Harley-Davidson, Inc. (HOG) Q4 2013 Earnings Report, Transcript and Summary

Good morning. My name is Briana, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] Thank you. Amy Giuffre, Director of Investor Relations, you may begin your conference.

Thank you, very much, and hi, everyone. Welcome to Harley-Davidson's fourth quarter 2013 earnings conference call. The audio for today's call is being webcast live on harley-davidson.com. The support slides can be accessed on our website by clicking on Company, Investor Relations, then Events and Presentations. Our comments today will include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC. Harley-Davidson disclaims any obligation to update information in this call. This morning, you'll hear from Harley-Davidson's CEO, Keith Wandell; CFO, John Olin; and President of Harley-Davidson Financial Services, Larry Hund. Then we'll open the call for questions. So let's get started. Keith?

Thank you, Amy. Good morning, and thanks for joining us today. Harley-Davidson had a great year, and I couldn't be more proud of the entire team: Of our employees, dealers and suppliers. We achieved what we set out to do from exciting new products to improved manufacturing operations, retail gains, as well as the growing diversity of our customer base. All of these translated to continued strong improvement in the company's financial performance and shareholder value. Full-year EPS grew more than 20% on a 5.7% increase in revenue. And at year end, Harley-Davidson's total shareholder returns were up more than 40% from the start of the year, outpacing the S&P 500. In manufacturing and product development, Harley-Davidson has been relentless at driving improvements throughout the company that enable us to design, build and deliver motorcycles with greater speed, efficiency, safety and quality. With the launch of Surge Production early last year, we were able to build motorcycles closer to when they were needed, and to have the flexibility to adjust more quickly to market forces. We saw great improvement in better matching our production to customer preferences, seasonality and geographic demand. And with the startup of Surge Production at our Kansas City plant earlier this month, we expect continued improvements on this front. And then, there are the products. The product -- Project Rushmore motorcycles that we rolled out in August were the first to come through our new world-class product development pipeline. They introduced major innovation and design improvements and bring the voice of the customer into our product design process in a whole new way. From the launch on August 19 through the end of the year, our dealers sold nearly 28,000 motorcycles worldwide from the 8 models in the Rushmore line up. And these bikes were embraced not only by our core customers, but our outreach customers as well. And then on the heels of Rushmore, we revealed the Street 750 and the Street 500. And these totally new motorcycles are designed for the lifestyle and riding needs of a growing generation of urban, young adults globally. The reveal of these motorcycles generated a tremendous amount of excitement, and we're looking forward to the retail rollout in the next coming months. And as we look down the road, there's a lot more to come. We have other new incredible motorcycles that are in our product development pipeline. And we believe these new products, together with our efforts, and those of our dealers, will enable us to continue to broaden our reach. Last April, we reported that for the fifth straight year, Harley-Davidson was the undisputed U.S. market share leader in new motorcycle sales to each of our outreach customer segments, who we define as young adults 18 to 34, women, African-Americans and Hispanics. And you may recall that one of our key goals is to grow sales in the U.S. to outreach customers at a faster rate than we grow sales to our core customers. And we did that for the first time in 2012. And now I'm pleased to report that in 2013, retail sales of new Harley-Davidson motorcycles to outreach customers in the U.S. grew at more than twice the rate of sales growth to our core customers. The company also continued to grow and expand its international reach in 2013. Brazil is our largest market in Latin America. And last year, we captured the market share leadership in the 601cc and above category for the very first time. Overall, retail sales of new Harley-Davidson motorcycles in Latin America were up more than 13%. And in Europe, we increased our market share, and hold the #2 position in the highly-competitive 601 and up segment. And we had our best year ever for new motorcycle sales in our Asia-Pacific markets. We, again, were the market share leader in the 601cc plus in both Japan and Australia, and we saw strong growth in the emerging markets. Worldwide, Harley-Davidson now sells motorcycles in 89 countries, and we've opened 118 new dealerships since 2009. So all in all, 2013 was an outstanding year, and we haven't even touched on the success of the 110th anniversary on our new e-commerce rollout and a significant other number of highlights. The company and the brand are strong. And as we look at 2014 and beyond, we believe we're in a great position to leverage our momentum, expand our reach among new and existing customers and further strengthen Harley-Davidson's position as one of the world's leading brands. So again, thanks for your interest and investment. And now, I'm going to turn it over to John Olin.

