Harley-Davidson Inc (HOG) 2010 Q3 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the third-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.

Ms.

Giuffre, you may begin your conference.

Thank you, Simon.

Welcome to Harley-Davidson's third-quarter 2010 earnings 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, Harley-Davidson's CEO, Keith Wandell, will share his thoughts on the progress to date against our strategy.

CFO John Olin and President of Harley-Davidson Financial Services, Larry Hund, will provide comments on the quarter.

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

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

So let's get started.

Thank you, Amy.

Good morning and thanks, everyone, for joining us on the call today.

As I look at where Harley-Davidson stands today, it is clear to me that we are making solid progress against our goal, which is to transform our business at all levels so that we can succeed not only at today's volumes but, more importantly, grow and restore greater profitability over the long term.

Without question, a lot of hard work lies ahead, along with many challenges.

The economy has yet to turn around in a convincing way and many consumers remain on the sidelines.

However, as I look at all we've accomplished since we announced our new strategy to deliver results through focus, one year ago almost to this day, I am proud of everyone in our organization.

Through the outstanding efforts of our entire team, we are bringing our strategy of focus on the Harley-Davidson brand to life.

So let me start off with a thank you to all of our employees.

You are showing that as one Company, one team, working in one direction, we have accomplished a lot.

I also want to thank our dealers, who in most of our global markets have faced the toughest business climate in their lifetimes.

But our market-share gains demonstrate that, working together, Harley-Davidson and its dealers continue to provide a great lifetime experience for our customers.

What we set out to do one year ago was nothing short of transforming our Company and our business, and there is no aspect of our business that is going untouched or unchallenged.

In this process we believe we are positioning Harley-Davidson for future prosperity.

Let me review some of what we have accomplished.

We begun to implement a new operating structure at our York plant, enabled by a new labor agreement.

This new continuous improvement production system focuses on greater flexibility for surges to meet seasonal and other volume needs; an enhanced ability to vary product mix in line with customer expectations; and greater production efficiency overall.

Again, special recognition goes out to our York employees.

In addition to our management team, both the local and international union officials have shown tremendous leadership.

I was in York a couple weeks ago, where I walked the factory floor, and it was a great opportunity to talk with our employees.

I have to tell you just how impressed I was with the new operating model that is coming to life there, thanks to the best thinking of all of our employees.

But more than that, I was especially impressed by the attitude of the York workforce in the face of all of the changes.

They truly get why this work is so important and what a difference it makes now that they are implementing it and living it.

At Harley-Davidson Financial Services, we have seen great improvement through our strategic focus on the performance of our Financial Services business and have delivered strong profitability in the past three quarters.

We have completed the divestiture of MV Agusta and exited the Buell business in order to focus our resources and energies on growth through the Harley-Davidson brand.

We have seen Harley-Davidson strengthen its lead in the US in new motorcycle sales to young adults, not just in the heavyweight category but across all sizes of on-road motorcycles.

In 2008, we became the overall market leader to young adults, defined as customers 18-to-34 years old; and in 2009 we expanded that lead.

In fact, we sell more new Harley-Davidson motorcycles to today's generation of young adults than we did to the Boomers when they were young adults.

Our brand has great appeal to these consumers, and we have a great opportunity with this customer base.

We are also driving our international strategy through our entry into markets like India and our expansion in others like China and Central and Eastern Europe.

Over the past 12 months we have open 27 new dealerships in international markets.

In the Europe region, sales of new Harley-Davidson motorcycles are up 5.6% through nine months compared to last year, as we have continued to gain share.

A transformation in product development is firmly underway and becoming more deeply rooted each day.

Through lean engineering principles and disciplines we expect to greatly compress development cycle times to bring product wow to the marketplace more quickly.

We have achieved new labor agreements in Wisconsin that, when they take effect in 2012, will enable the same kind of flexibility to deliver on customer expectations that we are bringing to York.

Change is never easy, and I know we asked our unionized Wisconsin employees to make a difficult choice.

And like York, the union officials demonstrated great leadership during this challenging time.

Together we are making the necessary changes across our entire Company which we believe will allow us to succeed in a competitive global marketplace.

Those are just some of the highlights of everything that is underway across the entire enterprise for the past year since we rolled out our new strategy.

Without doubt, we have our work cut out for us; but we are intensely focused on those things over which we have control.

We have a clear vision for the future, and we have a clear strategy to take us there.

All of these tremendous efforts are going to allow us to better focus on growth opportunities going forward.

I am extremely proud of all that we have accomplished so far, and I am confident we will accomplish much more in the future.

Now let me turn it over to John, who will provide details on the quarter.

Thanks, Keith, and good morning, everyone.

