Harley-Davidson Inc (HOG) 2010 Q1 法說會逐字稿

Good morning.

My name is Sara, and I will be the conference operator today.

At this time I would like to welcome everyone to the Harley-Davidson first quarter 2010 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.

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

Amy Giuffre.

You may begin your conference.

Thank you, Sara, and welcome to Harley-Davidson's first quarter 2010 conference call.

Today's call is being webcast live on Harley-Davidson.com where you will also find slides containing supporting details.

The slides 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 will 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'll open the call for your questions.

We ask that each caller ask only one question, and we appreciate your cooperation.

Let's get started.

Keith.

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

As we noted in our earnings release, we are making good progress on a number of fronts with some encouraging directional improvements.

We recorded earnings of $0.29 a share from continuing operations which are the best earnings we have posted since last year's first quarter.

Worldwide dealer retail sales of our motorcycles declined 18.2% in the quarter compared to the first quarter of 2009, and this was the smallest quarterly year-over-year decline since the last year's first quarter and the rate of decline lessened throughout the first quarter.

We returned Harley-Davidson financial services to profitability with operating income of $26.7 million.

Given all the difficulties of the past year this is especially welcome news that reflects extremely well on the team at HDFS.

We are on track with our restructuring activities including the transformation under way at our York, Pennsylvania factory.

We believe dealer inventory is an appropriate level in aggregate for our current market and our expectations for the year.

Managing supply in line with demand will continue to be a priority for our Company.

We are moving full speed ahead with our go-forward business strategy.

Let me say thanks at the outset to all of our employees, dealers, and suppliers for all the hard work and efforts to deliver the results that we are seeing.

There is no doubt that we still have a long way to go, and it will continue to be a bumpy road on a number of fronts given the uncertainty that remains in the economy and ongoing consumer caution.

Still, it is good to see the progress that's occurring as a result of the actions that we put into motion last year to strengthen Harley-Davidson and to grow the reach of the brand.

Our entire team is moving with great purpose and speed as we implement our go forward business strategy with a focus on global growth and continuous improvement, so let me take a couple minutes to highlight a few of the things that are unfolding through our strategy and contributing to our momentum.

Like last year's Iron 883 motorcycle the new 48 that we introduced this January is getting great traction.

The 48 is the latest in our dark custom series of motorcycles designed to appeal to young adults and in particular we're having a hard time keeping it in our dealerships.

We are seeing good results from two marketing programs that are currently under way.

Our competitive bike exchange has generated a marked increase in trade ins from competitive bike owners with many of them moving over to one of our touring bikes.

Once more, this program is succeeding in one of its main objectives which is to let people know that our dealers are taking in competitive trade-ins.

The ride easy guarantee is exceeding its target goals for selling the remaining noncurrent model year new motorcycles.

In March women's garage party month attract the more than 25,000 women to dealerships to learn about and get more comfortable on our bikes.

Dealers enthusiastically embraced this program holding some 450 garage parties, and many of the women attending are enrolling in a rider's edge new rider course and anecdotally dealers are reporting a positive sales impact.

We are reinvigorating our customer experience and events in a number of ways.

At Daytona bike week last month we moved our primary show venue from the Convention Center to a street event in the heart of the action across the street from the dealership.

We repositioned our demo rides program at Daytona to reach a more competitively focused audience and conducted more than 8,300 demo rides during that bike week.

For the first time even non-riders could experience the feel of a Harley for themselves on stationary dynamometers.

45 a.m.

this morning India standard time our new dealer in Mumbai took the first official booking of a Harley-Davidson motorcycle order in India, a 2010 XL1200N Nightster.

The international dealer network is expanding elsewhere as well.

We're opening a dealership in Ecuador this month and in May the first of four newly appointed dealers will open in Mexico.

Every year we conduct Harley Owner's Group officer training in various sites across the country.

Two weeks ago about 1,200 of these loyal enthusiasts were in Milwaukee for training and more than a third of them were from international markets that represented over 25 countries.

HOG has more than a million members worldwide, and I can tell from you the time I spent with these members at this local chapter officer's training they are unbelievable ambassadors for our brand.

As you can see there is an incredible amount of activity under way to support of our growth strategy, and I have just barely scratched the surface.

Turning for a moment to continuous improvement the restructuring of our York operations is well under way and the project is on target and on schedule and is exceeding our expectations.

The physical restructuring and cultural change processes are on schedule as is the outsourcing of non-core operations.

We have implemented the work rule changes in the new contract and our employees are involved and engaged.

In March the plant had two days of weather related closings, yet we still met the full month production schedule as a result of improved productivity and efficiencies that exceeded our target.

