Harley-Davidson Inc (HOG) 2016 Q3 法說會逐字稿

Good morning. My name is Chrissy and I will be your conference operator today. At this time I would like to welcome everyone to the Harley-Davidson third-quarter 2016 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions).

I would now like to turn the call over to Amy Giuffre, Director of Investor Relations. Please go ahead.

Thank you and good morning everyone. You can access the slides supporting this call on Harley-Davidson.com. Click company at the top 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 in this call.

This morning our President and CEO, Matt Levatich, and CFO, John Olin, will be hosting the call. Matt, let's get started.

Thanks, Amy, and thanks to all of you for joining us on the call today. Before John goes into the financial results, I would like to cover the market and company performance for the quarter and provide context on what we see going forward.

First, while we recognize that the environment continues to be challenging, we believe we are on the right course in making prudent decisions for our future by focusing our investment on growing the sport and Harley-Davidson's place in it. We are focused on influencing customer choice and growing our reach and impact with customers all while delivering strong returns to investors.

We continue to be pleased with our market share performance given the fierce competition in the US market and ongoing global macroeconomic challenges. Third-quarter market share was essentially flat in the US as we maintained our strong leadership with over half of the 601+cc market. Our overall market share performance in the US and gains in other key global markets like Australia and Japan provide strong affirmation of the progress we are making with our investments to drive demand through awareness, access, increased ridership and bold new products to reach more people in more places.

An absolute highlight of the quarter was the reaction around the world to our model year 2017 new products. One of our key areas of focus is to accelerate the cadence and impact of new products and in late August, we delivered. We could not be more pleased with the launch of and response to our model year 2017 lineup. Most notably, we have had an extremely positive reaction to our Milwaukee-Eight engine which we debuted on all of our touring motorcycles in conjunction with a redesigned upgraded suspension.

We know what our riders want and we delivered with a big step forward that accentuates everything we are known for, a powertrain and chassis package with innovative technologies that provide more torque, more horsepower, greater comfort and enhanced look, sound and feel. The feedback from riders, dealers and industry experts alike has been tremendous. All it takes is one ride to feel the power the Milwaukee-Eight engine brings to our riders and to the Company going forward.

The significance of the Milwaukee-Eight engine is already evident. In September we saw touring sales in the US increase by double digits along with increased demand for test rides. Given initial results, we are confident the entire lineup will drive our retail sales for the remainder of 2016 and position us well heading into the spring riding season and beyond.

As we indicated on our last call, we will continue to manage supply in line with demand. We maintain production ahead of retail in the third quarter in order to support the initial dealer fill of model year 2017 motorcycles and we plan to reduce production in the fourth quarter to finish the year with flat year-over-year US retail inventory.

As we look ahead, continued softness in the US industry is a clear area of concern and we are taking further steps to be sure we are positioned appropriately. In Q4, we will be streamlining our organization to execute our demand driving strategies with increased focus, alignment and agility. John will provide the financial details around these steps momentarily.

Our strategy to invest in driving demand around the world is unchanged and we are steadfast in our commitment to deliver strong returns to investors while doing so. Harley-Davidson has been in the motorcycle business continuously since 1903 and during that time we have experienced all types of economic, market and industry ups and downs and today is no different. We believe our strategy is sound and every decision we make is tied to driving it forward and delivering for all of our stakeholders.

We are intensely focused on gaining and securing market share in the 90+ markets we are in and doing so profitably. The launch of the Milwaukee-Eight power touring motorcycles is one powerful example of how we lead by delivering for our passionate and loyal riders. We are also investing to reach new riders by growing distribution internationally and by training new riders right here in the United States.

Through September, we have trained over 52,000 riders this year through the Harley- Davidson Riding Academy in the United States demonstrating that we are building momentum and bringing new riders into our sport and brand through this fantastic competitive advantage.

During the quarter, we opened nine new international dealerships and a total of 20 year to date. In the fourth quarter, we expect to add another 16 new dealers and re-enter Indonesia, all part of our strategy to increase access to our sport and brand by adding 150 to 200 new dealerships internationally by 2020.

Last week I was with our Asia-Pacific team in China and Singapore. I was able to see the team in action as they continue their efforts to grow our reach and impact in these important markets. I was also privileged to engage with passionate dealers who are investing with confidence in Harley-Davidson's future. It is in these experiences that I am reminded of what incredible strength we have in our people and in our worldwide dealer network.

Looking forward, we acknowledge that economic and political uncertainty weighs on the minds of consumers in the US and in some of the other markets where Harley-Davidson competes. As the industry leader we believe we are best positioned to strengthen the sport of motorcycling over time. We will continue to manage the Company and brand with the future in mind and will not compromise by taking short cuts that would diminish customer loyalty and passion or sacrifice our strong Company fundamentals.

