Harley-Davidson Inc (HOG) 2014 Q3 法說會逐字稿

Good morning.

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

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

(Operator Instructions)

Thank you.

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

Thank you, Tanya, and good morning, everyone.

Welcome to Harley-Davidson's third-quarter 2014 earnings conference call.

The audio for our calls is webcast live on Harley-Davidson.com and you can access the supporting slides on that site by clicking About Harley-Davidson at the bottom of the home page, then Investor Relations, and Events and Presentations.

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

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

Our comments will include forward-looking statements that are subject to risks that could cause actual results to be materially different.

Those risk 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 for joining us on today's call and thanks for your interest and investment in Harley-Davidson.

As we noted in today's earnings release, the third-quarter financials were in line with our expectations.

Our business and financials are strong through nine months, with year-over-year consolidated revenue up, while net income and EPS grew double-digits.

Retail sales of new Harley-Davidson motorcycles grew 3.8% worldwide and 3.4% in the US, which topped extremely strong sales in last year's third quarter.

You will recall that the launch of our initial Project Rushmore motorcycles in last year's third quarter drew one of our largest single quarter retail increases in recent years.

They were up 15.5% worldwide and 20.1% in the US.

John is going to cover those details in more detail in a few minutes.

A strong contributor to this year's third-quarter retail lift was the rollout of our great line-up of 2015 motorcycles in late August.

Today, we have 36 models in our product line-up.

There are 7 new Project Rushmore motorcycles, including 3 Road Glides, that mark the return of this popular bike.

With world-class aerodynamics, ergonomic fit, passenger comfort, and infotainment and audio performance, Road Glide builds on the momentum from last year's Rushmore launch.

These bikes underscore our commitment to delivering amazing motorcycles through customer-led design and the response has been great.

From introduction through the end of the quarter, the new Road Glide models were the best-selling 2015 Harleys.

Along with continued strong demand for Street Glide and Ultras, they contributed to exceeding the strong sales in the year-ago quarter.

Other new Rushmore models include the CVO Street Glide; the Electra Glide Ultra; Classic Low and Ultra Limited Low; and the Freewheeler, a trike that is all about hot rod attitude on three wheels.

Leading up to the 2015 launch, the model year changeover in our plants was the smoothest in recent history, which speaks to our many advances on the manufacturing front, and the continued strong results in operating performance.

Further driving retail was a rebound in Sportster sales, as well as increased availability of the Street 750 and 500.

The response to Street has been extremely positive.

In India, three out of every four Harleys sold in the third quarter were Street, and in southern Europe, Street has also been performing very well.

And Street is reaching the target audiences in the US, both outreach customers and those new to the Harley-Davidson brand.

We are excited to begin expanding Street distribution to other international markets in late 2014.

We also see great opportunity with Street in our Riding Academy, where enrollment is up this year, and bringing new riders into the brand.

We believe this bodes well for our strategy of having riders learn on an authentic Harley that they can actually buy.

And then there is Project LiveWire.

Starting in the third quarter, we've taken the Project LiveWire fleet of electric motorcycles on the road, giving more than 3,000 demo rides to a broad mix of Harley and non-Harley riders alike.

By a wide margin, those taking a LiveWire demo have told us the experience exceeded their expectations and they'd be interested in buying one.

Project Rushmore, Street, and LiveWire all demonstrate how we are staying true to our roots while broadening our reach to new riders worldwide, offering cutting-edge products and features in today's motorcycles and exploring tomorrow's.

We continue to see the success of our product manufacturing and retail strategies, which are delivering an outstanding customer experience, driving bottom-line improvement and expanding the reach of the brand.

Through nine months, sales to our US outreach customers have grown more than twice the rate of sales to core customers.

In the third quarter, our share of 601cc+ (sic -- see press release, "601+cc") US market was a strong 56.3%, the highest to date this year.

International retail sales were up 4.8% for the quarter, and the Asia-Pacific market has double-digit growth in both the quarter and year-to-date.

Fueling Asia-Pacific's growth were India, China, and other emerging markets in the region.

Another indicator of brand strength and connection, H.O.G.

membership, is up worldwide and strong in established markets and new markets alike.

H.O.G.

membership in EMEA hit an all-time high in September.

So all in all, we've achieved a lot so far this year and we're on track for a year of growth and strong financial performance in 2014.

In closing, I want to acknowledge the outstanding work and commitment of our employees, our more than 1,450 dealers in 90 countries, and our suppliers.

Their efforts to keep the customer at the forefront of all we do and to continuously take our products and customer experience to the next level are key to Harley-Davidson's strong market leadership.

Now I'm going to turn it over to John with details on the quarter.

Thanks, Keith.

Good morning, everyone.

As we anticipated, our third-quarter key financial metrics were down versus prior year.

This is the result of a planned shipment reduction to address retail inventory that increased behind soft retail sales in the second quarter.

Despite the impact of our shipment adjustment, the business continued to perform extremely well, with new product momentum, strong productivity, and focused spending.