Thanks, Keith, and good morning, everyone. I'll review 4th quarter financial results starting on Slide 11. During the quarter, Harley-Davidson, Inc. consolidated revenue was up 1.7% to $1.19 billion. Our fourth quarter net income improved to $75.4 million, an increase of $4.8 million or 6.8%. Similarly, diluted earnings per share rose to $0.34 per share, up 9.7% from the year ago quarter. Operating income from the Motorcycle segment was $60.7 million, up 14.3% compared to last year's fourth quarter. The strong increase in Motorcycle business was driven by a 2.1% increase in revenue despite a 1.0% decline in shipments. Motorcycle segment operating income benefited from lower SG&A and restructuring spending, partially offset by a slightly lower gross margin percent. As expected, operating income at HDFS was down behind a higher provision for retail motorcycle loan losses. We're pleased with our fourth quarter and full year financial results. Now let's take a look at retail sales on Slide 12. Worldwide retail sales of new Harley-Davidson motorcycles were up 5.7% during the fourth quarter, driven by increases in both the U.S. and international markets. For the full-year, worldwide retail sales were up 4.4% compared to 2012. This increase was in line with our expectations, driven by momentum in the second half, following the launch of our model year 2014 motorcycles. Let's take a look at U.S. market on Slide 13. Retail sales in the U.S. were up 6.3% in the fourth quarter, positively impacted by the continued momentum from the 2014 motorcycle lineup. As we anticipated, U.S. retail sales growth in the fourth quarter slowed from the third quarter's growth rate, behind 2 key drivers. First, a tough year-over-year comparison of 8.4% growth in 2012. Q4 2012 benefited from the retiming of sales from Q3 when availability was limited by production disruptions related to our ERP implementation at York in Q3 2012. And second, we believe the impact of the absence of the popular Road Glide models in the 2014 model year become evident in Q4. Worldwide retail sales represented about 9% of total U.S. retail sales in the fourth quarter of 2012. Road Glide models were discontinued for the 2014 model year, but will be reintroduced when they're upgraded with Rushmore features. The absence of Road Glide was also evident in our market share for the quarter. As we have discussed, we have expected to give back some market share, which we did in the fourth quarter. We continue to be very excited about the momentum behind our model year 2014 products, especially Project Rushmore. During the second half of 2013, U.S. retail sales were up 14.8%, which was right in line with our expectations. For the full-year, U.S. retail sales were up 4.4%, and Harley-Davidson's market share was up 1.0 percentage points, finishing the year at 54.9%, which is a record high, and represents the fifth consecutive annual increase. Over the last 5 years, we have gained 13.4 points of share, and hold a 47%[ph] point lead over our nearest competitor. Finally, as expected, U.S. dealer retail inventory was down approximately 1,850 motorcycles at the end of Q4 compared to 2012. Year-end retail inventory was down, as we prepared to implement surge manufacturing at our Kansas City plant, and as we continue to remain committed to aggressively managing supply in line with demand. Overall, we're comfortable with the 2013 dealer retail inventory levels. For 2014, we expect U.S. year-end retail inventory to be up from 2013 levels, driven primarily by the addition of the new Street motorcycles. On Slide 14, you'll see retail sales in our international markets grew 4.7% in the fourth quarter and 4.3% for the full-year. In our EMEA region, Q4 retail sales were up 5.5%, driven by our core European markets, which were up 5.1% compared to last year. This increase was driven by strong growth in Northern Europe, led by Germany and France. For the full year, EMEA retail sales were down 1.0%. In 2013, our 601-plus cc market share in Europe was 12.8%, up 0.7 percentage points versus the same period last year. Our market share gains in Europe are especially encouraging in light of the economic situation and promotional discounting by our competitors in that region. While we're encouraged by fourth quarter results, we remain concerned with ongoing economic challenges in Europe and the potential impact on our European business. We will continue to focus on what we can control, which includes building our brand experience across Europe and expanding our distribution network in emerging markets in that region. In the Asia-Pacific region, retail sales were up 6.1% in the fourth quarter, driven by double-digit growth in emerging markets, especially India and China. For the full-year, the Asia-Pacific region delivered growth of 9.8%. Latin America region retail sales were down 2.8% in the quarter, as a result of a decrease in Brazil, partially offset by growth in Mexico. During the fourth quarter, Brazil's retail sales fell due to a very slow Brazilian motorcycle homologation process that kept us from getting our new Rushmore and Sportster motorcycles in the dealerships in 2013. These models have now been approved, and will start arriving in dealerships in mid February. For the full year, retail sales were up 13.1% in our Latin America region. Finally, retail sales in Canada were up 13.3% in the fourth quarter, and 4.6% for the full-year. As we have discussed, we have been very focused on investing in our international businesses. Since 2009, we have targeted 100 to 150 international new dealer points through 2014. And over the last 4 years, we have opened 118, with 2/3 being in emerging markets. On Slide 15, you'll see wholesale shipments of Harley-Davidson motorcycles in the quarter were down slightly compared to last year, as we prepared to initiate surge manufacturing in Kansas City this month. Fourth quarter shipments finished within our expected range of 45,000 to 50,000 motorcycles. During the quarter, the mix of touring motorcycles decreased 2.1 percentage points from the prior year, as we lapped a very high Touring mix during the same period last year. In 2012, Touring shipments were unusually high in the fourth quarter, following production disruptions related to the implementation of our ERP system at York. 2013 international shipments, as a percent of total, were slightly higher than 2012. We are committed to investing in international growth, and continue to believe international retail sales will grow at a faster rate than domestic retail sales over the next 3 to 5 years. On Slide 16, you'll see revenue for the motorcycle and related product segment was up 2.1% in the fourth quarter, and up 6.4% for the full-year. Motorcycle revenue was up 1.4% despite a 1.0% decrease in shipments. Fourth quarter revenue benefited from price increases versus prior year. For the full-year, motorcycle revenue was up 8.0%, behind a 5.2% increase in shipments. For 2013, the average motorcycle revenue per unit increased $412 from the prior year, primarily driven by higher pricing and favorable mix, partially offset by unfavorable currency impact. On average, our key currencies in 2013 were weaker against the U.S. dollar by approximately 3% compared to 2012. Parts and Accessories sales were up 4.8% in the fourth quarter, and 1.5% for the full year. General merchandise was up 2.5% in the quarter, and down 1.2% for the full year compared to 2012. Both the fourth quarter and full-year growth were impacted by lapping the strong sell-in of 110th anniversary apparel and accessories, which began in Q3 of 2012. Turning to restructuring on Slide 17. As we closed out our restructuring activity at the end of 2013, we recorded a Q4 restructuring benefit of $0.4 million, versus an expense of $1.6 million in the fourth quarter of last year. We also experienced approximately $4 million in temporary inefficiencies, versus approximately $7 million in last year's fourth quarter. For the full year 2013, we recorded a restructuring benefit of $1.2 million, versus a 2012 expense of $28.5 million. Temporary inefficiencies during the year were approximately $15 million, versus $33 million last year. We realized annual savings from all restructuring activities of approximately $310 million in 2013, met our targets along the way, and have successfully transformed our manufacturing operations and continue to advance our product development capabilities. We expect to realize approximately $10 million in additional savings during 2014 and going forward. With the completion of our restructuring activities, we have significantly reduced our fixed cost structure and therefore, improved the overall profitability of the company. At the start of restructuring our motorcycle fixed cost were in the range of 20% to 25% of our motorcycle manufacturing cost. Beginning in 2014, we expect our motorcycle fixed cost to be approximately 15% to 20% of motorcycle manufacturing cost, resulting in gross margin on incremental motorcycle volume of approximately 47%. Going forward, we'll remain intensely focused on improving our cost structure and managing the business to be stronger, more flexible and more profitable. On Slide 18, you'll see gross margin in the quarter was 31.5%, which was 0.3 percentage points lower than last year. Volume, price and raw materials were all favorable for the quarter, partially offset by unfavorable mix, foreign currency exchange and manufacturing. During the quarter, mix was unfavorable behind a lower mix of Touring motorcycles compared to 2012 when touring mix was high following the ERP implementation at York in Q3 2012. Foreign currency exchange was unfavorable for the fourth quarter as the result of a sizable devaluation of the yen, the Brazilian real and the Australian dollar on a year-over-year basis. Manufacturing cost in Q4 reflected the benefits from restructuring and lower temper efficiencies, as compared to last year's fourth quarter. However, manufacturing costs were adversely impacted by lower year-over-year production levels, as we prepare to implement surge manufacturing at Kansas City in 2014. Full year gross margin was 35.4%, which was up 0.6 percentage points from last year. We are very pleased with our gross margin growth in 2013, especially in light of the fact that foreign currency exchange negatively impacted gross margin by approximately 0.4 percentage points. On Slide 19, operating margin as a percent of revenue for the fourth quarter was 5.9%, up 0.6 percentage points compared to last year's fourth quarter. Operating margin of $60.7 million for the quarter was favorably impacted by slightly higher gross margin, lower year-over-year restructuring expense and lower SG&A spending. For the full year, operating margin as a percent of revenue was 16.6%, up 2.1 percentage points compared to last year. We were very pleased with our ability to leverage both our gross margin and operating expenses in 2013. Now moving on to our financial services segment on Slide 20. In the fourth quarter, HDFS operating profit decreased $1.7 million, or 2.6% compared to last year. The 2 primary factors impacting fourth quarter results where: First, net interest income was favorable $9.3 million, driven by a lower interest expense, primarily due to lower cost of funds; and second, the change in the provision for retail credit losses was unfavorable by $13 million due to higher retail credit losses. On a full-year basis, HDFS posted an operating profit of $283.1 million, a decrease of $1.6 million, or 0.6% compared to 2012. We are very pleased with the performance of the financial services business. Going forward, we continue to expect pressure on HDFS' operating income as the result of modestly higher credit losses and tightening net interest margins due to increase in competition and higher year-over-year borrowing costs. Now Larry will provide more detail on HDFS' operations on Slide 21. Larry?

