Harley-Davidson Inc (HOG) 2009 Q2 法說會逐字稿

Good morning.

I will be your conference operator today.

At this time, I would like to welcome everyone to the Harley-Davidson second quarter 2009 earnings conference call.

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

After the speakers remarks, there will be a question-and-answer session.

(Operator Instructions).

Thank you.

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

Amy Giuffre.

Thank you.

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

Today Harley-Davidson's President and CEO, Keith Wandell will provide comments on our business.

Harley Davidson's Interim CFO and Controller, John Olin will share the financial results for the second quarter, and Larry Hund, President of Harley-Davidson Financial Services will share details from that segment.

At the close of our prepared comments, we 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 July 23rd by calling 706-645-9291, or 800-642-1687 in the US.

The PIN number is 15669305#.

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

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

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

Now I will turn the call over to Keith.

Thank you, Amy.

Good morning, everyone, and thank you for joining today's call.

It is good to have this time with you today to talk about our second quarter results.

Before I get started, I wanted to use this opportunity to thank our employees and our dealers, for the great professionalism that they continue to demonstrate, and for staying highly focused during these tough times.

Since May 1st, we have focused on two clear priorities.

The first priority is to insure long-term strategy that will align all of our resources on relentlessly driving sustainable profitable growth for all of our stakeholders, and to align our suppliers, our dealers, our employees and our leadership, as one team with clarity of purpose, and to continue to build the iconic Harley-Davidson brand with an intense customer focus.

The second priority is to make sure that we are doing the right things, to guide us through the current economic downturn, and that our team is properly aligned to execute on these actions.

While our current challenges are substantial, so are our unique strengths, and if those strengths are properly put to work, through the right long-term strategy, we have a strong conviction that we can indeed operate as a competitive, growing business, as the economy strengthens.

With that said, given the urgency of our current situation, we really wanted to focus today on our immediate challenges, and the key actions we are taking to work through them.

By now you have all seen our second quarter results in this morning's press release, but let me quickly just call out a couple of key points.

Overall sales of Harley-Davidson motorcycles at retail in the US, declined significantly in the second quarter, with the backdrop of unemployment at 25-year highs, and consumer confidence at near record lows.

While our Company did take actions earlier in the year to modify our cost structure, we are committed to making the additional tough decisions required to balance supply in-line with our current demand, and to emerge from this recession positioned to move ahead with strength.

The further declines at retail have led to an intensified imbalance in our supply and demand in the last few months.

And as most of you know, when it comes to protecting and enhancing the brand, managing supply in-line with that demand is one of the most important things that we can do.

So we are taking more aggressive action by reducing our 2009 shipment plan by 25 to 30%.

As a result, we are taking the corresponding actions to bring our cost structure in-line with the volume reductions.

Overall, we are reducing the size of our hourly production work force by approximately 700 positions, beyond the reductions that were announced earlier this year.

And in addition to that, we believe there is a tremendous opportunity for improved efficiencies and cost effectiveness at our Touring and Softail facility in York, Pennsylvania.

We have undertaken a study along two parallel paths, one path is to look at how we restructure those operations, and the other path is to potentially relocate those operations to another US location.

We expect to make a decision on the best path forward later this year.

We also announced today that we are making further reductions in the size of the non-production.

primarily salaried work force, about 200 positions on the motorcycle side, and about 100 more at Harley-Davidson Financial Services.

Let me assure you we are not taking these actions lightly.

We are taking these actions because we feel a strong sense of accountability, to make the tough calls that are required to insure the long-term viability and success of Harley-Davidson.

And with respect to Harley-Davidson Financial Services, even though these are challenging times, the ability of HDFS to provide retail financing is a key strategic advantage for us, and our dealers.

So the progress that we have made in recent months with HDFS have been critical.

As you know, we believe we have obtained the needed funding for HDFS into 2010, and we continue to work diligently on the future liquidity needs of that business.

There is one final action I wanted to share with you.

We recently realigned our senior management team into a simple unified structure with clear lines of accountability.

It is extremely important that we work through this challenging period by managing Harley-Davidson as one company, working as one team, that is pulling in one direction.

Our new structure puts us in a much better position to operate with speed, clarity, decisiveness, and the accountability that we need.

Now with that, let me turn it over to John Olin, who will go through more details with you on the financials for the quarter.

John?

Thank, Keith, and good morning.

We provided a great deal of information in the press release and accompanying financials this morning.

So on today's call we will provide additional information on the most critical areas and get right to your questions.

I will start by reviewing the three important areas that we have focused on, as we manage through the recession.

One, investing in our brand, two, improving our cost structure, and three, obtaining funding for HDFS.

While spending has been reduced on a year-over-year basis, we continued to invest what we believe is our appropriate levels of resources in our brand, products and businesses.

As Keith noted, managing the supply of our motorcycles in-line with demand, is one of the most important things we can do to protect and enhance the brand.

As evidenced by today's shipment announcement, we are committed to maintaining our brand strength.

Also, on July 25th, the essence of our brand investments and strength will be brought to light as we introduce our new our new 2010 model year motorcycles to the global market.

We believe that our investments will fortify the power of the brand, as well as position us for a strong recovery.

Our second area of focus is to improve our cost structure.

We continue to make good progress toward our overall goal of lowering our fixed costs.

The additional restructuring activity we announced today will further our efforts.