In short we have seen a significant accomplishment from this facility which is a testament to the commitment and focused effort by the entire team at York and our Union leadership.

In Milwaukee we're also on target with our restructuring activities.

We expect to largely complete the consolidation of powertrain operations by the end of the second quarter.

Moving forward, we will remain intently focused on identifying the competitive gaps and closing those gaps wherever they exist in our operations.

We believe there are still many opportunities to improve efficiency, flexibility, and cost competitiveness and align production across our operations.

So in summary, we're making good progress and we're seeing some encouraging signs even as we continue to deal with the level of uncertainty in the global economy.

The Harley-Davidson brand remains powerful and strong with great appeal to both current and new customers in the US and globally.

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 the appropriate urgency.

Now let me turn it over to John Olin for a more detailed look at the financial results.

Thanks, Keith.

Good morning, everyone.

During the first quarter Harley-Davidson motorcycles and related product revenue from continuing operations was down 18.9%.

This was expected as we shipped 28.1% fewer motorcycles than the first quarter of last year.

Income from continuing operations and earnings per share were both down as a result of lower revenue and the impact of ongoing restructuring activities.

Moving on to retail sales on slide 10, during the first quarter our dealers, retail sales of Harley-Davidson motorcycles were down 18.2% on a worldwide basis as compared to last year.

While an 18% reduction is disappointing, it was not unexpected given the overall economic conditions.

Despite lower overall retail sales, we have made some encouraging progress on the retail front.

On a sequential basis comparing the last quarter 2009 to the first quarter of 2010 we saw an improvement in the rate of retail sales decline in the US and international markets.

In addition, the Europe region posted sales increases for the second consecutive quarter.

Regarding market share, our US market share decreased by 2.3 percentage points in the first quarter as we lapped a strong first quarter 2009 share increase of 8.2 percentage points and as we continue to face significant price competition from many of our competitors.

Now let's talk about the health of the US dealer network on slide 11.

First, and I know you have heard me say this numerous times, but it is important to reiterate that we remain committed to aggressively managing the supply of motorcycles in line with demand.

We believe this will help protect our premium brand which ultimately helps keep the dealer network strong.

As we exited the first quarter, US dealers, retail inventory was down over 23,000 units for the first quarter of 2009 and considerably from the peak in 2006.

As Keith mentioned, we feel that the US dealer inventory level is appropriate as we begin the 2010 selling season.

However, our dealers are carrying a higher level of previous model year motorcycles than they normally do this time of year primarily due to the steep decline in retail sales experienced in the second quarter of 2009.

We are supporting our dealer's efforts to sell through these motorcycles.

Keith talked about our efforts during the quarter including the ride easy guarantee which offers value-added incentives on the purchase of certain previous model year custom motorcycles and special financing for certain qualified purchasers of previous model year Sportsters.

Also during the quarter we offered a program which encouraged competitive owners to trade in their bike for a new Harley-Davidson.

These programs successfully drove targeted consumers into the dealerships and encouraged sales during the early spring.

The US dealer network remains profitable.

Through the first three months of the year we lost only 6 dealer points versus a forecast of up to 15 dealer point closures.

The start of the selling season was a welcome improvement to all our dealers who persevered through a very long winter.

We do expect more dealers to close due to financial issues, and as we have said before, we believe that some contraction of the dealer network is healthy at this time.

As we move forward we have several levels of insight into our dealer financials through our motorcycle business as well as through HDFS.

We have realistic expectations and are taking a proactive approach to maintain a healthy dealer network.

Our international dealer network remains healthy as well.

We believe there is potential to add 100 to 150 international dealer points through 2014 as we have stated in our strategic plan.

On slide 12 you will see wholesale shipments of our dealers to our dealers for the first quarter were down 28% compared to last year.

Shipments in the quarter were in line with our expectations and resulted in significantly lower dealer inventory than one year ago.

Sportster represented 15.3% of shipments, down 7.2 percentage points from last year.

Conversely, touring mix increased 7.9 percentage points aided by strong Tri Glide sales and continued strength of our high-end offerings.

This adjustment in mix continues to balance yield inventory that has been disrupted by the economic crisis.

As you may recall, we increased Sportster production in the first half of 2009 in anticipation of a more price conscious consumer.

Preference skewed towards our higher end models, so we significantly reduced production of 2010 Sportsters in the fourth quarter of last year.

Still, retail inventories of 2009 model year Sportsters remained high as we entered into the first quarter.

Also keep in mind that last year shipments of the new Iron 883 started in the beginning of the first quarter and this year's new Sportster 48 did not start shipping until later in the first quarter.

For the second quarter we expect to ship between 55,000 and 60,000 Harley-Davidson motorcycles to our worldwide dealers which is in line with last year's second quarter shipments of 58,000 units.

