Harley-Davidson Inc (HOG) 2011 Q4 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the fourth-quarter 2011 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) Amy Giuffre, Director of Investor Relations, you may begin your conference.

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

The audio for today's call is being webcast live on Harley-Davidson.com.

The slides, which are generally available at least 30 minutes prior to the call, can be accessed by clicking on Company, 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.

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

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

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

Then we will open the call for your questions.

Let's get started.

Keith?

Thank you, Amy.

Good morning and thanks for joining us on the call.

Throughout 2011 everyone at Harley-Davidson has been hard at work transforming our company.

We have come a long way and I couldn't be more proud of our team.

I know our entire team finds it gratifying to see these efforts reflected in the financial results that we reported today.

Our fourth quarter continued the positive trend of this year.

We had strong improvement in earnings in Q4, capping off a year in which earnings more than doubled from 2010.

And the year finished strong at retail as well.

New Harley-Davidson motorcycles were up almost 11% worldwide compared to last year's fourth quarter and up almost 6% for the full year.

Sales were strong in both the US and the international markets.

Once again, we gained market share.

For the fourth quarter, Harley-Davidson held a 59.4% share of the US heavyweight market and our 2011 full-year market share was 55.7%.

These results are a demonstration of the dedication and hard work of all of our employees and our dealers to be customer-lead and to fulfill customers' dreams through remarkable motorcycles and extraordinary customer experiences.

We are committed to be world-class in everything we do.

To be more agile, more efficient, and more effective at developing and building great motorcycles and delivering them to customers around the world.

Let's take a look at some of the key milestones along our journey.

In 2011 we made great strides in the transformation of our York operations.

All the motorcycles there are now built under one roof on one assembly line.

But even more powerful than the bricks-and-mortar change is the change in the culture, where the employees on the line are creating and implementing operating improvements on a daily basis.

Similar changes are underway in the operating structure at Kansas City and are on a fast ramp up in Milwaukee and Tomahawk in preparation for the new contract that will enable these changes in just a couple of months.

And our CKD operations in Brazil and India are implementing these operating systems as well.

We also moved into a new facility in Brazil to give us the capability and the capacity to meet the needs of that growing market going forward.

When it comes to creating remarkable motorcycles, we have reengineered our entire product development approach and it really started to gain traction in 2011.

The goal is to implement a laser focus on the best product opportunities, to reduce time to market, and increase product development capacity through efficiencies.

So while this work is more behind the scenes and not as visible as manufacturing, it is just as significant.

At retail we began the work with our worldwide dealer network to provide the capabilities and systems that will improve all the ways that Harley-Davidson interacts with customers.

The goal is to provide a premium retail experience with every customer, every day, and everywhere in the world while strengthening our dealer profitability.

One example is e-commerce, where in 2011 we laid the foundation for an entirely new, rich, and distinctly Harley-Davidson online shopping experience that will roll out this year.

In 2011 we continued to expand in international markets.

We opened regional headquarter offices in Singapore to support the Asia-Pacific region and in Miami to support Latin America and Mexico.

We added 35 dealers in international markets, including Mexico, India, Thailand, Turkey, China, and Brazil.

In fact, in Brazil we completely [restructured] the retail operations through 11 new dealers.

Together with the team here at Harley-Davidson, they have done a fantastic job and it's the key reason, along with improvements in Mexico, for the 17.5% retail sales growth in Latin America in 2011.

And there are many other examples of progress including the nearly completed efforts to right-size the US dealer network and to support them more effectively, and our continued success reaching young adults, women, and other outreach customers, even while we retain remarkable brand loyalty with our existing customers, or outperforming a flat S&P 500 with a 12% rise in share value.

While we are encouraged by all this progress, there is still a lot to be done over the coming months and our team is working harder than ever to deliver on our goals.

As we look at the rest of 2011, we will continue to keep a close watch on the marketplace and remain cautious in our expectations at retail, given the degree of continued economic uncertainty, including regions like the euro zone.

But our vision is clearly set on the future as we continue the transformative work that is underway and we continue efforts to restore margins and profitability and to continue to meet the challenges of the ever-changing marketplace.

By transforming our approach to product development, manufacturing, and the retail experience we believe we will continue to exceed customers' expectations globally to create growth opportunities and sustain our business for all of our stakeholders.

So, again, I want to thank all of our employees, our dealers, and our suppliers for their tremendous efforts in 2011 and for their hard work in the coming year.

And thanks to our shareholders for your investment in Harley-Davidson.

So I will be back later to answer questions, but now let me turn it over to John Olin.

Thanks, Keith, and good morning, everyone.

I will review the financial results starting on slide nine with the fourth-quarter results.

During the quarter Harley-Davidson Inc.

consolidated revenue was up 9.3% behind a 14.0% increase in shipments of Harley-Davidson motorcycles.

Our fourth-quarter income from continuing operations improved to $54.6 million, an increase of $96.7 million.

Similarly diluted earnings per share rose to $0.24 per share, up from the year-ago quarter which was a negative $0.18 per share.

Operating income for the Motorcycle business was up $35.6 million, up $42.3 million compared to last year's fourth quarter.

The strong increase in the motorcycle business was driven by increased motorcycle shipments and the higher gross margin as compared to last year partially offset by higher SG&A and restructuring spending.

