Harley-Davidson Inc (HOG) 2012 Q1 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the first-quarter 2012 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions) Thank you.

Amy Giuffre, Director of Investor Relations, you may begin your conference.

Thank you, Beth, and welcome to Harley Davidson's first-quarter 2012 earnings conference call.

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

The supporting slides 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.

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

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

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

Now we will open the call -- and then we will open the call for your questions, so let's get started.

Keith?

Well, thank you, Amy, and good morning.

Thanks to everyone for joining us on today's call.

As we noted in the press release, we are pleased by the strong start to the year, and I want to begin with a thanks to all of our employees, our dealers and our suppliers.

They are really the front line in our progress and they continue to do a great job at bringing the Harley-Davidson experience to our customers throughout the world.

You know, when I came to Harley-Davidson three years ago, I knew that the Company had tremendous untapped potential and incredible opportunities, and that has never been more true than today.

It is through our strategy of transformation that we believe we will exceed the ever-increasing expectations of our customers, we will create opportunities for growth, and we will build a sustainable business for the future.

We continue to see the evidence of our progress in the numbers that we reported today.

You know, we believe the first-quarter retail results and indeed the trend of the past several quarters reflect the outstanding appeal of our products and the efforts of our employees and the more than 1400 dealers in 79 countries around the world, along with the improving macroeconomic conditions in the US.

Over the past few years, we have continued to bring out great products that are hitting the mark with our customers.

The latest of these are the Seventy-Two and the Softail Slim, both of which were introduced just a couple months ago.

You know, the Seventy-Two is inspired by the early chopper era, taking its cues from the custom culture that still exists today along Whittier Boulevard in East LA, also known as Route 72.

No one but Harley-Davidson could do a factory custom motorcycle like the Seventy-Two with its unique, big metal flake paint which requires a complex, multistep paint process.

Similarly, the Softail Slim returns the Softail motorcycle to its essential elements.

With a low seat height, it comfortably fits a wide range of writers.

And as with all of our motorcycles, customers can achieve a truly personalized fit through a wide variety of accessories, which is one of our competitive advantages.

The Seventy-Two and the Softail Slim are just the latest new motorcycles that are reaching new customers.

The 48 which we introduced in early 2010 made the list of top 10 sellers in Europe last year, and that is a first for Harley-Davidson.

The SuperLow, which we introduced in July of 2010, was recently cited by Power Sports Business as the number one selling cruiser to women.

You know, earlier this month Motociclismo, which is a leading motorcycle publication in Brazil, Latin America and Europe, named the Night Rod Special its Moto D'Oro, the top award in the custom category.

These examples all point to the bigger story of Harley-Davidson's growing market leadership in the US and growing strength in international markets.

It is all a part of our strategy to increase the relevance of our motorcycles to more riders, and it is working.

We now have the 2011 outreach demographics sales data for the US, and once again Harley-Davidson is the leader in on-road motorcycle registrations in all of our target demographic segments.

We are the leader in sales to young adults, women, diverse customers, as well as our core customers, and not just in the heavyweight segment.

Among young adults aged 18 to 34, we captured the market leadership position in all displacements of on-road bikes in 2008, and expanded this leadership in the 2009 to 2011 time frame.

We are also number one across all displacements among women, Hispanic, and African-American riders.

So if we look at just the heavyweight segment in 2011, there are four points I would like to make.

Number one, nearly half of all heavyweight motorcycles sold to young adults were Harley-Davidsons.

Number two, nearly two-thirds of heavyweight motorcycles sold to women were Harleys.

Number three, we also sold more than half of all of our heavyweight motorcycles sold to African-American customers.

And number four, nearly 6 in 10 heavyweight motorcycles sold to Hispanic riders.

We also maintained our long-running leadership among US core customers, those being Caucasian men over the age of 34 selling more than 6 in 10 motorcycles in the heavyweight category.

And when it comes to new customers, more than one-third of our US dealers' new motorcycles sales in 2011 were to customers who were new to the Harley-Davidson brand; customers either buying their first motorcycle or those who previously owned a competitive bike.

Turning to the markets outside the US, in the 15 country European market, more than two-thirds of those who bought a new Harley-Davidson motorcycle in 2011 were first-time Harley buyers.

We gained 1 point of heavyweight market share, strengthening our number two position in this highly competitive market.

In the Latin American region, for the first quarter of 2012, retail gains were led by Brazil where we are still in starting to see the results of our investments in that market, all to better focus on delivering a great customer experience.

You know, last month, I and several of the team, we were in Manaus, Brazil, for the dedication of our relocated CKD assembly operations, and then attended the grand opening of a new dealership in Sao Paulo.

There were more than 1000 people at the dealership party.

And I will tell you, the buzz and the enthusiasm were just simply incredible.

You know, we continue to make gains in the Asia Pacific region as well, with first-quarter new Harley-Davidson motorcycle sales up more than 25% from the year-ago period.

And we are very pleased to see double-digit growth in Japan as they recover from last year's tragic events.

We also saw very strong growth in Asia Pacific's emerging markets, including both India and China, where retail sales doubled in each of those areas during the quarter compared to last year.