As a result of our shipment expectations, and our continued focus on reducing costs, we will reduce approximately 1,000 positions.

This is in addition to the work force reductions totaling 1,100 to 1,200 hourly production positions, and about 300 non-production, primarily salaried positions during 2009 and '10, that we announced earlier this year.

We expect the costs associated with today's announced activities to be approximately 40 million, which increases our expected total restructuring cost to be between 160 million and 190 million over the next two years.

Of that total, between 130 million and 150 million are expected to be incurred during 2009.

Approximately 80% will be cash charges.

The expected savings associated with today's announced activities will be approximately $70 million on an annual basis, which increases our expected ongoing restructuring savings to be between 140 million and $150 million.

In 2009, we expect restructuring savings to be between 70 million and $85 million.

Of the 70 million of annual savings expected from today's announcements, 60 million is expected to come from reduced SG&A spending at the motor company, HDMC will accelerate various productivity efforts, reprioritize spending, and reduce it's work force by approximately 200 non-production positions.

The remaining 10 million is expected to be realized by Harley-Davidson Financial Services, primarily as a result of a work force reduction of approximately 100 positions.

These costs and savings do not include any actions that may result from the York assessment currently underway.

Our third area of focus is to obtain funding to support the lending activities of HDFS.

I am very pleased to report we have made progress on this very critical initiative.

In April we replaced a $500 million asset-backed conduit facility with a 1.2 billion asset-backed conduit facility which matures in April 2010.

And renewed a 625 million of this 950 million, [364-day] credit facility, which now expires in April 2010.

In May, HDFS entered into a 500 million TALF eligible term securitization transaction.

Additionally, earlier this week, we closed another TALF eligible term securitization transaction for 700 million.

In both cases, demand was strong and we saw spreads tighten between the May and July transactions.

The weighted average interest rate in the May transaction was 2.8%, while the July rate fell to 2.1%.

To-date with we have exceeded our 2009 expected $1 billion funding requirement by approximately $1.2 billion.

We will use the excess to support our anticipated 2010 funding needs, including mitigating the refinancing risk of the bank credit facility and conduit facility which come due in 2010.

Now I will comment on the financial results for the motorcycles and related products segment for the second quarter of 2009, which compared to the second quarter of 2008, clearly reflect the ongoing difficulties in the global economic environment.

As you saw on the announcement this morning, worldwide dealer retail sales were down significantly from last year.

A couple of points worth mentioning, in the US Harley-Davidson motorcycle retail sales fell 35.1%, while the 651-plus CC motorcycle market segment decreased 48.1% during the second quarter.

Harley-Davidson's share increased to 51.5%, an increase of 10.3 percentage points over last year's second quarter.

This compares favorably to the first quarter 2009 when Harley-Davidson market share was up 8.2 percentage points.

Consequently, Harley-Davidson's June year-to-date market share was 54.1%, up 10.2 percentage points versus the prior year.

International retail sales continue to be affected by the global economic downturn.

Retail sales for the second quarter were down 18.2%, virtually unchanged from the first quarter of this year.

Wholesale shipments of Harley-Davidson motorcycles for the second quarter were 58,179.

Of that total, Touring represented 36.1%, compared to 31.4% last year.

Custom including our Softailed Dyna VRSC motorcycles were 38.2%, compared to 52.2.

In Sportster motorcycles were 25.7%, compared to 16.4%.

Shipment mix typically varies from quarter to quarter, and reflects changes in production line rate, consumer demand, and other market conditions.

In the second quarter of 2008, wholesale shipment mix was impacted by increased custom shipments, to meet initial retail demand for the new Rocker and Cross Bone models, as well as timing of model year change over.

Driving the change in Sportster mix in the second quarter of 2009 versus the same period in 2008, was our expectation of a more robust demand for Sportsters to meet the needs of what we expected to be a more value minded customer in this tough economy, which has not materialized in recent retail sales.

To address this, we expect to adjust mix in the back half of 2009 to a more favorable mix of Custom and Touring products, which will help offset margin pressure for the remainder of 2009.

Revenue from Harley-Davidson motorcycles was 808.7 million, down 31.7% from the second quarter of 2008.

This decrease was primarily a result of lower shipments during the quarter, the negative impact of foreign currency exchange rates, and an unfavorable shipment mix resulting in a decrease in average revenue per unit of $844.

Both gross and operating margins were adversely impacted by the shipment volume reduction, and the resulting allocation of fixed costs over fewer units.

Gross margin in the quarter was 33.5% of revenue, down from 35.7% in the second quarter of 2008.

During the quarter, gross margin was negatively impacted by the allocation of fixed costs over 22,147 fewer units, unfavorable product mix, and a negative impact from foreign currency exchange rates, partially offset by favorable raw material prices, and productivity gains compared to last year's second quarter.

Gross margin was down slightly from the first quarter of 2009, primarily due to volume reductions in the second quarter.

Operating margin for the second quarter of 2009 decreased to 14.5% from 20.1% during the second quarter of 2008, primarily impacted by lower gross margins and the impact of SG&A spending in relation to lower revenues.

SG&A spending as a percent of revenue was up, despite the fact that SG&A expenses were down 30.7 million during the quarter versus the prior year.

We continue to expect full-year gross margins will be between 30.5 and 31.5%.

