Harley-Davidson, Inc. (HOG) Q2 2015 Earnings Report, Transcript and Summary

Good morning. My name is Laurel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Harley-Davidson second quarter 2015 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I will now turn the call over to Amy Giuffre, Director of Investor Relations. Please go ahead.

Thanks, Laurel, and good morning, everyone. You can access the slides supporting this call on Harley-Davidson.com. Click About Harley-Davidson at the bottom of the home page, then Investor Relations, and Events and Presentations. Our comments will include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC. Harley-Davidson disclaims any obligation to update information in this call. This morning, our CEO Matt Levatich and CFO John Olin will be hosting. Matt, let's get started.

Thanks, Amy, and thank you everyone, for joining us on the call today. As you know, this is my first earnings call as President and CEO of Harley-Davidson, but this is far from my first earnings cycle here. As a longtime member of the Harley-Davidson team, I'm not only incredibly proud of where this company has been, I'm incredibly excited about where we are going. You've all read the headlines and results in the news release this morning. Sales, shipments and earnings are in line with our expectations. As always, John will go into the detailed financials behind that in a few minutes, but first I want to take a second and talk about the big picture of the quarter, the environment we are in, and why I'm encouraged about both our performance and our prospects. In April, we acknowledged the environment was going to be difficult in the face of currency and discounting by competitors. But we didn't sit on our hands, we leveraged our strengths, pulled together as a team, and came to the table to compete and win. The tough call in April to take down shipments was the right call, and reflects our long-standing commitment to manage supply in line with demand. The fact that we delivered shipments in line with that guidance in the second quarter, while maintaining near record gross margin, shows the strength and flexibility we have built on the operations side of the business. But of equal or greater importance in my mind is our commitment to drive demand, and do so in ways that are reinforcing of our premium brand. Harley-Davidson has powerful fundamental strength and assets, and we leverage some of the many competitive advantages we have like HDFS, our riding academy, our richly iconic brand, and our great dealer network to drive demand in the quarter. For example, in the US we implemented targeted financing offers through HDFS. And we rolled out free rider training to active and veteran military personnel through our riding academy. The outstanding response to the riding academy program reflects its power and potential as a conduit to the sport through our brand, our retail channel, and through great products like the Street, which we use in support of riding academy training. We believe that taken together, our actions to drive demand have had a positive impact on retail sales. During the quarter, we saw increasing momentum in the US, with near double-digit growth in June's retail sales of new Harleys. In fact, it was our strongest June retail motorcycle sales in the United States since 2008. In Europe, we also stepped up our marketing efforts, and saw growth in new motorcycle sales return in June. At the same time, sales of new Harleys in the Asia-Pacific region were up strongly in the quarter, driven in part by the great reception to our Street motorcycles in particular in China and India. In fact, the Harley-Davidson Street 750 was the best-selling new Harley ever in the region when it comes to first-year sales. Street has also been very successful in bringing new riders into the Harley-Davidson brand, both in the US and internationally. In its initial year alone, 7 out of 10 Harley-Davidson Street motorcycles in the United States - those customers were new to the brand. In EMEA, it was 9 out of 10. And in the India nearly all Street customers were new to our brand. We believe this success underscores the large untapped potential in our business, not to mention what happens when we deliver for customers with great products like Street, and we will continue to aggressively tap that potential. During the second quarter, we also demonstrated our commitment to shareholder returns when we announced our intent to leverage the current environment and our strong balance sheet to increase share repurchases. This decision was driven by what we believe to be a favorable credit environment and our current share price, which we believe is inordinately influenced by near-term headwinds, including currency exchange rates. On the operations side, we plan to close on the previously announced transaction with our Canadian distributor in early August and transition to direct distribution in Canada. We have a strong team in place, and look forward to all the opportunities and efficiencies we expect to create in that market. Looking ahead, we are excited about the 2016 model year motorcycle launch, and bringing our global dealer network together for our annual dealer meeting in late August. The dealer meeting is always a highlight of my year because it's a time when we come together, align, and share in the mutual pride of being in Harley-Davidson motorcycle business, and inspire and motivate the best dealers in the industry. Before I turn it over to John, I want to reiterate how proud I am of this company, this team, and all the work that's being done at Harley-Davidson each and every day. Every quarter and every year will have challenges, but we can probably all agree that second quarter retail numbers were not as good as we'd all like. We're energized by the challenges and the competition. Headwinds like these are nothing we haven't seen before in our 112 years, we see them as catalysts for getting stronger, and we are. Make no mistake, driving demand and growing the business are top priorities for all of us at Harley-Davidson. Even as we address the near-term market conditions, our eyes and energy are clearly focused on our strategies for growth and continued industry leadership, long-term. These strategies include rolling out great new products, growing sales to US outreach customers faster than to core, bringing increasing numbers of new customers into the brand internationally, and taking the Harley-Davidson retail experience to new heights, all in ways aimed to make Harley-Davidson the most customer-led company in the world. We are confident in the strength of our business, our strategies and our team. We are strong in our leadership position. We're managing the business for the long term, and we're here to win. With that, I'll turn it over to John.

