Harley-Davidson Inc (HOG) 2009 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the third quarter 2009 earnings conference call.

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

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

(Operator Instructions).

Thank you.

Ms.

Giuffre, you may begin your conference.

Thanks, Rachel.

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

Today's call will be Webcast live on Harley-Davidson.com and supported by visuals that can be accessed by clicking on Investor Relations, then Events and Announcements.

To view a larger version of any slide, click the expand button on the lower right of your viewing window.

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.

This morning, you'll hear from Harley-Davidson's CEO, Keith Wandell, CFO, John Olin and President of Harley-Davidson Financial Services, Larry Hund.

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

Keith?

Thank you, Amy and good morning to everyone and thanks for joining us.

You've all seen our news release and so you know that we have a lot to talk about today.

The first is our results for the third quarter.

We also want to share with you a high level summary of our business strategy that will guide our decision making as we go forward.

Our strategy is designed to strengthen the Harley-Davidson brand for the long-term future growth and to deliver results through increased focus.

And there are really two aspects to that focus.

Number one, we will focus on extending the Harley-Davidson brand by leveraging our unique strengths.

We're concentrating our investments in products and experiences on one of the strongest global brands with the goal of enabling us to continue to expand worldwide, attract new customers everywhere we do business, and also reinforce our high commitment to our core customers.

It is in this context of focusing on the Harley-Davidson brand that we have made the decisions announced today to discontinue the Buell product line, and to divest our MV Agusta unit and John Olin will go into additional details related to these decisions.

And secondly, we will focus on continuous improvement in every aspect of our manufacturing, product development and business processes.

I'll be back a little later with a closer look at our strategy.

But as I turn the call over to John, I just wanted to congratulate him on being named our Chief Financial Officer last month.

As the interim CFO, John showed tremendous leadership during a difficult time for the Company so with that, John, I'll turn it over to you.

Thanks, Keith.

As most of you know, our near term plan has been to invest in our brand, improve our cost structure and obtain funding for HDFS.

These three areas of focus will continue to help us manage through the economic recovery and we have integrated them into our long-term strategy.

The first focus area, investing in our brand, is the cornerstone of the strategy.

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 and, as evidenced by our anticipated significant reduction in fourth quarter shipments versus prior year, we remain committed to the brand.

Our second area of focus has been to improve our cost structure.

To date, we are on track with previously announced restructuring activities.

We are working to reduce administrative costs, eliminate excess capacity and exit non-core operations.

This morning we announced additional restructuring actions regarding Buell and MV Agusta.

These decisions are in alignment with our long-term strategy which is to, one, focus on extending the Harley-Davidson brand by leveraging our unique strengths.

And two, focus on continuous improvement.

Our decision to discontinue Buell and sell MV Agusta takes into consideration the following.

Investment in the Harley-Davidson brand has provided greater returns than either the Buell or MV Agusta brands.

Harley-Davidson customers have a much higher repeat purchase intent.

And our success in attracting new customers to the Harley-Davidson brand indicates the brand is well positioned to grow worldwide in the future.

Let's take a look at Buell.

We will work closely with all our stakeholders to facilitate an orderly departure from the Buell product line over the next several months.

The Buell dealer network will continue to sell new motorcycles into 2010 and provide service into the future.

We have chosen to discontinue the Buell product line as opposed to selling the business, in part because Buell is so integrated into the Harley-Davidson business systems and distribution network.

From an accounting perspective, Buell is not considered a separate and distinct operation, and as a result, will not be presented separately as a discontinued operation.

The financial results related to Buell will continue to be reported as a component of income from operations.

Related discontinuation costs will be recorded as restructuring expenses, and gross profit will continue to include earnings on the sale of our remaining Buell inventory.

Of approximately $125 million in total costs associated with the discontinuation of Buell, we expect to incur approximately $55 million of restructuring and impairment costs in 2009, related to contractual requirements, write-down of assets, and severance benefits.

We also expect to reduce our hourly workforce by approximately 80 employees, and our non-production primarily salaried workforce by approximately 100 employees.

During the third quarter, we recorded a $14.2 million impairment charge related to the fixed assets associated with Buell.

The assets were written down to their estimated fair value and the charge was included within restructuring expense and other impairments line item on our income statement.

In addition to restructuring charges, we anticipate approximately $60 million in costs related to helping our dealers sell their inventory and charges for obsolete inventory, which will negatively impact gross margin in the fourth quarter.

In addition, we expect approximately $10 million of costs in 2010.

Buell revenue was $134.9 million in 2008 and $59.4 million 2009 year-to-date.

Capital expenditures related to Buell were $6.6 million in 2008, and $3.8 million September year-to-date.

We estimate that the Buell product line reduced income from operations by approximately $18 million in 2008, and approximately $27 million, including the impairment charge, during the first nine months of 2009.

We have not quantified the benefits of increased focus on Harley-Davidson brand as a result of discontinuing Buell, nor included any potential savings in our restructuring estimates.

Turning to our plans to divest MV Agusta, like Buell, ongoing investment in MV Agusta does not align with the Company's long-term strategy.

MV Agusta has value driven by it's respected heritage, exciting products and passionate workforce.

It is a standalone entity with a separate distribution network.