Operating income at Harley-Davidson Financial Services was up 30.7% behind improved credit loss performance.

Finally, our improved financial performance for the quarter was also driven by lower year-over-year interest expense as a result of the December 2010 repurchase of $297 million of high interest notes.

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

Now let's take a look at retail sales on slide 10.

Overall, worldwide retail sales of new Harley-Davidson motorcycles were up nearly 11% in the fourth quarter, the largest quarter-over-quarter increase in the past 25 quarters.

For the full year worldwide retail sales were up 5.9% compared to 2010.

This reflects global product appeal -- strong global product appeal, worldwide dealer efforts, and our continued investment in growth opportunities around the world.

In the US, retail sales in the quarter were up double digits despite the challenging, but slightly improving, economic environment.

Sales in the US during the quarter were supported by strong product offerings, improved consumer confidence, and improved product availability.

For the full year US retail sales were up 5.8% and the full-year market share strengthened by 0.8 percentage points to 55.7%.

Retail sales in international markets for the quarter grew 9.7%, driven by growth in all regions.

For the full year international retail sales were up 6.1%.

During the fourth quarter, Latin America was up over 40% as the dealer networks in Brazil and Mexico continue to come up to speed and tap into new growth opportunities in those markets.

Canada was up 18.8% in the quarter, which pushed Canada's full-year retail sales into positive territory for the year.

Sales in the quarter benefited from consumers in Quebec purchasing motorcycles before a sales tax increase took effect in January.

The Europe region was up nearly 6% for the quarter compared to 2010.

Similar to last quarter, Germany, France, and emerging markets saw strong retail sales growth partially offset by softness in Southern Europe and the UK.

Market share through November was 13.7%, up 1 percentage point, our highest market share ever in the European market.

Retail sales in Asia-Pacific region were up 2.5% in the quarter driven by double-digit sales growth in both Australia and emerging markets, partially offset by declines in Japan.

On slide 11 you will see wholesale shipments of Harley-Davidson motorcycles in the quarter were up compared to last year and within our expected shipment range of 45,500 to 52,500 motorcycles.

Temporary production constraints at York eased during the fourth quarter allowing a higher mix of touring motorcycles compared to last year.

Sportster represented 18.1% of total fourth-quarter shipments and finished near the high end of the historical range of 18% to 22% for the full year, which was expected due to strong demand for Sportster models and because York production has been temporarily constrained.

Slide 12 provides some additional detail on the US dealer network inventory and demonstrates the strength of our brand as measured by total demand in the US.

During the fourth quarter inventory in the US grew nearly 10,000 units from third-quarter 2011 level as dealers prepared for spring.

Year-end US dealer inventory was up slightly compared to last year.

We remain committed to aggressively managing new motorcycle supply in line with demand.

We believe that the US dealer network profit margins have improved compared to last year behind higher retail sales and prudent management of their cost structures.

Used bike sales in the US dealer network were up double digits through November compared to the same period last year.

When you combine used bikes sold through all channels with new bike sales, total demand for Harley-Davidson motorcycles in the US remains strong.

On slide 13 you will see revenue for the Motorcycles and Related Products segment was up 12.0% in the fourth quarter and up 11.6% for the full year behind strong growth from all our businesses.

Harley-Davidson motorcycle revenue was up 13.5% behind a 14.0% increase in shipments during the fourth quarter and up 13.3% behind a 10.7% increase in shipments for the full year.

For the full year the average motorcycle revenue per unit increased $340 from the prior year primarily driven by favorable currency exchange.

Parts and Accessories sales were up 7.9% for the quarter driven in part by holiday sales promotions, focus on product availability, and growth in new and used motorcycle sales.

For the full year P&A sales were up 9.0% over 2010.

General merchandise was up 12.8% in the fourth quarter as a result of increased sales in certain categories such as leather and sportswear.

For the full year, general merchandise revenue was up 5.8% over 2010.

Turning to restructuring on slide 14, for the last three years we have been intensely focused on improving our cost structure and transforming the business to be stronger, more flexible, and more profitable in the future.

York continues to be a key focus of our restructuring activities.

During the fourth quarter we continued to experience downtime but we achieved our target throughput rates by the end of the fourth quarter, which was ahead in our initial expectations.

Also during the fourth quarter we announced our plan to exit our Australian wheel and hub manufacturing operations.

We experienced $6 million in temporary inefficiencies during the quarter and $32 million for the full year.

Restructuring expenses were $19.0 million for the fourth quarter and $68.0 million for the full year, which was slightly lower than anticipated.

We have adjusted our remaining total projected restructuring cost to reflect refined timing and reduced the range of total expected program costs due to favorability to date.

We expect temporary inefficiencies in 2012 to be generally in line with our 2011 temporary inefficiencies as we complete the restructuring at York, implement our new labor contracts in Kansas City and Wisconsin, and exit our wheel manufacturing operations in Australia.

In the second quarter of 2012 we plan to implement a new ERP system at York which we expect will give us many new capabilities across the supply chain, including the ability to do more factory customization, enable more flexible production, and provide end-to-end supply chain integration.

We expect to experience downtime at York as the system is installed and our employees manage through the steep learning curve.

