Harley-Davidson Inc (HOG) 2014 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the fourth-quarter and full-year 2014 earnings conference call.

(Operator Instructions)

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

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

The audio for our call 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.

Our 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.

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

Then we will take some questions.

So let's get started.

Keith?

Good morning, and thanks for joining us on the call.

John will provide the details on the quarter and the year, but first I want to highlight some of our major achievements for 2014, and then briefly touch on some of our future opportunities.

Full-year diluted EPS grew more than 18%, making this the fifth consecutive year of double-digit EPS increases.

Consolidated revenue topped the $6 billion mark for the first time since 2006.

Gross and operating margins were up strongly, driven by our focus on operational efficiencies and our commitment to continuous improvement in every aspect of our business.

A big piece of these improved efficiencies came from manufacturing.

2014 marked our second year of flexible surge production.

The financial impacts of surge and all the other improvements in manufacturing in recent years have been remarkable, to say nothing of the added flexibility that surge gives us to capitalize on changing market conditions.

On the product side, our new 2015 motorcycles have been extremely well received.

Retail sales of the new Project Rushmore motorcycles, including the return of the Road Glide, the introduction of Classic Low and Ultra Limited Low touring bikes, a CVO Street Glide, and the Freewheeler have been very strong.

We also rolled out the Street 750 and 500 last year, designed for a new generation of global riders.

And the response has been outstanding.

And in the fourth quarter, retail sales of Street drove double-digit gains in Harley-Davidson's small cruisers in the United States.

To date, the majority of initial US Street purchases have been new to the Harley-Davidson brand.

In the international markets Street is selling very well.

And in India, the Street 750 was recently named Motorcycle of the Year.

In 2015, Street will be available in nearly all of our markets worldwide.

Also, we continue to see an extraordinary level of interest and positive feedback for a bike that's not even on the market, Project LiveWire, Harley-Davidson's first electric motorcycle.

In 2014 we gave more than 6,800 demo rides in the US, with the vast majority of riders saying that it far exceeded their expectations.

The demo tour is moving to Europe, Canada, and Asia-Pacific in 2015.

In line with our strategic plan, international markets are playing an increasingly significant role for the Company.

In 2014, international sales of new Harley-Davidsons grew at more than 5% and accounted for more than 36% of total retail Harley-Davidson motorcycle sales.

That's up from 30% in 2008.

We've said for several years that we expect international sales to grow at a faster rate than domestic sales, and in 2014 that came into play.

The Asia-Pacific, EMEA, and Latin America regions posted the highest new retail motorcycle sales on record for each region.

And we are also seeing success as a result of our US outreach strategies.

In 2014 for the third straight year sales of new Harleys to our outreach customers consisting of young adults, women, African-Americans, and Hispanics grew at more than twice the rate of sales to core customers.

From Street to Touring, we're delivering motorcycles that bring these new riders into the Harley-Davidson family.

So overall, 2014 was another great year.

And we remain focused on managing the business for the long term, building on our strategies and driving continuous improvement.

It's been a little over five years since we unveiled our strategies to focus solely on the Harley-Davidson brand, to be customer-led in everything we do, to transform every facet of our business and ensure we are developing great leaders at every level of the Company to drive our performance.

Looking at what we've achieved since 2009, there is no doubt in my mind it was the right strategy.

And I'm extremely proud of everyone on our team.

And the proof is in the results.

But looking ahead, our strategy will continue to focus on maximizing our opportunities in order to increasing realize our full potential as a growing global company.

That includes what we see as tremendous opportunities in bringing new wow products to market, further extending our international reach, and expanding our opportunities with outreach customers.

It also includes further optimizing Harley-Davidson's agility in manufacturing, product development, and customer retail experience.

With ongoing strategic direction and clear focus, our business objectives remain extremely relevant.

First, to outperform the S&P 500 over time, to grow international retail sales at a faster rate than US sales, and within the US to grow sales to outreach customers at a faster rate than sales to our core customers, and grow earnings at a faster rate than revenue.

So to recap, we have seen proof of what can be accomplished through a sound strategy, focus, and determination and by working together as one Company, one team moving in one direction.

We also know our work is never done when it comes to continuous improvement.

And I have every confidence that we will continue to achieve great things together.

With that, I want to thank you for your interest and your investment in Harley-Davidson.

I'll turn it over to John for more detail on the quarter and the year.

Thanks Keith, and good morning everyone.

I'll discuss our fourth-quarter and full-year financial results, starting on Slide 10.