Thanks Matt. Today, I'll provide additional insight around our financial results found in the press release and slides. The summary of our second quarter financial results starts on slide 10. Results were in line with our expectations, given lower shipments in the quarter following the shipment guidance reduction we took in April. During the quarter, revenue was $1.82 billion, net income was $299.8 million, and diluted earnings per share were $1.44, all down on lower shipments and ongoing pressure from unfavorable currency exchange. As expected, operating income from the motorcycle segment was down 19.6% compared to last year's second quarter. Motorcycle segment operating performance continues to be very strong when considering the lower volumes and unfavorable currency impact. The motorcycle business operating margin was down 2.7 percentage points, driven by higher SG&A spending on lower revenues, while gross margin remained very strong at 39.2%. At HDFS, operating income was up 10.0% year-over-year. Despite the challenging conditions, we continue to focus on delivering strong margins and strong returns over the long term. Now let's take a closer look at Q2 performance, starting with retail sales on slide 11. As we continued to face a very challenging retail environment in many markets, worldwide retail sales of new Harley-Davidson motorcycles were down 1.4% in the second quarter. In the US, retail sales were down 0.7% as we continued to experience pressure from foreign exchange driven discounting by other brands, and as we lapped last year's strong Rushmore sales. Internationally, retail sales were mainly impacted by new low-priced models from competitors in Europe, currency driven volume declines in markets where we sell in non-local currencies, and challenging economic conditions in some markets. As we exited the second quarter, our business remains under pressure from increased competitive activity, including aggressive price discounting in the US enabled by the dramatic shift in world currencies. We have taken action around the world in a manner which will reinforce our brand premium. We are very pleased that our market actions help drive very strong sales results in the month of June. We remain confident in our worldwide motorcycle shipment guidance of up 2% to 4% for the full year. We expect second half retail sales growth to be driven by our continued demand driving market actions that we've initiated in various world markets, the continued worldwide rollout of our Street motorcycles, ongoing international dealer expansion, the introduction of our 2016 model year motorcycles in late August, and our ongoing brand strength. We remain focused on delivering the Harley-Davidson customer experience to riders around the world. We expect to grow the appeal of the Harley-Davidson brand, expand international sales, and increase sales to outreach customers in the US. We are confident in our business and the great opportunities that lie ahead. Let's take a look at the US market on slide 12. Second quarter retail sales were down 0.7% in the US. Excluding the fleet of Street motorcycles for rider training registered by dealers during last year's second quarter, sales would have been up 2.1% year-over-year. We believe the factors that were underlying US retail sales results during the quarter were, first, as expected we lapped the very enthusiastic reception to the initial Rushmore launch. Q2 2014 retail sales of touring models were up a very strong 31% compared to the prior year, a tough year-over-year comparison for Q2 2015. Second, we experienced continued pressure from significant price discounting by most of the competition. Partially offsetting these challenges, we continued to experience success in our latest Rushmore models launched last August, and with sales of our Street motorcycles. Street motorcycle sales continued to drive our performance in small cruisers, which grew double digits year-over-year. To counter the competitive environment in the US market, we have initiated a three-pronged market action plan, which includes lifestyle and brand advertising and marketing, targeted finance offers, and leveraging HD's other competitive advantages such as riding academy and our dealer network. The bulk of these market driving actions were introduced in late May through mid-June. While it is still early, we believe these activities are having a positive impact on our retail sales. During the quarter, we saw increased momentum resulting in near double-digit growth in June's retail sales. Turning to market share. During the quarter, US industry grew at 6.8%. We had a very strong market leadership share of 47.5%, and believe the industry's robust growth during the quarter bodes well for motorcycling. However, our Q2 market share was down 2.8 percentage points versus prior year. While we anticipated some level of share loss following the 13.4 points of market share gains in recent years, our market share over the last three quarters was more severely impacted than we had expected as a result of increased price discounting by the competition and inclusion of auto cycles in the industry numbers. We are pleased to see a moderation in market share loss from the first quarter decline of 4.7 percentage points, and believe the improvement is driven by strong brand strategy and recent market share actions to drive demand in this tough competitive environment. This is not the first time we’ve experienced period of extreme discounting by competitors and likely it won't be the last. However, we will protect our brand premium. We will not take a short-term view and compete with brand damaging discounting, nor will we ship out of balance with retail demand. We continue to manage the Harley-Davidson brand for the long term. At the end of the second quarter, US retail sales was down approximately 1600 motorcycles on a year-over-year basis.