So all in all, it's great to see our strategy come to life.

In spite of all the good stuff I just spoke about, the most encouraging part is that I believe the best is yet to come.

We believe there are many growth opportunities.

In international markets we believe we have barely tapped the potential.

In the US, while we are proud of our market share gains in recent years, we believe there is a lot of room yet to run on the industry's road to recovery.

Industry volumes last year were about half of their prerecession peak, and the industry is still working through the excess of used bikes.

Harley-Davidson is growing outreach faster than core, and we expect to further broaden the reach of our products in markets everywhere through these remarkable new motorcycles.

When I look at all the exciting products that are in the development pipeline, see the results of our changes in manufacturing and look at all of the great things to come through our focus on retail excellence, I believe the opportunities for this company and this brand are tremendous.

And all of us at Harley are working harder than ever to realize these opportunities.

So thank you again for being on the call.

Thanks for your continued interest in Harley-Davidson, and now let me turn it over to John Olin.

Thanks, Keith, and good morning, everyone.

I'll review the financial results for the first quarter, starting on slide 11.

During the quarter, Harley-Davidson, Inc.

consolidated revenue was up 16.7% behind a 19.4% increase in shipments of Harley-Davidson motorcycles.

Our first-quarter income from continuing operations improved to $172 million, an increase of $52.8 million.

Similarly, diluted earnings per share rose to $0.74 per share, up from $0.51 a share in the year-ago quarter, a 45.1% increase.

Operating income from the Motorcycle business was $208.1 million, up $83 million or 66.4% compared to last year's first quarter.

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

Operating income at Harley-Davidson Financial Services was strong during the quarter, but down slightly compared to last year's first quarter when HDFS's results were favorably impacted by a retail credit loss release of $12.7 million.

We're off to a great start this year, delivering strong results as we make progress against our growth strategies and the transformation of our business.

Now let's take a look at retail sales on slide 12.

Overall, worldwide retail sales of new motorcycles were up over 20% in the first quarter.

This represents 11 consecutive quarters of largely improving results as we continue to invest in sustainable growth opportunities around the world.

The growth trend in retail sales reflects the strong global brand and product appeal, as well as the worldwide dealer efforts Keith just mentioned.

Moving on to slide 13, retail sales in the US exceeded our expectations.

During the quarter, sales in the US were up 25.5%, supported by momentum from the strong affinity for the Harley-Davidson brand, appealing 2012 motorcycles, and improving macroeconomic conditions.

Also, we believe the unusually mild weather in the first quarter, including the warmest March in 50 years, encouraged early sales to some customers who may have otherwise purchased later in the spring season.

US market share strengthened by 4 percentage points to 57.4% in the first quarter versus prior year.

As a result of stronger than expected first-quarter 2012 retail sales, US retail inventory at the end of the first quarter was down approximately 4400 units compared to last year.

US retail inventory was at its lowest level in many years, and we expect retail inventory will remain tight over the next couple of quarters.

On a sequential basis, retail inventory during the quarter was up about 1500 units from the end of last year, as dealers prepared for spring.

On slide 14, you will see retail sales in international markets for the quarter grew 11.2%, driven by strong growth in Asia Pacific and Latin America regions.

During the first quarter, Latin America was up 85%, driven by strong performance in Brazil, as the dealer network continues to gain momentum compared to last year's first quarter when we were starting the process of building a new dealer network.

Retail sales in Mexico were also strong during the quarter.

Retail sales in Asia Pacific region were up 25.4%, driven by strong growth across the entire region.

Canada was up 1.5% in the quarter, and the EMEA region was down 1.1% for the quarter compared to 2011.

We saw year-over-year growth in some major European countries, including Germany, France and Switzerland and the emerging markets, but that growth was offset by declines in Southern Europe and the UK.

Despite challenging retail conditions in Europe, market share continued to strengthen and through February was 13.5%, up 1.4 percentage points.

As we have discussed, international expansion is one of our core areas of investment in future growth.

It is our objective to open 100 to 150 new international dealerships between 2009 and 2014.

Since 2009, 67 incremental international dealerships have been opened, with roughly two-thirds in emerging markets.

On slide 15, you'll see wholesale motorcycle shipments in the quarter were up 19.4% compared to last year, and 1300 units above the high end of our expected shipment guidance range as a result of higher than expected retail sales.

The year-over-year increase in shipments was also aided by six additional days included in this year's Q1 fiscal quarter versus last year's.

The fourth quarter of this year will include five fewer days than last year's.

This adjustment is required every several years to sync up our fiscal calendar with the regular calendar.

During the first quarter, Touring as a percent of total shipments was up versus prior year, and all categories were within their historical mix ranges.

As of the end of the quarter, we continue to hold a higher than normal level of motorcycles in our company inventory to support shipments during the ERP implementation.

On slide 16, you will see revenue for the Motorcycles & Related Products segment was up 19.8% in the first quarter, behind strong growth from all our businesses.

Motorcycle revenue was up 19.5% behind a 19.4% increase in shipments during the first quarter.

Parts & Accessories sales were up 21.1%, and General Merchandise was 19.2% in the quarter, driven by improved product availability, strong international sales and improved worldwide retail motorcycle sales.

