Harley-Davidson Inc (HOG) 2013 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

My name is Aaron, and I'll be your operator today.

At this time, I would like to welcome everyone to the first quarter 2013 earnings conference call.

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

After our speakers' remarks, we are going to have a question-and-answer question.

(Operator Instructions)

I'd like to turn the call over to Miss Amy Giuffre, Director of Investor Relations.

Miss Giuffre, you may begin your conference.

Thank you.

Welcome to Harley-Davidson's first quarter 2013 earnings conference call.

The audio for today's call is being webcast live on www.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 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 CEO Keith Wandell, CFO John Olin, and President of Harley-Davidson Financial Services Larry Hund.

Then we'll open the call to your questions.

Let's get started.

Keith?

Thank you, Amy.

Good morning and thanks to all of you for joining us today.

We appreciate your interest and your investment in Harley-Davidson.

Before we get to the discussion of the quarter, I just want to expand on the news that we shared earlier this week about our continued market leadership in our US customer segments.

As you know, we've been highly focused on positioning the Company for long-term success by growing sales to new groups of customers in the US and internationally while also growing sales among our traditional customer base.

Just this past January, we reported that in 2012, Harley-Davidson sales grew faster for the first time to our US outreach customers, which consists of young adults 18 to 34, female riders, African-American and Hispanic riders, then to our traditional US customer base of Caucasian men ages 34-plus.

In fact, in 2012, sales to outreach customers grew at more than twice the rate as sales to our traditional core customers.

And just this past Monday, we provided further proof of Harley-Davidson brand appeal when we released newly-available 2012 data for each of these US market segments.

Among the highlights were that last year, for the fifth straight year, Harley-Davidson was the number one seller across all CCs of new street motorcycles in the US to each of these outreach segments as well as to our traditional customers.

And among young adults, we sold nearly twice as many new street motorcycles as the nearest competitor.

We sold nearly half of all new street motorcycles purchased by African-Americans and by Hispanics in the US.

And we sold more new street motorcycles to women than all other brands combined.

These facts demonstrate the strength and broad appeal of our products and the Harley-Davidson brand across all of these diverse groups.

Another way to look at brand appeal is sales to customer who are new to the brand.

And last year, nearly four of every ten sales of new Harley-Davidson motorcycles in the US were to new customers.

And, of course, our strategy for a long-term sustainable future is also focused on global opportunities.

In 2012, two thirds of Harley-Davidson sales outside the US were to customers who were new to the brand.

Together with the US number, this means that nearly half of all of our global sales last year were to new customers.

We believe all of this new data demonstrates that Harley-Davidson's multicultural, multi generational strategy is effectively reaching customers both in the US and around the world.

And we believe our strategies in product development, manufacturing and retail, with their focus on optimizing our ability to deliver great product and customer experiences, will continue to provide a competitive advantage and fuel growth.

Through our product development strategy, we continue to hit home runs with motorcycles like Breakout.

We have improved product development time to market and have other great new motorcycle introductions around the corner later this year.

In manufacturing, the implementation of seasonal surge production in our York plant in January came out without a hitch.

Our employees did an unbelievable job in this implementation, and as a result, we're now building more motorcycles closer to when they're needed.

We also continue to see great improvement in better matching production to customer demand.

Again, earlier this week, we launched our state-of-the-art eCommerce site to deliver the premium online experience that customers expect, and we believe this will be a great enhancement to serve current customers, attract new customers, and to generate growth over time.

When I think of all we have accomplished in a few short years and all the opportunities that we have in front of us, I believe we are in a great position for the future.

We have outstanding brand strength and appeal across generations, across cultures, and across borders.

We continue to expand our competitive position.

We enjoy outstanding customer loyally, and we have great opportunity in the pool of potential customers, as John will tell you about in a few minutes.

I want to thank everyone -- our employees, our dealers, and our suppliers.

They're doing an outstanding job every day to deliver for our customers and fulfill the dreams of personal freedom for people around the world.

The riding season is starting up.

There is a summer of great 110th anniversary events ahead, including major celebrations in Rome and Milwaukee.

And all of us at Harley-Davidson look forward to spending time with our customers and celebrating with our extended family.

And now, let me turn it over to John Olin.

Thanks, Keith, and good morning, everyone.

