Harley-Davidson, Inc. (HOG) Q4 2014 Earnings Report, Transcript and Summary

Good morning. My name is Susan, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Fourth Quarter and Full-Year 2014 Earnings Conference Call. [Operator Instructions] Thank you. Amy Giuffre, Director of Investor Relations, you may begin your conference.

Thank you, Sue, and welcome to Harley-Davidson’s fourth quarter 2014 earnings conference call. The audio for our call is webcast live on harleydavidson.com and you can access the supporting slides on our site by clicking About Harley-Davidson at the bottom of the homepage, then Investor Relations and Events and Presentations. Our comments will include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC. Harley-Davidson disclaims any obligation to update information in this call. This morning we’ll hear from Harley-Davidson's CEO, Keith Wandell; CFO, John Olin; and President of Harley-Davidson Financial Services, Larry Hund. Then, we’ll take some questions. So let’s get started, Keith?

Good morning, and thanks for joining us on the call. John will provide the details on the quarter and the year, but first, I want to highlight some of our major achievements for 2014 and then briefly touch on some of our future opportunities. Full year diluted EPS grew more than 18%, making this the fifth consecutive year of double digit EPS increases. Consolidated revenue topped the $6 billion mark for the first time since 2006. Gross and operating margins were up strongly, driven by our focus on operational efficiencies and our commitment to continuous improvement in every aspect of our business. A big piece of these improved efficiencies came from manufacturing. 2014 marked our second year of flexible Surge Production. The financial impacts of Surge and all the other improvements in manufacturing in recent years have been remarkable to say nothing of the added flexibility that Surge gives us to capitalize on changing market conditions. On the product side, our new 2015 motorcycles have been extremely well received. Retail sales of new Project Rushmore motorcycles, including the return of the Road Glide, the introduction of Classic Low and Ultra Limited Low touring bikes, CVO Street Glide and the Freewheeler have been very strong. We also rolled out the Street 750 and 500 last year, designed for a new generation of global riders and the response has been outstanding. And in the fourth quarter, retail sales of Street drove double digit gains in Harley-Davidson’s small cruisers in the United States. To date, the majority of initial US Street purchases have been new to the Harley-Davidson brand. In the international markets, Street is selling very well. And in India, the Street 750 was recently named Motorcycle of the Year. In 2015, Street will be available in nearly all of our markets worldwide. Also, we continued to see an extraordinary level of interest and positive feedback for a bike that’s not even on the market, Project LiveWire, Harley-Davidson’s first electric motorcycle. In 2014, we gave more than 6800 demo rides in the US, with the vast majority of riders saying that it far exceeded their expectations. The demo tour is moving into Europe, Canada, and Asia Pacific in 2015. In line with our strategic plan, [indiscernible] increasingly significant role for the company. In 2014, international sales of new Harley-Davidsons grew at more than 5% and accounted for more than 36% of total retail Harley-Davidson motorcycle sales. That’s up from 30% in 2008. We’ve said for several years that we expect international sales to grow at a faster rate than domestic sales. And in 2014, that came into play. The Asia Pacific, EMEA and Latin America regions posted their highest new retail motorcycle sales on record for each region. And we’re also seeing success as a result of our US outreach strategies. In 2014, for the third straight year, sales of new Harleys to our outreach customers consisting of young adults, women, African Americans and Hispanics grew at more than twice the rate of sales to core customers. From Street to Touring, we’re delivering motorcycles that bring these new riders into the Harley-Davidson family. So overall, 2014 was another great year and we remain focused on managing the business for the long term, building on our strategies and driving continuous improvement. It’s been a little over five years since we unveiled our strategies to focus solely on the Harley-Davidson brand, to be customer led in everything we do, to transform every facet of our business, and ensure we’re developing great leaders at every level of the company to drive our performance. Looking at what we’ve achieved since 2009, there’s no doubt in my mind it was the right strategy and I’m extremely proud of every one of our team and the proof is in the results. But looking ahead, our strategy will continue to focus on maximizing our opportunities in order to increasingly realize our full potential as a growing global company. That includes what we see as tremendous opportunities in bringing new wow products to market, further extending our international reach, and expanding our opportunities with outreach customers. It also includes further optimizing Harley-Davidson’s agility in manufacturing, product development and customer retail experience. With ongoing strategic direction and clear focus our business objectives remain extremely relevant: first, outperform the S&P 500 over time; to grow international retail sales at a faster rate than US sales; and within the US, to grow sales to outreach customers at a faster rate than sales to our core customers; and grow earnings at a faster rate than revenue. So to recap, we’ve seen proof of what can be accomplished through a sound strategy, focus and determination and by working together as one company, one team moving in one direction. We also know our work is never done when it comes to continuous improvement and I have every confidence that we will continue to achieve great things together. With that, I want to thank you for your interest and your investment in Harley-Davidson and I’ll turn it over to John for more detail on the quarter and the year.

