Harley-Davidson Inc (HOG) 2009 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the first quarter 2009 earnings results for Harley-Davidson, Inc.

(Operator Instructions) Thank you.

I would now like to turn the call over to the Director of Investor Relations, Amy Giuffre.

Thank you, Patrick.

And good morning, everyone.

Welcome to Harley-Davidson's first quarter 2009 conference call.

Today, Harley-Davidson's CEO, Jim Ziemer, will provide comments on our business.

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

At the close of our prepared comments, Tom and Jim will open the call for your 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.

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

The PIN number is 90951487#.

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 information in this call.

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

Good morning, and thank you for calling in.

As you know, at the end of this month I'm retiring after 40 wonderful years with Harley-Davidson.

So, this is my last earnings call.

And if I add them all up, I think it comes out to something like 80 or more calls, although who is counting?

The future -- I look forward to listening in online and letting someone else field your great, thoughtful questions.

Now, I know my successor, Keith Wandell, is truly excited to be joining Harley-Davidson and honored to the opportunity to lead this amazing organization.

He looks forward getting to know those of you who cover Harley-Davidson.

While I won't take a lot of time on today's call, I do want to provide an update on a few things and also share a few perspectives.

Obviously, these are challenging times for Harley-Davidson.

As they are for most companies.

And while we prefer the challenges that come with managing in good times, we also have no doubt that our responsibility is to manage our Company well, through both good times and the times of challenge, and to do so in a way that protects and enhancing the Harley-Davidson brand, and drives growth over the long-term.

As a management team, we have been extremely determined to make what we believe are wise choices that will best equip Harley-Davidson for long-term success.

In January, we announced a clear three-part strategy to guide Harley-Davidson through this difficult recession, at the same time strengthening our operations, our market presence, and our financial results for the longer term.

Tom is going to update you on a number of the details.

Let me just refresh on the high points.

That strategy has three main thrusts.

Investing in the Harley-Davidson brand, getting our cost structure right, and attaining funding to support the lending activities of HDFS.

Looking at the first of these, the Harley-Davidson brand, it consistently ranks among the strongest of the strong.

It is a unique brand that is built on personal relationships and the deep connections with customers, unmatched riding experiences, and proud history.

And more than anything, the unique ability of our products to fulfill the dreams of every generation that comes along.

Now, that's a great asset to have during tough times.

The single bit -- and it's the single biggest reason, we believe we're in better shape than so many other similar companies.

Now turning to our cost structure.

We have begin executing a number of changes, including the planned consolidation of some of our production facilities.

Our objectives are clear and straightforward.

We need to reduce excess capacity and make the necessary changes that will enable us to be more competitive for the long-term.

When it comes to funding for HDFS, we continue to work on putting that in place, and as Tom will spotlight in greater detail, we believe we are well along the way to provide for HDFS's needs.

HDFS fulfills an important role in retail motorcycle sales and dealer wholesale credit, especially in the current environment.

Now, let me turn for a minute to the leadership transition.

My successor, Keith Wandell, brings an abundance of experience that I'm sure will serve this great Company going forward.

As Harley-Davidson continues to expand its global reach and achieve operational and organizational excellence at every level, and I know his values are closely aligned with the things that Harley-Davidson values.

I'll be working closely with Keith to ensure a seamless transition.

Keith is fortunate to be joined by the richly talented leadership team that is in place at Harley-Davidson and by all of our great employees and our outstanding dealer network and their suppliers who know this organization so well.

I want to acknowledge and thank each and every member of the Harley-Davidson family for everything you do for this Company.

It is the passion, and the commitment of all its stakeholders that make Harley-Davidson a very special Company.

I'll be back for the Q&A later in the call.

For now, I'll leave you with one last thought.

That thought is completely personal.

Leading this Company has been a true privilege, both when times were booming, and in times of adversity.

I'm very proud of what our team has accomplished during my time at the Company.

And as we think about where this Company will be in the next 40 years, I have great conviction that Harley-Davidson will emerge from these challenging economic times, strongly positioned to take advantage of the opportunities that lie ahead.

With that, I'll turn over to Tom.

Great, thank you, Jim.

Good morning, everyone.

As we exit the first quarter, there is a lot of activity at Harley-Davidson.

We continue to actively strengthen our brand value and our premium positioning.

Our national Screw It, Let's Ride, Ride for [Aid], and Super Ride efforts continue to generate a lot of buzz and reinforce the core values and strength of our brand.

Through March of this year, our dealers have trained nearly 5,000 people to ride a motorcycle through our Rider's Edge New Rider Course which is up over last year.

A few weeks ago, our young adult outreach team rolled into Austin, South Side, Southwest Music Festival, where they created an impromptu hangout dubbed the Golden Horse Saloon.

The spotlight was on the new 883 Iron Dark Custom, and they made thousands of live impressions and even more on Facebook, MySpace, and Twitter during the three-day fest.

