Harley-Davidson Inc (HOG) 2009 Q4 法說會逐字稿

Good morning, my name is Sara and I will be your conference operator today.

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

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

You may begin your conference.

Good morning, and welcome to Harley-Davidson's fourth quarter 2009 conference call.

Today's conference call will be webcast live on harleydavidson.com and supported by slides that can be accessed by clicking on Investor Relations, then events, and announcements.

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

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

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

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

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

Keith?

Thank you, Amy, and good morning, everyone, and thanks for joining us on the call.

We've got a lot of ground to cover this morning, so we'll get right to it.

As you saw in the press release today, Harley-Davidson reported its first quarterly loss in many years with full year revenues and profits decreased from last year.

These results were not surprising.

In fact, they were as we had expected because they were the direct result of the economic climate and the decisive actions we took throughout the year, actions to deal not just with the recession, but to position our company for the future through the go-forward strategy that we unveiled in October.

We firmly believe the short-term pain that Harley Harley-Davidson is going through as a result of our actions is worth the longer-term gain that we expect to see as a result and we have confidence that we're doing the right things to manage our business prudently and effectively in this economy and to restore Harley-Davidson to greater profitability going forward.

So let's take a look at 2009 and our actions and then I want to turn my attention to what lies ahead.

When I joined Harley-Davidson in May, we set out two key priorities for our team.

First was to continue to take the actions necessary and execute effectively on our strategy to manage the business in the current economic environment.

At the same time, it was even more essential that we develop a clear, comprehensive and powerful strategy to maximize our opportunities for growth and profitability going forward.

So looking at our actions to execute effectively the current environment, we reduced shipment volumes significantly to align our inventories, we embarked on major restructuring of our production operations, we obtained funding for the lending activities of HDFS and positioned HDFS for solid footing in 2010, and launched our go-forward business strategy to deliver results by focusing on the four key colors of our strategy, which are growth, continuous improvement, leadership development, and sustainability.

Under our strategy, we are focusing our investment behind the uniquely strong Harley-Davidson brand as the most attractive path to sustained long-term growth through products and experiences, global expansion, outreach to new customers, and our commitment to core customers.

As we look at the year in front of us, we expect 2010 to continue to be challenging.

Our strategy and the performance goals that we have laid out through 2014 are based on an appropriately prudent approach and our growth targets will take hard work and intense focus to reach, but we believe they are eminently achievable and appropriately conservative.

But even in an environment where consumers are more practical and cautious, we believe that people still dream about the Harley-Davidson experience and everything we see indicates that the brand is as strong or stronger than ever, both in the US and globally.

So we will continue to solidify our position and execute on our go-forward strategy, including bringing exciting products to market like the 48 that we are introducing today, and which like the other dark custom bikes is intended to reach new young adult customers.

In addition to our focus on growing core and outreach markets in North America, we will also continue to focus on expanding the brand in international markets.

Harley-Davidson's brand appeal around the world is as strong or stronger than ever.

And so in summary, our fourth quarter and full year 2009 results are a direct reflection of the economy and the actions that we took to manage the business prudently and effectively in the current environment and more importantly for the future.

While we expect 2010 to be another challenging year for the industry and for Harley-Davidson, the Harley-Davidson brand has exceptional strength and we are highly focused on continuing to grow the reach of our brand around the world.

And we have a great conviction that our go-forward strategy is focusing our company in the right direction and that we are executing our strategy with appropriate urgency.

So with that, I would like to say thanks and let me turn it over to John Olin for numbers and the details.

Thanks, Keith.

This morning I'll discuss some of the details around our financial results, provide an update on restructuring activities, and discuss the expectations for 2010.

Through the fourth quarter, Harley-Davidson Inc.

revenue from continuing operations was down 40.2% and we recognized a loss for the first time in recent history.

This loss was expected as a result of ongoing restructuring activities, costs associated with exiting the Buell product line, and the impact of shipping 53% fewer bikes than the fourth quarter of last year.

While the shipment reduction negatively impacted the quarter's results, the positive news is that our US dealer network had a year end inventory level that was significantly lower than last year and we believe appropriate for the current environment, which I'll talk more about shortly.

Moving on to Slide 11, retail sales of Harley-Davidson motorcycles were down worldwide during the fourth quarter and the full year 2009 compared to last year.

A few points to note about retail sales -- in the fourth quarter, our worldwide retail sales rate was flat compared to last quarter.

In international markets, we saw another sequential improvement in retail sales rate and after being down for three consecutive quarters Europe was up slightly in the fourth quarter.

Regarding market share, our US market share decreased by 4.8 percentage points in the quarter, as we lapped a strong fourth quarter 2008 share increase of 4.4 percentage points.

Also driving the decrease in fourth quarter 2009 market share were strong sales in the performance segment due to significant price discounting during the quarter.

For the full year, our market share was up 7.9 percentage points versus 2008.

On Slide 12, our US dealer networks year end retail inventory was down 18,000 units compared to last year.

It was the third consecutive year we significantly reduced dealer inventory and we remain committed to the task of balancing supply in line with demand.

As retail conditions remain challenging, we continue to execute our plan to help protect the integrity of our dealer network.