Thanks, Keith, and good morning, everyone. I'll discuss our fourth quarter and full-year financial results starting on slide 10. During the quarter, Harley-Davidson, Inc. consolidated revenue was $1.20 billion, net income in the quarter was $74.5 million, and diluted earnings per share were $0.35 per share. Operating income for the Motorcycle segment was $35.9 million, 40.9% lower than last year's fourth quarter. Segment revenue was flat to prior year. The decrease in the Motorcycle business operating income was driven by a lower gross margin percent and higher year-over-year SG&A spending. Operating income at Harley-Davidson Financial Services was up 1.8% year-over-year. Also during the quarter, we had lower year-over-year interest expense behind the retirement of our high interest debt last February and a lower effective tax rate. We will continue to focus on delivering strong margins and strong returns over the long term. Now, let’s take a closer look at fourth quarter performance, starting with retail sales on slide 11. Q4 worldwide retail sales of new Harley-Davidson motorcycles were up 2.8% over last year’s increase of 5.7%. This year’s Q4 results were driven by strong increases in our international markets, partially offset by a decline in the US. Fourth quarter worldwide retail sales reflected an outstanding consumer response to our new 2015 model year motorcycles, including Street, which sold very well in initial rollout markets. Retail sales gains from the new model year bikes were partially offset by a year-over-year decline in retail sales of our initial Rushmore models as we lapped the enthusiastic customer response after the initial launch of Rushmore in 2013. For the full year, worldwide retail sales were up 2.7% compared to 2013. 2014 retail sales reflected very challenging US weather conditions in the first half of the year and the absence of the popular Road Glide models for much of the year. As we exited the fourth quarter, we believe our brand and core demand fundamentals remain very strong. In 2015, we expect continued momentum behind our model year 2015 motorcycles, including increased worldwide distribution of Street motorcycles. Let’s take a look at US market on slide 12. Retail sales in the US were down 1.6% in the fourth quarter compared to the prior year which included initial Rushmore launch. We believe the factors that affected US retail sales during the quarter were: first, retail sales of the seven new model year 2015 Rushmore models were very strong; as anticipated, Road Glide sales were very robust and they represented about 14% of US retail sales in Q4 versus last year when Road Glide only represented about 4% of sales. Second, retail sales of the new Street motorcycle appear to be largely incremental. We’re pleased to see that the majority of initial Street purchasers were new to the Harley-Davidson brand, reinforcing the strategic importance of this new growth opportunity. In fact, on a combined basis, retail sales of our Sportster and Street motorcycles were up double digits in the quarter. And finally, our retails sales of the first Rushmore models, which launched in August of 2013, were down year-over-year as we lapped the initial enthusiastic customer response to these highly innovative game-changing motorcycles. Q4 2013 retail sales of non-Road Glide Touring models were up in excess of 40% compared to Q4 2012. That set up a very tough comparison for Q4 2014. For the full-year, US retail sales were up 1.3%. As I’d mentioned, full year retail sales benefitted from strong sales of Rushmore and Street motorcycles. However, we believe 2014 retail sales were adversely impacted by weather and the absence of Road Glide. Full year market share decreased 1.6 percentage points, largely driven by the absence of Road Glide. We believe our market share was also impacted by increasing discounting by our competitors late in the year. Finally, as expected, US dealer retail inventory was up approximately 2900 motorcycles at the end of 2014 compared to 2013, largely due to the initial dealer fill of Street models for retail. We believe year end dealer inventories is in a good position going into 2015. On slide 13, you'll see retail sales in our international markets were up 9.2% in the fourth quarter and 5.4% for the full year. We’re very pleased with our international performance in 2014. In fact, we experienced all-time high retail sales for EMEA, Asia Pacific and the Latin America regions. In our EMEA region, Q4 retail sales were up 8.7%, driven by growth in nearly all countries throughout the region. In particular, we saw strong growth in Southern Europe, Germany, Switzerland, and emerging markets in the region. For the full year, EMEA retail sales were up 6.4% and full year market share in Europe was 12.0%, down 0.8 percentage points behind the introduction of several performance-oriented models by the competition. In the Asia Pacific region, retail sales were up 14.2% for the fourth quarter. Retail sales in emerging markets within the region were up significantly driven by India where retail sales more than doubled during the quarter as a result of very robust demand for our new Street motorcycles. In addition, sales continue to be very strong in China. And in Japan, sales growth turned positive following a couple down quarters which were driven by the impact of an increase in the consumption tax. For the full-year, retail sales were up 11.8% in our Asia Pacific region. Latin America region retail sales were up 4.7% in the quarter, as a result of strong growth in Mexico, which Brazil up modestly. For the full year, retail sales in the Latin America region were up 2.1%. Finally, retail sales in Canada were down 5.7% in the fourth quarter, and down 10.8% for the full year. We believe currency-driven price increases impacted retail sales throughout the year. While we’re encouraged by fourth quarter international performance, we remain concerned with ongoing economic challenges in several markets. We will continue to focus on what we can control, which includes building our brand experience across the world and expanding our distribution network in emerging markets. Since 2009, we have added 136 new international dealer points to the distribution network. We believe we can continue to realize strong international growth opportunities by prudently expanding our distribution network and increasing our brand relevance by delivering new products such as Street and Rushmore which appeal to the global customers. On slide 14, you’ll see wholesale shipments of Harley-Davidson motorcycles in the quarter were up 1.2% compared to last year. Fourth quarter shipments finished within our expected range of 46,500 to 51,500 motorcycles. During the quarter, the mix of Touring motorcycles increased 3.5 percentage points from the prior year, as Rushmore models continued to stimulate demand in the market. Also, during the quarter, the shipment mix of our Street and Sportster category was up 3.1 percentage points, reflecting our first year of Street shipments. For the full year, we shipped 9900 Street motorcycles worldwide at the high end of our expected shipment range of 7000 to 10000 motorcycles. We expect that the Street and Sportster category mix will be considerably higher in 2015 behind increased Street shipments. 2014 international shipments as a percentage of the total were 35.7%. We are committed to investing in international growth and continue to believe international retail sales will grow at a faster rate than domestic retail sales over the next few years. On slide 15, you'll see revenue for the motorcycles and related product segment was flat in the fourth quarter, with a 1.2% increase in motorcycle shipments. Revenue was primarily impacted by unfavorable currency exchange. For the full year, motorcycle segment revenue was up 5.9%, behind a 3.9% increase in motorcycle shipments. During the quarter, the average motorcycle revenue per unit decreased $133 from the year ago quarter behind unfavorable currency exchange and unfavorable mix, partially offset by higher pricing. On average, our key currencies were weaker against the US dollar by approximately 9% compared to Q4 2013. For the full year 2014, average motorcycle revenue per unit increased $584 from 2013, driven by higher pricing and favorable mix, partially offset by unfavorable currency exchange rates. Parts and Accessories sales were down 2.2% in the fourth quarter, and up 0.2% for the full year. For the full year, P&A retail sales benefitted from strong international sales, partially offset by lower accessories sales following the strong launch of Project Rushmore accessories in 2013. General merchandise was down 1.1% in the quarter, and down 3.7% for the full year compared to 2013. Both the fourth quarter and full-year results were impacted by our aggressive SKU reduction plan across our apparel offering in an effort to transform the retail customer experience with a more targeted assortment of popular styles. On slide 16, you’ll see gross margin in the quarter was 30.5%, which was 1.0 percentage points lower than last year. Gross margin performed very well with volume, price, mix, all being favorable during the quarter, partially offsetting unfavorable foreign currency exchange. During the quarter, overall mix was a benefit of $4.4 million, driven by a rich sales mix of parts and accessories and general merchandise. As expected, motorcycle family mix had an unfavorable impact on margin, driven by higher Street shipments. The mix of models within the families was largely flat to prior year. For the first quarter 2015, we expect mix to adversely impact margin, driven by increased shipments of Street motorcycles, which were not in year ago shipment. During the first quarter, we will continue to expand Street distribution to most of Western Europe, Japan, Australia, Mexico and Canada. Foreign currency exchange was $22.8 million unfavorable for the fourth quarter. This was driven by the significant weakening of our key foreign currencies within and on a year-over-year basis. The euro, yen, Brazilian real, and Australian dollar devalued an average of 6% from the beginning to the end of the quarter and were 9% weaker compared to the prior year quarter. This resulted in an unfavorable revenue impact of approximately 2.5% and an unfavorable revaluation of foreign-denominated assets on the balance sheet. Full year gross margin was 36.4%, which was up 1 percentage point from last year. We are very pleased with our 2014 gross margin growth and the balance composition of margin growth across volume, price, mix and manufacturing productivity. On slide 17, operating margin as a percent of revenue for the fourth quarter was 3.5%, down 2.4 percentage points compared to last year’s fourth quarter. As anticipated, operating income of $35.9 million for the quarter was unfavorably impacted by lower gross margin and higher SG&A spending. For the full year, operating margin as a percent of revenue was 18.0%, up 1.4 percentage points compared to last year. We’re very pleased with our ability to leverage both our gross margin and operating expenses in 2014. Going forward, we remain intensely focused on the cost structure that will enable growth and continuous improvement to drive our business to be stronger, more flexible and more profitable. Now moving on to our Financial Services segment on slide 18, in the fourth quarter, HDFS operating profit increased $1.1 million, or 1.8% compared to last year. The fourth quarter increase was driven by $5.4 million of improved profitability from on non-lending activities. On a full year basis, HDFS posted operating profit of $277.8 million, a decrease of 1.9% compared to 2013. We were very pleased with the performance of the financial services business. The business remains very profitable with industry leading returns and a strong portfolio. Now Larry will provide more detail on HDFS’ operations on slide 19. Larry?

