Harley-Davidson Inc (HOG) 2012 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Harley-Davidson fourth-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)

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

Ms. Giuffre, you may begin.

Thank you, Sarah.

And welcome to Harley-Davidson's fourth-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 on our website 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 other 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'll open the call for your questions.

So let's get started.

Keith?

Thank you, Amy.

And good morning and thanks for joining us today as we review our 2012 results and look ahead to next year.

We appreciate very much your interest in Harley-Davidson.

Our entire team takes pride in what we achieved last year.

We did what we set out to do.

Driving improvements on many fronts, and growing the business and shareholder value.

EPS was up 16.7% for the full year.

And new Harley-Davidson motorcycle retail sales grew 6.2% worldwide.

We completed the highly successful launch of the ERP production system at our York plant.

And shares of Harley-Davidson stock rose more than 25% in value during the year, once again outpacing the S&P 500.

These are just some of the latest proof points of the vast improvements at Harley-Davidson's operations and performance since embarking on our strategy of transformation in 2009.

Today, Harley-Davidson is leaner, more agile and more responsive to our customers and the changing marketplace than ever before.

And we continue to move aggressively to raise our performance to new levels.

All of this is only possible through the efforts and dedication of our employees, our dealers and suppliers.

They are doing a truly outstanding job.

And together, working as one team and moving in one direction, we are driving performance and delivering for our customers and all stakeholders.

As we enter 2013, the restructuring of our production operations is largely behind us.

The roll-out of the ERP system at York in the third quarter went incredibly well, and is beginning to yield results.

Day by day, we are improving our ability to supply dealers with the mix of motorcycles they need for their customers and in a more timely manner.

The ramp-up of surge production at York has also gone well since we launched it at the start of the year.

We are on target with our run rates, safety, and quality.

And have successfully integrated more than 400 seasonal employees to support surge at York and our Wisconsin plants which supply York.

Let me just note that we're extremely grateful to all of our full-time production employees who have been welcoming and helpful to the seasonal workforce.

At Kansas City we continue to lay the groundwork for the launch of surge production in 2014.

Turning to retail, new Harley-Davidson motorcycle sales grew solidly in 2012, fueled by exceptional products and retail experiences.

In the US, retail new Harley-Davidson motorcycle sales grew 6.6%.

Market share grew 1.5 points in the US heavyweight market to 57.2%.

Sales to US outreach customers grew faster than to core customers in 2012.

And Harley-Davidson continued its market share leadership in all of our outreach demographic segments.

We also continue to grow internationally, as the result of numerous improvements in our operations and distribution networks over the last few years.

We opened 31 international dealerships in 18 countries in 2012, including Malaysia, Russia, Turkey, and Bolivia.

New Harley-Davidson motorcycle retail sales were up 39.2% in Latin America in 2012 and beat the old unit volume record set in 2008 by more than 25%.

December was the best month ever for unit sales in Latin America.

In the Asia-Pacific region, retail sales were up 14.3% and were the highest ever for us in a number of countries including Australia, Korea, China, and India.

Sales also grew in Japan, which is our largest market in the region.

And while we are pleased with our achievements in 2012 and over the last several years, more important is the road ahead.

We expect to build on our strategy of bringing exceptional products to market, producing them in ways that are more responsive to the market, and providing personal, customized retail experiences.

Each of these things is key to delivering on our purpose as a Company, which is to fulfill dreams of personal freedom for people around the world.

In 2013 and beyond, we plan to further leverage our manufacturing capabilities so that we can increasingly build the exact motorcycles our customers want and deliver them when and where they want them.

And we will continue to raise the bar by bringing great motorcycles to market in a shorter amount of time.

We will also build on our competitive advantage in financial services, parts and accessories, MotorClothes Apparel and general merchandise.

Going forward, we will continue to refine our retail 20/20 strategy, which is all about strengthening Harley-Davidson's retail support systems, dealer capabilities and distribution channels, thus providing for a personalized customer experience every time, everywhere, every day.

Through all of these efforts we believe we are in sound position to further expand sales with outreach and core customers in the US, and to continue to grow internationally.

2013 is shaping up to be another exciting year for Harley-Davidson, especially with our 110th anniversary celebrations that are happening throughout the year.

And we invite everyone to join in.

So let me wrap up by thanking you again for your interest and investment.

2012 was a watershed year for Harley-Davidson.

And all of us at the Company are working hard to carry this momentum forward.

Now let me turn it over to John Olin.

Thanks, Keith, and good morning everyone.