In October, we estimated that 15 to 30 additional dealer points could close over the next six months.

During the fourth quarter, 14 dealer points closed, so during 2009, a total of 28 dealer points closed.

We continue to expect approximately 15 additional dealer points will close in the next three months.

On Slide 13, you will see wholesale shipments to our dealers for the full year were down 26.5% to 223,000 units.

Of that total, Sportsters represented 21.2% of shipments, just slightly more than 2008 full year total.

Mix shifted between the custom and touring families compared to 2008, primarily driven by the new tri-glide models.

And shipments to international markets increased to 35% of the total.

On the next slide, you will see revenue in all categories of the motorcycle and related product segment was down in the fourth quarter and the full year.

A 45.6% decrease in Harley-Davidson motorcycle revenue during the fourth quarter was primarily a result of lower shipments, partially offset by favorable shipment mix, and favorable foreign currency exchange.

P&A and general merchandise revenue were down less than motorcycle revenue.

Both were an important part of our growth strategy, and we are excited about the prospects of these high margin businesses in the future.

For example, the Fit Shop is a new P&A concept that enabled sales people to show customers how handle bars, seats, controls and suspension affect riding position, comfort and confidence.

General merchandise just launched a new Pink Label Collection, a portion of the proceeds will support the Breast Cancer Network for Strength.

Both support our strategy to reach a more diverse rider base.

As retail sales, shipments, and revenue have been down due to the recession, we have been intensely focused on improving our cost structure and structuring the business to be stronger and more profitable in the future.

Throughout 2009, we announced significant restructuring efforts that will result in reduced excess capacity, and increased focus on our core operations.

During the fourth quarter, we made the decision to consolidate our three-vehicle test facilities into one location, further streamlining operations.

The estimated total cost in savings associated with our 2009 restructuring activities are summarized on Slide 15.

During the fourth quarter, we shut down Buell production.

Financial results related to Buell will continue to be reported as a component of income operations.

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

In 2009, we recorded approximately $116 million of the estimated $125 million in costs related to exiting Buell.

On Slide 17, you'll see our total 2009 restructuring costs were $221 million, which exceeded our estimated range of $190 million to $210 million, mainly driven by higher Buell restructuring costs.

However, total Buell exit costs are still expected to be $125 million, as there was favorability in the gross margin impact associated with the Buell product line exit.

Restructuring savings were $91 million, slightly above the high end of our expected range.

We now expect total restructuring and impairment costs will be between $430 million and $460 million through 2012 and we continue to expect total cumulative annual savings associated with our restructuring to be between $240 million and $260 million.

Expected costs and savings by year are provided on the slide.

On Slide 18, you will see gross margin in the quarter decrease to 20.3% of revenue compared to last year.

As expected, gross margin was negatively impacted primarily by lower shipments and Buell exit costs, but also by unfavorable manufacturing costs due to lost absorption.

Overall material costs, favorable mix, and higher than expected productivity provided some favorable offset.

Full year gross margin was 32.3% of revenue and we continue to be very pleased with the gross margin strength of our core business, despite volume declines of over 26% from 2008.

On Slide 19, operating margin as a percent of revenue for the fourth quarter was a negative 29%, which was impacted by lower gross margin of $254 million, restructuring and asset impairments of $120 million, and higher SG&A expenses.

Full year operating margin decreased to 7.3% as a result of lower gross margin, and restructuring and asset impairment charges.

SG&A finished the year down by $91 million, driven by an estimated $83 million in restructuring savings.

Now moving on to our financial services segment, during the quarter, HDFS recorded an operating loss of $7.1 million, an improvement of $17.8 million compared to last year.

The main drivers of this improvement were income from past off balance sheet securitizations increased by $18.1 million during the quarter, impairments to retain securitization interests for the fourth quarter 2009 were $9.8 million compared to $25.3 million impairment in the fourth quarter of 2008.

Provision for retail loan losses increased by $19.9 million during the quarter, primarily due to a higher balance of held for investment receivables versus the prior year.

And the provision for wholesale loan losses decreased by $7 million relative to the fourth quarter of 2008.

This decrease resulted primarily from lower outstanding receivables due to reduced motorcycle inventory in the dealer network from a year ago.

It is encouraging that our credit risk assumptions in both the retail and wholesale portfolios did not change significantly from the third quarter of 2009.

The remaining $11.1 million of improvement is primarily the result of a fourth quarter 2008 provision for lower cost market adjustments on held for sale receivables.

There is no comparable item in the fourth quarter 2009, as these receivables were reclassified as held for investment at the end of the second quarter 2009.

On a full year basis, HDFS incurred $118 million loss, largely due to $101 million of one-time items recorded during the year.

In October, we said we expected HDFS to incur losses in the next couple of quarters due to seasonality, lower recovery values, and higher costs of debt.

Since then, HDFS continued to access the debt Capital Markets at relatively attractive cost of funds and repaid the $600 million, 15% inner company loan to Harley-Davidson, Inc.

HD Inc.

will hold the debt and will incur related interest expense.