Thanks, John, and good morning. During the fourth quarter, HDFS retail motorcycle loan originations increased 14.2%, or $58.3 million compared to the same period last year. The increase was primarily driven by higher year-over-year new retail motorcycle sales and a 4.3-percentage-point increase in retail financing market share for the fourth quarter compared to last year. For the full year, HDFS retail financing market share of new Harley-Davidson motorcycles sold in the U.S. increased to 54.5%, compared to 50.9% in 2012. The primary drivers of the year-over-year market share gain were the pricing changes in the prime segment, which were initiated in the second quarter in response to increasing competition and the strong sales of Touring motorcycles. Finance receivables outstanding increased 3.7% compared to a year ago, driven by growth in both the retail and wholesale portfolios. We believe the overall loan portfolio was solid, comprised of profitable loans, funded in both the prime and subprime segments. In 2013, between 75% and 80% of our new retail loan originations were prime. Moving on to credit performance on Slide 22. The 30-day delinquency rate for retail motorcycle loans at December 31, 2013 was 3.71%, or 23 basis points lower than 2012. This is the lowest year end 30-day delinquency level in at least 12 years. Annual retail credit losses increased by 30 basis points to 1.09% compared to 2012, primarily driven by lower levels of recoveries from accounts charged off in prior years. This was expected, given the lower level of credit losses in the past few years has left a smaller pool of potential recovery dollars. In addition, HDFS experienced an increase in losses due to lower recovery values on repossessed motorcycles following the launch of our new Rushmore motorcycles in the third quarter. We are pleased with the progress at HDFS in 2013, as we continue to maintain a strong liquidity position, deliver solid credit performance and contribute strong profitability. We remain focused on enabling sales of Harley-Davidson motorcycles, while providing an attractive return to Harley-Davidson, Inc., as demonstrated by the $120 million dividend HDFS paid to Harley-Davidson, Inc. earlier this month. Now let me turn it back to John.

