Harley-Davidson Inc (HOG) 2015 Q1 法說會逐字稿

Good morning.

My name is Lisa.

I will be your conference operator, today.

At this time, I would like to welcome everyone to the first quarter 2015 earnings conference call.

(Operator Instructions)

I now turn the call over to Amy Giuffre.

You may begin your conference.

Thank you, Lisa, and good morning, everyone.

Thanks for joining Harley-Davidson's first quarter 2015 earnings conference call.

We webcast the audio for our calls live on www.harley-davidson.com.

You can access the supporting slides on our site by clicking, about Harley-Davidson at the bottom of the homepage, 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 on this call.

Participating on today's call will be Harley-Davidson CEO Keith Wandell; Incoming CEO Matt Levatich; and CFO John Olin.

Following our comments, we will take some questions.

Let's get started.

Keith?

Thank you, Amy.

Good morning, and thanks for joining us on today's call.

As always, we appreciate your interest in Harley-Davidson.

As you know, this is my last earnings call before retiring on May 1. So, let me just say that it has been a tremendous privilege to work here for the last six years with an outstanding team, from our employees to our dealers and suppliers.

And also, to get to know so many of our customers, investors, and all of you who cover us.

During the last six years, our team has made incredible gains in how we bring new products to market.

How we produce them, and how we provide the best customer experience in the industry.

We have significantly grown our global footprint, and broadened our US customer base.

And while first quarter retail results did not meet our expectations, and we are adjusting shipments to manage supply in line with demand and protect our premium brand, the fact remains that Harley Davidson stands in a position of great strength thanks to the hard work of our entire team.

We continue to improve our financial performance and operations, reflecting the ongoing power of our transformation and how it drives our operating effectiveness.

Just to note, a key measure of financial performance, the 39.1% gross margin percentage that we reported this morning is the highest in at least the last 15 years.

We are the undeniable market leader in the 601CC plus segment of the motorcycle market, with a broad and outstanding line of products, and retail motorcycle sales six times those of the nearest competitor in the US.

The Harley-Davidson brand is among the most iconic on the planet; a position of strength that we have built over many decades.

We have got incredible breadth and depth in our retail distribution, and a compelling strategy that is focused on growing our reach to new customers in the US, growing internationally, and continuously improving every aspect of how we operate.

As we noted in today's press release, we now have the breakout of Harley-Davidson's market share for 2014 by demographic group.

And for the seventh straight year, we remained the number one seller of new on-road motorcycles in the US to each of the demographic groups that we track, both in the 601CC plus segment and across on-road motorcycles of all displacements.

Turning to international markets, while some parts of Europe were affected by currency and soft economic conditions in the first quarter, other parts of the EMEA region did well.

For example, it was our best quarter ever in our Central, Eastern, and Southeastern European markets, as well as South Africa.

In Asia Pacific, we had our strongest quarter ever in India and China, as well as exceptional initial demand for the Street 750 in Korea, Vietnam and Thailand.

Street is doing very well in its initial rollout in Australia and New Zealand, among others.

In Latin America, sales were up double digits in Mexico, with about half of the increase coming from the Street 750.

Clearly, Street is hitting the mark.

I also want to touch on some recognition Harley-Davidson has received in recent weeks.

We placed in the top 10 in the Forbes ranking of top employers in America, based on a national survey of more than 20,000 employees at US companies.

On the brand side, we were named 2015 motorcycle brand of the year in the EquiTrend Harris Poll annual study of brands that's based on familiarity, quality, and consideration.

I mention these as a reflection of the passion and dedication of our workforce, as well as the power of our brand.

Our team's many accomplishments during my time here demonstrate the power of our strategy in being customer lead, and I could not be more proud of everyone.

And, I personally believe Harley-Davidson's best days are yet to come.

Harley-Davidson has a remarkable leader in Matt Levatich as its next CEO.

Matt has an outstanding track record.

He knows this business in and out, and has been a driving force behind our strategy, with the vision to take Harley-Davidson to great places.

So with that, let me turn it over to Matt.

Thank you, Keith.

I don't want to take too much time because I know there is a lot to get to.

And I will be talking with many of you again in the coming days and weeks.

I do want to take this opportunity go to thank Keith for his inspired leadership.

Keith has always been too modest to take credit for returning Harley-Davidson to strength, establishing a culture of leadership, and charting a clear vision and strategy for the future.

But everyone associated with this Company will continue to be inspired by his tremendous contributions.

And we all have great confidence in the future, from our position of strength and industry leadership.

In his comments, Keith touched on a few of Hartley's many strengths, from our incredibly talented and passionate employees and our powerful global dealer network, to our brand and industry leadership, our manufacturing product development and retail prowess, our increasingly diverse customer base, and of course, our unrivaled motorcycles.

We have been in the motorcycle business continuously through all of the many ups and downs for 112 years.

For the last six, we have built on our strength and taken our capabilities to a whole new level, with agility to perform in a world and marketplace that is more dynamic and complex than ever.