During the quarter, Harley-Davidson, Inc consolidated revenue was $1.20 billion, net income in the quarter was $74.5 million, and diluted earnings per share were $0.35 per share.

Operating income for the Motorcycle segment was $35.9 million, 40.9% lower than last year's fourth quarter.

Segment revenue was flat to prior year.

The decrease in the Motorcycle business operating income was driven by a lower gross margin percent and higher year-over-year SG&A spending.

Operating income at Harley-Davidson Financial Services was up 1.8% year over year.

Also during the quarter we had lower year-over-year interest expense behind the retirement of our high interest debt last February and a lower effective tax rate.

We will continue to focus on delivering strong margins and strong returns over the long term.

Now let's take a closer look at fourth-quarter performance, starting with retail sales on Slide 11.

Q4 worldwide retail sales of new Harley-Davidson motorcycles were up 2.8% over last year's increase of 5.7%.

This year's Q4 results were driven by strong increases in our international markets, partially offset by a decline in the US.

Fourth-quarter worldwide retail sales reflected an outstanding consumer response to our new 2015 model year motorcycles, including Street which sold very well in initial rollout markets.

Retail sales gains from the new model year bikes were partially offset by a year-over-year decline in retail sales of our initial Rushmore models, as we lapped the enthusiastic customer response after the initial launch of Rushmore in 2013.

For the full year, worldwide retail sales were up 2.7% compared to 2013.

2014 retail sales reflected various challenging US weather conditions in the first half of the year and the absence of the popular Road Glide models for much of the year.

As we exited the fourth quarter, we believe our brand and core demand fundamentals remain very strong.

In 2015 we expect continued momentum behind our model year 2015 motorcycles, including increased worldwide distribution of Street motorcycles.

Let's take a look at US market on Slide 12.

Retail sales in the US were down 1.6% in the fourth quarter compared to the prior year, which included initial Rushmore launch.

We believe the factors that affected US retail sales during the quarter were first, retail sales of the seven new model year 2015 Rushmore models were very strong.

As anticipated, Road Glide sales were very robust and they represented about 14% of US retail sales in Q4 versus last year when Road Glide only represented about 4% of sales.

Second, retail sales of the new Street motorcycle appear to be largely incremental.

We are pleased to see that the majority of initial Street purchasers were new to the Harley-Davidson brand, reinforcing the strategic importance of this new growth opportunity.

In fact, on a combined basis retail sales of our Sportster and Street motorcycles were up double digits in the quarter.

And finally, our retail sales of the first Rushmore models, which launched in August 2013, were down year over year as we lap the initial enthusiastic customer response to these highly innovative game-changing motorcycles.

Q4 2013 retail sales of non-Road Glide touring models were up in excess of 40% compared to Q4 2012.

That set up a very tough comparison for Q4 2014.

For the full year, US retail sales were up 1.3%.

As I had mentioned, full-year retail sales benefited from strong sales of Rushmore and Street motorcycles.

However, we believe 2014 retail sales were adversely impacted by weather and the absence of Road Glide.

Full-year market share decreased 1.6 percentage points, largely driven by the absence of Road Glide.

We believe our market share was also impacted by increasing discounting by our competitors late in the year.

Finally, as expected, US dealer retail inventory was up approximately 2,900 motorcycles at the end of 2014 compared to 2013, largely due to the initial dealer fill of Street models for retail.

We believe year-end dealer inventories is in a good position going into 2015.

On Slide 13 you'll see retail sales in our international markets were up 9.2% in the fourth quarter and 5.4% for the full year.

We are very pleased with our international performance in 2014.

In fact, we experienced all-time high retail sales for EMEA, Asia-Pacific, and the Latin America regions.

In our EMEA region, Q4 retail sales were up 8.7% driven by growth in nearly all countries throughout the region.

In particular we saw strong growth in Southern Europe, Germany, Switzerland, and emerging markets in the region.

For the full year EMEA retail sales were up 6.4%.

And full-year market share in Europe was 12.0%, down 0.8 percentage points behind the introduction of several performance-oriented models by the competition.

In the Asia-Pacific region retail sales were up 14.2% for the fourth quarter.

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

In addition, sales continued to be very strong in China.

And in Japan, sales growth turned positive following a couple down quarters which were driven by the impact of an increase in the consumption tax.

For the full year retail sales were up 11.8% in our Asia-Pacific region.

Latin American region retail sales were up 4.7% in the quarter as result of strong growth in Mexico, with Brazil up modestly.