We are pleased that we are able to maintain this guidance, despite further shipment reductions.

For the second half of 2009, the negative pressure on margins resulting from additional shipment reduction, will be offset by a product mix that is more favorable than previously anticipated, and increased productivity coming from our operations.

Now moving on to the Financial Services segment.

By now you are all well aware that HDFS recorded an operating loss of 62.1 million during the second quarter, a decrease of 99.3 million compared to operating income of 37.1 million during the year ago quarter.

This decrease was primarily the result of HDFS recording the following adjustments during the second quarter.

First the establishment of an initial credit loss allowance of 10.9 million for the receivable securitized, and the $500 million term asset-backed transaction HDFS completed in May.

This transaction was structured in a way that did not qualify for sale or off-balance sheet accounting treatment.

As a result, it was recorded on balance sheet, and the receivables were reclassified as held for investment, and thus an allowance for credit loss was required for those receivables.

As a result of on balance sheet accounting for a securitization, the financial statements will reflect three primary differences from past transactions.

First, no gain or loss is recorded on the transaction.

HDFS will recognize the interest income on those secured receivables over the life of the loan, offset by the interest on a secured debt.

Contrary to previous transactions where HDFS recognized a gain or loss at the time of sale, and recorded income associated with it's retained interest and servicer fee income.

Second, as I had mentioned, the financed receivables representing the underlying collateral remain on the Company's balance sheet, and are classified as financed receivables held for investment, which requires the establishment of an allowance for credit losses.

And third, the resulting secured borrowings are recorded as debt on the Company's balance sheet, which is reduced monthly as available collections on related motorcycle loans are applied to the outstanding principle.

The next adjustment made during the quarter was the establishment of an initial credit loss allowance of $61.8 million, for receivables that were reclassified from held for sale to held for investment.

We decided to reclassify the receivables, because it is now our expectation and intent, that future transactions will be structured in a manner that requires on balance sheet accounting.

This treatment is consistent with recently issued FASB rules, which require on balance sheet accounting for most types of securitization transactions beginning in 2010.

It is important to point out that these two adjustments totaling 72.7 million, were both one-time noncash items.

The resulting accounting treatment changes the timing of the P&L recognition of the receivables, but does not alter the economics of the portfolio.

At the end of the second quarter, approximately 5.12 billion of receivables were classified as held for investment.

Of those receivables, 1.07 billion were wholesale, and 4.05 billion were retail.

Finally, second quarter results were impacted by an increase in credit loss assumptions, which resulted in a $15 million impairment to retain securitization interest, compared to a $6.3 million write-down during last year's second quarter.

This quarter's write-down is due to higher actual and projected credit loss assumptions on several of these transactions, partially offset by slowing actual and projected prepayment speeds.

Now, I would like to welcome Larry Hund back to the team.

Larry joined as President of HDFS a few weeks ago, and will now review HDFS's operations and portfolio performance for the second quarter.

Thanks, John.

Good morning, everyone.

First, let me say that I am excited to be back with HDFS, and look forward to working again with so many friends at Harley-Davidson, and within our dealer network.

I am already working closely with our leadership team and our staff, as we remain focused on our previously identified 2009 priorities, which are obtaining the required funding for our business, continuing to make appropriate underwriting enhancements, and improving our collections operations in this challenging economic environment, while continuing to support the Harley-Davidson dealer network.

During the second quarter, HDFS originated 700 million in retail motorcycle loans, compared to 1 billion in the second quarter of 2008.

This 33% decrease is primarily attributable to lower retail sales of Harley-Davidson motorcycles in the US.

HDFS US retail market share of new Harley-Davidson motorcycles sold was 48.7% in the second quarter of 2009, compared to 53.1% in the second quarter of 2008.

This decrease in market share is consistent with what we experienced in the first quarter, and demonstrates that there continues to be a competitive marketplace in retail financing for Harley-Davidson motorcycles.

During the first half of this year, we made significant adjustments to our underwriting criteria, including requiring increased down payments in certain credit tiers, implementing more conservative loan to value requirements, implementing revised customized credit scoring models, and modifying certain credit authorities and controls.

On the portfolio management side, we have made significant efforts to keep delinquencies and losses in check during this very challenging period, including increasing collection staffing, modifying collection strategies, and improving motorcycle repossession processes.

Despite significant efforts from our team, the impact of a recession and high unemployment resulted in the 30-day delinquency rate of 4.97% of managed retail motorcycle receivables as of June 28th, 2009, compared to 4.65% at the end of the second quarter of 2008.

Annualized retail motorcycle credit losses for the first half of 2009 were 2.69%, compared to 2.14% for the first half of 2008.

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

Due to ongoing economic challenges and rising unemployment in the US, we continue to expect higher levels of delinquent loans and retail credit losses, as we go through the second half of the year.

Therefore, we will continue to evaluate our underwriting criteria, to balance the availability of credit, with the appropriate risk and return dynamics on the portfolio.

Regarding our cost structure, as John mentioned, we will be making staff reductions and reducing other general and administrative costs, to generate approximately 10 million in annualized cost savings.

These reductions primarily reflect the significant reduction in new business origination levels, compared to the prior year.

I want to reassure you that given the current environment, there will not be any significant change in our commitment to portfolio management efforts.

So to wrap up on HDFS, we have met our expected funding needs for 2009, and continue to work to obtain ongoing funding, as evidenced by our very successful securitization earlier this month.