While our business and industry will always have challenges, Harley-Davidson also has incredible opportunities.

We have a clear and compelling strategy, and we are running this business for long-term performance.

That means keeping on the throttle to further leverage our strong product development and manufacturing capabilities even as we increasingly focus on maximizing our potential at retail to grow internationally, and to further broaden our reach with new customers here in the United States.

As good as we may be today, we know we can build on our many strengths to be that much better tomorrow.

Thank you.

Here is John with the details on the quarter.

Thanks, Keith and Matt.

Before I get into the details, I would like to take a minute to thank Keith for his service to this great Company.

I will personally miss Keith a ton.

I would also like to congratulate Matt on his new role.

There is not a better person or a more capable leader to take Harley-Davidson into the future; a very exciting future, filled with great opportunity.

Now let's discuss the first quarter financial results, starting on slide 13.

During the quarter, Harley-Davidson Inc consolidated revenue was $1.67 billion.

Net income in the quarter was $269.9 million, and diluted earnings per share was $1.27.

Operating income for the motorcycle segment was $345.5 million, slightly lower than last year's first quarter.

Segment revenue was down 3.9%, behind significantly unfavorable currency exchange and lower year-over-year shipments.

Despite the lower revenue, the motorcycle business operating margin was up 0.8 percentage points, driven by a higher gross margin percent and flat year-over-year SG&A spending.

Operating income at Harley-Davidson financial services was up 2.3%, year-over-year.

Also during the quarter, we had a lower effective tax rate.

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

Now let's take a closer look at first quarter performance, starting with retail sales on slide 14.

Q1 was a tough quarter, with worldwide retail sales of new Harley-Davidson motorcycles down 1.3% compared to last year's increase of 5.8%.

Retail sales were soft in both the US and several international regions during the quarter.

First quarter worldwide retail sales continue to reflect an outstanding consumer response to our new models, including Street, which sold very well in the initial rollout markets and in new markets which were added throughout the quarter.

In the US, retail sales were impacted by increased competitive price discounting.

The year-over-year comparison also reflects lapping the very enthusiastic reception to the initial rushmore models.

Internationally, sales were mainly impacted by lapping last year's favorable weather throughout Europe, and also lapping the significant pull forward of sales in Japan in advance of the April 2014 consumption tax increase.

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

However, in the near-term, our US business is under pressure from increased, very aggressive competitive discounting, enabled by the dramatic shift in world currencies.

Consequently, we believe it is prudent to adjust our shipment plan for the full year.

We now expect to ship 276,000 to 281,000 motorcycles worldwide, which represents growth of approximately 2% to 4% versus prior year.

Our previous guidance was 282,000 to 287,000 motorcycles.

It is critical for Harley-Davidson to support a healthy retail channel and protect our premium brand by aggressively managing supply in line with demand, as we have consistently done over the last several years.

Going forward, we expect continued success as we execute our long-term growth strategies.

We remain very confident in our business and a great opportunity that lie ahead.

Let's take a look at US market on slide 15.

First quarter retail sales in the US fell short of our expectations, down 0.7% compared to the prior year.

We believe the factors that affected US retail sales growth during the quarter were; first, as expected, we lapped to the very enthusiastic reception to the initial rushmore launch.

Q1 2014 retail sales of non-Road Glide touring motorcycles were up a very strong 35% compared to the prior year; a tough year-over-year comparison for Q1, 2015.

Second, we experienced adverse weather conditions in certain regions of the US.

And finally, continued pressure from significant price discounting by most of the competition, which increased from Q4, 2014, and was up significantly compared to last year's first quarter.

Given the levels of competitive inventories in the retail channel, coupled with foreign exchange that was favorable for our competitors, we expect aggressive discounting from the competition will continue for some time, as they work through what we believe to be excessive retail inventory.

Partially offsetting these challenges, we continue to experience success with our latest Rushmore models, launched last August, and with sales of our Street motorcycles.

Street 750 sales continue to drive our performance in the small cruiser segment, which grew double digits on the year-over-year basis.

During the quarter, the industry grew 9.0%.

We had a very strong market share of 51.3%.

We believe the industry's robust growth during the quarter bodes well for motorcycling.

However, our share was down 4.7 points, versus the prior year.

While we anticipated some level of share loss following the 13.4 points of market share gains in recent years, our market share in Q1 2015 was more severely impacted then we expected, as a result of increased price discounting by the competition.

This is not the first time we have experienced a period of extreme discounting by our competitors, and likely won't be the last.

However, we will continue to protect our premium brand.

We will not take a short-term view of the current competitive situation and compete by discounting.

We will continue to manage the Harley-Davidson brand for the long term.

We continue to aggressively manage supply in line with demand, and shipped to the low end of our guidance.

At the end of the first quarter, US retail inventory was up 6600 units on a year over year basis.

Primarily due to Street dealer fill, but also higher than expected due to soft retail sales in the quarter.

On slide 16, you will see retail sales in our international markets were down 2.4% in the first quarter, as we lapped very strong year ago retail sales growth of 10.9%.