I'll review the first quarter financial results starting on slide 9. During the quarter, Harley-Davidson, Inc.

consolidated revenue was up 9.9% to $1.6 billion.

Our first-quarter net income improved to $224.1 million, an increase of $52.1 million or 30.3%.

Similarly, diluted earnings per share rose to $0.99 per share, up 33.8% from the year-ago quarter.

Operating income for the motorcycle segment was $276.8 million, up 33.0% compared to last year's first quarter.

The strong increase in the motorcycle business was driven by an 11.1% increase in revenue as shipments were up 17.1%.

Additionally, motorcycle segment operating income benefited from higher gross margin and lower restructuring spending.

Operating income at Harley-Davidson Financial Services was up 6.1%, behind higher net interest income.

We are very pleased with our first quarter results.

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

Worldwide retail sales of new Harley-Davidson motorcycles were down 9.1%, reflecting weather in the US and macroeconomic challenges that continue in Europe.

Despite these factors, the Harley-Davidson brand is strong and is benefiting from the success of our key growth strategies.

We, along with our dealers, continue to invest in the Harley-Davidson experience, including our remarkable products, expanding the reach of the brand to new customers in the US, and expanding our international distribution.

We continue to gain momentum and market share in many key markets, and we believe we are on track to deliver our full-year shipment guidance of 259,000 to 264,000 units or up approximately 4.5% to 6.5%.

On slide 11, dealers in the US posted solid Q1 2013 retail sales results, especially when considering the tough year-over-year comparison of up 25.5%, as well as the challenging economic environment.

Last year's sales results during the first quarter were driven by the mildest weather across the United Sates in over 100 years, which we believed pulled sales forward from the second quarter of 2012.

Against this backdrop, US retail sales of Harley-Davidson motorcycles were down 12.7% while the heavyweight motorcycle segment was down 16.5%.

Dealer retail inventory in the US increased 13,300 units in Q1 of 2013, which we believe as driven by higher shipments, largely enabled by the successful implementation of surge manufacturing at York.

The increase in inventory will improve product availability from the tight levels experienced in 2011 and 2012.

We also expect higher year-over-year inventory in the second and third quarters of this year and reduced Q4 inventory in anticipation of additional surge capability in the first half of 2014.

Before we discuss market share, I want to point out a change in how we report heavyweight motorcycle industry and market share data.

In order to more closely align with the universal market definition, we now define heavyweight motorcycles to have at least 601 cubic centimeters of engine displacement.

Previously, our definition of heavyweight included motorcycles with engine displacements of at least 651 CCs.

The share difference between the 601 and 651 CC segments is small.

For example, full-year 2012 share of the 651 CC segment in the US was 57.2%, while our market share of the 601 CC segment was 53.9%.

A five-year history of both market segmentation is available on the Investor Relations section of our website.

Now during the first quarter, Harley-Davidson's share of the 601 CC heavyweight market strengthened by 2.2 percentage points versus prior year to 55.9%, which represents another record quarter of market share.

Our strong market share gains were driven by the strong appeal of the Harley-Davidson brand and products.

Keith highlighted the latest data illustrating our strong brand relevance across generations and continued success in attracting new and diverse riders.

But there's another part to this story.

We also believe we have a long-term opportunity when you look at population trends from the US census bureau.

Take a look at the chart at the bottom right-corner of slide 11.

The blue line represents Caucasian men ages 35 to 74, our traditional customer base, and the population segment that has represented the largest portion of US retail sales for many years.

As the blue line shows, this pool of approximately 50 million people is expected to be stable and strong through at least the year 2050 as new generations move into and through this population segment.

The red line represents the US population of young adults ages 18 to 34, women, Hispanics, and African-Americans.

The US Census Bureau projects that this pool, which is three times larger than our traditional customer base today, will grow at an annual rate of about 0.75% to more than 200 million people between now and 2050.

These are the same outreach demographic segments in which Harley-Davidson has established a clear leadership position.

In 2012, retail sales to these groups grew at more than twice the rate of sales to our traditional customers.

Taken together, our strategy to focus on growth among young adults, women, Hispanics, and African-Americans, as well as our traditional customer base of Caucasian men 35-plus, lines up extremely well with these population trends.

We believe the opportunity in our traditional base of strength will be strong for many years.

And the opportunity in our other key outreach segments is large and projected to grow.