I will review the financial results, starting on slide 7.

During the quarter, Harley-Davidson Motorcycles and Related Products revenue from continuing operations was down 1.9%.

Our financial performance in the quarter included slightly lower year-over-year shipments of Harley-Davidson motorcycles and improved gross margin, offset by higher SG&A and restructuring charges versus last year.

Harley-Davidson Financial Services had another strong quarter.

Both income from continuing operations and earnings-per-share were up during the quarter.

Moving on to retail sales on slide 8, during the quarter our worldwide dealers' retail sales of new Harley-Davidson motorcycles were down 7.7% compared to last year.

In the US, retail sales were down 9.4% and continued to be affected by choppy economic conditions.

While the US market was down over 14% during the quarter, our market share strengthened, up nearly 3 percentage points to 56.5% from last year.

On a year-to-date basis our US market share is up 0.6 percentage points to 54.5% versus prior year.

In the Europe region Harley-Davidson retail sales were up 11.4% during the quarter compared to last year's third quarter.

On a year-to-date basis through August, the overall market was down 2.4% and our market share increased to 12% compared to 11.5% last year.

In other international markets Harley-Davidson retail sales in the Latin American region were up 4.6%.

Asia-Pacific region was down 12.1%, largely driven by softness in Japan.

And Canada was down 26.7%, lapping a relatively strong year-ago quarter.

Overall, our international sales were down 3.6% for the quarter.

On slide 9 you will see wholesale shipments to our dealers for the third quarter were down slightly compared to last year.

Shipments in the quarter were at the low end of our expectations and resulted in approximately 18,000 fewer new units in US dealer retail inventory than one year ago.

We are tightening our expected range for full-year shipments and now expect to ship between 207,000 and 212,000 Harley-Davidson motorcycles worldwide.

For the fourth quarter we expect to ship between 41,000 and 46,000 motorcycles, which is 14% to 28% higher than last year's fourth quarter.

Sportsters represented 20% of total shipments in the quarter.

We expect fourth quarter's mix of Sportsters to be higher than last year's 12.9% mix in the fourth quarter, which was impacted by a shutdown of that production line last year.

We continue to expect that Sportster as a percent of total shipments will be within the historical range of 18% to 22% for the full year.

Slide 10 provides a snapshot of the overall US dealer network.

As we have said, we are focused on the health and integrity of the Harley-Davidson dealer network.

For the quarter, overall retail inventory was down; and more importantly, dealers had significantly fewer prior model year motorcycles at the time of model year changeover than they did last year.

We started shipping the 2011 motorcycles in late July, and the new models including SuperLow, Road Glide Ultra, and models featuring the new PowerPak have been well received.

MSRP pricing on the 2011 models in aggregate is flat compared to last year, both in the US and on a global basis.

In addition to improved inventory position, we believe US dealers continue to sell our motorcycles at or near MSRP.

While dealers' profitability has certainly been impacted, we believe the US dealer network in aggregate remains profitable.

Dealers continue to carefully manage their businesses and refine their operations as needed.

We do expect and are encouraging some contraction of the network.

On slide 11 you will see revenue for the Motorcycles & Related Products segment for the third quarter was down nearly 2% compared to last year.

During the quarter, average revenue per Harley-Davidson unit sold increased $178 from the prior year as a result of favorable product mix, partially offset by unfavorable foreign currency exchange.

Turning to restructuring on slide 12, we continue to be intensely focused on improving our cost structure and restructuring the business to be stronger and more profitable in the future.

During the quarter we incurred $67.5 million in restructuring expenses, largely driven by expenses associated with Wisconsin operations' restructuring which we announced last month.

As you will see on the slide, we have refined costs and savings associated with our overall restructuring activities.

Costs have been retimed across 2010 through 2012, and the expected total range was reduced by approximately $10 million.

We continue to expect total ongoing annual savings of between $290 million and $310 million upon completion of restructuring activities, but have retimed expected savings in 2010 through 2012.

On slide 13 you will see gross margin and the quarter was 34.9%, 1.5 percentage points above the same quarter last year.

This was driven by a richer mix of products and favorable foreign currency exchange, partially offset by unfavorable manufacturing and raw material costs.

Gross margin for the first nine months was 35.5%, which was up slightly compared to prior year and exceeded our full-year guidance range of 32.5% to 34%.

Our full-year gross margin expectations have not changed; and therefore we expect gross margins to be lower in the fourth quarter as a result of our expectations to produce fewer units compared to the previous three quarters this year.

Additionally, as I mentioned earlier, we expect Sportster mix to be higher than last year's fourth quarter, which was lower than the historical range.