Repayment of this debt to HD Inc.

positively impacted HDFS's fourth quarter results and going forward, we believe HDFS's cost of funds will be more reflective of current market interest rates.

We expect the new interest rate structure will assist us in moving to profitability in 2010.

Now Larry will review HDFS's operations and portfolio performance.

Thanks, John.

During the fourth quarter, HDFS originated $284 million in retail motorcycle loans, down 25% compared to last year, primarily due to lower retail sales of Harley-Davidson motorcycles in the US.

For the full year, HDFS originated $2 billion to retail motorcycle loans, down 29% compared to 2008.

HDFS retail market share of new Harley-Davidson motorcycles sold in the US was down nearly five percentage points to 48.8% in 2009 compared to 2008, due to an increase in cash buyers and also due to competition, particularly in the prime rated customer segment.

At the end of the fourth quarter, of the approximately $4.8 billion of receivables that were classified as held for investment, $4 billion were retail and $863 million were wholesale.

We are pleased with the progress resulting from the significant underwriting adjustments we made in 2009.

We continue to see improved performance on early stage delinquencies and defaults for loans originated in 2009 compared to the prior year.

At the end of 2009, 80% to 85% of our new loan originations were prime compared to approximately 75% in previous years.

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

The impact of the recession and high unemployment continue to drive delinquencies and credit losses.

The 30-day delinquency rate for managed retail motorcycle loans at December 31, 2009 was 6.51%, up slightly over 2008.

Our increased collections staffing levels and modified collection strategies have enabled us to manage delinquency levels close to last year, despite increasing unemployment in the US.

Annualized retail credit losses increased to 2.86% for the full year in 2008(Sic-see press release) and were driven by a higher frequency of loss and a decline in the recovery values of repossessed motorcycles.

So in conclusion, as John mentioned, we continue to make significant progress in improving our liquidity position and reducing our cost of funds.

As we work through the winter months and given continued high unemployment rates in the US, we expect to continue to see higher levels of delinquent loans and retail credit losses in the near term.

We believe our underwriting criteria are appropriate and we will continue to evaluate them on an ongoing basis.

Now, let me turn it back to John.

Thanks, Larry.

One of the top areas of focus in 2009 was to obtain funding to support HDFS's lending activities.

During the fourth quarter, HDFS obtained $1.8 billion of funding.

Last quarter, we said we were engaged in reviewing our strategic options to find more diversified and cost effective funding in order to meet HDFS's goal of providing credit while delivering appropriate returns in profitability.

The process is progressing, as we continue our discussion with several institutions.

Realistically, we recognize that this is a challenge.

However, we remain cautiously optimistic that we can find additional opportunities to improve HDFS's funding profile.

In the meantime, we are pleased with HDFS's fourth quarter results and are seeing some positive signs as we move into 2010.

On Slide 24, we'll see our overall cash position and liquidity strategy.

We ended this quarter with $1.7 billion of cash and marketable securities.

This is a significant and welcomed improvement in liquidity from just one year ago, and we believe it's an appropriate level, given the uncertain economy.

Of the total $1.7 billion, HDFS ended the year with $489 million in cash after repaying HD Inc.

the $600 million it borrowed in February 2009.

Additionally, HDFS has access to approximately $2 billion of available liquidity through bank credit and asset-backed conduit facilities.

As of the end of 2009, we believe we have met HDFS's anticipated 2010 funding needs through our 2009 actions.

During the year, we expect to prefund our 2011 needs to the capital markets and by renewing a portion of the bank credit and asset-backed conduit facilities.

Going forward, our strategy will be to maintain a minimum of 12 months of liquidity and cash and/or credit facilities.

We will carry higher cash balances until we see stabilization and improvement in the economy, capital and credit markets, and our company's credit ratings.

We will continue to try to diversify our funding profile through a combination of short-term and long-term funding vehicles, reduce our reliance on the term asset-backed securitization market and continue to pursue all avenues to obtain cost effective funding.

Now, I'll review the remaining Harley-Davidson financials on Slide 25.

On a continuing basis, Harley-Davidson, Inc.

2009 revenue, net income and earnings per share were down compared to last year, mainly due to significant one-time items related to restructuring and asset impairment charges, and the reclassification of HDFS receivables during the year.

On Slide 26, I would like to highlight two items.

First, with regards to operating cash, despite the large drop in motorcycle shipments and the restructuring spending that we incurred, we were able to generate operating cash of over $600 million, which included a fourth quarter contribution of $215 million to our pension plans.

And second, our tax rate increased significantly in 2009 relative to 2008, primarily due to the one-time charge for Wisconsin tax law change and the non-deductible HDFS good will write-off, as well as the impact of reduced earnings.

In 2010, we expect the full year effective tax rate will be approximately 36.5% continuing operations.

We are proceeding with our plan to sell MV Agusta.

As a result, MV Agusta's assets and liabilities have been classified as held for sale and its financial results have been presented as discontinued operations for all periods presented.

During the fourth quarter, we wrote down the carrying value of MV Agusta's assets resulting in noncash charge of $53 million net of related tax benefits.

For the fourth quarter and full year, we recognized a loss from discontinued operations, the details are on Slide 27.