As we look forward to the remainder of the year and beyond, we feel great about our brand, our business, and our future.

However, near-term, we do remain cautious on the US economy.

On slide 12, you will see first quarter retail sales in our international markets were down 1.8%.

In our Europe region, Q1 retail sales were down 10.8%.

We continue to experience significant softness in the southern European countries.

In addition, retail sales in the northern countries were down in aggregate, driven primarily by the prolonged economic crisis across the region.

Emerging markets within the EMEA region continue to grow, reflecting the success of our strategic investment in international growth.

During the first quarter, our share of the 601 CC market in Europe was 11.4%, which was largely flat to prior year despite aggressive discounting by our competitors.

We remain concerned about the potential effect on sales of the ongoing recession in Europe, which continues to result in very low consumer confidence, high unemployment, and constrained credit.

We will continue to focus on the factors that we can control, which includes building our brand experience across the region, and expanding our distribution network in emerging markets.

In the Asia-Pacific region, retail sales up 11.5%, driven by double-digit growth in Australia and emerging markets.

In Japan, retail sales were up 4.7% despite a challenging economic environment and increased repetitive activity.

The Latin America region was up 6.2%, driven by Brazil and Mexico.

This growth is on top of last year's first quarter increase of 85%.

During the quarter, the Harley-Davidson brand took the number one share position in Brazil's heavyweight market.

Finally, Canada's retail sales were down slightly during the quarter.

Despite the challenges in Europe, we are confident in our international growth strategy and continue to invest, especially in emerging markets.

During the quarter, six dealerships were opened in six different countries including Turkey, South Africa, and the Philippines.

Since 2009, we have opened 99 dealerships, which is in line with our goal of opening 100 to 150 new international dealerships by the end of 2014.

On slide 13, you will see wholesale shipments of Harley-Davidson motorcycles in the quarter were up 17.1% compared to last year as we took advantage of our surge manufacturing capability, which we initiated at York this quarter.

The implementation of surge manufacturing in York allowed us to increase production of our Touring and Softail families ahead of the peak selling season.

Last year, production of these models were constrained due to our restructuring.

We also increased production in our Kansas City plant compared to last year's first quarter.

Shipments in the first quarter of 2013 were within our expected range of 71,000 to 76,000 motorcycles.

The mix of motorcycle shipments in the quarter shifted towards custom bikes.

The mix of Touring bikes was strong but down slightly versus last year's first quarter when we shipped a high percentage of Touring motorcycles.

International shipments as a percent of the total were down compared to 2012, reflecting our efforts to navigate through the tough market conditions in Europe.

On slide 14, you'll see revenue for the motorcycle-related products segment was up 11.1% in the first quarter, behind increased year-over-year motorcycle shipments.

Motorcycle revenue was up 15.9% behind a 17.1% increase in shipments during the first quarter.

For the quarter, the average motorcycle revenue per unit decreased $158 from the prior period, primarily driven by unfavorable currency exchange, partially offset by higher pricing.

On average, our key currencies during the first quarter were weaker against the US dollar by approximately 4% compared to last year.

Related business revenue was down for the quarter compared to last year as both parts and accessories, and general merchandise revenue generally track more closely with retail motorcycle sales than with motorcycle shipments.

Parts and accessories sales down 7.5%, and general merchandise was down 3.3% in the first quarter compared to retail sales of motorcycles, which were down 9.1% compared to Q1, 2012.

Turning to restructuring on slide 15, restructuring expenses were $2.9 million during the first quarter.

We also experienced approximately $3 million in temporary inefficiencies versus approximately $7 million in last year's first quarter.

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 to focus on improving retail capabilities and strengthening our worldwide distribution channels and product development capabilities.

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

On slide 16, you will see gross margin in the quarter was 36.7%, which was up 0.8 percentage points versus last year.

Volume, price, materials and manufacturing were all favorable for the quarter.

As expected, foreign currency exchange was significantly unfavorable during the first quarter related to the year-over-year hedge impact and continued volatility in key currencies.

Mix was marginally unfavorable during the quarter as we experienced unfavorable mix within families and geographies, partially offset by the favorable impact of higher shipments of custom motorcycles.

Manufacturing costs were favorable to prior year, benefiting from restructuring savings, higher production in the quarter, and lower temporary inefficiencies as compared to last year's first quarter.