On a year-to-date basis, EPS is up 20.1%.

With that as background, let's discuss our Q3 results on slide 11.

During the third quarter, Harley-Davidson Inc.

consolidated revenue was $1.3 billion, net income in the quarter was $150.1 million and diluted earnings per share were $0.69 per share.

Operating income for the Motorcycle segment was $146.3 million, 16.6% lower compared to last year's third quarter.

The decrease in motorcycle business was driven by a 4.2% decrease in revenue behind a 6.2% lower shipments.

Motorcycle segment operating income was also impacted by a lower gross margin percent and higher year-over-year SG&A spending.

At Harley-Davidson Financial Services, operating income was up modestly year-over-year.

Also during the quarter, we had lower year-over-year interest expense behind the retirement of our high interest debt in February.

We are pleased with the strength of the Business through the first nine months of the year.

We continue to run the Business for the long-term and focus on delivering strong margins and strong returns.

Now let's take a closer look at third-quarter performance, starting with retail sales on slide 12.

We are very excited to report that Q3 worldwide retail sales of new Harley-Davidson motorcycles were up 3.8% over last year's very strong increase of 15.5%.

This quarter's results were driven by increases in both the US and international markets.

As we exited the third quarter, we believe our brand is rock-solid and core demand fundamentals were strong as ever, evidenced by solid market share performance, strong US outreach results, a healthy mix of new-to-brand customers, and a shorter repurchase cycle.

Third-quarter worldwide retail sales also reflected retail momentum throughout the quarter, driven by continued strength of our 2014 model year motorcycles and the highly successful introduction of our 2015 model year.

During the fourth quarter, we expect continued worldwide retail sales momentum behind Street, Road Glide, and the complete line of Rushmore motorcycles.

On slide 13, let's review the US market, where third-quarter retail sales were up 3.4% compared to prior year.

We believe the factors that benefited US retail sales during the quarter were: first, the original eight Rushmore models we launched last year continued to be highly successful at retail this year; second, a strong 2015 model year launch, including the return of Road Glide.

The sales were great with initial Road Glide motorcycles turning very quickly when they hit the dealerships.

In addition, we had a very positive response from our new Low Touring models, the Freewheeler trike, and of course, CVO Street Glide.

Third, retail sales were robust with improved availability in the third quarter.

Early purchaser surveys suggests Street is attracting outreach customers that are new to the Harley-Davidson brand.

This is in line with our product strategy and supports our expectations that a majority of Street sales will be incremental.

And fourth, as we anticipated, Sportster motorcycle sales rebounded in the US, following retail softness in the first half of the year.

We believe the preannouncement of Street may have caused some customers to hold off their purchases until they could compare the varying features and benefits of Street and Sportsters.

We believe that each of these platforms addresses distinct customer needs, evidenced by the fact that Sportster sales grew in Q3 and Street sold also very well.

Now turning to the market share in the US, during the quarter we had a strong market share of 56.3%.

Market share was largely flat to prior-year, despite lapping significant year-ago share gains and continued headwinds from the absence of Road Glide for most of the quarter.

Through the first nine months, US retail sales were up 1.9%, and market share decreased 1.1 percentage points compared to last year.

During the third quarter, there was significant progress in bringing dealer inventory in line with demand.

Our dealers' efforts to sell through 2014 model year motorcycles have been very successful.

As we have discussed many times, we are committed to aggressively managing supply in line with demand, as demonstrated by the reduction in our shipment guidance last quarter.

Quarter-end inventory was up approximately 4,000 motorcycles compared to last year, due in part to initial dealer fill of Street models for retail.

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

On slide 14, you will see retail sales in our international markets were up 4.8% in the third quarter.

In the EMEA region, Q3 retail sales were up 1.7%, driven by growth in the UK, Spain, and France.

During the first nine months of 2014, our 601+cc market share in Europe was 12%, down 0.6 percentage points versus the same period last year.

Year-to-date share was down 0.6 points, as we lapped year-ago share gains, and on the introduction of several performance-orientated competitive models.

In the Asia-Pacific region, retail sales were up 12.8% in Q3.

Retail sales in emerging markets within the region were up significantly, driven by India, where retail sales tripled during the quarter, as a result of very robust demand for the new Street motorcycles.

The Latin America region was up 7% during the quarter, driven by very strong growth in Mexico, partially offset by a modest decline in Brazil.

We remain cautious on the Brazilian market, as it continues to be impacted by a slowing economy, consumer uncertainty, and very aggressive price competition.

Retail sales in Canada were down 5.8% in the third quarter, where we believe currency-driven price increases negatively impacted retail sales.

Since 2009, we have added 126 new international dealer points to our distribution network.

We believe that we can continue to realize strong international growth opportunities by expanding our distribution network and increasing our brand relevance by delivering new product such a Street.

On slide 15, you will see wholesale shipments of Harley-Davidson motorcycles in the quarter were down 6.2% compared to last year, as we adjusted our production after a softer-than-expected second quarter.