For the full year, retail sales in the Latin America region were up 2.1%.

Finally, retail sales in Canada were down 5.7% in the fourth quarter and down 10.8% for the full year.

We believe currency-driven price increases impacted retail sales throughout the year.

While we are encouraged by fourth-quarter international performance, we remain concerned with ongoing economic challenges in several markets.

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

Since 2009 we have added 136 new international dealer points to the distribution network.

We believe we can continue to realize strong international growth opportunities by prudently expanding our distribution network and increasing our brand relevance by delivering new products, such a Street and Rushmore, which appeal to the global customers.

On Slide 14 you'll see wholesale shipments of Harley-Davidson motorcycles in the quarter were up 1.2% compared to last year.

Fourth-quarter shipments finished within our expected range of 46,500 to 51,500 motorcycles.

During the quarter, the mix of touring motorcycles increased 3.5 percentage points from the prior year, as Rushmore models continued to stimulate demand in the market.

Also during the quarter, the shipment mix of our Street and Sportster category was up 3.1 percentage points, reflected our first year of Street shipments.

For the full year we ship 9,900 Street motorcycles worldwide, at the high end of our expected shipment range of 7,000 to 10,000 motorcycles.

We expect that the Street and Sportster category mix will be considerably higher in 2015 behind increase Street shipments.

2014 international shipments as a percentage of the total were 35.7%.

We are committed to investing in international growth, and continue to believe international retail sales will grow at a faster rate than domestic retail sales over the next few years.

On Slide 15 you will see revenue for the Motorcycles and related product segment was flat in the fourth quarter, with a 1.2% increase in motorcycle shipments.

Revenue was primarily impacted by unfavorable currency exchange.

For the full year, Motorcycle segment revenue was up 5.9% behind a 3.9% increase in motorcycle shipments.

During the quarter, the average motorcycle revenue per unit decreased $133 from the year-ago quarter behind unfavorable currency exchange and unfavorable mix, partially offset by higher pricing.

On average, our key currencies were weaker against the US dollar by approximately 9% compared to Q4 2013.

For the full year 2014 average motorcycle revenue per unit increased $584 from 2013, driven by higher pricing and favorable mix, partially offset by unfavorable currency exchange rates.

Parts and accessories sales were down 2.2% in the fourth quarter and up 0.2% for the full year.

For the full year P&A retail sales benefited from strong international sales, partially offset by lower accessory sales following the strong launch of Project Rushmore accessories in 2013.

General merchandise was down 1.1% in the quarter and down 3.7% for the full year compared to 2013.

Both the fourth-quarter and full-year results were impacted by our aggressive SKU reduction plan across our apparel offering in an effort to transform the retail customer experience with a more targeted assortment of popular styles.

On Slide 16 you'll see gross margin in the quarter was 30.5%, which was 1.0 percentage points lower than last year.

Gross margin performed very well with volume, price, mix all been favorable during the quarter, partially offsetting unfavorable foreign currency exchange.

During the quarter overall mix was a benefit of $4.4 million, driven by a rich sales mix of parts and accessories and general merchandise.

As expected, Motorcycle family mix had a unfavorable impact on margin, driven by higher Street shipments.

The mix of models within families was largely flat to prior year.

For the first quarter 2015, we expect mix to adversely impact margin, driven by increased shipments of Street motorcycles, which were not in the year-ago shipments.

During the first quarter we will continue to expand Street distribution to most of Western Europe, Japan, Australia, Mexico, and Canada.

Foreign currency exchange was $22.8 million unfavorable for the fourth quarter.

This was driven by a significant weakening of our key foreign currencies within and on a year-over-year basis.

The euro, yen, Brazilian real, and Australian dollar devalued an average of 6% from the beginning to the end of the quarter, and were 9% weaker compared to the prior-year quarter.

This resulted in an unfavorable revenue impact of approximately 2.5% and an unfavorable revaluation of foreign-denominated assets on the balance sheet.

Full-year gross margin was 36.4%, which was up 1 percentage point from the last year.

We are very pleased with our 2014 gross margin growth and the balance composition of margin growth across volume, price, mix, and manufactured productivity.

On Slide 17 operating margin as a percentage of revenue for the fourth quarter was 3.5%, down 2.4 percentage points compared to last year's fourth quarter.

As anticipated, operating income of $35.9 million for the quarter was unfavorably impacted by lower gross margin and higher SG&A spending.

For the full year, operating margin as a percentage of revenue was 18.0%, up 1.4 percentage points compared to last year.