Thanks, Larry. Now let's take a look at cash and liquidity on Slide 23. As you'll see at the end of the quarter, we had $1.17 billion of cash in marketable securities. In addition, we had $1.28 billion of available liquidity through bank conduit and credit facilities. We currently have and intend to continue to maintain a minimum of 12 months of projected liquidity needs in cash and/or committed credit facilities. During the fourth quarter, we repurchased approximately 2.7 million shares of Harley-Davidson stock for $176 million, with a full-year total of 7.7 million shares for $456 million. During the first quarter of this year, we plan to pay off the $303 million of H-D, Inc. high-interest debt. We do not expect to make a contribution to our qualified pension plans in 2014, as the funded status of our pension and postretirement plans improved by $600 million as a result of robust market returns and higher discount rates. As we have stated, returning value to our shareholders through increasing dividends and share repurchases is a top priority. We will continue to evaluate opportunities to enhance value for our shareholders. Now I'll review the remaining Harley-Davidson, Inc. financials on Slide 24. I'd like to highlight 2 items. First, with regards to operating cash flow, the company generated operating cash of $977.1 million in 2013. Operating cash flow was up $175.6 million from last year, primarily driven by increased earnings. And second, the full-year tax rate was 34.1%, compared to 35.1% in the year-ago period. This reflects the benefit of both the 2012 and 2013 research and development tax credit due to the retroactive reinstatement of credit -- of the credit in early 2013. The summary for the full-year 2013 is on Slide 25. We had net income of $734 million in 2013, which was up 17.6% compared to 2012. The motorcycle segment operating income was up 21.7% compared to prior year. Strong motorcycle segment growth was driven by higher revenues, improved gross and operating margins and lower year-over-year restructuring expenses. As expected, HDFS income was down slightly during 2013 behind higher credit losses. On Slide 26, you'll see our overall expectations for the year ahead. In 2014, we expect to ship 279,000 to 284,000 motorcycles on a worldwide basis, up approximately 7% to 9% from 2013 shipments. We believe the underlying worldwide demand fundamentals for Harley-Davidson motorcycles are strong. We expect shipping growth will be driven by the strong appeal of the Harley-Davidson brand; great model year 2014 and 2015 motorcycles; the introduction of the new Street motorcycles, which we estimate shipments of 7,000 to 10,000 units; continuing outreach momentum in the U.S.; and international expansion. During the first quarter, we expect to ship between 76,500 and 81,500 motorcycles, up approximately 2% to 8%, compared to last year's first quarter shipments of 75,222 motorcycles. During the last several years, we have provided gross margin guidance given our focus on our restructuring activities that were largely aimed at improving our gross margin profitability. Since 2009, we have significantly improved gross margin from 32.3% to 35.4%. As we go forward, we will provide guidance on operating margin as a key financial metric rather than gross margin. We believe that operating margin will more appropriately capture our opportunities to leverage both gross margin and our investment in SG&A. For 2014, we believe operating margin for the motorcycle segment will be between 17.5% and 18.5%, up from 16.6% in 2013. We believe 2014 operating margin will benefit from a modest increase in gross margin and from SG&A falling as a percent of revenue. Let's take a closer look at both. In terms of gross margin, we expect both puts and takes in 2014. On a positive side, we expect additional restructuring savings of approximately $10 million, plus about $8 million less in temporary inefficiencies than what we experienced in 2013. We also expect incremental margin behind higher production and lower pension expense. On the negative side, we expect headwinds to gross margin percent from mix, pricing and foreign currency exchange. As we have discussed, while we expect pressure on gross margin percent from mix and pricing, we expect both mix and pricing to positively impact 2014 gross dollar -- gross margin dollars. Finally, we expect foreign exchange to have an adverse impact on both gross margin percent and dollars. As we look forward to the first quarter, we expect gross margin percent to be down slightly year-over-year due to start-up costs associated with the launch of our new Street motorcycles. We expect incremental start-up costs to impact both Q1 and Q2. Looking forward at SG&A, we expect it will increase in 2014 as we continue to invest in future growth opportunities, but we expect that it will decline as a percent of revenue as we leverage our current SG&A spending. For HDFS, we expect operating income will be down modestly in 2014 compared to 2013. Capital expenditures in 2014 are expected to be between $215 million and $235 million. Finally, we expect full-year 2014 effective tax rate will increase to 35.5%. The increase is largely driven by the absence of the R&D tax credit in 2014. So, to recap, we are certainly pleased with our fourth quarter results and key accomplishments throughout the year. During 2013, we successfully increased sales, gross margin and operating margin, which resulted in a 20.6% increase in diluted earnings per share; initiated flexible manufacturing at our York facility; completed restructuring activities started in 2009; launched one of the most significant new model years in our history; celebrated 110th anniversary around world; and delivered shareholder value through increase dividend of 35.5%; and the repurchase of $456 million in company's shares. We're excited about 2014, and we'll 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] Your first question comes from the line of James Hardiman with Longbow Research.