In our EMEA region, Q1 retail sales were down by 5.6%, driven by lapping last year's very favorable weather conditions across Europe, current soft economic conditions in some markets, and currency driven volume declines in markets where we do not sell in local currencies, such as in Russia.

Europe market share in Q1 was 9.8%, down 1.5 percentage points behind the introduction of several low-priced models by the competition.

In the Asia-Pacific region, retail sales were down 1.1% in the first quarter.

The decline was entirely driven by the lapping of year ago retail sales growth of 33.1% in Japan, as sales were pulled forward in advance of the consumption tax increase in April 2014.

Excluding Japan, Q1 retail sales in the Asia-Pacific region were up nearly 20%.

Emerging markets within the region, especially India and China, continue to post very strong growth.

Latin America region retail sales were up slightly in the quarter as a result of strong growth in Mexico.

Largely offset by soft retail sales in Brazil.

Retail sales in Brazil have been impacted by a slowing economy, consumer uncertainty, and very aggressive price competition.

Finally, retail sales in Canada were up 5.7% in the first quarter, as we lap currency driven pricing actions initiated last year by our distributor.

While we remain cautious in the near-term outlook, given the economic challenges in some international markets, we're focused on the long-term growth strategies.

Despite the volatility in global retail sales, we believe we can continue to realize strong international growth by prudently expanding our distribution network, building our brand experience across the world, and delivering exceptional products that inspire riders.

On slide 17, you will see wholesale shipments of Harley-Davidson motorcycles in the quarter were down 1.4% compared to last year.

First quarter shipments finished near the low end of our expected range of 79,000 to 84,000 motorcycles, as we manage supply in line with lower-than-expected retail sales.

During the quarter, the mix of touring motorcycles increased 3.9 percentage points from the prior year, as Rushmore models continue to be in high demand.

Also during the quarter, the shipment mix of our Street and Sportster category was up 2.8 percentage points, reflecting our shipments of Street motorcycles in the quarter.

Q1 2015 international shipments as a percent of total were 28.8%.

We continue to believe international retail sales will grow at a faster rate than domestic retail sales over the next few years.

On slide 18, you will see revenue from the motorcycle and related products segment was down in the first quarter, driven by unfavorable currency exchange and a 1.4% decrease in motorcycle shipments.

During the quarter, the average motorcycle revenue per unit decreased $405 from the year ago quarter behind unfavorable currency exchange, partially offset by higher pricing.

On average, our key currencies were weaker against the US dollar by approximately 14% compared to Q1, 2014.

During the quarter, we took an off model year price increase of 1.2% in Europe to help mitigate the impact of unfavorable foreign currency exchange in that region.

Parts and accessory revenue was down 7.2%, in the first quarter, primarily driven by unfavorable currency exchange.

General merchandise revenue was up 3.6% in the quarter.

On slide 19, you will see gross margin in the quarter was 39.1%, which was 1.4 percentage points higher than last year.

Gross margin performed very well with price, mix, raw materials, and manufacturing all being favorable during the quarter, partially offsetting unfavorable volume and foreign currency exchange.

During the quarter, overall mix was a benefit of $9.1 million, largely driven by a rich sales mix of parts and accessories and general merchandise.

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

The mix of models within families was also slightly unfavorable to the prior year.

Foreign currency exchange was $39.5 million unfavorable for the first quarter.

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

The Euro, Yen, Brazilian Real, and Australian dollar devalued an average of 8% from the beginning to the end of the quarter, and were 14% weaker compared to the prior year quarter.

This resulted in an unfavorable revenue impact of approximately 3.5%, and an unfavorable reevaluation of foreign denominated assets on the balance sheet.

We are very pleased with our Q1 2015 gross margin percentage growth.

The record Q1 gross margin performance evidences that the underlying margin structure of the Company is very strong.

We remain focused on driving efficiencies throughout our operations.

On slide 20, operating margin as a percent of revenue for the first quarter was 22.9%, up 0.8 percentage points compared to last year's first quarter.

Operating income of $345.5 million, was down $2.2 million versus the prior year, driven by slightly unfavorable gross margin dollars and relatively flat SG&A spending.

We were very pleased with our ability to leverage both our gross margin and operating margin as a percent of revenue in the first quarter of 2015.

Going forward, we 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 onto our financial services segment on slide 21.

In the first quarter, HDFS's operating profits increased $1.5 million, or 2.3%, compared to last year.

The primary factors impacting first quarter results were, first, net interest income was favorable to the prior year by $4.4 million, driven by higher receivables, partially offset by lower yields on receivables due to increased competition.

Second, the provision for retail credit losses was unfavorable to prior year by $5.4 million, due to higher retail credit losses and an increase in the reserve rate.

Finally, HDFS had strong increases in its insurance and credit card licensing revenue during the first quarter.

We were very pleased with the performance of the financial services business.

The business remained a very profitable, with industry-leading returns.

Now let's take a look at HDFS's operations on slide 22.