I'll review the financial results, starting with the fourth quarter on slide 10.

During the quarter Harley-Davidson, Inc.

consolidated revenue was down 1.1%, behind a 7.2% decrease in shipments of Harley-Davidson motorcycles.

Our fourth-quarter income from continuing operations improved to $70.6 million, an increase of $16 million or 29.3%.

Similarly, diluted earnings per share rose to $0.31 per share, up 29.2% from the year-ago quarter, which was $0.24 per share.

Operating income from the Motorcycle segment was $53.1 million, up 49.4% compared to last year's fourth quarter.

The strong increase in motorcycle business was driven by lower restructuring spending and a higher gross margin as compared to last year.

Operating income at Harley-Davidson Financial Services was up 10.9%, behind higher net interest income and improved credit loss performance.

We are very pleased with the fourth-quarter results and our continued progress against our growth strategies.

Now let's take a look at retail sales on slide 11.

Overall, worldwide retail sales of new Harley-Davidson motorcycles were up 7.5% in the fourth quarter.

For the full year, worldwide retail sales were up 6.2% compared to 2011.

This reflects the strength of the Harley-Davidson brand and appeal of our motorcycle model years 2012 and 2013, worldwide dealer efforts and a continued investment in growth opportunities around the world.

Now let's take a look at the US market on slide 12.

Retail sales in the quarter were up 8.4% compared to last year's fourth quarter, despite a challenging economic environment for consumers.

Retail sales in the US were driven by strong product appeal, success of outreach efforts, and slightly improved product availability for most of the quarter.

For the full year, US retail sales were up 6.6%.

Market share in the fourth quarter strengthened 1.6 points versus prior year to 60.9%.

And full-year share finished up 1.5 points to 57.2%, another record year of market share.

Finally, retail inventory in the US fell from the end of last year by approximately 1,200 units.

We reduced shipments in preparation for our flexible manufacturing capability, which allows us to begin surging production with seasonal demand in the first quarter of this year.

We also expect retail inventory to be down at the end of 2013, as we prepare for manufacturing surge capability at our Kansas City facility in the first half of 2014.

On slide 13 you'll see retail sales in international markets for the quarter grew 6.3%, driven by strong growth in the Latin America and Asia-Pacific regions.

For the full year, international retail sales were up 5.6%.

During the fourth quarter, the Latin America region was up 23.5%, driven by Brazil and Mexico.

As we exited 2012, we had 14 dealerships in Brazil and are on track to continue to grow this important market into the future.

Retail sales in the Asia-Pacific region were up 14.8% in the quarter, driven by double-digit sales growth in Australia and emerging markets.

Japan saw strong growth despite a challenging economic environment and intense competitive activity.

The EMEA region was down 3.3% for the quarter compared to 2011, as we continue to see softness in the Southern Europe markets.

For the full year, retail sales in the EMEA region were down 3.0%.

Market share in Europe through November was 13.3%, down only slightly to the prior year despite the economic concerns in that market.

We expect continued volatility and pressure on sales in Europe in 2013.

Canada was down 13.8% in the quarter compared to the same period in 2011, which benefited from a year-end sales boost prior to a sales tax change effective January 2012.

For the full year, Canada retail sales were up 0.7%.

International expansion, especially in emerging markets, is one of our three core areas of investment for future growth.

During the quarter, 15 dealerships were opened in 12 different countries.

Since 2009, 93 new dealerships have opened.

Great progress toward our goal of 100 to 150 by the end of 2014.

On slide 14 you'll see wholesale shipments of Harley-Davidson motorcycles in the quarter were down compared to last year as we prepared for surge manufacturing, which we initiated at York this month.

Shipments were within our expected shipment range of 44,500 to 49,500 motorcycles.

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

International shipments as a percent of total were up only slightly compared to 2011, reflecting the tough market conditions in Europe.

Given that our European business was down in 2012, and the economic concerns that remain in Europe for the near term, we no longer believe that we will meet our goal of international retail sales exceeding 40% of total retail sales by 2014.

However, we continue to believe international retail sales will grow at a faster rate than domestic sales through 2014.

On slide 15 you'll see revenue for the Motorcycles and Related Products segment was down 1.5% in the fourth quarter.

And up 6% for the full year behind strong growth from all our businesses during the year.

Motorcycle revenue was down 2.6% behind a 7.2% decrease in shipments during the fourth quarter.

And up 5.9% behind a 6.2% increase in shipments for the full year.