There is no doubt that the Harley-Davidson experience is alive in the marketplace with customers of all ages.

In terms of the brand and the overall business, we continue to be focused on the long-term while we manage through the current economic environment.

We are making progress toward restructuring our business and reducing our fixed-cost structure.

As promised, I will provide an update on the progress of the restructuring activities in just a few minutes.

First, I'll review the first quarter 2009 results for the motorcycles and related products segment.

I'll start by looking at our dealers retail sales.

On a worldwide basis, retail sales of Harley-Davidson motorcycles by our dealers were down 12%, compared to a year ago.

In the US, first quarter 2009 retail sales of new Harley-Davidson motorcycles decreased 9.7%, compared to the same period in 2008.

In last year's first quarter, US retail sales decreased 12.8%, compared to the prior year.

As Jim mentioned in the press release, we are mildly encouraged by the slower rate of retail sales decline relative to the prior two quarters, but we do remain cautious.

Overall, the US 651 plus cc motorcycle market decreased 22.3% in the first quarter.

Harley-Davidson's market share increased to 57.8%, during the first quarter, an increase of over 8 percentage points over last year's 49.6% market share during the first quarter.

This year's first quarter international retail sales were down 17.2%, compared to last year's first quarter, when our international dealers' first quarter retail sales were up 16.8%.

We continue to expect tough economic conditions globally, and therefore, we continue to expect a decline in overall international retail sales for the full year.

During the quarter, the Europe region was down 17.4%.

Clearly many European countries are experiencing the same economic challenges as many other parts of the world, compounded by the late arrival of spring weather in some European countries.

However, we did see retail sales trends improve in late March compared to the first two months of the year.

The Latin America region was down 26.3%, or 488 units versus the same period last year.

However, the region was up over 50% in the first quarter of 2008.

One key driver of the retail sales decline was the significant weakness of the Brazilian and Mexican currencies versus the US dollar.

Canada was down 30.4% or 816 units as the country is also experiencing a softening of the overall economy, particularly in the regions that support the automotive industry and the oil-producing regions, as well as the impact of higher local retail pricing.

The Asia-Pacific region was down 7.2%, or 382 units, compared to the first quarter of 2008, primarily driven by challenging economic conditions, negatively impacting customer traffic at dealerships in Japan.

As stated in the release this morning, we shipped 74,670 Harley-Davidson motorcycles worldwide during the first quarter and anticipate shipping between 55,000 to 59,000 units in the second quarter of 2009.

This is approximately 21,300 to 25,300 fewer units than the second quarter of 2008 as we continue to implement the overall 10% to 13% shipment reduction versus last year.

We continue to expect to ship between 264,000 to 273,000 Harley-Davidson motorcycles for the full year 2009.

Now let's take a look at motorcycle family shipment mix in the first quarter.

Touring was 34.8%, compared to 36.7%.

Custom, representing our Softail, Dyna, and VRSC motorcycles was 42.7%, compared to 40.5%.

And Sportster motorcycles were 22.5% of the total shipment mix for the first quarter of 2009 compared to 22.8% during the first quarter last year.

Turning to first quarter financials, for the motorcycles and related products segment.

Revenue from Harley-Davidson motorcycles was $1.01 billion, down 0.3% from the first quarter of 2008.

This decrease was primarily the result of the negative impact of foreign currency exchange rates and an unfavorable product mix, resulting in a decrease in average revenue per unit of $565.

Revenue from parts and accessories was $169.8 million for the quarter, or a decrease of 6.7% from the year-ago quarter.

This decline is primarily attributable to the decrease in accessory sales which are generally correlated to new motorcycle retail sales.

Parts sales continued to be steady and were flat compared to last year's first quarter.

General merchandise revenue for the quarter was $75.2 million, a decrease of 10.5% or $8.8 million.

Taking a look at margins.

Gross margin in the quarter was 36.9% of revenue, up from 36.4% in the first quarter of 2008.

One primary driver of this increase in margin was favorable raw material prices compared to last year's first quarter.

Operating margin for the first quarter 2009 was 17.7%, down from 20% during the first quarter of 2008.

This decrease was primarily driven by the negative impact of $34.9 million in pre-tax restructuring charges.

We continue to expect gross margins to be between 30.5%, and 31.5% for 2009, which compares to 34.5% for the full year of 2008.

The decrease is primarily due to an expected unfavorable shipment mix versus 2008, the allocation of fixed cost over fewer units, and expected unfavorable foreign currency exchange rates versus 2008.

Now I'll provide an update on our planned restructuring and volume reduction activities.

Overall, we are making good progress.

In January, we initially estimated that the planned unit volume reduction and restructuring activities would result in the elimination of about 800 hourly production jobs during 2009 and 2010.