To minimize the impact on dealers and customers during the implementation, we produced more motorcycles than typical in the fourth quarter and expected to carry higher company inventory into the second quarter of 2012 when we expect production to be impacted by the ERP implementation.

As a result, fourth-quarter inventory was up $92 million, largely due to approximately 7,000 additional units that were built during the quarter.

As of the end of 2011, we realize $217 million in annual ongoing savings as a result of restructuring activities which was within our expected range.

We continue to expect total ongoing annual savings of between $315 million and $335 million upon completion of our restructuring activities.

On slide 15 you will see gross margin in the quarter was 31.2%, which was 1.6 percentage points higher than last year.

Gross margin for the quarter was favorably impacted by all areas noted on the slide except raw materials, which were unfavorable due to increased metals and fuel costs compared to last year.

Manufacturing benefited from restructuring savings and incremental margin on higher volumes.

Full-year gross margin was 33.4%, which was 0.8 percentage points below the prior year and slightly lower than our expected range of 33.5% to 34.5%.

Gross margin was impacted by higher-than-expected raw material costs and mix that was less favorable than expected.

On slide 16 operating margin as a percent of revenue for the fourth quarter was 3.5%, up 4.2 percentage points compared to last year's fourth quarter.

Operating margin was favorably impacted by higher gross margin, partially offset by higher SG&A and restructuring costs.

As expected, SG&A was roughly $6 million higher during the quarter compared to the same period last year driven by the recent brake switch recall.

For the full year SG&A increased $41.7 million from 2010, largely the result of investment in growth and [in the call].

As a percent of revenue SG&A was 1.3 percentage points lower at 19.9% as compared to 2010.

We expect SG&A spending will increase on a year-over-year basis as we continue to invest in growth, but decreased as a percent of revenue through 2014.

Now moving on to our Financial Services segment on slide 17.

In the fourth quarter HDFS profit increased $13.3 million, or 30.7%, compared to last year.

The three key drivers of fourth-quarter results were provision for retail credit losses was $8.6 million lower in the fourth quarter 2011 versus the fourth quarter 2010, primarily due to lower credit losses as a result of favorable retail receivables performance.

Second, provision from wholesale credit losses was $3.2 million lower in the fourth quarter of 2011, primarily due to favorable wholesale credit loss performance.

And, finally, HDFS operating expenses were $3.7 million lower than last year.

On a full year basis HDFS posted an operating profit of $268.8 million, an increase of $86.9 million or 47.8% compared to last year.

As we look forward to 2012, we believe HDFS's operating income will decrease compared to 2011, primarily due to the lapping of approximately $40 million of 2011's balance sheet allowance releases.

We cannot assume a similar financial benefit will recur in 2012.

We expect 2012 operating income will also be impacted by lower net interest as the book of retail loans continues to contract and modest tightening of margins on [fine-tier] retail lending.

We are very pleased with the performance of the business and believe HDFS provides a competitive (technical difficulty) Harley-Davidson motorcycles and related products.

Now Larry will provide more detail on HDFS's operations on slide 18.

Larry?

Thanks, John, and good morning.

During the fourth quarter HDFS retail motorcycle loan originations increased 14.2%, or $43 million.

[The increase was] driven by higher new motorcycle loan originations behind a strong increase in retail sales and a 2.6 percentage point increase in market share.

Used motorcycle loan originations also increased compared to last year.

For the full year HDFS retail market share, new Harley-Davidson motorcycles sold in the US was 51.0%, up 3.1 percentage points compared to last year.

In 2011, 80% to 85% of our new loan originations were prime, in line with last year.

At year-end 74% of our total portfolio was comprised of loans originated post-underwriting changes made in January 2009.

However, with the higher level of receivables originated prior to the start of the economic downturn rolling off the books, finance receivables outstanding decreased 4.5% compared to a year ago.

This declining receivables pool reflects the lower US retail sales through the downturn and will continue to impact HDFS net interest income.

During 2011 HDFS was focused on prudently increasing overall credit application approval rates and we saw a modest increase in the fourth quarter.

Our goal is to have a portfolio that continues to perform well over time and delivers an appropriate return on equity.

We are very pleased with the improved retail delinquency rate and retail credit losses compared to last year, which you will see on slide 19.

The 30-day delinquency rate for retail motorcycle loans at December 31, 2011, was 3.85%, or 122 basis points better than the same date last year.

Annualized retail credit losses improved by 91 basis points to 1.20% for 2011 compared to last year, driven by the impact of changes in underwriting implemented three years ago as well as the lower frequency of loss and improvement in the recovery value of repossessed motorcycles.

A portion of this loss improvement is due to recoveries on loans written-off in prior years.

Given the strong credit performance of loans originated since 2009, we expect lower levels of recoveries in future periods.

We are pleased with the progress in HDFS in 2011.

During the year we maintained a strong liquidity position, reduced our cost of funds, and delivered strong profitability.

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

The most recent example of this is the $225 million dividend HDFS paid to Harley-Davidson Inc.

earlier this month.

Now let me turn it back to John.

Thanks, Larry.

Now let's take a look at cash and liquidity on slide 20.

We will see that at the end of the quarter we had nearly $1.7 billion of cash and marketable securities, which includes the impact of a $525 million asset-backed securitization transaction that HDFS completed during the quarter at a weighted average rate of 0.99%.