We will lean into our strength in product development and our unrivaled connection to our riders to continue to bring innovative products to market that drive engagement and participation in our brand worldwide. The new Milwaukee-Eight engine is a powerful example but it is just one example of the strength of our product plan for 2017 and beyond.

Harley-Davidson gives people a way to experience and express their own personal freedom. This is our purpose and it is a powerful motivator for every one of us associated with this brand. You have our commitment to build on our incredible strength and deliver strong returns on your investment in us.

With that, I will turn it over to John. Thank you.

Thanks, Matt, and good morning, everyone. Today I will provide additional insight around our third-quarter financial results found in our press release and supporting slides starting on slide eight.

During the quarter, revenue was $1.27 billion, net income was $114.1 million and diluted earnings per share were $0.64. As we anticipated, operating income from the motorcycle segment was down 23.9% from last year's third quarter. Segment revenue was down 4.3% in the quarter behind a 9.1% decrease in motorcycle shipments.

Gross margin as a percentage of revenue decreased versus prior year as a result of higher year-over-year manufacturing costs. SG&A was up in the quarter as we increased our demand driving and product development investment. Operating income as a percent of revenue in Q3 was 10.0%.

At HDFS, operating income was down 4.6% year-over-year. We remain focused on driving demand and delivering strong margins and strong returns over the long-term as we continue to navigate through the ongoing challenging conditions.

Q3 worldwide retail sales of new Harley-Davidson motorcycles are summarized on slide nine. Retail sales in international markets were up modestly. US industry slowdown continued driving Harley-Davidson retail sales down 7.1% in the US and down 4.5% on a worldwide basis. Our increased investments in driving demand and product innovation are mitigating the effects of the intense global competitive environment including the expanded price gaps to the competition in the US and the impact of new product introductions.

This is no more evident than with the overwhelmingly positive response to our model year 2017 motorcycles featuring the Milwaukee-Eight engine. Our new products drove significantly improved US retail sales and market share in September. We also saw positive retail momentum in EMEA and in Asia-Pacific, we are encouraged by the initial customer response as the 2017 models began arriving at the end of the quarter.

Let's take a closer look at US sales on slide 10. Q3 retail sales in the US were down behind continued weak industry results. We believe the industry continues to be impacted by lapping year-ago industry growth driven by aggressive competitive discounting, weak sales in oil dependent areas and softer year-over-year used bike values across the industry. While the overall industry performance is disappointing, we are encouraged with our ongoing market share stability. Our Q3 share of the 601+cc market was largely flat. However, our share in the month of September was up a strong 3.2 percentage points.

Our year-to-date market share was up 0.8 percentage points to 50.8%. We believe our market share was driven by our demand driving investments focused on growing product awareness and ridership in the US, and the fantastic response to our new 2017 model motorcycles featuring the Milwaukee-Eight engine.

While our competitors continue to engage in levels of discounting comparable to last year's third quarter, we are very pleased that we were able to grow our year-to-date market share in the US with our brand enhancing actions and our new innovative motorcycles.

In Q3, we completed the initial dealer fill of our 2017 model year motorcycles. This combined with weak retail sales for most of the summer drove higher than desired US retail inventories at the end of the quarter. We are committed to our strategy to aggressively manage supply in line with demand and plan to reduce production in the fourth quarter in order to end the year with US retail inventory flat to prior year.

On slide 11, you will see retail sales in our international markets were up 1.0% in Q3. During the quarter, EMEA retail sales were up 1.9%. The Milwaukee-Eight engine has received a great reception and provided a lift to retail sales in the month of September in the region. EMEA year-to-date market share was 10.3% largely flat to prior year. Asia-Pacific retail sales were up modestly from prior year driven by strong growth in Japan and Australia. We expect growth in the Asia-Pacific region to accelerate in Q4 behind improving availability of our 2017 model year motorcycles, the planned opening of approximately 11 new dealerships and the reopening of several dealerships in Indonesia which were exited at the beginning of the year.

Retail sales in Latin America were down in the quarter driven by declines in Brazil. Brazil's retail sales continue to be impacted by a slowing economy, consumer uncertainty and very aggressive price competition.

In Q1, we increased model year 2016 motorcycle prices by approximately 23% in response to the devaluation of the real.

Finally, retail sales growth in Canada continued in the third quarter, up 4.3% year-over-year. To support our strategic focus on increasing brand access, we plan to continue to expand our international distribution.

On slide 12, you will see wholesale shipments of Harley-Davidson motorcycles in the quarter were down 9.1% within our shipment guidance range. Third-quarter shipment mix was skewed toward touring reflecting our investment in new 2017 touring motorcycles featuring the Milwaukee-Eight engine.

On slide 13, you will see revenue for the Motorcycles & Related Products segment was down in the third quarter behind a weak US retail industry and our corresponding decrease in year-over-year motorcycle shipments.