John, that was retail inventory.

US retail inventory was down approximately 1600 motorcycles on a year-over-year basis. Excluding incremental retail dealer fill of Street motorcycles, Q2 retail inventory was down significantly as expected. We were very pleased with inventory levels at the end of Q2. This reflects the benefits of our flexible manufacturing capability, and our commitment to manage supply in line with demand. On slide 13, you'll see retail sales in our international markets were down 2.7% in the second quarter. We initiated market actions to counter increased competitive activities and weak economic trends in certain international markets. Similar to the US, we initiated these activities in mid-to-late second quarter, and we were very encouraged by June's retail sales results. In the EMEA region, retail sales were down as the region experienced the impact of several low-price models introduced by competitive brands and lapped strong year-ago retail sales of 7.0%. In addition, we experienced currency driven volume declines in markets where we sell our motorcycles to dealers in non-local currencies, such as in Russia. Year-to-date Europe market share was 10.2%, down 1.9 percentage points behind the impact of low-priced models introduced by the competition in the performance and standard segments, market segments where Harley-Davidson's motorcycles do not compete. In the Asia-Pacific region, retail sales were up 16.6% in the quarter. The region experienced growth in all major markets, and in particular in our emerging markets led by India and China. Driving these results is the Street motorcycle, which launched in many Asia-Pacific markets in the first half of 2015. Street makes entry into the Harley-Davidson brand more attainable for riders around the world, and the early results are very exciting. Retail sales in Japan were up, and they were impacted by the restructuring of distribution in that market, including a new pipeline distribution process and rationalizing the dealer network in order to improve the customer experience. Latin America region retail sales were down modestly in the quarter as a result of soft retail sales in Brazil, largely offset by strong growth in Mexico. Retail sales in Brazil continue to be impacted by a slowing economy, consumer uncertainty, and very aggressive price competition. Finally, retail sales in Canada were down behind a highly competitive environment coinciding with the transition of the business from a distributor to direct distribution. While we remain cautious in the near-term outlook, given the economic challenges in some international markets, we are confident in our current market efforts and remain focused on the long-term growth strategy. Despite the volatility in global retail sales, we believe we can continue to realize international growth by prudently expanding our distribution network, building our brand experience across the world, and delivering exceptional products that inspire riders. On slide 14, you will see wholesale motorcycle shipments in the quarter were down 7.6% compared to last year and within our expected range of 83,000 to 88,000 motorcycles. The overall shipment mix reflects higher concentration of Street, as we continue the global rollout of these models. As we exited Q2 2015, we believe US retail inventories in the dealer network were at appropriate levels. Q2 2015 international shipments were 35.3% of total shipments. We continue to believe international retail sales will grow at a faster rate than domestic retail sales over the next few years. On slide 15, you will see revenue for the motorcycle segment was down in Q2 compared to last year, driven by 7.6% lower motorcycle shipments and unfavorable currency exchange which reduced revenue by approximately 4.6%. During the quarter, the average motorcycle revenue per unit decreased $692 from the year ago quarter behind unfavorable currency exchange and product mix partially offset by higher pricing. Parts and accessories revenue fell 5.4%, driven by unfavorable foreign currency exchange. General merchandise revenue was up 1.5%, driven by robust international growth, largely offset by unfavorable foreign currency exchange. On slide 16, you will see gross margin in the quarter was 39.2%, which was 0.3 percentage points lower than last year. Gross margin performed very well when considering the adverse impact of foreign currency exchange and lower volumes. During the quarter, overall mix was unfavorable $16.5 million, largely driven by family mix, which included a higher mix of Street motorcycles and a lower mix of touring motorcycles. Foreign currency exchange was $36.1 million unfavorable for the second quarter. This