We continue to take appropriate actions in modifying our underwriting criteria, managing our portfolio, and dealing with our cost base, given lower levels of business volume.

We expect 2009 to continue to be a tough year as it is for many participants in the consumer finance space, but believe we are taking the appropriate steps to manage through it.

Finally, I would like to take a moment to compliment the HDFS team, which is doing a great job focusing on our objectives in this difficult environment, and I am glad to be back working with them.

Now I will turn it over to John for the remaining Harley-Davidson Inc.

consolidated financial results.

Thanks, Larry.

Cash and cash equivalents as of June 28th, 2009 totaled 1.03 billion, compared to 803.4 million last year.

Cash used by operations was 164.4 million for the first six months of 2009, compared to 39.0 million of cash used by operations during the first six months of 2008.

Operating cash flow was adversely impacted by a decrease in net income during the period, and no off balance sheet securitization proceeds.

During the first six months of 2009, depreciation was 126.9 million.

Capital expenditures were 57.3 million for the first six months, down 42.4% compared to the same period in 2008, as we continue to work toward reducing overall costs.

For the full year of 2009, we now expect capital expenditures to be between 145 million and 175 million.

Included in this total are between 20 million and 30 million of capital expenditures, related to the implementation of our restructuring plan in 2009.

Without the restructuring capital, expected full year capital expenditures will be down between 77 million and 107 million from 2008.

During the quarter we recorded a one-time noncash impairment charge of 28.4 million to write-off the remaining balance of goodwill associated with HDFS.

This write-down was a result of an evaluation analysis that took into account 2009 results, and lower shipment guidance.

As Keith stated, despite the current economic conditions, and this associated write-off of goodwill, HDFS's ability to provide retail financing is a strategic benefit to the overall company.

So all-in-all it was a tough quarter.

We continue to take the necessary actions to manage through the economic downturn, and stay focused on strengthening the Harley-Davidson brand, improving our cost structure, and obtaining the necessary funding for HDFS.

We are confident we will emerge from this economic downturn even stronger.

Please note that we will be filing an updated press release correcting hourly work force reduction numbers, as well as a six month cash flow and capital expenditures.

We have used the correct numbers on today's call.

Now we would be pleased to take your questions.

(Operator Instructions).

We will pause just a moment to compile the Q&A roster.

Your first question comes from Tim Conder from Wells Fargo.

Thank you.

And Keith, welcome aboard, we look forward to meet you here in a couple of weeks, and John and Larry, welcome back, we look forward to working with you again.

Thank you.

Thanks, Tim.

A couple of items, gentlemen.

I guess a little confused as to why the production was up near the higher end of your previously announced range for the second quarter, given the poor retail sell through that you saw as you progressed through the quarter.

Then especially given it is the end of the model year.

So I guess that is one thing, and then related to the Company level inventories, up 27%, how much of that is carry over model year '09, versus prebuild for your launch here of model year '10?

Tim, I will take that question.

With regards to the production being up more toward the high end of guidance for the quarter, as we got out of the first quarter we were right on-track with our expectations, and volumes started to fall, given the supply chain, and all of the materials coming at us, it was prudent to continue to build out a model year as we had to avoid obsolescence charges.

So that is why we continued on at that pace.

With regards to the Company inventory, they are up given the timing of the cutover of the model year 2010 vehicles, what we are doing is cutting over earlier this year to model year 2010 than we did a year ago, about ten days on average.

So we are holding those vehicles until the show next week.

Okay.

So the majority of the inventory that we are seeing on balance sheet is the majority of that model year 2010, or is there a certain percentage of it that may be model year 2009 that still needs to be flowed through?

No, it is all model year 2010, and processed inventories are actually down, what you are seeing is all the build for model year 2010, and the launch, we will start shipping those out at the dealer show next week.

Okay.

Finally, I am still a little bit confused with the credit loss allowance on the reclassification.

I was under the understanding and impression that each quarter there was basically adjustments made to adjust for your prepays, assumptions to adjust for the discount rates, adjust for the used residual values, and so forth.

Can you, again I apologize for asking this, but go through again, walk through the reasoning why?

I know you hit the majority of that in your preamble, but still a little confused as to why that occurred to that magnitude?

You are referring to the $15 million impairment of retained securitization interest?

Well, I understand that part is sort of the normal quarterly ongoing, where you make those adjustments, but the larger portion, was that solely related to the decision to keep things on balance sheet?

Yes.

Was that the primary trigger?

Yes.

Let's talk about that.

You are talking about the $73 million one-time reclassification charge to that.

Yes.

I am sorry.

Yes.

As you know we typically and historically recorded incoming receivables as held for sale.

It has been the Company's intention to sell those in securitizations, and on off balance sheet transactions.

We have done that for years.

As we started running into the economic and credit issues as of last year, we were unable to access those markets.

We still had an intention to sell those units, or to sell those receivables into the marketplace.

And they started to buildup and at the end of the first quarter they were over $2 billion on our balance sheet.

And we got into the May timeframe and the TALF money came in, and the securitization markets opened up, and we did a transaction.

At that time, Tim, the transaction that we did, and the way that was structured required us to account for it on balance sheet, okay.