During the first quarter, HDFS's retail motorcycle loan originations increased 3.2%, or $19.3 million compared to the same period last year.

The increase was primarily driven by a 1.3 percentage point increase in retail financing market share for the first quarter compared to last year, and a higher average amount financed per motorcycle.

Finance receivables outstanding increased 6.6% 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 the prime and subprime segments.

In Q1 2015, approximately 80% of our new motorcycle loan originations were prime.

Moving on to credit performance on slide 23.

The 30 day delinquency rate for retail motorcycle loans at March 31 was 2.64%, or two basis points lower than the same period last year.

Delinquency rates across the portfolio continued to perform at record low levels.

Annual retail credit losses increased by 23 basis points to 1.56%, compared to last year's first quarter, driven by modestly higher credit losses, in line with increased subprime originations in recent years, as well as changing consumer behavior.

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

HDFS remains focused on enabling sales of Harley-Davidson motorcycles while providing attractive returns to Harley-Davidson Inc.

Now, let's take a look at cash and liquidity on slide 24.

You will see, at the end of the quarter, we had $1.23 billion of cash and marketable securities.

In addition, we had $1.88 billion of available liquidity through bank credit and conduit facilities.

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

During the first quarter, we successfully completed a $700 million asset backed securitization transaction with a weighted average interest rate of 1.19%.

We also completed a $600 million, five-year medium-term note offering with a coupon of 2.15%.

Additionally in the first quarter, HDFS paid $100 million dividend to HD Inc.

We further demonstrated our efforts to return value to our shareholders by repurchasing 2.9 million shares of Harley-Davidson stock for $182.5 million during the quarter.

Returning values to the 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 25.

I would like to highlight two items.

First, with regards to operating cash flow, the Company generated operating cash of $174.7 million in the first quarter.

Operating cash flow was down $28.9 million from last year, driven by higher working capital and higher wholesale finance originations.

And second, first quarter tax rate was 34.4%, compared to 35.0% in the year ago period.

On slide 26, you will see the overall expectations for 2015.

In 2015, we now expect to ship 276,000 to 281,000 motorcycles on a worldwide basis, up approximately 2% to 4% from 2014 shipments, but approximately 6,000 fewer motorcycles than prior guidance.

We believe it is prudent to adjust our plan at this time given the increased aggressive price discounting that is occurring in the US market.

We believe the underlying worldwide demand fundamentals for Harley-Davidson motorcycles remains strong despite the aggressive competitive discounting that is occurring.

We are committed to protecting our premium brand and will keep our focus on the long-term sustainability of our business.

During the second quarter, we expect to ship 83,000 to 88,000 motorcycles, which is down approximately 5% to 10% compared to last year's second-quarter shipments.

For 2015, we continue to believe operating margins for the motorcycle segment will be between 18% and 19%, compared to 18.0% in 2014.

In 2015, we expect gross margin will be flat to up modestly compared to 2014, impacted by both puts and takes.

On the positive side, we expect favorable impact from motorcycle pricing and strong productivity gains.

On the negative side, we expect gross margin will be adversely affected by unfavorable foreign currency exchange, increased pension expense, and unfavorable mix.

To dimensionalize the foreign currency exchange risk, if currencies held at yesterday's exchange rates for the remainder of 2015, our full-year motorcycle segment revenue would be adversely impacted by approximately 4.25%.

One percentage point worse then we anticipated on our January call, as currencies continued to devalue during the quarter.

Taking into account our natural hedges and the fact that we have a significant portion of this year hedged, we would expect about half of the unfavorable revenue dollar impact to translate into lower gross margins for the full year.

Looking forward to the second quarter, we expect foreign currency exchange impact to be considerably worse than the first quarter's $39.5 million reduction.

Assuming yesterday's exchange rates hold for the entire quarter, we would expect second-quarter revenue to be adversely impacted by approximately 5%, with approximately 60% of the revenue decline adversely impacting second quarter's gross margin dollars.

We believe second-quarter gross margin will be down approximately 2.5 percentage points versus last year's gross margin percent, driven by unfavorable currency, lower production as we adjust to lower shipment expectations, and unfavorable mix during the quarter compared to last year.

Looking at SG&A, we now expect spending to be flat to down in 2015, as we work to mitigate the adverse impact of lower revenues.

In addition, we continue to expect that SG&A will decline as a percent of revenue.

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 to $260 million as we increase investment in product development focused on bringing exciting new products to market, and as we continue to invest in our systems 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.

Looking back on the quarter, while we are facing significant price discounting in the US, we're pleased with our key accomplishments during the quarter.

We successfully increased gross and operating margin percent, continued to grow outreach in excess of two times the core customer growth in the US, expanded distribution of Street into many new international markets, expanded our international dealer network, and delivered shareholder value through the repurchase of $183 million in Company shares.

For the remainder of 2015, 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)

Craig Kennison, Baird.

Good morning.

Thanks for taking my question.

Keith, best wishes from all of us at Baird.

First question here, and I'll leave it at one, is on the buyback.