I was hoping you could help us -- you talked a little bit about sort of the core versus outreach customers in 2013 being up. Some of that might have been a function of sort of the Project Rushmore bike not coming out until later in the year. How should we think about that in 2014? My general assumption is that Project Rushmore is the biggest thing you guys have going on, and that ultimately, you're focusing on the core first. So I'm assuming that, that will sort of reverse itself in '14. And I guess, specifically, how should we think about pricing in '14 on those bikes, and ultimately, mix?

James, this is John. James, as Keith had mentioned in the preamble, we couldn't be more excited about our work on outreach sales. So for the year of 2013, we grew outreach at 7.2%, and our core customer at 3.1%, which again was over twice the rate, and the second time in 2 years. You mentioned the impact of Rushmore coming late in the model year. Again, this is all part of the fatten the tail strategy. On one end of the spectrum, is products like Rushmore that encourage trade-up at a high revenue and at a very high margin, and typically are aimed at our core customer. But I want to remind you that Rushmore is selling extremely well with outreach customers. And as we've talked in the past, motorcycles like the Street motorcycle is the #1 selling bike to women, young adults, African-American and Hispanic -- I'm sorry, Street Glide. And so we're seeing a tremendous amount of bikes being sold -- Rushmore bikes being sold to outreach as well.

This is Keith, James. I just want to add on here that our strategy is, and has been, to grow our outreach customers at a faster rate. We want to grow our core customers, but we just believe and have believed and continue to believe that we have a lot of opportunity with these underserved demographics, and also, internationally. And so, again, while Rushmore has been extremely popular with our outreach customers, Street Glide has been extremely popular. I just want to remind you that we focused only on the Harley-Davidson brand, all of our dollars and product development are being focused on the brand. We have a whole pipeline of products coming that are intended to not only solidify and grow our core customer base, but to bring new outreach customers into our dealerships in the years to come as well.

Your next question comes from the line of Craig Kennison with Robert W. Baird. Craig R. Kennison - Robert W. Baird & Co. Incorporated, Research Division: Larry, I'd like to ask you, have you seen any change in credit availability at either the prime or subprime levels? At reference, Carmax, for example, one of your peers in the financial space where subprime has tightened a little bit.

I had seen that release on CarMax as well. I would say that we are seeing strong credit availability, particularly in the prime segment. I would say in the subprime segment, obviously, there's less availability, but we have not seen any pullback on competition in the subprime segment.

Your next question comes from the line of Rod Lache with Deutsche Bank.

Could you talk, first of all, a little bit more about the -- thanks for the volume estimates for the Street 750 and 500. How are those positioned, such that they won't affect the Sportster and some of your other products? Do you feel that those would be largely accretive? And if I could just also ask for clarification on the margins -- the margin drivers. Can you give us some sense of how you're thinking about FX and commodities in terms of magnitude this year, just given some of the volatility we've seen recently?