On slide 14, operating margin as a percent of revenue for the third quarter was 9.3% versus 11.8% in 2009.

SG&A in the quarter was adversely impacted by the Company's short-term incentive plan accruals compared to the prior year.

This year we have accrued in each quarter for a potential 2010 year-end STIP payout.

If you recall, during the first half of last year we accrued for an expected 2009 year-end STIP payout.

Then in the third quarter, the potential for a payout was eliminated when we significantly reduced our shipment guidance which prevented us from meeting the established target goals.

As a result, we reversed the first-half accruals in the third quarter of last year, which reduced SG&A.

Additionally, while this year's third-quarter SG&A increased compared to last year, as you look forward keep in mind that we had one-time items in the fourth quarter of last year which we don't expect to repeat in 2010, including a $19 million charge related to warranty and recall.

Now moving on to the quarterly results for our Financial Services segment, on slide 15.

In the quarter HDFS posted a $50.9 million profit, an improvement of $82.4 million compared to last year.

The key drivers of the third-quarter 2010 improvement were -- net interest income was favorable by $63.3 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, which includes the impact of the transfer of debt from HDFS to H-D, Inc., in 2009.

Next, the provision for retail credit losses which is associated with all on-balance sheet retail receivables decreased by $23.3 million, primarily due to a $28 million charge to increase reserves during last year's third quarter.

This year-over-year change was partially offset by the need to re-provide for losses on the increased on-balance sheet receivables.

Our credit risk assumptions in the retail portfolio did not change significantly from the prior quarter.

Next, the impact of the provision for wholesale receivables is favorable by $6.9 million compared to last year due to an approximately $5 million net increase in reserves during last year's third quarter.

In addition, there was a 24% reduction in the wholesale receivables balance compared to last year's third quarter.

The unfavorable $11.9 million All Other line primarily reflects the net effect of the fact that we no longer have securitization accounting.

The items that existed last year were income on retained securitization interest; servicer fees; and the impact of impairment charges associated with retaining securitization interests.

We are pleased to see another positive quarter at HDFS.

Larry will provide more details on HDFS's operation now.

Larry?

Thanks, John, and good morning.

During the third quarter, HDFS originated $543.3 million in retail motorcycle loans, down 7.6% compared to the same period 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 48% for the first nine months of 2010, down 1.1 percentage points compared to the same period last year.

Regarding competition, we continue to see increased activity, particularly in the prime-rated customer segment.

At the end of the third quarter, of the approximately $6.2 billion of net finance receivables, $5.5 billion were retail and $0.7 billion were wholesale.

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

For the first nine months of 2010, 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 on to delinquency and losses on slide 17, where you will see the 30-day delinquency rate for managed retail motorcycle loans at the end of the quarter was 4.83%.

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

As I mentioned during last quarter's call, historically delinquencies and losses increase during the second half of the year as we move out of riding season.

Annualized retail credit losses improved by 66 basis points to 2.04% for the first nine months in 2010, driven by lower frequency of loss, the impact of changes in underwriting, and improvement in the recovery values of repossessed motorcycles.

We are pleased with the progress at HDFS during the third quarter, but we remain cautious, given the continuing economic challenges with unemployment near 10% and the fact that we are moving out of riding season.

Now, let me turn it back to John.

Thanks, Larry.

We are pleased that HDFS is making progress towards their goal of providing credit while delivering appropriate returns and profitability.

Now let's take a look at cash and liquidity on slide 18.

You'll see at the end of the quarter we had $1.55 billion of cash and marketable securities.

In addition, HDFS had approximately $1.04 billion of available liquidity through bank, credit, and conduit facilities.

Our cash strategy continues to require maintaining a minimum of 12 months of projected liquidity needs in cash and/or committed credit facilities.

Now I will review the remaining Harley-Davidson, Inc., financials on slide 19.

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

First with regards to operating cash from continuing operations, the Company generated operating cash of $1.17 billion during the first nine months of 2010.

The Motorcycle business continued to generate strong cash flow.

Of the total, the Motorcycle business generated $523.7 million of operating cash.

Through the first nine months of 2010, our effective income tax rate for the continuing operations was 34% compared to 47.7% for the same period last year.

The year-to-date 2010 effective tax rate through the third quarter was favorably impacted by the settlement of an IRS audit and an increase of a tax benefit related to domestic manufacturing, offset by the tax impact of federal healthcare reform legislation.

The 2009 effective tax rate for the same period was unfavorably impacted by a one-time tax charge related to Wisconsin tax law change and nondeductible goodwill charge.

On slide 20, you'll find a summary of MV Agusta business, which is presented as discontinued operations.

As most of you know, we concluded the sale of MV Agusta.

