Harley-Davidson Inc (HOG) 2011 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Harley-Davidson first-quarter 2011 earnings conference call.

(Operator Instructions).

Thank you.

I would now like to turn the call over to our host, Ms.

Amy Giuffre, Director of Investor Relations.

You may begin your conference.

Thank you and good morning everyone.

Welcome to Harley-Davidson's first-quarter 2011 earnings conference call.

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

The slides can be accessed by clicking on Investor Relations, then Events and Presentations.

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, matter we have noted in our latest earnings release and filings with the SEC.

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

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

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

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

Let's get started.

Keith?

Thank you and good morning everyone.

Thanks for joining us on the call today.

It's been nearly two years since I joined Harley-Davidson as CEO.

In that time, through the hard work and dedication of all of our employees, we've undertaken one of the biggest transformations in the Company's history.

From a foundation as one of the most iconic brands in the world, we are transforming Harley-Davidson to be leaner, more agile, and more effective than ever at delivering great products and experiences to an increasingly global community of customers.

We are making great progress and today we reported further evidence of this renewal with earnings per share up more than 75% from the year-ago period and worldwide retail new motorcycle sales turning positive, up 3.5%.

Dealer new retail motorcycle sales in international markets grew more than 11% during the quarter with Europe in particular showing strength.

The US was nearly level with a year ago.

While it's good to see this overall retail improvement we've said all along that we would have a cautious outlook for the year, particularly in the United States.

We now have the market share data for new on-road motorcycle sales for 2010.

Again, Harley-Davidson was the number one seller in the US to young adults ages 18 to 34.

In fact, we increased our market share among these customers to more than 30%.

Just to be clear, that's in sales to young adults across all sizes of on-road motorcycles.

In just the heavyweight category, we had nearly half of all young adult sales last year.

This sort of story is similar for on-road new motorcycle sales among other demographic groups as well.

We increased our market share among US women, selling more than half of all new motorcycles sold to these riders.

Our dealers sold nearly half of all the new motorcycles sold to Hispanic customers, and we increased our market share across all CCs among African-Americans to nearly 43%.

We are pleased to see these results, which reflect the impact of our multi-generational and a multi-cultural strategy.

Regarding our financial performance, in the first quarter, we saw earnings improvements at HDFS.

The team at HDFS has done an outstanding job of managing that business.

On the motorcycle side of the business, we announced this morning that we could see a modest effect on shipments this year as a result of a subcomponent supply issue related to last month's earthquake in Japan.

First, our hearts go out to the people of Japan in the aftermath of the tragic events there.

I just want to recognize all the members of the Harley-Davidson family in Japan where our employees and dealers are truly doing a remarkable job under very difficult circumstances.

Relative to our production operations, the transformation that's underway continues to move full speed ahead and we expect it to yield outstanding dividends over the long haul not only in terms of financial returns but also in our ability to be much more customer led in our production capabilities.

Here too our employees are doing some monumental work.

However, it's important to remember that we expect short-term inefficiencies as we make the transition at York.

In the first quarter, we reached another milestone in the transformation of our motorcycle operations with the ratification of the new labor agreement at our Kansas City plant which follows the ratification of new agreements in Wisconsin last fall.

We are now through the cycle of contract negotiations.

Working with our union leadership, we now have seven-year agreements in place in all of our facilities.

Now, it's all hands on deck in implementing the changes that will lead us in the future by being more flexible and customer led.

While we are in the midst of a lot of change, our employees are excited and energized because, through our strategy, we are taking one of the world's greatest iconic brands to the many roads of the world.

We are assuring like never before that we are customer led in all we do, making customers' dreams a reality by delivering remarkable products and extraordinary experiences.

We are transforming the business in ways that preserve Harley-Davidson's great heritage, even as we explore new ways to grow the reach of our brand globally.

While there are many challenges ahead, these are exciting times for our Company and we are pleased with our progress.

So, in closing, I want to thank all of our employees, dealers, and suppliers for their outstanding efforts to move Harley-Davidson forward.

I continue to be impressed with their dedication and commitment.

I'll be back later for questions, so let me turn it over to John for details on the quarter.

Thanks Keith and good morning everyone.

I will review the financial results starting on Slide 10 with the first-quarter results.

During the quarter, Harley-Davidson Inc.

consolidated revenue was up 1.5% behind a 0.3% increase in shipments of Harley-Davidson motorcycles.

Our first-quarter income from continuing operations improved to $119.3 million, an increase of 73.5%.

Similarly, the diluted earnings per share rose to $0.51 per share, up from the year-ago quarter which was $0.29 per share.

Our improved financial performance for the quarter was driven by strong operating income at HDFS and lower year-over-year interest expense as a result of last December's repurchase of $297 million of high-interest notes and a lower effective income tax rate than last year's first quarter.

Operating income from the motorcycle business was flat to last year's first quarter as lower gross margin largely impacted by the inefficiencies at York was offset by lower spending and our ongoing restructuring activities.

We are pleased with the quarter's results and our continued progress against our growth strategies and transformation of our business.

Moving on to retail sales on Slide 11, worldwide retail sales of new Harley-Davidson motorcycles were up 3.5% in the first quarter, driven by strength of international sales, which were up 11.3% in the quarter compared to last year.