Great. Rod, this is John. With regards to the Street 500 and 750, again, as Keith had mentioned, we couldn't be more excited to be introducing these models in the second quarter. When we look at the overall pricing, in the U.S., the MSRP will be from $6,700 from the 500cc motorcycle to $7,500 for 750, a very attractive price point, and certainly considerably lower than Sportster. And Sportster's range anywhere from $8,000 to about $11,000. And even with a much lower MSRP, we're looking for ongoing gross margins of Street to be in line with our Sportster line. So we feel very good about the margins and certainly, the price point. Do we expect some cannibalization of Sportster? Yes, we would expect a little bit of cannibalization, especially of 883, but nothing all that great because of, again, the differential in the price point, as well as the type of bike and the attitude of the bike. Remember, this thing is designed for an urban environment and young adults. It's a Dark Custom, it will appeal to outreach customers. It's liquid cooled, which is very different with our new revolution x engine. So there'll be some cannibalization, but not to any great extent. I think then, Rod, you had asked about FX and raw materials. First of all, when we look in 2014 on raw materials, we would expect it to be largely flat on a year-over-year basis. We're not seeing any big moves in raw materials that would cause us concern at this point. And of course, we continue to monitor that. With regards to foreign currency, we do expect it to be unfavorable in 2014. And I believe that would be the third year of unfavorability in terms of foreign currency. And as you know, this year was quite painful in terms of foreign currency exchange. On a full-year basis it cost $39 million, and that was largely driven by significant devaluation of the yen, the Australian dollar and the Brazilian real. So as we look forward, as we exit this year and the positions that we have on and the hedges that we have on, as well as where currencies are today, and the general expectation that the U.S. dollar will strengthen, we do expect foreign currency exchange to be unfavorable, both on a dollar basis, as well as affecting our gross margin percent in 2014.

Your next question comes from the line of Tim Conder with Wells Fargo Securities.

A couple of things here. The gross margin, John, you alluded to the start-up costs related to the Street in the first half of the year. Should we interpret that to mean that the margins in the first half of the year potentially could be down a little bit, given all the other factors that you cited? And then the other piece here relates to cash flow. What's that minimum liquidity that you talk about, and above that, should we expect all free cash to be returned in dividends or share repo?

Okay, Jim. When we look at that Street introduction, there will be incremental start-up costs associated with it. Remember, this is the first time we're introducing a product in 2 separate plants in the history of the company, and one of them will be international; the first time we're doing manufacturing outside the United States, an entirely new supply chain. There's a lot of things happening with this product that are going to drive some higher start-up costs, and those costs are going to hit in the first half. And so, what we can say is that we do expect first quarter gross margin percent to be down slightly on a year-over-year basis, driven by those start-up costs. But again, once we get it up and running, we expect margins that look very similar to Sportster on a much lower revenue. In terms of overall cash flow and liquidity, as we've talked about, we are going to maintain 12 months of liquidity in terms of cash and committed credit facilities into 2014 and then in the foreseeable future. Anything beyond that, that we would deem as excess cash is coming back to our shareholders, and I think we've got a great track record over the last couple of years of delivering all that cash back. So when you look at our flows this year, we had $456 million go back in the form of dividend repurchases, $188 million in dividends, and then $175 million contribution to our pension plans. Now as we look to 2014, we clearly are not going to be funding the pension plan, so that will be additional excess cash to be returned to our shareholders or to pay down debt. So yes, all excess cash will come back to our shareholders, and again, with the reminder that we will be paying down the Buffet debt of $303 million here, and I believe the next week.

Your next question comes from the line of Greg Badishkanian from Citi Research.

Just in terms of sales for 2014, your guidance, 79% increase, a little better than my estimate. And I'm just wondering, typically you provide more conservative guidance, and that growth rate is higher than you've typically guided in the past. Is it just due to the Street bikes? And could you have a little bit of cannibalization, and just kind of the other factors there. Because you have, I guess, in the second half, you have new model year 2015 products, what are you thinking of those? And then, to kind of look at the run rate of the fourth quarter going into next year, how much did weather really impact that 6% U.S. retail sales number, because obviously, every -- all the leisure vehicle companies have seen a pretty big impact from weather.

Greg, we feel great about our guidance of 279,000 to 284,000. All I can say is that we believe we'll ship between those numbers. The drivers are the appeal of the brand. I don't think the brand has ever been stronger. The brand fundamentals are very strong. We've got Rushmore momentum coming in the model year '14 products. And yes, we're very excited about model year 2015 motorcycles. The Street adds a couple points of shipment margin under that 7% to 9%, and remember, the other thing about Street is that's just the initial rollout. It's only 5 markets this year, and we'll continue to roll it out over 2015. And then we've got some momentum in international business, and we're happy to see Europe start to turn the corner there, with 5% growth and especially, core Europe growing. So all those things make us very comfortable with our shipment guidance of 279,000 to 284,000 units. Your other question, Greg, was with regards to the fourth quarter, and overall retail sales in the fourth quarter, and were they impacted by weather. And it doesn't matter if you're a local market or in a big region, weather affects the timing of motorcycle sales. And so yes, we do believe that we were impacted by weather, but this is a business that we're in, and we're always going to see weather push sales. We don't think that we've lost any sales. We do think that they'll be pushed forward, but in particular, starting in the second month of -- second week of November, weather turned a little bit worse than a year ago levels, but again, we'll pick that volume up, and we feel good about where we're at. I think the bigger impact on our Q4 sales was really the Road Glide -- the absence of the Road Glide, which we completely expected, and that's going to provide some headwind with regards to retail sales as we go forward, as well as market share. And again, when you look at Q4 of 2012, Road Glide represented 9% of that volume, and that Road Glide customers are incredibly loyal to that motorcycle. It is different; it's a different design, it's a different look and a different ride. And so they -- knowing that, that -- those models are going to come back with Rushmore features, we believe that they're out of the market, and that's probably the biggest impact that we had on our retail sales in the fourth quarter.