As we said last quarter, we continue to experience cost pressure from our suppliers of purchased components.

On slide 17, operating margin as a percent of revenue for the first quarter was 19.6%, up 3.3 percentage points compared to last year's first 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.

As a percent of revenue, SG&A in the first quarter was 17.0% versus 18.6% in the prior year quarter.

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 18.

In the first quarter, HDFS's operating profit increased $4.1 million or 6.1% compared to last year.

The three key drivers of the first quarter results were, first, net interest income was up $10.7 million resulting from lower interest expense, which was primarily driven by lower cost of funds.

Second, the combined change in the provision for retail and wholesale credit losses was unfavorable by $3.8 million on lower credit loss and reserve releases and slightly higher retail credit losses.

And finally, operating expenses up $3.2 million.

We're pleased with the performance of our Financial Services business in the first quarter.

On a full-year basis, we continue to believe HDFS's 2013 operating income will be modestly lower than 2012 as the business benefited from approximately $17 million of 2012 credit loss reserve releases, which may not repeat in 2013.

In addition, we also expect modestly higher retail credit losses in 2013 due to lower recoveries resulting from fewer chargeoffs in prior periods, changing consumer behavior, and HDFS funding of additional loans we believe are prudently structured in the near-prime and sub prime markets.

Keep in mind, of the $17 million of credit loss reserve releases in 2012, $11.2 million were released during the second quarter of last year.

So we will be lapping that comparison in the second quarter of this year.

Now Larry will provide more detail on HDFS's operations on slide 19.

Larry?

Thanks, John, and good morning.

During the first quarter, HDFS retail motorcycle loan originations decreased 7.9% or $43.7 million compared to the same period last year.

The decrease was primarily driven by lower year-over-year new retail motorcycle sales and a 1.2 percentage point decrease in retail financing market share.

For the first quarter, HDFS retail financing market share of new Harley-Davidson motorcycles sold in the US was 45.8% compared to 47.0% in the first quarter of 2012.

This decrease was primarily due to increased competition in the prime segment.

As a result, we reduced pricing in certain prime credit tiers late in the quarter to position ourselves more competitively in the market.

Finance receivables outstanding increased 2.3% compared to a year ago driven by growth in the wholesale portfolio.

We believe the overall loan portfolio is solid, comprised of profitable loans funded in both the prime and sub-prime segments.

In the first quarter of 2013, between 75% and 80% of our new loan originations were prime.

Moving on to credit performance on slide 20, the 30-day delinquency rate for retail motorcycle loans at March 31, 2013 was 2.92% or 36 basis points higher than 2012.

This is consistent with consumers' willingness to take on more debt, as well as our actions over the last several years to modestly increase approval rates in the near-prime and sub-prime categories as we fund additional loans that we believe are prudently structured.

To put this delinquency percentage in proper perspective, this is only the second time in at least the last 12 years where HDFS has finished the first quarter with retail delinquency below 3%.

Annual retail credit losses increased by 9 basis points to 1.09% in the first quarter compared to 2012, primarily driven by lower levels of recoveries.

We are pleased with the progress at HDFS as we continue to maintain a solid liquidity position, reduce our cost of funds, and deliver strong profitability.

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

Now, let me turn it back to John.

Thanks, Larry.

And now we'll take a look at cash and liquidity on slide 21.

You will see that at the end of the quarter, we had $1.15 billion of cash and marketable securities.

In addition, we had $1.26 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.

During the quarter, there were several transactions related to cash.

First, HDFS paid a $185 million dividend to H-D, Inc.

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

This contribution reduces the $221 million Q4 2012 increase in our long-term pension and post-retirement liability, which was driven by the pension discount rate assumptions changing from 5.3% to 4.2%.

I am very pleased to report that during the quarter, Harley-Davidson increased our quarterly dividend from $0.155 to $0.21 per share, an increase of 35.5%.

We also repurchased approximately 2 million shares of Harley-Davidson stock for $105 million during the quarter.

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.

Last week, we also completed a $650 million asset-backed securitization transaction with the weighted average interest rate of 0.71%.

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

financials on slide 22.

I would like to highlight two items on the slide.

First, with regards to operating cash flows, the Company used operating cash of $109 million during the first quarter, driven by increased wholesale lending and a $175 million contribution to our pension plans in January.