In the US, retail sales in the quarter were down 0.5% and market share was 53.4%, down 1.9 percentage points from year ago and down slightly from the historical high we reached at the end of last year.

I would like to recognize the continued efforts and progress of our US dealers despite the impact of challenging macroeconomic conditions, which include persistently high unemployment, falling home values, and low consumer confidence.

The US dealer network is facing fierce price competition from deep competitive discounting and from strong values on used Harley-Davidson motorcycles.

Strength in the international markets was primarily driven by Europe region, which was up 22.7% compared to last year.

The year-over-year improvement was consistent with most countries in our Europe region and was aided by improved price availability compared to the first quarter of 2010, especially with respect to Sportster motorcycles, which was impacted by the shutdown of our Kansas City plant in the fourth quarter of 2009.

Canada sales were also up 7.5% during the quarter.

Asia-Pacific region was down 3.9% driven primarily by the impact on retail sales related to the natural disaster in Japan and severe flooding in Australia.

The Latin American region was down 5.4% as we closed the previously existing dealer network in Brazil and started the process of appointing new dealers.

This was planned as part of the agreement that was announced in December 2010 to terminate the exclusive dealer contract that was in place and allows us to expand our presence in Brazil.

On Slide 12, you will see wholesale shipments of Harley-Davidson motorcycles in the quarter were about flat to last year and within our expected range of 51,000 to 56,000 motorcycles.

First-quarter shipments were not impacted by the aftermath of the earthquake in Japan.

Shipment mix of Touring, Custom, and Sportster motorcycles were all within historical ranges.

Slide 13 summarizes a few key points about our dealer network in the US.

As I mentioned last quarter, as a result of stronger-than-expected fourth-quarter 2010 retail sales, the US dealer network's 2010 year-end inventory was at the lowest level in many years and below what we believe is an appropriate ongoing level.

During the first quarter in the US, we shipped about 35,000 Harley-Davidson motorcycles and our dealers sold roughly 32,000 at retail.

While US dealer inventory increased modestly over Q4 2010 levels in preparation for the spring selling season, it was down about 10,500 units compared to the first quarter of 2010.

We continue to believe the aggregate dealer inventory in the US is below an appropriate level to keep our brand healthy and execute our growth strategy.

Therefore, even with the modest shipment guidance adjustment announced today, we expect to replenish a portion of dealer inventory by year end.

We will continue to aggressively manage the supply of new bikes in line with demand while we also support the dealers' efforts to sell more used bikes.

Healthy used bike sales enhanced dealer revenue, maintain real resales and narrow the gap between new and used motorcycle pricing.

Used bikes sales to the US dealer network were up double digits through February compared to the same period last year.

When you combine the strong used Harley-Davidson sales with new retail sales in the US, total demand for Harley-Davidson motorcycles continues to be strong.

As the economic conditions continue to be challenging, dealers continue to proactively manage their businesses and we believe the US dealer network in aggregate remains profitable.

On Slide 14, you will see revenue for the Motorcycles and Related Products segment was up in the first quarter.

During the quarter, average motorcycle revenue per Harley-Davidson units sold increased $414 from the prior year as a result of favorable mix and currency exchange.

Parts and Accessory sales were up over 10% during the quarter, driven in part by a focus on product availability, high demand for our new accessory product offerings and growth in worldwide retail motorcycle sales.

General merchandise was down 5.6% in the first quarter compared to last year largely related to the timing of delivery of product between the first and second quarters of this year.

Turning to restructuring on Slide 15, our efforts to improve our cost structure and transform the business to be stronger and more profitable in the future are well underway.

During the first quarter, we incurred $23 million in restructuring expenses, which was about $25 million less than last year's first quarter when we incurred charges associated with the initial implementation of York's new labor agreement.

Our expected full-year total costs and savings associated with our restructuring activities are summarized on this slide.

This summary also includes the expected cost savings and associated changes to our Kansas City operations that Keith mentioned.

On Slide 16, you'll see gross margin in the quarter was 33.1%, 3.5 percentage points lower than the same quarter last year.

Gross margin for the quarter was impacted by four key drivers.

First, foreign currency exchange was unfavorable by $6 million during the first quarter.

Next, mix was favorable by $5.3 million despite a higher percentage mix of Sportsters versus higher-margin Touring and Custom motorcycles.

Mix was positively impacted by mix within families and by our Power Pack options offered at the start of the 2011 model year, while materials were unfavorable $5.7 million due to increasing metals and fuel costs.

Finally, as expected, manufacturing costs for the first quarter were unfavorable as productivity was impacted by temporary inefficiencies at our York facility as we restructure and transform our operations at that site.

As we have discussed for the past couple of quarters, the magnitude of change that is occurring at York is quite significant and includes retraining our entire workforce on a new operating system, outsourcing nearly 2000 non-core parts and subassemblies, moving and reconfiguring production lines, implementing a new ERP system, and redefining our vehicle delivery process.

The restructuring of our York facility is expected to be largely complete in the first half of next year.

Through the next several quarters, we continue to expect York deficiencies will be adversely impacted by restructuring activities.