Revenue in the quarter was favorably impacted by currency exchange, higher pricing and mix. As a result, the average motorcycle revenue per unit was up $1035 for the quarter.

Wholesale and MSRP weighted average pricing for our new 2017 model your motorcycles increased by approximately 2.25%. After adjusting for the cost of new content, pricing net of cost increased approximately 1.25 percentage points expressed as a percent of revenue. Please note that these percent increases are more favorable than the estimates we included in the new model launch video in August.

Parts and accessories revenue was down behind lower motorcycle shipments and retail sales during the quarter. General merchandise revenue was also down, driven by lower sales of sportswear and riding gear.

Our gross margin review is on slide 14. As expected, Q3 gross margin was unfavorable driven by higher manufacturing costs partially offset by favorable price, mix and raw materials. Additionally, currency exchange was favorable for the first time in eight quarters driven by higher revenues behind a slightly weaker US dollar.

Manufacturing costs were in favorable by $18.7 million during the quarter. We expected significant unfavorable variances and manufacturing largely driven by costs related to both the implementation of our ERP system in Kansas City and the launch of the new Milwaukee-Eight engine. We also expect a loss absorption behind lower production during the quarter as we implemented these two very successful programs.

Looking forward, we expect Q4 manufacturing costs to be favorable as we return to normal operations. Over the long-term, we will continue to execute our strategies investing in the future of our brand and the sport of motorcycling globally while delivering strong margins.

On slide 15, operating margin as a percent of revenue for the quarter was 10.0%, down compared to last year's third quarter. Operating margin was impacted by lower gross margin as well as higher SG&A as we increased our investments in demand driving and product development. We remain intensely focused on a cost structure that will enable profitable growth and continuous improvement to drive our business to be stronger, more flexible and more profitable.

Moving on to HDFS on slide 16. During the quarter, HDFS's operating profit decreased $3.4 million or 4.6% compared to last year. The primary factors impacting third-quarter results were first, net interest income was up over prior year by $2.5 million. This increase was driven by higher receivables partially offset by higher borrowing costs.

Second, the provision for retail motorcycle loan losses increased over prior year to $10.1 million driven by higher retail credit losses and associated increase in the allowance.

HDFS operational results are summarized on slide 17. For the quarter, originations were down 10.2% compared to last year. HDFS's share of US new retail sales were strong at 64.3% yet down 5 percentage points as we lap the impact of last year's low rate finance offers. Year-to-date loan originations were comprised of approximately 80% prime loans and 20% subprime. As a predominant industry lender to subprime customers, these originations continue to represent a significant number of retail sales to the Company at very attractive returns.

At the end of the quarter, we had $351.4 million of cash and cash equivalents at HDFS. In addition, HDFS had $983.7 million of available liquidity through bank credit and conduit facilities.

On slide 18, you will see 30-day delinquency rate for retail motorcycle loan receivables on our balance sheet was 3.61% or 45 basis points higher than Q3 2015. 12 basis points of the increase represents a change in mix of the portfolio after the Q2 full securitization of prime receivables. The delinquency rate on a managed basis including those loans that were part of the full securitization was 33 basis points higher than in the prior year due in part to deterioration in oil dependent areas and rising delinquencies across the portfolio which is consistent with industry trends.

The annualized credit loss rate for receivables on our balance sheet was 1.59% or 40 basis points higher than Q3 2015. On a managed basis, credit loss rate was 1.57%. The increase was the result of higher losses on loans in oil dependent areas, normalizing loan performance and lower used bike values at auction.

It is important to note that while both delinquencies and credit loss rates were up versus prior year, the rate of increase has remained constant over the last few quarters. During the quarter, HDFS continued to maintain a strong liquidity position and contributed strong profitability to the Company.

The remaining Harley-Davidson Inc. financial results are summarized on slide 19. A few things to note. Operating cash was down from last year driven primarily by lower year-to-date net income and year-to-date tax rate was 32.9% which was lower than last year's tax rate behind the successful closure of various tax audits in Q2.

The Company has and intends to continue to maintain a minimum of 12 months of projected liquidity needs in cash and or committed credit facilities.

Returning value to our shareholders is a top priority. We expect to return all excess cash to our shareholders in the form of increasing dividends and continued share repurchases.

On slide 20, you will see that we did both during the third quarter. We will continue to look for additional opportunities to maximize shareholder value by returning excess cash to our shareholders without damaging the long-term value of the Company or the brand.

On slide 21, you will see our overall expectations for 2016. For the remainder of the year, we are confident in our shipment guidance of 264,000 to 269,000 motorcycles or approximately down 1% to up 1%. We are very encouraged by the momentum we experienced in the US in September when our new model year 2017 motorcycles drove an increase in retail sales of approximately 5% and a more than 3 percentage point increase in market share.

We expect worldwide retail sales growth in the fourth quarter driven by significant demand for our Milwaukee-Eight engine, our increase in demand driving investments, expansion of the international dealer network, and lapping last year's US industry decline of 3.8%.