Through June 2010, losses on discontinued operations net of taxes totaled $103.5 million.

During the third quarter of 2010, the loss from discontinued operations was $4.9 million net of taxes.

As we have been expecting, the global economies continue to struggle, and we will continue to take a conservative approach as we manage the business.

On slide 21 you will see that on a full-year basis we have increased the low end of our expected shipment range.

We now expect to ship between 207,000 and 212,000 Harley-Davidson motorcycles worldwide as we continue to aggressively manage supply in line with demand.

Through continuous improvement and careful management of capital expenditures, we now expect full-year capital expenditures to be between $190 million and $210 million, which includes between $75 million and $90 million related to restructuring.

Gross margin guidance for 2010 remains unchanged.

John, before you go on, I just want to make one correction.

I may have just taken my notes wrong, but the Company generated $1.17 billion of operating cash.

Thank you.

Sorry for the interruption.

As we look back on the third quarter of 2010, we were pleased to see progress on many fronts.

We completed the sale of MV Augusta to focus on Harley-Davidson brand and completed labor negotiations with our Wisconsin unions, which will improve flexibility and ongoing manufacturing cost structure when the contract is implemented in 2012.

Carryover of retail inventory was significantly reduced to make way for exciting 2011 model year product offerings.

We also continued profitability at HDFS, and we continued to deliver on strong financial performance with increasing gross margin and good cash flow at the Motor Company.

Continued challenges in the economy and pressure on the retail customer reinforce our commitment to maintain cautious -- remain cautious through the recovery.

We will continue to aggressively manage the supply of new motorcycles in line with demand, in an effort to move toward a more normal ratio of used-to-new bike sales, which we expect over time will improve used bike pricing.

While progress will likely reflect the choppiness of the overall economic recovery, we believe we have made progress in this area, further strengthening the brand.

We are executing a solid plan designed to lower our breakeven point and regain operating margin at significantly lower volumes.

Restructuring has already delivered significant results, and we have not compromised the capacity for future growth.

In fact, our plan is to more efficiently respond to future demand.

We continue to invest in our future and have demonstrated that with the introduction of the new model year 2011 motorcycles, an ongoing international market development, and through our outreach marketing efforts.

As I have said before, I can't tell you definitely when retail growth will return, but I can assure you that we are managing the business prudently, with a focus on our future.

We are ready to expand our sales when world economies improve, and we'll remain disciplined as we manage the Company.

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

(Operator Instructions) Ed Aaron, RBC Capital Markets.

Thanks, good morning, everybody.

I wanted to just ask my question on mix.

You continued to surprise to the upside there.

It's above and beyond what I think can be explained by the shift in the motorcycle families.

So I know that there are a number of different factors that influence the mix in any given quarter, but I am just wondering if maybe there is some sort of a structural change that might help explain it.

And also just like to get your thoughts on whether you think it can continue as you look out into 2011.

Yes, Ed, with regards to mix, there aren't a lot of things that affect mix.

One of the obvious ones is mix between families; and that would be Sportsters versus Touring or Cruising motorcycles.

There is always mix within -- also mix within family that affects pretty dramatically.

What we are seeing in the results in this quarter as well as the previous couple quarters is some of the mix within family.

For example, the Ultra Limited that we introduced a year ago, July, is a $25,000 Ultra; and that is replacing a lot of the Ultras that we used to sell at a price around $20,000.

So moving up within the product spectrum within families.

In addition, when you look at Sportster, you have got the 48 model, which is a 1,200.

And that is bumping up against year-ago results of 883, Iron 883, which was lower-priced.

So there is a lot a mix within families that is affecting our results.

In addition, for the quarter when we look at the introduction of new products in 2011, our model year 2011, we have added what we call a PowerPak.

It is standard on three models including the Road King Classic, the Ultra, and the Road Glide Ultra.

That again takes up the sales price, and that provide a higher-powered motor, a 103-cubic-inch motor, along with standard ABS and a security system.

So we expect that to continue as again we lap model year '10 motorcycle sales in the next year.

We have had other things that affect mix.

We have got mix of our related products.

When you look at P&A, the difference between selling a replacement engine versus a nut cover -- very big differences in mix as well.

Same thing with General Merchandise and our licensed product.

Thanks for taking the question.

I will pass it on.

Thank you.

Rod Lache, Deutsche Bank.

Good morning, everybody.

Had a couple things.

Just first of all, as you reconfigure your plants and make them more flexible, I was wondering what your thoughts were on how much you can bring down your peak dealer inventory, and whether there is some financial implications of that.

I believe you guys do some inventory support for your dealers.

Hey, Rod.

This is Keith.