Also reflected in the manufacturing line on the slide are higher product costs compared to last year due to new features and content that are offered on model year 2011 motorcycles.

On Slide 17, operating margin as a percent of revenue for the first quarter was 11.8% versus 12.2% in 2010.

Operating margin was negatively impacted by lower gross margin which was largely offset by lower restructuring spending as we lap last year's first quarter, which included significant charges associated with York's new labor contract.

SG&A was slightly lower during the quarter compared to the same period last year as we continue to carefully manage our expenses while we invest in our growth strategy.

As we have previously stated, we expect SG&A spending will decline as a percent of revenue between 2009 and 2014.

Now, moving on to our Financial Services segment on Slide 18, in the first quarter, HDFS posted a $67.9 million operating profit, an improvement of $41.2 million compared to last year.

The key drivers of the first-quarter results were net interest income of $12.6 million higher in the first quarter of 2011 versus the first quarter of 2010 due to widening interest-rate spreads driven by lower cost of funds on a lower receivables base.

The provision for retail credit losses was $28.8 million lower in the first quarter of 2011 versus first quarter of 2010, primarily due to improved credit loss rates as a result of favorable retail receivable performance.

During the quarter, HDFS reduced the total allowance for credit losses by $14 million to $159.7 million to reflect lower anticipated credit losses.

Now, Larry will provide more key detail on the HDFS' operations.

Larry?

Thanks John and good morning.

During the first quarter, HDFS originated $453.7 million in retail motorcycle loans, up 21.2% compared to the same period last year, primarily due to higher used Harley-Davidson motorcycle loan originations.

This corresponds to the increasing number of used Harley-Davidson motorcycle sales being made by the dealer network.

HDFS also increased its share of new Harley-Davidson loan originations, growing retail market share by 5.3 percentage points to 47.4% during the first quarter compared to the same period last year.

At the end of the first quarter, of the approximately $6.2 billion of finance receivables, $5.2 billion were retail and $1 billion were wholesale.

At the end of the quarter, over 50% of the retail portfolio was comprised of loans originated after underwriting changes were made in January 2009.

Consistent with recent quarters, retail loan originations were 80% to 85% prime.

The 30-day delinquency rate for managed retail motorcycle loans at the end of the first quarter was 3.68% or 89 basis points better than the same period last year.

Annual retail credit losses improved by 125 basis points to 1.58% in the first quarter compared to the first quarter last year.

This improvement was driven by the impact of changes in underwriting as well as lower frequency of loss and improvement in the recovery values of repossessed motorcycles.

We're pleased with the continued improvement in credit performance during the first quarter, but we'll continue to monitor the unemployment picture, motorcycle recovery values, and the pace of the recovery in the US consumer environment.

During the first quarter, HDFS delivered increased profits, maintained a strong liquidity position, and reduced our cost of funds.

We remain focused on enabling retail sales of Harley-Davidson motorcycles while providing an appropriate return to Harley-Davidson Inc.

Now, let me turn it back to John.

Thanks Larry.

Now, let's take a look at cash and liquidity on Slide 21.

As we mentioned during the Q4 conference call, HDFS paid a $125 million dividend to H-D Inc.

during the first quarter, reflective of HDFS' reduced capital needs on a lower receivables balance.

HDFS remains focused on delivering an appropriate return on equity and prudently managing its debt-to-equity ratio.

Also during the quarter, H-D Inc.

made a $200 million contribution to our qualified pension plans, which reduced our pension and post-retirement reliability to $354 million.

You'll see at the end of the quarter we had $1.05 billion of cash and marketable securities.

In addition, HDFS had approximately $1.24 billion of available liquidity through bank credit and conduit facilities.

For our cash and liquidity strategy, we continue to maintain a minimum of 12 months of projected liquidity needs in cash and/or committed credit facilities.

Now, I'll review the remaining Harley-Davidson Inc.

financials on Slide 22.

I'd like to highlight two items on this slide.

First, with regards to continuing operations, the Company used operating cash of $105 million during the first quarter, driven by the $200 million contribution to our pension plans.

Second, our effective income tax rate from continuing operations was 34.8% compared to 47.2% in 2010.

The Q1 2010 tax rate was negatively impacted by a one-time tax charge of $13.3 million associated with the federal healthcare reform legislation.

In 2011, we continue to expect full-year effective income tax rate will be approximately 35%.

Now, turning to guidance on Slide 23, based on what we know today about the anticipated subcomponent supply issue related to the aftermath of the earthquake in Japan, we have made a modest adjustment by reducing the low end of our shipment guidance to account for the uncertainty.

We now expect full-year 2011 Harley-Davidson motorcycle shipments to be between 215,000 and 228,000 units, up 2% to 8% from 2010.

During the second quarter, we expect to ship between 62,000 and 67,000 units.

We're also reducing the low end of our 2011 gross margin guidance.

We now expect gross margin will be between 33.5% and 35% for the full year due to incremental costs and potential unfavorable impact of mix and loss absorption associated with the expected supply chain disruption.

We continue to expect capital expenditures to be between $210 million and $230 million, which includes between $60 million and $75 million of capital related to restructuring.

As we look back on the first quarter of 2011, while the global economies continue to be challenged, we're happy to report our first retail sales growth since before the economic downturn took hold.