As a result, we expect to report MV Agusta results as a discontinued operation, which means MV revenue cost, and earnings will be reported as a separate line item below Harley-Davidson's income from continuing operations beginning in the fourth quarter.

MV Agusta revenue was $15.9 million in 2008, and $42.9 million September year-to-date.

Net losses were $30.1 million in 2008, and $52.6 million through the first nine months of 2009.

This includes an $18.9 million impairment charge of goodwill related to the purchase of MV Agusta recorded in the third quarter.

The decrease in fair value of the business unit was driven by a number of factors, including the recent downturn in the European economy, and its impact on the sport bike market.

Capital expenditures have been $12.8 million during the first nine months of 2009.

So, with the additional $55 million restructuring and impairment costs associated with Buell, we now expect restructuring and impairment costs will be between $215 million and $245 million over the next two years.

During the third quarter, the motorcycle segment incurred $50.7 million in restructuring and impairment charges, versus $0.9 million of restructuring charges in the prior year quarter.

We continue to expect total annual savings associated with restructuring will be between $140 million and $150 million upon completion of the announced activities.

These estimates do not include any action that may result from the York assessment currently under way.

We expect to provide additional detail regarding York in mid to late December.

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

I am very pleased to report that we have exceeded our $1 billion, 2009 funding needs by $1.9 billion, which will support any 2010 funding needs, including the mitigation of 2010 financing risk.

Last week we closed a $700 million TALF-eligible term securitization.

We saw strong demand and the weighted average interest rate dropped to just 1.2% from 2.1% in our July transaction.

Now, I'll comment on the financial results for the motorcycles and related products segment for the third quarter.

Worldwide dealer retail sales of Harley-Davidson motorcycles during the third quarter were down 21.3% compared to down 9.6% in 2008.

On a sequential basis, worldwide sales were down less than they were in the second quarter of this year, when they were down 30.1%.

In the US, we continue to perform better than the overall market.

During the third quarter, US Harley-Davidson motorcycle retail sales decreased 24.3%, while the US 651 plus CC motorcycle market dropped 35.9%.

Our market share was up 8.4 percentage points to 53.8% in the quarter, versus last year.

In international markets, we saw a sequential improvement with sales being down 13.1% in the third quarter, versus down 18.2% last quarter.

Let's take a minute to discuss the health of our US dealer network.

We remain committed to reducing dealer inventory.

Between 2007 and 2008, we trimmed year end US dealer inventory by approximately 22,000 units.

And, as you know, we have taken actions in 2009 to reduce shipments which we believe will result in significantly lower inventories at the end of 2009 compared to last year.

As retail conditions remain tough, our dealers are taking actions to reduce their expense structures to align with lower revenues.

And we have appropriate plans in place to manage the expected loss of some dealers as well as encourage the consolidation in select markets to help protect the integrity of our world class dealer network.

To date, four dealers and 10 secondary dealer locations have closed, and we expect 15 to 30 dealer points could close during the next six months.

Wholesale shipments of Harley-Davidson motorcycles for the third quarter were 54,236 down 20,468 units from the same quarter last year in line with our third quarter shipment guidance, and consistent with our previous annual shipment projection of being down 25 to 30% from 2008.

During the third quarter, we experienced a stronger mix of Touring motorcycles versus the prior year.

During the fourth quarter, we are planning no Sportster motorcycle production and we'll take advantage of the shutdown to accelerate consolidation of our Wisconsin powertrain facilities, which we expect to complete in mid-2010.

Revenue from Harley-Davidson motorcycles decreased to $803.3 million from the third quarter of 2008, primarily as a result of 27.4% lower shipments of Harley-Davidson motorcycles during the quarter, partially offset by favorable shipment mix, resulting in increased average revenue per unit of $1,006.

Total revenue for the segment was $1.12 billion, down 21.2% from the third quarter 2008.

Gross margins in the quarter decreased to 33.1% of revenue compared to last year.

Gross margin was negatively impacted by lower shipments, unfavorable foreign currency exchange rates and unfavorable manufacturing costs driven by lost absorption on fewer units shipped, partially offset by higher than expected productivity, favorable mix and lower raw material costs.

We are pleased to maintain our expectation of full year gross margin between 30.5 and 31.5% despite the impact from discontinuing the Buell product line.

For the fourth quarter, we expect gross margins to be negatively impacted by fixed costs spread over 14 to 19,000 fewer units and the impact of approximately $60 million charge resulting from the discontinuation of Buell, only partially offset by raw materials favorability, a favorable product mix and expected productivity improvements.

Operating margin for the third quarter 2009 decreased to 9.5%, negatively impacted by lower gross margin, restructuring charges and asset and goodwill impairments, partially offset by lower SG&A spending.

Now, moving on to our Financial Services segment.

During the third quarter, HDFS reported an operating loss of $31.5 million, a decrease of $67.1 million compared to last year.

This decrease was driven by several items.

First, a $41.4 million increase in the provision for retail loan loss allowance.

Of that total, $28 million was due to expected higher loss incidents and lower recovery values of repossessed motorcycles in the future.

The remaining $13 million was due to credit losses on a higher balance of loans held for investment versus the prior year.

Next, net interest income decreased by $8.7 million between the third quarter of 2008 and the third quarter of 2009, largely resulting from higher interest expense.