I know you have worked very hard to rebuild the balance sheet.

But with the stock under pressure, would you consider adding a turn or two of leverage in order to accelerate the buyback plan that you already have in place?

Hello, Craig.

This is John.

We would consider that, and the strategy has been to first repair our credit ratings, which now we are sitting on two A-'s and an A. But, that is something we would consider as we move forward.

How much leverage, John, would you consider?

Craig, that is something that we would not discuss at this time.

Good.

Thank you.

Sharon Zackfia, William Blair.

Hello.

Good morning.

A question on the competitive dynamic, which you mentioned last quarter as well.

I don't recall the last quarter you mentioned currency as being one of the dynamics behind the competitive discounting.

Maybe you could help us think about -- anytime historically where you have seen competitors use currency to their advantage and the length that that's lasted?

And how you assess the risk of really not responding, versus the peer group?

And then secondarily, just a quick question on Europe.

Just wondering if there was any negative reaction to the price increase there?

The first question, Sharon, is have we seen other times?

In particular, when you look back over about the last 15 years, there are two times in which Harley-Davidson lost share largely due to competitive discounting, that was in 2000 and 2008.

Now, in 2000, by 2002, market share was back.

We lost about three points in both cases.

In 2000 and 2008.

In 2008, we lost three points of market share, and then in 2009, we gained back 8.5 points.

This has happened before.

We expect it to happen again.

And the way that we have managed it is the way that we have always managed our great premium brand.

We are not going to jump in and respond to price discounting by discounting our great brand.

We are managing this for the long-term value of the brand and the Company.

And suck industry profits out of it by lowering margin and selling non-full margin product is not the way to do it.

Again, history shows that market share will come back in a short period of time.

So we are going to continue to manage this thing for the long-term and do what is right for the brand overall.

In terms of -- I think your third question, Sharon, was on Europe.

The price increase took effect about a month ago.

It was 1.2%, given the overall devaluation in Europe, which is significantly more than that.

We are balancing that with a competitive set there.

And we have not seen -- not long enough to get a read on any impact of the price increase.

Felicia Hendrix, Barclays.

Good morning.

Keith, I would also like to add congratulations.

It has been a pleasure working with you.

I hope you enjoy your next chapter.

So, just a few questions.

One is, just trying to get some more granularity on the guidance reduction.

I'm just wondering -- is guidance cut more of a proactive move or is it more reactive to something you are seeing so far now?

I know you have given a lot of color about the competition and why you are doing it.

But again, reactive, proactive?

That would be helpful.

And then also, you did give some color about this and how you are planning on offsetting the pressures of the deleveraging effect of lower unit sales, and FX on gross margins.

I'm wondering if you can talk a little bit more specifically about the efficiencies that you are enjoying there to help offset some of that?

And then finally, now you're back half loaded pretty significantly.

So what gives you your confidence in that?

Thank you.

Thanks, Felicia.

The guidance reduction -- the first question was with regards to the guidance reduction.

Is it proactive or reactive?

We called out in the 4th quarter that we saw the competitive discounting increased quite dramatically in the 4th quarter.

At that time, we said two thirds of our competition had stepped it up.

We were seeing discounts up to $2,000.

As we move into the first quarter, we are seeing a couple things happened from what we saw in the first quarter.

Both the depth and the breadth of the discounting has increased quite significantly from the 4th quarter.

We're seeing discounts now up to $3,000 a bike.

We are also seeing our competition reprice or lower MSRP's.

Some cases up to 25%.

So with that, to answer your question, it is both reactive and proactive.

We do expect that this is more of a fundamental change.

There is excess inventory in the Channel.

And there is newfound money by the competition, which is largely on Japanese and European competitors, that have seen their economics shift quite dramatically in the last three quarters.

So we believe that price discounting will continue for a few, to several more quarters.

And therefore, we are certainly being proactive because we are not going to discount.

What we're going to do is take down our volume.

We're going to continue to invest in the equity side of the business and building the brand and the lifestyle aspects of it, but we are not going to participate in discounting.

We're lowering our volume 6,000 units.

And going to continue to sell full margin motorcycles as we move into the future.

A little bit reactive on what we lost in the first quarter.

But much more proactive on what we expect over the next couple of quarters.

The next question you asked is about the efficiencies.

So thanks for asking that.

Don't want it to go unnoticed that we had a record gross margin in the first quarter.

39.1%, which was up 1.4 percentage points.

And that is despite a currency headwind of what amounted to 1.2 points of gross margin.

We could not be more pleased with the underlying fundamentals of our margin structure and how things are proceeding.

A lot of that is driven in the manufacturing line item.

And the plants are running very well.

Continuous improvement here is an everyday thing.

We continue to find ways to take costs out of the business.

And to drive things forward.

We talked about our pricing, and our ability to price.

And that is driving a lot of the favorability in the quarter as well.

James Hardiman, Wedbush.

Good morning.

Thanks for taking my call.