We're also pleased to see strong profits at HDFS and progress with our restructuring and transformation of the motorcycle business.

We are encouraged by the progress being made in our international markets with Europe and Canada retail sales well over last year's levels, Brazil already appointing new dealers to serve our customer in that market, and in Asia where we are humbled by the resilience and courage of our employees and dealers that they managed in the wake of tragedy.

As I mentioned earlier, we continue to be pleased by the efforts of our US dealers as they face challenges.

Overall, we are excited about the long term as we execute our strategies to transform and grow our business.

We will continue to manage the business prudently and have adjusted guidance as we navigate through the uncertainties that 2011 might bring.

We will also remain disciplined in the execution of our growth strategy throughout the year.

The supply-chain issues from Japan are certainly a bump in the road, but the fundamentals of our business are strong and we won't be deterred as we make progress along our journey to growth and we remain focused on delivering strong margins, strong returns, and value to our shareholders.

Thank you for your continued confidence and investment in Harley-Davidson.

Now, let's open the call up to your questions.

(Operator Instructions).

Sharon Zackfia, William Blair.

John, I was hoping you could give us some kind of incremental color on the cadence of the inefficiencies I presume at York that is pressuring gross margin.

I think it was $21 million or so in the quarter if I'm not mistaken.

Is that something that becomes less pronounced as the year goes on, or if you could help us think about that?

Yes, Sharon, the inefficiencies for York during the quarter -- let's take a step back.

Let's look at overall gross margin, and let's step back to what we had discussed last quarter when we issued initial gross margin guidance of 34% to 35%.

We said several things would happen -- first three things that would positively affect gross margin.

First was that gross margin would benefit from continued productivity and restructuring savings in the neighborhood of $50 million, and that's on the restructuring slide and certainly in line to deliver that.

Next, we said we expected incremental margin from higher shipment volumes behind our initial guidance about 5% to 8%.

Finally, we said we expect a modest mix favorability that would largely hit in the first half before we lapped the benefits of the Power Pack introduction.

We then said that these positive impacts to gross margin would be partially offset by headwinds from foreign currency exchange, higher raw material costs.

Finally, we said that we would incur temporary inefficiencies at our York facility as we continue to outsource non-core parts and cut assembly operations over to a single line.

Well, let's look at the first-quarter results and how we did against that.

First, currency was unfavorable by $6 million in the quarter or 0.6 gross margin point.

Next, mix was favorable despite the higher shipment base of Sportsters.

This was more than offset by the favorable mix within families and the high take rate on the Power Pack option.

Raw materials were unfavorable by nearly $6 million and that was driven by largely by steel, aluminum, and copper.

Then we had significantly higher fuel costs.

Finally, manufacturing costs were unfavorable despite the fact that volumes were flat.

When we look at that, the -- when we talk about the flat volumes, first we had talked about having incremental margin on a full-year basis.

Given the lat volumes in the first quarter, we didn't get any benefit from incremental margins but we still anticipate incremental margins will benefit us as we grow volumes for the remainder of the year and on a full-year basis, up 2% to 8%.

That should start to come in the second quarter as we've got our volume call up 3% to 7%.

Again, favorable manufacturing variance is largely explained by two items.

First, we had the higher product costs driven by features and content that ratted at the model year.

Then second is the manufacturing costs that were temporarily -- the temporary inefficiencies associated with the transformation of our York facility.

These were about $11 million in the quarter.

Again, we will expect them to continue throughout the transformation, which will run through the second half of -- I'm sorry, the first half of next year.

The year-over-year cost of these will improve as we move into the back half of this year, so as we lap the costs that started in the third quarter of last year and so last year, Sharon, about $5 million in each quarter.

I think it was $5 million -- $4 million in the third quarter and $5 million in the fourth quarter that we had last year, $11 million in the first quarter of this year.

Again, those expenses should taper off as we continue the execution and the transformation through the first half of next year and.

On a year-over-year basis, they will be mitigated by lapping the year-over-year costs in the back half of the year.

Ed Aaron, RBC Capital.

I just want to go back to your comments earlier about the market share performance in the quarter and it kind of slipping back down a little bit.

I think you mentioned the competitive discounting and the strong values in use.

Did you use comments that mean to imply that the pricing on used bikes is still relatively low and that's affecting new bike sales?

Did I interpret that correctly?

Because the demand there seems pretty good, so I'm wondering why pricing might not be firming more.

Well Ed, prices are firming and we've seen prices firm over the last several quarters and they continue to firm in the first quarter.

Overall, sales of used bikes -- and as we look at registrations, those are a month delayed through February.

Used bikes did sell very briskly.

They were up from February 23.4%.

That drove our total demand for Harley-Davidson motorcycles.

When you look at both used new and used motorcycles, total demand was up 18%.

So if we step back and look at what happened last year on a full-year basis, total demand was up 3.1%, which was driven by used bike sales up 11.8% and new bikes down 11.7%.

Obviously the new bike sale rate of decline improved as we went through last year, and so now within the first quarter or in the first two months of the year, used bikes continue to sell well.

So we are clearing a lot of used bikes from the market, which is good and in line with our strategy to narrow the gap between new and used pricing.