Your next question comes from the line of Pat Archambault with Goldman Sachs.

Just looking -- with this being, I think, the first year of kind of OpEx/SG&A with fairly minimal restructuring charges in it compared to history, I think it came in somewhere around 18.9%, 19%. If you look back historically, the last time you kind of recorded a year where you had similar levels of revenue that SG&A/OpEx number was, of course, lower in the 15s. And I understand that it probably costs more to sell a bike now than it did back then, but could you, A, maybe just give us a sense of what the structural differences are in the business now? And then maybe a little bit more about the longer-term opportunity to leverage that down because it does look like it's a potential margin opportunity even beyond 2014.

Pat, so overall, SG&A, let's start with the fact that it represents -- it's about 80% fixed. But that doesn't mean that it isn't subject to inflation because it certainly is. But when we look at our motorcycle growth and revenue growth, the SG&A base is highly leverageable. Again, about 80% fixed, 20% is more variable and more directly tied to motorcycle sales. So as we look forward, I mean there's a tremendous opportunity to leverage that base of SG&A spending, and that's why we did move from guidance to add gross margin to operating margin. We want to make sure our investors, as well as our employees, are focused on that opportunity. I don't know when you go back and look over time, you'd asked about SG&A because there was inflationary pressures, and also, the big investment we've made over the last 3 years in our international expansion have pushed SG&A up. But again, a lot of that footprint is set from an international perspective, and we expect to leverage that with international growth exceeding our domestic growth.

Your next question comes from the line of Jaime Katz with MorningStar.

Can you guys talk a little bit about how you're thinking about pushing price increases through, going forward, particularly overseas, and maybe what you're seeing in way of competitive environment over there promotionally?

Jaime, this is John. We actually don't think about it as pushing price increases through. We think about more of delivering value to our customers that they're willing to pay for, and I think Rushmore is a great example of that. We're able to increase -- well, drive the entire line of pricing at 3.5% in model year 2014, certainly more of a larger price increase of about 5% on our Touring motorcycles. And it was delivering an incredible amount of value, because we know our customers better than anyone else in the world, and we'll continue to do that. We think that the brand gives us a lot of opportunity and pricing power as we go forward, but I think the pricing opportunities are going to be driven by the life cycle plan that we have in design. And the models that we're going to be bringing forward will allow us to continue to increase our prices behind the value that we deliver. I'm sorry, the other question was competitive environment internationally. We feel great about opportunities to expand our business internationally. We certainly had some headwinds in Europe, and this quarter represents the best growth that we had in Europe in the last 11 quarters. So hopefully, we'll see Europe economically get better. We do expect some up-and-down quarters there, but that's really where we've had the most pressure in terms of a competitive standpoint, and even within Europe we've been -- the team has done a great job at growing market share, and grew a significant amount of share in 2013. So the rest of our focus internationally is really through building the distribution network and building the brand internationally.

Your next question comes from the line of Gerrick Johnson with BMO Capital Markets.

In U.S. you gained 2 points a share in the third quarter without the road glide. Now you're down about 3% in the fourth quarter. Can you just discuss other factors that may have impacted share, perhaps talk about the competitive environment, products and promotion and do you anticipate gaining U.S. share in 2014?

Gerrick, in Q4, we did lose some market share. And as we talked about at the Investor Day back in August, we expected that we would be given back some market share. So there was 3 drivers of the market share in the third quarter. First was, similar to retail sales, when you look at the company, the comp was a little bit tougher in the fourth quarter. On a year-ago basis, we lost share in the third quarter of 2012 because of the fact that we're putting in the ERP system, and we pushed volume out of that quarter into the fourth quarter, so that was part of what we were comparing against. The biggest driver though of share loss in the fourth quarter was the absence of Road Glide. And again, when you have a year-ago product that sold 9% of your total U.S. volume, and we no longer have those models in the lineup, and this year is the comparable and we believe the loyalty of those customers we'll have them out of the market until we reintroduced that product, that was the largest impact of the share loss. And then also, during the quarter, we had increased competitive activity. As we look forward to 2014, we would expect headwinds in terms of market share for the next couple of quarters, in particular, due to the absence of Road Glide.

Your next question comes from the line of Felicia Hendrix with Barclays.