For the full year, the average Motorcycle revenue per unit decreased $44 from the prior year, primarily driven by unfavorable currency exchange, partially offset by higher pricing and favorable mix.

On average, our key currencies during 2012 were weaker against the US dollar by approximately 6% compared to last year.

Parts and accessory sales were up 0.2% for the quarter, and up 5.3% for the full year, compared to 2011.

General merchandise revenue was up 6.8% in the fourth quarter and up 9.2% for the full year.

Turning to restructuring on slide 16.

In 2012 restructuring costs were $28 million and we experienced approximately $33 million in temporary inefficiencies.

We achieved savings of $280 million, hit our targets along the way, and have successfully transformed our manufacturing operations.

And continue to advance our product development capabilities.

In 2013, we expect to substantially wrap up the current restructuring activities.

During 2013, our efforts will focus on completing operating system training in Wisconsin and Kansas City, exiting our Australian wheel and hub manufacturing operations, and preparing for surge manufacturing in Kansas City in 2014.

We expect these activities will result in approximately $13 million of restructuring costs and approximately $17 million of temporary inefficiencies.

Upon completion of those restructuring activities at the end of 2013, we expect to achieve the full annual savings of approximately $320 million starting in 2014, with expected total cost, restructuring cost, of approximately $495 million.

Since 2009 we have been intensely focused on improving our cost structure and transforming the business to be stronger, more flexible and more profitable.

As we near the completion of this restructuring, we will continue our focus on improving retail capabilities and strengthening world-class distribution channels and product development capabilities.

We have established a culture of continuous improvement and we'll continue to look for ways to operate in the most efficient and profitable manner.

On slide 17 you'll see gross margin in the quarter was 31.8%, which was 0.6 percentage points higher than last year.

Gross margin for the quarter was driven by flexible favorable mix behind increased touring production, favorable pricing, and modestly lower raw material costs compared to last year.

As anticipated, foreign currency exchange was unfavorable behind a stronger US dollar.

Finally, manufacturing costs were flat to prior year, as restructuring savings were largely offset by lost absorption due to significantly lower production in the quarter.

Full-year gross margin was 34.8%, which was up 1.4 percentage points from the prior year.

Gross margin finished at the low end of our expected range of 34.75% to 35.75%, primarily as a result of key foreign currencies devaluing quite significantly beginning in the second quarter of 2012.

The adverse financial impact of the devaluation was somewhat tempered in 2012 due to our currency hedges.

We expect continued unfavorable currency exchange in 2013, as our currency hedges that were initiated at higher exchange rates roll off in 2013.

On slide 18, operating margin as a percent of revenue for the fourth quarter was 5.3%, up 1.8 percentage points compared to last year's fourth quarter.

Operating margin for the quarter was favorably impacted by higher gross margin and lower year-over-year restructuring costs, partially offset by slightly higher SG&A.

While we expected SG&A for the quarter to be modestly below last year, it actually finished $1.3 million higher than last year.

For the full year, SG&A increased $49.4 million from 2011, primarily a result of investment in our future growth.

As a percent of revenue, full year SG&A decreased slightly versus the prior year.

We continue to expect SG&A spending will increase on a year-over-year basis in 2013 and 2014, as we continue to invest in growth initiatives, but decrease as a percent of revenue through 2014.

Now moving on to our Financial Services segment on slide 19.

In the fourth quarter, HDFS's operating profit increased $6.2 million, or 10.9% compared to last year.

The three key drivers of fourth-quarter results were -- first, the provision for wholesale credit losses was $2.6 million lower in the fourth quarter of 2012, primarily due to favorable wholesale portfolio performance.

Second, net interest income was up $2.2 million, resulting from lower interest expense, which was driven by a favorable cost of funds and lower debt levels.

Finally, the all other category was up $3.9 million, driven primarily by the strength in our insurance business.

On a full-year basis, HDFS posted an operating profit of $284.7 million, an increase of $15.9 million, or 5.9% compared to 2011.

We are very pleased with the performance of the Financial Services business.

We believe HDFS's 2013 operating income will be modestly lower than 2012, as the business benefited from $17 million of 2012 credit loss reserve releases which will not repeat in 2013.

In addition, we also expect modestly higher credit losses in 2013 due to changing consumer behavior, HDFS's funding of additionally prudently-restructured loans in the near and sub prime segments, and lower recoveries resulting from lower charge-offs in prior periods.

Now Larry will provide more detail on HDFS's operations on slide 20.

Larry?

Thanks, John, and good morning.

During the fourth quarter, HDFS retail motorcycle loan originations increased 17.6%, or $61.5 million compared to the same period last year.

