Harley-Davidson Inc (HOG) 2014 Q1 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the first-quarter 2014 earnings conference call.

(Operator Instructions)

Thank you.

Ms. Amy Giuffre, you may begin your conference.

Thank you, and welcome to Harley-Davidson's first-quarter 2014 earnings conference call.

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

And the supporting slides can be accessed on our website by clicking on Company, Investor Relations, and Events and Presentations.

This morning, Harley-Davidson CEO, Keith Wandell; CFO, John Olin; and President of Harley-Davidson Financial Services, Larry Hund will provide their perspective on the quarter.

Following our prepared remarks, we will open the call for questions.

Today's comments 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.

With that, let's get started.

Keith?

Thank you, Amy.

Good morning, and thanks to all of you for joining us on today's call.

As we noted in today's earnings release, Harley-Davidson delivered gains on many fronts in the first quarter, with motorcycle shipments up 7.3%, consolidated revenue up nearly 10%, and diluted earnings per share up 22.2%.

Dealer new Harley-Davidson motorcycles sales were up 5.8% globally, with increases of 10.9% internationally and 3% in the US.

Our performance reflects the hardworking contributions of employees at every level of our organization, as well as the outstanding efforts of our dealers and our suppliers.

Everyone is focused each and every day on continuous improvement throughout the organization to deliver outstanding experiences to our customers.

In our production operations, we increased the level of first-quarter surge production in the plants from the year-ago period and improved our surge efficiencies.

Through surge, we continued to improve our ability to produce the right mix of motorcycles and to get them to the right customers at the right time.

Motorcycles like the highly popular Project Rushmore touring models, which again performed extremely well.

We also know, with the recent availability of Polk data for 2013, that one of the Rushmore bikes -- the Harley-Davidson Street Glide Special -- was the best-selling new motorcycle model in America last year.

And for the record, as long as we're talking about bestsellers, our custom cruiser Harley-Davidson Breakout was the number two best selling model in America in 2013.

On another major new product front, we recently began shipping the first Harley-Davidson Street 750 and Street 500 motorcycles, a milestone in our strategy to further expand our reach with young adults globally.

The Street 750 got off to a strong start in India, with high consumer interest as showroom display and demo motorcycles hit the dealerships.

In the US, the first Street 500s went into the Harley-Davidson Riding Academy fleets at our dealerships.

We will continue to fill the Riding Academy pool, and then look forward to shipping both the Street 750 and 500 for US retail sales late in the second quarter.

And we will begin shipment of the Street 750 for retail in Italy, Spain and Portugal in the next several weeks.

In other product news, we launched two more new models in early March: the Low Rider and the SuperLow 1200T.

The Low Rider was the original custom cruiser when it was first introduced in 1977.

And in its return, with today's advancements and performance, it expands Harley-Davidson's leadership of the category.

The SuperLow 1200T is targeted for a customer who wants great touring features but on a motorcycle that is smaller and lighter than our big twin touring models.

And what's even more exciting is that as we look down the road, there's a lot more ahead -- other great new motorcycles in our world-class product development pipeline to further grow our leadership among core and outreach customers in the US and globally.

As detailed in today's earnings release, not only was Harley-Davidson the number one seller of new on-road motorcycles to US outreach and core customers for the sixth straight year in 2013; we grew our market share in each of these segments according to Polk new motorcycle registration data from IHS Automotive.

Clearly the entire team is doing a great job of bringing new riders into the Harley-Davidson family, even as we grow sales to core customers.

As we enter the prime selling season in many of our key markets, we are excited about the rest of the year and we know that our dealers are too.

We got off to a great start in the first quarter, and believe we are well-positioned to leverage the many opportunities we see in the marketplace globally.

So thanks for your investment in Harley-Davidson, and thanks again for joining the call today.

And now I'm going to turn it over to John Olin with details on the quarter.

Thanks, Keith, and good morning, everyone.

I'll review the first-quarter financial results, starting on slide 12.

During the quarter, Harley-Davidson Inc.

consolidated revenue was up 9.9% to $1.73 billion.

Our first-quarter net income improved to $265.9 million, an increase of $41.8 million or 18.6%.

Similarly, diluted earnings per share rose to $1.21 per share, up 22.2% from the year-ago quarter.

Operating income for the Motorcycle segment was $347.7 million, up 25.6% compared to last year's first quarter.

The strong increase in motorcycle business was driven by an 11.1% increase in revenue behind a 7.3% increase in shipments.

Motorcycle segment operating income also benefited from a higher gross margin percent, partially offset by higher year-over-year SG&A spending.

As expected, operating income at Harley-Davidson Financial Services was down behind a higher provision for retail motorcycle loan losses.

Also during the quarter, we had lower year-over-year interest expense, largely offset by a higher tax rate.

We are pleased with our first-quarter financial results and look forward to the rest of the year.