Now, I would like to talk about two important changes in our financial reporting.

First, in the first quarter of 2010, FAS 166 and 167 will be adopted and approximately [$1.9 million] of receivables and related debt will be brought back onto our balance sheet.

Adoption will also result in small adjustment to retained earnings.

Upon adoption, we expect to remain in compliance with all our debt covenants.

We will provide more details in the 2009 10-K.

The second important change to our financials also involves HDFS.

With the complexity and changing dynamics of the financial services business, we feel it is important for our stake holders to see more detail around our motorcycle and financial services segment.

Therefore, in the 10-K, we will begin providing consolidating financial information that will break down the income statement, balance sheet, and statement of cash flows for each segment.

So all in all, 2009 was a challenging year, but we are confident that we have taken the appropriate actions to restore greater profitability and drive long-term growth.

We expect 2010 to be another challenging year.

As a result, we expect Harley-Davidson motorcycle shipments in 2010 to be between 201,000 and 212,000 motorcycles, down 5% to 10% from 2009 as a result of two key factors.

First, we expect the global economies to remain challenging, with continued high unemployment and low consumer confidence in the United States.

Second, we expect continued price competition from other manufacturers, as they reduce excess inventories.

We also anticipate price competition at the local level, as retailers discount excess inventory driven by contraction of the dealer network.

In 2010, we will take a conservative approach to shipment volumes, as we continue to work with our dealers to aggressively balance supply in line with demand.

And when demand improves, we will be ready to increase production.

We expect gross margins to be between 32% and 33.5% for the full year, and capital expenditures are expected to be between $235 million and $255 million, which includes approximately $95 million to $110 million in restructuring capital.

As we put 2009 behind us, it is important to note that despite significantly lower volumes and restructuring spending, Harley-Davidson remains a very strong company with an incredibly powerful brand.

Our strength is evidenced by our solid gross margins and our ability to generate positive cash from the motorcycle segment in the challenging business environment.

We'll continue to take the necessary actions to manage through the economic downturn and execute our long-term strategy.

And now let's open the call up to your questions.

(Operator Instructions) And your first question comes from the line of Tim Conder from Wells Fargo, your line is open.

Thanks you.

Keith or John, could you break out the amount of restructuring charges, if you had to allocate them to cost of sales and then operating expenses for the fourth quarter, and then in your restructuring of the costs that you've outlined for 2010 the same way?

Do you want that broken out for the fourth quarter?

Just a rough allocation, fourth quarter or more importantly going forward -- how much of the restructuring would you anticipate would be related to cogs and how much to operating expenses?

Well, Tim, I have a slide on Page 17, we have the actuals, how they fit in for 2009, so 2009, the actual costs for the motorcycle segment was $221 million and that was 65% cash.

The savings was $91 million, and that was 91% SG&A, which equates to $83 million on a full year basis.

And then the slides that are posted that you'll have access to also go through 2010, 2011, and 2012, and give the amount of cash, as well as the split between SG&A and cost of goods sold.

But I mean on the savings, right?

But as far as the restructuring, how those will be flowed through, in your, again, it's reported that you show a total and then you kind of show how that's in the fourth quarter, but going forward, how do you expect that?

I guess another way to ask it, is the 33.5% gross margin guidance for the year, that does not include any restructuring charges at all, correct?

Correct, Tim.

All of the restructuring, anything that's classified as restructuring expense is broken out on a separate line out on the P&L, underneath SG&A.

So we've got the gross profit, selling, SG&A expenses, and then restructuring is broken out separately.

So there is no restructuring expense in the cost of goods sold or in the gross margin.

Now, what we did have in the exit of Buell, of the $116 million of restructuring expenses, $71 million went through the restructuring line, and there was another $45 million that's not classified as restructuring expense, but that money was necessary to move the product.

Basically it was to discount the product, as well as to take care of obsolete inventories.

That does go through gross margin.

Okay.

So we will have a one-time gross margin expense in 2009 of $44.8 million that we would not expect to repeat next year.

Okay, okay.

No, that helps.

And then on HDFS, it appears again that your delinquencies and your credit losses are kind of leveling out at the fourth quarter run rate.

Should we perceive that and from a reserve standpoint going forward, is that kind of a fairway to look at it?

I don't think we're giving forward-looking guidance here, but I would say that certainly we saw some stabilization and recovery values on repossessed motorcycles as we got into the last couple of months of the year, and certainly we're going to be watching that very closely as we get into next year.

As you remember, we had taken up reserve levels in the third quarter.

Based on fourth quarter performance, those reserve levels stayed fairly consistent with where they were at the end of the third quarter.

And related to HDFS, Keith, you guys have said, and John, that you're looking at diversifying your funding.

Also, could you look at other structures for HDFS while still keeping some of the ownership?

Could you maybe give us an update on that?

And besides being more transparent, which we thank you for at HDFS, is that also maybe a precursor to something that you guys may be looking at?

No.

Well, let me answer that, the second part first, Tim, one, a lot of this stuff is coming back on the balance sheet in terms of receivables and debt.

We think it's very important for everyone to see the separate businesses.