On slide 13 you will see revenue in all categories of the motorcycle and related product segment were down in the first quarter.

The 20.0% decrease in Harley-Davidson motorcycle revenue during the first quarter was primarily the result of lower shipments partially offset by favorable shipment mix and foreign currency exchange rates.

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 reduce administrative costs, eliminate excess capacity and increase focus on core operations.

During the quarter we incurred $48.2 million in restructuring expenses.

We remain on track to deliver the expected full year total cost and savings associated with our restructuring activities which are summarized on slide 14.

On slide 15 you'll see gross margin in the quarter was 36.6%, 0.5 percentage point below the same quarter last year.

As expected gross margin was positively impacted by a significantly more favorable mix as I explained earlier.

Mix favorability was partially offset by unfavorable manufacturing costs due mainly to lost absorption.

Productivity in our operations continues to be strong, especially considering the consolidation taking place in our powertrain operation and the transformation under way at our York facility.

First quarter gross margin exceeded our full year guidance largely due to strong mix shift between Touring and Sportster.

As the year progresses we anticipate Sportster mix will end up in line with the historical range and we continue to expect full year gross margin will be between 32% and 33.5%.

On slide 16 operating margin as a percent of revenue for the first quarter was 12.2% which was impacted by $94.5 million of lower gross margin and higher restructuring costs of $13.3 million partially offset by lower operating expenses.

Now, moving onto our financial services segment, on January 1st we adopted FAS 166 and 167.

On slide 17 you will see a summary of the adjustments to implement those accounting changes.

As a result of the adjustments HDFS recorded assets and liabilities associated with the securitization transactions previously recorded as off balance sheet.

The largest impacts were due to recording of approximately $1.9 billion in finance receivables and related debt as well as a $41.0 million one-time charge to retained earnings.

HDFS's quarterly results, one of our big headlines today are on slide 18.

In the first quarter HDFS posted a $26.7 million profit, an improvement of over $15 million compared to last year.

We believe that with the adoption of FAS 166 and 167 our financials for HDFS will provide a more transparent easier to understand view of the business.

Having said that, over the next several quarters the year-over-year reconciliation as is presented on this slide will be impacted by comparability issues due to the extensive accounting changes from last year.

The key drivers for the quarter improvement were net interest income was favorable $36.4 million compared to last year as a result of the increase in on balance sheet receivables and an improvement in the net interest spread as the cost of funds at HDFS has decreased.

The provision for retail credit losses which is associated with on balance sheet held for investment retail receivables was $28.5 million higher compared to the first quarter last year as all receivables are now on balance sheet.

Importantly, our credit risk assumptions in the retail portfolio did not change significantly from the prior quarter.

The impact of the provision for wholesale receivables is favorable compared to last year on a 29% smaller wholesale receivable balance from the prior year.

And operating expenses were lower during the first quarter as a result of restructuring savings in the business.

The $2 million all other line primarily reflects the net effect of the fact that we no longer have gain on sale accounting, and the items that existed last year were income on retained securitization interest, servicer fees, low com adjustments and the impact of impairment Charges associated with retained securitization interests.

After three quarters of losses we are pleased to see HDFS return to profitability.

Lower cost of funds, improving credit loss trends and improving values of repossessed motorcycles have all contributed to a strong quarter at HDFS which Larry will tell you more about now.

Thanks, John.

During the first quarter HDFS originated $374 million in retail motorcycle loans, down 21% compared to last year primarily due to lower retail sales of Harley-Davidson Motorcycles in the US.

HDFS's retail market share of new Harley-Davidson Motorcycles sold in the US was down nearly 5 percentage points to 42.1% in the first quarter compared to last year.

As dealers are reporting more cash buyers in the market.

Also, we are seeing increased activity from competitors, particularly in the prime rated customer segment.

At the end of the first quarter of the approximately $6.6 billion of net financed receivables, $5.6 billion were retail and $1 billion were wholesale.

We continue to see good credit performance on early stage delinquencies and defaults for loans originated after we made significant underwriting adjustments in January 2009.

In the first quarter 80% to 85% of our new loan originations were prime compared to our historical experience of approximately 75% prior to these underwriting changes.

Now, moving onto delinquencies and losses on slide 20, where will you see the 30-day delinquency rate for managed retail motorcycle loans at the end of the quarter was 4.57% which is better than both the comparable quarter end results in 2008 and 2009.

Our increased collections staffing levels, modified collection strategies, and changes in underwriting have enabled us to effectively manage delinquency levels and bring them down compared to last year despite high unemployment in the US.

Annualized retail credit losses improved by 58 basis points to 2.83% for the first quarter of 2009 driven by lower frequency of loss and improvement in the recovery values of repossessed motorcycles.