Thanks, John, and good morning. During the fourth quarter, HDFS retail motorcycle loan originations increased 4.7% or $22.3 million compared to the same period last year. The increase was primarily driven by a 1.6 percentage point increase in retail financing market share for the fourth quarter compared to last year and a higher average amount financed per motorcycle. For the full year, HDFS continued to have a strong retail financing market share of new Harley-Davidson motorcycles sold in the US. Our market share increased to 56.8%, compared to 54.5% in 2013. Finance receivables outstanding increased 7.4% compared to a year ago, driven by growth in both the retail and wholesale portfolios. We believe the overall loan portfolio was solid, comprised of profitable loans funded in both the prime and subprime segments. In 2014, approximately 80% of our new retail loan originations were prime. Moving on to credit performance on slide 20, the 30-day delinquency rate for retail motorcycle loans at December 31, 2014 was 3.61%, or 10 basis points lower than year end 2013. This is the lowest year-end 30-day delinquency level in at least 13 years. Annual retail credit losses increased by 13 basis points to 1.22% compared to 2013, primarily driven by lower levels of recoveries from accounts charged off in prior years and modestly higher credit losses as a result of changing consumer behavior. We are pleased with the progress at HDFS in 2014, as we continue to contribute strong profitability, delivered solid credit performance and maintained a strong liquidity position. We remain focused on enabling sales of Harley-Davidson motorcycles, while providing an attractive return to Harley-Davidson, Inc., as demonstrated by the $100 million dividend HDFS paid to Harley-Davidson, Inc. this month. Now let me turn it back to John.