And second, the tax rate for the first quarter was 33.8%.

This reflects the benefit of the full year of 2012 and first quarter of 2013 R&D tax credit, which was reinstated retroactively with the enactment of the American Taxpayer Relief Act of 2012 at the beginning of 2013.

We continue to expect our full-year effective tax rate will be approximately 34.8%.

On slide 23, for 2013, you'll see that for 2013, we continue to 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.

During the second quarter, we expect to ship between 80,000 and 85,000 units, which is in line with last year's second-quarter shipments of 83,500 units.

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

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

Looking back, we feel very pleased with our first quarter results and key accomplishments, which include successfully initiating surge manufacturing at York effectively eliminating our temporary capacity constraints; launching our new eCommerce experience, which will bring a premium online shopping experience to customers.

We continue to deliver significant shareholder value by increasing our dividend by over 35% and repurchasing 2 million shares of our stock.

Our 110th anniversary year is underway, and we plan to continue to bring new customers into the Harley-Davison brand from all over the world.

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

We continue to position the Company for the long-term success by growing new groups of customers in the US and internationally while we continue to grow sales of our traditional customer base.

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

Thank you for your continued confidence and investment in Harley-Davidson, and now, let's take your questions.

(Operator Instructions)

Sharon Zackfia, William Blair.

Good morning.

I had two questions.

First, gross margin was a nice positive surprise in the quarter, and I think it was better than you had led us to believe earlier in January.

So what surprised you on the gross margin side?

Was it York functioning more smoothly than expected?

Or what have you?

And then, secondly, currency is a little opaque to those of us on the outside.

And with the yen devaluing during the quarter, how do we think about currency through the remainder of the year, versus what we just saw in the first quarter?

Okay, Sharon.

First of all, gross margin -- we had a gross margin of 36.7% in the quarter.

And, yes, when we gave guidance on the last conference call, we said we would be slightly ahead of year-ago quarter, which was 35.9%.

So we were looking at 10 or 20 basis points ahead.

We actually came in favorable to that, and the reason largely was how smoothly the surge manufacturing at York came off.

So we experienced lower temporary inefficiencies than we had anticipated.

Again, as Keith had mentioned, that was an absolute, tremendous execution.

We took production up and capacity utilization; we improved overall quality.

Safety was the best quarter we've ever had in York, and we hit our production targets.

So the driver of the increase in gross margin was due to that.

The second question, Sharon, that you had asked is with regards to currency.

What we've said is, on a full-year basis, currency would be unfavorable.

We certainly saw that come through in the first quarter.

So basically, in the first quarter, as I mentioned in the prepared remarks, is that the foreign currency is devalued by 4%, and that was really driven by two of them.

The yen fell 15% from a year ago, and the real fell 11%; and that drove revenue to be down about $14 million.

And cost of goods sold is a little unfavorable as well, as we lapped gains of a year ago on hedges that now turn into losses.

So first quarter was in line as we expected; it was down about $15 million.

As we look forward on a full-year basis, I expect it to continue to be unfavorable, and as we look to the second quarter, we would expect currency to be unfavorable as well -- however, not to the same magnitude as we saw in the first quarter.

Craig Kennison, Robert W. Baird.

Thanks for taking my questions as well.

Just interested in whether you can help us understand how weather impacted your sales in Q1 in markets that really don't show much of a difference in weather.

Thanks, Craig.

So again, as everyone is well aware of, last year's first quarter was up 25.5%.

And to really understand the extent of that, you have to get into some of the numbers.

25 states in last year's first quarter were at all-time highs.

In 118 years, the warmest ever.

Another 13 states were the top five warmest in 118 years.

Of those 38 states, Craig, they virtually accounted for 100% of the decline in year-over-year retail sales.

And if you take a state like California, where weather was pretty similar on a year-over-year basis, California had solid growth between 2012 and 2013.

So again, we're confident that this year's decline of 12.7% is weather-driven, and it just happens to be March is a large month, so about half of the volume for the first quarter; and it's really a swing month.

And we always say at Harley-Davidson, spring always comes, and it just didn't come in this year's first quarter, and we were laughing on last year's very high numbers.

Tim Conder, Wells Fargo Securities.

John, thanks for the color on the weather.