So, we do have brisk sales as well as rising prices on used bikes.

Okay.

Then maybe one more follow-up on the market share question.

Dealers are getting to be kind of concerned about the limited availability of product out there.

I'm kind of wondering if maybe we are at a point where production is almost starting to lead the retail instead of retail leading production.

Would you agree with that statement?

Well, it's in line with our strategy to aggressively manage supply in line with demand.

So when we look at -- the first-quarter inventories are low.

They are 10,500 lower than they were a year ago and in aggregate, on an going basis, we do believe they're lower than what we would like to see moving forward.

We will fix that by the end of the year by putting a little bit more inventory in or ultimately shipping in a little bit more than our dealers retail for the year.

James Hardiman, Longbow Research.

I'm going to ask Ed's question a slightly different way and then I had a question about second-quarter guidance.

But ultimately when you think about the disruptions taking place at York, do you think that a lack of product hurt retail sales during the quarter?

When you look at certainly your shipment numbers, Touring shipments were down, although overall retail was up a little bit.

Do you think the retail numbers -- certainly in our conversations with dealers, it seems like these guys are clamoring for Touring bikes.

Anecdotally are you seeing that?

Yes.

Overall, dealers are certainly clamoring for product, and I think more acute on the Touring side.

Again, this is in line with our strategy of limiting new bike supply to the price gap between new and used.

We're seeing that happening in the quarter.

So the question is are we missing any sales because of tight inventories?

I don't think that it is significant and if we are, we don't believe we're losing them to the competition.

What we would do is we are seeing some customers wait to get the exact model and color that they wanted.

It's going to take a little bit of time to get that as the dealers go throughout the dealer network or they wait for the bike to be shipped.

The second thing that we are seeing and it's certainly in line with our strategy is that a lot of customers are opting to buy used bikes.

Again, that is firming up used bike prices.

Until we get that relationship a little bit tighter, then we'll start to see a shift toward more new bike sales versus used bikes.

So everything is moving as we expected and as we hoped in the first quarter.

Again, overall total demand through February is up over 18%.

Thanks.

To that point, second-quarter guidance up basically 5% to 13% in terms of shipments.

You've talked about a little bit of inventory fill this year.

Is the second-quarter increase in shipments more about inventory fill or is it more about better strength that you are seeing at retail.

I guess also related to that, when you talk about the Japanese disruption, is that a second-quarter event?

In other words, would your guidance have been higher in the second quarter had it not been for the Japanese disruption, or is that a later on in the year type of an event?

Thanks.

Given -- with regards to your first question, James, is most of the inventory fill or getting our inventories a little bit more in line with an ongoing steady state of inventory will happen more in the back half of the year, not in the second quarter.

With regards to the second question, it's no, our guidance has not been affected by the supply disruption in Japan.

We would expect that to be more in the second half.

Craig Kennison, Robert W.

Baird.

I want to focus on the tragedy in Japan as well.

You mentioned the supply chain impact, but what do you see as the demand impact?

I think you sold about 11,000 bikes in that market at retail last year.

Then secondly, how do you see the supply chain impact affecting your mix?

Is it more severe for Touring bikes for example than for Sportsters?

Thank you.

The overall impact on the quarter in Japan, as you'll notice from the financials of the press release, was down 9.3%.

Clearly, the run rate or our sales rate changed dramatically from March 11 to the end of the month.

Again, as Keith had mentioned, our team is doing a wonderful job of keeping product flowing.

We do expect that the events in Japan will have an impact on retail sales on a full-year basis.

But you've got to keep in mind that it's only 5% of our overall sales.

So, while it will have an impact, we'll work through that.

Secondly, Craig, your second question was on the supply-chain disruption and I believe mix.

Right.

How might that supply-chain disruption impact mix?

Is it disproportionately bad for your Touring line?

Yes, let's start with what we know.

Harley-Davidson is a direct supplier.

We supply or support -- sorry, source a limited number of components, including electronics.

We've confirmed that all of our Tier 1 suppliers are up and running and there's no issues.

However, suppliers of our suppliers, we have identified a supply issue and that's with a chip used in our radios from a sub-tier supplier.

So based on what we know today, we are looking at -- we have viable paths resolved on the radio issue, but we do expect a supply interruption of radios that we anticipate could cause us to adjust the timing or the mix or the overall volume of shipments in the back half.

So because it's a radio chip, Craig, it will affect only a portion of our Touring motorcycle line.

Again, we are -- we've got an incredibly talented team of people working on it and we do have viable paths to resolve it, but we're taking the prudent and cautious approach and lowering volumes and letting everyone know that there is an issue and that we are working through it as expeditiously as we can.

Tim Conder, Wells Fargo.

Let me follow on the gross margin line of questioning with a couple of components there.

John and Keith, it seemed the wording though in the press release -- and John, just what you said, you believe you have viable alternatives.

It sounds largely though that you are going to be able to mitigate the Japanese supplier issue.

Is that the current feeling?

Then as it relates to I guess cadence of impact on gross margin, the $50 million in cost savings, any direction you can give us with that from the first quarter?

Then it would appear obviously that that's going to ramp throughout the year.

But any additional color you can give there.

Then finally on the gross margin, the FX headwind.