Third-quarter shipments finished within our expected shipment range of 49,000 to 54,000 motorcycles.

During the quarter, the mix of Touring motorcycles increased 2.5 percentage points from prior-year, as Rushmore models continued to stimulate demand in the market.

Also during the quarter, shipment mix of our Street and Sportster category was up 3.8 percentage points, as we ramped up Street production through the quarter.

With our Street start-up issues largely behind us, we have reached our expected production run rate and we continue to expect a significantly higher shipment mix of Street and Sportster motorcycles in the fourth quarter versus the third quarter.

On slide 16, you will see revenue for the Motorcycles & Related Product segment was down 4.2% in the third quarter, behind a 6.2% decrease in shipments.

During the quarter, the average motorcycle revenue per unit increased $228 from the year-ago quarter, primarily driven by higher pricing and favorable mix.

On average, our key currencies in the third quarter were weaker against the US dollar by approximately 1% compared to 2013.

During the quarter, we introduced our new 2015 model year motorcycles.

Wholesale and MSRP prices have increased by an average of about 1%.

After adjusting for the cost of new content, pricing net of cost was up 0.5 percentage point, expressed as a percentage of revenue.

Parts & Accessories sales were down 4.2% in the third quarter, due to lower accessory shipments, as we lap the initial sell-in of Project Rushmore accessories in last year's third quarter.

General Merchandise sales were up 4.8% during the quarter.

The increase was driven by strong international sales, partially offset by lower US sales, as we move forward with our aggressive SKU reduction plan, to help focus dealers on fast-moving product and to improve the customer experience with a more targeted assortment of popular styles.

On slide 17, you will see gross margin in the quarter was 34.9% which was down 0.4 percentage points compared to last year.

While gross margin in the quarter was impacted by unfavorable volumes, currency, raw materials, and manufacturing costs, margins were not down as much as we anticipated, as we experienced better-than-expected mix and manufacturing performance.

During the third quarter, mix was a benefit of $13.7 million, which exceeded our expectations for the quarter.

While Motorcycle family mix was unfavorable, driven by higher Street shipments, the mix of models within the families was favorable, as customers continued to trade up to higher content models.

Also driving favorability in the quarter was a much richer mix of Parts & Accessories and General Merchandise products.

For the fourth quarter, we expect mix to be adversely impacted by an increase in Street shipments from Q3 levels, as we now produce at planned rates throughout the fourth quarter.

Foreign currency exchange was $11.5 million unfavorable for the quarter.

This was driven by significant weakening of our key currencies within the third quarter; the euro, yen, Brazilian real, and Australian dollar devalued an average of approximately 7% from the beginning to the end of the quarter.

This resulted in an unfavorable revaluation of foreign-denominated assets on the balance sheet.

Manufacturing costs in Q3 were unfavorable by $3.3 million, driven by lost absorption on lower year-over-year production.

Manufacturing costs did finish better than expected, behind strong productivity gains and lower than expected Street start-up costs in the quarter.

On slide 18, operating margin as a percent of revenue for the third quarter was 12.9%, down 2 percentage points compared to last year's third quarter.

Operating income of $146.3 million for the quarter was unfavorably impacted by lower gross margin and higher SG&A spending.

SG&A was adversely impacted by two recalls announced during the third quarter, which resulted in a one-time charge of approximately $14 million.

Excluding recall costs, SG&A spending was lower on a year-over-year basis, driven primarily by the timing of expenses, which we expect will shift into the fourth quarter.

Going forward, we will remain intensely focused on a cost structure that will enable growth and continuous improvement to drive our Business to be stronger, more flexible, and more profitable.

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

In the third quarter, HDFS' operating profit of $77.8 million was 2.2% higher than last year.

The two primary factors impacting third-quarter results were: first, net interest income was favorable, $4.9 million, driven by higher receivables, partially offset by lower yields on receivables due to increased competition; and second, the provision for retail credit losses was unfavorable by $7.7 million, due to higher retail credit losses, an increase in the reserve rate and growth in retail receivables.

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 rising borrowing costs.

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

Larry?

Thanks, John, and good morning.

During the third quarter, HDFS retail motorcycle loan originations increased 4.3%, or $35.4 million, compared to the same period last year.

The higher originations were driven by increased new US motorcycle sales and a higher average amount financed.

HDFS retail financing market share of new Harley-Davidson motorcycles sold in the US was largely flat at 59.7% in the third quarter of 2014.

Finance receivables outstanding increased 7.9% compared to a year ago, driven by growth in both the retail and wholesale portfolios.

HDFS continues to provide loans in both the prime and sub-prime segments.

Year-to-date, approximately 80% of our retail loan originations were prime.

We believe the overall loan portfolio was solid, comprised of profitable loans in both segments.

Moving on to credit performance on slide 21.

The 30-day delinquency rate for retail motorcycle loans at the end of the quarter was 3%, which was favorable compared to the third quarter of 2013 rate of 3.11%.