On the gross margin, I wanted to circle back to that.

Given that you said that the real reason for the upside versus your expectations was the better execution on the operational side there in York, what would preclude us from thinking that, that should continue going forward here in the second quarter?

And I know you mentioned currency was worse than your expectations.

I think your expectations had been about $13 million; you said it came in at a negative $15 million and you expect it to still be negative going forward.

But all that together, why wouldn't you raise the gross margin, I guess, at this point?

That's question number one.

And number two, is there any type of sensitivity you can give us on foreign exchange?

Say, if you've put on any new hedges, folding all of that in; and X percent change in revenue in this basket of countries will impact EPS that much?

Why it mounds?

Okay, Tim, I think your first question was, why don't we raise full year gross margin?

That's an easy answer.

That's because we think it's going to be between 35.25% and 36.25%.

What we saw in the first quarter -- largely the one-time temporary inefficiencies.

And that's what drove us favorable to what we had anticipated three months ago, and that was driven by the York piece.

What you also saw in the first quarter is higher production.

And I will say that when we look at overall production for this year, that 100% of our production increases are going to come in the first half.

And you saw some of that in the first quarter, and will see a little bit more in the second quarter.

But by and large, we're on track.

We're right on track, with not only our retail sales -- I didn't mention that before.

From internal plan perspective, actually we had retail sales falling a little more in the first quarter; so in the US, we're a little bit ahead of our plans there.

And our financial plans were right on track -- a little bit better in gross margin for the quarter, but that was more of a one-time deal.

I'm sorry.

Second question, Tim -- sensitivity on foreign currency and rules of thumb.

We don't have any rules of thumb that are very easy to translate.

And when you do the accounting for currency, it is very complicated.

You've got a couple pieces -- the revenue piece, which is more straight forward, which is a year-over-year impact of average exchange rates and how it affects revenue.

And the cost of goods sold, though -- you have hedges that you put on in prior periods and how they relate, so those are always changing.

You've got a balance sheet revaluation, which in this quarter -- the first quarter -- was significantly negative because of the rapidly-declining yen; and that's a mark from the beginning of the quarter to end of the quarter.

Then you have the offset of natural hedges of products you're producing and bringing in from those markets.

And with all those moving pieces, there is no common rule of thumb that you can say that if this happens, that will happen.

It has to do with previous hedges and the timing of when they're falling.

So I wish there was a way we could say -- here's the way to really make it simple, but the accounting is -- the fact of the matter is, it's not all that simple.

But yen, on a full-year basis, we expect currency to be unfavorable; and as I just mentioned, when we look at the second quarter, we expect currency to be unfavorable, but not to the same magnitude as we saw in the first quarter.

Ed Aaron, RBC Capital Markets.

Thanks for the question.

I would like to hear your thoughts on the impact of the recent change in the dollar/yen relationship.

In addition to understanding not only the translation and transaction impact, but I also wanted to get your sense for how you think your Japanese competitors might respond from a pricing perspective, since weaker yen helps their overall competitiveness.

As I mentioned, on a year-over-year basis, the Japanese yen devalued 15%.

And so if you're a manufacturer producing in Japan, and selling your products in the US, that is very favorable.

The question, Ed, I think, is will we expect the Japanese to take pricing actions here in the United States.

The answer is, they run their business, and we don't have a lot of insight.

What I can say, though, is, as the yen strengthens, we do not see the Japanese lower prices to any great extent -- I'm sorry, they didn't raise prices to any great extent.

The Japanese competitors have always been in it for the long term.

And they've been pretty steady in their overall pricing.

So I don't know if they would now take prices down, given the fact that they took lower profits over the last few years.

But again, we don't know what they're going to do.

Rod Lache, Deutsche Bank.

Thanks.

It's actually Pat Nolan on for Rod.

Just a quick follow-up.

I missed the total manufacturing inefficiency number when you were going through that.

What was that in the quarter?

It was $3 million in the quarter compared to $7 million in the year-ago quarter.

Got it.

And are you still expecting -- I know you previously thought the $33 million impact of that in 2012 -- basically cut that in half in 2013.

Do you expect that now, that you can keep that outperformance in Q1, it actually comes -- reduce it by more than 50% on full-year basis?

Given the favorability, Pat, in the first quarter, we would expect temporary inefficiencies to come in a little bit favorable on a full-year basis.