Now let's take a look at retail sales on slide 13.

Worldwide retail sales of new Harley-Davidson motorcycles were up 5.8% during the first quarter, driven by increases in both the US and international markets.

For the quarter, worldwide retail sales tracked below our expectations, driven by very difficult weather conditions in the US, which we believe will primarily impact the timing of the sales between the first and second quarters.

We remain confident in our full-year shipment expectations.

Let's take a look at the US market on slide 14.

Retail sales in the US were up 3% in the first quarter.

Even with the year-over-year increase, we believe US retail sales in the first quarter were adversely impacted by two factors.

First, as we anticipated, the absence of the popular Road Glide models in the 2014 model year continue to impact year-over-year sales results.

Road Glide represented about 10% of US retail sales in the first quarter of 2013.

And second, we believe that extremely difficult weather conditions across the eastern two-thirds of the US adversely impacted the timing of retail sales.

We believe underlying demand for our model year 2014 motorcycles is strong -- in particular, demand for Project Rushmore touring motorcycles.

In fact, overall touring retail sales were up year-over-year, despite the absence of Road Glide models this quarter.

Street 500 motorcycles began shipping in late Q1 for dealer use and US rider training.

There is great dealer and customer excitement for our new Street models.

We expect Street motorcycles to be available in the US for consumer sales beginning in late Q2.

Finally, as Keith noted, we received a strong reception to last month's mid-model year introductions of yet another two models: the Dyna Low Rider and the Sportster Custom 1200 touring model.

We have strong market share of 56% in the first quarter.

Market share was roughly flat on the year-over-year basis, despite the absence of Road Glide.

US dealer retail inventory was [up] approximately 750 motorcycles at the end of Q1 compared to the same quarter last year.

We are comfortable with the inventory levels at the end of Q1, and remain committed to aggressively managing supply in-line with demand.

We continue to expect US year-end retail inventory to be up from 2013 levels, driven primarily by the addition of the new Street models.

On slide 15 you will see retail sales in our international markets grew 10.9% in the first quarter.

In our EMEA region, Q1 retail sales were up 8.2%, driven by growth across most of the European countries.

This increase was aided by favorable year-over-year weather comparisons across most of Europe.

Emerging margins within the EMEA region continue to grow, reflecting our investment in the distribution network.

In the first quarter, our 601+

CC market share in Europe was 11.3%, down 0.1 percentage points versus the same period last year.

In the Asia Pacific region, retail sales were up 25% in the first quarter, driven by strong growth in Japan -- spurred by a consumption tax increase that went into effect on April 1 of this year, which we believe pulled forward some sales into the first quarter.

Emerging markets within the region were also up double-digits during the quarter.

Latin America region retail sales were up 8.9% in the quarter as a result of growth in both Brazil and Mexico.

Finally, retail sales in Canada were down 2.4% in the first quarter, which we believe is due to unusually harsh weather in that market.

As we have discussed, we have been very focused on investing in international businesses.

Since 2009, we have targeted 100 to 150 international new dealer points through 2014.

And since 2009, we have opened 120, with two-thirds being in emerging markets.

On slide 16, you will see wholesale shipments of Harley-Davidson motorcycles in the quarter were up 7.3% compared to last year.

First-quarter shipments finished toward the high-end of our expected shipment range of 76,500 to 81,500 motorcycles.

During the quarter, the mix of touring motorcycles increased 3.2 percentage points from the prior year as we surged to meet expected spring demand for our new Project Rushmore touring motorcycles.

Also during the quarter, shipment mix of our Street and Sportster category was up 1 percentage point, in part driven by the initial shipments of our new Street motorcycles.

We'll continue to ramp up Street motorcycle production through Q2 and be up to speed during the second half of the year.

On slide 17, you will see revenue for the Motorcycles and Related Products segment was up 11.1% in the first quarter, behind a 7.3% increase in shipments.

During the quarter, the average motorcycle revenue per unit increased $836 from the prior year, primarily driven by higher pricing and favorable mix -- partially offset by unfavorable currency impact.

On average, our key currencies in the first quarter were weaker against the US dollar by approximately 3% compared to 2013.

Parts and Accessory sales were up 7.7% in the first quarter.

And General Merchandise sales were down 11.1% as a result in the shift of promotions from Q1 of last year to Q2 of this year, and lapping 110th anniversary apparel and accessories sales in Q1 of 2013.

On slide 18, you'll see gross margin in the quarter was 37.7%, which was up 1 percentage points compared to last year.

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

During the quarter, mix was $17.2 million favorable behind a much higher mix of touring motorcycles compared to 2013.

Looking forward, we expect mix will become unfavorable in the second half of the year as Street production increases.

Foreign currency exchange adversely impacted revenue in the first quarter as a result of a sizable evaluation of the yen, the Brazilian real and the Australian dollar on a year-over-year basis.