We are very pleased with our ability to leverage both our gross margin and operating expenses in 2014.

Going forward, we main 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 onto our Financial Services Segment on Slide 18.

In the fourth quarter HDFS' operating profit increased $1.1 million, or 1.8%, compared to last year.

The fourth quarter increase was driven by $5.4 million of improved profitability from our non-lending activities.

On a full-year basis HDFS posted operating profit of $277.8 million, a decrease of 1.9% compared to 2013.

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

The business remains very profitable, with industry-leading returns and a strong portfolio.

Now Larry will provide more detail on HDFS' operation on Slide 19.

Larry?

Thanks John, and good morning.

During the fourth quarter HDFS retail motorcycle loan originations increased 4.7%, or $22.3 million, compared to the same period last year.

The increase was primarily driven by a 1.6 percentage point increase in retail financing market share for the fourth quarter compared to last year and a higher average amount financed per motorcycle.

For the full year, HDFS continued to have a strong retail financing market share of new Harley-Davidson motorcycles sold in the US.

Our market share increased to 56.8% compared to 54.5% in 2013.

Finance receivables outstanding increased 7.4% 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 2014, approximate 80% of our new retail loan originations were prime.

Moving onto credit performance on Slide 20.

The 30-day delinquency rate for retail motorcycle loans at December 31, 2014 was 3.61%, or 10 basis points lower than year-end 2013.

This is the lowest year-end 30 day delinquency level in at least 13 years.

Annual retail credit losses increased by 13 basis points to 1.22% compared to 2013, primarily driven by lower levels of recoveries from accounts charged off in prior years and modestly higher credit losses as a result of changing consumer behavior.

We are pleased with the progress at HDFS in 2014 as we continue to contribute strong profitability, delivered solid credit performance, and maintained a strong liquidity position.

We remain focused on enabling sales of Harley-Davidson motorcycles while providing an attractive return to Harley-Davidson, Inc as demonstrated by the $100 million dividend HDFS paid to Harley-Davidson Inc this month.

Now, let me turn it back to John.

Thanks, Larry.

Now let's take a look at cash and liquidity on Slide 21.

You will see that the end of the quarter we had $964.2 million of cash and marketable securities.

In addition we had $1.22 billion of available liquidity through bank credit and conduit facilities.

We are -- 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 fourth quarter we successfully completed a $400 million three-year medium-term note offering with a coupon rate of 1.55%.

Also this month we completed a $700 million asset-backed securitization transaction with a weighted average interest rate of 1.19%.

We further demonstrated our efforts to return value to our shareholders by repurchasing 3.3 million shares of Harley-Davidson stock for $222.1 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 repurchasing shares.

Now I will review the remaining Harley-Davidson Inc financials on Slide 22.

I'd like to highlight two items.

First, with regards to operating cash flow, the Company generated operating cash of $1.15 billion in 2014.

Operating cash flow was up $169.6 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, the full-year tax rate was 34.2% compared to the 34.1% in the year-ago period.

During the quarter, the R&D tax credit was reinstated for 2014.

The full-year benefit was recognized entirely in the fourth quarter.

The summary of full-year 2014 is on Slide 23.

We had net income of $844.6 million in 2014, which was up 15.1% compared to 2013, and earnings per share was up 18.3%.

The Motorcycle segment operating income was up 15.2% compared to prior-year period.

The Motorcycle segment growth was driven by strong revenue growth and improved gross and operating margins.

As expected, HDFS income was down slightly during 2014 behind higher credit losses.

Finally, we had lower year-over-year interest expense behind the retirement of our high-interest debt last February.

On slide 24 you'll see our overall expectations for 2015.

In 2015 we expect to ship 282,000 to 287,000 motorcycles on a worldwide basis, up approximately 4% to 6% from 2014 shipments.

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

We expect shipment growth will be driven by the strong appeal of the Harley-Davidson brand, great model year 2015 and 2016 motorcycles, full-year Road Glide availability, improving the availability and expanding distribution of the new Street motorcycles, continuing outreach momentum in US, and international expansion.

During the first quarter we expect to ship between 79,000 and 84,000 motorcycles, which is approximately 4% to down 2% compared to last year's first-quarter shipments.

For 2015 we believe operating margin, the Motorcycle segment will be between 18% and 19% compared to 18.0% in 2014.

In 2015 we expect gross margin will be up modestly, impacted by both puts and takes.