A lot of my questions have been answered, and you gave great color on your prepared remarks, so I appreciate that. Just to stick on this market share commentary, just wondering if you could touch upon what you're seeing from your newest competitor, Indian, as they've been ramping, and do you see that as being a bit of a headwind to some of your market share improvement? Or is it all the -- just a return of the Road Glide? Maybe if you -- I don't know if you can calculate this, but maybe if you could give us some kind of guesstimate of what your market share might have been, kind of adjusting for the Road Glide or normalizing for the absence of that?

Felicia, it's John. Let's start with the last one first. We're not going to speculate on what market share would have been had the Road Glide been in there, but just to suffice to say that it was a huge part of our sales in 2012, and it's no longer there. When we look at Indian, they sold some motorcycles in the fourth quarter. We expected that. They've been out of business for quite sometime and Polaris has been promoting them heavily. So they sold some motorcycles, but nothing outside our expectations at all. So it's what we expected. It hasn't thrown us off our plan at all. We'll see how they continue to roll out. I would imagine a lot of that was driving the overall category up and the new people coming in picking up a nostalgic bike, but it's going to take some time to understand where everything nets out, but everything is well within our expectations.

And Felicia, this is Keith. I'll just add that as we sat back and look at these numbers here sort of as a leadership team, we have to remember that we did gain a full point of market share this year, and that was our fifth consecutive year. And over the last 5 years, the market share has increased 13.4%, and we're at all-time high market share numbers in our company now. Having said that, we take every one of our competitors seriously. And clearly, Indian has targeted Harley-Davidson, but so has Honda and so has Suzuki and Yamaha and other companies over the years as well. And so while we monitor that regularly, we take all of our competitors seriously, what we've done here is we've transformed our company, and we've also transformed the culture in our company and how our employees think. And none of our employees take our market share leadership for granted. None of our employees think that we're great, but they all know that we're on a journey to be great. And so everything that we do in our company, everything that we've done, every ounce of energy that collectively we've put into our company in the last several years has been all about designing and developing and bringing great new products to market, which you're beginning to see, and there's more to come. It's been about manufacturing in a great way. We -- our plant in York, Pennsylvania -- the transformation that took place in that plant in less than 4 years is unbelievable. We were just awarded one of the Industry Week's Best Plants in America. And it's really an example of what we can do -- an American manufacturing to be competitive and provide great, world-class products and export freedom around the world. So -- and so that's what we're all about, and our dealers are all in. Our dealers are stepping up their game in terms of providing great customer experiences every day that are personalized, that are trusted and that are social. And so, we're -- we got our eyes straight ahead, right? We're not looking back, and we think that we're going to be able to compete very well.

And your last question comes from the line of Adam Jonas with Morgan Stanley.

Just a question on pricing for both of used and your expectation of new. You mentioned that you're seeing some lower recoveries within HDFS, with the Rushmore success. I'm just wondering is that, A, is one of the expectations and, whether there's any commentary of the overall environment for your used bikes. And then on the pricing comment, the guidance. I think you said price mix would be positive for dollars, but negative for margin. If you were to isolate pricing, specifically, is that also the case that it would be negative for margin? And if so, I was just wondering is that because you expect content to be higher? Just a bit more color there.

Jonas, I'll start with the second question first. In terms of pricing, this really is driven largely by the model year '14 pricing in which we increased our overall revenue across all the lines, across all the regions by about 3.5%. When you look at the gross margin piece of that that increased at a slightly faster rate. It increased at 4-point -- the cost increased at 4.2%. So what that cascades down to is gross margin growth of about 2.1%. So we had higher revenue and certainly higher margins and higher dollar profits. But when you look at that content growing at a little -- with our cost of goods sold growing little bit faster rate than revenue, we did see a headwind on gross margin percent by about 0.05 point and we feel that was the right thing to do for our shareholder, and to drive shareholder value, and make sure that we didn't over price the motorcycles. They've got a tremendous amount of content, but there are some stiff increases in there of up to about $1,800 on some of the models. So we want to digest that, and again, as we mentioned earlier, we think that we have pricing power as we move into the future, which you're absolutely right. Is dollar profit in revenues accretive due to our pricing actions and we'll be slightly -- so slight headwind to overall gross margin percent.

And Jonas, this is Larry. Just adding on what you said about used. Not surprisingly, I think with the great introduction of Rushmore, and all the content, those motorcycles have, number one, dealers are taking a fair amount of trades when selling those new motorcycles. That has meant they have not had to go to the auctions quite as much for their used motorcycle source. And this has put a little bit downward pressure on recovery values. Also some downward pressure probably on used motorcycle prices.

Okay, thanks, gentlemen, thanks, everybody. Thanks for joining us today and this morning. The audio and visual support for today's call will be available at Harley-Davidson.com. The audio can also be accessed until February 13 by calling (404) 537-3406, or (855) 859-2056 in the U.S. The pin number is 26990236#. We appreciate your investment in Harley-Davidson, and if you have any questions, please contact the Investor Relations at (414) 343-8002. Thank you.

This concludes today's conference call. You may now disconnect.