And certainly the high margin motorcycle business that we've got that has very little debt and very high margins and the investment returns or the returns on equity that we've gotten off our financial service business.

So we want to start to show the different dynamics of the business.

So that doesn't have anything to do with looking forward at HDFS from a strategic standpoint.

But what we have said a couple quarters ago that we were evaluating our options, our strategic options as it relates to obtaining a more diversified low cost funds for HDFS.

Our goal at HDFS has been to provide credit, while balancing appropriate returns and profitability.

And in that end, we've engaged an advisor and are discussing potential opportunities for several institutions.

At this point, we're still in the process, but we're realistic that it's a challenge.

There is no cookie cutter model out there that says here's the best way to transfer risk or to reduce lower cost of funds, but we're working on it as diligently as we can and we remain cautiously optimistic that we'll find opportunities out there to improve the funding profile.

But Tim, let's be clear.

We believe HDFS provides a strategic advantage to Harley-Davidson.

We also believe the company benefited from having HDFS this year, it benefited both the company and our dealers.

And any arrangement must be with the company's long-term interest at heart.

And that includes underwriting, long-term commitment, and certainly recognition of any of the value that HDFS brings to the organization.

Okay, great.

Thank you, gentlemen.

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

Your line is open.

Hi, good morning.

I had a couple of questions.

I guess firstly, the selling, administrative and engineering bumped up significantly this quarter sequentially.

I was just wondering if there was anything unusual in that number as we looked at the fourth quarter?

This is John.

Number one is full year basis, we're very pleased that SG&A was down $91 million, driven by $83 million of restructuring.

However, as you point out, SG&A was up in the fourth quarter and that was driven largely by increased warranty and recall costs, and we had several things happening in the quarter with that.

As you might remember, we had a recall of our FL motorcycles.

In addition to that, we did what we call a product program.

It's not a safety recall.

It's an item outside of warranty, but it's something that we believe is important to the customer and from a quality standpoint that related to tires for our touring motorcycles.

So there was a charge in there for that.

And then finally, our overall warranty rates were increased as we've seen some of our actuals come in a little higher than we expected.

John, do you have the aggregate amount that that impacted?

That will be broken out in the 10-K, Sharon, but it would be in the range of $15 million year-over-year.

In total?

Yes.

Okay, and then as we look forward into 2010, understanding you're embarking on all of the restructuring activities, I know you don't give selling, admin, and engineering expense guidance, but are you expecting to see consistent year-over-year improvement throughout 2010?

How should we think about that, as we embark on the year?

As mentioned, Sharon, we don't provide SG&A guidance.

However, when we look at the restructuring savings, again, we delivered $83 million of SG&A restructuring, and if you look into 2010, we are expecting to deliver additional restructuring savings in the SG&A line.

And we've given guidance on $135 million to $155 million, of which 70% to 80% of it will be SG&A.

Okay, and then I know you went over the Buell expenses, but there were a lot of numbers given out in the presentation.

Did I write down correctly that the quarter, there was $116 million in Buell expenses, and could you just remind me what the original expectation was?

And I know you said the full expectation hadn't changed, but maybe the timing had changed differently had indicated.

Yes, sure, Sharon.

What we said last quarter when we announced that we were exiting the Buell product line is we expected $125 million of exit costs.

That hasn't changed.

Those costs would hit in two lines of our P&L.

One in the restructuring costs and the other in gross margin.

As I mentioned before, the gross margin piece is to discount some of those bikes to clear the market.

During the quarter, $71 million hit in restructuring, so for the motorcycle segment, we had $221 on a full year basis.

$71 million of that was for restructuring at Buell.

And that was about $10 million higher than we originally anticipated.

However, the gross margin piece that hit in the fourth quarter was $45 million, and that was favorable in the same neighborhood as the unfavorability, so overall, the $125 million is on track.

However, restructuring piece is higher.

Okay, thank you.

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

Your line is open.

Good morning, everybody.

Can you hear me?

Hi, Rod.

Just another question on this operating expense, SG&A, and engineering.

It had been running at $190 million to $200 million a quarter.

And this $256 looks like a meaningful uptick, even adjusted for that $15 million warranty charge.

Could you just give us the sense of what we should be thinking going forward for the pace of SG&A, considering the head count reductions and savings you guys have achieved this year?

Well, a couple points, Rod, one is timing, and SG&A timing always comes into play.

So the fourth quarter is a little bit higher.

The other thing is, there may be a little bit of confusion because through the first three quarters, we had SG&A expenses for MV Agusta in there and they have now been pulled back.

But other than what we've provided as far as the productivity, or the restructuring savings going forward, I can't provide a whole lot more than that.

But the MV Augusta, if you're pulling that out now, I would imagine that that would lower the pace of that operating expense.

And looks like historically it's picked up maybe $5 million or $10 million in the fourth quarter.

But it is a little bit larger.

Is there anything else that you can point out as unusual?

No, nothing beyond the timing things that happen in any given quarter.

Okay.

I would suggest you look at the full year number going forward and, again, some of the restructuring savings that we expect to get next year out of SG&A.

Okay, and this year, you produced 223,000 bikes and you sold 243,000 and you talked about a 5% to 10% decline in production, but also this year you produced 8% or 9% fewer motorcycles than you sold.