This was the lowest third-quarter 30-day delinquency rate in the last 13 years.

However, as we anticipated, annual retail credit losses for the first nine months increased by 20 basis points to 1.08% compared to 2013, due to lower recovery values on repossessed motorcycles, the impact of changing consumer behavior, and lower levels of recoveries from accounts charged off in prior years.

During the third quarter, HDFS continued to maintain a strong liquidity position, delivered solid credit performance, and contributed strong profitability.

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

Now I'll turn it back to John.

Thanks, Larry.

Now let's take a look at cash and liquidity on slide 22.

You will see that at the end of the quarter, we had $1.04 billion of cash and marketable securities.

In addition, we had approximately $1.6 billion of available liquidity through bank credit and conduit facilities.

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

During the third quarter, HDFS successfully completed a $600 million medium-term note offering with a coupon rate of 2.4%.

In addition, we renewed our $600 million US conduit facility.

We further demonstrated our efforts to return value to our shareholders by repurchasing 2.6 million shares of Harley-Davidson stock for $169.6 million during the quarter.

As we have stated, returning value to our shareholders is a top priority; we will continue to evaluate opportunities to enhance value for our shareholders through increasing dividends and share repurchases.

Now I'll review the remaining H-D, Inc.

financials on slide 23.

I would like to highlight two items.

First, with regards to operating cash flow, we generated operate in cash of $966.9 million through the first nine months of 2014.

Operating cash flow was up $141.8 million from last year, primarily driven by lapping of last year's pension contribution of $175 million and increased earnings, partially offset by higher wholesale finance originations.

And second, our year-to-date tax rate was 34.9% compared to 34.3% in the year-ago period.

The higher tax rate reflects the absence of the R&D tax credit in 2014.

On slide 24, you will see our overall expectations for the remainder of the year.

We continue to expect to ship 270,000 to 275,000 motorcycles on a worldwide basis in 2014, up approximately 3.5% to 5.5% from 2013 shipments.

During the fourth quarter, we expect to ship between 46,500 and 51,500 motorcycles, which is flat to up 10% compared to last year's fourth-quarter shipments of 46,618 motorcycles.

We also continue to expect 2014 operating margin for the Motorcycle segment will being 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.

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

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

And finally, we now expect our full-year 2014 effective tax rate to be approximately 35%, down a 0.5 percentage point from prior guidance due to a higher projected benefit from the US manufacturing deduction.

So to recap, during the quarter, we experienced increased retail sales and delivered solid market share, despite extremely strong year-ago comps; further raised the new product [bar] with the introduction of our 2015 model year motorcycles; increased the retail availability of Street motorcycles in the US, India, and southern Europe; and delivered shareholder value through dividends and repurchase of $170 million in Company shares.

As we look forward, we feel great about our brand, the Business's core demand fundamentals, our ability to leverage the Company's cost structure, and the success we are experiencing with our key growth strategies.

We will continue to position the Company for long-term success by investing in growth through new products, expanding brand relevance to more customers in both the US and abroad, and through international expansion.

We will remain focused on 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.

Sharon Zackfia, William Blair.

Quick questions.

First, on currency, obviously, there's a lot of concern among investors about what a strengthening US dollar might mean for Harley competitively, and also from a gross margin perspective.

So perhaps you could talk about that, maybe longer-term, into 2015 on the competitive structure on the gross margin?

And then secondarily, it sounds like the Street is doing really, really well overseas, and I'm just wondering how many were you going to produce in India of this year and what is the capacity constraint on the India manufacturing plants?

Great, Sharon.

Let's start with our currency.

In the third quarter, we did see a little bit of devaluation on a year-over-year basis, which was unfavorable to revenue by about $1.8 million.

The biggest brunt of the decline year-over-year was the revaluation, as we saw a lot of inter-quarter devaluation.

So as we look forward into the fourth quarter, if currency stay where they exited the third quarter, we would expect an impact to revenue in the 1.5% to 2% range.

Some of that is hedged, so we do expect currency to be unfavorable in the fourth quarter; not to the same extent that we saw in the third quarter, but some pretty significant unfavorability.

And then as we move into 2015, it really depends on what happens to overall currencies.

As we've discussed, we do hedge.

We hedge typically out four quarters in a stair-stepped fashion, so we have got the most coverage on in the in quarter, which would be the fourth quarter in this situation and it steps down over the ensuing three quarters.

So if things don't change from here, there will be significant currency headwinds next year, which will affect revenue primarily, and then that will be somewhat offset by the hedge positions that we have.

The second question that you had, Sharon, is with regards to Street and sales overseas.

We couldn't be more pleased with the way Street is selling, both in the US and overseas.

As Keith had mentioned, that three out of four motorcycles in India are Street.

In addition, during the third quarter, we sold more Street motorcycles internationally than we did domestically, and that's even taking into consideration that distribution in the US was a little bit light.

So as we look forward, what we're going to do is it start to expand Street to our other markets around the world.