During the quarter, we expect to ship between 44,200 and 49,200 motorcycles, down approximately 8% to up approximately 2%. As mentioned earlier, we expect to end the year with US retail inventory being flat to prior year.

Recognizing the slower industry growth that we are continuing to experience in the US, we will be streamlining our operations to be even more focused, aligned and agile. We expect a fourth-quarter charge of approximately $20 million to $25 million primarily for employee separation and reorganization costs. Including the reorganization charge, we continue to expect SG&A to be flat to up modestly and operating margin for the motorcycle segment to be 15% to 16% for 2016. As a percent of revenue, we now expect SG&A to be largely flat to prior year.

Overall, we are thrilled with the initial response to our new model year 2017 motorcycles despite the weakness in the US industry retail sales. It highlights Harley-Davidson as a leader in new product innovation and reinforces our strategy to invest in new product development. We are on the right path, are disciplined in the execution of our strategies and continue to make necessary decisions intended to support the prudent retail inventory position and protect our strong brand and profitability into the future.

We will continue to navigate through the challenging environment and are making investments to drive demand and deliver strong margins and strong returns over the long-term.

Now let's take your questions.

(Operator Instructions). Tim Conder, Wells Fargo Securities.

John, first of all, John, congrats to the Cubs so far. Just wanted to pass that along. Just on the overall related to HDFS, just conceptually things are ticking up a little bit as would be expected with the overall credit cycle here. But can you kind of give us a framework looking versus the past -- granted, it was a very dire period with the financial crisis, over a cycle just any type of framework you could outline for us where you would anticipate those losses going over the next cycle in a downturn perspective?

Thanks, Tim. When we look at both delinquencies and credit losses, we certainly have seen an increase on a year-over-year basis and starting with delinquencies as we have discussed, the delinquencies have been at historical lows. I mean they have really been low since the last three or four years and so with the rise and we have seen on a year-over-year basis about a 33 basis point increase, that increase has held steady over the last three or so quarters but is higher year-over-year.

But even with that, Tim, delinquencies are near historical lows and certainly still much better than they were prior to the downturn that we experienced. So we are keeping an eye on it. HDFS is doing an absolutely fantastic job, working collections as well as tweaking the underwriting that we have got. And we talked a little bit earlier, we made some underwriting adjustments in oil dependent areas in the United States a couple of quarters ago.

The other piece of that is credit losses and credit losses are also up in the neighborhood of 40 basis points year-over-year which is certainly a concern. Still when you look at credit losses over this period of time, Tim, we are in the 10-year historical average that we have had in terms of credit losses. Both in terms of delinquencies and credit losses, we are certainly within the models in our pricing and within our expectation of overall losses.

Similarly with credit losses, we have seen those rise a little bit more and longer than we have in terms of delinquencies and that is really due to the softness that we have seen in the auction market, that really started back in Q4 of 2014, somewhat aligned with the shift in world currencies. But again overall, we are within what we have seen in historical norms over the last 10 years. We are not providing any projections going forward but again HDFS is addressing what we have got and making the changes that are necessary to continue to maintain their industry-leading profitability at HDFS.

Sharon Zackfia, William Blair.

Good morning. Two quick questions. I guess on the reorganization during the fourth quarter, are there any ongoing savings associated with that? Secondarily, just wanted to get your thoughts on taking price both domestically and in some of the international markets given the weakness you are seeing?

Thanks, Sharon. With regards to the reorganization as we had mentioned, we are recognizing the challenging US industry and taking the prudent actions to appropriately size the organization. With that we will have the charge of $20 million to $25 million and the benefit of that will be the $30 million to $35 million of savings into 2017. And really that will be deployed to protect our margins as we look to move into 2017 in a more uncertain US industry growth profile.

With regards to overall pricing, we had mentioned that for the model year we increased prices by 2.25% and when you look at the value that we have added to our motorcycles in particular touring motorcycles with our first new engine design in 18 years and the benefits in terms of power, acceleration, the suspension, heat management and you can go down the list in vibration and so on and so forth, we believe we have added significantly more value to the motorcycles than the pricing that we have taken.

So we are confident with that pricing and we have enjoyed the ability to price our motorcycles for the last several years and we feel good about where we are at with this price increase moving into our 2017 model year.

Joseph Spak, RBC Capital Markets.

Good morning. Thanks for taking the question. Two quick ones. So I guess I just wanted to delve more into the guidance a little bit and I recognize you don't normally give what you are forecasting for retail. But the inventories in the US are up almost 10,000 units. You are saying it is going to be flat by year-end and even the low-end of the shipment guidance is only a reduction of four. So I was wondering if you could help us square that?