On slide 17, we have laid out the expected restructuring activities along with the impact of resulting temporary inefficiencies.

This slide is intended to provide a clear view of our restructuring activities, the cadence and the impact as we head into the final innings of the restructuring plan.

As we have discussed, we're in the process of exiting our Australian wheel manufacturing operation.

We are also implementing our new seven-year labor agreement and continuous improvement system at Kansas City and in Wisconsin.

Also, during the quarter, we completed the consolidation of our General Merchandise and Parts & Accessories distribution with a third-party logistics partner.

During the last call, we stated that we expected to launch our ERP implementation at York in the second quarter.

We also stated that a quality launch was our top priority and that we would not launch unless we were absolutely ready.

During our extensive systems test we uncovered opportunities to further improve the design of the system and further reduce the expected downtime during launch.

As a result of these learnings, we have decided to adjust the timing of the launch and now plan to launch the system in early July.

While we are anxious to complete the implementation, the new learnings and the adjusted timing provides some benefits.

First, the July launch allows us to continue to produce motorcycles without the ERP production disruption during the height of the spring selling season.

This is particularly attractive, given the very strong first-quarter retail sales.

Second, the July launch is expected to slightly reduce production downtime, and given the improved solution has increased our confidence in a smooth implementation with less risk.

And finally, the July implementation allows us to sync up the ERP systems launch with the start of the 2013 model year motorcycle production, which provides for a more efficient use of the normal transition period to the new model year.

As a result of the adjusted timing of the ERP, we will reallocate approximately $10 million of total expected capital to support restructuring.

However, this does not change our full-year structuring timing, cost or savings expectations.

We experienced approximately $7 million in temporary inefficiencies during the quarter, and continue to expect temporary inefficiencies in 2012 to be generally in line with 2011, which were $32 million.

The expected ranges for the remaining quarters are noted on the slide.

Year-over-year production in the third quarter will now be negatively impacted by the ERP implementation downtime.

We also expect production to be lower in Q4 than prior year due to our ability to flex production in York in the first half of 2013.

Turning to the restructuring cost and savings on slide 18.

We experienced $11.5 million in restructuring expenses during the quarter and continue to expect to spend $50 million to $60 million for the full year.

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

On slide 19 you will see gross margin in the quarter was 35.9%, which was 2.8 percentage points higher than last year.

Manufacturing benefited from restructuring savings and incremental margin on higher production, and foreign exchange benefited gross margin by $11 million driven by favorable hedge positions.

Raw materials were negatively impacted by rising fuel and a slight increase in steel costs.

On slide 20, operating margin as a percent of revenue for the first quarter was 16.3%, up 4.5 percentage points compared to last year's first quarter.

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

SG&A was roughly $33 million -- was up roughly $33 million or 16.3% higher during the quarter compared to the same period last year.

This increase was primarily driven by six extra days included in this year's first quarter compared to last year's fiscal calendar.

Conversely, the fourth quarter of this year will have five fewer days compared to last year's fourth quarter and, therefore, we expect Q4 SG&A to be favorable compared to last year.

This quarter's SG&A increase was also a result of investment in our growth initiatives and timing of spend within the year.

As a percent of revenue, SG&A was 18.6% versus 19.2% in the same quarter last year.

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

Now, moving onto our Financial Services segment on slide 21.

HDFS operating profit decreased $0.5 million or 0.8% compared to last year's first quarter.

The key drivers of the first-quarter results were net interest was up $1.3 million due to favorable borrowing costs, partially offset by lower revenues as our book of retail loans continues to shrink, reflecting lower motorcycle sales during the downturn.

Second, the provision for retail credit losses was $6.6 million higher in the first quarter of 2012 versus the first quarter of 2011, primarily due to a $12.7 million 2011 credit loss reserve release versus a $2 million 2012 release, partially offset by lower credit losses.

And finally, the provision for wholesale credit losses was $1.9 million lower in the first quarter of 2012, and operating expenses were $1.7 million lower than the same period last year.

We're very pleased with the performance of the business and believe HDFS provides a competitive advantage for sales of Harley-Davidson Motorcycles & Related Products.

Now, Larry will provide more detail on HDFS's operations on slide 22.

Larry?

Thanks, John, and good morning.

During the first quarter, HDFS retail motorcycle loan originations increased 22.1% or $100 million, compared to the same period last year.

The increase was driven by higher new motorcycle loan originations, partially offset by a 0.4 percentage point decrease in retail market share of new Harley-Davidson motorcycle financing.

Additionally, used motorcycle loan originations increased during the quarter.

Total finance receivables outstanding decreased 3% compared to a year ago, as runoff of older retail loans exceeded new originations.

HDFS has focused on prudently increasing credit application approval rates for near-prime and subprime customers over the last several quarters.

The objective is to use our analytics from 20 years of motorcycle lending to approve more credit applications in well-structured loans.

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 23.

The 30-day delinquency rate for retail motorcycle loans at the end of the first-quarter 2012 was 2.56% or 112 basis points better than the same date last year.

Annualized retail credit losses improved by 58 basis points to 1% for the first quarter compared to last year, primarily driven by our continued strong underwriting, collection, and loss mitigation efforts, as well as improving consumer credit behavior and macroeconomic conditions in the US.