Thanks, Larry. Now let's take a look at cash and liquidity on slide 21. You'll see at the end of the quarter, we had $964.2 million of cash and marketable securities. In addition, we had $1.22 billion of available liquidity through bank credit and conduit facilities. We currently have and intend to continue to maintain a minimum of 12 months of projected liquidity needs in cash and/or committed credit facilities. During the fourth quarter, we successfully completed a $400 million 3-year medium term note offering with a coupon rate of 1.55%. Also this month, we completed a $700 million asset-backed securitization transaction with a weighted average interest rate of 1.19%. We further demonstrated our efforts to return value to our shareholders by repurchasing 3.3 million shares of Harley-Davidson stock for $222.1 million during the quarter. As we have stated, returning value to our shareholders is a top priority. We will continue to evaluate opportunities to enhance value for our shareholders through increasing dividends and repurchasing shares. Now I'll review the remaining Harley-Davidson, Inc. financials on slide 22. I'd like to highlight two items. First, with regards to operating cash flow, the company generated operating cash of $1.15 billion in 2014. Operating cash flow was up $169.6 million from last year, primarily driven by lapping of last year’s pension contribution of $175 million and increased earnings, partially offset by higher wholesale finance originations And second, the full-year tax rate was 34.2%, compared to 34.1% in the year-ago period. During the quarter, the R&D tax credit was reinstated for 2014, so full year benefit was recognized entirely in the fourth quarter. The summary for the full-year 2014 is on slide 23. We had net income of $844.6 million in 2014, which was up 15.1% compared to 2013 and earnings per share was up 18.3%. The motorcycle segment operating income was up 15.2% compared to prior year. The motorcycle segment growth was driven by strong revenue growth and improved gross and operating margins. As expected, HDFS income was down slightly during 2014 behind higher credit losses. Finally, we had lower year-over-year interest expense behind the retirement of our high interest debt last February. On slide 24, you'll see our overall expectations for 2015. In 2015, we expect to ship 282,000 to 287,000 motorcycles on a worldwide basis, up approximately 4% to 6% from 2014 shipments. We believe the underlying worldwide demand fundamentals for Harley-Davidson remains strong. We expect shipping growth will be driven by the strong appeal of the Harley-Davidson brand; great model year 2015 and 2016 motorcycles; full year Road Glide availability, improving availability and expanding distribution of the new Street motorcycles, continuing outreach momentum in the US and international expansion. During the first quarter, we expect to ship between 79,000 and 84,000 motorcycles, which is up approximately 4% to down 2% compared to last year’s first quarter shipments. For 2015, we believe operating margin for the motorcycle segment will be between 18 and 19%, compared to 18.0% in 2014. In 2015, we expect gross margin will be up modestly impacted by both puts and takes. On the positive side, we expect favorable impact from motorcycle pricing, incremental margin driven by higher motorcycle production and strong productivity gains. On the negative side, we expect lower gross margin as a result of unfavorable foreign currency exchange, increased pension expense and unfavorable mix. To dimensionalize the foreign currency exchange risk, if currency held at yesterday’s exchange rates throughout 2015, our motorcycle segment revenue would be adversely impacted by approximately 2.25%. And while we have a significant portion of the year hedged at attractive rates, we would expect about half of the unfavorable revenue dollar impact to translate into lower gross margin. Pension expense will increase in 2015 as a result of a lower discount rate and change in mortality assumptions. Finally, we expect the impact of mix to be negative as we continue to increase distribution of Street motorcycles. Looking at SG&A, we expect spending to increase in 2015 as we continue to invest in future growth opportunities, but we expect it will decline as a percent of revenue as we leverage our current SG&A spending. For HDFS, we expect operating income will be down modestly in 2015 compared to 2014 as a result of higher credit losses and tightening net interest margins due to increasing competition and rising borrowing costs. Capital expenditures in 2015 are expected to be between $240 million and $260 million as we increase investment in product development focused on bringing exciting new products to market and as we continue to invest in our systems infrastructure. Finally, we expect our full-year 2015 effective tax rate will be approximately 35.5%, which reflects the absence of the R&D tax credit in 2015. So looking back, we are very pleased with our 2014 results and key accomplishments. In 2014, we successfully increased sales, gross margin and operating margin, which resulted in an 18.3% increase in diluted earnings per share; expanded our flexible manufacturing capability at our US plants; continue to grow outreach in excess of two times our core customer growth rate in the United States; launched seven new Rushmore motorcycles in the new Street platform; revealed Project Livewire, our first electric motorcycle; expanded our international dealer network; and delivered shareholder value through a dividend increase of 31%; and repurchased $604 million in company's shares. We're excited about 2015, 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 Rod Lache. Your line is open.