On the positive side, we expect favorable impact for motorcycle pricing, incremental margin driven by higher motorcycle production, and strong productivity gains.

On the negative side, we expect lower gross margin as a result of unfavorable foreign currency exchange, increased pension expense, and unfavorable mix.

To dimensionalize the foreign currency exchange risk, if currency held at yesterday's exchange rates throughout 2015, our Motorcycle segment revenue would be adversely impacted by approximately 3.25%.

And while we have a significant portion of the year hedged at attractive rates, we would expect about half of the unfavorable revenue dollar impact to translate into lower gross margin.

Pension expense will increase in 2015 as a result of a lower discount rate and change in mortality assumptions.

Finally, we expect the impact of mix to be negative as we continue to increase distribution of Street motorcycles.

Looking at SG&A, we expect spending to increase in 2015 as we continue to invest in future growth opportunities, but we expect it will decline as a percentage of revenue as we leverage our current SG&A spending.

For HDFS we expect operating income will be down modestly in 2015 compared to 2014 as a result of higher credit losses and tightening net interest margins due to increasing competition and rising borrowing costs.

Capital expenditures in 2015 are expected to be between $240 million and $260 million as we increase investment in product developed focused on bringing exciting new products to market and as we continue to invest in our system's infrastructure.

Finally, we expect our full-year 2015 effective tax rate will be approximately 35.5%, which reflects the absence of the R&D tax credit in 2015.

So looking back, we are very pleased with our 2014 results and key accomplishments.

In 2014 we successfully increased sales, gross margin, and operating margin which resulted in a 18.3% increase in diluted earnings per share.

Expanded our flexible manufacturing capability at our US plants, continued to grow outreach in excess of 2 times our core customer growth rate in the United States, launched seven new Rushmore motorcycles and the new Street platform, revealed project LiveWire, our first electric motorcycle, expanded our international dealer network, and delivered shareholder value through a dividend increase of 31% and repurchase $604 million in Company shares.

We are excited about 2015, and 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)

Rod Lache, Deutsche Bank.

Good morning, everyone.

It's actually Pat [Mullin] on for Rod.

Just wanted to clarify a couple of points on the [lock].

So John, I think you said it was 3.25% would be the impact if FX is at current spot rates, and you expect 0.5 of that ti impact you next year?

Yes

So that's, if I'm doing the math right, that is approximately like a $15 million or so drag year over year?

No, Pat.

It would be significantly more than that.

So let's take -- let's understand what's happening.

We've seen a tremendous devaluation, starting back in the third quarter.

Devalued 7%, another 6% in the fourth quarter, and if you look from January 1 of this year to January 28, yesterday's rates, there was another 4% devaluation.

And that's taking our basket of currencies, our major four currencies which is the euro, the yen, the Australian dollar, and the Brazilian real, and the mix that we have.

We were down quite considerably.

So what we're saying here is that, if the rates held at yesterday's, where the exchange rates finished yesterday and they held throughout the year, that would take our expected revenue for 2015 and reduce it by 3.25 percentage points.

So you'd take Motorcycle segment revenue and take it down by 3.25 points.

Now with that, obviously we have hedges on during the year, and we've talked about that.

We typically hedge in a stair-step fashion.

So have some hedges on, but those will diminish as the year goes on.

And we would expect out of that revenue hit, 3.25% of our Motorcycle segment revenue, 0.5 of that would fall and be negative impact to gross margin in terms of the dollar -- gross margin dollar impact.

James Hardiman, Longbow Research

Good morning.

Thanks for taking my call.

Obviously you're not going to give us margin -- I'm sorry, segment level guidance.

I do appreciate the shipment guidance of 4% to 6%.

I guess my question is, it seems like Road Glide is going to be a pretty sizable benefit to the shipment guide.

And it sounds like you're saying Street is going to be up pretty meaningfully as well.

I guess the question is, A, can you quantify those benefits to the shipment guide?

And, B, if not, how are you thinking about everything else, right?

Your non-Road Glide, non-Street guidance, because it seems like for those of us that are trying to run the numbers, that 4% to 6% represents flat to maybe even down shipments of everything else.

How should we think about that?

Thanks, James.

We're not going to break it out by segment.

As we talked about in the preamble, we couldn't feel better about the Company's or the brands fundamentals from market share, to industry to outreach, to repeat and the new to brand, and so on and so forth.

So that'll be a big driver.

We've got the model year 2015 motorcycles, which we certainly saw in the fourth quarter, the new ones performed extremely well, including Road Glide.