However, despite the unfavorable impact of revenue, foreign currency exchange positively impacted gross margin by $5.2 million or approximately 0.6 percentage points of gross margin.

The positive impact was driven by a favorable balance sheet revaluation as currencies rebounded within the first quarter of 2014.

Manufacturing costs in Q1 reflect the benefits from increased year-over-year production and restructuring savings compared to last year's first quarter.

However, manufacturing costs were adversely impacted by startup costs associated with the launch of our new Street platform of motorcycles, which are being produced in Kansas City and India.

We expect the startup costs for Street to continue into the second quarter.

Q1 gross margin percentage exceeded our expectations.

We originally expected gross margin to be down slightly versus last year as a result of Street platform startup costs, as well as unfavorable currency exchange.

While Street startup costs did adversely impact gross margin, the plants outperformed our expectations for seasonal surge ramp-up costs.

And foreign currency exchange significantly exceeded our expectations, as we anticipated it would be a headwind to Q1 gross margin percent rather than a strong benefit.

On slide 19, operating margin as a percent of revenue in the first quarter was 22.1%, up 2.5 percentage points compared to last year's first quarter.

Operating income of $347.7 million for the quarter was favorably impacted by higher gross margin and the absence of restructuring expense -- partially offset by higher SG&A spending.

We are very pleased with our ability to leverage both our gross margin and operating expenses in the first quarter.

Going forward, we will remain intensely focused on improving our cost structure and managing the business to be stronger, more flexible and more profitable.

Now, moving on to our Financial Services segment on slide 20.

In the first quarter, HDFS' operating profit of $63.2 million was $8.3 million or 11.7% lower than last year.

The primary factors impacting first-quarter results were: first, net interest income was unfavorable $0.9 million, driven by lower yields on receivables due to increased competition.

Second, the provision for retail credit losses was unfavorable by $6.3 million due to higher retail credit losses, an increase in the reserve rate and growth in retail receivables.

As expected, the higher credit losses were impacted by lower recovery values of repossessed motorcycles following the launch of Rushmore models last fall, and changing consumer behavior.

And finally, the provision for wholesale credit loss was unfavorable by $1.1 million.

Going forward, we continue to expect pressure on HDFS' operating income as a result of modestly higher credit losses and tightening net interest margins due to increasing competition and higher year-over-year borrowing costs.

Now, Larry will provide more detail on HDFS' operations on slide 21.

Larry?

Thanks, John, and good morning.

During the first quarter, HDFS retail motorcycle loan originations increased 19.3% or $99 million compared to the same period last year.

The increase was primarily driven by higher year-over-year new retail motorcycle sales and a 6.2 percentage point increase in retail financing market share for the first quarter compared to last year.

For the first quarter, HDFS retail financing market share of new Harley-Davidson motorcycles sold in the US increased to 52% compared to 45.8% in 2013.

The primary drivers of the year-over-year market share gain were the strong sales of touring motorcycles and the pricing changes in the prime segment, which were initiated in the second quarter last year in response to increasing competition.

Finance receivables outstanding increased 6.7% compared to a year ago, driven by growth in both the retail and wholesale portfolios.

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, between 75% and 80% of our new retail loan originations were prime.

Moving on to credit performance on slide 22, the 30-day delinquency rate for retail motorcycle loans as of March 31, 2014 was 2.66%, or 26 basis points lower than 2013.

This is the second-lowest first-quarter delinquency percentage for HDFS in the last 13 years.

Annual retail credit losses increased by 24 basis points to 1.33% compared to 2013, driven by higher losses due to lower recovery values on repossessed motorcycles following the launch of our Project Rushmore motorcycles last fall.

We expect this impact to continue through the first half of this year.

Additionally, the increase in credit losses also resulted from changing consumer behavior and lower levels of recoveries from accounts charged off in prior years.

During the first quarter, HDFS continued to maintain a strong liquidity position, deliver solid credit performance and contribute 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 let's take a look at cash and liquidity on slide 23.

You will see at the end of the quarter we had $1.03 billion of cash and marketable securities.

In addition, we had nearly $1 billion of available liquidity through bank credit and conduit facilities.

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

During the first quarter, we increased the dividend by 31%, and we repurchased 1.2 million shares of Harley-Davidson stock for $76.6 million.

Our Board of Directors also authorized the repurchase of an additional 20 million shares, which increased our authorization to 28.1 million shares as of the end of the quarter.

We also paid off the $303 million of Harley-Davidson Inc.

high-interest debt, and HDFS (technical difficulty) $120 million [dividend] to Harley-Davidson, Inc.

Earlier this month, HDFS successfully completed a $850 million asset securitization transaction at a weighted average interest rate of 0.93%.

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 Harley-Davidson Inc.

financials on slide 24.

