 8% increase.

Is that in volume or in price or -- I just want to get a little more color about what that used bike increase was.

Yeah.

We track the industry data, used Harley motorcycle sales, so that is -- that's an industry number, so it's the selling -- it's the number of units of used Harley-Davidsons sold and registered in total, not just dealerships.

Because you talked about the used bike prices increasing as well.

Is there -- do you have any color on is that in the fourth quarter, whether used bike prices were still up in Q4 or has that softened a bit?

We get data on a little bit of a lag.

As we said before, we had strong used bike performance throughout the entire -- throughout the first ten months of the year.

We did see a little softening in November and December.

Again, though, we've got to be a little careful because of seasonality and the number of units that are sold during the last couple months of the year.

But still strong overall but we did see a slight softening of used prices in the last couple months of the year.

Okay.

Great, that's helpful.

And then my last question is you announced the Sportster promotion where you're guaranteeing MSRP.

You announced that in the last couple of days in Q4, it looks like it impacted the margin.

Basically, are you recognizing up front all of the expense that you think will be associated with that or will some of that promotional -- most of the promotion happening in '09, will all the expense of it be now here in Q4 or will we see it again later in '09 as well?

We've made an estimate of what we think the take rate will be on that program and recorded the expense of that program.

It's actually a contra revenue account that we've had to record it as during the fourth quarter.

So the great majority of that expense, assuming our assumptions are right on the utilization of it, will have been recorded in the fourth quarter.

Okay.

Great.

That's very helpful.

Thank you.

Great.

Thank you, Robin.

We're going to end the Q&A right here.

I want to thank you for your time this morning.

Appreciate your interest and your investment in Harley-Davidson and now I'll 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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