Increased interest expense was driven by the $600 million unsecured debt that was issued at 15% rate during the disruption in the capital markets in February 2009.

Also driving increased interest expense is the cost of carrying large cash balances to assure liquidity in these uncertain capital market conditions.

HDFS's wholesale allowance for loan losses increased by $7.1 million relative to the third quarter of 2008.

The increase reflects credit risk in the portfolio from expected dealer closures that I mentioned earlier.

Finally, other securitization decreased by $11.3 million during the quarter, as a result of fewer off-balance sheet securitizations.

This amount includes a $3.4 million impairment to retain securitization interest due to higher actual and projected credit loss assumptions, partially offset by slowing actual and projected prepayment speeds.

On a year-to-date basis, HDFS has incurred $110.8 million loss, largely due to the charges recorded last quarter, including the loss provision established when we reclassified loans to held for investment and the HDFS goodwill impairment charge.

HDFS continues to be adversely impacted by the current economic environment.

We expect HDFS will likely incur losses in the next couple of quarters as a result of four key factors.

Number one, lower resale values and higher credit losses typically experienced during the cold weather months.

Number two, continued pressure on incidents of loss as unemployment rates are expected to rise.

Three, the impact of higher cost funding raised during the recent capital market disruption.

And four, the impact of carrying large cash balances to minimize refinancing risk of our April maturities.

We expect HDFS will return to profitability as they work through the credit issues associated with pre-2009 retail loan originations and as the economy improves.

We continue to believe that HDFS provides an advantage for Harley-Davidson by providing a reliable source of financing for our customers and our dealers.

Because our goal at HDFS is to appropriately balance credit and appropriate returns and profitability, we are currently engaged in reviewing our strategic options to find more diversified and cost effective funding in order to meet our HDFS goals.

Now I'll turn the call over to Larry, who will review HDFS's operations and portfolio performance for the third quarter.

Thanks, John.

During the third quarter, HDFS originated $588 million in retail motorcycle loans, compared to $821 million in the third quarter of 2008.

This 28% decrease is primarily attributable to lower retail sales of Harley-Davidson motorcycles in the US.

HDFS retail market share of new Harley-Davidson motorcycles sold in the US was 51.2% in the third quarter of 2009, compared to 57.6% in the third quarter of 2008.

This decrease in market share shows that there continues to be a competitive marketplace in retail financing for Harley-Davidson motorcycles.

At the end of the third quarter, approximately $5.18 billion of receivables were classified as held for investment.

Of these receivables, $938.6 million were wholesale, and $4.24 billion were retail.

As we have said, we have made significant adjustments to our underwriting criteria earlier this year, 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.

We are pleased with the progress resulting from these changes.

And while it is still early, we are seeing improved performance on early stage delinquencies and defaults for loans originated in 2009 compared to the prior year.

In addition, these changes have driven a shift in the mix of new originations to 80 to 85% prime loans, compared to approximately 75% in previous years.

We continue to monitor the performance of these new originations very closely and we will make additional changes to our underwriting standards that we deem appropriate.

Regarding delinquencies and credit losses, the impact of the recession and high unemployment continue to drive increases.

The 30 day delinquency rate for managed retail motorcycle loans at September 27th, 2009, was 5.8%, compared to 5.59% at the end of the third quarter of 2008.

In managing collections, we have increased our staffing levels and modified collection strategies which have enabled us to manage delinquencies close to last year, despite increasing unemployment in the US.

From a credit loss perspective, annualized retail credit losses totaled 2.7% for the year-to-date, versus 1.97% last year.

The year-over-year increase in credit losses continues to be driven by an increase in the frequency of loss and a decline in the recovery values on repossessed motorcycles.

As we move out of riding season, and with unemployment continuing to be very high in the US, we expect to continue to see higher levels of delinquent loans and retail credit losses into the early part of 2010.

So in conclusion, we continue to make significant progress in improving our liquidity position as evidenced by the recent $700 million securitization.

We believe we have made appropriate underwriting changes, but will continue to evaluate them on an ongoing basis, and credit losses will continue to be a challenge in the near term, given continuing high unemployment rates.

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

consolidated financial results.

Thanks, Larry.

Compared to the same quarter last year, Harley-Davidson Inc.

revenue was $1.12 billion, down 21.2%.

Net income was $26.5 million, down 84.1%, and diluted earnings per share were $0.11, down 84.5% from the same quarter last year.

This quarter's EPS includes one-time charges for asset and goodwill impairments of $33.1 million.

Cash and cash equivalents as of the end of the quarter totaled $1.52 billion.

For the first nine months of 2009, cash provided by operations was $511.1 million, capital expenditures decreased to $89.4 million, as we continue to drive productivity and reduce investment and capacity expansion.

And depreciation and amortization was $186.8 million.

The third quarter effective income tax rate increased to 61.8% compared to 38.2% in the prior year due primarily to the tax implications of MV Agusta, including the non-deductible write-down of goodwill and the impact of reduced Company earnings.

We expect full year 2009 effective tax rate on continuing operations, excluding MV Agusta, to be approximately 59% due to the previously reported one-time charges for the Wisconsin tax law change and the non-deductible goodwill write-off for Harley-Davidson Financial Services, as well as the impact of reduced earnings for the remainder of the year.