So in conclusion, HDFS remains the primary source of funding for Harley-Davidson wholesale and retail motorcycle lending, and our profit this quarter is encouraging.

We continue to make progress as our cost of funds has decreased and the performance of our portfolio has improved compared to last year.

With unemployment near 10%, and ongoing economic challenges we will continue to watch losses and delinquencies closely.

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

Now I will turn it back to John.

Thanks, Larry.

As most of you know, we are currently 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 and profitability.

The process is progressing, and we are considering several potential scenarios.

HDFS's return to profitability reinforces that we do have options and we will make the right decisions for the long-term.

On slide 21 you will see our overall cash position at the end of the quarter.

On March 28, we had $1.48 billion of cash and marketable securities.

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

As of the end of the quarter HDFS had approximately $900 million of liquidity through bank credit and asset backed conduit facilities.

HDFS is currently in the process of negotiating the bank credit facility and asset backed conduit facility.

We expect negotiations will be complete by the end of April.

Our cash strategy continues to require a minimum of twelve months of projected liquidity and cash and/or other credit -- committed credit facilities.

Now I will review the remaining Harley-Davidson financials on slide 22.

I would like to highlight a couple of items on the slide.

First, with regards to operating cash, despite the large reduction in motorcycle shipments and the restructuring spending that we incurred we were able to generate operating cash of over $200 million during the first quarter with the motor company generating $61.6 million in operating cash.

Regarding our tax rate, if you recall, last year we incurred a tax charge due to a change in the Wisconsin tax law which we did -- which did not recur this year but drove the first quarter tax rate up to 45.4% last year.

This year our first quarter effective income tax rate from continuing operations was 47.2%.

The increase was generally due to a $13.3 million tax charge associated with the taxability of Medicare Part D reimbursements under the recently passed healthcare bill and the expiration of the research and development tax credit.

As a result, we now expect our 2010 full year effective next tax rate from continuing operations to be approximately 40.5%.

On slide 23 you will find a summary of the MV Agusta business which is presented as discontinued operations.

During the first quarter we posted an operating loss of $6.8 million, and we wrote down the carrying value of MV Agusta's assets resulting in a noncash charge of $28.6 million net of related tax benefits.

As we noted in the release this morning, we are currently in discussions with potential buyers for MV Agusta.

Looking forward to the remaining quarters of 2010, we continue to expect that the global economies will remain challenging.

As we have said, we'll take a conservative approach to shipment volumes as we continue to aggressively balance supply in line with demand.

On a full year base our shipment, gross margin, and capital expenditures guidance for 2010 remains unchanged and they are noted on slide 24.

As we look back on the first quarter of 2010, we were pleased to see some improvement in the retail sales rate from previous quarters and profitability return to HDFS.

We look forward to coming quarters as our sales season progresses and we prepare to launch our 2011 model year motorcycles in July.

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

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

(Operator Instructions) Your first question is from Tim Conder.

Your line is open.

Thank you.

Congratulations on the continued good execution here, gentlemen.

Thank you.

A couple of items.

John, or Keith, either one, can you give us any additional color on used bike price trends, what you're seeing out there, and then one of the things that you cited back in January on your conference call as it related to used bike prices was your concern about the Japanese and their clearing of noncurrent inventory.

Just collectively maybe give us an update on that and then also more of a housekeeping item, the FX impact on both gross margin and operating expenses in the quarter?

All right.

Starting out with used bike prices, as we look at repos as a proxy for used bike prices, and I think we mentioned last quarter that we have seen some firming up in the last quarter of 2009, and since November we have seen repos improve all the way through the first quarter and now slightly above year ago levels.

I think, Tim, your next question was on price competition, and we're seeing a similar level of price competition in the first quarter as we saw in the fourth quarter of last year, and we're seeing deals on motorcycles anywhere from $500 a bike to $5,000, so nothing is really changed quarter over quarter in that front.

As far as the FX on gross margins, that was unfavorable by $4 million and FX on operating expenses was unfavorable by $3 million during the quarter.

Okay.

So it sounds, though, like your concern entering the year here related to the Japanese to continue to clear inventory, it sounds like that's substantially reduced given what you're seeing in used bike prices.

Is that fair or are you still worried that maybe that could come back and bite you somehow?

No.

I think what we're seeing is exactly what we thought we would see is fierce price competition, and that's clearly what we're seeing.

Okay.

And I will turn it over and get back in queue if we have some additional follow-ups then.

Thanks, Tim.

Your next question comes from Craig Kennison.

Your line is open.

Congratulations and thanks for taking my question.