I would like to highlight two items.

First, with regards to operating cash flow, we generated operating cash of $203.6 million in the first quarter.

Operating cash flow was up $312 million from last year, primarily driven by the lapping of last year's pension contribution of $175 million, lower working capital and increased earnings.

And second, first-quarter tax rate was 35% compared to 33.8% in the year-ago period.

This reflects the benefit of last year's first-quarter rate from the retroactive reinstatement of the R&D tax credit for both 2013 and 2012.

On slide 25, you will see overall expectations for the quarter ahead.

It 2014, we continue to expect to ship 279,000 to 284,000 motorcycles on a worldwide basis, up approximately 7% to 9% from 2013 shipments.

We believe the underlying worldwide demand fundamentals for Harley-Davidson are strong.

We expect shipment growth will be driven by the strong appeal of the Harley-Davidson brand, great model year 2014 and 2015 motorcycles, the introduction of the new Street motorcycles -- which we estimate to ship between 7,000 and 10,000 units -- continuing outreach momentum in the US, and international expansion.

During the second quarter, we expect to ship between 92,000 and 97,000 motorcycles, up approximately 8.5% to 14.5% compared to last year's second-quarter shipments of 84,606 motorcycles.

We continue to believe 2014 operating margin for the Motorcycle segment will be between 17.5% and 18.5%, up from 16.6% in 2013.

We believe 2014 operating margin will benefit from a modest increase in gross margin and from SG&A falling as a percent of revenue.

Looking at SG&A, we continue to expect it will increase in 2014 as we invest in future growth opportunities.

But we expect that it will decline as a percent of revenue as we leverage our current SG&A spending.

For HDFS, we continue to expect operating income will be down modestly in 2014 compared to 2013.

We continue to expect capital expenditures in 2014 to be between $215 million and $235 million.

Finally, we continue to expect our full-year 2014 effective tax rate will be approximately 35.5%.

So to recap, we are certainly pleased with our first-quarter results and key accomplishments throughout the quarter.

We successfully increased sales gross margin-operating margin, which resulted in a 22.2% increase in diluted earnings per share.

Initiated surge manufacturing at our Kansas City plant, shipped the first all-new Street motorcycles, launched two additional 2014 models -- the Low Rider and Custom 1200T.

And delivered shareholder value through a 31% dividend increase and repurchase of $77 million of Company shares.

We are excited about 2014.

We will continue to position the Company for long-term success by remaining focused on executing our growth strategies and delivering strong margins, strong returns and value to our shareholders.

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

And now let's take your questions.

(Operator Instructions)

Tim Conder, Wells Fargo Security.

Congratulations on a good execution, gentlemen, and the whole team.

Thanks, Tim.

A couple of items here.

If Road Glide was still in the mix right now, would it be fair to say that your market share would be up that 9% or 10%?

Or would there be some other dynamics that are going on there?

And then, John, more from a housekeeping perspective, can you detail out the Street first-quarter startup costs?

And then also just any inefficiency cost beyond Street?

Yes, thanks, Tim.

Again, as we've talked about Road Glide, there's an extremely popular couple of models.

And in Q1 of 2013, represented 10% of our sales.

So, we also believe these customers are some of our most loyal to the bike they ride.

And the Road Glide is very different in the way it's engineered, the way it looks, and the way it rides on the road.

So we do believe those folks are not in the market at this point.

And if they were, we certainly believe our market share would be a fair amount higher.

And certainly that is the largest driver of our market share.

Now, having said that, Tim, market share we couldn't be more pleased with at 56% -- largely flat, with the absence of Road Glide.

You've also got to remember that a year ago, market share was up 2.4%.

And the reason that was so high of a gain was that we increased availability.

And that was the first time in probably 8 to 10 quarters that we were able to get more motorcycles in the market.

So not only did we not have that, we certainly had a tough comp in terms of market share.

And then increased competition, especially for the performance segment, was strong in the first quarter.

We've seen the performance segment be down for the last five years.

And I think that's a tremendous sign for the industry.

So with all those things and those headwinds against market share, we couldn't be more pleased with delivering 56% market share for the quarter.

The second question that you asked, Tim, was on Street startup costs.

For the quarter, Street startup costs were in the $4-million range.

And again, we've never started up a product in two factories before.

And this will be done in Kansas City and in India.

And also, not only in India are we starting up Street, but we're starting up our manufacturing operations, which means we'll be fabricating in that plant.

So we got a lot going on with Street.

The startup is going very well.

We expect startup costs of about the same amount to a little bit more in the second quarter.

And let me give you a quick recap as to where we're at in terms of Street.

We did have shipments in the first quarter.

Probably should think about that in terms of hundreds versus anything else.

That will continue to build through the second quarter, and we'll be up to speed in the back half of the year.

As we had mentioned, we've about halfway filled in our Rider Academy.