So all in all, it was another tough quarter and we expect to manage through the challenges for the remainder of the year.

We are narrowing our guidance and now expect Harley-Davidson motorcycle shipments to be between 222,000, and 227,000 motorcycles in 2009.

We continue to expect gross margins between 30.5 and 31.5% for the full year.

And our capital expenditures are now expected to be between 125 and $145 million.

We'll continue to take the necessary actions to manage through the economic downturn and are excited to begin executing our long-term strategy, which Keith will review in more detail.

Thanks, John.

So those are the facts on the third quarter.

Now let me turn to our go-forward strategy and what it means.

We organized our strategy around four pillars.

Growth, continuous improvement, leadership development and sustainability.

First is growth, which is the single most critical need for Harley-Davidson right now.

We expect to grow through new innovative products, outstanding experiences and extending the brand among both core customers and outreach demographic segments globally.

Continuous improvement is the ongoing process of making all aspects of our business more competitive by improving everything we do every day.

And leadership development within the Company is an imperative to create a Harley-Davidson that can compete and win for decades to come.

And sustainability is always expanding the ways in which we can incorporate social and environmental responsibility into our business and manufacturing processes and products.

If you look at the work we've done across those pillars, you can boil down much of our strategy into a single word, and I mentioned it earlier, and that's focus.

It's all about focusing on the Harley-Davidson brand and driving it to its full potential globally.

In fact, we're calling our strategy delivering results through focus.

And today we're going to talk about our focus on growth and continuous improvement specifically.

When it comes to growth, we are intent on extending the Harley-Davidson brand by leveraging our unique strengths and what do we mean by extending the brand and leveraging our unique strengths?

Well, the Harley-Davidson brand is one of the most powerful brands in the world.

But we also have great conviction that there is much more that we can do to tap into the power of that brand and expand it even further.

And it all starts with our clear strength, products.

We're focusing on leveraging our leadership of the custom cruiser and touring segments, playing to our natural advantages with the objective of outgrowing our competitors in each of these segment everywhere in the world.

And we will continue to own and define the customization and personalization, which is another one of Harley-Davidson's unique strengths.

P&A and general merchandise represent more than 23% of our revenue year-to-date, reflecting the importance of custom, personalized experiences, and we will build off our unique expertise to develop relevant products that attract even more young adults, women and other new customers into the Harley-Davidson brand.

And we will focus on high impact, new product introductions as we hone in on what's most meaningful to our customers.

We will expand the brand through related products and services like Screaming Eagle Performance Parts or finding new ways to enhance the hog experience and broaden it to more riders or creating apparel collections designed specifically for the needs and preferences of outreach segments.

Another clear strength is how we connect with customers, bringing the Harley-Davidson experience and lifestyle to consumers around the world.

We're highly focused on expanding our global presence by accelerating our growth in key international markets and we continue to see strong upside potential in established markets and emerging markets alike.

One way we will seek to grow our penetration globally is to increasingly create market specific, locally relevant products and services that both embody the essence of the Harley-Davidson brand and appeal to local needs and tastes.

That includes the possibility of in-market design and manufacturing.

We expect to expand in mature international markets where we already have an established presence and we continue to see opportunities to create and fulfill additional demand for our products.

And increasingly we have the operational horsepower to do so, such as in Europe where we've grown market share for four years running through 2008.

Holding the number four spot in the heavy weight segment last year and continuing to gain share this year.

We also see long-term opportunities in developing markets like Latin America, India and China.

A case in point is India, where our approach is to lay the groundwork, put our dealer infrastructure in place, and align on our product plan.

Then, as disposable incomes rise and consumers increasingly look to buy bigger bikes, we will be on the leading edge of that opportunity.

We will also be looking for ways to push the envelope when it comes to extending our brand in those regions, for example, through apparel.

We see China in a very similar way.

Between now and 2014, we expect to expand our international dealer network by 100 to 150 dealer points, primarily in markets where we already have a presence and see opportunities to create and fulfill additional demand.

In Mexico, for example, we are growing to 13 dealers this year from the eight that we had at the start of 2009.

We are also focusing on extending our effectiveness among new demographic segments and making our brand more accessible to new customers.

Our brand is known and revered across a large range of demographic groups and we are focused on providing the products, features and experiences that will convert that admiration for the brand into purchases.

We're already seeing the results.

For example, the Iron 883 motorcycle has done exceedingly well among riders under age 35.

Among these young adults, Harley-Davidson is number two in the US market overall market share.

And we are the market share leader in heavy weight motorcycles among young adults with more than a third of that market.

We know from our research that the Harley-Davidson brand is as strong and well accepted among young adults in the US and internationally as it is among our current core customers.

And with our product plan, we are confident that we will continue to expand the appeal of Harley-Davidson motorcycles to the under 35 age group.

We also know Harley-Davidson has strong relevance as a lifestyle brand beyond the dedicated motorcyclist.

Some people may never ride a bike yet are strong enthusiasts.

Look for us to push the boundaries when it comes to how we engage with everyone who admires the brand.

And of course, we remain highly committed to our core customers.

We are clear about how to continue to grow with them for many years to come.

Ever since we introduced the Tri Glide, rider enthusiasm has been outstanding and it has been a real challenge trying to keep up with the demand.