The increase was driven by higher new motorcycle loan originations, behind a strong increase in retail sales, and a 2.8 percentage point increase in market share.

Used motorcycle loan originations also increased compared to last year.

For the full year, HDFS retail financing market share of new Harley-Davidson motorcycles sold in the US was 50.9%, flat compared to 2011.

The overall loan portfolio was solid, comprised of profitable loans funded in both the prime and sub prime segments.

In 2012, approximately 80% of our new loan originations were prime.

At year end, 88% of the total portfolio was comprised of loans originated after underwriting changes HDFS made in January 2009.

With the higher level of receivables originated prior to the start of the economic downturn rolling off the books, finance receivables outstanding decreased 0.4% compared to a year ago.

This declining receivables pool reflects the lower US retail sales through the downturn that we expect will continue to impact HDFS net interest income through the first half of 2013.

Moving on to credit performance on slide 21.

The 30-day delinquency rate for retail motorcycle loans at December 31, 2012 was 3.94%, or 9 basis points higher than 2011.

I want to point out that 2011 and 2012 are the only years where HDFS has finished the year with a 30-day delinquency rate below 4.5%.

So credit quality remained in good shape.

Annual retail credit losses improved by 41 basis points to 0.79% in 2012 compared to 2011, driven by the impact of changes in underwriting and collections, as well as a lower frequency of loss.

This is the lowest level of retail credit losses at HDFS in over 10 years.

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 at HDFS in 2012.

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.

A recent example of this is the $185 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 22.

You will see at the end of the quarter we had $1.2 billion of cash and marketable securities, which includes the impact of the repayment of a $400 million HDFS medium-term note.

In addition, HDFS had $1.66 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 needs in cash and/or committed credit facilities.

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

Larry just mentioned the dividend HDFS paid to HD, Inc.

We also made $175 million contribution to our qualified pension plans.

This contribution reduces the $221 million Q4 2012 increase in our pension and post retirement liability which resulted from the discount rate assumption changing from 5.3% to 4.2%.

I am also very pleased to report that during the fourth quarter we repurchased approximately 1.2 million shares of Harley-Davidson stock for $53.4 million.

As we have stated, returning value to our shareholders through increasing 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 23.

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

First, with regards to continuing operations, the Company generated operating cash of $793.1 million during 2012, even after a $200 million contribution to our pension plans in January of last year.

And second, our full-year effective tax rate from continuing operations was 35.1% compared to 30.9% in 2011.

The 2011 tax rate benefited from a change in Wisconsin tax law associated with certain net operating losses, the favorable settlement of an IRS audit, and the impact of the federal research and development tax credit.

In 2013, we expect full-year effective income tax rate will be approximately 34.8%, which includes the impact of the restatement of the federal research and development tax credit, with the enactment of the American Taxpayer Relief Act of 2012.

The summary of full-year 2012 financial results is on slide 24.

We had net income of $623.9 million from continuing operations in 2012, which was up 13.8% compared of to 2011.

2012 earnings were driven by strong growth in the Motorcycle segment.

The Motorcycle segment operating income was up 27.5% compared to last year.

Motorcycle growth was driven by higher revenues and improved gross and operating margins.

HDFS operating income was also up 5.9%.

On slide 25 you'll see that for 2013 we expect Harley-Davidson motorcycle shipments to be between 259,000 and 264,000 motorcycles on a worldwide basis, up approximately 4.5% to 6.5% from 2012.

Our 2013 shipment guidance reflects new model year 2013 and '14 products, continued success of our outreach efforts in the US, improved product availability in the US, continued expansion of our international distribution network, and the strong appeal of the Harley-Davidson brand.

While we are very optimistic about the strength of our business and brand, we remain cautious about the world economies, in particular in the US and Europe.

During the first quarter we expect to ship between 71,000 and 76,000 units, which is up approximately 10% to 18% compared to last year.

This increase is driven by the surge manufacturing capabilities we have put in place.

We expect retail inventory to increase by the end of the first quarter as we prepare for the 2013 selling season.

We expect full-year 2013 gross margin will be between 35.25% and 36.25%.

2013 gross margin will have both puts and takes.

On the positive side, we continue to expect approximately $25 million in incremental restructuring savings, about $16 million less in temporary inefficiencies than we experienced in 2012, incremental margin behind higher production and higher pricing.

To a lesser extent, we expect favorable product mix.

On the negative side, we expect unfavorable currency exchange as we lap hedges established at higher levels of foreign exchange, higher pension expense, and pressure on materials costs.