Was that -- is there some negative hedging impacts there that caused that to be negative?

Just a little more color on that.

Thank you.

Yes, this is Keith.

I'll start off with the supply issue.

I'll let John talk about the gross margins.

You know -- and again, John mentioned it.

We have a full court press on in terms of understanding the impact of every one of our suppliers, subcomponent suppliers etc.

We believe as we -- and this is a very fluid situation, even 1.5 months or so after the tragedy.

But we believe, as we sit here today, we have mitigation in place for all of these issues.

There could be a question around timing of, say, getting a supply from a new supplier for a certain chip or whatever that might be.

That's why we are being very cautious in terms of changing our bottom-end guidance because there could be some timing issues.

We're looking at -- we mentioned the Touring bikes.

We're looking at ways to mitigate that issue, even at a retail sales level.

So, our level of confidence is very high.

We're just, like everything else we are doing, we are just being very cautious that we don't sort of over-state the possible.

Keith, on that, what you just commented on about to mitigate the retail sales impact, would that -- and maybe I am reaching a little bit here -- but would that imply going ahead and shipping the bike and then putting in the radio afterwards so there would be -- obviously there would be a little bit of a cost impact, but it wouldn't be as much as missing that sale potentially?

Well, we are looking at several options around that, so we haven't really landed on one yet.

We have time here; we have time to make that decision.

We're talking to our dealers.

We're making sure that anything that we do is a value add for our customers instead of some perceived negative or a take-away.

All right.

Tim, the second part of your question is gross margin, the $50 million.

As I had mentioned, we certainly anticipate that we'll get all $50 million.

The pieces of our restructuring largely at York but other parts of the restructuring that we've got going on, as they fall into place, those restructuring savings will ramp.

Again, as I had mentioned, the temporary inefficiencies are at varying levels depending on the activities that are going on at York.

Those will act to dampen some of the gross margin expansion, but the $50 million will continue to build each quarter as we work our way through the year.

Then John, a rough number of maybe how much -- a rough guesstimate of how much was in the first quarter.

The temporary inefficiencies was $11 million.

Of the restructuring savings I guess.

I mean I don't know if you can separate the two or --?

Only provide $50 million on a full-year basis on the restructuring.

Hang on a second.

This is Keith again.

I just want to jump in here and say I know we keep talking about these inefficiencies at York.

Nothing happened at York that was unexpected, at least from our perspective.

We have all the confidence in the world that we are on track with this restructuring.

It's a major, major undertaking, no question.

Our people are fully engaged and -- but we don't sit here today and say "Wow, jeez, we didn't expect this or that." I think and as John mentioned, it will be mitigated as we go forward.

What we've said all along is that, by the end of 2012, this transition would be fully completed and will be into this whole new operating model that we've been implementing now for the last year, 1.5 years.

So far through this process, you guys have been on or slightly ahead of your plan all the way along.

It's been very clear.

Yes but you know and again, as you think about the transition, now we are right in the heart of all of the outsourcing of the 2000-some components.

You can only imagine the implications of all of that.

We are in the process now of moving into the new building; we are in the process of moving our assembly lines to a flexible assembly line where we can produce every product and every line.

We had some issues with the implementation of that as you might expect for some programming issues or whatever.

But those were things that while we would like them not to happen, are things that are not the usual unusual but sort of the usual issues that come along.

So again, I think if -- in my mind, there was probably about $1 million of costs that occurred that were sort of out of the what we might have expected and that had to do with the startup of some lines and things like that.

But you know, we are fully confident about where we're at and where we're going to end up here.

Finally, Tim, the last question you asked was on foreign exchange.

So, currency was benefited -- I'm sorry, revenue benefited from foreign currency exchange by about $9.9 million.

That was driven by a weakening dollar against the yen and the Australian dollar.

We're largely flat versus the euro.

Cost of goods sold, however, was unfavorable by $15.9 million, which is driving the $6 of unfavorability that I spoke to in gross margin.

That is driven largely by the remeasurement of the euro debt that we had.

It actually produced a gain a year ago of about $13 million.

So as you know, that debt was repurchased or that debt was extinguished when we sold MV Agusta in the third quarter of last year.

So there is no comparable piece this year with that.

Then again we're left with the gain that we had a year ago of $13 million.

That's what's driving the unfavorable currency exchange in gross margin of $6 million.

Rod Lache, Deutsche Bank.

Good morning everybody.

I just was wondering.

Since the York inefficiencies weren't unexpected, can you just give us a ballpark of what you had budgeted for this for the full year when you gave us the gross margin guidance?

We don't provide that Rod.

It's, again, the first quarter is the largest quarter that we've had on the inefficiencies because of the tremendous amount of things that are cutting over in the first quarter.

We do have other things that are going to happen throughout the year and into the second quarter of next year.

We expect them to taper off.

Then again, we will start to lap the inefficiencies that we had last year in the second -- third and fourth quarter which were about $10 million.

But you said that they would taper off quarter to quarter going forward.

Is that correct?

Well, the inefficiencies will be at varying levels depending on the activities that are going on at York, but in general, the $11 million is a high water mark.

Right, okay, yes, because it sounds like it could be obviously a positive one, (inaudible) away so it would just be helpful to get some quantification.