We will start late in the fourth quarter and ship in a few hundred units into Europe and start to get that dealer network ready.

We'll be in full production for Europe in the dealer fill in the first quarter of 2015.

In addition, we'll expand to Japan, China, Australia, and Mexico in the beginning of 2015, and then toward the end of 2015 into 2016, we will expand to the rest of our international markets.

From a capacity standpoint, we certainly have the capacity to meet that roll-out plan.

Joe Spak, RBC Capital Markets.

Thanks.

Good morning, everyone, and thanks for taking the question.

Two questions, really.

One, I was wondering if you could give some indication as to the percent mix between 2014 and 2015 model year on the sales, but really, more specifically, on the current inventory situation in the US?

And then the second question is, I was wondering if you had quantified some of the hits to gross margin in the quarter from some of the subvention you did with the financing [bills] during the quarter?

Okay, Joe.

We don't break out sales between model years within the quarter.

Certainly, what we'd like to stress is that overall retail sales were very strong in the third quarter, especially in the United States, where we're getting over a comp of up 20%.

We did end the quarter with inventories heading in the right direction.

Remember, we took on inventory out after a soft second quarter, and are focused on making sure that we maintain an incredibly strong brand, an incredibly strong dealership, and limit discounting in the best fashion that we can, and that is through managing inventory in line with demand.

We did see inventories fall and we exited with retail inventories up 4,000 units, and a lot of those being Street dealer fill.

So we made great progress in getting the inventories where we want them to be.

By the time we're out of the fourth quarter, we'll be right back in line with our original plan, which is to have inventories up modestly behind the Street dealer fill.

When you look at overall 2014 versus 2015 carryover, it is a little bit heavier this year than it was last year, and again, by year-end, we'd expect to add that in line.

The second question was the impact of some of the subvention that we've done on the financials, I believe.

First of all, let me give an idea of what we did do.

In line with making sure that we limit discounting in the network as much as we can, we helped supported our dealers through offering two finance programs and it was no money down and a limited lower rate financing program.

They were only offered to our very top-tier customers.

Through the quarter, they represented sales of about 5% of the motorcycles in the United States, so it didn't impact a whole lot of sales.

We don't believe there was a big incremental impact on sales, in general; however, it was effective in limiting discounting, as well as moving out model year 2014 motorcycles.

And the overall hit to the financials was very nominal.

Again, it wasn't on a lot of volume.

It's included in the Q3 results.

You are talking in the probably $2 million to $3 million range.

Craig Kennison, Robert W. Baird.

Good morning.

Thanks for taking my questions, as well.

Maybe Larry, I will ask you the question on the subprime market.

There have been more and more concerns about that particular market.

Are you seeing any divergence in how subprime tiers are performing, number one?

And then secondly, you commented that there were lower recovery values.

Could you comment on used bike values and whether maybe your production cut has helped stabilize that market?

Okay.

Thanks, Craig.

First, on the subprime market, what we've seen is what we've expected for a period of time, which is that market, I would say, is just starting to normalize.

Subprime credit had absolutely tremendous performance, if you look back at 2011 and 2012, as far as very, very low levels of delinquency and loss.

We think subprime is still very attractive.

It is performing very well compared to our models and we are priced for it, but, as we expected, we are seeing credit losses starting to, I will call it, normalize and increase somewhat in that market.

Second, regarding lower recovery values on repossessed motorcycles, you are seeing a couple of impacts there.

Harley-Davidson dealers are taking a lot of trades, with all the Rushmore product they are selling, so that their need for purchasing repossessed motorcycles at the auctions has declined versus where it was a year ago, because they feel they have sufficient inventory of used bikes that they are getting from the trade market, so that's put a little bit of downward pressure on recovery values.

It will be interesting to see how that plays out over the next six, nine months, as we go into next year's riding season.

Hopefully that's bottomed out, but too early to call that.

Felicia Hendrix, Barclays.

Hi.

Thank you.

Just a few questions.

First housekeeping, just wanted to make sure I was doing some simple math properly.

On the $14 million recall expense you highlighted, I'm getting that, that was about a $0.04 impact to your earnings in the quarter?

Second, John, thank you for the color on SG&A.

You said that some expenses will shift into the fourth quarter.

So with that in mind, how should we think of SG&A in the fourth quarter?

We're estimating its flat year-over-year.

Just maybe some color there?

And then finally, Larry, we just talked about HDFS and your percentage of prime and subprime.

I'm just wondering, first, could you just tell us what percentage of non-HDFS-financed bikes you think are purchased with cash?

And then if you take your share of those purchased with cash, isn't it fair to say that your prime profile, if you include cash, is closer to about 90%?

Thank you

Okay, Felicia, this is John.

Your math is correct.

$14 million would be in the neighborhood of $0.04 EPS for the quarter.

And with regards to SG&A, so SG&A was up this quarter, and if you take out the one-time recall, we're actually about $6 million favorable.

What we believe is that $6 million is all timing and that will shift into the fourth quarter.