Good morning, everyone. It’s actually Pat Nolan on for Rod. Just wanted to clarify a couple of points on the walk. So John, I think you said it was 3.25% would be the impact of FX at current spot rates and you expect you’ve got half of that impact to your next year?

Yes.

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

No, Pat, it would be significantly more than that, so let’s take – let’s understand what’s happening; we’ve seen tremendous devaluation starting back in the third quarter, devalued 7%, another 6% in the fourth quarter. And if you look from January 1 of this year through January 28th yesterday’s rates, there was another 4% devaluation. And that’s taking our basket of currencies, our major four currencies which in the euro, the yen, the Australian dollar and the Brazilian real, and the mix that we have, we’re down quite considerably. So what we’re saying here is that if the rates held at yesterday’s, where the exchange rates finished yesterday and they held throughout the year that would take our expected revenue for 2015 and reduce it by 3.25 percentage points. So you take motorcycles segment revenue and take it down by 3.25 points. Now with that obviously we have hedges on during the year and we talked about that. We typically hedge in a stair step fashion, so we have some hedges on, but those will diminish as the year goes on and we would expect out of that revenue hit, 3.25% of our Motorcycle segment revenue, half of that would fall and be negative impact to gross margin in terms of the dollar, gross margin dollar impact.

Your next question comes from the line of James Hardiman. Your line is open.