You have come a long way to get the scarcity value of the brand back, but is there any concern among dealers about a lack of available supply and might you have to ease on that strategy a bit?

Craig, this is Keith.

That's one of the things we're constantly talking about, and there is varying views on this.

I think it varies from dealer to dealer as well because some dealers have sold more product than others, so we're looking at this thing sort of across the system, and as we mentioned in the call, we think that the efforts that we have made to bring inventories in line, we think we're at an appropriate level given how we see the rest of the year unfolding, and we didn't change our guidance on the rest of the year shipments, and we do have I would say gates in place where we're looking at specific dates where we're continuing to make decisions about production both plus or minus as we go forward, but right now we think in aggregate we're pretty much where we thought we needed to be and we're going to continue to manage at those kind of levels.

Thanks.

I will get back in the queue.

Your next question comes from Ed Aaron.

Your line is now open.

Great.

Good morning.

Nice job on the quarter.

I almost can't believe I am about to ask this question but on HDFS when you consider the degradation of the market share and the improvement in loss rates, is there almost any consideration to maybe easing credit a little bit after the tightening that you did over the last couple of years?

Ed, we look at it at our underwriting criteria every month, and we make modest adjustments or tweaks, but we think we're in a good spot right now, and we think we're balancing the availability of credit out there in the dealer network with very prudent underwriting standards, and I think those are reflects in our results, so I think right now we have got a good balance, but we will continue to look at it every month as we go forward.

Thanks and just a quick follow-up if I could for the loans that came back on balance sheet, January 1, can you give us a sense of where the initial loss reserve was set on those loans when they came back on?

They came back on at about 2.6% which is a little lower than our on balance sheet receivables before, and the reason for that is these came from securitizations that are all reasonably mature from 2006, 2007, and 2008 and therefore they have sort of passed their peak loss curve at this point.

Thank you.

Sara, do you have another caller for us.

Your next question is from the line of Rod Patch (sic).

It is Rod Lache.

Good morning and congratulations, everybody.

Hi, Rod.

I had a couple of questions.

First of all, trying to reconcile your full year gross margin guidance which is down quite a bit from Q1, is that basically the mix that you're anticipating?

Secondly, as a follow-up to that question on the price competitiveness, doesn't really appear that your US market share is down all that much if at all from the full year 2009.

Is this a market share level that you think you can sustain and then lastly, 70% to 80% of our savings looks like should be in the SG&A, but your operating expenses down by about $3 million.

Can you just kind of reconcile that and give us some sense of how we should be expecting SG&A to look this year?

Okay.

The first question was on first quarter margins which were 36.6%, down about 0.5 a point from a year ago, and, yes, it is above our guidance of 32% to 33.5%, but certainly we expected that given the mix shift between Touring and Sportsters, so during the quarter we shift in 7.9 percentage point more of Touring, and that's because as we have seen all last year and certainly into this year the strong sales of those bikes certainly led by the Trike as well as the new Ultra Ltd.

and Road Glide that we introduced last July.

Conversely our Sportster mix was down 7.2 percentage points, and again as we entered into the first quarter, we still had a fair amount of model year 2009 Sportsters, so we moderated production and therefore shipments in the quarter due to that and then as I mentioned on the call as well is when we look at the year-over-year shipments between Iron 883 and the 48 we shipped in much fewer 48s, and that was because a year ago when the plant was still up and operating at the end of 2008 we were building forward for the introduction at our winter dealer meeting because the plant was shut down this year in the fourth quarter we didn't have that opportunity, and again got into production a little bit later in the first quarter.

So that's a pretty significant mix shift, and that drove $54 million of margin favorability which pushed up the gross margin up about 5 percentage points.

As we progress through the year we expect our Sportster mix it normalize, and a lot of that mix favorability to reverse out.

Rod, I think your second question was on the price competitiveness.

Can you repeat that?

Well, you're holding onto 55, 56% market share in the US market despite that, and it is down year-over-year, but that's against the Sportster promotion in Q1, so just kind of give us a sense of -- that's still an awfully strong market share versus what you had for the full year last year.

Are you thinking that this price competition although it is out there just not having as much of an impact on your performance vis-a-vis the market?

Rod, this is Keith.

Let me just jump in.

What we're really focused on here is the brand.

We think and we believe that our brand is extremely strong.

It has a tremendous -- there is a tremendous passion amongst our core customers and outreach customers, everything we're doing is intended to promote our brand, strengthen our brand, and we think the people that are coming into our dealerships to buy our product are focused strictly on buying a Harley-Davidson.

I think that's what you're seeing.

This is part of our strategy.

It is part of our focused business strategy going forward, and we're just not going to deviate from that.

Okay.

And the question on SG&A and the operating expenses?