So that was recorded on balance sheet, and then we started to work on our next TALF deal, which just closed two days ago, and that structure was done in a similar way that was going to require on balance sheet accounting treatment.

So at that time, the remainer that we had in held for sale of about $2.7 billion, our intent changed.

We did not believe that we were going to be able to sell those in off balance sheet transactions.

So we changed our intent, and we are now going to hold those for investment, and that is consistent with the newly issued FASB rules that came out earlier in June.

And we would have to do this anyhow beginning in 2010, and with that change in intent, we will be moving held to sale to held for investment.

We have to establish an initial credit loss provision, and that is the 72.7 million.

Okay.

Okay.

So again, the key one-time was this related, giving the change and intent relating to the accounting treatment?

Correct.

One-time, noncash, the economics of the portfolio have not changed at all.

Okay.

Great.

Thank you, gentlemen.

Look forward to seeing you in a couple of weeks.

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

Baird.

Good morning, everyone.

I look forward to working with you.

Keith, are there goals you have that you can point to on the cost side, maybe it would be profit per bike, or a certain level of SG&A expense, that you can point to for investors that are focused on the long term, and can get excited about?

Well, we obviously do have metrics that we hold ourselves accountable to, and we are actually going through process of understanding again, where we have been, and what we think we can accomplish.

So without getting into the specifics, let me just say my mindset is, and I think the mindset of all of us here at Harley, is no matter how good we are doing, or how well we have done, we can always do better.

It is about continuous improvement, and we are really focused on trying to understand how we can we drive the continuous improvement in our product development cycles, how we bring products to market, our marketing initiatives, as well as everything we do in our plants.

I have had the opportunity to go through all of our operations, meet with all of our employees, and clearly, we have great operations, but there is also room for improvement, and I think as we go forward, you will begin to see some of those initiatives and actions.

Thank you.

And then on HDFS, you obviously see the strategic value of that business, but would you consider any structural changes that might minimize your capital investment, for example partnering with a third party to underwrite, and the you would collect the origination fees?

I think that, and that is one of the learnings for me in the first couple of months here, and I am convinced having met with several of our dealers, both on the dealer town hall circuit, as well as our dealer advisory counsel, and then through just a lot of different visits to dealerships, that HDFS is clearly a strategic asset and advantage for our Company and our dealers.

I think that shows up in our market share gains in spite of the fact that the market is down in total, like as John had mentioned, we have still gained market share, and we believe it is largely due to our ability to provide both wholesale floor planning, as well as retail loans, and then the insurance and extended service plan opportunities in a one-stop shop fashion at our dealer.

Having said that, it is also very clear that we have to find lower sources of funding if you will for that business.

So I think that in terms of how we are looking at HDFS, clearly a strategic asset, but we are clearly looking at what other strategic options there may be, to help us to get access to lower capital, cost of capital.

Finally you have obviously decided to cut production to protect the scarcity value of the brand, we like that decision, but what are you looking at, to know that you have the right level of inventory?

What metrics would you point to internally?

Let it suffice to say that we spent a tremendous amount of time, effort, and energy, trying to make sure, based on all of the information that we have, market share data, trends, certainly looking at unemployment trends, consumer confidence trends, those kinds of things that, that the actions that we were taken are prudent, given everything we know today, to realign our inventories with demand.

Okay.

Thank you.

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

Thanks.

I wanted to ask you about kind of looking out to next year, and I appreciate the fact that there is a lot of uncertainty, and you are making a lot of decisions over the next few months, but your margins I guess when you think about your margin guidance for this year, and whether that is sustainable in 2010, you had very high margins in Q1 of this year, that obviously with the production cuts we might not see next year, and also you will have the benefit of not producing Sportsters, your lowest margin bikes, for a full quarter this year.

But assuming that you will go back to a more normalized production next year, that maybe margins in 2010 will be down even with some of the cost savings you are implementing?

So if we think about production, your guidance for this year may be having earnings in the $0.70 to $0.80 range, and then who know what the consumer is going to do if we think of production as being flat.

Is it possible we can see an additional earnings decline next year, unless there is something in your margins to think about that is not as apparent?

Hi Robin.

This is John.

We are not going to give forward-looking margin information, but what I can say is all of the actions that we are taking today, eliminating excess capacity, reducing administrative costs and exiting noncore business operations, which are the core strategies of our fixing our cost structure, will improve our margin structure going forward, and we are very focused on that.

In addition not only to those restructuring activities, as we are seeing in the second quarter, our employees are all getting after the continuous improvement, pulling forward productivity projects, and we are dropping a lot of productivity as we go along.

So we expect that to continue as well.

Okay.

And then the other question I had is just regarding liquidity with HDFS, and with the change in accounting treatment, I guess I am curious partly why you decided not to use the [inaudible] accounting when FASB didn't require it, yet and the ruling I think wasn't even until after the May transaction.

I don't know if you can quantify what the loss on sale would have been, or gain or loss would have been if you didn't change the accounting?

But I guess the bigger question is when we look at your balance sheet now, it used to be easier to look at your receivables held for sale, and get a sense of what kind of liquidity you could get from securitizing that?

So I wonder if you could just help us think of what is available, what receivables are available, retail receivables not wholesale, retail receivables that have not been securitized, that would not be needed to back up the conduit draw down, in other words what is available to securitize additional liquidity above that $1.2 billion conduit?