After further development and refinement of production and restructuring plans, we now expect that approximately 300 to 400 additional production jobs will be eliminated over the next two years.

Regarding costs, we now expect costs associated with the restructuring activities to be approximately $120 million to $150 million over the next two years, compared to our original estimate of $110 million to $140 million.

Of these charges, we continue to expect that approximately 75% will be cash.

We now expect to incur between $90 million and $110 million of these costs in 2009, including the $34.9 million incurred in the first quarter of this year.

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

We are also increasing our range of expected savings, and now estimate ongoing annual savings of approximately $70 million to $80 million upon completion of the volume reduction and restructuring actions, with 2009 savings estimated to be between $20 million to $25 million, and 2010 savings estimated to be between $40 million to $55 million.

We will continue to provide quarterly updates as we implement the volume reduction and restructuring activities.

Let's move on to Harley-Davidson Financial Services segment results for the first quarter.

As the Interim President of HDFS, I'm pleased with the progress we continue to make in the operations of the business.

I, along with the strong HDFS leadership team and dedicated employees, remain focused on our 2009 priorities, which are to obtain the required funding, continue to make appropriate underwriting enhancements, and improve our selection operations, while continuing to support the Harley-Davidson network.

During the first quarter, Harley-Davidson Financial Services recorded operating income of $11.2 million, a decrease of $23.7 million, compared to operating income of $34.9 million during the year-ago quarter.

This decrease was primarily due to writedowns of retained securitization interest and finance receivables held for sale.

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 an $8.6 million writedown.

This was primarily due to higher projected credit loss assumptions, partially offset by an improvement in the interest rate environment.

Our quarterly review and evaluation of the assumptions used to value the retained securitization interest pool resulted in a $17.1 million writedown this quarter, also due to higher projected credit loss assumptions.

During the first quarter, HDFS originated $476 million in retail motorcycle loans, compared to $580 million in the first quarter of 2008.

HDFS's US retail market share of new Harley-Davidson motorcycles sold was 46.9%, compared to 51.4% in the first quarter of 2008.

This decrease in market share highlights that Harley-Davidson motorcycle retail financing continues to be a competitive marketplace in many regions of the United States.

Throughout the first quarter of 2009, we continued to take actions to adjust our underwriting standards and collection practices to mitigate the impact of a deteriorating US economy on our loan portfolio.

In January, we implemented additional underwriting changes, including increased downpayments in certain credit tiers and more conservative loan-to value requirement.

The results of previous underwriting enhancements and improvements in collection activities are beginning to show in our performance.

In terms of our credit performance, the 30-plus day delinquency rate for managed retail motorcycle loans increased just 11 basis points to 4.89% at the end of the first quarter of 2009, compared to 4.78% at the end of the first quarter of 2008.

Relative to other consumer finance portfolios, we continue to perform well due to the loyalty of our customers and the improvements made to underwriting and collection activities.

Annualized credit losses on managed retail motorcycle loans were 3.41% for the first quarter of 2009, compared to a 2.71% for the same period in 2008, a 70 basis point increase.

The year-over-year increase in losses was driven by higher frequency of loss and a higher average loss per motorcycle as we saw a decline in recovery values during the first quarter.

However, we have seen some improvement in auction prices during the last few weeks.

Notwithstanding, the actions and improvements we made to our underwriting and portfolio management activities, we continue to expect higher retail credit losses throughout this year, due to a challenging consumer environment and rising unemployment in the United States.

We will continue to evaluate our underwriting criteria to balance the availability of credit with the appropriate returns on the portfolio.

As you just heard, there is a lot of activity at HDFS, and the management team is doing a great job working through all of it while staying focused on our objectives.

I am pleased to announce a new member of the management team.

Steve Cunningham.

Steve joins us as the new CFO of HDFS.

Prior to coming to HDFS, he spent eight year at Capital One Financial Corporation, most recently as CFO for the auto finance business.

I would also like to take a moment to thank Harley-Davidson's Treasurer, Perry Glassgow, for serving as the acting CFO of HDFS.

Okay.

I will now provide an update on HDFS funding.

I stated on January 23rd that we expected a funding need of $1 billion during 2009.

I also said we needed to address the $500 million asset-backed conduit facility which was set to expire on March 31, 2009.

In addition, during 2009, we also need to address the $950 million, 364-day credit facility, which expires in July of this year.

I am pleased that we have made very good progress during the first quarter in all of these areas.

As I said in January, one of our preferred funding paths was to seek funding through the unsecured debt market.

We accomplished this in February when we completed a $600 million unsecured debt transaction.

We will continue to carefully monitor the unsecured debt market for additional opportunities.

In March, we extended the term of the $500 million asset-backed conduit facility.

The conduit now expires in March, 2010.

We are currently working with several of our banking partners in an effort to increase the size of this conduit facility over the next few weeks.