So obviously you’re not going to give us margin, I’m sorry, segment level guidance and I do appreciate the shipment guidance of four to six. I guess my question is it seems like Road Glide is going to be a pretty sizable benefit to the shipment guide and it sounds like you’re saying Street is going to be up pretty meaningfully as well. I guess the question is, A, can you quantify those benefits to the shipment guide and B, if not, how are you thinking about everything else, right, your non-Road Glide, non-Street guidance, because it seems like for those of us that are [indiscernible] on the numbers that four to six represents flat to maybe even down shipments of everything else, how should we think about that?

Thanks, James. You know, we’re not going to break it out by segment. And as we talked about in the preamble, we couldn’t feel better about the company’s or the brands fundamentals from market share to industry to outreach to repeat and the new to brand and so on and so forth. So that will be a big driver. We’ve got the model year 2015 motorcycles, which we certainly saw in the fourth quarter, the new ones, perform extremely well, including Road Glide. And then as you mentioned, we got the full year Road Glide and Street coming back, along with international expansion. But we also have some headwinds when we look at next year. Those being one as lapping the Rider Academy [ph] sell in, which was about 2200 units in the United States in the first half of last year. So we got to lap that. And then secondly, as we talked about, in the fourth quarter, we had very significant year-ago enthusiasm for Rushmore and so we got some big gains to lap in the first and second quarters. They tend to taper off each other quarters. And then finally, competitive discounting is coming into play a little bit here. When we take all of that, we couldn’t feel better about our shipment guidance of up 4% to 6%. And we do expect both the new models as well as our core bikes to grow during that to deliver the 4% to 6%.

Your next question comes from the line of Gerrick Johnson.

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

Thanks, Gerrick. We don’t provide guidance on all of our segments. We did provide it for Street in the first year just to get everybody in the ballpark and we provided it’s 7000 to 10000 units, came in at the very high end of that and we couldn’t be more pleased with that. But no, Gerrick, we’re not going to provide another guidance for Street. Suffice it to say is that we would expect Street to be up quite considerably from 2014 levels in 2015, as one we have a full availability in the United States for the selling season as well as our initial four markets last year and we’ll be expanding throughout most of the rest of the world markets through 2015.

Your next question comes from the line of Joseph Spak, RBC Capital Markets.

Hi, this is [indiscernible] signing in for Joe Spak. Just quick question, what is your industry retail growth view for 2015 and what is HOG US retail view that’s embedded in your 2015 shipment guidance?

We don’t provide a forward look at industry retail sales, but what I can tell you is we couldn’t be more excited about the industry growth that we saw in 2014, the increased investment in the industry. So in 2014 we were up 2.5% and that’s with a very slow start to the year. Industry was only up about 1% through the first half due to a very difficult weather conditions, so grew much faster in the back half. But when we talk about the very strong brand fundamentals, certainly the industry growth is one of them and we would expect to see the industry to grow quite well as we move into 2015, but we do not provide a forecast of it. And certainly some of that thought goes into our shipment guidance of up 4% to 6%.

Your next question comes from the line of Tim Conder.

Thank you. John, if you can just give us one shot at - it’s all FX question here, little bit is housekeeping, how much of the fourth quarter 2014 was due to the balance sheet revaluation? And then on a go forward basis with FX, you commented that you of course have your forward 12 months rolling hedges, can you give us any color on those four major currencies, your exposure, what percentage are hedged for your expected 2015 exposure at this point and any levels where you’re hedged?

Great, Tim, thank you. On the fourth quarter currency, let’s just take a run through, we don’t break out specifically the revaluation, but I can give you a sense of magnitude. Revenue was hit by $26 million by that year-over-year 9% devaluation. We did pick up some favorability in cost of goods sold of about $3.5 million and that was driven by very favorable gains in terms of the hedges that we did have in place for the quarter, a lot of those being put on several quarters before at very attractive rates. However, the balance sheet revaluation was very significant. I don’t quantify exactly the number, but it was certainly over $10 million. So that brought the overall impact down and ultimately it hurt operating profits by $23 million, which represented about 1.4 points of gross margin. So ex currency, our gross margin was actually pretty strong and certainly would have been up. Overall revenue in the quarter was hurt by about 2.5%. As we look forward to the first quarter, Tim, we would expect actually more unfavorablities than we saw in the fourth quarter. So we expect more than $23 million that we had in the fourth quarter and we would expect revenues to be down about 3.25% for the first quarter. And you asked about the positions that we have, we don’t provide those, because they change on a regular basis. And as the year goes on, obviously the hedge positions change. Suffice it to say that in the dimentionization of our credit risk in 2015, all of that’s incorporated. So as of today, all of our positions are incorporated and we would expect revenue to be down 3.25% and half of that falling through to impact gross margin. So that’s kind of an all-in number for you.