Right now, we have got 5.12 billion of receivables as held for investment, Robin.

Of that $4 billion are retail, and at this time we are not going to break out the pieces that are available for securitization, or conduit, or medium term note, or anything else.

We are looking to follow a diversified funding path, and at this point they are all on our balance sheet, and we are looking more at how do we lower the cost of funds against that portfolio.

Once you have securitized them, how would they be available for additional liquidity?

Well, we continue to use the term, we expect to continue to use the term asset backed securitization markets.

We will continue to do securitizations, as long as the market remains attractive from a cost of funding, and available to us.

So that will just be one of the sources of funding that we use to fund the overall portfolio.

The securitizations will act very similarly to the way they have always done in the past.

The only thing is that we will have the receivables on our balance sheet, as well as debt from the securitizations.

So just in terms of helping us think about what you have available to securitize, is there a ball park you could give us, of what of that 4 billion retail, isn't already being used to overcollaterallize the May and July TALFs, and being used for the 1.2 billion?

No, what we can say is that we have got enough retail loans to continue to securitize more at this point.

Okay.

Thank you.

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

Hi.

Good morning.

I have a few questions.

One back to your operations, a lot of talk, and probably prior to your time, but a lot of talk and focus on the retail environment, or the retailer environment rather in domestically, and having demand better aligned with supply.

Hasn't in the past had a lot of talk about your focus internationally, other than continuing to try to gain market share there.

But clearly, inventories are building internationally, the market is weak there as well.

And I am wondering what some of your thoughts are, in terms of addressing the international channels going forward?

Well, I think first of all that, as we look at the international markets, it is clear that the Harley brand has significant meaning in those markets, just like it does in North America.

And clearly, some of the markets, some of the international markets are different in so far as the products that are being asked for, demanded by the customers.

And so it certainly varies by market.

If you think about Europe as an example, and you think about the custom touring market, that makes up a relatively small piece of the overall market, and we have a very large share of that market, which is another indication of the strength of our brand, and the demand of our brand from our customers.

So really as we think about these markets, what we are really looking at is how do we design and develop and bring to market, relevant product that are meaningful to the customers in those markets, so that we can continue to gain share, whether it is in Europe or whether it is in Japan, or India, or wherever it might be.

Okay.

And then just in terms of the magnitude of production cuts, particularly in the Sportster and V ride lines, is there any message there regarding the future viability of those lines?

There is certainly no intended message.

It is just that as John mentioned in his comments, we anticipated a higher level of retail sales of Sportsters given the tough economic environment, and as it turns out, we actually had a higher mix in our Touring line, which is in one way good, but obviously we now have this imbalance, and our actions are just only solely intended to bring that back into balance.

Okay.

Moving back to HDFS, I was wondering in terms of your allowance for doubtful accounts, do you expect further provisioning there, and I was wondering what it was in the second quarter?

We don't, John talked about the majority of the provisioning obviously related to the one-time reclassification that John reviewed.

Right.

As far as additional provisioning, obviously we have a very disciplined process that we go through every quarter, and we will evaluate both the wholesale, which we do on a specific dealer by dealer basis, and the retail, which would be more of a homogenous pool.

We look at it in the aggregate, and we will evaluate those, and make appropriate adjustments at that time.

Okay.

So you won't break out the second quarter separate from what you have already discussed, which was more accounting related?

That certainly is the vast majority of the provision during the second quarter, just by far the reclassification of those receivables is really what drove it.

As far as the total provision you will see that broken out, I think when we file our 10-Q.

Okay.

Great.

Then just a final question, I was wondering if you could let us know what the over-collateralization was under the JPMorgan facility at the end of the second quarter, and what the balance in that facility is at the end of the second quarter?

No, we can't provide that.

Okay.

Okay.

Thank you.

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

Good morning, guys.

A quick question on the economic backdrop here.

I guess just the demand backdrop.

I think most people expected that the second quarter would be down, or at least notice that the second quarter was down versus the first quarter.

Have you figured out any reasons as to why that would be the case?

Is it merely what is going on in the economy, which doesn't seem like it got that much worse from the first quarter to the second quarter, or is it more what you guys are doing specifically as a company, specifically some of the promotions that seemed to be successful in the first quarter, that you didn't repeat in the second?

First of all I think for us it was a little bit unusual if you go back to the first quarter, and our retail sales were down quite as much as some of the other industries, and then April, May, June they were down more significantly.

And so we just believe that given the economic backdrop, given the high levels of unemployment, I think which is we have a close correlation probably to, as well as consumer confidence in the fact that we are selling the bigger ticket discretionary items have impacted us.

But on the other hand, if you look at, and I know the information was in the releases, but if you look at the sale of motor clothes as an example, parts and accessories, even though they were down, they weren't down nearly as significantly as retail motorcycle sales, and also if you look at our Rider's Edge participation, that was up 7% year-over-year.

So all of those things, again point to the stickiness if you will of our brand, they point to the fact that our customers are still very loyal to the brand, and that there are even more people out there looking to come into the sport, through Rider's Edge as an example, and maybe they just can't afford to buy a bike right now as they get through the program, but we think all of those things are positives at this point in time.

I certainly agree there.

Just trying to figure out what the major difference between the first quarter and second quarter was?