That will continue on toward the end of the second quarter, at which time we'll switch over and start to provide units for sale to customers in the US.

Right now we're shipping in India.

And by the end of the second quarter, we'll start shipping to southern Europe.

So I'm very excited about the Street model.

Joe Hovorka, Raymond James.

Just one quick question on the Rider's Edge, or rider's advantage program.

When you ship a Street in there, is it tagged and licensed in the state?

Does that show up as a retail sale?

Or does it not show up as a retail sale?

Good question, Joe.

Bikes that we ship into the Rider Academy will reflect, in the quarter that we ship it, as a retail sale.

Okay, it will.

Okay.

Yes, it will.

That's all I had.

Thanks.

Thank you, Joe.

James Hardiman, Longbow Research.

Congrats on a great quarter.

First to housekeeping, and then a bigger-picture question.

Just looking at the numbers in the press release, it looks like your retail was up 3%, the industry was up 1%, I think, based on what you do in the release.

But then you're saying that's flat market share.

And then conversely, Europe -- you guys are up about 9%.

In the release, it says the industry was up 25%.

Are there different numbers being used there?

And, just bigger-picture question in terms of market share.

At your big Analyst Day last year you talked about the longer-term outlook losing a little bit of share.

Certainly the expectation, I think, is that you're going to lose share this year, given not only the bike that you don't have, but also the introduction of some other big competitors, Indian most notably.

Are we definitely going to see you guys lose share this year?

Or after a pretty strong first quarter, do you feel better about where that market share outlook will be?

Thanks.

Thanks, James.

Yes, as you noted out, the press release -- and if you go back in any quarter, they never tie out completely.

So the process is, is that we submit -- along with our competitors -- submit retail sales to, in the US, the MIC.

And in Europe, there's various agencies that track it.

And the difference that you see is timing.

To see a couple-point difference is not a big deal.

The timing in Europe is a little bit bigger than typical.

But it is just timing, and we'll see those numbers work out over the year.

And as you look at it on a full-year basis, James, versus a quarter, they do get very close.

But they're the same numbers, just timing as to when they're recorded as a registration versus submitted by the companies.

On the second question that you had asked is on market share.

You know, we feel very good about overall market share.

What we said is that we expect headwinds in 2014, largely driven by the absence of Road Glide.

Which, again, is a huge part of our volume last year, and it won't be there until we re-introduce Road Glide.

So we expect those headwinds to continue.

But as I had mentioned, couldn't be more excited about the strength -- or the underlying strength of the brand that we saw in the first quarter, and having flat market share.

Craig Kennison, Robert W. Baird.

I wanted to understand the international strength that we're seeing.

And maybe you could unpack the extent to which it's been driven by more distribution points, better same-dealer sales at existing dealers, or just new products.

It's an exceptionally strong number.

Well, Craig, I think that it's driven by all of them.

But let's take a quick spin around Europe when we look at it.

Europe is the second quarter in a row that we've seen positive growth after a very difficult couple of years' period of time.

So we're certainly very optimistic about what we're seeing out of Europe.

The core European regions, or the 16 countries, were up 8.8%.

Now, that is partly driven by favorable weather.

They had a very mild winter this year, very much unlike the United States.

And that was compared to a more rough winter the year before.

So that helped drive it.

What was really exciting about Europe is, it was across almost every country in Europe, with the exception of Spain.

So, really good growth two quarters in a row.

We'll continue to work on it.

I think the team in Europe has done a wonderful job in driving the brand forward.

The new product is being very well received, as it is in other places in the world.

And we continue to add distribution points.

When we look at Asia Pacific -- which was up 20.5% -- and you look into the detail, that was driven by Japan, which was up the largest market in Asia Pacific.

That was up 33%.

And that was a lot of volume pulled forward into the first quarter because of the initiation of a increase in the consumption tax in Japan of 3 percentage points.

So we would expect that to start to dissipate over time.

When we look at Asia Pacific going forward, we don't have any retail sales in there for Street.

And we're very excited about the opportunity for Street in Asia Pacific through the Indian market.

Hey, John, this is Keith.

I just want to add something, Craig.

Make no mistake about it: the technology that we're introducing in our new bikes is having a major impact in the international markets, particularly in Europe.

And it's really, I think, helping our brand gain momentum and gain strength in those markets.

And then, finally, Latin America was up strong.

And we didn't even get the Rushmore or the Street into the marketplace until late in the first quarter.

So, overall, Craig, feel very good about international.

We do have some timing happening in the 10.9% increase that you saw this quarter.

But very bullish on what's happening in our international businesses.

Rod Lache, Deutsche Bank.

A couple things.

One is, the pricing and mix obviously were very strong -- $45 million, $46 million year over year.

Can you give us some color on how we should be thinking about that?

Maybe size it up for the second quarter, particularly the mix.