As you mentioned, we got the full-year Road Glide and Street coming back, along with the international expansion.

We also have some headwinds, right, when we look at next year.

Those being, one, is lapping the Rider Academy sell-in, which was about 2,200 units in the United States in the first half of last year.

So we have to lap that.

Then secondly, as we had talked about in the fourth quarter we had very significant year-ago enthusiasm for Rushmore.

And so we got some big gains to lap in the first and second quarters.

They kind of taper off each of the quarters.

Then finally competitive discounting is coming into play a little bit here.

We take all of that, we couldn't feel better about our shipment guidance of up 4% to 6%.

And we do expect both the new models as well as our core bikes to grow to that to deliver the 4% to 6%.

Gerrick Johnson, BMO Capital Markets.

Good morning.

Now that you have full distribution this year of the Street 500 and 750, can you give us a new goalpost for what you think you can ship in the year?

Thank you.

Thanks, Gerrick.

We don't provide guidance on all of our segments.

We did provided it for Street in the first year, just to get everybody in the ballpark.

And that we provided at 7,000 to 10,000 units, came in on the very high end of that, and we couldn't be more pleased with that.

No, Gerrick, we're not going to provide another guidance for Street.

Suffice to say is that we would expect Street to be up quite considerably from 2014 levels in 2015.

As one, we have a full availability in the United States for the selling season, as well as our initial four markets last year.

And we will be expanding throughout most of the rest of the world markets through 2015.

Joseph Spak, RBC Capital.

Hi.

This is Ritapa Ray for Joe Spak.

Just a quick question.

What is your industry retail growth view for 2015?

And what is HOG's retail view that's embedded in your 2015 shipment guidance?

We don't provide a forward look at industry retail sales, but what I can tell you is we couldn't be more excited about the industry growth that we saw in 2014, the increased investment in the industry.

So in 2014 we were up 2.5%, and that's with a very slow start to the year.

Industry was only up about 1% through the first half due to very difficult weather conditions.

So grew much faster in the back half.

When we talk about the very strong brand fundamentals, certainly the industry growth is one of them.

And we would expect to see the industry to grow quite well as we move into 2015.

But we do not provide a forecast of it.

And certainly some of that thought goes into our shipment guidance of up 4% to 6%.

Tim Conder, Wells Fargo Securities.

Thank you.

John, if you could just give us one -- it's all an FX question here.

A little bit is housekeeping.

How much of the fourth quarter 2014 was due to the balance sheet revaluation?

And then on a go-forward basis with FX, you commented that you of course have your forward 12-month rolling hedges.

Can you give us any color on those four major currencies, your exposure?

What percentage you're hedged for your expected 2015 exposure at this point, and any levels where you're hedged?

Great, Tim.

Thank you.

On the fourth-quarter currency, let's just take a run through.

We don't break out specifically the revaluation but I can give a sense of magnitude.

Revenue was hit by $26 million by that year-over-year 9% devaluation.

We did pick up some favorability in gross margin -- I'm sorry, cost of goods sold of about $3.5 million.

And that was driven by very favorable gains in terms of the hedges that we did have in place for the quarter.

A lot of those being put on several quarters before at very attractive rates.

However, the balance sheet revaluation was very significant.

I don't quantify exactly the number, but it was certainly over $10 million.

So that brought the overall impact down, and ultimately it hurt operating profits by $23 million, which represented about 1.4 points of gross margin.

So ex currency our gross margin was actually pretty strong, and certainly would have been up.

Overall revenue in the quarter was hurt by about 2.5%.

As we look forward to the first quarter Tim, we would expect actually more unfavorability than we saw in the fourth quarter.

So we expect more than the $23 million that we had in the fourth quarter.

And we would expect revenues to be down about 3.25% for the first quarter.

When you -- you asked about the positions that we have.

We don't provide those because they change on a regular basis.

As the year goes on, obviously the hedge positions change.

Suffice to say that in the guidance, or in the dimensionalization of our credit risk in 2015, all of that is incorporated.

So as of today, all of our positions are incorporated, and we would expect revenue to be down the 3.25%, and 0.5 of that falling through to impact gross margin.

So that's kind of an all-in number for you.

Felicia Hendrix, Barclays Capital.

Good morning.

Thanks for taking my call.

Just two quick questions.

John, you said earlier in your remarks and the answer to someone else's question that you seeing a little bit of competitive discounting right now.

Wanted to see if you could address that.

Then just with FX, you have given us good color, thank you very much, at current rates.