It doesn't carry through to the second quarter.

Those were largely start-up costs of getting people in, trained, and what we thought -- slower line speeds.

But again, they got up to speed very quickly, and everything went extremely well.

So that would be viewed more as a one-time favorability the first quarter.

And overall, on a full-year basis, we'll bring the number down a little; but again, does not repeat throughout the year.

James Hardiman, Longbow Research.

Question on the second-quarter guidance.

Basically, you're saying you're guiding wholesale to be flat.

It's not like you're saying inventories are going to be up.

The only way that math really works is if retail is down.

I know you don't give any sort of guidance on retail, but just connecting the dots, you have basically given some indication.

First, how should I think about the second quarter from a retail perspective?

Obviously, a big decline in the first quarter, but you got much easier comparison.

And secondly, what's the range of retail growth that you think your production is capable of handling at this point?

Is there any upper limit to what you could handle in terms of satisfying retail demand with your production?

Thanks.

I'll start with the last question first.

I'm not going to provide retail growth, but we have got the capacity we need to do, to satisfy market demands.

And that's what restructuring has been all about over the last several years.

And this fourth quarter was a big piece of that in putting the surge production into play and into operation.

So overall capacity is not a near term concern for us.

With regards to the second quarter, the shipping guidance is for 80,000 to 85,000, which is in line with what we did last year, at 83,500.

Remember, last year's 83,500 had 7000-ish coming out of inventory; and this year, we're looking to produce -- we don't have them in inventory to release them.

So that will be increased production.

When you look at inventories growing, remember the launching spot that we're taking off in the first quarter is much higher than it was a year ago.

It doesn't necessarily preclude retail from growing.

We don't provide any retail guidance.

What I can tell you is, we're all looking forward to much easier comps in the second and third quarter than we had in the first quarter.

And again in the first quarter, we had retail sales up a year ago of 4% and down 5.2% in the third quarter driven by ERP implementation.

So the next two quarters, which represent about 60% of our retail sales, we're going to have comps that are about flat to a year ago.

So we're very excited and looking forward to that.

But beyond that, I can't provide any guidance on retail sales, but feel good about our shipping guidance of 4.5% to 6.5%.

Patrick Archambault, Goldman Sachs.

Yes, thank you very much.

Actually, I just wanted to go back to a larger strategic question, tying in to some of the competitive actions.

You guys have consistently seen share gains in the United States.

This quarter was no exception.

Can you talk a little bit about what you see really driving that?

And also tying it into the yen question -- what's the discounting activity been by some of your competitors?

Have they pulled back?

Has that created some opportunity?

A little bit more color on that would be great.

Thanks.

From a discounting standpoint, we continue to see a lot of discounting by competitors -- not only Japanese -- and looking in the range of $750 to $2000 a unit.

We have not seen any big difference in discounting by Japanese competitors.

But we continue to see overall discounting.

The other question --

Yes.

This is Keith.

The question about the market share gains.

Clearly, we put a strategy in place several years ago that said -- we want to develop and bring new products to market more quickly.

These are starting to come through the pipeline now.

We want to be more efficient and effective in how we manufacture closer to the customer.

We're doing that, and we want our dealers to provide a great customer experience every time, every day, every place in the world, and that is well underway as well.

If you ask me why are we gaining market share, those are the reasons.

We're living our strategy, we're making it happen.

We're focused on -- as we talked about earlier today, we're focused on bringing new riders into the family.

Four out of every ten bikes sold in the US -- that was the case.

One out of every two around the world.

That was the case.

And we're gaining market share in those outreach segments where we think it's very important.

John talked about some of the demographics going forward, and what that looks like over the next several years.

We just believe that strategy we put in places is the reason we're winning those market share gains.

Gerrick Johnson, BMO Capital Markets.

Sometimes you give us a change in total demand including pre-owned.

How did that look this quarter?

Was there a big difference between what was moving, pre-owned versus new?

Gerrick, this is John.

The new/used data is a month lag; so on January and February, which is a very small data point and a very small part of the year, suggests that used fell faster than new.

Overall, total demand in those two months for Harley-Davidson motorcycles was down about 11.7% -- well, exactly 11.7%.

And largely driven by declining used.

New is much stronger in January/February time frame.