While we continue (technical difficulty) disciplined in how we manage the loan portfolio and the overall business, we have no assurance that current consumer behavior will continue.

At some point, shifting consumer behavior may temper the strong credit performance we have experienced.

We are pleased with the continued progress at HDFS.

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

Now, I'll turn it back to John.

Thanks, Larry.

Now let's take a look at cash and liquidity on slide 24.

You will see at the end of the quarter we had $1.4 billion of cash and marketable securities.

During the quarter, HDFS completed a $400 million medium-term note issuance at a rate of 2.7%, and we contributed $200 million to our qualified pension plans.

Also, as we noted on the last call, HDFS paid a $225 million dividend to Harley-Davidson, Inc.

In addition, HDFS had $1.1 billion 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 use in cash and/or committed to credit facilities.

During the first quarter, we increased the quarterly dividend from $0.125 a share to $0.155 a share, a 24% increase.

In addition, we repurchased approximately 254,000 shares of Harley-Davidson stock for $11.3 million during the quarter.

Our first-quarter repurchase activity was lower than we had planned.

Due to uncertainty around the timing of our ERP launch, we believed it was prudent to suspend share repurchase activity until we determine the new launch timing and communicated the plan to all stakeholders.

We anticipate reinitiating share repurchase activity during the second quarter.

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'll review the remaining HDFS, Inc.

financials on slide 25.

I would like to highlight one item on this slide.

With regards to continuing operations, the Company used operating cash of $74 million during the first quarter compared to $105 million used in 2011.

The Motorcycle business generated operating cash of $21 million during the first quarter, even after a $200 million contribution to our pension plans.

On slide 26, you will see that for 2012 we now expect Harley-Davidson motorcycle shipments to be between 245,000 and 250,000 motorcycles on a worldwide basis, up 5% to 7% from 2011, compared to prior guidance of up 3% to 5%.

Our revised full-year 2012 shipment estimate takes into account slightly improved capacity at York and increased production at Kansas City.

We continue to be committed to aggressively managing supply of new motorcycles in line with demand.

In the US, we expect our dealers to retail more units than we ship in 2012, thereby lowering year-end retail inventories in the US, given our flexible manufacturing capability which we expect will be online in the first half of next year.

During the second quarter, we expect to ship between 79,000 and 84,000 units.

In anticipation of the planned ERP launch and our 2013 model year cutover in July, we will significantly draw down company-owned inventory in the second quarter.

In fact, production will actually be slightly lower in Q2 than Q1 due to fewer production days.

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

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

We believe that raw material surcharge and temporary inefficiencies from our restructuring activities will be comparable to 2011 levels.

We expect currency to be a headwind in 2012, and now expect product mix will be slightly unfavorable for the full year.

Finally, we expect capital expenditures to be between $190 million and $210 million, which now includes approximately $35 million of capital related to restructuring.

As we look back on the first quarter of 2012, we are very pleased to deliver strong results and progress on many fronts.

Worldwide retail sales were extremely strong, driven by sales in the US, and we gained market share in key markets.

An increasing number of diverse customers are being drawn to Harley-Davidson (technical difficulty).

We increased our 2012 shipment guidance, and our quarterly dividend was increased by 24% while we continue to repurchase shares.

We continue to make progress toward our transformation to a world-class manufacturing and product development.

And the entire organization has sharpened its focus on continuous improvement across all areas of our business.

We remain focused on executing against our strategies as we complete the final activities in our manufacturing restructuring, continue to transform 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.

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

Ed Aaron, RBC Capital Markets.

Great.

Thank you for taking the question, and really nice quarter, everybody.

You mentioned in your prepared remarks that the industry is still working off used inventory, and I was hoping you could maybe just give us some color on where you are with your used situation versus your competitors.

Because it does seem like your used inventory has really dried up, and I am wondering if you having a cleaner inventory mix out there might have driven some of the market share gain in the quarter.

So I was hoping you could also maybe comment on how your used growth compares to your new buy growth for Q1.

Great.

Thanks, Ed.

When we look at Harley-Davidson in particular, in the quarter we saw basically pricing flat or stable versus prior year, and we also saw that in the fourth quarter.

So we saw a lot of gains prior to that, probably four or five straight quarters, and much more flat performance in the fourth quarter and the first quarter here.

When we look at overall used bike sales, or kind of the growth between used and new, we did see what looked to be an inflection point in the fourth quarter of last year where we saw actually new start to exceed the growth of used.

And in the fourth quarter, new was up about 12% and used was up just shy of 6%.

Last year total demand for new and used was up 8.1%.

And as we look in the first two months of this year, data is on a month lag.

So through February, total demand for Harley-Davidson motorcycles was up 22.5%, with new slightly exceeding the used growth rate.

So we are pretty pleased with that.

And the used and new ratio was flat on a year-over-year basis.

Great, that's helpful.

Then just one quick follow-up and then I will pass it on.

But changing the timing of the ERP rollout, did that affect how many bikes you kind of pre-built in the first quarter versus what you might have expected to pre-build previously?