In addition, HDFS had $920 million of available liquidity through bank credit and conduit facilities.

We currently have and intend to continue to maintain a minimum of 12 months of projected liquidity needs in cash and/or committed credit facilities.

Earlier this month there were two significant transactions related to cash in 2012.

Larry just mentioned the dividend HDFS paid to HD Inc.

We also made a $200 million contribution to our qualified pension plans, which will reduce our year-end pension and post-retirement liability of $571 million.

I am also very pleased to report that during the quarter we repurchased approximately 3.5 million shares of Harley-Davidson stock for $127 million.

As we have stated, returning value to our shareholders through dividends and share repurchases is a top priority.

We will continue to evaluate opportunities to enhance value for our shareholders.

Now I will review the remaining Harley-Davidson Inc.

financials on slide 21.

I would like to highlight two items on this slide.

First, with regards to continuing operations, the Company generated operating cash of $885 million during 2011 after a $200 million contribution to our pension plans.

The Motorcycle business continued to generate strong cash flow of $673 million of operating cash during the year.

Second, for the full year the Company's effective tax rate from continuing operations was 30.9% compared to 33.5% in 2010.

In 2012 we expect full-year effective income tax rate will be approximately 35.5%.

As noted on slide 22, during the fourth quarter we realized a $51.0 million benefit on income from discontinued operations driven by the reversal of prior-year tax reserves related to our divestiture of MV Augusta.

We do not anticipate any further financial implications associated with our sale of MV Augusta.

A summary for the full-year 2011 financial results is on slide 23.

We had net income of $548.1 million from continuing operations in 2011, which was double compared to last year's results.

Earnings were positively impacted by higher revenues and improved operating margins in the Motorcycle segment, strong operating income at HDFS, lower year-over-year interest expense as a result of repurchase of $297 million of debt in 2010, and a lower effective tax right in 2011 as compared to 2010.

On slide 24 you will see that for 2012 we expect Harley-Davidson motorcycle shipments to be between 240,000 and 245,000 units on a worldwide basis, up 3% to 5% from 2011.

Our full-year 2012 shipment estimate takes several factors into consideration including macroeconomic concerns, near-term production limitations driven by our ongoing restructuring activities, and our strategy to move production closer to retail sales.

First, while we are encouraged by our strong retail sales in the fourth quarter, we remain cautious on the US recovery and concern over the continuing debt crisis in Europe.

In 2012 we will continue to aggressively manage the supply of new motorcycles in line with demand.

Second, as I mentioned during the restructuring comments, we expect temporary capacity constraints to offset or to affect our production volume in the second quarter.

To mitigate production disruptions during the implementation of the new ERP system in York, we expect to carry higher company inventory into the second quarter of 2012 and we expect production to be impacted by the implementation.

Lastly, our 2012 shipment guidance takes into consideration a new capability to efficiently flex our labor force starting in the first half of 2013.

This capability is a key component of our strategy to be more flexible and to efficiently produce motorcycles closer to customer demand.

Beginning in early 2013 we expect to be able to increase production at our York facility by adding flexible workers, thus increasing capacity utilization in the first and second quarters of 2013.

Consequently, in the US, we expect our dealers to retail more units than we ship in 2012 thereby lowering year-end retail inventory in the US dealer network.

Our ability to maximize flexibility in the entire manufacturing system will occur in 2014 when the same capability will be in place for our Kansas City and Wisconsin operations.

During the first quarter we expect shipments -- we expect to ship between 58,000 and 63,000 units in an effort to increase US first-quarter dealer inventory and prepare for second-quarter implementation of the ERP system.

This increase in the first-quarter shipments is possible because the York plant is currently running at our targeted throughput.

We expect full-year 2012 gross margin will be between 34.75% and 35.75%.

We expect gross margin will be positively impacted by incremental restructuring savings, increased productivity from every day continuous improvement opportunities, and the 2012 model year pricing actions announced in July 2011.

We believe that product mix, raw materials, and temporary inefficiencies from our restructuring activities will be comparable to 2011 levels while we expect currency to be a headwind in 2012.

Finally, we expect capital expenditures to be between $190 million and $210 million which includes approximately $25 million of capital related to restructuring.

As we look back on 2011, we are very pleased to deliver strong results and progress on many fronts.

As Keith and I mentioned earlier, earnings for 2011 more than doubled.

We also repurchased 6 million shares of our stock for $218 million during the year.

Retail sales in all regions were up compared to last year, and we gained market share in major markets around the world as increasingly more diverse customers are being drawn to the Harley-Davidson experience.

We have made great strides towards transforming to a best-in-class manufacturing and product development and have sharpened our focus on continuous improvement across the organization.

We will continue to prudently manage through any challenges the future might bring and we are excited about the long term.

We remain focused on executing against our strategies to complete the transformation of our organization and grow our business, while 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) Felicia Hendrix, Barclays Capital.

Good morning.

You guys kind of touched on this a little bit, but I just wanted to talk about your unit guidance for 2012 just to understand it a little bit more clearly.

You mentioned that it's heavily weighted to the first quarter; you built some inventory in the fourth quarter, you build some in the first half to just kind of compensate for potential disruption.

I am just wondering, just wanted to make sure that I am interpreting this correctly.

Based on that comment, would you expect unit growth to be up again in the second quarter?