And, when you're looking at the production, is the touring retail sales in line at this point with what your shipments percentage is?

Or are you still basically over-building on touring to fill in inventory?

And then, lastly, related to that, when does the Road Glide come back in?

Is that something that could benefit this year's retail sales?

Thanks, Rod.

Again, when you look at our gross margin bridge, we had a lot of strength.

Every element was positive.

And certainly, in particular, pricing and mix.

Pricing was up $14 million.

And again, that's the 3.5% price increase that we took earlier in the year.

But as a percentage of revenue, actually pricing was a little bit of a drag, as we had anticipated, on gross margin percent.

When you look at mix -- mix being up $17.2 million -- we look at mix three different levels, or three different businesses: motorcycle, parts and accessory, and general merchandise.

All three of those were favorable, and that doesn't happen all that often.

And when you take and look at the motorcycle mix -- which was the biggest driver -- we were favorable in family mix, model mix, and geographic mix.

So, very strong quarter on mix.

And it also added as a percent of gross margin to the overall quarter.

You had asked, Rod, what happens as we go forward.

And we would expect still some good strength in mix in the second quarter behind Rushmore as it compares to non-Rushmore product, right?

That'll be our fourth quarter of having that in the market.

Now, that'll start to get diluted a little bit as we ramp up shipments of Street.

And so, in the second quarter, we'll continue to ramp up those shipments.

And that will start to have an adverse impact.

But overall, mix we would expect in the second quarter to be favorable.

As you get into the back half, two things happen.

As we start to lap Rushmore sales against itself and would expect the strong mix gains that we've had start to dissipate, and at the same time we'll have Street into full production.

And we do expect in the second half of the year that mix will be unfavorable, both on a dollar and a percent basis.

Remember, when we launched Street, we said it would be 0.5 a point dilutive of overall gross margin.

You're not seeing that in the first quarter.

And you'll really start to see that in the back half of the year.

You had asked about production versus shipments.

We are producing full-out our Rushmore bikes.

And they are selling as they are getting to the dealerships.

We are not building any inventory in terms of -- we are not building much inventory on our entire line, but certainly not building inventory in the field on Rushmore.

Again, they're selling very well, and we're very pleased as to what we are seeing.

And the third question, Rod, is with regards to Road Glide and when it's coming back.

I cannot specifically tell you when it's coming back.

I can tell you that it is on plan, and everything is going according to plan.

But, as you know, we don't talk about when product is coming out.

Suffice to say that we're very excited about it.

It is a big driver of our growth, as well as our customers' desires.

And it will come out with the Road Glide -- I'm sorry, the Rushmore features.

And we're all excited about it.

Greg Badishkanian, Citigroup.

John, sometimes you talk about the sunshine-state performance versus the weather-impacted states.

If you can give us a little bit of color on that, as well as how retail inventory levels, or dealer inventory levels are doing right now.

Great, Greg.

What a quarter.

What a winter, especially if you're sitting in the Midwest.

As we look at overall weather, on the eastern two-thirds, as we had mentioned, it's certainly been very difficult.

And if you break it up into three ranges, Greg, and you talk about where weather was significantly worse on a year-over-year basis.

And certainly the Central area, where we're at today, was one of those record cold -- 90% of Lake Michigan froze.

Sales were down considerably.

As we exit the third quarter, we still have a couple regions that are down on a year-over-year basis, and that being in the Central and the Northeast regions.

Now, where we've seen weather that is comparable on a year-over-year basis, we've seen good growth.

And where we've seen weather considerably better -- i.e., the West -- we have seen significant growth in those markets.

As the weather breaks, we're starting to see those sales come in line.

Very tough in the Southeast for the first, January-February.

As weather broke down there, we saw good sales, and now they're up a little bit on a year-over-year basis.

So we are excited about weather evening out and becoming more seasonal in the second quarter here.

Thanks.

Pat Archambault, Goldman Sachs.

Building on an earlier question on slide -- relating to slide 18, I think if I have this right you said that manufacturing had come in a bit better than what you expected, and certainly currency had.

I can't remember if raw materials were better than expected.

But it sounds like there's a lot of items here that have come in favorable this quarter.

I understand that there are some headwinds as you get into the second half, like mix.

But that's something that was always anticipated, based on your schedule.

So, how much upside risk is there to that operating margin guidance?

Or, is there some expectation that some of these good guys are going to reverse in subsequent quarters?

Great question.

Let's take currency for the quarter.

As we had talked about, we expected gross margin to be down slightly.

The biggest difference and driver between what we expected and where we ended up was currency.

We had an unusual quarter in currency, in that the revenue on a year-over-year basis was down by $10.5 million.

And that was because of a devaluation from first quarter this year to first quarter last year.

And we anticipated that.