And with the rider response to the improvements like the new Touring chassis and products like the 2010 Electra Glide Ultra Limited, we have great confidence about extending the ride and generating ongoing purchases among our most loyal customers.

When it comes to bringing our brand to life in local communities, our dealers are critical.

I've already talked about dealers internationally.

But just know that in the US, everywhere we sell motorcycles, we are focused on helping dealers achieve excellence in all aspects of their operations through robust sustainable business practices.

And we are also focused on the financial strength of the dealer network through having the right number of dealers in the right places.

And relative to HDFS, while it is going through a difficult period, we intend to continue to provide a reliable source of financing for retail customers and dealers.

But rest assured, we will continue to take the appropriate actions to address profitability.

You know, I've covered a lot of ground fairly quickly when it comes to our focus on extending the brand but quite simply it really boils down to this.

We firmly believe that a dollar invested in going to market with the Harley-Davidson brand delivers much more impact than the same dollar invested elsewhere.

When it comes to reaching new rider demographics and enriching the experience for current core customers around the world.

By focusing our investment behind the Harley-Davidson brand, we believe we are substantially improving the brands and the Company's ability to grow.

It's all about delivering results through focus.

Now let's just spend a minute on continuing improvements.

As most of you know the contraction in our business over the past couple years has prompted us to make major moves in this area already.

The reality is, we need to institutionalize continuous improvement in our product development, our business processes, and our manufacturing operations.

As an ongoing way of life at Harley-Davidson, and as a way to strengthen our ability to reinvest in our brand.

Through a disciplined approach to continuous improvement, we expect to shorten lead times, reduce complexity, and get our motorcycles to market in the most cost effective way possible.

We also expect continuous improvement to allow us to become increasingly effective at aggressively managing supply in line with demand, an important discipline that you will see us continue to emphasize.

So to wrap things up, how are we going to measure success and hold ourselves accountable?

Our success will be characterized in a number of ways, including these long-term factors.

Number one, we expect to outperform the S&P 500 over our planning horizon and longer term.

We also expect to see our international motorcycle sales grow at a faster rate than domestic sales.

We expect to add 100 to 150 international dealer points through 2014 and we expect international unit sales to exceed 40% of our total sales by 2014, up from about 31% today.

Third, we expect sales to our core customer base to grow, but sales to our outreach customers to grow at a faster rate.

And we expect earnings to grow at a faster rate than revenue through 2014, including productivity savings net of inflation of 120 to $150 million, including the restructuring of our York operations, and SG&A to decrease as a percentage of revenue.

So with that, I'd like to just open the call up to your questions.

And I want to say again thank you for taking the time this morning.

We certainly appreciate your interest and your investment in Harley-Davidson.

(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 from Wells Fargo Securities.

Your line is now open.

Thank you.

Keith, could you just clarify one of the last statements you made there, the 120 to $150 million, if you could just maybe go through that again and expand on that last statement.

And was that inclusive or exclusive of what you're looking to do at York?

That is inclusive of the restructuring at York and it's net of inflation.

Okay.

So over $120 million to $150 million, is that -- so that's you're starting post the savings that you already outlined with the restructuring, again, through '14 or is that everything collective?

Yes, that's post.

Okay.

So the $140 million to $150 million, then add another $120 million to $150 million on to that is what you're saying.

Yes.

Thank you.

Sorry for not making that more clear.

Okay.

Thank you.

And then the other question is on -- it appears that you all are very comfortable with the sell-through that you're seeing right you now or the levels of inventory in the channel, you narrowed your guidance to the upper half of the range.

Should we anticipate any on a go-forward basis your production to basically match the sell-through that we're seeing?

Well, we've given for the remainder of this year or beyond this year, Tim?

Beyond this year.

If you just take looking forward, just as a general rule, do you want to expand basically any supply demand gap that's there or do you want to kind of keep it where it is and let that fluctuate according to you how your sell-through goes?

By the end of the year, we are very comfortable with where our inventory levels are and they will decrease between now and the end of the year as we take our production down.

As we move into 2010 we will look to keep that inventory level tight throughout 2010.

Okay.

Okay.

And then maybe a question for Larry or whoever wants to take this.

Given what you outlined with HDFS, assuming no further improvement nor deterioration in the current economic environment, would you anticipate your reserves -- what point would you anticipate the level of reserves that you're taking to moderate or maybe turn positive?

Tim, I think really probably two things would be drivers of that.

One is obviously we're looking at unemployment very closely.

So if we start to see improvement in unemployment, I think that's going to have a positive impact on our portfolio and then the required reserve levels.

And I think the second thing, as I talked about is we made significant changes to our underwriting criteria, beginning 2009.

We're seeing positive trends there.

As that -- as those new assets become a greater percentage of the total portfolio, over time -- today they are not that big a percentage of the total portfolio, but over time as they become a bigger percentage, that should drive better credit performance and lower reserve requirements.

Okay.

Great.

Great.

Thank you, gentlemen.

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

Baird.

Your line is now open.

Good morning and John, congratulations on your new permanent role.

Don't think I've been a part of a quarter packed with more information than this.

I'll try to be brief.

With respect to your negotiations in York, can you give us an update on your upcoming events as the year concludes?