So I'm just trying to figure out, if rates change is the percentage change, is it linear or is it exponential?

Thanks.

Felicia, on discounting, we've talked about this the last couple of quarters.

We haven't seen a dramatic shift in discounting.

When we look in the fourth quarter, we have seen a stepped-up level of discounting.

Now, we always see a lot of volatility in the fourth quarter.

One, it's the lowest sales month, right?

It's less than 16% of our retail sales.

But also there's a lot of positioning by competition in clearing out inventories.

So we saw two-thirds of the folks that were -- that have been discounting dramatically increase the discounting on a year-over-year basis.

So it's something that we will keep a close eye on.

But you have to remember that our competitors' models are a little bit different.

The majority of motorcycles that they sell in a given year are old model years.

And the fourth quarter was no different.

55% to 75% of the models that the competition sold were over a year old.

And so just maybe just cleaning out inventories, but had a big impact on overall market share in the quarter as well.

We saw discounts anywhere from $300 a bike to $2,000.

So just something for us to watch going forward.

But we did see an increase in discounting in the fourth quarter.

The second quarter -- the second question, Felicia, was the exchange rates.

If they move from here, they are not linear, right, because we got revaluation of assets depending on what happens within quarters.

And we've got the fact that we are constantly changing our hedge position.

As we've talked about, we put on hedges in a stair-step fashion over four quarters.

We will continue to do that.

So it is not linear.

But certainly with that information, should provide a good starting point.

But then as the year goes on and things change, that could change a bit.

Joe Hovorka, Raymond James.

Quick questions.

One is, do you anticipate shipping one-to-one wholesale versus retail in 2015?

And then secondly, is the FX impact included in the gross margin outlook, the up modestly for 2015?

Thanks.

Joe, let me start with the second one, so we just finish with FX.

It is all incorporated in our operating margin guidance of 18% to 19%.

When we look at that currency guidance, we would expect it to be a headwind of about 0.5 to 0.75 of a gross margin point.

So obviously ex currency, gross margin -- I'm sorry, operating margin would be a fair amount higher.

Again, we couldn't be more excited about what we've done in terms of the manufacturing side of the business to deliver those margins and our ability to price in those types of things.

So the underlying cost structure and momentum that we've got is fairly significant.

We couldn't be more pleased.

Certainly currency is throwing us here a pretty big headwind.

So the second question is with regards to, I'm assuming, retail inventory at the end of the year.

So this year we were up exactly where we thought.

And again, I couldn't say we couldn't be more prouder of the way that the organization responded to the soft, or the poor weather in the first half, and the ability of our flexible manufacturing system to adjust very quickly.

At the end of the year, we ended with inventory, retail inventory is exactly where we expected in the United States.

They were up, but almost all driven by the Street dealer fill.

As we look forward, and feeling very good about where our inventory position is today, we would expect inventory to rise behind just the higher sales, basically holding our days inventory constant year over year.

So there would be a modest increase in inventory on a year-over-year basis as we exit 2015, based on our forward look of retail sales.

Adam Jonas, Morgan Stanley.

Hi.

This is Neel Mehta in for Adam Jonas.

Just very quickly, one last FX housekeeping question.

Are you able to tell us your euro/dollar assumptions for next year, along with any other rate assumptions you're able to offer?

And then finally, can you elaborate on your 2015 outlook in some of the macro troubled markets like LatAm and Canada?

I'm sorry, the second part of the question?

He's just looking for assumptions on certain currencies going forward.

In terms -- thanks Neil.

With regards to our assumption on currencies, we don't provide that.

Economists can't get it right.

What we've done is, is we typically hedge on a routine basis to give us more time to react to currencies.

But we are no better at guessing those things as anyone else.

We're certainly not going to provide our assumptions going forward.

The guidance, the dimensionalization that we gave just gives you a point in time, but not a forward look at what we expect currencies to do.

And then your thoughts on macro going forward for LatAm and Canada?

Overall, when we look at some of the economies in our international markets, we do have some concerns out there.

Certainly Brazil has had a tough row to hoe here.

We would expect some tough sledding still to continue there.

Japan, and even Europe.

Europe had pretty significant industry growth in motorcycles, but the economy there is something we want to keep a close eye on.

And then Canada.

Given the exchange rates and the oil, and Canada's been a little bit tough.

So when we look at the world markets, again we couldn't be more excited about our international opportunity.

But are a little bit cautious on a few markets out there.

Jaime Katz, Morningstar.

Good morning.

Thanks for taking my questions.