Not the changing of the ERP.

In the first quarter -- let's kind of take a step back in the conference call.

We talked about we entered the quarter with 7000 excess units, and at that time we had intended to build our company-owned inventory in anticipation of the ERP launch, and we also expected to build retail inventories a little bit.

Moving the ERP launch did not have any impact.

But as we dialed forward three months, what we did see is that we were able to maintain the excess inventory that we had built in the fourth quarter of 2011.

We still have approximately 7000 units of excess inventory.

However, our company inventory fell by 4400 units, but the movement of the ERP did not affect that.

What it does effect is our ability to continue to produce throughout the second quarter in the height of the selling season.

So as we look at inventories, while they are down coming into it, we have the excess inventory that we would expect to release in the quarter and feel that pretty much for the second quarter we will be at year-ago inventory levels.

Great.

Thank you very much.

Sharon Zackfia, William Blair.

Hi, good morning.

I had a couple of questions on cadence.

I think, John, you mentioned that shipments would be down in the fourth quarter year-over-year as you prepare for surge capacity in 2013.

So does that still imply that you expect shipments to be positive in the third quarter with ERP?

And then just secondarily on gross margin, should we assume peak gross margins then in the second quarter as well, given the shipment cadence in the second quarter?

Okay, Sharon.

So kind of let's talk about the cadence driven by the ERP move.

So we had first anticipated that production would fall in the second quarter as we implemented the ERP system.

Now we will move that to July, and so we would expect production to kind of continue throughout the second quarter.

But that production will be down a little bit in the second quarter versus the first quarter.

What we have done now is push that, kind of the production out, the production reduction to July.

And in doing that we are also syncing it up with our model year 2013 product.

So when we look at the second quarter, we will have very healthy shipments into the trade.

We are looking to ship in 79,000 to 84,000 units, which well exceeds our year-ago second quarter which was 64,000.

And a lot of that is coming from inventory.

So as we proceed through the second quarter, which we are starting out at very low levels of inventory, we will ship in the vast majority of the excess 7000 units and we will ship out most all the 2012 -- remaining 2012 product prior to July.

The reason being is that we have the new model year coming right behind the ERP launch, so what we want to do is get that out into the trade.

Now the nice thing about moving the ERP system back is this is the time when dealers are typically used to having inventories run low in anticipation of the new model year.

So we have got -- we have pretty strong production in the first quarter, be slightly down in the second quarter.

It will be down in the third quarter and the fourth quarter; down in the third quarter because of the ERP launch, and in the fourth quarter because of the ability to surge up capacity at York in the first half of 2013.

And then on gross margin?

The question on gross margin was we would expect gross margin to be better in the second quarter than the third quarter because of the shift in the production.

When you look quarter over quarter, production is down slightly from first quarter to second quarter.

So gross margin would probably be pretty much in line with what we saw in the first quarter.

Thank you.

Craig Kennison, Robert W.

Baird.

Good morning.

Thanks for taking my question.

John, what is the motivation to further destock your dealers?

Is it to drive up residual values of your used bikes?

If so, are you seeing the trade-in customer come back now that his bike is worth a little bit more?

Thanks, Craig.

We are not motivated to further destock the retail trade.

It certainly went down in the second quarter because of the very high retail sales in the first quarter.

And actually that is why we shipped a little bit over our first-quarter guidance.

That volume came from the fact that we were expecting to put more in inventory in anticipation of the ERP.

We shipped that instead.

As we said last year, we felt that as we looked at the end of the quarters 1, 2 and 3, inventories were lower than we would like on an ongoing basis.

And in the first quarter we stated we'd like to increase inventories a bit.

It was just the strong retail sales that brought retail inventories down.

We do expect to have inventories tight, but it is not our expectation to further destock the trade in the United States.

So just to be clear, on a full-year basis you think retail and wholesale in the US will be close to 1 to 1?

No, no.

We will retail more than we ship, but that will happen in the fourth quarter as we get ready for the surge and our capability for flexible manufacturing in the first half of next year.

Okay, got it.

And then just on the international side if I may.

You're at 67 dealers; your plan was 100 to 150 over a period of time.

How many more do you think you can do in 2012?

Do you ultimately think you will be closer to that 100 or that 150 number?

Thank you.

Thanks, Craig.

You know, at this point, we are just providing guidance that we will be between the 100 and 150.

We are right on plan with what we set up a couple years ago, and we are putting up dealers every quarter.

We feel great about where we're at.

Thank you.

Tim Conder, Wells Fargo Securities.

Thank you.

First of all, John, any color you can give us on the level of overtime that you worked in the first quarter?

And then will that -- I anticipate that would continue in the second quarter versus what you would view as a normalized rate?

We were working overtime in the first quarter.

What I would characterize it was would be not full out, but we were working a fair amount of overtime.

We don't believe that that is sustainable for long periods of time.

We will expect to work a little bit of overtime in the second quarter as well.

Any quantification of that that you can give us, John, just on an ongoing basis to look at it?

Was it kind of more of a normal rate; or how much it cost you, so to speak?

No, you know, again it was a moderate amount of overtime, and we don't expect to do that on an ongoing basis.