And then second would be on those cuts and those savings. I just want to make sure are those being -- you said reinvested to protect margin, is that different from the actions you took earlier this year which were to actually -- in the $70 million which was more to try to stimulate demand? I guess I just want to get a better understanding of how you think you are going to reinvest it in the business? Thanks.

Thanks, Joe. With regards to overall guidance, 264,000 to 269,000 units, we are confident. Third quarter was a tough quarter for us, certainly lower than what we had expected but still confidence in hitting our guidance. And you are absolutely right, inventory was up 9700 units, much higher than we would like at this point in the year but in line with what we saw in the second quarter. Second quarter we were up about 8600 units and put more inventory in the system because of the ERP implementation that we did.

We had hoped to burn off more of that inventory over the third quarter. That didn't happen but we did not take, as Matt had mentioned up front, we did not take the actions of reducing production at that time because of the fact that we've got our new model year 2017 motorcycles out and to get worldwide dealer fill, it was important that we continued to produce.

So as we look forward to the fourth quarter, we are committed to bringing inventories in line with prior-year levels at the end of the year and that will happen in two ways, Joe. One, we expect retail sales growth in the fourth quarter driven by several things; the Milwaukee-Eight engine, the demand driving investments that we are making which have been very effective, the dealer expansion. I believe in the fourth quarter we got 16 dealerships opening and as far as I remember, that is the most we have ever opened in a quarter. So that will help benefit it. And then finally, lapping the very soft industry in a year-ago basis.

So retail sales growth, the other pieces; we will be taking production down in the fourth quarter. We are absolutely completely committed to managing supply in line with demand and expect to be flat on a year-over-year basis.

Your second question, Joe, is with regards to these savings. Again, Sharon had asked about $30 million to $35 million of savings and we will use that again to protect our margins into the future. We will continue to invest at very high levels of marketing spend and we will also make sure that in a slower growth environment we are a little bit more defensive and protective of those margins and we are looking to maintain them as we move into 2017.

Rod Lache, Deutsche Bank.

Thanks. Just first, a point of clarification. I think you said that your operating margin guidance includes the charge. Just want to make sure whether you misspoke and clarifying. I think you were just saying that the $30 million to $35 million SG&A and presumably also the $74 million of non-recurrence of manufacturing inefficiencies that those are available for you to protect margin despite higher spending in other areas?

Okay, Rod. Operating income that we provided for this year 2016 will include a charge of $20 million to $25 million. So after we spend the $20 million to $25 million one-time expense on employee-related mainly costs, we will still be within our guidance of 15% to 16% operating margin for 2016. Also benefiting 2016 operating margin would be the fact that we expect manufacturing expense to be favorable. So again through the first three quarters of this year, we had significant unfavorability in manufacturing expense driven by two huge initiatives, the ERP implementation and our first new engine in 18 years. They will provide benefits over the next decade moving forward, were quite expensive putting in. And with that in the fourth quarter we would expect manufacturing favorability which will also add to our margin benefit, our operating margin guidance of 15% to 16%.

Craig Kennison, Robert W. Baird.

Good morning. Thanks for taking my question. This is for Matt. Matt, you made a big decision at the start of this year to reallocate $70 million in funds in order to drive demand. I am curious what you think worked, what didn't work and what changes you might consider for next year?

Thanks, Craig. By and large, we are actually very pleased with all of the investments that we made. In particular you can see the point about the cadence and impact of new products with the Milwaukee-Eight and I would say that that is the leading edge of stepping up the focus of our product development investments to have that reach and impact.

The comments that I made about Riding Academy and in general the whole initiative of ridership in the United States and the role that the Riding Academy plays in bringing new people into the sport and in particular through our brand and through our dealership, we are very pleased with those 52,000 new riders that we have trained.

And the other I guess the third big hitter is access through enhanced distribution and the dealers we have added year-to-date, 20 and the expected 16 in the fourth quarter helps us with our reach internationally. So those to me are the big hitters. In general the envelope around it is just making sure that we increase awareness of the brand and of the products along the way.

All those have gone really well according to our expectations. Obviously we learn with everything we do and we continue to dial in our efforts going forward in particular Riding Academy is going to continue to be a high leverage asset for us. How do we make sure that the 52,000 people are the right kinds of new riders that have a long life with us and are going through the class and are high-yield riders coming out the other side and working with our dealers to both expand the number of them that offer the class as well as the number of classes they are able to offer and the conversion rate of everybody that goes through it is going to be a key focus of Riding Academy going forward.

We will continue to dial-in everything that we are doing, learn from everything that we are doing as well as explore new opportunities as they emerge to drive demand for the products and for the brand. Thanks.

Greg Badishkanian, Citigroup.

Great. You mentioned that retail sales were up about 5% in September. I think you were referring to US and I'm just wondering also how you think that is going to progress in the fourth quarter? Would you expect a ramp up as the awareness of the new model increases or would you expect kind of a steady-state?