Yes.

SG&A again as we finished last year were $91 million favorable on a year-over-year basis in SG&A and felt great about that.

We don't provide forward guidance on SG&A, but we do have additional productivity savings or restructuring savings that we are on track to receive in the 2010 period.

For the quarter we were favorable by $3 million or $3 million lower SG&A spending, and this quarter that was largely driven by favorable Buell and partially offset by increased investment in our international businesses, and in addition at HDFS we're very pleased that the SG&A was down about 10% there as well or about $3 million or $4 million.

Maybe just to clarify on your table it is like $50 million or $60 million of incremental savings in 2010 versus 2009, and you say 70 to 80% of that is going to be in SG&A.

Is that a net reduction in SG&A that you're alluding to there or is that a gross number that gets offset by something else?

Well, I think the start with the 2009 base is a good place to started, but what we're talking and referring to though are restructuring savings that are come.

We could see other ups and downs in SG&A in the core base as we go through the year as well.

Thank you.

Your next question comes from James Hardiman.

Your line is now open.

Good morning and congrats on a solid start to the year.

Question on HDFS.

If I recall correctly, the big debt covenant that you have to worry about is sort of a 10 to 1 debt to equity ratio.

I guess first question just calculating that do you net out the cash?

If you don't net out the cash you're looking at eight times if you do it is more like six times.

How should I calculate that and more generally how should I think about that going forward?

Do you feel comfortable that that's not an issue with the new receivables on the balance sheet and/or conversely are you in negotiations to maybe get those covenants renegotiated?

James, this is John.

One, we do not net out the cash, but we feel very good to where we're at with regards to the covenants, so as you pointed out we did bring a lot of debt back onto the balance sheet with FAS 166 and 167.

We meet all of our covenants and certainly including the 10 to 1 debt to equity but as well as some of the other covenants that are out there, and we're fine where we sit today.

Okay.

Just more generally sort of given the receivables that you brought onto your balance sheet and where they stand from an aging perspective, when you think about that mix of debt, how should we think about that going forward when you balance -- a lot of these new receivables are going to be getting paid off, I'm imagining that they're a couple years old on average.

When you balance that with the new receivables, you're bringing onto your balance sheet, is the debt overall for HDFS going to be growing as we move through the year given the current mix of debt or is it going to be basically staying the same, sort of how should I think about the rate of change to that debt as we move through the year?

The rate of change is going to depend on the rate of receivables, growth or decline, and we'll continue to match the debt the best we can with the receivables.

Remember, a lot of our receivables are -- a lot of our debt is self liquidating through the securitization, so as a lot of it gets paid down the debt goes down and we'll continue to do our best to match the two,.

And I think to John's point if you take the $1.9 billion of receivables and debt that were added back on the balance sheet with FAS 166 and 167, all of that is self liquidating and match funded because of the structure of the securitizations.

Okay.

And so just basically based on sort of where you think sales are going to be this year, we shouldn't expect debt to continue to grow as we move through the year?

Is that--?

I don't think we're giving any forward guidance on this.

I think what we're saying is that we'll finance ourselves as we think is appropriate throughout the year, but we certainly raised a fair amount of debt in 2009, and I think that's left us well-positioned in 2010.

Okay.

At the very least we don't have to worry about that debt to equity ratio getting from 8 to 1 to 10 to 1.

It is clearly not on your radar at this point?

We feel very comfortable where those relationships are.

And again, any funding that we do in 2010 will be for 2011.

We're fully funded for 2010.

Great.

Thanks, guys.

Your next question comes from Felicia Hendrix.

Your line is now open.

Good morning, guys.

A lot of my questions have been answered, so I will ask this one.

Keith, you talked about in your prepared remarks the ongoing opportunities in terms of costs -- continued cost improvement.

Just wondering, have you looked at Kansas City at all?

Is there any future opportunities there?

Well, I mean, we're looking at every one of our operations and sort of using the transformational labor agreement that was negotiated at York as a benchmark if you will, particularly in terms of work rules and flexibility and those kinds of things and we are working with all of our Union representatives as well in each of our facilities identifying performance gaps and how do we get better, and so clearly each one of our facilities is under review for the opportunities that we have for improvement both in costs, in manufacturing flexibility, and those kinds of things.

Okay.

And then just on HDFS in terms of the process, you guys have been evaluating scenarios for a while.

Can you give us some kind of sense of how close you might be in terms of finding a more diversified and cost effective funding there?

At this time, Felicia, we can tell you we've engaged and an advisor in discussing several opportunities with several institutions.

We're being realistic as far as the challenge ahead of us to do something, but we remain cautiously optimistic that we can find additional opportunities to lower or improve the funding profile for HDFS.