It looks like gross margin is expected to tick up modestly in the year ahead, despite FX headwinds.

So can you maybe offer some more of the positive commentary on where you think your best opportunity is to capture that gross margin expansion is?

Then just any additional commentary that you might have on what's resonated well in international markets, which performed very well in the recent quarter, outside of that Street model?

Thanks.

Great.

Opportunities on operating margin is, very simply is we've priced our model year 2015 motorcycles, and that's going to continue to drive margin opportunity both in dollars as well as percent.

The other is, is incremental margin coming from increase sales, that 4% to 6% shipment increase.

Jamie, as we've talked about in the past, we have had a core margin of about 36%, but for each increment bike that we put through the system here, it's increment margin of about 47%.

So that will drive a lot of benefit in terms of overall gross margin percent as well.

Then finally, the business model that have we put together and the flexible manufacturing that we've got working and the focus that the plants have on continuous improvement, the systems that we've put in are all driving fantastic productivity out of the plants.

And we would expect that to continue into 2015.

Again, I can't say enough about how strong that's been.

The second question that you asked is with regards to our international growth.

We've talked a lot about international.

We've invested, we expanded the dealer network, and we expect that to continue in 2015.

Aside from Street, and we've talk about Street, three out of four motorcycles in India are Street.

In southern Europe it sold very well.

It's bringing a lot of new people into the brand.

And we'll clearly expand that in the first quarter here to many more markets around the world.

But we can't overlook how well our other products are doing internationally.

[Internationally] core products are all up this year, and expected to be up next year.

But in particular, Project Rushmore motorcycles are selling extremely well internationally.

For example, in Europe we're well over 20% growth in our touring product.

And that's happening in Asia and in Latin America as well.

And so we couldn't be more excited about the overall portfolio internationally.

Greg Badishkanian, Citigroup.

On the international front.

Trends were really solid there.

With the headwind of currency and maybe some macro issues, how do you see your pricing changing in the first half at retail, the Harley motorcycle pricing at retail?

And then how do you think that will maybe compare versus some of your competition?

Thanks, Greg.

Our overall approach to managing currencies has been to sell our products in local currencies, right?

And we keep local prices stable that way.

And then we manage the overall currencies kind of back here as a basket of currencies, and manage that through the P&L.

We believe keeping prices stable at the market level is the best way to build and manage a premium brand, and it's worked very well for us.

What we're seeing here is certainly unprecedented.

One, to see the magnitude of change and to see everything moving in the same direction.

And obviously we've given some dimensionalization on the impact on our earnings.

So we're certainly concerned.

We will look at all options to deal with it.

But let me tell you, Greg, is that we're going to do what's right for this brand in the long term, and we're going to work through it.

But whatever we do decide to do, it will be in the best interest of the brand going forward.

David MacGregor, Longbow Research.

Yes, good morning.

Thanks for taking the questions.

I guess just to build on the international line of questioning, you've talked in the past about trying to get to 100 to 150 dealers.

You are kind of approaching the high end of that range now.

You're talking a lot about growing the international side of the business.

Can you sort of layout for us what the plans are in terms of dealer development over the next couple of years?

Yes.

One, we look to continue to expand the dealer network.

And I would expect -- you can expect that the dealers that will open up will be in line with what you saw in 2014.

But more importantly is making sure that we're increasing throughput through those dealers and making sure that all of our products are there and ready to go when we do open those dealers.

Again, we're very excited about the opportunity, and we feel that there's a lot more to gain in distribution over the next several years.

Patrick Archambault, Goldman Sachs.

Hey, great.

This is actually Dave Tamberrino on for Pat.

I'm glad we made it in under the wire here.

Our just question, circling back to the Q4 shipment.

You ended up towards the low end of your guidance range.

Can you kind of dimension what really drove it into that lower range?

Was it a competitive pricing, was it a stronger used bike market, or is there something else maybe we're not thinking about?

No, David.

It's our desire and our mandate to aggressively manage supply in line with demand.

We knew we were going to have a tough retail sales quarter in the fourth quarter, given the fact that the non-Road Glide touring bikes were up 40% on a year-over-year basis.

And what we want to do is manage to an inventory level that's appropriate to continue to maintain the premium nature of our brand, and we did exactly that.

We ended up exactly where we expected, exactly where we planned a year ago for inventories to end up, which were up driven only by Street.

So we shipped in to hit those inventory levels.

Great.

Thank you John, and thank you everyone for calling in.

Thanks for your time this morning.

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