We are in -- we are currently in negotiations with our labor union and I would characterize those as just being sort of in the beginning phases.

And we do expect and will have an answer and a decision on York sometime between the first and 31st of December.

And whereby we will either be staying in York and restructuring that operation in a way that will be sustainable for our Company going forward, or we will then move the operations to another location.

Thanks.

And I think big picture, a lot of investors are trying to get at the earnings power potential of Harley-Davidson with so many changes being announced here.

Beyond the charges and the divestitures, can you give us a sense for the Harley-Davidson going forward once we get to a normal level of production and growth, and a normal level of margin?

Maybe just frame the earnings power potential of the Company.

Well, I'll let John start off and then I'll probably come back in on that one a little bit later.

Yes, Craig.

Through the last numerous years, we've had very high margins and a very powerful underlying business in our HD motor Company and today's announcement is basically to redirect focus to that Company and continue to drive forward.

We've got plans in place through the restructuring, which we had talked about before with the 140 to $150 million in place.

And now as we look forward to 2014, another $120 million to $150 million, which will bring back our margins in a large respect.

So we'll continue the focus.

And we feel great about where we're at with the brand and the consumers' liking of the brand.

We're working through a rough spot here in the economy and we see great things as we move forward with Harley-Davidson.

I would just add that we do have a very comprehensive, strategic plan in place that's been developed with a whole lot of input from all of our employees in a very collaborative manner.

It's -- I mean, I guess I would characterize as a not overly aggressive if you will, but we feel very, very good about our ability to deliver the plan and as John mentioned, the upside of the results that we expect to see.

Is there an operating margin goal, maybe 250,000 bikes that you think is achievable in the period you describe?

Craig, we feel great about the future but we can't get that specific with you at this time.

Okay.

Fair enough.

And then just last question on HDFS.

Any plans at all to add a third party underwriter to that structure?

Thank you.

As John mentioned or Larry in their comments, we are actively engaged in discussions around what are strategic options for that business.

And certainly there's a wide range of what those might look like.

But that's certainly part of the consideration.

And as I mentioned in my comments, we are focused on the profitability of this business.

Got it.

Thank you.

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

Your line is now open.

Thanks.

Had a couple questions.

You mentioned that potential cost savings including York restructuring or potential move to another location.

And I wonder if you could sort of talk about timing of that because announcing something in December in the middle of your modeling your production would seem to make -- could potentially be fairly disruptive to 2010, if you were to move to another location.

And I wonder if you could just put some color around should we be thinking of that as a two year time frame if you were to move from York to another location.

So those cost saves would be like a 2012 impact?

Just to sort of get some more context with that number you threw out there.

And then I also had a question about your continued margin guidance for the year.

You've talked before about fixed cost, 25% or so of your cost of goods sold.

So that would imply much higher margins than the margin guidance you're giving even if we add back the -- factoring in the charges that you're talking about in Q4.

Just a calculation of your fixed cost would imply much higher gross margins than what you're saying as was the case in Q3, which you delivered today.

And that's a (inaudible) benefit from mix or any other things that would help the margins even more.

So I'm just trying to get a sense of why your margin guidance is so low given that your fixed costs are only about 25% of COGS.

This is Keith.

Let me give you sort of an answer to the first part of the question around York.

I'll let John jump in here on the margins.

We didn't really to be honest with you hear part of what your last question was so we're sort of struggling here a little bit with that.

But in terms of York, clearly, if there's a decision made that we have to move the facility, there's no denying that that would be disruptive.

We believe that we have contingency plans in place to minimize that disruption.

Again, this is a decision that's being made for the long-term health and well-being of our business, so we cannot get derailed here with the short-term concern.

And it is a concern but, again, we've got contingency plans in place to deal with it, get through it.

Our hope, and we stated this publicly, our hope and desire is that we will be able to stay in York because of the minimization of that disruption.

But we can only stay there if in fact we have a plant in a facility that is sustainable for the long term for this business.

Under no other conditions.

So the time frame thinking that that's maybe something, just 120 to $150 million you put out there, the context of that is maybe like late 2011 or 2012, that's not something we should be thinking about.

It depends.

It depends if we stay in York or if we don't stay in York.

If we stay in York it will probably be sooner than later.

If we leave York it would probably be later than sooner.

It will be in that time horizon that we talked about.

We'll lay that out Robin, when we make the decision and expect a report on it in December.

And then on the margin guidance?

Let's talk a little bit about the third quarter margin and then we'll talk about the impacts on the fourth quarter.

Third quarter, we had a margin of 33.1%, which was down 0.9 of a percentage point from the previous quarter.

So feel very good about the strength of the margins and how well they held up, especially with volumes being down, shipments being down in the quarter of 27.4%.

In the quarter, margins were aided by favorable mix, which we had talked about last quarter and in addition, favorable raw material costs, partly offset by unfavorable currency.

And again the manufacturing side which is very much driven by the lost absorption of being down the 27% in shipments.

And again, productivity continues to perform very well in our organization.

As we look forward to the fourth quarter, what we are is holding to the guidance of down 30.5 to 31.5%.

This is going to imply with volumes being down approximately 50% in the fourth quarter, there will be a fair amount of loss absorption.

We'll pick some of that up again with expectation of continued productivity.

But in addition to that we will be putting in $60 million of lower revenue as we exit our Buell business.