And then is it possible for us to see units down for the rest of the year?

And then just one follow-up with gross margins.

I was wondering if you could just walk us through the components of the $17.9 million improvement related to manufacturing, because that was the biggest difference between your actual and our estimates.

Thanks.

Okay, Felicia.

Again, as you had mentioned, in the fourth quarter we were running very well at York and we produced 7,000 more units of product from York that we will hold in inventory for shipment in the second quarter.

Our guidance for the first quarter is up, I believe, 8% to 17% and with that we hope to build a little bit extra in the first quarter, too, to bring that into the second quarter.

We are not providing specific guidance for the second quarter at this time, but to say that given the implementation of ERP system production will be affected quite a bit, probably during the quarter down about 40%.

So, again, we are not going to provide second quarter, but we should have inventory to cover the implementation of the ERP system or the downtime caused by that.

And the second question, Felicia, I believe was the $18 million of manufacturing favorability in the fourth quarter and that was driven largely by the restructuring savings that we have had coming in.

So when we look at restructuring on a full-year basis we had $45 million of favorability and a lot of that came in in the second half -- in the second quarter.

I am sorry, in the second half, in the third and fourth quarter, and that is largely the $18 million.

Also benefiting manufacturing in the fourth quarter was the incremental volume that we produce.

Okay.

So maybe I missed this, but you guys missed the guidance so I am just trying to figure out where that -- I guess the quarter came in lower than we would have expected based on your guidance.

I was just trying to understand where the difference was.

So overall -- so on a full-year basis; let's talk about full year.

We had gross margin of 33.4%.

Our guidance as of the third quarter was 33.5% to 34.5%, and so that would put -- we missed a little bit expectations in the fourth quarter because we gave that guidance in the third quarter.

Two things that affected our profitability in the fourth quarter in terms of gross margin.

One of them was raw materials.

Raw materials increased in its unfavorably from 7.9% to -- I am sorry, $7.9 million to $9 million.

Given the fact that our shipments went down by about 20%, we had expected raw materials to come down a little bit on a quarter-over-quarter basis.

So that was a little bit of it.

It takes time for the raw material increases to flow through the system and we would expect the raw materials costs to start to mitigate at this point going forward.

The second area is mix.

So coming out of third quarter we had an unfavorable mix of about $27 million driven by the disruptions at York at that time.

We said we expected mix to be favorable in the fourth quarter and it is by $1 million.

However, we did expect a little bit more favorability out of mix.

Good news is that the mix was not driven by our touring production.

Matter of fact touring production was 42.6% of our overall production for the quarter and over the last three years that is the highest production of touring that we had.

I think one other quarter we were also at 42.6%.

So, again, the plant was working very well.

So where mix was a little bit less than expectations was on model mix, an example of that would have been high content of CVO and very high profitable CVO models.

So we have pushed some of that off and we will make it up in ensuing months given the high content and the complexity of the head.

Another example of mix being a little bit less than anticipated was in our Parts and Accessories business.

I mentioned in the third quarter that we have got to focus on and increase our share of market in consumables, which tend to have a lower margin.

Those sales were up quite considerably in the fourth quarter, which is great news, but it did affect our mix a little bit negatively.

Okay.

All very helpful.

Thank you.

Craig Kennison, Robert W.

Baird.

Morning.

Thanks for taking my question.

John, you said that you plan to retail more than you ship in the US.

What is the worldwide expectation?

Worldwide would be the same.

In aggregate, we would expect shipments to be lower given our capability to move production closer to demand.

However, given the shipment of international and the time it takes to get the bikes to international markets, we would not expect a big move in international inventories.

But on a worldwide basis they will be down led by the US.

So on a worldwide basis you would expect to reduce inventory?

Yes.

And then a quick follow-up, on SAP could you give us any milestones to focus on for 2012 as you make progress on that initiative?

Well, right now we feel great about where we are at.

We are in the final phases of testing and we will begin the implementation in the second quarter, so we will know a lot more by the time we report earnings at the end of the second quarter.

So we feel good about where we are at.

We have built up inventories so that we don't disrupt on the flow of product to our dealers and customers, and it will be installed by the end of the second quarter is the plan.

Thanks, and congrats to the entire team.

James Hardiman, Longbow Research.

Good morning.

Thanks for taking my call.

Just wanted to delve in a little bit more with the shipment guidance for 2012.

As we think about that 3% to 5% growth rate obviously there are a lot of puts and takes with what you are doing.

I guess my question is, from a production standpoint, should we think about that 5% as ultimately the maximum amount of shipments we could get from your production given the inefficiencies at York?

Or is that 5% more indicative of where you think retail is going to be once you sort of account for some of those puts and takes?

James, overall, the 3% to 5% is driven by the three things concerns over the macroeconomics, in particular in Europe, some capacity constraints that we have in the first half and the fact that we will be taking inventory out of the overall system suggests that retail will be a little bit higher than year ago.

When we specifically look at the production constraints they are huge in the second quarter.

We were able to build forward in the fourth quarter, so from a shipment perspective we are hoping to cover that, but from an upside perspective the first half is very limited.

Back half we have a little bit more flexibility, but again our selling season is largely in the spring and the summer season.

So we could go over the 5%, but it would be more in the back-half production versus first half.