But given the tight inventories, we were able to work it.

Beyond that, not prepared to really give much more, Tim.

Okay, and then back to this growing gap or below where you have the -- where you would desire the US channel inventories.

As you alluded to earlier, you entered 2011 saying hey, we're a little bit below our ideal levels.

We want to have shipments exceed retail in '11.

Well, that didn't happen because of the stronger retail.

Same thing you wanted to do this year, as you have already said.

Well, that is not going to happen now, given the strength of retail.

Any quantification or guidance as to where -- are you 5000 units or so under where you ideally would like to be, whatever the base level is in the US channel?

Well, think overall, we are going to continue to aggressively manage supply in line with demand.

So a year ago, we felt we were a little bit light and we wanted to put some more in.

And, you know, I would say a moderate amount.

We are going to continue to be very prudent in what we put into the trade, but last year it was low.

Now, in the first quarter, we are 4400 lower than we were at that point, so we would expect a fair amount to be put in.

I did not say that we felt we would be down on the year.

I did say that we would be tight for the remainder of the year.

When we look at the second quarter which is the height of our selling season, we do have the 7000 excess inventory we would expect to put into the trade in the second quarter.

And I would expect most of the second quarter to be in line with year-ago inventories.

And as we end the quarter, the second quarter, I would expect retail inventories to be higher as we ship out everything.

And the cadence of the timing of our model year launch has pushed back a couple weeks this year.

So I think we will end the second quarter at higher inventories, and that will ready as for the ERP launch and the model year switchover.

Okay, so being down retailing more than shipped, that was then a fourth-quarter comment?

Yes, on a full-year basis because of the inventory -- the retail inventories that we will take down in the fourth quarter, we would expect to have our dealers retail more than we ship.

That is in the fourth quarter where we don't have the pressure on sales, and we will have the firepower coming out of York given our new surge capability to make the units closer to customer demand.

Okay, and then lastly, any type of pick-up rate once you get everything implemented here?

What type pick-up rate that you could see on incremental sales on a go-forward basis, once we see everything implemented here say by the end of '12?

Pick-up rate to operating margin, gross margin, however you want to characterize it?

Well, look on the slide 12, I believe, is we would expect additional restructuring savings coming in.

We're expecting restructuring savings of $58 million to $78 million incremental this year, and then another $20 million or so next year.

So we would expect those savings to come in according to plan, as well as our spending on restructuring which is $50 million to $60 million this year, dropping off in 2013.

So that should both widen gross margins as well as operating margins.

Okay, great.

Great quarter.

Rod Lache, Deutsche Bank.

Good morning.

Was wondering, just a couple questions still on the inventory and production and sales.

At what point do you believe inventories would actually start to constrain sales or market share?

And then on the production, you produced above the high end of your expected range this quarter.

Can you just kind of give us what some of the gating factors will be that would allow you to get more units out over the next couple quarters?

Is there potential to get more out if the ERP implementation goes as planned?

Just lastly on the production, you've mentioned before that you won't have full flex capacity throughout the network until 2014.

Can you give us a sense of where your network capacity will be at in 2013?

Can you repeat the first question?

Well, the first question was just when does the inventory situation start to constrain sales?

Are you getting close to that point or are you still far away from it?

Yes, Rod, you know, we are -- the inventories are tight, and customers coming in at this time may have to wait for a particular color or a particular model.

Our dealers are trading out there.

We do not think that it is costing us lost sales, but in some cases it is delaying the sale to our customers; something that we don't want on an ongoing basis, but that is where it's at.

So when you say constrained sales, I don't think that we are at that point.

There is inventory in the system and the dealers are working diligently to get the customer the model and the color that they want.

So overall, I don't think that we are in that area.

But customers are having to wait and we don't think that they are switching brands because of that wait.

And again, we are waking working as diligently as we can to get more production and to meet that demand, which leads me to your second question is in terms of production.

You know, we were able to exceed the guidance for the quarter, but that did not come necessarily from a lot of production, or more production than we expected.

We eked out a little bit more in York, but we are talking hundreds of units.

Most of that came from we were expecting to build in excess and put it in inventory in anticipation of the ERP launch, and instead we shipped that out.

So production is very tight.

If the ERP implementation goes better than expectation, we could see a little bit of capacity freed up at that time.

And then the next opportunity for production coming out of York is not until late in the fourth quarter.

Now we do have capacity at Kansas City, and as we raise our overall shipment guidance from 3% to 5% to 5% to 7%, the vast majority of that additional volume is coming out of Kansas City.

So we are very constrained at York until the fourth quarter of this year.

And what is the trajectory of your capacity growth?

You have talked about getting to your historical peak if you look out to 2014, but is it sort of the midpoint between that and where you are this year, is what you would expect to be at for 2013?

Well, in terms of capacity in 2013, you know, the constraint is at York.

And in the first half we will be able to flex production, so we will be able to meet the demand of what we have in sales in 2013 through the ability to flex our production at York.

We are not concerned about production -- or capacity in 2013.

Okay, so you -- there isn't really the limitation in 2013, You're going to be at your full flex capacity in that time frame?

Well, we are looking to surge at York only.