was driven by the significant year-over-year weakening of our key foreign currencies. Key currencies devalued an average of 19% compared to the prior-year quarter. Our Q2 2015 gross margin as a percent of revenue exceeded our expectations, as foreign currency exchange came in better-than-expected behind some strengthening of foreign currency exchange rates within the quarter, and better-than-expected manufacturing productivity. Our Q2 2015 gross margin of 39.2% is evidence of our strong underlying margin structure and flexible manufacturing capability. We remain focused on driving efficiencies throughout our operations. On slide 17, operating margin as a percent of revenue for the second quarter was 23.1%, down 2.7 percentage points compared to last year. SG&A spending in the quarter was up on a year-over-year basis, due to increased marketing investment as we address the highly competitive environment. Also SG&A expenses in the quarter included recall reserves of $16.4 million, which included a voluntary recall on touring motorcycles that we incurred late in the quarter. Going forward, we remain intensely focused on a cost structure that will enable growth and continuous improvement to drive our business to be stronger, more flexible and more profitable. Now let's take a look at our financial services segment on slide 18. HDFS is a strategic competitive advantage for Harley-Davidson. It enables wholesale and retail sales of the Harley-Davidson motorcycles and delivers attractive returns for the company. During the quarter, HDFS' operating profit increased 10.0% compared to last year. Net interest income was favorable to prior year driven by higher receivables, partially offset by lower yields on receivables due to increased competition. Also HDFS had increase in insurance and credit card licensing revenue during the second quarter. We are very pleased with the performance of the financial services business. The business continued to be very profitable with industry-leading returns. HDFS' second quarter operations are summarized on slide 19. HDFS' retail motorcycle loan originations increased 7.0% compared to last year's second quarter, primarily driven by a 6.8 percentage point increase in our US retail finance market share, and higher average amount financed per motorcycle. Finance receivables outstanding increased 5.0% compared to a year ago, driven by growth in the retail portfolio. On a year-to-date basis, loan originations were comprised of approximately 80% prime loans, and 20% subprime. As a predominate lender to subprime customers, these originations represent a significant amount of retail sales for the company at very attractive returns, which further reinforces the competitive advantage that HDFS brings to the company. At the end of the quarter, we had $419 million of cash and cash equivalents at HDFS. In addition, HDFS had $1.84 billion of available liquidity through bank credit and conduit facilities. Finally, during the second quarter, we successfully completed a $500 million asset-backed securitization transaction, with a weighted average interest rate of 1.16%. Credit performance tracked very well during the quarter. On slide 20, you will see the 30-day delinquency rate for retail motorcycle loans at June 30, 2015 was 2.71%, or 3 basis points higher than the same period back last year. Delinquency rates across the portfolio continued to perform at near record low levels. Annual credit losses increased by 11 basis points to 1.08% compared to last year second quarter, driven by modestly higher credit losses in line with increased subprime originations in recent years, as well as changing consumer behavior. During the second quarter HDFS continued to maintain a strong liquidity position, and contributed strong profitability. HDFS remains focused on enabling sales of Harley-Davidson motorcycles, while providing an attractive return to Harley-Davidson, Inc. The Harley-Davidson, Inc. financial results are summarized on slide 21. I'd like to highlight that the company generated operating cash of $613.9 million in the first half of this year. Operating cash was up $43.4 million from last year, driven by lower net wholesale lending, partially offset by lower net income. The company currently has and intends to continue to maintain a minimum of 12 months of projected liquidity needs in cash and/or committed credit facilities. Switching our focus to shareholder value on slide 22. Returning value to our shareholders is a top priority. You will see that during the second quarter, we paid a dividend of $0.31 per share, and we repurchased 2.8 million shares of Harley-Davidson stock for $164.8 million. As we move forward, we will invest to grow