Just related to that, did you say that there were $10 million of costs related to additional content that you are putting into the product?

No, I did not say that.

Okay because the rest of that $21 million.

Yes, the other large piece of the overall manufacturing on Slide 16 I believe it was would be the cost of higher product cost, given the model year content that we added at the model year.

That includes the Road Glide Ultra, black line that just came out, certainly the cost of Power Pack and ABS options.

The revenue associated with those obviously is captured in revenue and on Slide 16 would come out in the mix section.

Again, mix was favorable as it bumped up against the unfavorable Sportster mix.

Right.

It just looks like the mix positive is less than the cost negative associated with that.

I'm not sure if I'm thinking about that right or wrong.

But it's --

The mix favorability would be higher than that, Rod, but you've got the Sportster mix which is a big negative coming in the mix, as we had about 4.5 percentage points more of Sportster mix than our custom motorcycles.

Okay.

And the -- I was wondering if you can quantify raw material cost expectations for the year and whether there is any consideration being given to adjusting pricing to reflect that.

Then lastly, on the mix, it's helpful that you give us the mix of production.

Can you just give us a sense of whether the mix of your retail sales is similar to what you are producing currently?

I'm sorry Rod, the first question --

Raw materials.

Raw materials.

Yes, we don't provide a full-year look at raw materials.

Certainly, they rose higher than they were in the fourth quarter of last year.

Metals drifted up a bit, but a lot of it in the newer news was on the fuel costs.

I don't know.

The fuel costs were probably $1.5 million to $2 million of the total.

The rest was in steel, aluminum and I believe copper.

But we don't have a full year -- we don't provide a full-year estimate of raw material costs, but we do expect, as I said last quarter in explaining the gross margin, that they will be higher on a year-over-year basis and we expect that trend to continue.

The mix of sales production mix through the first quarter versus the back half is we don't provide production mix but we could be affected by the mix of Touring bikes.

Again, as Keith mentioned, we've got viable paths to resolve the supply disruption, but that might affect our mix of Touring bikes as we move into the second half.

I was more asking about the mix of retail sales, whether it's kind of consistent with -- we see what your production mix is and understand that there obviously could be some production disruptions that presumably would be temporary.

But are your retail sales kind of matching the mix of production that we are seeing right now?

Yes.

Patrick Archambault, Goldman Sachs.

I guess maybe a couple on HDFS.

Can you give us a sense, first of all, in terms of where you think your provisioning could go?

I think you had said you had taken provisions down by, again, I can't remember the exact numbers.

Maybe it was like $14 million or something.

You know, you ended the year at 2.8% in 2010.

I'm not sure where that would put you now.

But could you give us a sense, as a total kind of managed receivables, what kind of provisioning you would kind of shoot for coming down from that 2.8% neighborhood I guess?

Patrick, this is Larry.

A couple of comments.

First, we are not going to give obviously forward-looking guidance.

What I can tell you is that the reserve at the end of the first quarter was 2.58%, down from 2.80% at the end of the year.

Then, obviously we go through a very disciplined process every quarter in evaluating the delinquencies, evaluating the credit losses during that quarter and then looking, trying to look forward sort of over the next, say, 12 to 15 months and figure out where we stand and then make adjustments to the allowance based on that outlook.

So, obviously we don't want to give forward-looking guidance but we did take it down 22 basis points during this quarter.

That made up almost the total of the $14 million that John mentioned for the reduction in the allowance.

I guess but just to ask it a different way, if you look back sort of the mid part of the last decade, you got down to sort of 1.2%, 1.3% in terms of your allowance, which would suggest on paper that you still have some potential to go if credit trends continue to go to the right way, which they clearly are.

Is there something that would prevent you from taking provisions to that level, or should we at least assume that, if credit trends continue to behave well, there's definitely further upside from lower provisions in the HDFS bucket?

I would look at it and say our retail credit losses in the first quarter were 1.58%.

Certainly, we have a reserve that is higher than that at the moment.

So, there is at least the potential that there could be some additional reduction if credit trends continue to be positive, but that's going to depend on consumer behavior and how our portfolio performs and how our recovery values performs.

So we'll evaluate that every quarter as we go forward and obviously make adjustments in our allowance for losses as we do every quarter.

Okay, that's helpful.

Actually, one more on HDFS is you said your funding mix in terms of 2011, you've got a strategy of being a little bit more balanced, which means it sounds like you're going to look to do both unsecured as well as ABS.

How should we think about the cost aspects of that, because clearly you're -- it's going to be a little bit more expensive obviously to do medium-term notes than ABS.

So is that something that -- can you give us a sense of maybe order of magnitude what kind of funding mix you might move to and whether that is something that could constrain net interest margins.

Sure.

I mean obviously once again we are not going to project where we are going to be in the future but just to give you a sense, I think our last securitization we did in 2010, I think the all-in cost and everything was probably about 1.5%.

We did a $450 million unsecured deal here in the first quarter.

The overall cost of that was a little below 4%, so you can see the difference in cost when you're dealing with that mix.

Obviously, I think it's important for us to have diversified sources of funding in the business, and we're going to try to balance that with having what we think is an appropriate overall cost of funds.