We still have the other plants to do it, but right now, capacity -- there is plenty of capacity at Kansas City.

So again, we will have the capacity to meet the needs of 2013.

Okay, and then just last two things.

Are you still expecting this decline in HDFS, say at a $48 million decline in these releases expected?

Are those expectations changing now, given what you see happening in losses?

Have you done any sort of modeling about just the overall weather impact; maybe just by looking at the warmer states where weather is less of a factor?

Rod, this is Larry.

Let me take the HDFS question.

I would say we had a -- as John talked about, a modest decrease in reserves here in the first quarter compared to last year.

We have a very disciplined process we go through every quarter, and we will continue to evaluate that.

Obviously, I think as we've stated previously, we expect any reserve reductions this year to be significantly lower than the nearly $40 million that we realized last year.

Thank you.

This is Amy.

I am just going to jump in and remind everyone to ask just one question so we can get to everyone's questions.

Thank you.

Felicia Hendrix, Barclays.

Hi, good morning, everybody.

Just getting another question on your flex capacity, but more from an inventory perspective.

As we think about your getting to that point where you can flex your capacity at York, just wondering on a go-forward basis how we should think about inventory levels?

Obviously, we can't look at history to help us model this.

So I was just wondering if you could give us any color, because your manufacturing is going to be very different now.

Yes, as far as overall inventory levels, it doesn't affect really Company inventory too much.

But what it does affect is really trade inventory levels in the fourth quarter.

So historically, Felicia, we would start building in October on a level basis and a trajectory, and what we would do is put that inventory in the trade and our dealers would hold it until it was alleviated in the springtime.

Now what we will be able to do is bring those levels down and produce when the customer wants it, and we will be able to start surging in the beginning of the next model year, and so we will just produce closer to demand.

So I think the biggest change in terms of retail inventory is less inventory in the field in the fourth quarter.

Okay, yes, that was specifically what I was asking.

And so should we think about it as having just a slight cushion built upon what we would estimate for your production or is it, as someone said before, more 1 to 1?

We are going to ease into this capability, so we would expect the inventories to come down a little bit in the fourth quarter, not anything huge, and we will continue to work on it.

We won't be fully capable until 2014 across all of our plants, but we would expect to step down inventory in the fourth quarter and produce closer to sales in the first half.

Okay, and just different question than has been asked so far.

You've been gaining market share; it has been very nice and very impressive.

Just wondering if you are seeing anything from your competitors that might skew the sustainability of these market share gains?

Well, you know, I don't think we would expect to hold on to a 4 point gain for the entire year.

We are very pleased in what we see.

We know that the brand appeal is very strong.

We also know that the model year 2012 product is being very well-received, and the 103 engine is certainly working to close that value gap between new and used.

So we are going to continue to work on our side of it and develop great products, and the marketshare will take care of itself.

Okay, great.

Thanks very much.

Gerrick Johnson, BMO Capital Markets.

Hey, good morning.

Latin America, other Asia, very big numbers there.

Can you discuss maybe in a little bit more granularity the number of dealers that you have in those geographies now compared to say a year ago?

And also if you expect this kind of growth to continue or sort of moderate through the year?

Well, in terms of -- again, we are very pleased with what we are seeing in Asia Pacific up 25% versus down on the year-ago period.

Japan is popping back after obviously the tragic events there.

And then our growth in emerging markets, India and China were up over double.

You know, when we look at the overall dealership, the incremental dealerships, Gerrick, we put in probably 30 dealers last year on a year-over-year basis.

Two-thirds of them are in emerging markets, so they are in places like China and India, Indonesia, and some in Latin America.

Those are not included, the ones in Brazil, because those were replacement dealerships.

So they are ending up in those areas.

They are driving great growth.

Emerging growth markets are growing at a much faster rate than the rest of Europe.

And they are partially driven by the incremental dealerships.

Patrick Archambault, Goldman Sachs.

Hi, good morning.

I just wanted one clarification in terms of the decision to move the York -- the SAP implementation at York.

You know, the three reasons you outlined seem highly logical.

Was it just kind of opportunistic to do it at a better time, or were there any other issues where you thought that maybe the preparedness wasn't where you needed it to be to do it in Q2 that also led to that decision?

And then I guess just on the back of that, in terms of Q3 can you help us think a little bit about how -- I mean you have said some already on it, but I think you were talking about one month that was going to be down 40% at York previously at the peak of the implementation.

Is that still the kind of production cadence we should be thinking about for Q3 now?

Great, Patrick.

With regards to the ERP launch, no, it was driven by the testing that we were doing.

We do all kinds of tests, and one of the tests that we do is a shop floor test.

And basically what we do is disconnect all the old systems, put the new system in, and they're able to test the system along with the operational processes.

And what we discovered is in the parts and handling area, we had basically more complexity than we needed, and that complexity didn't come with a commensurate benefit.

So as we said before, we are not launching this thing until absolutely ready.

So we stepped back and took the time to change a few things in the design, which will take complexity out and, therefore, de-risk it a little bit.

And given that, we have pushed it back.

And then we talked about the three or so benefits that are associated with that, one being more confidence in our launch and less time to ramp it up.

So we expect a little bit more on production coming out.