For Q1 2013, we expect gross margin will be slightly improved over Q1 2012, driven by increased production, largely offset by unfavorable currency exchange.

We expect an adverse impact from foreign currency in Q1 2013 to be similar to the impact we experienced in Q4 2012.

Capital expenditures in 2013 are expected to be between $200 million and $220 million.

Looking back, 2012 was truly a pivotal year.

We completed a successful ERP implementation and effectively transformed our manufacturing and product development operations.

Retail sales in the US were another bright spot.

Once again, we gained market share.

And outreach sales grew at twice the rate as our sales to core customers.

In international markets our prudent investment in emerging markets helped offset softness related to the challenging macroeconomic environment in Europe.

Gross margin during the year was up 1.4 points and operating margin was up 2.5 points.

We are excited that the temporary capacity constraints related to restructuring are now behind us.

And we look forward to the completion of our current restructuring activities.

2012 was another year of delivering significant shareholder value.

Our share price was up 25.6%, we increased dividends by 24%, and repurchased $300 million of our shares.

2013 is our 110th anniversary year and we plan to continue to bring new customers into the Harley-Davidson brand from all over the world.

As we have done for many years, we'll deliver market-leading products and experiences that fulfill dreams of personal freedoms like only Harley-Davidson can.

We will remain focused on executing our growth strategies and we expect to continue to deliver strong margins, strong returns, and value to our shareholders.

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

And now let's take your questions.

(Operator Instructions)

Ed Aaron from RBC Capital Markets.

I actually wanted to ask a couple of clarification questions about the first quarter, if I could.

I think the Q1 shipment guidance is higher than most expected.

Is that entirely a reflection of the surge capabilities coming online?

Or is there also a message in there about either a view of retail sales this year or a view of inventories being lower than you want them to be?

And then my follow-up is just a clarification question on the currency impact for Q1.

John, when you say similar to Q4, are you referring to that on a gross profit dollar basis or on a gross profit margin basis?

Thanks.

Okay.

Thanks, Ed.

Number one is, in the Q4 we have shipment guidance of 71,000 to 76,000 units.

And that's up 10% to 18%.

And, yes, that is driven by our surge manufacturing capability in our York facility.

So, the overall strategy has been to produce closer to customer demand.

The customer demand is toward the end of the first quarter and the second quarter.

And so we will put the units in and increase overall availability in the first quarter.

Now, having said that, we ended a year ago at very low inventories.

As a matter of fact, two years ago we were on pretty low, and last year they fell another 4,400 units.

So, as we exit the first quarter with the increase in shipments, we would expect inventories to be up on a year-over-year basis.

The second question, Ed, you asked was with regards to Q1 currency.

And the comment was, we expect it to be in line with what we saw in Q4.

And that would be, yes, both from a revenue standpoint and an impact on gross profit standpoint.

So we would expect continued devaluation on a year-over-year basis affecting revenue, and also the loss on overall hedging similar to what we saw in Q1.

I'm sorry, loss similar to what we saw in Q4.

Tim Conder from Wells Fargo Securities.

John, on that FX, just to continue that on for 2013, in your slide 17, you had $17 million negative FX impact for 2012.

Collectively for '13 do you anticipate that at this point being higher?

Lower?

Similar to that?

And then also on the gross margin guidance that you have here, is there any way to quantify what would be maybe a surge learning curve impact?

Or at minimum just is that some factor here that is within your gross margin guidance for 2013?

Okay.

Tim, the first question was on a full-year basis and in 2012 we had $17 million impact on foreign currency.

We're not going to quantify that further.

Again, the first quarter's going to look similar to the fourth quarter of last year.

And to say that on a full-year basis we expect currency to adversely impact both revenue and gross profit.

The second question that you had was with regards to the surge learning curve, and how is that incorporated into, I believe, the gross margin guidance.

So one is, some of the one-time aspects of surge is incorporated in our temporary inefficiencies.

And some of those came in 2012 as we prepared.

The first part of the surge opportunity was in hiring, recruiting and hiring, and a lot of that took place last year and would be included in temporary inefficiencies in 2012.

As we look forward into next year, there are some costs that would be included and fall under gross margin through temporary inefficiencies.

And then also at the end of the year we've got Kansas City going onto surge, and we would expect some similar one-time costs as we set the system up and get over that learning curve that you mentioned.

Craig Kennison from Robert W. Baird.

John, could you just clarify, with respect to dealer inventory for all of 2013, whether you still expect to reduce that inventory on a year-over-year basis?