Certainly as we go through our reconfiguration of our entire manufacturing processes, obviously as we bring production closer to customer demand that will obviously have an impact on the need for dealers to carry certain levels of inventory in peak versus off-peak times.

I think there are -- and Larry can weigh in here too.

I think there are some wholesale financing implications to that, that would be helpful.

Yes.

I think if you take a look at even where we are right now at the end of the third quarter, our wholesale receivable outstandings are down 24% from where they were just a year ago.

So this change as far as reduction in shipments of motorcycles is already having an impact on the amount of inventory dealers have to carry, and I think helping them from a cash flow standpoint.

But I think that is really a byproduct of what we are doing.

I mean the real focus on our entire reconfiguration is just simply to be more flexible, be closer to demand; to allow our customers to come to a dealership, order a motorcycle that they want, the color want it configured -- within reason -- the way they want it, and get it in a reasonable length of time.

Okay.

Just very quickly was hoping you can comment on your outlook for raw materials at this point as you look out over the next year, just given what steel has been doing.

Any thoughts on the growth initiatives in China and India?

How meaningful are they now, and what is the trajectory of growth there?

Rod, I can't provide a forward look at commodities.

I don't know.

What we do know is where we come from and how it flows through our system.

So again in the fourth quarter we saw commodities really drop like a rock.

They retraced to the beginning of probably mid or late 2009 into 2010, and they retraced in aggregate about 50%, and now really have been trading sideways for the last several months.

It takes a while for that to flow through.

As you can see in our financial results, we have been realizing some unfavorability in the metals complex, about $9 million on a year-to-date basis.

So in the short term we would expect that trend to continue just because it is flowing through.

And again, things are flowing through our supply chain.

As far as India and China, your question about India and China, we look at these as both very important markets for us, particularly into the future.

There is a lot of work to be done there around tariffs and around manufacturing capabilities, etc.

But certainly when you look at our strategy, our strategy is focused on those areas and growing our sales in those areas as we go forward.

India, we have opened, I think, four of the five dealerships that we planned to open so far this year.

The fifth one will open soon.

We have been very successful in selling bikes there.

We didn't have a plan to sell a large amount of bikes initially; but I think we are on plan, what we thought it would be.

The interest, the affection for the brand is incredible, and we see it as a big market for us going forward.

Okay; but no volume comments at this point?

I guess it is not material yet.

It is sort of a long-term strategy; is that right?

Exactly.

Okay, thank you.

Sharon Zackfia, William Blair.

Hi, good morning.

I was hoping you could give us some color on how used bike prices trended during the quarter.

Then separately, I know you talked about dealer rationalization.

I mean, what do you think the healthy number is for dealers in the US?

Sharon, with regards to the first question, as we look across several data points including wholesale, retail, survey data, we believe that used bike price values have improved and are ahead of year-ago levels.

We continue to remain disciplined against our strategy to aggressively manage supply in line with demand.

The second part of your question, Sharon, was --?

In the US, as you have talked about dealer rationalization, ultimately what do you think the healthy number is for dealers in the US?

Well, the challenge with the dealer network is balancing the customer experience with their profitability.

Right now we feel great about what the dealers have done in cutting their costs, as we have, and getting more efficient in the overall dealer network.

Still got a ways to go, but we believe that when volumes do return a lot of the profitability will return.

So, in aggregate, we've seen about 35 dealerships through the first quarter exit and a handful probably in the second and third quarter.

Looking for a little bit more contraction, especially in the larger metropolitan areas.

I wouldn't expect any huge transformation or any huge numbers to come out of the system, Sharon.

It is more of a refinement at this point, again trying to balance the profitability with the customer experience.

Okay.

Can I ask maybe a follow-up as well?

I guess this is for Keith.

As you talk about the restructuring process really creating less of a lead time between demand and production, how does that impact when you go into your planning process for a year, when the lead times are significantly shorter?

Does it make sense to give out production on an annual basis, or should it be on a more near-term basis?

Well, I mean I think it makes sense to give production on an annual basis just at least from a planning perspective, certainly.

But then I think it gives us a better capability as we roll through the year to make those adjustments and be more accurate with those.

Today it's a little bit more of a cumbersome process.

If you notice, our guidance this year has stayed 201,000 to 212,000 all the way through the year; and now we change it by 1,000 in the last quarter because we just don't have that manufacturing flexibility and capability to respond today that we really need.

So I think it will be -- I think you will see still an annual look; but we will be able to update it more regularly.

Okay, great.

Thank you.

Tim Conder, Wells Fargo.

Thank you.

Just a few here.

Back to the mix question on a go-forward basis, can you give us any color with how maybe bringing the trike production in-house influenced the quarter?