And that will come in the form of lower revenue and higher costs as we write down obsolete inventories and move the dealer or help the dealers move the bikes in dealer inventory.

So with that, we expect fourth quarter margins to be down significantly from the prior year, but falling in on a full year basis into our 30.5 to 31.5% range.

So sounds like a lot of the same factors in Q3 impacting Q4 which is what it looked like to us.

That's great.

Just the very last question, then.

Your comments about focusing on the core products and your concern about profitability.

When you're talking about HDFS, it seems like you could potentially maybe be interested in selling HDFS, you've done previously with your credit card programs in the spirit of the focus that you're talking about.

Is that something being considered?

Again, Robin, and I mentioned this just a little bit ago, we are currently engaged in a process of looking at all options for HDFS and we're committed to -- we're committed to having both retail and wholesale financing for our customers and our dealers.

We understand the issues around HDFS and we're looking at a broad spectrum of options in order for us to be able to ensure the stability and profitability of that business.

Okay.

Great.

Thank you.

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

Your line is now open.

Good morning.

I think most of my questions have been answered.

A couple just clarification questions, I guess first on the third quarter.

Obviously, a number of different charges.

There was the 18.9, the 14.2, and then whatever is left in the restructuring number there.

I guess the question, if we were going to add those numbers back it seems like the tax treatment of some of those may be sort of different than others.

Where we would get to if we added those three numbers back on an EPS basis from your $0.11 GAAP number?

I can't go back and figure out what EPS would or wouldn't have been.

We've got earnings per share for the quarter of $0.11.

Clearly, that was impacted by two, probably three big items.

One is the $18.9 million non-deductible goodwill charge, charge-off for MV Agusta, $14.2 million asset impairment at Buell.

And then, again, the other big piece of our earnings for this was at HDFS, which was $28 million of higher loss provision for future losses.

I guess the question then is -- $18.9 million doesn't affect your taxes one way or the other.

The 14.2 --

It affects the tax rate.

It affects the tax rate.

But you don't -- it's not deductible, right?

Correct.

If I was going to add that back, I wouldn't adjust that for taxes.

The 14.2, would I adjust that for taxes?

That is tax deductible, correct.

Yes.

I guess then what tax rate would I use?

It wouldn't be the 60 plus percent tax rate that you reported for the quarter, right?

What's sort of the -- I guess one of the questions I'm getting at -- what is the go-forward tax rate for you guys once all the MV Agusta stuff is behind you?

Well, I would expect a more normalized tax rate, but we're not giving guidance on 2010 tax rate.

And I appreciate given the fact that our income has fallen especially the last couple quarters, and we've had some non-deductible items and one-time items for the year, it has pushed our tax rate up quite significantly.

Actually started in the first quarter with a $22.5 million NOL that we had to write off when the State of Wisconsin changed its laws.

So that's driven our overall tax rate up but we would expect a more normalized rate as we go forward, but absolutely no guidance has been provided at this time on 2010 tax rates.

That's fair enough.

Is there anything remaining after MV Agusta that would drive it above sort of 2008, 2007 levels?

Is there something that I'm missing there that would continue to make it higher than those levels?

I can't provide any information on that at this time, Jim.

Okay.

Fair enough.

In terms of HDFS, I think it's the end of the year, beginning of next year, you need to bring the securitized receivables on to your balance sheet.

Is that a fourth quarter event or a first quarter event and do you expect any significant charges associated with that?

Jim, you're referring to what previously was FAS 166 and 167.

The accounting standards have changed, requiring off-balance sheet trusts to be brought back on balance sheet and we will do that as of January 1st, 2010.

What we expect to have happen we're still analyzing the impacts of it is basically we've got special purpose trusts the receivables and debt.

The receivables will come back on our balance sheet and be recorded as an asset as a held for investment receivable, and the debt will come back onto our balance sheet as well.

What will happen and the way they'll be put back on is as if those were always run through our held for investment from the start of those loans all the way through.

So what we'll do is a calculation, determining where that was, and an adjustment based on what was going to get put back on will fall into retained earnings.

That's our understanding of how it will work.

So there will be no P&L impact at this time; our belief is no P&L impact.

Great.

And then just can you give us the topline and EBIT impact of currency in the quarter?

Yes.

Currency in the quarter was roughly $14 million unfavorable to EBIT, and revenue was a benefit of about $2.5 million.

Excellent.

Thanks, guys.

Thank you.

Your last question comes from the line of Edward Aaron from RBC capital.

Your line is now open.

Hello, Ed?

Hello?

Can you hear me?

Hello.

Yes, we can hear you.

Thanks.

Sorry about that.

Just wanted to follow up on HDFS, if I may.

Just struggling a little bit to get my head around the change in the expense structure of that business, which was bigger than I would have expected given that the funding costs are relatively low, incrementally from where they were a quarter or two ago.

And there seems to be some signs of stability especially on the delinquency rate.

Can you help me understand where the real change came from relative to last quarter?

While you say the expense on the one hand is relatively low on the new securitizations, we're carrying right now a lot of cash on our balance sheet.

And so, therefore, you have interest expense but you don't really have a related earnings stream from that.

So certainly that is a piece of it.

And then as we discussed, the higher provisions relate to a greater incidence of loss.