So are you suggesting that you're anticipating a double-digit decline in sales next year?

Could you just maybe elaborate a little bit on that?

We don't provide any forward-looking information on retail sales.

What I can say, Rod, is that we ended the year where we wanted to be in the retail inventories in the United States.

We feel that we're at the right inventory level for the size of the business that we have and we'll continue to adjust going forward and we'll manage inventories very aggressively, or we'll manage our supply in line with demand.

Okay.

Your point, your point is valid.

I can't help you out more.

The bases are very different between our shipment base versus our retail sales base.

So that will have some play in percentages.

Right, but it just looks like accounting for that inventory correction, you have a pretty, either conservative or sort of pessimistic view on the outlook for sales this year.

Well, we believe that the 5 to 10 is an appropriate look, given what we see in the economy, and the price competition that we would expect in 2010.

Okay, and on the HDFS business, could you tell us what your allowance for losses was as a percentage of receivables in the quarter, and is it the same on a managed basis including the off balance sheet receivables?

Well, the allowance at the end of the quarter is $150 million, or about 3% of the on balance sheet receivables, pretty consistent with where it was at the end of the third quarter.

The provision in the quarter was about $31 million, and we had about $30 million in charge-offs so not a lot of change in that allowance balance.

Now, remember, on the off balance sheet, we don't provide a reserve per se.

What we do have is the retained securitization interest, and obviously we have underlying assumptions for credit losses related to that.

But that's entirely different.

Now, what John talked about in FAS 166 and 167, in the first quarter, those off balance sheet receivables will be coming back on the balance sheet and we will be providing a reserve against them.

Okay, and could you tell us what the book value was of HDFS and also what happens to the MV debt at this point?

The book value was in the neighborhood of 870.

And again, when you get the financial, the 10-K, that will be broken out, will be extremely clear.

I'm sorry, Rob.

What was the second question?

The MV Agusta -- debt, does that get classified as discontinued ops, or is that retained?

No, everything that's related to -- let me get back to you on that, Rod.

Okay, and just lastly, do you have the cash from operations from the industrial business from the motorcycle business specifically?

I know you said you were going to be publishing that in your K.

Rod, we're going to separate it all out.

Now you want it all now!

If the cash from the operating business was, is a range of $540 million of the $600, in the range, and that will be broken out in the 10-K.

Right, and I assume all the $117 of CapEx was in that business.

Yes, yes.

Okay.

Thank you.

And, again, I would like to say that certainly one of the indicators of a tough year, or positive indicator is the ability of the motor company to generate that much cash when we had net income of $70 million, is a tribute to incredibly powerful business model.

And that's net of your pension contribution and restructuring, right?

Yes, yes.

What was the restructuring cash this year?

I don't have that number.

Okay.

The overall restructuring expense is $221 million for the motorcycle segment, an additional $3 million at HDFS.

But out of the cash, we did have $230 million in pension contributions, $215 million in the fourth quarter.

Great, thank you.

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

Baird.

Your line is open.

Good morning.

If I could go at the shipment guidance question again, in the past you've disclosed whether you plan to ship more or less, or reduce inventory in the channel.

What's your view on that going into 2010?

I don't know if we typically provided that guidance, but right now, again, all I can say, Craig, is we ended the year right where we wanted to be.

We'll continue to adjust aggressively supply in line with demand.

We do expect shipments to be down, but we're not going to give guidance on where we expect to end the inventories in the dealer network.

You can be very assured that we'll be managing it or working it very closely.

Okay, thanks.

And what was the dealer point count at the end of 2009 and what do you expect it to be at the end of 2010?

The dealer count is on Slide 12.

It's 757 dealer points, which are main line dealers, as well as secondary retail locations.

We do not provide guidance as to that number on a full year basis for 2010, but what we have said is that in the next quarter, the first quarter of this year we expect to lose approximately 15, or to have approximately 15 dealerships close in the first quarter.

Okay.

Shifting gears to Buell, dealers that carry Buell will have excess working capital dollars.

How would you expect those dealers to allocate those dollars?

Do you have a product in mind that they might carry to fill that gap?

Yes, we got a Harley-Davidson brand that's the best in the world.

They are going to sell through their units, now, the typical dealership did not have a tremendous floor plan of Buells, but we certainly expect and hope that they would invest that money in the Harley-Davidson brand.

Then similar question, you're going to add I think over time, up to 150 international dealers.

To what extent is there a channel fill opportunity to get those dealers up to speed with inventory?

We don't break out what that would be.

And quite frankly, I don't know what that number would be.

You know, if you look in Europe, we feel pretty good about the dealer network.

We've got some dealerships to fill in here and there in Western Europe.

But when you look into moving into new countries, India will obviously have some dealer fill that goes in there, and then this year we expect to open up five dealerships in India.

So, as we look at some of the countries that will have distribution expansion and there will be some fill, but that's not a large percentage of the shipments by any means.

Internationally, we typically have what we call pipeline.

The inventory is sent to a warehouse and the dealers draw from it because typically the dealer shops are smaller and they keep 20-ish bikes on the floor and then when they sell one, they draw from the warehouse.