We are very constrained in the first half in terms of production.

So, ultimately, I guess put another way, if -- and obviously you don't give guidance on retail.

But if retail came in much better than your expectations you could do more than that 5% from a shipment standpoint, assuming that it was at least a good chunk of that came in the second half?

We have more production capability in the second half of the year.

Okay.

And then just a quick follow-up.

I didn't hear -- I don't know if you really detailed it, but there was the big recall within the quarter.

Can you quantify that for us and where did that show up on your income statement?

The recall we announced sometime during the fourth quarter.

We booked a charge of $11.8 million and that was to provide for a rear tail light switch that we needed to replace on a little over 300,000 motorcycles.

I believe it was a $2 to $3 part.

With labor the total charge was $11.8 million.

James, that falls into SG&A.

As you see for the quarter, SG&A was up $6 million.

It was driven by that charge of about $12 million that we took.

Got it.

Thanks, guys.

You are welcome.

Tim Conder, Wells Fargo Securities.

Thank you and, again, congrats on an ongoing great execution.

Thanks, Tim.

John, if you could just kind of go over, if you could, a little bit of the timeline.

You had outlined how the inefficiencies from York occurred in each of the quarters in 2011.

Can you kind of talk about to us how that should look as far as where you should see the peak inefficiencies?

I would guess it would potentially be in the second quarter.

You did comment that for the full year those inefficiencies -- I think York, but I thought the way you phrased it would be for the whole system would be comparable year over year.

So that is question one.

Then maybe a question here for Larry regarding market share for HDFS.

Larry, looking to 2012 would you anticipate holding share or could -- given the increased competitiveness, especially in the super prime categories, could you see that share potentially erode a little bit?

I will take the first part of that question, Tim.

With regards to temporary inefficiencies timing, this year number one is we do expect temporary inefficiencies to be in line with last year.

Last year the aggregate temporary inefficiencies were $32 million and that was driven by the first quarter of last year at $11 million.

Then they kind of tapered off and ended the fourth quarter at $6 million.

We are not going to provide the timing of the overall inefficiencies next year, but certainly the second quarter would be a time where we would see an increase.

But we will also have temporary efficiencies in the back half of the year as we do the transformations at KC and Wisconsin in terms of the training that needs to be done there, as well as we move our wheel supply to alternate suppliers.

So those will affect our back-half temporary inefficiencies.

So just to clarify on that, John, the second quarter could actually be up year over year on the inefficiency standpoint, just given the magnitude of things that are occurring in that quarter?

Yes, it certainly could.

Okay.

This is Larry.

Tim, on HDFS market share, our market share for the year was 51% and we picked up 3 points of share this year.

I would not expect to see significant growth beyond that.

We are seeing some competition in the prime space, but I also think we are also out there with competitive programs and we should have a reasonable share next year.

Great.

Thank you, gentlemen.

Ed Aaron, RBC Capital Markets.

Thanks, good morning.

It sounds like you are expecting only a modest mix benefit in 2012 and I am wondering how much do you expect the capacity constraints will affect that mix number this year.

In other words, is the inventory depletion that you are expecting to see in 2012 with retail increasing faster than wholesale shipments, is the depletion going to come from products that are more favorable from a mix perspective?

Well, Ed, when we looked at overall mix we expect it to be flat and you got to remember that all kinds of things affect mix.

And within Motorcycle mix there is location, there is family, there is model, and then there is Parts and Accessories.

So, one, it's a tough thing to zero in on.

But when we look at overall mix, we take into consider new product offerings, incremental growth that we have got in our international markets and our outreach efforts that tend to be more toward the lower end product, and then we certainly got the strong demand for higher end, the capacity constraints will affect a little bit our mix.

But in aggregate, when we take it all and blend it all together, it looks to be that mix will be pretty flat versus year ago.

Great.

And then just one follow-up if I could on HDFS.

You released, I think the number was $40 million of reserves in 2011.

I know you are not expecting to replicate that in 2012 but do you see any room to release additional reserves this year even if it's more modest than what you had in 2012?

You know, right now we feel great about where we are at with the reserves and based on where we are at right today is, no, we would not.

But we will continue to read the situation and what credit losses do next year and continue to evaluate the overall portfolio and make adjustments as we see at that time.

But at this time we feel very good about where we are at with regards to our reserves.

Thanks for taking the questions.

Sharon Zackfia, William Blair.

Hi, I wanted to maybe go a little bit off in left field and talk about India.

As you have been ramping up there are there any benchmarks you can share with us about the performance in India so far?

And, ultimately, how you think that market develops versus a market like China, which probably hasn't been as strong of a market as you might have hoped initially?

Sharon, we feel very good about India.

We put up an initial, I believe it's seven dealerships in the first year of operation.

We expect to add another three dealerships next year.

We are bringing more models in to do CKD, which provides a much more favorable pricing environment.

So we were doing three CKD units and we are going to add two more as we look forward.

Again, it will lower the price of those units that we are assembling in country.

So overall we feel very good.

We look at it from India and China.

I think we probably would expect to see both of them as tremendous long-term growth for the Company, and probably a little bit quicker in India than China.

But both of them are going to be a good long-term investment.

We are not expecting to see huge gains in terms of moving the overall company needle in the near term, but those markets are growing at extreme rates on a year-over-year basis at this point.