If we could just do the math on your numbers versus the heavyweight industry, it suggests everybody else is up about 22%.

I guess, first, how is that possible?

Presumably, you've seen the [MIC] numbers.

I'm assuming that the vast majority of that is Japanese players.

I guess help us understand who is being the most promotional?

And I guess secondarily, how that is impacting your model lineup?

Is it primarily the lower end bikes that are getting beaten up by some of this promotional activity, given the type of bikes that are being discounted?

And are the entirety of your share losses to other manufacturers who are discounting?

Thanks.

Great question.

So in the first quarter -- in a quarter where weather was worse on a year-over-year basis, you are right, James.

We saw our competition up about 20%.

How is that possible?

It is possible with an incredible amount of money coming into the category and lowering the average prices of motorcycles.

Again, discounts up to $3,000, repricing MSRP.

That is the only way it is possible.

And yes, we're seeing the share loss come predominantly to price discounters; mainly the Japanese.

Again, we have experienced this in the past, we will experience it in the future.

When you look at what they are doing -- and kind of -- a difference from the 4th quarter to what we are seeing now -- in the 4th quarter, they predominately were discounting old model year products.

So, 2014, 2013 and 2012's.

Now we are seeing a migration to discounting of more current model year product, again leading us to believe that this is going to be a few quarters out.

That it will continue.

We are seeing the discounting across everything.

And it is not only the categories which we compete in, which are our touring and cruiser segments, but also we are also seeing that in performance bikes, we're seeing it in dual, and we're seeing it in standard.

So it is pretty pervasive.

When you look at where it is hitting the hardest, in terms of Harley-Davidson, that would be in the large cruiser segment.

Again, to give an example or dimensionalize it, if you look at the large cruiser segment, where we have our Softails, Dynas, and V-Rods competing, the competition grew that segment about 70% in the first quarter.

Again, that doesn't happen in a mature category without a shock to it.

That is the favorability that they are receiving foreign exchange being spent in that way.

(Operator Instructions)

Tim Condor, Wells Fargo.

Thank you.

First of all, Keith, thank you for everything -- contributing to the company.

Best of wishes on retirement.

John, just to follow on to the previous question -- as you've said, we have seen this discounting in the past.

And Harley has rebounded from it.

From what we hear from the dealers, though, also it would appear that, within the custom category and especially the sportster category, it is a matter of those products being a little bit longer in the tooth.

You guys have done a lot of innovation obviously in the touring and with the street.

But you can't do everything at once.

It would seem that the sportster and the custom are a little long in the tooth.

Could the combination of that and the discounting be the root of the issue, here?

And then, again, -- maybe as you bring innovation as you have done in the past, that could help turn the tide here?

Tim, the root of the issue is the discounting.

We are always focused on product.

We have a great product line up over the next several years.

We will continue to execute it.

What we are seeing in the near-term is an incredible amount of money coming in and reducing prices in the short term.

Again, we have been through this before.

Our brand and our brand power will get through it again.

It is all about the discounting.

Patrick Archambault, Goldman Sachs.

I hate to beat a dead horse on the product side, but I also have some questions just following up on that.

You know, really two specifically -- I should know this but I don't.

The Japanese competitors, do they manufacture at all in the United States?

Or is this entirely kind of a transactional benefit that they are getting from importing bikes?

My follow-up question is, is there also a new product angle on this?

I feel like there have been some refreshes at the competition -- Honda and Yamaha recently.

Is that correct, and is that having an impact as well?

Thanks, Patrick.

There is no manufacturing in the US by our Japanese or European competitors.

In terms of new products -- there are some new products out there.

But that is not the driver.

The driver is clearly the discounting that is going on.

There is no significant new products from certainly our Japanese or our European competitors that are driving market share.

Greg Badishkanian.

Just a question for Matt.

I'm just wondering if there are any changes in terms of the near term or long term strategy that you plan to implement, once at the helm?

Yes.

Thanks for the question.

As I mentioned, one of the great things that we have in the Company is a very clear and compelling strategy.

And the whole organization is focused on executing, as John has pointed out.

Clearly, we have some headwinds in the business that we are going to have to deal with.

And that will bring more focus and energy to the areas where we can best impact that.

As far as the strategy and our direction, we are doubling down and accelerating on it.

Joseph Spak, RBC Capital Markets.

Thanks.

Good morning.

Can you just provide a little bit more color on what gives you confidence for that big implied ramp in the back half of the year on the shipments?

And second, related to some of the challenges you faced earlier, one of the things we picked up on is a big discrepancy between some of those dealers in the North, and dealers and the South.

Dealers in the South actually, I think, reported some pretty decent performance.

I'm wondering if there is a product mix issue there, versus the competition?

Where some of your product wait a little more in the south, that caused you to lose share, and as the northern weather warms up, we're going to see any of this abate?

Thanks, Joe.

So the shipment ramp in the second quarter -- let's kind of run through where we are at.

Our shipments were down 1.4% in the first quarter, our guidance for 83,000 to 88,000 motorcycles in the second quarter is down 5% to 10%.