Obviously you had the trade up promotion for the Sportsters in the first quarter, which potentially helped, and it seems like you are bringing that back for the third quarter, and I am just trying to figure out if you think that was a major driver toward the outperformance in the first quarter, and if that could potentially help in the third quarter?

Jim, this is John.

The whole industry went down from first quarter to second quarter.

I don't think it was anything that we did specifically, the Ride Free guarantee program might have pulled a motorcycle or two forward, but nothing substantial.

And in actuality we gained share from the first quarter to the second quarter.

We were up 8.2 share points in the first quarter, and that increased to 10.2, so it is much more of an industry issue, than is anything specifically we did or didn't do.

Great.

Thanks.

On the cost side, how much of the cost reduction benefit that you guys have slated for this year, how much of that is gross margin, and how much of that is SG&A?

If you can tell us.

We haven't broken that out.

Okay.

Is it fair to say, well, let me ask it this way, I think previously despite the pretty significant cost savings that you guys are going to realize in 2009, the expectation was that SG&A spending wasn't going to be down significantly, because there were certain other items that you were going to have to spend money on.

Is that still a safe assumption, or given the incremental benefit, should we see a reduction in SG&A?

We are not going to give forward progressions on SG&A, but the actions that we took today will provide $70 million of less SG&A spending going forward.

Fair enough.

And then finally on HDFS, it seems as if the two charges you took in terms of the reclassification, one of them was for the current securitization, and one of them was for future securitizations.

Does that then mean that we should not expect another reclassification charge in the third quarter, as a result of the securitization that you just completed?

Absolutely.

Okay.

That was one-time reclassification.

From now on we will bring everything on balance sheet, and there will be no more reclassification charges.

Okay.

And so of the three buckets of charges that you reported today, obviously impairment charges, impairment charge is always a possibility, but the reclassification and the goodwill write-down, we shouldn't be seeing any more of those?

Correct.

Okay.

Perfect.

Thanks, guys.

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

Thanks.

Good morning.

The first question I just wanted to gauge your level of comfort with your ability to on your new production plan, to get the inventory to where it needs to be by the end of the year.

One of the things that concerns me a little bit is especially looking at how much your competitors are down year-over-year, in terms of their retail sales, and what they might have to do to clear through some of their own inventory, that would make it difficult for the product to turn through the channel.

Do you expect, on your current view of the world, that you will be essentially where you need to be, in terms of dealer inventory by the end of this fiscal year?

Again it goes back to the earlier comment, that we put a lot of time and effort into really trying to understand the right number of units to take out of production to balance our inventories certainly by the end of the year and going into next year.

We think we have done that given everything that we understand about the economy today.

Okay.

Thanks, and then I think a lot of us are obviously scratching our heads over the gross margin guidance, which was unchanged on a pretty massive production cut.

Certainly it is encouraging.

Obviously there is some mix stuff going on there, but I was wondering if you can give us a little more of a break down of the different puts and takes on the gross margin this year, just so we can have a better understanding of how to model it forward.

I don't know how specific you can be, but the forming factors that I think are involved there are obviously are fixed costs, deleverage, currency, mix, and commodities.

Any further clarify you can give on how those are all working together would be just helpful for our modeling purposes?

As we came out in January, we had the 30.5 to 31.5.

As you mentioned that was driven by three thing, the loss absorption on lower volumes, unfavorable currency expected, and unfavorable mix.

Now we have come out, we have lowered the volumes another 45,000 to 51,000 units, and we are not lowering the gross margin.

So the answer is why.

And that is the fact that the lost absorption on the additional units that we are taking out, will be offset by more strong favorable fix, given a shift from our Sportsters into our Big Twins, and then secondly, as we expect to generate more productivity than we did initially.

As I had mentioned earlier, the organization is very focused on it, and we are seeing those results and second quarter as well, as we will for the remainder of the year.

Lastly, you mentioned that that 70 million was coming out of SG&A.

Should I interpret that all of the cost cutting is more SG&A focused versus cost of goods?

The 70 million, 60 of it is motor company and that would show up on the SG&A line of our consolidated financial statements, 10 million of administrative costs are coming out of HDFS.

So all of those restructuring savings are basically below the gross profit line?

The vast majority is, yes.

Thank you for taking my questions.

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

Hi.

Good morning.

Hey, Patrick.

I guess just on the debt side of things, is there, it seems like you have been running in the 50s, in terms of short-term debt as a proportion of your funding.

And obviously you were sort of falling down below that at a specific time, and then with some of these recent transactions, you are kind of back up there.

Just wanted to get a sense of what you think the appropriate mix of short-term debt is for you guys, just on a longer term sustainable basis, in the interest of diversification, and if it is a lot, or if it is fairly similar to what we are seeing now, how much room is there to take your average interest cost, below the 6 or 7%, which it seems to be tracking right now?

We are not going to give future targets, but we are very focused on further diversifying our debt, and some of the benchmarks are going to be to find lower cost funds as well.

We do realize that the cost of funds are up versus a year ago, and we are focused on it.

We are adjusting the portfolio side of it with several price increases, and we are looking to further diversify.

And I guess would diversification entail doing a bit more longer term unsecured stuff as well, or are you still kind of very much focused on some of the shorter term, cheaper or less expensive paper as part of that plan?

We are evaluating all of the markets continually, and while we are very pleased that the markets are coming back, and we have got access to all markets, and we have accessed all markets this year, we are looking for the opportunities to again diversify and move to lower cost funds, and where we are at in any given time, we will take action if it seems appropriate at that time.