At the same time, we are working toward renewing a substantial portion of the $950 million, 364-day credit facility as we balance our funding requirements between the conduit and unsecured bank credit markets.

We also intend to access the term asset-backed securitization market in the second quarter.

We expect this transaction will be eligible for the Federal Reserve Bank's TALF Program.

In addition to these capital financing alternatives, we have also taken other actions to meet our funding needs.

In February, the Harley-Davidson Board approved a reduction of our dividend from $0.33 to $0.10, which provided about $54 million of cash savings in the first quarter.

We are also focused on improving the Company's overall operating cash flow by improving our management of working capital, and reducing capital expenditures, which I'll talk about in a moment.

These actions combined with the $600 million unsecured debt transaction put us squarely on track to obtain the $1 billion funding needs for 2009, which I referenced in January.

The potential increase in the asset-backed conduit and renewal of a substantial portion of the 364-day credit facility would exceed our total 2009 funding needs and begin to fund 2010 liquidity needs.

So to wrap up my HDFS comments.

We are working aggressively to obtain additional funding and actively managing the loan portfolios in a challenging environment.

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

Now here are the remaining Harley-Davidson, Inc.

consolidated financial results.

Cash and marketable securities at the end of the first quarter totaled $899.3 million, as of March 29, 2009, compared to $333.2 million last year.

Cash used by operations was $244.6 million.

This compares to $146.8 million of cash provided by operations, in the first quarter of 2008.

This decrease is primarily driven by two factors.

First, outstanding wholesale receivables were higher this quarter versus last year, as we extended the winter financing support program from mid-March to the end of April.

And second, we did not complete a securitization transaction during the first quarter this year, versus a $540 million securitization transaction completed during the first quarter last year.

For the first quarter 2009, depreciation was $56.2 million.

As I mentioned, we are working to reduce costs and capital expenditures.

As a result, capital expenditures were $22.9 million, down 47%, compared to the first quarter of 2008.

For the full year of 2009, we now expect capital expenditures in the range of $170 million to $200 million, including restructuring capital expenditures of $20 million to $30 million in 2009.

In aggregate, this is a $20 million reduction from our previous capital expenditure guidance.

Our first quarter effective income tax rate was 47.6%, compared to 36% in the same quarter last year.

This increase was due to an non-anticipated change in Wisconsin tax law which resulted in the establishment of evaluation allowance of $22.5 million related to net operating loss carry forwards, as well as tax implications of MV Agusta.

We expect our full year effective income tax rate to be approximately 43%.

So all in all, net income was $117.3 million in the first quarter, down 37.4% from the same period last year.

Diluted earnings per share for the first quarter were $0.50, a decrease of 36.7% from the year-ago period.

So to wrap it up, at the beginning of the call, Jim reiterated the three areas of focus to manage through the current economic environment.

During the first quarter, we continued to strengthen the Harley-Davidson brand, and have made good progress toward improving our cost structure and obtaining the necessary funding for HDFS.

We will continue to focus on managing through these turbulent times and are confident we will emerge even stronger.

Now before we go to questions, I would just like to take a moment and personally recognize Jim's amazing journey here at Harley-Davidson.

To go from elevator operator to CEO is truly unbelievable.

Jim's integrity, strong values, and love and passion for motorcycling and this Company runs deep, and is evidenced by his broad support among the employees here.

He will be missed by many.

Thank you, Jim.

I have truly enjoyed working beside you over the last three years.

Thank you.

Thanks, Tom.

That's not in the script.

No, I went a little off script, but very well deserved.

With that, can we turn it over to questions?

Patrick?

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

Your first question comes from the line of Tim Conder, Wells Fargo.

Thank you, and Jim, enjoy the retirement, well deserved, and thanks for the job over the many years.

Thanks, Tim.

A couple of questions, gentlemen.

Tom, could you maybe give us a little more clarity given the reserves that you took in the first quarter for HDFS.

What are your assumptions for credit losses that you now have built in to the reserves for the year?

And then also a clarification on used pricing.

If I heard your commentary right in the HDFS mention, you said that a little bit higher loss rate.

And then you mentioned something about recent auctions have been stabilized, and so -- so you are basically saying that in the first quarter you did see some erosion in the used pricing, but that's stabilizing?

Yes, Tim, first on credit losses for 2009.

As we took another look at the year and what is happening in the US economy with unemployment.

We did increase our credit loss assumption, both for our held-for-sale portfolio as well for our retained interest, and obviously that resulted in the writedown -- writedowns for the quarter.

Based on what we know today, and based on what we see in the environment, we thought it was prudent to take up those credit loss assumptions for the rest of the year.

Regarding the used prices, we did see a decline in recovery values during the first quarter as auction prices went down.

Some of that can be attributed to tighter dealer cash flows, and less auction involvement during the winter months.

But we have seen in the last few weeks, better results at our auctions.