And I guess, John, when would you expect those markets to actually be material to results?

Is it 2015, is it 2020?

What is the game plan?

Sharon, we can't provide anything that far out.

What we are doing -- what we know today is we are doing the right things, we are building the right dealer distribution networks, we have got the right teams landed to build the markets, and we are building the leisure sport of motorcycling as we go along.

So I don't think it's going to be way off into the future but it will be in the future.

Great, thank you.

Rod Lache, Deutsche Bank.

Was just wanting to dive a little bit into these production constraints a little bit more.

Just wondering, first of all, does the fact that you are going to be constrained, does that affect your pricing strategy at all?

Then as we look beyond 2012, as this increased flexibility comes online in 2013, can you talk about what your theoretical capacity might be at that point?

Would it be 260,000 or 280,000?

And also in 2014 it sounds like additional flexibility comes online.

How should we be thinking about, not necessarily what you are going to produce, but what you theoretically can have the flexibility to produce once you are done?

Rod, with regards to the production constraints, as we have talked about for the last year and certainly in the first half of next year we will have production constraints.

Does that affect our overall pricing strategy?

The answer is the temporary constraints do not affect our overall pricing strategy.

What we are working, though, to do is to build on long-term pricing power and we feel good about where we are at.

And that is making sure that we have got the right product in the market at the right time.

We feel great about the fact that in July of this year we were able to raise prices in a very difficult economy 1% in the United States and 0.75% in Europe.

We brought them down actually a little bit in Asia-Pacific.

So the temporary constraints do not affect our pricing strategy.

Certainly our strategy is to improve our pricing power of our overall products.

The second question was with relationship to our flexible manufacturing strategy.

So part of the overall York restructuring and the new contracts that we have got is to be able to flex our production capability in the high season or the selling season.

We are going to ease into that capability next year and we will have that capability for York.

Then in 2014 we will be able to do it across the system, including the engine plant here in Wisconsin.

With regards to capacity, it gives us a tremendous amount of capacity on a much smaller footprint that we had previously.

We are not going to provide an exact amount of capacity, but what we have said is that we will have enough capacity without any huge investments to get back to where we were, the ballpark of where we were pre-recession.

Okay.

Just on the restructuring that you are doing, there are some companies that have implemented these SAP systems pretty successfully and others have been tripped up a bit.

You guys are implementing all this while there is a lot of, I guess you could say, stability or restructuring going on within your existing manufacturing.

Can you just talk a little bit about what key items you see that kind of determine success or issues within the implementation of this?

Do you see this as a significant risk for 2012 or would you expect things to go relatively smoothly?

Our expectation is for them to go relatively smoothly.

Having said that any system implementation is subject to learning things on the fly.

We have tested the system [dramatically].

We have been working on it for over two years, and what we know today we feel very comfortable.

And all the testing that we have done we feel good about where we are at.

Doesn't mean there won't be hiccups, but what we believe is that any hiccups that we might have will not come through and affect our customers and dealers given the inventory that we have.

But the answer is the confidence is driven by the vast amount of testing that we have been doing.

Thank you.

Robin Farley, UBS.

Great.

Just circling back to the gross margin issue; I know you talked about you had lower guidance in October and kind of reiterated that lower guidance in November.

Then when you came below here you mentioned FX -- you mentioned currency impacting $9 million instead of the $7.9 million.

I guess it doesn't look like that would be enough to have to account for the miss in gross margin unless raw materials prices changed so much in the last month of the quarter.

But even that $9 million versus $7.9 million, if you could just give a little more color on what else may have been behind that.

And then I do have a follow-up question as well.

So as I had mentioned earlier, the two things that kind of missed our expectations were a little bit on mix; we expected slightly more favorable mix and slightly less unfavorable raw materials.

Actually currency, Robin, for the quarter was favorable $3.9 million and certainly exiting the third quarter we saw currency rates falling quite dramatically.

The euro continued to fall a bit, but we saw some recovery in the real and the Australian dollar.

So currency was not an issue for us in the fourth quarter; it was the raw materials.

Again, raw materials, given our shipment is down, we were expecting more of a plateauing in the fourth quarter.

Now we will expect that plateauing in raw material costs in the first quarter.

And I may have misspoken when I said FX.

I know it was a positive for the quarter but I guess what I was -- the raw materials and you mentioned the impact being $9 million instead of $7.9 million.

That is the delta I was talking about wouldn't really explain, wouldn't be enough to explain the gross margin miss.

But I guess you are saying mix is the other piece of that?

Well, it's not just the $1.1 million on raw materials, because shipments were down from about, I don't know, 60-some-thousand units to 50,000 units.

We would have expected raw materials to be down at the same rate level, so what we saw was a continuing rate increase as things float through the system on raw materials.

So it wasn't just the $7.9 million versus the $9 million.

It's the fact that we didn't ship in -- where shipments were much less in the fourth quarter we would have expected raw materials to be a little bit lower.

And the final question I had was your comment earlier about the 3% to 5% shipment growth in 2012 being more limited by -- it sounds like that is more limited by your view of retail demand than by your production constraint because you talked about being able to maybe go above that in the second half.

So if that is more limited by your view of retail demand I wonder if you can comment on -- I guess confirm that.

And I guess how does that tie into your expectation of US dealerships closing?