If you worked that math out, you are down 3% to 6% in the first half, which has an implied growth in the back half of about 16% on average.

So we are back loading the second half.

The reason being is all of basically the 6,000 units coming out, we are taking out in the second quarter.

Another opportunity to exercise our flexible manufacturing.

If you remember a year ago, in the second quarter, weather was very difficult, and we ended up with higher inventories than we had wanted at the end of the second quarter.

And we fixed that in the 3rd quarter.

At this point, we will bring inventories down in the second quarter.

So taking the $6,000 guidance reduction out in the second quarter and fixing inventories or bringing inventories where they should be at the end of the second quarter, requires us to have more shipments in the back half.

We feel very comfortable with that split.

Again, as we have always said and we have certainly demonstrated, we're going to aggressively manage supply in line with demand.

And make sure that the marketplace is clean as we move forward.

The second question that you had, Joe, in regards to the North and the South and the weather and so on and so forth.

If you look at the overall weather from the weather services was pretty even on a year-over-year basis, both in terms of average temperature and precipitation.

But when you look at it, this winter was a harder first quarter than last year because of the timing of when the weather hit.

And certainly the excessive snowfall in the Northeast.

We have seven sales regions.

Of those seven, three of them were down considerably.

That represents about 40% of our volume.

And the Northeast being down the most, which was down double digits.

In the areas that didn't have the weather issues, sales were very strong.

And we feel great about where we were at.

That was led by the West, which was up double digits.

That is the second year in a row that the first quarter was up over double digits in the West.

Again, it was clearly a weather issue.

It was not a product or mix or the inventories that we had in those markets, or uneven competition.

It was clearly the weather.

Gerrick Johnson, BMO Capital Markets.

Good morning.

I have two questions.

First on FX, you mentioned there is a $35.5 million net impact to gross margin.

Can you explain what happened to the top line?

Also, if there might have been a positive to cost of goods sold from production in say Brazil, India, sourcing in Japan?

Secondarily, when you do talk about competitive pricing, it seems like you are only referring to the foreign competitors.

But all you -- are you also talking about Indian?

They had $1000 off if you traded in a Harley.

Do you think you are seeing some impact from that?

I think you would see more impact from Indian, as opposed to the Japanese.

Thanks, Gerrick.

The first question was expound upon the currency in the quarter.

So what we had, at the top line, our revenue was impacted by $53.8 million.

That was that 14% devaluation, which is the average exchange rates between the first quarter of this year versus last year.

And so with revenue down $53.8 million, which is equivalent to 3.5%, we did have a pickup in cost of goods sold of $14.3 million.

And that was a result of the natural hedges that we have.

So some of our parts that we make motorcycles in the United States with, come from foreign markets.

And so there is a natural hedge there.

And also financial hedges that we had.

Those two gains were largely offset by the revaluation of our assets.

So we have to look and remark our assets from the beginning of the quarter to the end of the quarter.

There was an 8% devaluation within the quarter.

And that generated a significant loss on the revaluation of those assets.

That is more of a one-time loss.

And will reverse itself when currencies come back.

But, that minimized the impact of those hedges.

Therefore, that drove the $39.5 million hit to gross margin, which equated to 1.2 points of gross margin, and about $0.10 of earnings per share.

The other question that you had asked was with regards to competitive pricing.

Yes, we are well aware that Indian is discounting a fair amount as well.

Most of the conversation that we have had has been currency driven discounting.

All of our competitors -- most every competitor is discounting, including Indian.

And there are probably similar levels to the Japanese in a lot of respects.

Adam Jonas, Morgan Stanley.

Hello, everybody.

So we get the message loud and clear that you are not going to keep up with the discounting.

You're going to protect the brand for the long term.

That is great.

But, I think you also alluded to doing some other things with the ownership experience, or perhaps some other non-discounting items that could help continue engagement and give your rider community reasons not to switch.

It seems like these discounts are frankly working -- working really well.

Could you elaborate on what those things are?

What those other average nonprice efforts are, and how much they could be a burden near-term on results this year?

Thanks.

Thank you, Adam.

What we think the burden is, is 6,000 units.

That is what we are taking out of our guidance.

We are doing things -- in the first half, we have stepped up some of our advertising.

We got a young adult campaign going on.

And a competitive core customer campaign going on.

And also to work to mitigate it, we have taken pricing action in Europe.

And you are looking at actions in Canada as well.

So again, we're going to continue to do what has made our brand great in the past.

And continue to invest in that brand, but not tear it down by discounting it.

Rod Lache, Deutsche bank.

Thanks.

I had two questions.

One is -- is there anything specific that you can point to on the manufacturing side that drove that $19 million positive, and should that continue?

Any additional commentary, there?

Secondly, if the currencies stay where they are, you said that that would be about a 4.25% impact on revenue.

So about a $240 million headwind on the motorcycle business.

Presumably that would be where the earnings impact would be if you didn't have these hedges.