We have also done a lot of work to increase the number of auction sites and how we prepare the bikes for auction, as well as doing online auction processes.

So I think a combination of -- now that we're into riding season, and the actions we're taking to improve our auction results, we're starting to see a recovery in recovery values.

On -- on that process, did the trade-in, trade-up program, we heard from several dealers that that was pretty successful, but potentially some of them even got a little bit heavy on used Sportster inventory.

Did that factor into the first quarter pricing in any way?

No, I don't really think it had an impact during the first quarter here.

You are refer to the Ride Free program, which we are very happy with the results of that during the quarter.

I don't think that really impacted it during the first quarter here.

Okay.

And then -- and, again, in your reserves on the credit losses, do you feel pretty comfortable now that your -- you have taken a pretty conservative stance with regards to the balance of the year, given what you are seeing in the broad economy at this point?

Yes, every quarter we go through it, and, a lot develops during a quarter.

So we have taken a look at all of the latest economic forecasts, and -- as well as our own credit models, and based on what we know today, based on our own models, I feel very good that we have made a good estimate for the rest of 2009.

We'll have to wait and see how the rest of the year plays out.

So as you know, where we have got tough headwinds with consumer confidence and unemployment.

But on the flip side, you can see our portfolio is performing quite well in this environment.

As we have seen the seasonal decline in delinquencies that we see every spring, and as well, only to have an 11 basis point increase year-over-year, I think says a lot about the performance of the portfolio.

I think we are doing a lot of right things, but a lot of tough headwinds right now in the economy.

Tim, we have always been very conservative as we looked at these reserves.

There is a lot of dynamics.

Obviously as Tom mentioned, consumer confidence in the economic.

At the same time, Harley-Davidson is doing quite well considering all of those economic headwinds, as our retail sales in the US were down 9.7%.

Total industry was down 22%.

If you take Harley-Davidson out of that industry comparison, the industry was down 35%.

So I think that that helps too in managing the resale and -- of the repossessed motorcycles.

Okay.

And, again, gentlemen, your tact with controlling inventories has been very good.

Lastly, gross margins, with guidance, does that include or exclude the restructurings?

And the incremental restructuring, is that built in as part of your union contract, or was that something outside of the union contract -- personnel adjustments that are provided for in the union contract?

The restructuring activities are outside of the -- the restructuring costs are outside of the gross margin line, so it would have no impact there.

The additional headcount action is really just a result as we spent the last three months and our manufacturing teams have gone back and looked at ways to take volume out and implement the restructuring activities, it really -- they came at more efficient ways to do it, and ended up with a revised number.

Great.

Thank you.

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

Baird.

Good morning, everyone.

Good morning, Craig.

Jim, let me also congratulate you on an incredible 40-year run.

Best wishes to you.

On the TALF program, can you give us an idea of what the appetite is for a deal?

And is there is market for a non-TALF securitization?

Yes, Craig, it is Tom.

As I have said, we're getting ready to prepare, and we expect in the second quarter to come in to the term asset-backed market.

The market has opened up, as you know, with a few transactions being done.

Based on our discussions with our underwriters and different potential investors, we do think there is demand out there for a Harley-Davidson asset-backed transaction.

We think the best chances of success are making it a TALF-eligible transaction.

When we go to market, we'll see where the market is and what investor demand and appetite is.

But, we want to make it TALF eligible.

And then that way, we can both get non-TALF as well as TALF investors into the transaction.

Do you have a sense of the size of the transaction and the potential cost of debt?

Not at this point.

We're looking at a lot of alternatives of how to structure the transaction, and a lot of it is going to depend over the next month or two, how the TALF market develops, and how the asset-backed market develops.

So at this point in time, I'm reluctant to give you a particular size or cost of funding on the transaction.

You borrowed about $600 million from Berkshire and Davis at 15%, but we calculate your blended cost of debt closer to 7%.

Where do you see the blended cost of debt heading in the the next 12 to 24 months?

And how does that influence your outlook for HDFS?

As you pointed out, right, you have to look at the blended cost of debt on the overall liability side of the business.

As we look forward to it, there's no doubt the capital markets have changed, and it's getting more difficult to get competitive financing out there, but we're spending a lot of time, as you know, getting the funding lined up, and doing it in a cost-effective way.

A lot of our cost of funding from here really is just going to depend on how the capital markets evolve over the next 12 month time period.

I think there's no doubt that that's going to be one of our major challenges going forward -- is obtaining cost-effective funding.

That's going to force us to look at all of the different things we do in HDFS, and how we run the business to make sure we can offset any higher cost of funding and still get acceptable returns in the business.

So, it's clearly going to be a challenge for us going forward.

I think, will we go back to historical cost of financing rates that experienced in the last five or 10 years?

Probably be some time before the market goes there.

Should it get better than what we have experienced here in the last six months or so?

Yes, we do think it will get better.