We said all year long that we expected SG&A to be up on a year-over-year business, but fall as a percent of revenue, and with that, we would expect our fourth-quarter SG&A spending to be up, probably in the 3% to 5% range.

Then on prime/subprime, this is probably anecdotal because we don't have perfect information on cash.

We've always estimated that about 20% of sales are cash.

Once again, you never know is that coming from a home equity line of credit or some other source, but roughly, we've always thought that, that's about right.

And regarding our mix, you are right, we do a lot of prime financing, but we are a full credit spectrum lender, and if you look, we've been fairly consistent around this 80/20 mix of prime/subprime in loans we've financed for a good number of years now.

Gerrick Johnson, BMO Capital.

Good morning.

I was wondering on Street, your original guidance was about 7,000 to 10,000 shipped in the year.

I was wondering if that still holds or if you've tightened that up and maybe how many were shipped in the quarter?

And then second question, your Rushmore has been great, we've seen a bounce back in Sportsters, but maybe just some conversation as to why Dyna and Softail is still a little bit weak?

Thank you

Thanks, Gerrick, this is John.

7,000 to 10,000, we still feel very good about that.

No change there.

And then with regards to the customer segments, over the last several quarters, when we show our shipments as a percent of total, we've certainly seen that custom has been down.

That is nothing less than what we expected.

We've been investing in the Rushmore line of product and also in the Street and we would expect both of those to go faster than the custom segment and that's what we're seeing in overall shipments.

And the other thing is, and important to note when we look at our custom motorcycles, when we came out with Rushmore, in line with our [fat-in-the-tail] strategy, its purpose was to encourage people to trade up.

We are seeing that.

We're seeing folks that have been on our custom motorcycles trading up to products like Street.

And Street is viewed by a customer as a custom motorcycle -- sorry Street Glide and now Road Glide.

And so we are seeing those folks trade up to a Rushmore product, which is in line with the strategy and certainly more profitable for us.

So overall, what we're seeing in custom is what we expected.

Also to note, with regards to custom segment, or the large cruiser segment, in the third quarter, as well as on a year-to-date basis, we've picked up share of that market.

James Hardiman, Longbow Research.

Hi.

Good morning.

Congrats on a real strong quarter here.

John, maybe you could just help us peel back the layers on the gross margin a little bit.

You talked about it being down 250 bps headed into the quarter.

I'm assuming that currency only pushed you in the wrong direction.

You finished down just 40 bps.

Firstly, can you quantify the balance sheet devaluation in the third quarter like you have done a couple of times in the past?

And then just maybe walk us through some of the individual items.

It seems like there was a pretty sizable delta versus how you were thinking about mix in some of these other items.

Could you just walk us through why those were so much different than you thought heading into the quarter?

Absolutely, James.

Let's start with the currency piece.

When you break up the components of currency, $1.8 million was unfavorable on the revenue line, and that leaves $9.7 million unfavorable, largely driven by the devaluation.

Matter of fact, the devaluation marking the foreign denominated assets was a little bit greater than that and partially offset from some favorable hedge performance that we had on in the quarter.

Net, that is unfavorable $11.5 million, which did impact gross margin, by about 9/10 of a gross margin point, and you're right, that's more than we had anticipated going the other way.

The other part of your question, James, is that we did expect gross margin to be more unfavorable than it was.

We couldn't be more pleased to see that to be wrong.

But it was really driven by the two pieces.

One is mix, and we did expect the mix to be unfavorable in aggregate for the quarter, and it ended up being strongly favorable at $13.7 million.

Let me go through the pieces of that very quickly is we've talked about there's varying pieces of mix and family mix is typically the biggest driver of overall mix and that's the mix between the various families that we have.

That was unfavorable, as we anticipated, in the quarter and that goes back to seeing that Street percentage of total shipments rise to an increase of 3.8 percentage points.

It did rise and that was unfavorable.

Where we were pleasantly surprised is in two other areas of mix, one being model mix.

We've seen strong model mix over the last several quarters and expected that to temper a little bit as we lapped Rushmore on a year-over-year basis.

Those are our customers that are trading up within a family and buying higher trim or higher content models.

So that's a customer buying an Ultra Limited versus an Ultra or a Street Glide Special versus a Street Glide.

They continue to be very strong in their trading up to higher trim models, again, which is a great thing.

And then the last piece of mix that was very favorable, that we didn't anticipate, was related products mix and that's in both Parts & Accessories and General Merchandise and customers just choosing a higher mix of products.

For example, in General Merchandise, higher profit leathers and riding gear, and in Parts & Accessories, chassis products, suspension and braking products.

The other area of favorability was in manufacturing expense.

While it was unfavorable in the [Milwaukee city] by $3.3 million, we anticipate it to be more unfavorable, driven by lower production.

That lower production is due to us taking out the 9,000 units.

Again, however, we had very strong productivity and the plants have been doing a wonderful job; the overall operations have been doing fantastic for the last several quarters and the third quarter was no different.