Your next question comes from the line of Felicia Hendrix.

Just two quick questions. John, you said earlier in your remarks in your answer to someone else’s question that you’re seeing a little bit of competitive discounting right now, I wanted to see if you could address that? And then just with FX, you have given us good color, thank you very much, at current rates. So I’m just trying to figure out if rates change, is the percentage change, is it linear or is it exponential?

Felicia, on discounting, we talked about this the last couple of quarters and we haven’t seen a dramatic shift in discounting. When we look in the fourth quarter, we have seen a stepped up level of discounting. We always see a lot of volatility in the fourth quarter, one it’s the lowest sales month, right, it’s less than 16% of our retail sales, but also there’s a lot of positioning by competition in clearing out inventories. So we saw two-thirds of the folks that have been discounting dramatically increased the discounting on a year over year basis. So it’s something that we’ll keep a close eye on. But you got to remember that our competitors’ models are little bit different. The majority of motorcycles that they sell in a given year are old model years and the fourth quarter was no different. 55% to 75% of the models that the competition sold were over a year old and so just maybe just cleaning out inventories. But that had a big impact on overall market share in the quarter as well. We saw discounts anywhere from $300 a bike to $2000, so just something for us to watch going forward, but we did see an increase in discounting in the fourth quarter. The second question, Felicia, was the exchange rates. If they move from here, they are not linear, right, because we got revaluation of assets depending on what happens within quarters and we got the fact that we are constantly changing our hedge position. As we talked about, we put on hedges in a steer step fashion over four quarters, we’ll continue to do that. So it is not linear, but certainly with that information should provide a good starting point. But then as the year goes on and things change, that could change a bit.

Your next question comes from the line of Joe Hovorka.

Two questions. Do you anticipate shipping one-to-one wholesale versus retail in 2015? And then secondly, is the FX impact included in the gross margin outlook, the up modestly for 2015?

Joe, let me start with the second one to just finish with FX. It is all incorporated in our operating margin guidance of 18% to 19%. When we look at that currency guidance, we would expect it to be a headwind of about half to three-quarters of gross margin point. So obviously ex currency, operating margin would be a fair amount higher. And again, we couldn’t be more excited about what we’ve done in terms of the manufacturing side of the business to deliver those margins and our ability to price and those types of things. So the underlying cost structure and momentum that we’ve got is fairly significant, we couldn’t be more pleased. Certainly, currency has thrown us here a pretty big headwind. So the second question is with regards to, I’m assuming retail inventory at the end of the year, so this year we were up exactly where we thought. And again, I couldn’t say we couldn’t be more prouder of the way that the organization responded to the soft or the poor weather in the first half and the ability of our flexible manufacturing system to adjust very quickly. At the end of the year, we ended with retail inventories exactly where we expected in the United States. They were up, but almost all driven by the Street dealer fail. As we look forward and feeling very good about where our inventory position is today, we would expect inventory to rise behind just the higher sales, basically holding our days inventory constant year over year. So there would be a modest increase in inventory on a year over year basis as we exit 2015 based on our forward look of retail sales.

Your next question comes from the line of Adam Jonas.

Hi, this is Neil in for Adam Jonas. Just very quickly one last FX housekeeping question. Are you able to tell us your euro-dollar assumption for next year along with any other rate assumptions you’re able to offer? And then finally, can you elaborate on your 2015 outlook in some of the macro troubled markets like LatAm and Canada?

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

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

With regards to our assumption on currencies, we don’t provide that, an economist can get it right. What we’ve done is we typically hedge on a routine basis to give us more time to react to currencies, but we’re no better at guessing those things as anyone else and we’re certainly not going to provide our assumptions going forward. The dimentionalization that we gave just gives you a point in time, but not a forward look at what we expect currencies to do.

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

Overall, when we look at some of the economies in our international markets, we do have some concerns out there, certainly Brazil has had a tough row to hoe here. We would expect some tough settings still to continue there; Japan and then even Europe. Europe had pretty significant industry growth in motorcycles, but the economy there is something we want to keep a close eye on. And then Canada, given the exchange rates and oil, and Canada has been a little bit tough. So when we look at the world markets, again we couldn’t be more excited about our international opportunity, but are little bit cautious on a few markets out there.

Your next question comes from the line of Jaime Katz.