What we didn't anticipate was within the quarter, from the beginning of the quarter to the end of the quarter, we saw currencies actually rebound across all four of our major currencies -- including the euro, Australian dollar, Japanese yen, and Brazilian real -- quite significantly, about 3 percentage points.

And what that requires is us to re-mark our assets, and that drove the favorability.

So while we had unfavorable revenue, we actually had favorable profit because of that re-valuation gain that we took.

Now, Craig, you asked about what's going to happen in the future.

We still expect currency to be a headwind as we look forward.

But it's hard to tell.

If currencies stay the way they are, that gain'll be basically a one-time gain.

If currencies de-value again and go back to where they were, then, Pat, they would -- we'd see that gain reverse itself.

So, when we look at it, currencies -- we're not completely sure, but we think it's a headwind.

Mix, we've talked about.

Everything else in terms of manufacturing, efficiencies we're getting out of the plant, restructuring savings -- everything's going according to plan.

And we're very pleased as to what we're seeing.

Felicia Hendrix, Barclays.

Two questions for you.

The first is just on the cadence of shipments.

I think this is an attempt to discuss a few questions ago.

So you explained very clearly, thank you, that you had some surge of the touring bikes in the first quarter.

And if you look historically at your shipments versus sell-through, historically, there has been a build in the first quarter.

But, as we all know, historical shipment patterns are changing now because of the manufacturing programs that you've implemented.

So, just trying to think about the cadence of shipments versus sell-through in the second, third, and fourth quarters.

Will they be more even?

Is that how we should think about that?

And then, my second question is, if you could just comment on the Low Rider and the SuperLow, and the reception of those bikes at the dealerships.

You talked about how the Sport is going to be dilutive in the second half.

But just wondering if those bike sales are offsetting that so much, or somewhat, and how we should think about the impact of what you launch after the dealer show.

Thank you.

Thank you, Felicia.

The cadence of shipments -- all the heavy lifting of moving inventory.

And basically over the last three years, what we did is took where we were, that we shipped in 50%, we've produced 50% in the first half of the year and the second half.

But retail sales were about 60%.

Last year, we really got over the hump.

And last year we produced about 60% and shipped about 60% in the first half of the year.

And that's in line with our retail sales.

So having said that, Felicia, we don't expect any big changes in cadence of shipments and take-away.

Now, weather is always going to bounce things around a little bit.

But by and large, the pattern should be similar to what we saw last year.

We exited last year, and the quarterly inventories we felt very good about.

At the end of this year, we would expect inventories to go up a little bit because we've got the new family of motorcycles in Street.

I want to make one thing clear -- and to the question that I mentioned before.

I was referring to the shipments of Street and the retail sales in terms of year-over-year basis.

We are increasing the inventory.

Inventories went up -- our overall bikes in the system went up 18,500 units, and that's a seasonal increase.

When you look at a year-over-year basis, they were up about 750 units.

So again, in line with what we're seeing on a cadence basis, but certainly building from a seasonal perspective.

You had asked about the Low Rider and the Super -- or the 1200T, the two new models that we had launched.

When we look at Low Rider, it's a cruiser motorcycle, and it's got pretty good margins.

Not as high as the touring motorcycles, but certainly higher than Sportster.

Sportster motorcycle margins are the lowest, and they're not going to offset what we're going to see in Street.

But, overall, they're selling better than what we expected.

They're great additions and continue to flank our bikes in the Dyna and the Sportster categories.

Jaime Katz, Morningstar.

I'd be curious if you guys would get a little bit more granular on the Asia Pacific region.

We've been hearing from some other consumer companies that China's holding up okay, but maybe that Australia's been a little bit weaker.

So I am curious what your anecdotes are there.

And then also, have you updated your thoughts on how flex capacity affects your longer-term operating margin potential assumptions?

Just an update on that.

Thanks.

Thank you, Jaime.

When we look at sales across AP, we talked about in the quarter -- which is kind of an anomaly with Japan and their changing of the consumption tax.

But otherwise, our emerging markets in the region, which are certainly led by China and India, are well into the double digits.

And we're not seeing a big impact.

But you've got to remember that our businesses there are still pretty small.

And we've got a lot of distribution opportunity, and don't think that they're going to be derailed in any great respect because of the economy.

When you look at Australia, Australia sales are up.

They're more moderate -- in the moderate range.

But we're feeling very good about the business there as well.

And, again, on a year-over-year basis, we're up 20%.

I think last year we were up about 12%.

So we've got a lot of good momentum come out of Asia Pacific, and expect that to continue as we move forward.

The second question that you asked, Jaime, was with regards to our flexible manufacturing, and what's the long-term opportunity with regards to that.

The biggest part of the long-term opportunity is really matching our sales -- or, the production with our customer needs, and getting much closer to the customer purchase cycle.

And with that, we'll have the right models in the right dealerships at the right time.