So a lot is going to depend on market development here over the next year.

Thanks, and finally, Jim, now that the CEO search has concluded.

What characteristics was the Board looking for in the ideal candidate?

Thanks.

Obviously, they were looking for a great track record of global success in the global market.

Great leadership ability and focus, and I think Keith Wandell fills that.

I mean he comes from Johnson Controls, a greatly successful company for the last -- he has been there for 21 years, and certainly a driving force in their success as kind of their Number 2 person over there.

We are fortunate in both his experience and his abilities as he comes to Harley-Davidson to make sure we take advantage of all of the opportunities that we have in front of us.

Thanks, and congratulations, Jim.

Thanks a lot, Craig.

Your next question comes from the line of James Hardiman from FTN Equity Capital Markets.

Congrats to Jim, and best of luck in your future endeavors.

Couple of questions, first let's start with HDFS.

I don't want to parse words too much, but I just want to make sure we're on the same page.

The $1 billion of needs for 2009, that hasn't changed.

You got $600 million of that from the bond.

Not sure how you are counting the dividend, whether that's $50 million for just the quarter or $200 million, but I just wanted to focus on the statement that you made that the upsizing that you expect from the asset-backed facility, in conjunction with the re-upping of the commercial paper, which I'm assuming if that's anything less than $950 million will actually be a negative number.

But, I think you said that combined those two would cover -- would get you to that $1 billion.

And I just wanted to make sure that I'm looking at that the right way.

Basically you are saying that the upsizing minus anything short of $950 million will get you the rest of the way, which I'm assuming is somewhere between $200 million and $350 million, depending on how you count the dividend.

Am I looking at that the right way?

Yes, Jim, let me try to clarify it, or make sure we all are on the same page.

We do have the $1 billion of funding need that I stated on the January 23rd call.

We did the $600 million unsecured debt transaction in February.

We have reduced our dividend.

So in the first quarter we saved approximately $50 million on that dividend reduction.

Depending on what assumptions you make going forward on the dividend, you will also have additional cash savings for the rest of the year on the dividend.

So we're well toward, just with those two actions alone, getting toward the $1 billion funding need.

If I look at the asset-backed conduit facility and the unsecured bank facility and look at the two of them together.

I expect when we increase the size of that, of the conduit facility, and also renew a substantial portion of the 364-day facility, the two of those combined will be greater than the $950 million bank facility we have today, and the $500 million we have outstanding.

So when you look at the combination of those two combined, that will give us an increased amount of credit availability.

And it will get to you over the $1 billion finish line, is basically what you are saying?

Right.

And I guess the question is, are you using -- obviously we have our own assumptions, but are you using $50 million in savings for the dividend, or are you using $200 million to get to that assumption of -- across the $1 billion, I guess, is the way to put that?

Yes, I'm just looking at what our current dividend is relative to last year, and counting that as savings going forward.

For the full year, the assumption is that the dividend isn't coming back this year.

Okay.

In terms of your second quarter guidance.

If retail is anything like it was in the first quarter, your shipment guidance seems to suggest a pretty significant inventory draw-down.

Is there some reason to think second quarter is going to be worse from a retail perspective, or conversely, do you feel like you really need to draw down inventory pretty meaningfully?

Or it is just an issue of being especially cautious?

It's kind of all of those things.

This is Jim Ziemer.

As you compare the two years, I look at the second quarter '09, versus '08, there is a change in when we ended the current model year and opened up the new model year.

And we don't ship out the new model year, 2010 in the case of this year, until after we have a dealer meeting in July.

So that has an impact.

Some of the reduction that we are doing this year -- a lot of that happens with shutdown days that occur in June, just before end of the new model year.

So, it has a greater impact in the second quarter than any other quarter.

So that's the biggest thing.

And then there's no doubt that we are, again, taking a very conservative approach to the year, and drawing down total dealer inventories for the year.

And that has an impact in the second quarter.

A lot of things -- in particular (inaudible) model year, and in particular the reduction of shipments for the year occur in the second half -- second quarter.

Great, and then just finally, the market share increase I think you said was 8% year-over-year.

That's an unbelievable number.

Great job on that.

I guess, what is driving that?

I know you talked about last year, Honda dumping a lot of low-priced product on the market, but I think that was more of a second quarter, third quarter item, which in theory should be a tailwind for you this year, given the fact that Honda is no longer doing that.

And if anything, raising their prices.

What drove the market share in the first quarter, and how should we think about that going forward?

I think some of the market share gain was -- a lot of the lackluster performance of the competition.

Again, the competition -- if you look at the competition by itself, their total retail sales were down 35%, and -- to get to that total industry down to 22%.

So -- and part of that was -- as you point out, some was as they were aggressively pricing their prior-year product, and it's all the competition.

Honda, obviously a big factor in that because they are Number 2 in market share.

But they were aggressively pricing prior year product really for the first nine months last year.