A little bit better than we had anticipated.

And also Street start-up costs, we talked about last quarter, expected them to be about $5 million.

They were a little bit shy of $3 million, so feel very good about how the team has dealt with that.

As I mentioned in the preamble, we put the start-up issues behind us and we're running at full production for Street.

Tim Conder, Wells Fargo Securities.

Thank you and congrats to everyone on a great execution in the quarter here.

Couple things, John.

If you could just revisit here the Company-level inventories built here.

Can you talk about what's behind that?

And then, collectively, just to confirm, I think you just said it though, but you're pretty well done with the Street start-up cost supplier issues, so just to confirm that?

And then two others, real quickly here.

The Street, how much did you get into Europe, if any at all, during the quarter?

That would seem like it would continue to help what could be a little bit of economic headwinds?

And then finally any update on timing of LiveWire?

You had it in the slide deck, you said your reception was better than expected in the test.

Just any update on the timeline there?

Thank you.

Okay.

Thank you, Tim.

First question was Company-level inventory.

Yes, if you look on our balance sheet, inventories are up probably in the 15% range.

That is driven by finished goods inventory, partially offset by General Merchandise inventory being down.

We talked about General Merchandise, as we prune SKUs, we expect that inventory to come down and it is.

We do have higher Company-owned inventory -- finished good inventory on a year-over-year basis.

That's for the sole reason of is, we are working off the model year 2014 and aggressively managing the supply of units out in the field.

And so we held back on a few thousand motorcycles and those will get shipped in the fourth quarter here.

Next question was Street start-up cost.

The start-up issues are largely behind us.

We do expect some nominal start-up costs in the fourth quarter, but nothing that we would expect to even need to report on.

But we're running at speed, at originally planned speed at this point, and while a lot of the third quarter, we didn't have full distribution, which probably impacted retail sales, we will be fine by the time we end the year and be ready for the selling season in the United States, as well as in international markets.

With that, we would expect the mix of Street in the fourth quarter to increase a fair amount from what we saw from the third quarter, as well, because we will be producing at full run, and again, expect that to have an adverse impact on Q4 mix.

The next piece is Street in Europe.

We have been shipping into Europe from the initial onset in the southern European countries of Italy, Spain, and Portugal.

We have not shipped beyond those in the third quarter.

We do anticipate to ship a couple to a few hundred units here in the fourth quarter, but very nominal overall volumes.

In Europe, as I had mentioned, most of the shipments for the dealer fill will take place early in 2015.

And then your fourth question was the timing of LiveWire.

We are still where we talked about the last time we talked, is we are gathering consumer feedback.

As Keith had mentioned, the feedback has been absolutely fantastic.

Our plan is to take the demos and expand them from the United States, which we've been doing this year and will do the balance of this year, into Europe and Canada in 2015.

And so, Tim, we're going to continue to collect feedback and make sure we understand the requirements of a great electric motorcycle and then we'll make a decision at that point.

Joe Hovorka, Raymond James.

Thanks, guys.

Just a couple quick questions.

One can you give what Road Glide was as a percentage of retail in the third quarter 2013 and then what it was in the third quarter of 2014?

And then if I use your 56.3% market share of the 600+cc (sic -- see press release, "601+cc") market, it looks like you sold at retail a little bit fewer than 700 Street 500s.

One, I wanted to make sure that number was correct.

And two, if I recall, there was almost 1,700 in the second quarter at retail.

What's the delta there?

I'm surprised that it's gone down by that much?

Okay, Joe.

The first question is Road Glide.

As I had mentioned, Road Glide, it still represented a headwind in the third quarter, even though it is actually our fastest turning products coming out and meeting all our expectations.

A year ago, third quarter we at 8% of US sales were Road Glide.

This year's third quarter, about one-half that amount, about 4% is in Road Glide.

So we're coming up to speed.

And you look at the third quarter, really an inflection point.

For the three previous quarters, the absence of Road Glide has been a pretty stiff headwind.

As we start to move forward over the ensuing four quarters, we would expect a nice tailwind from Road Glide.

But in the third quarter, we sold about one-half as many this year's third quarter as we did last year's third quarter.

With regards to the overall Street, we don't provide a break-out of the 500 to 700, and to be honest -- the 500 to 750 -- to be honest, I didn't completely follow the math, but I think the answer to your question is in the first half of the year, and in particular, the second quarter, we shipped a fair amount of 500s in for the Rider Academy training.

They were all shipped by the end of the first half and what you are seeing in the second half is 500s for consumer use.

If there is any other questions, you can follow up with Amy.

Greg Badishkanian, Citigroup.

Great.

Thank you.

Just wanted to follow-up a little bit on that question, as well as just overall in the fourth quarter.

What are some of the puts and takes --obviously, Road Glide becomes a tailwind and you have much easier comparisons in the fourth quarter than you did in the third quarter -- but what are some of the other factors we should think about when we are modeling out retail sales for next quarter?

Overall, we've got a tremendous amount of retail sales momentum.