So there is not a lot to put in the dealerships.

Very good.

Thank you.

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

Your line is open.

Thanks.

I had a couple of questions on margins.

Your guidance in the last few quarters on gross margin have seemed very low and then you've beaten that guidance and it's not surprising, but trying to understand how to view your 2010 margin guidance, so I wonder if you could tell us a little bit about what surprised you in your fourth quarter gross margins that they came in so much higher than your guidance, which, again, seems very low, so what wasn't factored in your guidance that helped gross margin in the fourth quarter to be above that?

And then also, wonder if you could give us some sense of what your Sportster mix might look like in 2010, just given the production shutdown in 2009, trying to think about how that mix will look on a year-over-year basis?

And then another question after that.

Thanks.

Well, in general, Robin, we're very pleased with the overall margin strength that we've had in the company and we looked at margins, we were down a couple percentage points year-over-year, and taking out the Buell, the one-time items that hit Buell in the fourth quarter, overall margins for the year were only down 1.2 percentage points.

And again, we feel extremely pleased that the power of our ability to hold up gross margins, despite a 26% decline in shipments, specifically to answer your question, is that, yes, our guidance has been below where we've come in actuals and I think it's largely driven by the incredible productivity that the operations organization has generated.

I couldn't be happier with the organization and them buckling down and pulling forward productivity projects and refocusing on continuous improvement every day.

That's really what's been delivering more than what we expected.

In the fourth quarter specifically, a little bit of it was the Buell piece.

So we expected a larger cost in gross margin in the fourth quarter, and, again, as I mentioned, we got a higher cost in restructuring, but a lower cost in gross margins.

Yes, only that would have been 100 of the 300 basis points higher.

Then on the Sportster mix, can you address where you expect that to come in?

We don't specifically give mix out by family.

We, again, feel good about our overall inventories, but we're probably a little bit heavier on Sportster inventories at this point, but all in all, we feel real good about where the inventories ended the year.

I guess, without putting a specific number on it, can you just sort of make a general comment about the Sportster family, and how you think about that in terms of your long-term strategy?

I'm just trying to get a sense of whether we would see something different.

Obviously for 2009, the timing, production and the shutdown and all of that would be probably a one-time kind of thing.

Trying to get a sense of whether we see similar mix as we've seen the last 10 years or just sort of general comment like that, even if you don't put a number on that.

Yes, this is Keith.

We continue to see the Sportster be an important part of the lineup, you know.

Obviously we just announced today that we're launching a new model called the 48, which is another extension if you will of that line, sort of in the dark custom family, that's intended to reach out to younger riders.

We've had tremendous success with the dark custom line-up in terms of attracting young buyers to the Harley-Davidson brand.

Unfortunately, because of the economy the way it is and maybe some of the younger folks having more difficulty having access to capital or borrowing, I'm sure it's impacted it somewhat, but overall, we feel pretty encouraged and we continue to see that as just a very important part of our line-up going forward.

Okay.

That's helpful.

Thank you.

And then if I could, one final question in terms of gross margin going forward.

With the closure of Buell, could you quantify what impact on gross margins that would have if you didn't do anything else differently, just sort of what the year-to-year benefit to margin would be just from closing Buell, and then also trying to think about, you talked about York, I don't know if you've given the exact timing about when all of the cost saves would be in place in York -- I know your initial target talked about 2014 before the specific December announcement in York, so just wondering when you expect the full cost save in York to be in place by?

Okay.

With regards to Buell, next year, our margins we expect to be between 32% and 33.5%.

Buell will be a very small part of that.

We still have some Buells to sell through.

I don't know the impact year-over-year.

Buell had a lower gross margin, but it was a very small part of the overall business.

So I don't know the quantification of that, but I don't think it would be all that great.

With regards to York, we expect savings to start coming through in this year.

The bulk of the savings will be hitting in 2011, toward the back end of 2011 and certainly into 2012.

We've got some York restructuring still happening in the very beginning of 2012, but the vast majority of all expenses will be in the 2012 actuals, and again, you can see the rollout in the restructuring slides that we have given in terms of when we expect the overall savings and certainly York is a big driver of the overall piece.

Okay, great.

Thank you.

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

Your line is open.

Good morning.

Most of my questions have been asked.

I did have a couple more, though.

Just to ask a little bit more about the gross margin guidance for 2010, basically you're looking for flat, maybe even a little bit down to up a little bit, despite, you mentioned $45 million of the Buell stuff not repeating in 2009 and then the restructuring savings, which I think based on the math, is $30-plus million of restructuring savings that should hit the gross margin, what are the negatives that I should think about?

Obviously there's assuming down shipments, there's a little bit of deleverage there, but are there other negatives that get in the way of the gross margins not being a little bit better than what you're guiding to?

How should I think about that?

Well, when we look at the margins, you're thinking about it the right way, James.

Certainly productivity, which is made up of restructuring savings, and continuous improvement savings, partly offset by a loss absorption, so with shipments being down 5% to 10%, that would certainly be a negative.

And in any given year, we've got costs that inflate, inflation in the plans and so on and so forth.