You indicated about a 50% pass through, so $120 million, but it sounds like, based on your guidance, you are seeing about $95 million in the first half, which leaves only about $25 million on the back half.

I'm wondering whether I am misinterpreting what you are saying, or whether that is correct?

Okay, Rod.

The first question is -- is the manufacturing -- is there anything in particular?

Again, as I'd mentioned, the ongoing continuous improvement, the way we are operating the plants is all going very well.

There is a one-time that we're lapping in manufacturing expense.

That is the Street start up costs.

If you will remember, a year ago, we had a fair amount of startup cost with Street.

That was about $4.7 million, $5 million.

And so we are lapping that.

So that would provide some of that benefit that we saw in manufacturing.

But that is the core level of profitability.

We're just lapping that piece of it.

The second question that you had is with regards to our full-year guidance, in terms of revenue.

4.25%.

You had used a number of $240 million, we won't comment on that.

But 50% of that will fall down and hit gross margin in an adverse fashion.

We will pick up some of that in SG&A.

The question that you asked is with regards to the magnitude of -- I guess the first-half revenue hit and gross margin hit, versus the back half.

The worst quarter that we're going to have, if everything again remains constant, is the second quarter.

And that is because a year ago, our foreign currencies were the strongest in the second quarter.

And then we saw, late in the 3rd quarter, that the currency started to devalue.

So we will be lapping that as we get toward the end of the year.

And so -- yes, you are right, the biggest magnitude of impact of foreign currency will be in the first half of the year.

And more specifically, in the second quarter.

David MacGregor, Longbow Research.

Thanks for taking my questions.

A couple questions on the international side of the business.

Can you talk a little bit about dealer inventories internationally, and where those stand?

It sounds as though the price competition might be global.

But if you could just sort of address that, and confirm that if that is accurate.

Finally, on the finance business, how much international is in your finance portfolio?

And are there any concerns that we should have with respect to change in the sort of the threshold in which you are granting credit?

Thanks, David.

The first question is international dealer inventory.

It had been pretty consistent on a year-over-year basis.

But dealer inventory -- international is on a different inventory system.

Our dealers pull -- when they sell one, they pull one.

We call it, pipeline.

Inventory is more Company owned internationally than dealer owned.

We have very little change in dealer inventories from period to period.

Just because of the way that we supply our dealer network.

And any inventories would be more Company owned inventories as they fluctuate up and down.

So inventories -- just different than in the United States, where we push the inventory out to the dealers after we manufacture them.

Second question is price competition global?

No.

We are not seeing global price competition.

Our competitors are largely Japanese and European.

They are certainly realizing a strong benefit when they sell in the United States.

But otherwise, we are not seeing any huge price competition, outside of Brazil, in our foreign markets.

Final question was is the percentage of revenue at HDFS -- should you be concerned with regards to that and the currency impact on HDFS?

The answer is no.

HDFS is predominately in the United States and Canada.

They do help with arrangements around the world, but the vast majority of revenue is here in North America.

James Hardiman, Wedbush.

Thanks for taking a quick follow-up here.

I love the commentary on -- sort of the regional disparities in demand.

It almost seems to suggest with the Northeast way down, West Coast way up, that there is an opportunity here in the second quarter and beyond -- that things could get a little bit better.

I guess, are you thinking about things that way -- it wouldn't seem as such, given the reduced guidance?

Or do you think that some of these other offsets are only going to get worse?

Do you think that -- from a competitive perspective, the second quarter is actually going to be a little bit worse than the first quarter?

Thanks.

Thanks, James.

We're very confident in our shipment guidance of 276,000 to 281,000.

We've talked about weather before.

If it happens early in the season, we think it is more timing.

And if spring doesn't happen or it gets pushed out, we do believe there is a larger impact on a year-over-year basis.

At this point, on the weather, we would believe more timing.

The 6000 units that we took out are driven by the competitive discounting that we are seeing in the United States.

Internationally, we feel very good about our business there.

And in the United States, we are under pressure from the price discounting.

And we are dealing with that by taking 6,000 out and tightening up our inventories here a little bit.

We feel very good about our 2% to 4% shipping growth as we move forward.

Gerrick Johnson, BMO Capital Market.

Thanks for the follow-up.

Do you feel you were negatively impacted in the quarter by not having any new mid-year models like you did last year?

Also did you ship any streets to riding academy this quarter?

We will start with the second question first.

No.

Predominately, the dealer fill for Rider Academy happened in the first and the second quarter of last year, it was about 2200 units.

Gerrick, there could be a couple of replacement units going into the market now.

It was largely a one-time dealer fill.

That was about 600 units in the first quarter, and 1,600 units in the second quarter.

The second is, in terms of model year launches, from time to time, we have come out with a mid-model year.

I think the last couple of years, we have.

It is all part of the broader plan on product development.

We have got that sketched out for the next five years.

So we did not intend to have a product in this quarter.

And we don't -- do not believe it had a dramatic impact on our volumes in the first quarter.

Thank you, John, and thank you, everyone, for your time this morning.

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