I think that's the biggest opportunity that we've got with flexible manufacturing.

We're seeing a lot of the financial benefits in terms of some of the lower cost of doing it, from wage rates to certainly leveraging the assets in the plant during that period of time.

But I think the biggest benefit is really us getting much closer to that purchase cycle and making sure the products are there when our customers want them.

Gerrick Johnson, BMO Capital Markets.

Wondering if you guys grew sales to outreach faster than core in the quarter?

And, if not, do you expect that to kick back into effect with the balance of the year, with Street and the SuperLow 1200?

Thanks.

Thanks, Gerrick.

During the first quarter, actually, core sales to core customers grew faster than outreach.

Now, if we go back and look at 2012 and 2013, outreach grew at over twice the rate of our core sales.

And we expect that to continue into the future, and certainly continue this year.

However, for the first quarter, we had core growing faster.

I think core was up about 4% and outreach was up about 2%.

Certainly expected, given the fact that Project Rushmore is a great opportunity for trade-ups of our core customer.

Now, having said that, as Keith had mentioned, the Street Glide's the number one selling motorcycle in the nation, as well as to our outreach group.

But the Project Rushmore product is certainly over-shared to our core customer.

So, having said that, first quarter, core grew faster.

We expect by the end of the year that outreach will be up, growing at a faster pace.

And as you had mentioned, Gerrick, very much so that Street is going to help bring that formula back in line.

Adam Jonas, Morgan Stanley.

Could you offer comment on used bike prices?

You mentioned for you guys that some of the recovery values are suffering from the introduction of the new technologies.

That's understandable on the Financial Services side.

But overall, for the market, maybe a comment.

And also, housekeeping.

I noticed the 25% increase in the accounts receivable balance.

Was wondering if that was driven by some of the extended cash conversion cycle as you are growing the international business more.

Or any other driver for that, if that's temporary or not?

Thanks.

Thank you, Adam.

What I'll do is, I'll take the first question -- I'm sorry, I'll take your second question.

And then have Larry answer how used bike prices are affecting us.

With regards to accounts receivable balance, it is up.

It is up for a couple of reasons, seasonally, as we're shipping in more product.

Remember, our accounts receivables are international sales.

All of our domestic sales are recorded on the books of HDFS as a financed receivable.

But our accounts receivables are international sales, so they're up quite a bit.

So that's driving them to be higher from a seasonal standpoint.

Also, we changed credit terms in Brazil to help with the growth there.

We used to have cash in advance, and now we've got them on terms like the rest of our international markets.

And then, foreign currency translation also impacted accounts receivable.

And Adam, as it relates to used bike prices, as we noted, obviously, the recovery values we're receiving on sales of repossessed motorcycles at auction are down a little bit with the -- after the introduction of the great Rushmore line.

Used motorcycle prices at the dealer level are down a little bit, but actually holding up reasonably well.

So we'll see how that plays out over the rest of the year.

James Hardiman, Longbow Research.

Just wanted to follow up on a question Hovorka had earlier in the call, which I thought was a good one.

The Street bikes -- obviously they're a different animal in terms of how they're being treated.

Can you give us an idea of what retail would have been up in the absence of those bikes, since they're also being treated as retail?

Secondly, are those in the market share numbers?

And then, thirdly, in terms of inventory, can you talk about what you expect to happen to inventory in the absence of those bikes, since, as I think about this, if it's a wholesale shipment and a retail sale, does that count as an inventory build?

So, just walk through the different components of how we should be looking at the Street bikes, since they are a little bit different.

Okay, James, if I miss any of those, please let me know.

With regards to our retail sales, which were up 3% in the United States, there wasn't any retail sales internationally of Street motorcycles.

They started in April.

So, of the 3%, the amount that Street would be with that would be very nominal.

Because we didn't ship out many bikes in the first quarter.

I don't know what that would be, but it would be very slight.

It did not affect our market share numbers at all.

Remember, our market share is 601cc's plus, and the bikes that we're shipping in for training are 500cc's.

So that's not picked up in market share.

Now, when we do start to ship 750 for consumer use in the United States, they will hit market share.

But we haven't shipped any of those yet.

When we look at inventory -- and what we've said is on a full-year basis, our year-end inventory -- retail inventory -- we expect it to increase.

And that increase will be largely driven by Street motorcycles.

So we've got a dealer fill, and in the United States, that's the inventory that I think you're referring to, James.

We've got 700 dealers out there that we'll have at inventory.

So we would expect their inventory to go up because of the new models of Street.

When you look at the other models, or the base models prior to Street, we would expect them to grow in relationship to our overall sales -- i.e., keeping our forward turns constant.

We feel very comfortable with the overall inventory level.

And we're going to continue to manage it aggressively in line with demand.

So we would start to expect that to grow in line with retail sales.

All right.

Thank you for your time this morning.

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