Then do you feel that you are fairly well caught up where you want to be as far as meeting the cadence of demand versus supply on the trikes?

With regards to the trikes, bringing it in-house certainly lowered our manufacturing cost.

Didn't have an impact on revenue.

Trike sales continue to be very good, and we are very pleased with the way that category is developing and growing.

But again, bringing it in-house was certainly a cost-benefit to the Company.

Okay.

Then, John, a couple housekeeping items here.

Can you give us any FX impact on the revenue line and then the SG&A line during the quarter?

And then anything you can give us as far as your expectations for tax, D&A, and CapEx looking into '11?

With regards to into 2011, we are not going to provide any forward-looking guidance in those areas that you mentioned, Tim.

However, on the currency side, revenue was impacted unfavorably by about $9 million.

That is the result of a year ago the euro in particular averaged $1.43 to euros versus about a $1.28 average this year.

And again that hit revenue for about $9 million.

As an aggregate SG&A was favorable by about $400,000, $0.5 million.

And in total EBIT was favorable by $6.7 million; and that is largely the result of the cash flow hedges that we had on for the quarter and also the revaluation of our euro-denominated debt that we extinguished during the quarter after the sale of MV Agusta.

Okay.

Then, John, Keith, whoever wants to take this, you talk about your minimum cash needs here for years out of funding.

Should we think somewhere in that neighborhood of $1 billion, $1.2 billion?

And then I guess the follow-on question is -- at what point then do you -- and what you do with the excess cash above that?

We are not going to provide guidance as far as what we are going to hold in cash, Tim, at this point.

What I can say is that the higher cash balances reflect some more conservative view of the current economy and credits markets.

And certainly some current short-term cash needs, including next quarter we have a $200 million medium-term note coming due, and also evaluating contributions to the pension plan.

The Company will continue to carry higher cash balances until we see conditions improve.

More specifically is improvement in the economy and Harley-Davidson sales, continued stability in the capital markets, and stabilization and improvement in the Company's credit ratings.

Going forward what I can say is that the Company strategy is to maintain a minimum of 12 months of its projected liquidity needs through a combination of cash and credit facilities.

Okay.

Then lastly -- I apologize if I missed this.

What was the actual comp accrual?

You mentioned that last year obviously in the third quarter you reversed a lot of things because they weren't going to be achieved.

So that provided a very, very easy comparison.

But what was the actual dollar accrual in the third quarter for this year, John?

I don't have the exact dollar amount.

Again, with what happened in the first half of 2009, as usual we accrue what we expect the short-term incentive plan to be paid out on a quarterly basis.

That got reversed in the third quarter when we changed our guidance from being down 10% to 13%, to being down 25% to 30%.

At that time we reversed out everything we accrued in the first half.

I don't know what that number is, Ed.

However -- I'm sorry, Tim.

That compared with the accrual that we have in the fourth quarter does explain the entire SG&A variance, though.

Okay, great.

See you in a few weeks.

Thank you.

Craig Kennison, Robert W.

Baird.

Good morning.

Thanks for taking my question.

US retail was down 9%, which is a good sign.

But when you dig into that data, are there any conclusions you can draw about various constituencies within your consumer network?

Blue-collar versus white-collar, rural versus urban, young versus old?

Any conclusions you can draw about that?

Craig, we don't have it broken out in that way.

We certainly know from a standpoint of youth in some of our outreach markets that we are doing very well.

Youth in particular, we picked up a significant amount of share this year.

Women we're doing well, as well.

I think share is more stable in that segment.

But getting it into the other cuts that you mentioned, don't have that data.

Okay.

I will leave it at one question.

Thank you.

Himanshu Patel, JPMorgan.

Now that York and Wisconsin talks are behind you, any thoughts on when you would start discussions at Kansas City?

Yes, this is Keith.

Clearly we had a lineup of York, Wisconsin, Kansas City.

We don't have any definite time frame in line.

Kansas City already has a lot more of the contractual structure in place, I would say.

But nevertheless, I think we will have to have some discussions there to make sure that all of our plants are aligned so that we have a continuous flow, if you will, in flexible manufacturing process.

But no timeline has been stated at this point in time.

Okay.

Then on just the currency situation for 2011, can you just remind us how much of your euro exposure is hedged for next year?

We don't provide the amount of hedges that we have on at any point in time, Himanshu.

When we look at the euro, we have got some natural hedges in place, as parts that we buy back from Europe as well as some of the SG&A spending that we do there.

What we tend to do is to cover in the first couple quarters at a higher percentage than in the latter part of the year.

So it is not a set rate, but typically more coverage in the near-term quarters than later.

Okay.

Then last question, Keith, I know you mentioned used bike prices were up year-over-year.