the business and improve overall performance, and we will continue to evaluate opportunities to enhance value for our shareholders through increasing dividends and repurchasing shares. To that end, on slide 23, you will see that last month we announced our plan to add debt to the corporate balance sheet in order to enhance our share repurchase efforts, and deliver additional value to our shareholders. On June 17, we announced that we plan to incur $750 million of long-term debt, with the intent to use the funds to repurchase shares of the company stock. We expect to incur the debt in the next couple of weeks and complete the share repurchases by the end of this year. The repurchases will be an addition to our ongoing share repurchase plan, which we expect to be in line with last year's second half repurchases of 392 million. We believe this recapitalization is a great opportunity to increase our long-term shareholders ownership in the company without an adverse impact to the long-term value of the brand or the business. Our guidance is on slide 24. For the full-year 2015, we continue to expect to ship 276,000 to 281,000 motorcycles. Given our first-half results, we have a challenging back half to achieve our shipment guidance. We are confident that we're taking appropriate market actions to accelerate growth in the back half without participating in brand damaging motorcycle discounting. During the third quarter, we expect to ship 54,000 to 59,000 motorcycles, which is up approximately 6.5% to 16.5% compared to last year's third quarter shipments. For 2015, we continue to believe operating margin for the motorcycle segment will be between 18% and 19%, compared to 18% in 2014. In 2015, we now expect gross margin to be up modestly compared to 2014, impacted by both puts and takes. On the positive side, we expect favorable impact from motorcycle pricing and strong productivity gains. On the negative side, we expect gross margin to be adversely affected by unfavorable currency exchange and increased pension expense. To dimensionalize the foreign currency exchange risk, if currencies held at yesterday's exchange rates for the remainder of 2015, our full-year motorcycle segment revenue would be adversely impacted by approximately 4.25%. Taking into account our natural hedges, and the fact that we have a significant portion of the year hedged, we would expect about half of the unfavorable revenue dollar impact to translate into lower gross margin for the full year, reducing gross margin by approximately 0.75%. For the third quarter, assuming that currencies hold at yesterday's exchange rates, we expect revenue to be adversely impacted by approximately 5% with about 40% of the unfavorable revenue dollar impact to translate into lower gross margin for the quarter, reducing gross margin by approximately 1 percentage point. We now expect SG&A spending will be up modestly in 2015, both in absolute spending and as a percent of revenue, due to the recall expenses and investment in marking driving activities. For HDFS, we now expect operating income to be up modestly in 2015 compared to 2014. We continue to expect capital expenditures in 2015 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 continue to expect full-year 2015 effective tax rate will be approximately 35.5%, which reflects the absence of the R&D tax credit in 2015. This guidance does not include the impact of the anticipated Canadian distributor transaction. We expect the financial impact to be dilutive in 2015 to earnings per share by approximately $0.04 behind upfront transition costs. This impact will be realized largely in the third quarter. So, looking back on the quarter while we are facing significant competitive pressures around the world, we are pleased with our key accomplishments during the second quarter. We successfully maintained a strong gross margin percent despite lower volumes and unfavorable currency exchange, implemented market driving actions which drove June retail sales, expanded distribution of Street into new international markets and delivered shareholder value through the repurchase of $165 million in company shares, and announced $0.75 billion recapitalization. For the second half of 2015, we will navigate a challenging business environment. We remain confident in our shipment guidance and the actions we are taking to support retail sales in the second half of the year. We will continue to position the company for long-term success by remaining focused on executing our growth strategies, and delivering strong margins, strong returns, and value to our shareholders. Thank you for your continued confidence and investment in Harley-Davidson. Let's take your questions.