I would say that with HDFS returning to profitability reinforces that we have options, and we're certainly going to do the best for the long-term of the Company.

Okay.

Thank you.

Your next question comes from Robin Farley.

Your line is now open.

Thanks.

Two questions.

The first is your full year production guidance seems to imply the next three quarters would basically be flat production.

Should we interpret that as that is roughly your expectation for what retail sales will be in the next three quarters, in other words, as you're trying to match supply and demand, is that a reflection of the expectation for flat sales, and I also have a margin question and I will just start with that one.

Robin, this is John.

Robin, you're right we have our guidance out there which is down 5% to 10%, and after the first quarter we still feel that that guidance is appropriate.

We're down 18% on retail sales in the first quarter and while disappointing certainly showed improvement throughout the quarter.

As far as a proxy for retail sales going forward, I am not going to provide any forward look at retail sales but just to say that the 5% to 10% production guidance we have down versus year ago is we feel comfortable with and we're sticking to that guidance.

Okay.

And then I guess my other question was on the gross margin.

I know a lot of folks have asked the question already and I understand the mix impact was a 500 basis points benefit.

I guess one of the reasons probably why the question keeps coming up is last year a lot of your margin guidance all year was for 30% to 31% and you ended up over 32%, and so I guess just in trying to think about whether your guidance is is being conservative, I guess how would you compare it with your expectations for gross margins last year and where you came in and how you think about your guidance this year?

In other words, do you feel like you need to have the same level of conservatism in your guidance that you did last year?

Well, again, similar to the production guidance, the guidance of 32% to 33.5%, and we feel comfortable with that.

We were pleased to beat that in the first quarter, but again that is all explained by the mix.

When we look at the rest of the gross margin walk, manufacturing was unfavorable by $24 million, but again within that that was all driven by lost absorption, and on the productivity that the plants are spinning out is very favorable.

We hope and expect that to continue, but where we sit today we feel pretty good about gross margins, and certainly on track to continue to hit our guidance of 32% to 33.5%, but again that mix will reverse itself and most likely reverse itself as we bring Sportster back to historical levels, mix levels.

Okay.

So is it fair to say last year there were things that surprised on you the upside with margin guidance but your gross margin this quarter wasn't really a surprise to you, this is fully within your expectations, the fact that the margin is this much higher than the rest of the year, there is not an upside surprise to your expectations?

No.

The first quarter margin was in line with our expectations.

Great.

Thank you.

Your next question comes from Greg Badishkanian.

Your line is now open.

Thanks.

My question relates to international, just any change in the competitive environment there in addition did you also see a sort of improvement as we got into the selling season internationally as we did in the United States?

We don't really see much of a change competitively.

We are extremely focused on our international growth strategy.

We are on track to add a number of dealers that we have talked about in the past between now and 2014, and we just keep learning that the passion for this brand in every country in the world is very high, and so we're continuing to put the organization in place to drive our international growth, and the dealers in place to provide our products to our customers, and we feel good about what we're doing from an international growth perspective.

Great.

Did things pick up as we entered the spring selling season like it did in the North American region?

As we look at -- just taking the quarter, we were down 2.8% internationally with again as I mentioned Europe being up.

That's compared to last quarter of being down about 10%, so we're thrilled with the very large improvement in decline -- in the sales decline internationally from a sequential basis quarter to quarter.

Absolutely.

Great job on the quarter, guys.

Thanks.

Thank you, Greg.

Your next question comes from Patrick Archambault.

Your line is now open.

Yes.

I guess two quick ones.

Number one, it sounded like you said that the cadence of sales through the quarter improved quite a bit from January/February, and that was certainly borne out in a lot of people's channel checks.

How much of that momentum would you have said was due to kind of a little bit of a pent-up demand from bad weather and how is that looking as we sort of head towards kind of the back half of April here?

Well, Patrick, I am not going to blame anything on weather.

I will point out that early in February there was snow on the ground in 49 states, but we're not going to lay anything off on weather, and whether there was an impact there or not, I don't know.

What we are is pleased with the fact that throughout the quarter we did see retail sales momentum increase throughout the quarter.

I can't provide a look beyond that into April or into the second quarter.

Okay.

And last one you may have this in your deck somewhere but I see you have the equity balance for HDFS as of January 1.

Do you have it as of the end of the first quarter?

It is about $850 million.

Okay.

Great.

Thank you very much.

Thank you, Patrick.

Your next question is from Edward Ritchie.

Your line is now open.

Thank you.

I just have one question on interest expense which seemed to go up quite substantially in the first quarter.

Can you put some more clarity on that and say whether we should expect to see $100 million of interest expense for the full year or whether this is just a jump in the first quarter?