More aggressively in the second quarter, as you point out, but it still started in the first quarter.

So a lot of that, again, we're going to do better because we're a great brand than the competition.

We are going to go down with consumer confidence, access to capital affects everybody, but it affects commodities a lot more than it does great brands.

So I think our strong brand offset by the fact that they were extremely aggressive in pricing last year are the two combinations, why there's such a big increase in our market share for the first quarter.

Great.

Thanks, guys, and good luck, Jim.

Thank you.

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

Great.

Thanks.

A couple of questions.

First, it looks like a lot of the outperformance in Q1 was much better margins than were generally expected, yet your full year margin guidance is unchanged and is lower than that.

And you mentioned in Q1 lower steel prices, but I guess why would we not see better margins for the full year, given the outperformance in Q1?

Yes, Robin, as I said on the call, we did have a good first quarter, around our gross margin performance, but if we still look out to the rest of the year, we do have significant volume coming out, which is going to impact the allocation of our fixed costs over those fewer units.

As we also look at shipment mix for the full year, we expect that to have a negative impact.

And we don't know where the dollar is going to be relative to other currencies, but based on our forecasts, we also expect exchange rates to be negative for the remainder of the year.

So we're pleased with the performance here in the first quarter, but we still think due to those three items that our gross margin guidance is appropriate at this time.

Okay.

Great.

And two other things, one, if you could clarify Q2.

Will there be the same number of shutdown days versus the prior year?

Anything significantly different also, in terms of the new model year -- the shipment start day, which I know you said is July, but sometimes when it's at the start of Q3 it can impact Q2.

So can you just clarify that, and then just one final question after that.

I mean, we're not going to give the total number of shutdown days because it is different plant by plant, and that's driven by models and everything else.

But the number of shutdown days in direct answer to your question are significantly different -- higher in 2009 second quarter than it was in 2008 second quarter.

And again, like I said, the new model cutoff is different this year, and it occurs at an earlier date.

And therefore, there may be some production occurring, but those units would not be shipping in the introduction of the 2010 model year in July.

Is it a week?

Is it two weeks?

How different is the new model year shipment start date?

Yes, it's a few production days earlier.

And you know, Robin, it's very prudent for us to leave the old model year and start producing the new model year to make sure we manage the appropriate amount of inventory -- of prior model year inventory.

So we're moving it up, slightly in order to make sure we get that cutoff at the right time and start preparing for launch on the new model year in July.

Okay.

Great, thanks.

And then my last question is, in terms of the TALF funding.

I guess this is a two-part question.

One is, can you talk about how you the first and second round of TALF funding is?

Has that been in line with your expectations, or better or worse in terms of what you think the implications are for Harley.

And then also, when you outlined your financing needs, it sounds like you were saying maybe you think your liquidity is fine for the rest of the year, even if you don't do TALF securitization, but I don't want to put words in your mouth?

Yes.

First, our perspective on the TALF market.

I think -- we're very pleased that the program has started, and investors have started using it.

Although I think it has been utilized less than initially expected, and the utilization has been slower.

So I think the fact that it is up and running, and investors are starting to use it, and issuers are participating it, is a very good sign.

And I think the market will continue to get more efficient as we go forward.

And I think it will also have the residual effect of just opening up the overall asset-backed market and getting investor demand even for non-TALF transactions much higher in the marketplace.

Overall, we think it's a very good thing, and it should start stimulating better demand for overall term asset-backed securitizations.

And then, in terms of your liquidity position, even if you don't do a TALF transaction?

Yes, we can still meet the $1 billion dollar needs just with the activities that I outlined on the call.

Clearly, we would like to access the asset-backed market, either again with or without a TALF transaction, in order to start working on our 2010 funding needs.

Okay.

Great.

Thank you.

Your next question comes from the line of Felicia Hendrix from Barclays Capital.

Hi, good morning, and also Jim, wanted to just wish you luck with the next chapter of your life.

And please promise us you are not going to listen to future conference calls.

Please.

No promises made, but I'll have some withdrawals if I don't.

He'll be calling me afterwards, I'm sure.

Telling you everything you did wrong, right?

Couple of questions, one is I just wanted to tag on to -- with TALF, you had just mentioned that you would like to access it also to help for your funding issues for 2010.

Should we assume that you'll start out 2010 with a similar liquidity need as you started out with 2009?

Yes, Felicia, it's really difficult to estimate a really solid number for 2010 funding needs.

Now just given the uncertainty around the level of securitizations we'll do this year and so forth.

So, it's hard for me to give you a good solid answer right now around that.

But clearly, we know we will have some funding need under some reasonable volume assumption and reasonable market share assumption for HDFS.

So, I can't give you a good number now other than to say we want to start chipping away at it.

Okay.

Okay.

Great.

That sounds prudent.