So it looks like gross margin is expected to shake up modestly in the year ahead despite FX headwinds, so can you maybe offer more of the positive commentary on where you think your best opportunity is to capture that gross margin expansion is? And then just any additional commentary that you might have on what resonated well in international markets which performed very well in the recent quarter outside of that Street model?

Great. Opportunities on operating margin is very simply – we priced our model year 2015 motorcycles and that’s going to continue to drive margin opportunity both in dollars as well as percent. The other is there’s incremental margin coming from increased sales, that 4% to 6% shipment increase. And Jamie, as we’ve talked about in the past, we’ve had our core margin of about 36%, but for each incremental bike that we put through the system here, it’s an incremental margin of about 47%. So that will drive a lot of benefit in terms of overall gross margin percent as well. And then finally, the business model that we’ve put together and the flexible manufacturing that we’ve got working and the focus that the plans have on continuous improvement, the systems that we’ve put in are all driving fantastic productivity out of the plants and we would expect that to continue into 2015. Again, I can’t say enough about how strong that’s been. The second question that you asked is with regards to our international growth, we’ve talked a lot about international, we’ve invested, we’ve expanded the dealer network and we expect that to continue in 2015. But aside from Street and we’ve talked about Street, three out of four motorcycles in India are Street, in Southern Europe it sold very well, it’s bringing a lot of new people into the brand and we’ll clearly expand that in the first quarter here to many more markets around the world. But we can’t overlook how well our other products are doing internationally. And the core products are all up this year and expected to be up next year, but in particular Project Rushmore motorcycles are selling extremely well internationally. For example, in Europe, we’re well over 20% growth in our Touring product and that’s happening in Asia, in Latin America as well, so we couldn’t be more excited about the overall portfolio internationally.

Your next question comes from the line of Gregory Badishkanian.

Just on the international front, trends were really solid there. With the headwind of currency and maybe some macro issues, how do you see your pricing changing in the first half at retail, Harley motorcycle pricing at retail and then how do you think that will maybe compare versus some of your competition?

Our overall approach to managing currencies has been to sell our products in local currencies, right. And we keep local prices stable that way and then we manage overall currencies kind of back here as a basket of currencies, and then manage that through the P&L. And we believe keeping prices stable at the market level is the best way to build and manage a premium brand and it’s worked very well for us. What we’re seeing here is certainly unprecedented, one to see the magnitude of change and to see everything moving in the same direction, obviously we’ve given some dimentionalization on the impact on our earnings. So we’re certainly concerned and we’ll look at all options to deal with it. But let me tell you, Greg, is that we’re going to do what’s right for this brand in the long term and we’re going to work through it. But whatever we do decide to do, it will be in the best interest of the brand going forward.

Your next question comes from the line of David MacGregor.

Just to build on the international line of questioning, you’ve talked in the past about trying to get 100 to 150 dealers, you’re kind of approaching the high end of that range now, you’re talking a lot about growing international side of the business, can you sort of lay out for us what the plans are in terms of dealer development over the next couple of years?

One, we look to continue to expand the dealer network and you can expect that the dealers that will open up will be in line with what you saw in 2014. But more importantly is making sure that we’re increasing throughput through those dealers and making sure that all our products are there and ready to go when we do open those dealers. And again, we’re very excited about the opportunity and we feel that there’s a lot more to gain in distribution over the next several years.

Your final question for today comes from the line of Patrick Archambault.

It’s actually Dave [indiscernible] on for Pat and glad to make on to the wire here. Just a question circling back to the Q4 shipment, you ended up towards the lower end of your guidance range, can you kind of mention what really drove it into that lower range, was it the competitive pricing, was it a stronger use bike marketers or something else maybe we’re not thinking about?

No, David, our desire and our mandate is aggressively manage supply in line with demand. We knew we’re going to have a tough retail sales quarter in the fourth quarter, given the fact that the non-Road Glide Touring bikes were up 40% on a year-over-year basis. And what we wanted to do is manage to an inventory level that’s appropriate to continue to maintain the premium nature of our brand and we did exactly that. And we ended up exactly where we expected, exactly where we planned a year ago for inventories to end up, which were up driven only by Street. So we shipped in to hit those inventory levels.

All right, thank you, John, and thank you everyone for calling in and thanks for your time this morning. The audio recording and supporting slides will be available at harleydavidson.com. The audio can also be accessed until February 12 by calling 404-537-3406 or 855-859-2056 in the U.S. The pin number is 5737851 and then pound. We appreciate your investment in Harley-Davidson. If you have any questions, please contact Investor Relations at 414-343-8002. Thank you.