What's going on with interest expense, Edward, is that taken back to February of last year in the height of the liquidity crisis, Harley-Davidson Inc.

went out and borrowed $ $600 million of high interest debt which at that time had a coupon of 15%.

We pushed that down to HDFS, and it was on HDFS's books with the intention that when things got better and HDFS could fund themselves, that they would pay that debt back.

So at the end of the fourth quarter HDFS paid back the -- I am sorry, I think in November of last year HDFS paid back the $600 million to Inc.

and that's what you're seeing is the year-over-year comparison is a full year quarter with a $600 million at the Inc.

level versus only a very small portion of that a year ago.

We borrowed the money in February and for a period of time it resided at HDFS and a period of time at corporate, so going forward based on that $600 million the interest expense that we have in the fourth quarter is more normal as to what you'd see going forward.

Okay.

So average interest expense of close to $10 million a quarter is what you would expect then?

No.

The second quarter -- the first quarter of this year is more normal which we had at least $23 millionish.

Okay.

Thank you.

Your next question comes from Tim Conder.

Your line is now open.

Thank you.

Just a follow-up on previous question related to Kansas City and other opportunities in your labor contracts.

Is that currently contemplated in your cost savings guidance looking out either through '12 or '14?

We haven't provided cost savings guidance, Tim.

What we've said is that we will grow our profits greater than we will grow our revenue, but at this point we don't have any guidance out there on it, and as Keith had mentioned, we've got opportunities throughout the organization that we're looking at, and we would expect to continue to drive continuous improvement as we go forward.

Tim, are you referring to the chart that shows what we have sort of committed to for cost savings versus our restructuring?

Yes, Keith.

I am sorry, Tim.

My mistake.

No, that is not included.

No.

Okay.

That restructuring summary on page 14 is only the things that we have announced in 2009.

Okay.

And then just more of a housekeeping item, D&A and CapEx, maybe give us an updated there on what your expectations are for 2010?

A apologize if I missed it there in the deck.

On page 24, but CapEx we expect between $235 million and $255 million which includes about $100 million of restructuring capital.

Okay.

Great.

Thank you.

Thank you, Tim.

Your next question is from James Hardiman.

Your line is now open.

Thank you.

I appreciate you taking -- just two quick follow-ups.

First, I think we have probably run the gross margin stuff into the ground, but just real quick looking at the last couple of years it looks like the first quarter gross margin was the best of the year, certainly in 2008 and 2009.

Is there a reason -- is there a seasonal pattern there?

Are there some seasonal effects there that would suggest that in general first quarter margins are going to be better than the rest of the year and then my real quick second question is from international standpoint I think the feeling out there is that the international markets generally probably lag the US in terms of the recovery and yet your interactional business appears to be doing a lot better.

Is that basically a function of market share and is that sort of a delta that we should continue to see through the year that the international markets are going to out pace domestic or how should we think about that?

On the gross margin there is nothing in particular I would point to in the first quarter in terms of gross margin.

On the international front we have picked up market share the last several years incrementally last five years, particularly in Europe, and I think as much as anything else it is just a reflection of again the continued focus on putting the right kind of organization in place, dealer network, et cetera, to take advantage of the opportunities that exist in those international markets.

You have got to remember I think not too long ago when sales were a lot higher and we had some production constraints, we weren't even able to allocate as much production to the international markets, so we just continue to keep focused on that.

We talked about the fact we're going to add the 100 to 150 dealers between now and 2014 in the various regions of the world.

We're on track with our strategy, and we just feel real good about what our folks are doing in that area.

Makes sense.

Just so I sort of understand this, there is some industry numbers that you have given us but in general do you think the overall motorcycle industries in the respective countries are outpacing those of the United States or is it just you guys are outpacing -- your international business is out--?

I don't think it is so much the markets.

Again, I think it is just us taking advantage of the opportunities that we have.

Okay.

Perfect.

Thanks, guys.

Congrats.

Thank you.

Your last question comes from Ed Aaron.

Your line is now open.

Thanks for taking the follow-up.

Just wanted to make sure I understood the forward-looking statements about Sportster mix.

You mentioned going back to a more normal range.

Did you mean over the balance of the year or do you mean the historical normal range for the full year as a whole?

For the full year as a whole, Ed.

Thank you.

There are no further questions at this time.

We turn the call back over to you.

I would like to -- before we close out the call I would like to say that we stated that we had cash availability through credit facilities in the bank conduit of $900 million.

That was an error.

It should have been $2.1 billion, and I believe that was on the slide but I said $900 million.

With that, we would like to thank you for your time this morning and we appreciate your investment in Harley-Davidson.

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This concludes today's conference call.

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