I wouldn't put too much reliance on two months of winter data.

Greg Badishkanian, Citigroup.

Just looking at focusing on Europe -- you've maintained share, and obviously it seems like a lot of that was macro-driven.

Was there anything else that was notable, whether it was weather, competitive dynamics going on in that marketplace?

Greg, this is John.

The biggest driver is the macroeconomics.

We always say it's going to be sunny somewhere, but now that you mentioned it, across Europe, it was much colder in the first quarter.

As a matter of fact, the average temperatures were down about 14 degrees Fahrenheit for 10.5 degrees.

The weather was pretty tough in Europe as well, which probably had an impact on the category.

Germany was the coldest March in 150 years, and I think the UK was about 50-year high in terms of cold.

So weather did play into it, but it is more of the macroeconomics.

Where the north was holding up for the first several quarters since the sovereign debt crisis started in the third quarter of 2011, and they were really keeping Europe sales up, the last two quarters we have seen the north turn a little negative.

France in particular for us was a tough quarter in the first quarter.

So it would be macroeconomics.

Weather did play in to some extent.

That will work itself out in the next couple of months.

And then there is more intense competitive activity.

We're seeing more discounting by the competition in the first quarter.

And, yes, Greg, as you mentioned, we're very pleased to see our share largely flat, given the fact that our price points are typically higher.

It is just, again, shows the overall strength of the brand.

Felicia Hendrix, Barclays.

Good morning.

Talking about the competitive environment, I was just wondering if you could discuss your thoughts on the prospective new competition from Indian.

And then just to touch on the point that you made in Europe -- obviously macro is an issue and the weather will get better.

You just said you've maintained your market share and you're pleased.

Just wondering what kind of programs or things that you're doing in Europe to offset some of the weakness there?

And finally, if I could reiterate some of the prior requests for FX sensitivity.

I do think it's important.

I recognize it's difficult to come up with, but a lot of the other companies that we follow do provide such a sensitivity and they face the same difficulties.

And I just think it would be helpful to remove some of the uncertainty to our modeling.

Thank you.

Okay, Felicia.

Start with Indian.

So, from what we understand is, Indian is going to relaunch in mid-to-late summer.

We take all our competitors very seriously.

We believe competition is good for everyone.

In the US, we have 11 competitors in the heavyweight segment, and they have fine products, good brands, and have been vesting in their businesses' distribution systems for decades.

Yet the largest of them has an eighth share of the market, and with most others, less than 3% share.

Harley-Davidson a been in the motorcycle business for 110 years, and during that time, we've developed the world's most loyal customers, the strongest and most profitable dealer network, most remarkable motorcycles and one of the strongest brands bar none.

Our focus is on delivering our customers on every level through unrivaled products and experiences.

We'll keep an eye on Indian, as well as all our other competitors, but we're going to continue to focus on delivering Harley-Davidson to the world.

The second question that you had is, in Europe, what we're doing from a market share perspective.

Number one, I think it is just, again, the core strength of the brand has served us very well.

When we look at the overall situation in Europe, we're managing inventories very tightly.

The pipeline distribution system that we have already helps to get the right motorcycles to the right place and keeps the inventories at dealerships very low so their working capital is low.

We have rationalized some of the dealer network where appropriate.

We have consolidated some dealers largely in the South.

Dealer profitability is the top priority in making sure that our dealers remain profitable.

They proved very resilient in the 2008 through 2010 period.

And then we continue to work on emerging markets, and our growth strategy there of putting up on new dealerships.

With regards to the ForEx sensitivity -- we duly note your request.

Jaime Katz, Morningstar.

Good morning.

Can you talk just a little bit about how people in Europe are financing their bikes?

I know you had mentioned constrained credit.

Are you finding more people are trying to pay cash rather than finance?

Or are they using different channels than maybe they have in the past?

Jamie, this is Larry Hund.

We haven't seen a significant shift.

I would say, in Europe what you have is -- for the most part, you don't have as well-developed -- what I'll call a sub-prime lending market.

And so people who borrow tend to be more in the prime space.

You do have in Europe a larger percentage that do pay cash for their purchases; but there's a large percentage that finance as well.

I wouldn't say we have seen any dramatic shift in that over recent periods.

All right, thank you, Larry.

And thank you, everyone, for your time this morning.

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