And that leads to your next question is in the third quarter, you know, it is still in the 40% range.

We are hoping to get a little bit more capacity out because we have got an improved solution, but we are still in the range of 40% of one month's production being down because of the ERP implementation.

James Hardiman, Longbow Research.

Good morning.

Congrats on a great quarter.

My question is surrounding the guidance.

I think the similar question was asked coming out of the fourth quarter when 245,000 units was the high end of your guidance.

And the question was asked to the extent that you need to go above that, would you be able to -- does that represent the upper ceiling or could you get beyond that?

And the answer at the time was that maybe come the fourth quarter, once things are behind us, you could get above that 245,000.

Fast forward to today, the upper end is 250,000, and at the same time you have pushed backed the SAP implementation.

But ultimately the same question, if retail is such that you are exceedingly low in terms of retail level inventories in the fourth quarter, is there still an opportunity to do some catch-up and is there still potentially some upside to that 250,000 based on how retail trends play out?

Yes, so let's talk about getting to the 250,000.

So we boosted it a couple percentage points with about 5000 units.

The vast majority of that is coming from Kansas City product, and we couldn't be more thrilled that the demand for those products, which are largely directed at outreach customers, are doing very well and so we've got strong demand.

So we are taking the volume up, but the vast majority of it is coming from Kansas City.

As I said, we are eking out a little bit more production out of York.

We do have more capacity in KC, so that is not an issue.

And when we look at York, we are running very tight and we will continue to do so into the fourth quarter.

However, in the fourth quarter we do have some down days planned that we could run, and we could generate capacity in the fourth quarter.

The question at that time is really looking at the overall trade because we will have the capability to flex our production up even closer to when those units are going to want to be consumed in the spring, given our surge capability at York.

And we will evaluate that at that time.

Greg Badishkanian, Citigroup.

Great, thanks.

Yes, nice quarter, guys.

And just in terms of, the retail was so strong in the first quarter.

I know you pulled forward some demand, but I am guessing there is still some strength, underlying fundamental strength.

Any way to kind of break that out and quantify that at all?

Well, you know, we think it is clearly an extension of what we have been seeing on the improving retail sales trends.

And it was largely driven by incredible appeal for the brand.

Again, our share was up.

We were up 25.5% in the US and the industry was up 17.5%.

That means all other competition was up just over 8%.

So a lot of it has been driven by, again, the strong brand.

We talked about the new model year.

The 103 engine is pulling a lot, and then the improving underlying macroeconomic trends in the US.

We do believe that some of it to a lesser extent was driven by the very favorable weather conditions, and spring started a little bit early.

We have done the analysis of looking at northern states versus southern states, and we do see a slight improvement in growth rate in the northern states.

I don't think it is anything huge, but there is a weather effect that we saw in the first quarter, and so we would expect retail sales to moderate a little bit as we move into the spring selling season.

Robin Farley, UBS.

Thanks, I wanted to ask a question about HDFS and something related to the change in prime versus subprime versus the last couple of quarters you've reported.

But I also wanted to clarify your comments about the production that you're doing in advance and holding onto and not shipping.

Because during the call you said that you have maintained that excess of 7000 bikes in inventory, but then you also made a comment that company inventory fell by 4400 units.

So I just wanted to clarify kind of which of those things -- just to get a sense of where that bikes built but not shipped stands cumulatively from both Q4 and Q1 at this point.

And then also just to sort of understand how, although you can hold those and then ship them later, if you're doing that ahead of Q3 but your new model year starts in July, you will be shipping old model year bikes after the new model year starts, or you will be delaying the new model year start?

Just trying to understand how the bikes built in previous quarters can be held over once the new model year starts?

Thanks.

Okay.

Robin, the 7000 units we brought into the year we held through the first quarter, and we still have them.

What I referred to is that retail inventory, the field inventory fell by 4400 units.

Our company inventory is still up.

I also said that given the fact that we have now moved the ERP to July and we've synced that up with the model year 2013 new product launch, that we will release those 7000 prior to the third quarter.

We will release them in the second quarter, and that is what is driving some of our shipment in the second quarter so high as they are coming out of inventory.

So in the US we will ship as much as we can of model year 2012 product out in the second quarter versus the third quarter, because when we cut the system over we will begin making 2013 product.

And we will want to get everything out so that the dealers can sell them down in anticipation of the new model year.

And regarding the HDFS next, I would say what we saw this quarter was a slight shift towards more subprime in our mix.

We had in previous quarters talked about it being 80% to 85% prime.

This quarter was more around 80%.

And two things going on there.

The first is what we have talked about is our efforts to improve our analytical modeling to be able to approve more near-prime and subprime customers, and then we continue to see increasing competition in the prime lending space.

Thank you for your time this morning.

We appreciate your investment in Harley-Davidson.

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

The audio can be accessed until May 8 by calling 404-537-3406 or 855-859-2056 in the US.

The pin number is 65016753#.

We expect to report our second-quarter earnings on July 31, 2012.

We will publish a reminder notice about one month prior to that date.

If you have any questions, contact us at 414-343-8002.

Thanks.

And this concludes today's conference call.

You may now disconnect.