Or whether it might be closer to flat given what you're doing in York.

And then secondly, just comment on used bike values.

The question with regards to dealer inventory, let's take a look at the entire year.

For the last couple years we've talked about inventory being light, in particular in the first, second and third quarter.

We've been constrained from a capacity standpoint, largely through our York facility, for probably six of the last six or seven quarters.

Those constraints were lifted in the fourth quarter of 2012 and you saw the mix dramatically shift to touring.

As we enter into 2013 we feel very good about our overall mix of inventories.

But as we look at the entire year, we would expect to improve availability, or improve overall inventories in the first, second and third quarters.

We continue to expect in the fourth quarter that overall retail inventory will fall slightly.

And that is, again, in anticipation of our Kansas City facility being able to surge its production similar to what we're seeing in York this year.

And, therefore, we won't need to put as much in the dealer network in the fourth quarter when customers are not buying as many motorcycles.

So, improved availability for most of the year, Qs 1 through 3, and down slightly at the end of the year as we prepare for a surge at Kansas City.

The second question was what are we seeing in used bike values.

Again, we saw the big inflection of used bike values was in Q4 of 2011.

Since then, we've really seen stable values.

We haven't seen many moves in either direction.

And again, it just leads us to believe that the used bike glut issue is behind us, and that we can grow our new bike sales at or above the rate of used bike into the future.

James Hardiman from Longbow Research.

I just wanted to follow up on the 1Q shipment guidance and figure out how that fits into the year.

Obviously the growth in the first quarter is way ahead of the growth for the year.

Which implies the rest of the year will need to be short of that full-year rate.

Is that entirely a fourth-quarter event, or will we see that revert to the mean in 2Q or 3Q?

And just a clarification separately on the SG&A side.

You talked about how that was higher than you anticipated in the fourth quarter.

Were there some items that you'd like to call out there?

Does that flow through into 2013 or is it a one-time event?

Thanks.

Okay.

James, with regards to the first quarter, we do expect to be up more than our full-year average.

So, first quarter up 10% to 18%.

On a full-year basis, we would look to be up 4.5% to 6.5%.

Again, the reason we're doing that is we finished a year ago at extremely low inventories.

And, obviously, it's looking right at our selling season that really starts in late March and April.

So we look to replenish a lot of those inventories.

With regards to that, we're not going to provide guidance for the other three quarters except, as you pointed out, in terms of a growth rate they will be an average less than the first quarter.

But we're not going to provide that.

One quarter out we'll provide the next quarter shipment guidance.

The second question is with regards to SG&A in the fourth quarter.

Yes, three months ago we sat here and we thought that we would be down slightly.

We ended up, up slightly.

And there's nothing big driving it.

It's really just the timing of year-end expenses.

When we looked at the overall quarter we had favorability on a year-over-year basis due to a recall that we had in 2011.

And a lot of that was replaced by investment in our future growth.

We spent about $7 million in the quarter investing in future growth.

And that's in line with our overall rate of investment on a full-year basis.

On a full-year basis we spent about a little over $30 million in our future growth initiatives.

We would expect that type of spending in growth into 2013.

And we do expect 2013 SG&A to be higher than 2012, but lower as a percent of revenue.

Felicia Hendrix from Barclays.

John, with the temporary inefficiencies, I believe you said $17 million for the year.

I was just wondering, can you just walk us through how that might fall in the quarters?

I believe on your last call you said that there would just mainly be the inefficiencies in the first half and then the second half wouldn't have any.

So, just trying to reconcile that.

This year we had -- in 2012 -- $33 million.

We expect about 50% of that to go away.

So, we would expect about $17 million next year.

We don't provide that gating, Felicia, by quarter, but there's three main activities that are going to drive that spending.

One is continued training at our Wisconsin and Kansas City facilities.

That should be largely even through the year, maybe starting to taper off at the end of the year.

The second piece is what I had just mentioned.

In preparation for surge, we have a little bit of cost due York in the first quarter.

And then we'll be preparing for Kansas City in the fourth quarter.

And then, finally, as we exit our facility in Australia, those expenses will build throughout the year until we completely exit that facility.

So, I don't think that there's any dramatic change in the spending of that, but I can't provide quarterly guidance with regards to temporary inefficiencies.

Rod Lache from Deutsche Bank.

Good morning, everyone.

It's Pat Nolan on for Rod.

Just a couple of follow-up questions.

First, on the shipment guidance and what's underlying that, as far as your assumptions.