Could you comment sequentially whether they had improved or not?

On used bike prices, the data is not that granular.

The best we can tell is that we continue to make progress on -- or the used bike prices continue to firm up and certainly over year-ago levels.

Again, with all the different sources, all the different models, all the different years, Himanshu, it is very difficult to get that granular.

Okay, great.

Thank you.

James Hardiman, Longbow Research.

Good morning.

My question is surrounding inventories as we look forward.

Historically during the fourth quarter you build retail-level inventories anywhere between 25,000 and 35,000 units.

Meaning you ship that much more into the channel versus what is sold out of the channel ahead of the spring selling season.

Last year you actually drew down inventory a little bit.

Obviously you're not going to get in the practice of giving guidance on that or retail assumptions.

But just directionally, what can you tell us about what to expect?

Should it be closer to historical levels?

Or was last year not necessarily an outlier?

Then as we look forward, this is going to be the fourth year -- barring something crazy in the fourth quarter -- this is going to be the fourth straight year of pretty meaningful inventory reductions at retail.

Do you feel comfortable that you can get back to one-for-one wholesale-to-retail as you look forward to 2011?

With regards to the inventory piece, we would expect an inventory build in the fourth quarter as we start to prepare for the spring selling season.

As you look, James, over the three quarters previous, including this quarter, we have been down anywhere from 18,000 to 22,000 units.

In the fourth quarter we are going to lap a quarter where we took out a tremendous amount of inventory a year ago, right?

As we shut down -- in particular Kansas City was shut down most of the quarter.

So as we look forward, inventories will grow.

They will grow off a lower base, and that base is 18,000 units lower as we end the third quarter.

And we are going to be lapping a number of fourth quarter where we took down a lot of inventory.

So we will be more in line -- or the change in the inventory will not be as great in the fourth quarter because a lot of that was taken out a year ago.

And we feel very comfortable where we are with overall inventories, especially as we look at as we exit the third quarter versus year ago.

Our inventories are, one, much lower and in a position that we believe is adequate for the network to grow and to keep upward pressure on used bike prices.

And then secondly, the mix of inventory is dramatically better this year than a year ago, especially when you look at the carryover models.

A year ago we had the highest level by far of any carryovers because of the 35% decline in US retail sales in the second quarter.

So feel great about the number.

The carryover, relationship of carryover models, as well as the mix by family is in much better position than it was a year ago.

Great, thank you.

I will hop back in the queue.

Thanks.

Robin Farley, UBS.

Great, thanks.

I have two questions.

First is you talked about HDFS, your market share of new bikes sold for the year to date.

I wonder if you could give us the market share for the quarter versus last quarter.

Then my other question is on your margin guidance.

By maintaining your full-year guidance you are implying Q4 gross margin in the 21& range.

I guess if we look at what you have done so far this year, your margins are back similar to 2008 levels even though your production is a lot lower.

So I guess why would that not continue in the fourth quarter even with Sportster mix ramping back up to normal levels?

In Q4 of '08 you had margins in the low 30% range even with Sportsters in the mix.

So just trying to think about why your margins would be in the 21% to 28% range, squaring that with everything else we have seen.

Great, Robin.

I will start with that, the second question; and then Larry can jump in on the HDFS market share question.

You're right.

As we look at year-to-date margins, we're at 35.5%, and that is up 0.5 versus year ago.

We look at overall margin guidance, which is 32.5% on the 34%, we would certainly expect the fourth-quarter margins to be down below that.

There's four reasons really why we are looking at the margins to be lower.

The first and the biggest impact is that we expect lower shipments in the fourth quarter versus the previous three quarters.

So if we look at the first three quarters on average, we have averaged about 55,000 shipments per quarter.

Now our expectations are 41,000 to 46,000 expected in the fourth quarter.

And obviously, that will have an impact on the margin structure because of the fixed costs that are absorbed by much fewer units.

As we looked at the fourth quarter last year, margins were at 20.3%.

You adjust for the Buell one-time, they're still pretty low at 26%.

The second reason is the one that you had mentioned, Robin, it is the Sportster mix is expected to be higher than last year's -- versus last year, which was 12.9% of the mix.

So we would expect a higher mix of Sportsters, which will affect profitability through mix.

Additionally, in the transformation that is going on in York, right now we are looking to outsource a lot of the non-core products.

That is happening in this quarter as well as in the next couple of quarters.

With that, as we outsource that product, we have some inefficiencies in carrying duplicate overheads as we move those products out of that facility, shut down the facility, and move it to suppliers.

So that will provide some unfavorable variances in the fourth quarter.

And then finally, expect headwinds on currencies and metals to continue.