Okay.

And wanted to, I don't know, you might have said it.

Did you give us the subprime proportion of your book versus last year?

And if not, would we be able to give that from you?

We can give you a broader generality of where our new originations are.

If you look back a year ago, it was probably 70 to 75% prime, and then the remainder in the subprime tier.

With the changes we have made in underwriting criteria, today it is more in the 80 to 85% prime, and then 15 to 20% subprime.

Okay.

Great.

And then another one, you commented on delinquencies, and a softening in used vehicle prices, used bike prices, as being responsible for the increase in credit losses.

Can you give us any kind of sense, can you maybe dimension how used bike prices are tracking year-on-year for us?

As far as recovery values year-on-year, they are down probably about, oh 15% or so.

If you took it relative to the initial MSRP of the motorcycle.

Not surprising I think given what is going on in the economy, and given a lot of pressure on the consumer, and just the fact that we are repossessing more motorcycles in this part of the economic downturn, than we were a year ago.

Okay.

That is helpful.

And then actually just one last housekeeping one, I guess the Ride for Free program that is being reinitiated, how do we think about the impact of that, did you guys reserve for that this quarter?

Might that have had sort of an impact?

Or is that something that we will see accrue in subsequent periods?

We did not reserve for that in Q2.

That will be reserved for in Q3.

The program was launched there.

Earlier this year we did Ride Free guarantee, there were two pieces to that program earlier this year.

It was if you have traded in an earlier model Sportster, you would get MSRP if you bought a Big Twin.

The second piece of that was if you bought a Sportster, that during the year if you traded up to a Big Twin, you would receive MSRP.

The second piece of that that is going forward in the third quarter.

It is not entire program that we did in the first quarter, it is just the second piece that relates to Sportsters.

How much, because I think you gave out the numbers, in terms of how much you had reserved for the program, and the past program, and sort of give us a sense of what we might have to factor in for it?

I can't remember off the top of my head.

You can call Amy, and she can get that for you.

Okay.

Great.

That is all I had.

Thank you very much.

And our final question comes from the line of Rod Lache from Deutsche Bank.

Hi, everybody.

Hi, Rod.

Keith, can you elaborate specifically on your comment on the manufacturing base not being competitive or sustainable?

Do you have a preliminary assessment of the gap that you are looking at, or a BBT target, or something that you are kind of honing in on, as the savings opportunity or gap to become competitive?

Well, I would suggest that we have a directional number.

I am not really willing to talk about that at this point in time.

We are vetting that with obviously the entire organization.

I think, Rod, you are well aware that we really focus on continuous improvement, and again I will reiterate that no matter how well we are doing we can do better, and we are understanding where all of those opportunities are.

I think the only comment you may be referring to was maybe our York facility, and clearly we are working with our labor unions there, and all of our employees, and we are really trying to figure out, there is clearly a bigger opportunity probably in that facility for a lot of different reasons, than in many of the other ones.

So that is sort of top of mind for all of us.

But I can guarantee you that we are focused on driving continuous improvement, and just understanding exactly how we are going to take the costs out of the operations.

At Johnson Controls you were very transparent on what your three year target was, and what the target would be per year.

Do you anticipate bringing that kind of transparency and targets across to Harley-Davidson?

Well, and I think that again as we move forward here, we will be able to bring certainly more clarity to some of those things.

Right now, there is just a whole lot of work being done, and trying get everybody aligned around exactly what these opportunities are.

Okay.

And just as far as the savings, you gave us objectives for the full year, can you tell us how much you have achieved already, and what are your long-term expectations for where SG&A should be, or your operating expenses as a percentage of sales?

We are just at this point able to say that we will hit the full-year guidance we have got, and the range I provided.

As far as longer term, we are looking to size the business appropriately, with our volumes, but never lose sight of the fact that we are going to continue to invest in the brand, and we do know that this recession and economic downturn will end, and we are positioning ourselves to come out of it stronger than our competition.

Okay.

I mean you have given some specifics on SG&A savings from restructuring, I would imagine that there are other things like advertising, and other elements that you would be ratcheting down.

Is there any additional color that you can give us, you have commented on the gross profit margin, but just as far as SG&A levels?

Yes, typically we don't break out the line items of it, but I can tell you that the SG&A reductions are across the organization, some areas are getting hit harder than others, and all of our employees are focused on working smarter, and getting after the productivity opportunities that are available to them.

Okay.

Just lastly, to clarify your comment earlier, you were anticipating that on a full-year basis because of the downturn, the down time in Sportsters, that your mix would be positive year-over-year for the full year '09 versus full-year '08?

The mix is going to be very favorable in the back half of the year.

Right.

And it is more favorable than what you anticipated earlier in the year, but on a full-year basis, '09 versus '08, is mix a plus or a minus?

Not going to provide that.

Okay.

I am sorry.

All right.

Thank you.

Thank you, Rod.

Thank you for your time this morning.

I appreciate your interest and investment in Harley-Davidson.

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

Thanks, John.

If you would like to hear a replay of this conference, call 706-645-9291, and enter PIN number 15669305#, until July 23rd, or access the conference on Harley-Davidson.com.

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

Have a great day.

This concludes today's conference call.

You may now disconnect.