But the bigger piece would be lost absorption on lower volumes.

Okay, and then two just quick housekeeping questions, it looks like you're no longer separating out corporate expenses as a separate line item.

Does that now show up in SG&A?

And then just in terms of interest expense, you kind of touched on this.

The interest expense was higher in the quarter.

Normally the majority of that is in HDFS, how should we think about that going forward?

The corporate expenses, yes, James, they are now in SG&A, and when you get to 10-K, we'll break out the two business segments.

The corporate expenses will largely fall in the motorcycle segment.

Okay.

But you're absolutely right, the way we're presenting it now does not have corporate expenses and we won't break out corporate expenses, but those expenses will be in the motorcycle segment when we break out in the 10-K.

That's at least part of the reason why the SG&A was a little inflated versus prior quarter, prior years.

Then how about on the interest expense side, should we expect the interest expense to continue at the ink level going forward at the current rates or how should we think about that?

Yes, we'll spend a minute on that.

As mentioned in the preamble that HDFS repaid $600 million of the high interest debt that we took out in February.

As you recall, in February, the company made the decision to borrow $600 million in order to continue to lend to our credit worthy customers, as well as to our dealers for floor planning.

The debt was issued at the ink level and the funds were pushed down to HDFS.

Because we've always managed HDFS as a stand-alone entity, which means we expect HDFS to fund themselves and we expect appropriate returns on their equity, it was done with the understanding that we pay the funds back when liquidity improved.

It was basically a bridge in a liquid market.

So in the end, the repayment of the (inaudible) debt does not impact our consolidated earnings at all, but it will more accurately reflect the economics of HDFS going forward.

Consequently, in the corporate, beneath operating income, or beneath EBIT, will be the income, the interest expense, which will be much higher year-over-year in 2010 because it will include the interest from the $600 million.

Great, and then just last quick question here, in terms of India, you got the emissions restrictions pulled.

Can you talk a little bit about the likelihood of getting the tariffs pulled and how you think about this market sort of the size of the market with and without the current tariff structure?

The only thing we can say about the tariffs, we're actively involved with all of our contacts in Washington and working to try to do what we can to get those either reduced or removed, but I think we feel good about the Indian market in general.

The excitement of the consumer there is at a high level.

You know, when you look at the recent auto show where we displayed, the interest in our product and our brand was just incredible.

So, we are in the process of setting up our first five dealerships.

We hope to have those executed, mid year timeframe, and we have high expectations for that market over the long-term.

Great.

Thanks, guys.

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

Your line is open.

Thanks for squeezing me in, guys.

Good morning.

So Keith, could you maybe just kind of talk about your forward outlook now versus 90 days ago, and the reason I ask the question is, the last quarter you tightened the 2009 production range toward the upper end of where you had it before, and then you kind of came in toward the lower end of that and guided production down for 2010.

I'm just wondering if your big picture view of the world has changed much in the last three months?

And then I had a couple other questions after that.

Well, not a lot.

I think as we've sort of indicated through the whole call, I think we tend to be somewhat conservative in our outlooks and I think that's because we have a lot of uncertainty around the consumer coming back into the marketplace here in the very near term.

I will tell you this.

If you set aside the economy and the uncertainty in the economy, I couldn't feel better about where we're at.

I mean we have accomplished a lot.

I can't even tell you how proud I am of the whole team here, not just here in Milwaukee, but throughout the whole, I think we've done a lot of the heavy lifting that needs to be done.

I think we've made a lot of the tough decisions that needed to be made.

I think we're putting a foundation in place that I certainly feel good about.

I think we all feel good about.

And so the outlook in that respect, I feel better than I did 90 days ago.

In terms of the economy and where the consumer is, I probably feel about the same.

Okay.

That's helpful, thanks.

Then I don't know if this is more of a question or comment just on the operating expense issue, but that line item in your P&L has been really very predictable in the context of a P&L over the last year or two has not been predictable at all.

And the surprise there was pretty significant this quarter and the explanation on the warranty, $15 million warranty, it can really only explain maybe somewhere in the neighborhood of a third of the Delta between what you reported and what I think the person could have reasonably expected how those numbers have flowed over the last few quarters.

It just seems still a little bit difficult to reconcile.

Anything that you could do to help us understand that, I think would be very helpful.

And then the last question, you mentioned being comfortable with the US dealer inventory levels.

Do you feel the same way about international?

Again, going back to the expense, I think that you should look at it on a full year basis.

And again, we're right where we expected to be and pleased with our ability to take out a fair amount of expenses on a full year basis.

International inventories, we feel fine with.

We've always felt pretty comfortable where we are.

Again, the distribution system is a little bit different, but we feel very good.

We're ready to service those markets.

Okay.

So if you're comfortable with where the turns are, on US and a worldwide basis, I know you don't want to talk about retail sales assumptions, but by definition, doesn't that, doesn't that imply something that's down at least in the kind of mid teens range in terms of retail sales in 2010?

I'm sorry, Ed.

I can't give any forward-looking information on retail sales.

Always worth a shot.

Thank you very much.

Thank you, Ed.

And thank you for your time this morning.

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