Thanks, Greg. So we couldn't be more pleased with what we are seeing from our model year 2017 motorcycles driven by certainly the Milwaukee-Eight engine. Matter of fact as you look at the beginning of the quarter in July and August, we saw the same run rate from the industry down about 9%. Our sales were down about the same amount, a little bit more and really turned around in the month of September, up 5% in the United States. Also up pretty strong in EMEA. Those are the two markets that we had distribution of our model year 2017 motorcycles in.

It just started reach in our Asia-Pacific region very late in the quarter so we expect certainly a lift from the new product in the fourth quarter in those markets as well as in Latin America. They will arrive even later into the fourth quarter.

But the reception has been absolutely fantastic and so the lift that we are seeing in September we do believe it will be sustainable in the fourth quarter and drive increased retail sales in the United States as well as around the world with regards to that. Also had a big impact in terms of market share in the US and actually brought the industry to near flat for the month of September. So not only is it driving our sales but really having an impact on industry sales as well.

Felicia Hendrix, Barclays.

Hi, good morning. Thanks for taking my question. Just kind of staying on that topic, John, on the up 5% in September, I was just wondering was that mostly driven by the bikes with the new engines or was it driven by the entire new model line?

Also can you just help us understand what that comped against? It was my understanding that September 2015 retail registrations were down quite a bit so I am just trying to understand the benefit of an easy comp versus the accelerated sales from the new bikes. And that is kind of it.

Thanks, Felicia. Felicia, I cannot remember what the month of September a year ago was. The overall quarter for Harley-Davidson was down 2.5% and I just don't recall the cadence by month. And maybe Amy can help out with that.

When you ask about the driver in the month of September was largely our touring motorcycles. Touring motorcycles were up double digit and the United States represents a little over 50% of our sales in the US. So that was the biggest driver. The other categories which continue to see the cruisers doing well with the S models but the biggest driver in the month of September certainly was the touring bikes with the Milwaukee-Eight engine.

James Hardiman, Wedbush Securities.

Good morning. Thanks for taking my call. I maybe wanted to rephrase a previous question but essentially it would appear that retail was worse than you expected in the third quarter. Inventories are higher as we exit the third quarter. Ultimately shipments are towards the -- or at the low-end of what you guided and yet your full-year guidance is unchanged. So I guess the implication is you are more optimistic about the fourth quarter for us to still be able to get to those same numbers.

And I guess second question, sort of in the context of the color you gave on September, the math would seem to suggest that the fourth-quarter needs to be even better than that 5% growth just to get to the low end of the guide and probably more like double digits to get to the midpoint. Even within your guidance, are you toward the lower end of those numbers? Help us square how third-quarter was so much worse than you thought and now you are still maintaining the guidance?

Thanks, James. So number one is we certainly do expect a strong and growing retail sales in the fourth quarter. But James, we do not need the level of growth that you stated. I think you said mid-single digits to high or significantly higher than what we did in the month of September. That is not accurate.

So two things you need to go back and look at is when you look at the retail sales and try to equate them to wholesale shipments, the base of those two numbers starting the year were different off of a couple of thousand units. And while we will maintain inventories flat on a year-over-year basis in the United States, we do expect inventory growth in our international markets. We will be adding 36 new dealerships and we will certainly need inventory to help support that growth which is about 5% increase in our international dealerships.

So with those two things included in the computation, it is much less than needed, much less to hold the guidance and to come in at the low-end or the high-end of the guidance for the full-year guidance. But again, we do feel very good about the momentum that we have got coming out of the month of September and the reaction to our new product from the media, our dealers and customers around the world.

David MacGregor, Longbow Research.

Good morning. John, you talked about manufacturing being favorable to the fourth-quarter gross margins but you also got a manufacturing curtailment you are talking about as well. Can you just help us maybe unpack that number a little bit and help us understand some of the moving parts that gets you to that sense that it will be favorable?

Just quickly if you could talk about your 9700 units of inventory, how much of that is model 2016 versus model 2017?

Thanks, David. With regards to manufacturing expense, we have certainly had a tremendous amount of start up costs going on and lower run rate. As we exited the third quarter number one is the ERP system came up flawlessly as did the cutover to the new engine. We spent a lot of money on training our workforce and making sure that things went well.

As we exited the third quarter, the plants were up and running at speed and that will be the biggest driver of our year-over-year improvement from last year. We still will have lower production so we will have a headwind in overall manufacturing expense on loss absorption. But given the running of the plant and the speeds that we are at, we would expect that manufacturing expense to be favorable in the fourth quarter.

The second question that you asked, David, was of the 9700 units of higher inventory, what percentage is of carryover motorcycles? I do not know the absolute percentage of that. It is really hard to tell because that is just the increase in inventory. What I can tell you is model year 2016 carryover inventory is a much bigger percentage of the total inventory that we have in the system than we would like at this point. And it is higher than what we had on a year-over-year basis. The dealers are doing a very good job of burning through that carryover but it is no doubt higher than we want and that is an appropriate level.