Could you give us just some color on what you're expecting for overall industry growth next year?

And also, as a follow-up on your comments about pricing and mix.

So, if we look at it on a full-year basis, pricing was about a $30 million positive in 2012 and mix was a $5 million positive.

You said mix was going to be less of a positive, but pricing still positive.

Do you think it could be in the same range of benefit as you achieved in 2012?

Okay, Pat.

The first question on shipment guidance and what we expect out of industry growth, we don't provide a forecast of the industry, but just, in general, we feel very good about the industry and the strength of the industry.

In 2012, the overall industry was up 4%.

And actually in the fourth quarter it was up 5.3%.

So, we see the overall industry strengthening as our competition works through some of the used bike pricing issues that they have.

We do see growth next year, but we don't provide a quantification of that.

When we look at our growth of 4.5% to 6.5%, it's driven by the appeal of the brand and our 110th year, model year product that we feel very good about.

2013 model year product has been very strong for the last several months.

And we would expect that.

And then we're very excited about what we're coming out with for the 2014 product.

Outreach continues to go well.

We would expect that next year for outreach to grow faster than our core customer.

And in 2012 it grew at double that rate.

And then product availability I've talked about.

And then, finally, international distribution, we'll continue to expand that.

Tempering some of those things are overall concern with world economies, in particular in the US and Europe.

The next question that you asked is the magnitude of motorcycle pricing and mix favorability.

We're not going to provide overall line item guidance on the elements that make up gross margin.

But, as you know, we took pricing in August of 2012, so that will on a year-over-year basis lap for about eight months.

And that was about 0.75% price increase on a worldwide basis.

Again, overall, product mix was up slightly when you look at family mix of touring.

We feel good about how we entered the year on mix within family, within models, and within regions of the world.

We expect slight mix favorability into next year.

But, that's about all I can provide with regards to quantifying.

Gerrick Johnson, BMO Capital Markets.

Now that it's over, what was the dealer reaction to the model year shift?

Is this something you'll continue with going forward or will there be more changes?

And is there any way to quantify what kind of impact it may have had to retail sales in the year?

Thank you.

Gerrick, actually, the dealer response was very positive.

The reason we did it was because the dealers requested that we push it back.

So, the response was positive.

It certainly was a difficult time to do it.

When we planned to do it a couple years prior, we didn't realize we would also be putting in the ERP system.

So I think that added some complexity to our third quarter and drove inventories a little bit lower, a fair amount lower, than we would have anticipated.

But, we're very pleased with the dealer show being in late August and we expect to continue that into the future.

Jamie Katz from Morningstar.

I know the dealer presence or the rate that you're opening them globally remains unchanged.

But can you talk a little bit about how you guys perceive your opportunities in the different geographic regions, as Europe has begun to struggle a little bit more?

Or do you see more opportunities in maybe Asia now than before?

And how are you addressing that?

Yes, this is Keith.

First of all, we said, I think three years ago, that we were going to open between 100 and 150 new dealers around the world.

As you mentioned, we're certainly on plan to do that.

We believe that there's still opportunity really in every market.

We feel that the strength of the brand, the products, the new products that we're bringing to market, have tremendous appeal.

Clearly, and John mentioned in his comments, Southern Europe is weak right now because of some of the economic struggles that they're seeing.

We did mention in our notes earlier, we have a very strong year in Latin America.

We think there's still upside and opportunity in that region.

We had a strong year in Asia-Pacific and we highlighted some of those areas.

And a couple of them we talked about were China and India.

And we think there's tremendous potential there, as well.

Our sales, while increasing every year in those regions, are still pretty small.

And so, we think that as disposable personal income in those regions continue to grow, and we provide the right kind of products in those markets, we think there's upside there for us.

And then there's other emerging markets which we've just begun to touch.

So, we think the future's pretty bright in terms of our international expansion.

Ed Aaron from RBC Capital Markets.

Thanks, just a follow-up on HDFS, if I could.

You mentioned expectations for some changing consumer behavior in 2013.

And I was wondering if you could maybe elaborate on that a little bit.

Delinquencies are still a low but this was the first time we've seen a tick up a little bit in the last few years.

So, just maybe a little bit more color around how you see that unfolding in '13.

Sure.

Ed, this is Larry Hund.

If you look over the last year or two, what we've seen is consumer behavior, consumers have really been focused on rebuilding their credit profile, deleveraging, paying off debt.

And I think that's benefited us and other vehicle finance lenders.

In the fourth quarter we saw a very slight increase in our delinquency.