And just to switch gears, I'm wondering -- is there any way you can parse out how much your Ride for Free promotion in the quarter drove some of your strong sale performance -- relatively strong sale performance in the quarter?

There's no doubt that, we believe that the Ride Free promotion was a tremendous success, and there is two parts to that promotion.

One, encouraging people to come in and buy a Sportster, and Number 2, people come in with their prior-owned Sportster, and trade it in on a Big Twin motorcycle.

We think that was a success.

We're not going to give out the numbers of bikes that were on this program.

But at the same time, if I would have pulled every single one of those bikes out of our retail sales, we still would have gained market share.

We still would have performed better than the market.

So we believe it was a great program, and we believe our success in the quarter and in gaining retail sales and market share were driven by a combination of the program, and as well as our great brand.

And then on that, can you just talk a little bit more about the Super Ride program, and if you are going to have any other kind of sales-type promotions planned for this year?

Well, our marketing group is always looking at a lot of activities for the year.

So -- but for now, let's focus on the Super Ride program.

We're excited about this program, because it's a national demo program, and, we don't think anyone has ever really done it to this extent before in the industry.

So the program really lets any consumer walk into a dealership, and pick a motorcycle off of the floor and take it for a demo ride, and we know from our past experience, demo rides are one of our best conversion tools for riders.

So, we're really excited about it.

We rolled it out here at the beginning of April.

It also involves an element of incentive compensation to the dealer's salesperson.

In order for him or her to get a consumer on a motorcycle, and if they are able to do that and collect the consumer information, we're able to also incentivize the salesperson to get people on motorcycles again, and get them out on the road.

Because once you experience it, we find they come back with smiles on their faces and are ready to purchase it.

So, I think it is going to be a great program.

We just kicked it off.

So, it's too early to tell the early results of it, but we'll wait and see.

Great.

And then just quickly, moving to our international business.

March certainly did show improvement, but the market is still lagging in the US, and for the first time you are seeing some significant -- higher inventory build there, I'm just wondering if you are implementing any kind of programs or promotional programs there to drive sales growth?

We continue to monitor these markets.

And each market is certainly different.

Part of our reduction in production days in the second quarter will be to make sure that we stay ahead and not building inventory in these markets.

We are adjusting our levels of production to kind of match what we see currently going on in a market-by-market basis.

And like you said, the March activity was a little stronger than we saw in February year-to-date, but it's still -- we're monitoring each market by itself.

And can you tell us how April is looking so far?

We couldn't give a mid-quarter update, but like I said, March finished stronger than January and February did.

Okay.

Great.

Thanks a lot.

Thank you.

Your next question comes from the line of Sharon Zackfia from William Blair.

Hi, good morning.

Most of my questions have been asked, but I was just wondering if you could quantify the currency penalty in the quarter?

I think in the past you have given impact on operating?

Yes.

The impact on revenue was a negative $47 million about, and from an operating EBIT standpoint, it was about neutral.

Okay.

Thank you.

Yes, you have are welcome.

Our last question comes from the line of Ed Aaron from RBC Capital Markets.

Thanks, good morning, guys, and Jim, congratulations and good luck.

Thank you.

On the gross margin, can you help me reconcile the sequential improvement that you had?

Because the actual shipment number was similar to Q4 if not, I think maybe even a little bit slower.

And there was some significant sequential improvement in the gross margin.

And then just within that, were there any changes to the accrual that you made for the trade-up promotion in Q4?

Yes, on gross margin, Ed, it's a slight improvement.

A little bit of it was volume, but, again, the bulk of it was raw material prices.

There's some other pluses and minuses in there with mix and other factors.

On the accrual for the Ride Free program, we reversed just a couple or few million dollars of it, so we were pretty close with our initial estimate.

Okay.

That -- that's helpful.

And then my second question was just around mix of business at the retail level in the first quarter.

You talked about negative mix shift this year.

We didn't -- it didn't seem apparent to us, just from our checks that you had a lot of mix shift, but there is obviously some seasonality there, and you had that promotion.

So it's hard to -- .

Could you give us some help peeling back the onion

Yes, mix for the full year.

If you look at it, as I've always said, you really can't just look at one quarter because there is a lot that goes on in the manufacturing environment and with the different ordering phases and with our supply base and so forth.

So, again, be careful looking at one quarter.

But as we look for the full year, we continue to see in this economic environment that we think there's a more value-conscious consumer throughout, and that will drive demand for different models in our product line-up.

So year-over-year, again, when we look at total mix, we think it is going to be fairly unfavorable for us.

Thanks for taking my questions.

Thanks, Ed.

Alright.

Well thank you for your time this morning.

I appreciate your interest and for listening in, and for your investment in Harley-Davidson, and with that, I'll turn it back over to Amy for some final logistics.

Thanks, Tom.

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Thanks everybody for your well wishes.

This concludes today's conference call.

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