Where we sit today, I think on the term financing, we're about half unsecured, half through securitization.

We'll continue to evaluate that mix going forward.

Okay, but it could be sort of broadly in that proportion going forward, sort of half and half?

Broadly, but I would say obviously we're going to, at different times, try to take advantage of different market conditions.

If one market is more attractive, then we are going to maybe move a little heavier in that direction.

Okay sure.

Then I guess the last one I have is just changing gears a little bit -- is can we just talk a little bit about Brazil?

How much of that is just the impact of the distribution changeover in that market?

When is that expected to resolve itself?

Because -- and how is the underlying sort of market itself, absent those issues, behaving in terms of demand, and then also maybe a little bit of color on how Europe was so strong?

I know I guess there is an easy comp there because of the non-availability of product last year, but maybe we can talk about sort of how you would characterize the sort of end-market demand in Europe as well sort of ex-that item.

Patrick, the Latin America region was down 5.4% and that was largely all driven by Brazil.

We entered into an agreement to exit our exclusive dealer in Brazil again in December.

Basically what happened is, in early February, the dealer network, they had nine dealers that -- exclusive distributor had nine dealerships.

They all closed.

We've been adding dealers back, but the dealers that we added back did not begin selling product in the first quarter and we expect them to be up by the second quarter selling products.

How would you characterize just the underlying sort of health of the market?

Is that a -- is it something you would expect to be materially up year-on-year once you get your distribution back in place?

How long could that take I guess?

Patrick, this is Keith.

We think the underlying condition of the market is good.

Moving on to your question about Europe, I mean we're putting feet on the ground in Europe.

We're putting an organization in place that's really driving our improvements there.

We're putting dealers in place.

So it's all just part of the strategy that we've been talking about for the last couple of years, and we really feel good about our team in Europe.

And just sorry, just last on Brazil --

Patrick, we have to move on.

I'll follow-up with you on Brazil, though.

Robin Farley, UBS.

Thanks.

I just wanted to get a little clarification on your US strategy.

You had mentioned still wanting to build up inventory ahead of sales this year.

I guess that could mean one of two things.

It could mean you're either expecting US retail sales to be down for the year, or that you are expecting to ship more than an 8% increase to the US.

I am just wondering if you can clarify kind of which of those two things your strategy implies.

Then I have a follow-up question as well.

Robin, this is John.

I don't think it implies either of those.

We're simply going to ship.

We expect to ship in a little bit more than we sell.

So that means year-end inventories as we exit 2011 will be a little bit higher than they were in 2010.

Other than that, it's not implying anything except for we believe that inventories are a little bit lower than they need to be on an ongoing basis for the health of the business, and we look to put back a little bit more inventory by the end of the year.

So I guess to sort of understand what assumption you're factoring in for US retail sales for the year may be helpful.

Robin, we don't provide retail sales guidance, so we've got our shipment guidance out there, which is 215,000 228,000 are up 2% to 8%.

With that we, again, we expect to add a little bit and sell in a little bit more than is retailed.

Okay.

Then you talked earlier about used pricing as an indicator to you of your shipment strategy for new bikes.

Can you give us a sense of where used pricing is as a percent of new bike prices versus what your goal is or where you think that level should be?

The goal is to get back to the 2007/2008 levels of used bike prices in relationship to MSRP.

We don't provide an ongoing look at where we're at.

There are so many models, different families, different motorcycles, and all those pieces.

What we are very confident of and happy certainly to report is that those used bike prices have been firming up for several straight quarters and are certainly ahead of year-ago levels.

We still have a way to go, Robin, to get to where -- our goal of being at 2007/2008 used price levels.

The last question is previously you've talked about looking at the ratio of used and new bikes as kind of a guide to you of what -- of how you would think about new bike production.

Is that still a way that you think about it or is that ratio not as important to you?

Well, I think the ratio is a fact that it went from 1-to-1 to 2.3-to-1 by the end of 2010 from 2007.

Other than that, the real issue is the pricing dynamic between new and used, and that's what we're focused on.

Your final question, due to time constraints, comes from the line of Greg Badishkanian, Citigroup.

My question is just with respect to the Japan crisis.

Has that been -- what's been the impact on some of your competitors?

Do you have any visibility into that?

Well Greg, you know, we read all the stuff that's written about the competition and certainly they've had plants down.

They've had plants up; they've had plants down.

They are being affected.

It's hard to tell exactly what's happening in terms of their shipments though.

Our competition has got a fair amount of old product in the network.

As a matter of fact, during the first quarter, our Japanese competition sold 75% to 90% of all bikes that they sold in the first quarter were old model years.

So, while we know their plants have been down for varying periods between the various competitors, there still seems to be a fair amount of old inventory in the system.

This concludes our question-and-answer session.

Thank you for your time this morning.

We appreciate your investment in Harley-Davidson.

Thanks everyone.

The audio and visual support for today's call will be available at Harley-Davidson.com.

The audio can also be accessed until May 3 by calling 706-645-9291 or 800-642-1687 in the US.

The PIN number is 53244958#.

If you have any questions, please give us a call at 414-343-8002.

Thank you.

This concludes today's teleconference.

You may now disconnect.