Remember coming into the year, we were producing (technical difficulty) pulled back on as much production as we could in the second quarter. We were cutting over to a new model year and so we ended up with higher overall inventories. We are helping the dealers, our dealers are doing a good job burning through on the inventory and we are helping them. We've got a three-pronged approach in the marketplace right now to help out with that. Two are more consumer focused, one is more dealer focused.

Of the two consumer focused programs, one is financing, finance offers which we have on some of the models that we are more long on. I believe it is four touring models and one Dyna model and what that is is 1.99% no money down offer for top-tier. Significantly less coverage than we had a year ago so less but an opportunity to help our customers and dealers there.

And then secondly is our winter warranty program for our customers. This is not a new program to Harley-Davidson but we didn't offer it in the last couple of years. What that does, David, is any of our customers that buy a motorcycle in the United States in the winter months will get that added onto their warranty coverage. So effectively everyone that buys a motorcycle between now and April 1, their warranty, two-year warranty will start effectively April 1. So a consumer incentive there.

And then the final one is that a common practice among our dealers is to trade motorcycles to get the right color or they are long one model and short on another, they do a lot of trading. What we have done is for carryover 2016 models, we will help defray the cost of that trading that goes on and we hope to encourage and facilitate getting the right motorcycles to the right dealers at the right time to move through as much of the carryover inventory as quickly as we can.

Adam Jonas, Morgan Stanley.

Thanks. Just one follow-up, a lot of questions have been answered. Thank you. Can you remind us what percentage of your workers in the US are under temporary contract and any other details around that?

Temporary contract, what exactly do you mean, Adam?

More flexible contracts where the cost of separation might be different say from a permanent hire or full-time worker? Thank you.

So there's two avenues to that. There are hourly workers and last quarter we announced a layoff of a couple of hundred hourly folks and most of those we've got a fair amount of casual workers in the workforce and certainly we look to lay those off, those folks off first. But we did lay off a couple hundred of our employees. In terms of that workforce, during surge periods we can surge up to 30% but in any given period of time it is much less in terms of casual workforce in the hourly ranks.

In terms of on the salaried side, I don't know what the percentage is, Adam. But as we look to become leaner and more focused, we will lose some of the contingent workforce that we have working here and unfortunately we will also lose some of our full-time employees.

Jaime Katz, Morningstar.

Good morning. Thanks for taking my questions. You guys talk quite a bit about uncertainty in the economic environment and with parts and accessories down, I am curious whether you guys think maybe that consumers are either delaying the corresponding purchases to their bike purchase or are they foregoing them and they prefer to spend the money just on the bikes?

Second, factory inventory was down pretty well year-over-year. Can you tell us about where you think that might be going by year-end? Thanks.

Thanks, Jaime. Parts and accessories and general merchandise were both soft during the quarter. P&A was down I believe 8.3% and general merchandise 5.5%. But Jaime, you also have to look at that in the context of kind of what they track to. Our overall shipments were down 9.1% and some of our parts and accessories business tracks pretty well with shipments as dealers get motorcycles in and make changes to them. And then they will also both track pretty well to retail sales as well which on a worldwide basis was down 4.5% and 7% in the United States. So when you look at both P&A and general merchandise, they are down kind of straddling between what we were down in retail for the quarter and wholesale.

So on a year-to-date basis, parts and accessory I think is down about 2.5% and we have got retail sales down about that same amount, 1.9%. So on a year-to-date basis, they are tracking pretty much what we have seen in that relationship historically.

Your next question comes from the line --.

I'm sorry, Jaime, the second question was with regards to overall inventory. If you remember going back to the fourth quarter, we had inventory up quite significantly. As a matter of fact, it was up about 33% and that was to get a quick start in supporting the marketing spending that we were doing in the first quarter. And at that time we said we would burn that inventory off throughout the year and each period has come down and certainly happy to say that in the third quarter, overall inventory was down about $40 million driven largely by finished goods inventory partially offset by a little bit of rise in parts and accessories and general merchandise and so overall inventory is down about 9%.

As we look to the fourth quarter, we would expect overall inventories to be down as well on a year-end basis.

David Beckel, Bernstein Research.

Thanks for taking the question. I have a bit of a high level question that sort of effects not only this year but next. If you had to itemize sort of negative drivers that you have experienced throughout the industry for this year, what have been the most significant factors affecting US sales because it seems like the trend is decidedly departed from the last three to four years?

Following on that, to what extent do you see the current year's weakness as being more cyclical or secular in nature?

And a quick follow-up, you mentioned you are going to be helping defray the cost of trading of used bikes between dealers. I was just curious, what exactly or the extent to which those costs are material or not or any additional data you can provide there. Thanks.