[Operator Instructions] Your first question comes from the line of Derrick Johnson with BMO Capital Markets.

Good morning. I want to follow up on the comments about Street, the strong percentage of Street buyers being new to the brand. Would it mean that the cannibalization of other sportsters was lower than anticipated? I know it's hard to quantify but would these folks have bought a different brand? Would they have bought a different Harley, would they have nothing at all? What other insights can you give us there? Thanks.

Thanks, Derrick. When we set out with Street we didn't believe that there would be a ton of cannibalization between our Sportsters and Street motorcycles. They are very different motorcycles intended for a different customer and as we've seen the last year playout, Derrick, we believe that's the case. You're absolutely right, it's very difficult to pinpoint an absolute percent of cannibalization but we believe it's very low, and some of that is evidenced by the last four quarters, we have seen our small cruisers, which include Sportster and Street, grow well into the double digits behind Street in the United States. Now internationally, certainly most all customers coming in are new to the brand and as Matt had mentioned, 9 out of 10 in Europe are new to the brand and almost all of the folks in India are new. So we couldn't be more excited. The rollout has gone very well internationally and is certainly providing and filling in the role that it was intended to do in the United States.

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

Hi, good morning. John, you seem very confident in the business or maybe they provided you with a ton of energy drinks this morning, but you are confident.

A little of both.

I was just wondering, you talked in your prepared remarks about how optimistic the second half of the guidance is. I'm wondering if you could just talk about the implied fourth quarter guidance if you take the midpoint of the third quarter and the midpoint of full year that implies unit shipments of 21% in the fourth quarter. So seasonally that just seems high to us given the seasonality and also given the strategy of aligning shipments with demand so if you could touch upon that and just as a follow-up, I was just wondering if you could help us understand the cadence of retail sales in the quarter. I think the conventional wisdom was that retail sales were down earlier in the quarter and then ramped at the end. So I was just wondering if you could address the cadence. Thanks.

Thank you, Felicia. So two pieces - let's separate two pieces of the first question, is retail and shipments. So retail sales were down 1.4% in the first half and we are expecting retail sales certainly to accelerate in the back half of the year that supports our shipment guidance, which is up to 2 to 4 percentage points. But shifting to the specific question, Felicia, on shipments, if we look at overall shipments in the first half of this year, we were down 4.7% in shipments and as you look at year-to-date, year to go to hit that 2% to 4% shipment growth guidance, we would need our shipments to be up in the back half of 14% to 19%. So let's start out with the half and then we'll get into the two quarters in the back half. The reason that we're looking to ship more in the back half of the year is not really related to retail sales, it's related to what happened last year. Felicia, if you remember last year we had very tough weather in the United States. And consequently we ended up shipping in more motorcycles in the first half than retail sales warranted. Then we spent the second half taking production and shipments out of the back half to get inventories back in line. Consequently, last year at the end of the second quarter, our retail inventories were up too high and resulted in more carryover units than we would have liked. So, again our focus is always on aggressively managing supply in line with demand and making sure we're adequately supplying the market. So what we did this year is just to reverse out what happened last year. So we shipped in less this year than we retail in order to bring down second quarter retail inventories this year and we couldn't be happier as to where we're at. As we had mentioned, we're down 1600 units but when you adjust out the Street motorcycles, inventories are down significantly in line with where we believe we need to be to have a very smooth transition into the new model year of 2016 motorcycles. And consequently because we were down so much in last year's second half in shipments, we will be coinciding [indiscernible] 14% to 19%. What you have done is taken our shipment guidance of 54,000 to 59,000 in the third quarter, and I think that overall shipments, that suggested shipments will be higher in the fourth quarter and that is true. Now when we look at the back half of those two quarters we're moving production from the first part of the year to the fourth quarter. And the reason being is we've become very good of flexible manufacturing. And we have matched up our production with our demand very well given the manufacturing system that we have. But as we looked at last year that required a fair amount of down days in the fourth quarter and probably hurt efficiencies a little bit. So what we want to do is balance out production a little bit in the back half of the year between the third and fourth quarters. That will have a little bit of a headwind in terms of gross margin between the third quarter and the fourth quarter but on aggregate it won't have an impact. So again we are smoothing our production a little bit, that's translating into a little bit more shipments in the fourth quarter. The second question that you asked is the cadence in second quarter retail sales. As we mentioned in the prepared remarks, we've got a three-pronged approach to addressing the competitiveness and we're addressing that in Harley-Davidson's way, which is not price discounting. We've talked about this the last time. We will not meet discounting with discounting, we will not put hangtags on our motorcycles. That is certainly the easiest way to address some of the competitiveness we are experiencing in the United States. So with the three-pronged approach most of those activities got into the marketplace in mid-May to mid-June. And we've seen very strong results coming from that and so in April and May, retail sales were pretty soft, softer than what we saw in the first quarter. However June we built very strong momentum and we're near double digits in the United States as well as near double digit in international markets behind the investments that we have made to close that competitive gap.