If you adjusted for that one-time, the inefficiencies you are talking about with shutting down that facility, would you then expect margins to be up over 30%, given that your year-over-year production is probably going to be up?

Your guidance was for it to be up 14% to 28%; that is a pretty significant benefit in terms of year-over-year production.

All I can say, Robin, is that we would expect to be within the 32% and 34%, and we are not breaking out the individual pieces.

Robin, regarding the HDFS market share, the new unit retail market share for the third quarter, this year it was 49.6%.

Last year it was 51.2%.

Okay, great.

Thank you.

(Operator Instructions) Pat Archambault, Goldman Sachs.

Good morning.

Question on the cadence of sales you saw throughout the quarter.

It sounded like, based on a lot of the survey work that was done, July and August was pretty soft.

But then it seemed like you had a pretty good pickup in September, where I think most people's channel check suggested that it was up year on year.

Was that -- is that just a comps issue?

Or was there something sequentially that definitely seemed to increase in terms of the underlying sales rate?

And if you do agree with that, can you give us some color as to why it may have picked up as well as it did?

Pat, when I look at the third quarter in retail sales, really look at the tale of two halves of a quarter.

The first half of Q3 was really characterized by transitioning between model years.

We stopped shipment of model year '10 production in mid June and held model year '11 production until late July, early August.

So, therefore, the inventories in the first half of the dealer network were bled down quite significantly versus the prior year.

Anecdotally we had some dealers saying that inventories were so tight that their sales were being delayed.

The second half of the year was characterized by very strong dealer fill of model year 2011 bikes.

The bikes have been very well received by our dealers and customers.

And while the overall inventories are still down, the mix of inventories as I mentioned previously is dramatically improved, with better family mix, certainly better new models versus old models or old model years.

And we did see an improvement in the second half of the quarter.

Okay, great.

And there wasn't any sort of promotional activity or anything like that?

It was mostly just the inventory mix and the availability of '11s?

Right, Pat.

Very little promotional activities.

We had a promotion that ended in July that was a 1% financing promotion.

Very little volume.

It was only directed at very few models, largely excess, old model year Sportsters and V-Rods.

Got you.

Okay.

On HDFS, can you guys -- I don't know if -- I didn't think it was -- can you give us the level of provisions at the end of the quarter?

And if you have the chargeoffs as well, just those basic line items?

Sure, the allowance at the beginning of the quarter was $183 million.

The provision was $28 million.

Charge-offs were $29 million.

And then the allowance at the end of the quarter was $182 million.

Okay, great.

Thank you very much.

James Hardiman, Longbow Research.

Thanks.

Just as a follow-up, I think you have basically given us the pieces, but can you basically tell us what the assumed restructuring charges are going to be for the fourth quarter and what the tax treatment is going to be on that restructuring, just so we're all on the same page?

James, I would have to do the math.

We have got -- the overall restructuring expense would be $190 million to $210 million.

Our year-to-date restructuring I don't have right in front of me.

Whatever the difference between those two is what we would expect in the fourth quarter.

That would be a range between -- of about $20 million.

And that is all taxable at the overall corporate rate?

And was that the case in the third quarter as well?

I guess that's another question.

Well, when we talk about -- the restructuring expenses are a deduction from income and provide a tax benefit.

We do not pay tax on that.

And there is no difference in the tax treatment of the restructuring charges.

Right, yes, that was the question.

Then just real quickly with HDFS, it seems like net interest income was better third quarter compared to the second quarter.

Did any of the rates change?

I guess the question is, was it more a function of higher interest income from a rate perspective, or lower interest expenses versus the second quarter?

It's actually a combination.

The interest expense I think increased maybe on average about 25 basis points.

And then we also -- our interest income increased about 25 basis points and interest expense was also lowered by a little bit.

So really a combination of those two factors.

Excellent.

Thanks, guys.

Robin Farley, UBS.

Yes, hi.

I just want to clarify your answer to two questions ago when you talked about the quarter and the first half versus the second half.

When you talked about dealer fill in the second half after you introduced your new model year, you were talking about your shipments to dealers, right?

In other words, your sales being your shipments to dealers?

Those comments were shipped to dealers not sell-through comments, right?

I just wanted to clarify that.

Yes.

The shipment of our new model year products, Robin, we withheld until the summer dealer meeting and started shipping out in late July so we could get a good fill of new product into the dealer network.

But those would be our shipments.

Great.

I just wanted to clarify those were shipment comments, not sales.

Thank you.

There are no further questions at this time.

Mr.

Olin, I turn the call back over to you.

Thank you for your time this morning.

We appreciate your investment in Harley Davidson.

Thank you, everyone.

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