We're lapping a very difficult quarter from one of the greatest launches that we've had, and an incredible product and Rushmore, and certainly beating that.

So again, as I just mentioned, certainly the third quarter was an inflection point.

We feel great about the fact we had flat share, and that flat share, just to make sure everyone is clear, that is 1/10 behind the highest share that we've ever had as a Company in any quarter, so we feel great about where we're at from a standpoint of market share.

But Greg, as you pointed out, as we start to move forward, we will get a tailwind, certainly, from Road Glide, but you have got to remember that we also added four other models of Rushmore.

Those lows are going to open up a whole new audience to a lot of people that couldn't go on a -- couldn't fit on a Touring bike.

It will have the lowest seat height of any Touring bike in the heavyweight category.

So we've got that.

And then, of course, Street availability.

We still were hampered a fair amount of the third quarter in not having enough in the dealerships.

We will rectify that as we move through the fourth quarter, and again, we'll end the fourth-quarter and be ready for spring selling season with a full array of Street products here in the United States, as well as some additional international markets.

Other than that, the core fundamentals of the brand are all performing extremely well.

Our outreach sales did fantastic in the second quarter -- Sportster rebounding, as we had expected.

Repurchase intent, repurchase cycle, new to brand, the industry is performing very well.

We couldn't be more excited about what's in front of us.

Jaime Katz, Morningstar.

Thanks for taking my questions.

I'm just curious about the Street models.

Originally, they were supposed to act as a drag on gross margin.

When do you see those coming more in line maybe with Corporate averages?

And then secondly, can you talk a little bit more about Latin American performance?

It seems like there was a pretty big disparity between last quarter and this quarter.

I know you called out Mexico on this quarter's slides, but was there anything else that may have contributed to that?

Thanks.

Great, Jaime.

When we look at the Street motorcycle, what we have said is that we would expect about 0.5 points of dilutive impact to overall gross margin percent, certainly accretive to the profits and that's just at certainly at a lower price point and a lower profit per unit.

As we get those folks into the family, they will quickly trade out of Street into some of our bigger, more profitable motorcycles.

But that thinking hasn't changed.

Given some of the start-up costs that we've had, that 0.5 points dilutive aspect is more about 0.75 points this year.

But once we are past the start-up issues, we would expect Street to still be a little bit dilutive, as we continue to sell and grow that business.

But again, as we look at the long-term health of the overall business and how quickly people will move from that to other parts of the product and the new folks that it's bringing in, we couldn't feel better that we're doing great and certainly on strategy.

When we look at what the early performance is of Street, the vast majority of customers coming in are new to the brand, as well as outreach customers.

So again going back to the [fat-in-the-tail] strategy, you've got Rushmore on one side that's doing a fantastic job encouraging trade-up and you have got Street bringing in a very large percentage of new and outreach customers.

So we're doing fine.

But overall margins, no big change in margins with regards to Street.

The second question that you had, Jaime, is Latin American performance.

Yes, we're very pleased to see that turn a bit from the second quarter.

We were actually down on a year-over-year basis and that was driven by Brazil.

We have seen improvement in Brazil from the second to third quarter, but Brazil is still down, and down modestly in the quarter.

The gains that you're seeing at 7% up is largely driven by very strong performance in Mexico and the business in Mexico has been performing very well for quite a while, as was Brazil.

And Brazil, economic situation has changed a bit.

Consumer confidence has shifted a bit.

So we're a little bit cautious on Brazil, but seeing improvement from the second to third quarter there.

James Hardiman, Longbow Research.

Hi.

Just a couple quick follow-ups here.

On the inventory front, obviously, you've spoken to, for a while, increasing inventories as a result of the higher SKU count.

You're specifically talking about the Street, but help me walk through how to think about the rest of your line-up.

There's a lot of new SKUs year-over-year that you will finish this year with versus where you were last year.

You had all the new incremental Rushmore bikes and then there were some mid-year introductions, as well.

Are those just going to displace other retail units at retail or should there potentially be some incremental inventory as a result of that?

And bigger picture, do you expect to finish this year at the right amount of inventory or does some of that carry over into 2015 where there might be some incremental inventory still?

Great, James.

We expect to finish exactly where we've always intended to finish this year.

Again, I can't stress enough that we are completely committed to keeping a very clean dealer channel and aggressively managing supply in-line with demand and that's what prompted our actions last quarter.

We will be back on track at the end of the year and make great progress in the third quarter.

So to answer your question, we do expect year-end retail inventory to be up moderately behind dealer fill in Street.

The vast majority of any increase will be through to Street.

We would expect the rest of the line to be flat to slightly up in overall inventory.

And we've always got models coming in and out of the line-up, James, and we feel that we have got the right inventory levels and they can manage with what they have there; Streets being a little bit different, being a new platform, and those we need to get more slots into the dealership for.

So inventories will be up, but primarily driven by Street.

All right.

Thank you, everybody, and thanks for your time this morning.

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This concludes today's conference call.

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