Your next questions comes from the line of Craig Kennison with Baird. Please go ahead.

Good morning, thanks for taking my question. Just to follow up on the shipment guidance. To what extent does it include expectations for retail to accelerate, given new products you hope to announce? And then regarding inventory, to what extent does inventory grow because you have additional distribution points as you have indicated you really want to hold inventory flat otherwise?

Thanks, Craig. The bulk of what we're seeing in the shipment cadence and shipping more in the second half than the first half is to correct last year's shipping patterns that were disrupted by the unfavorable weather. Clearly, as we look at our production as well as our shipments, we're taking into account various market activities, certainly, our new products that are coming out. And so all of that is considered but the biggest driver in the splits of being down in the first half to up in the second half is really what happened last year and getting those inventories in line. When we talk about inventory growth, I would assume, Craig, you are referring to at the end of the year we expect and continue to expect inventory at the end of the year to be flat to up modestly. That does take into account the various models that we have in the marketplace. And I'm sorry, thank you, Amy. That answer is with regard to the United States that we expect it to be flat to up modestly. Internationally, we do expect inventories to rise as we add new dealer points and we're continuing on a similar pattern of adding dealers that we were in previous years. Actually in the quarter we added 11 new dealers, which we're very thrilled about. So with that internationally we will be putting more inventory to support that growth.

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

Hi, good morning. Maybe just a quick follow-up to the last point, John. The inventory being flat to up in the US, it seems like previously that was a function of just matching retail growth - so keeping turns constant. Year-to-date you haven't grown retail at all. So is that still how we should think about it, basically the growth in inventory commensurate with the growth in retail? And I guess more broadly, can you speak specifically about market trends that you are seeing, obviously, the Japanese are playing a role, presumably India is playing a role, and I think about those trends going forward which do you expect to get better and when? Does your guidance assumes that no share losses that you have seen in the first half of the year flatten out or maybe even flip into a share gain as we think about third and fourth quarters of this year? Thanks.

Thanks, James. The first question, industry growth and our retail. What we have said is that we expect flat to modestly up growth, and that is tied to basically holding terms flat. However when we look at that, number one is, we are expecting retail growth in the back half and we're certainly expecting to support our shipment guidance of up 2% to 4% withholding those inventories at year-end in the United States. And we're also looking at - when we talk about emerging we're looking at forward turns and what we expect to sell into the future as well. The second question that you had, James, is with regards to market trends. Why don't we start out with the first half? We have had a tough half largely driven by the price discounting but overall market share was down 3.5 percentage points. The bulk of that share loss is due to price competition in the marketplace. The second biggest driver of the market share loss in the first half was the inclusion of auto cycles in the motorcycle industry numbers, and these are a vehicle that's included that is very car-like. It's got side-by-side seating, gas pedal and brakes, steering wheel, very large front end. It just happens to have a single wheel in the back. States are having trouble figuring out what it is, in terms of, is it a motorcycle, is it registrable, is it an autocycle? But in any event, we do not believe that it competes directly with traditional motorcycles but it is having a large impact on our overall market share because we are 50% of the market. So those are the two largest drivers of market share losses. As we move forward we expect certainly our share losses to mitigate. We saw that in the quarter. If you look within the quarter, we kind of talked about the retail sales cadence within the quarter, which improved very much in the previous question but market share as well improved significantly in the quarter as we got some of our market response actions out. So as we move forward we would expect market share's to temper especially in the fourth quarter when we start to lap the initial impact of the price discounting.