I think at one point you had said 5% and I don't know if that was for 2012 or for the 12 months forward from fall.

I did not say that the shipment was more driven by retail.

I said that there is three things that we were watching closely and one of them was the macroeconomics.

We feel great about where we see retail sales in the US, but certainly remain cautious as we look forward given the tentative nature of the overall economy and consumer confidence.

But we are pleased that consumer confidence is up.

We are more concerned about retail sales in Europe, given the fact that they may already be in recession or may slip into recession there.

The temporary capacity constraints is holding our production down, certainly in the first half of the year.

And then the other piece of it is that we intend to take inventories down and that would suggest that retail sales would be higher than our shipment estimate.

So, again, we have not weighted them in any different way except to say all three of them, as we look forward, provides a shipment guidance of 3% to 5%.

And we will respond to activities throughout the period.

The other piece that you had mentioned, Robin, is the dealership closings.

We do not expect this to have a big impact on our sales at all.

The overall strategy was to help improve dealer profitability.

We have been very successful there and we have seen a great rebound in dealer profits in 2011.

When we look at dealer closings during the year I believe we closed 22 dealerships or consolidated 22 dealerships in 2011.

I think the previous two years we have done about 60 in total, so about 80 dealerships overall, which represents probably about 9% of the dealer network from pre-recession levels.

In 2012, your expectation for dealer closings?

We don't have any expectations for dealer closings and providing anything in 2012 it's not a main focus.

We feel very good about where the dealer network is today.

Okay, great.

Thank you.

Jamie Katz, Morningstar.

Thanks, good morning.

Can you talk a little bit about what you expect for both raw material costs in the year ahead, if that is going to ease, and also on any trends you have seen in new [versies] pricing?

In what pricing?

New versus used.

Sure.

Jamie, raw material costs, obviously we have seen a great run up in raw material costs and fuel over the last year.

Most of the metals complex seemed to kind of peak in April of this year, but it didn't retrace.

It just kind of plateaued in April and is maybe a little bit better in the fourth quarter.

Now it takes anywhere from three to six months for that to flow through our inventory.

Where commodity prices are going to go in the future don't really know.

Right now our expectation is that raw materials will be flat versus year ago.

And, again, we would expect to see raw materials, on a rate basis, peak in the next quarter.

We kind of thought they would peak this quarter and they are still flowing through at high prices.

So year over year we would expect them to be in line with last year.

Secondly, with regards to new and used pricing, we looked through, I believe, November used sales.

Used bike sales is up about 8.6% and total demand is up about 7.6%, so we are still very pleased with the strong total demand for our product.

And in the fourth quarter we started to see a shift or a closing of the gap between new and used sales growth.

So we are starting to see used sales growth come down a little bit and certainly seeing new accelerate, and that is what we have said would happen as we -- as the prices kind of equalized out in the marketplace.

Perfect.

Thanks so much.

Gerrick Johnson, BMO Capital Markets.

Thanks, good morning.

I just wanted to clarify the dealer closings, that 22 dealership number.

Was that net or gross, and can you break that now between US and international please?

Those are only in the US and those are net.

Those are the dealerships that we consolidated out, so we have always got a churn of dealerships that we are repositioning and replacing and so on and so forth.

So the net system was down by 22 dealerships this year.

Again, internationally I don't even know what the number is.

We didn't have the same issue internationally.

There was some dealerships that came in and out.

What we did from a closing standpoint -- from an opening standpoint we were able to open 35 new international dealerships in our quest to open 100 to 150 dealerships.

The vast majority of those are in emerging markets and we feel great about where our emerging market growth is today.

All right, great.

Very clear.

Thank you very much.

On the recall charge are you comfortable with the $11.8 million reserve and of the 300-and-some-odd-thousand bikes covered do you have an estimate of how many have actually come in for service for the brake light switch repair?

No, I don't have an estimate what that percentage is.

When we look at the overall $11.8 million we feel very comfortable with it.

We have assumed a very high take rate and a higher take rate than we typically would on recalls just because of the size of it.

So we feel great about the reserve and making sure that we hit that reserve at $11.8 million.

But I don't have the actuals to this point, Gerry.

Okay, great.

Thanks, John.

Felicia Hendrix, Barclays Capital.

Just a follow-up, I apologize if you touched on this, but the dividend that you paid from HDFS did you basically use that to fund your -- the pension contribution?

I don't know, Felicia, that wasn't the intent; money is money.

So we did have a dividend paid from HDFS to the motor company.

Last year we had one also; it was $125 million.

As we look at the amount of equity that we need to run HDFS on and to keep a conservative debt-to-equity, we had more funding in HDFS than we needed so the dividended back $225 million.

At the same time we saw our pension liability increase a fair amount.

So at the end of the third quarter our pension liability, pension and postretirement liability was about $370 million.

The falling discount rates, which by the way helps our Financial Service business, does not help on pension accounting.

We saw the pension liabilities increase by a little over $200 million and that is what we funded in the first quarter.

They are completely unrelated, but both necessary.

Okay, thanks.

As there are no further questions at this time, I turn the call back over for any closing remarks.

Thanks for your time, everyone, this morning and we appreciate your investment in Harley-Davidson.

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Ladies and gentlemen, this concludes today's conference call.

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