Thank you, David. So when we look at the year and the negative drivers are all based on the industry, David. Market share, we couldn't be more pleased with. Again, coming into the year, our objective was to stabilize market share. On a year-to-date basis, market share is up 0.8% and even when you look at the third quarter, market share was flat. But if you peel back a little bit further than that in the categories that we compete in in the third quarter that being touring, large cruisers and small cruisers, our market share was up quite significantly, up a full percentage point in those markets. And we gained market share in all three segments.

So we are competing extremely well without discounting and that is the equity spending that we are doing on brand building activities, Matt had talked a little bit about before. So that aspect is going very well, going better than what we had expected.

Where the negative drivers are is clearly around the industry and we have seen the industry that has performed very well over the last five years up through 2015, a CAGR of 2.9% and we got into this year and we had about 1 percentage point increase in the first quarter and then again toward the end of April things really started to fall out. When you look at what is driving the industry, one is up through three quarters is lapping very strong year-ago numbers. On a year-to-date basis, the industry was up about 6-point something% and that was driven by the onset of discounting. So last year was the first benefit that the competition got from significant price reductions.

So we are facing that headwind. That will start to reverse, David, in the fourth quarter as the year ago's fourth quarter comp is much easier and actually it was down almost 4%. So that we start to see reversing.

The second big driver is the weak oil dependent sales and this is again an overall industry problem. We have talked about our numbers and the last three quarters leading up to the third quarter we have seen that down about 10%. So that has been a significant drag on the industry.

Now in the third quarter, we actually saw that accelerate. Certainly disappointed with that but we saw that increase to a level of about 15% down in oil dependent areas in the quarter. The industry also saw an acceleration of that number.

So when you talk about going forward how does that continue, anyone's guess in the short term but at some point when that plateaus we will have a lower base and be able to grow off of that.

The third one is soft used values which the industry has experienced for the last several quarters. Again, we have talked about the bikes that go through our dealer network which is about one-third of the used bikes. Used bike prices held up very well through the third quarter of 2015 and over the last three or four quarters, we have seen some softness in used bikes as well as the industry. Our bikes continue to hold its value better than the industry by far but we are seeing used bike values fall. That puts a short-term headwind on new bikes sales.

Long-term it is not necessarily a bad thing and that dos bring a lot of new people into the industry. And a matter of fact for Harley-Davidson, the vast majority of new people coming into the brand come in on used motorcycles. So there is certainly some positive to that. But the industry will work through that softness and we would expect that to stabilize at some point in the future.

The second question that you asked, David, was with regards to trading of motorcycles between dealers and you had used the term used in describing that. What we are doing to move model year 2016 carryover motorcycles are just for new motorcycles have nothing to do with used. As a matter of fact, there was a report out last week that talked about a change in used strategy and I think there was some confusion with regards to what we are doing on model year 2016 carryover new motorcycles to move them to help our dealers move them which includes facilitating and defraying the cost of trading versus anything to do with used. So I want to make that clarification.

Joe Altobello, Raymond James.

Great, thanks, guys. Good morning. First, I was just trying to get a sense for how the finance promotions that you guys are in this quarter compared to last quarter and in particular how that might have impacted the month of September given the pretty strong retail number? And then secondly just a quick housekeeping item, could you remind us how much of the manufacturing costs this year are nonrecurring for next year? Thanks.

Thanks, Joe. The finance promotions on a quarter-to-quarter basis are down quite significantly in 2016 versus 2015. 2015 we were running deeper offers at 0.99% and much broader across our model lineup. Remember 2015 was the first year and the first impact that we were feeling of the significant discounting which was currency driven by the competition. And we did more finance offers last year than we did this year in general. And the spending is down quite significantly on a year-over-year basis.

So when we talk about some of the things that we are doing to help with regards to that is financing is actually lower on a year-over-year basis but we are very focused on helping move some of those models that we are long in.

Manufacturing costs? Yes, when we look at overall, the manufacturing expense line of our gross margin, we have seen a significant amount of costs over the three quarters, a significant portion of those are driven by the investments that we are making in the ERP system and all the retooling and training that we have done to bring the Milwaukee-Eight to market.

There is also other costs in there, loss absorption production is down on a year-over-year basis as well as in the second quarter, we had a fair amount of obsolescence as we tried to pull back just before the new model year came out. So we would expect the majority of those not to repeat next year. And again as I mentioned, that number will become smaller because we will be favorable in manufacturing expense in the fourth quarter.

Thanks, John. Thanks, Matt. Thank you everyone for your time this morning. The audio and slides will be available at Harley-Davidson.com. The audio can also be accessed until November 1 by calling 404-537-3406 or 855-859-2056 in the US. The PIN number is 82818180#. We appreciate your investment in Harley-Davidson. If you have any questions, please contact us at 414-343-8002.

Ladies and gentlemen, this does conclude today's conference call. Thank you for taking the time to join us today. You may now disconnect your lines.