And I think that's pretty consistent with what we're seeing out in the market, as well.

I think you're starting to see consumers take on a little bit more debt, maybe being a little bit less conservative.

And I think when that behavior changes, the offshoot of it is slightly higher delinquency, and slightly higher credit losses.

And I think that's what we've signaled for next year.

Felicia Hendrix from Barclays.

Keith, I had a bigger-picture question for you.

You guys gave us some good color about how to think about gross margins in '13, given what we know now.

But now that you have this surge capacity in place, I'm assuming that at York it doesn't just stop there.

So, I was wondering if you could help us understand what type of continuous improvement programs you might be looking at.

Or just other ways to continuously -- let's use that word again -- to continuously improve the excellent productivity that you'll be getting out of York just with the surge capacity.

And then perhaps also out of Kansas City.

First of all, Felicia, if you look at our strategy that we've had in place since the last several years, there's really only four pillars, and one of them is continuous improvement.

So, I think you make a very good point.

And what we've really been focused on is getting the entire organization to understand that no matter how well we're doing, whether it's in sales, in marketing, or whether it's in engineering or whether it's in manufacturing, that we can always do better.

And so if you think about York, you think about Kansas City, Pilgrim Road, all of our plants, Tomahawk, and the transformation that we're going through, certainly this is just the beginning.

In other words, we've just now kicked that off.

And our expectation is that we will continue to improve.

We'll continue to improve our productivity, we'll continue to improve our performance around quality, the health, safety, well-being of our employees.

And certainly all those things tend to make for a much smoother, more efficient operation.

So, our expectation is that we'll continue to get better as we go through surge the next year, the following year and the year after.

I don't know if that answered your question specifically.

Derek Johnson from BMO Capital Markets.

I was hoping you could just touch on your own Company inventories.

Down about 6%.

In preparation for flex, should work in progress be up, or are finished goods down?

What are the puts and takes in the Company inventory there?

This is John.

The Company inventory is down versus year-ago.

The main driver of that, Gerrick, is, if you recall, a year ago we were building inventory in the fourth quarter.

And we were keeping it in Company-owned inventory.

And we were going to release that, and we did release it when the ERP implementation went off.

So, to do the ERP implementation, we're expecting production to be down quite significantly in the month that we launched.

So, we had higher production in the fourth quarter than we did this year and last year, and also higher inventories.

So, that's the biggest reason for the drop.

But as you pointed out, because of production going to be up a fair amount in the first quarter, yes, certainly we have to bring on more materials for that production.

And that would take our work in progress inventories up and our raw materials up a little bit, as well.

So, those two work to offset each other but net-net we're down, as you had mentioned.

James Hardiman from Longbow Research.

Another follow-up for Larry, if you would.

You talked about HDFS being down in 2013.

Obviously, that was the initial expectation for 2012.

And I think that's been better than expected across the board.

Obviously, that's a testament to the work that Larry and the rest of the team has done over the course of the year.

But can we talk about, as the year has progressed, what surprised you maybe to the upside in HDFS?

And, as we roll forward to 2013, talk about some of those same factors.

What are the odds that 2013 could look a lot like 2012 in terms of outperforming expectations?

Or are we really at the end of the runway with some of these items?

Thanks.

Okay, James.

This is Larry.

The biggest thing, I think, surprise in 2012 was just how low the retail credit losses were.

At 79 basis points, clearly the lowest we've seen in over a decade.

And considerably better than what we had seen in 2011.

So, really, you say that drove a fair amount of profit for us last year.

I would say when you take a look at 2013, we don't think it's realistic to expect that continued drive downward in retail credit losses.

I think we expect the credit portfolio to perform well.

It's in good shape going into the year.

But we think, as far as the consumer is concerned, that they're starting to shift their behavior a little bit.

We may see a little bit higher credit losses.

As far as, call it, surprises on the upside next year, we think there's probably less potential for that, just given how low credit losses were in 2012.

Tim Conder from Wells Fargo Securities.

Keith, just to revisit your point on the additional emerging markets, you'd commented previously a few times about looking at some potential different approaches in, especially, the Indian market.

Any updates you can give us there or when we may start to see some fulfillment or evidence of that emerging?

I think, Tim, you know that we have a fully up and running CKB operation in India.

And we're actually assembling bikes over there.

We assemble certain models, and more and more models.

We continue to open dealerships.

And we continue to look at what are other opportunities in that part of the world.

So, I think going forward we'll probably have more to say about those things but right now that's where we're at.

There are no further questions in queue.

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