And also we saw declining values of repossessed motorcycles in the third quarter.

And as we're coming out of riding season, our expectation is obviously that we're looking at a couple of tough quarters on those recovery values and felt it was very prudent to take up those loss provisions in this quarter.

As far as the actual operating expenses of the business and the quarter, those were relatively flat.

Okay.

And then just a second question, looking out to 2010, I know you're not prepared to give any guidance yet.

But just to follow up I think it was Tim's question earlier, whether you expect to expand or contract supply in the channel.

What's the approximate rate of retail sales that one would have to assume for you to neither build nor decrease inventories next year in the US?

It's too early for us to provide any -- well, one, we don't provide any retail sales guidance at all.

And we haven't provided any shipment guidance.

But again, we're managing the inventories very aggressively and in line with our demand.

So you feel like at the end of the year, inventories will be where you would consider to be appropriate levels, is that fair?

Yes.

Okay.

Thank you.

Your last question comes from the line of Rod Lache from Deutsche Bank.

Your line is now open.

Good morning everybody.

Good morning.

I had a couple remaining questions.

First, on the $120 to $150 million of net additional savings, I think you said that that excludes SG&A savings.

So I was hoping you could comment on how you think about the right level of operating expenses for your business while kind of balancing these efficiency gains and the growth initiatives that you highlighted.

You're correct that SG&A is not included in the 120 to 150.

We've taken a lot of actions at the Company to reduce and size our SG&A in line with our business that we expect going forward.

And we've reduced SG&A spending throughout the organization and we feel it's at a level, based on where we're at to provide us the funds that we need to continue to invest in the brand, and in particular, our outreach customers, our international investments as well as new product development.

So we're feeling comfortable that given what we see the business going forward, that we've got the right level of spending.

So should we think about the level of spending that you've got today just on an absolute basis as being what you would sustain or are you thinking that there's kind of a decline as a percentage of sales, as sales recover?

I'm just not clear on what you're suggesting the opportunity would be on SG&A.

Well, certainly as we go forward and as we grow, we would expect SG&A to be a smaller percentage of revenue.

We do expect that SG&A will grow as we grow and it will grow with us but at a slower rate than revenue.

Okay.

And just also to clarify on HDFS, you mentioned $41.4 million increase in provisions.

Was that the provisions in the quarter or did they rise by that amount?

And can you maybe just give us a few other stats there, you know, what were the charge-offs in the quarter, what was the allowance?

Go ahead, John.

The $41 million has two pieces to it; $28 million, as Larry had mentioned, is an increase due to our expected or due to higher loss incidence rates as well as lower recovery values.

Another piece of that is about $14 million that is due to I believe -- I'm sorry, $13 million that's due to the fact that we've got more on balance sheet than we did a quarter a year ago.

And that's all the receivables that we brought on and the securitization markets went into stall last year.

And if you remember last quarter we brought about $2.4 billion of receivables back on so that's what makes up the $41 million.

Okay.

So that was the total provision in the quarter, am I correct?

Yes.

Okay.

And what were the charge-offs?

And I'm sorry, Rod, just to clarify that was for retail.

That was just retail.

Okay.

And what were the charge-offs in the quarter?

Rod, are you asking about losses?

Yes, the charge-offs net of recoveries that you disclosed in HDFS.

We don't provide that specifically.

Make sure I'm understanding.

The year-over-year quarter difference for retail loan portfolio was an increase of $41 million.

Right.

Let me ask it this way then.

What was the balance, what was the allowance for credit losses at the end of Q3?

Why don't you get back with Amy.

I don't have that right in front of me.

Give me a call, Rod.

All right.

Thank you.

Thanks, Rod.

I'll call you.

Actually, we do have it.

It's about $150 million.

$150 million.

Yes.

So just to -- relative to your receivable balance right now, you're talking about a 2.9% allowance as a percentage of your net receivables.

I guess I'm just trying to kind of correlate that with your loss performance.

I know that your losses are pretty low on the wholesale or at least they have been running at a relatively low rate and that's close to 20% of your book.

Should we be thinking that you're currently provisioning for something like a 3.5% loss rate on retail?

Is that where you're thinking things are trending right now?

Yeah, I think things are trending probably a little bit north of 3% because you have to break that total reserve down into the retail and the wholesale component.

Obviously retail's going to be high, wholesale's going to be lower and if you say we're at 2.7% year-to-date on losses.

And obviously we're going into a fourth quarter, you would expect to finish the year probably somewhere a little north of 3% and what we provided for here in the third quarter reflects that.

Okay.

Just it seems like your charge-offs are relatively low in order to come up with that $150 million of balance.

Maybe I should just follow up with you after the call.

But if you had $114 million allowance and then you increased it by $41.4 million, and you're only down to $150 million, there's just not a significant uptick in your charge-offs.

Is there anything that you would attribute that to?

No, I think as we said, we've seen an increasing trend in charge-offs in the retail business.

We see ourselves coming into probably some tough winter months in terms of charge-offs.

And then as John mentioned, a much smaller component obviously is the increase in wholesale and we manage through a few challenging situations in the dealer network.

I'll follow up after the call.

Thanks.

Thank you for your time this morning.

I appreciate your interest and your investment in Harley-Davidson.

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