Your next question comes from the line of Sharon Zackfia with William Blair. Your line is open.

Hi, good morning. A couple questions. John, I apologize, if I missed this but did you talk about gross margin cadence in the back half of the year? Then, secondarily, can you give us any insight on what you were thinking of in terms of pricing actions with model year 2016?

Thanks, Sharon. With regards to gross margin when we look at overall headwinds in terms of gross margin for the third quarter, we certainly have a fair amount coming in terms of currency and we do expect it to be a very tough quarter in currency before we start to see some of a year-over-year impact in the fourth quarter. We would expect revenues to be down 5% and the impact on gross margin in the third quarter to be about one full percentage point headwind. And the other piece that we mentioned is, when we were talking about shipment and production cadence, we're moving more production into the fourth quarter and that will have an impact of moving a little bit of gross margin out of the previous quarters into the fourth quarter so that will provide a little bit of a headwind in terms of gross margin in the third quarter as well. The second question is with regards to pricing action. Pricing as well as seeing our new product, you're going to have to wait until August 24 which is a Monday. We couldn't be more excited to roll out our new products and at that time we will have the new pricing for those products but we don't provide that prior to sharing that with our dealer network. So along with the new products, we are going to have to wait on that one.

Your next question comes from the line of Patrick Archambault with Goldman Sachs. Your line is open.

Thank you. It's actually Dave Tamberrino on for Pat. I will just ask one here on balance sheet optionality. As we think about where you're going to finish 2015, you'll have about half a turn in gross debt and about 0.2 turns in net debt, at least on our forecast. As we think about it what is the range or level that you would be comfortable with in terms of additional debt on the company going forward?

Dave, you are speaking with regards to the motorcycle segment. We feel very good about the action that we just took and putting the $750 million debt on there. As we looked at that amount, we looked at certainly making sure that we didn't do anything to affect the long-term business or brand and came out at $0.75 billion at this point. We are not looking to take on any more and we will be focused on executing that in the back half of the year.

Your next question comes from the line of Greg Badishkanian with Citigroup. Your line is open.

Great, thank you. Since you brought up June trends, which were very favorable, I'm guessing that July momentum didn't drop off in a very significant way? And then the second question is you mentioned three initiatives and which do you think had the biggest impact on the June pickup in retail sales?

You know, we exited the quarter with good momentum, and we're very pleased with that. We are reporting results as of the end of the second quarter, and we're not going to go beyond that. But again what we saw in the first quarter and the change and shift in momentum we feel very good about the overall second half. The second question is with regards to what we had talked about in addressing some of the competitive issues. We've got a three-pronged approach, and you can see most notably in there is brand damaging discounting is not a part of it. So we're very pleased with what we've got. It's not as easy, it's not as quick. We've got to be a lot more creative in how we do it, and the results are very strong. But when we look at the various pieces, they all work in concert with each other. When you look at the lifestyle and brand advertising, that's an investment in the future and an investment in the brand, in the brand premium. Hard to measure what that does on a day-to-day basis. The second piece of it is targeted finance offers. That is trying to close some of that competitive gap that we have in the marketplace. No, we haven't talked much about discounting but it certainly has not improved on a quarter-over-quarter business. It remains consistent to a little bit increased. We are seeing a couple more competitors and we're also seeing the level go up a little bit, now the top discount out there is $4000 a motorcycle. So the targeted finance offers are just that, very targeted and they allow us to work on some of that price gap. I will also say that being able to do this with HDFS is absolutely a fantastic benefit and advantage to us. We've immediately got over 700 dealers in the United States. We can access them. We can offer the same thing and we can get execution, very pristine across the US and certainly HDFS is proving to be a tremendous advantage. And then the last piece is really leveraging some of our competitive advantages, things that we have that no one else does. First and foremost is the dealer network and getting their focus where we need it to be. And the second are our assets such as rider academy. So a program like this and Matt had mentioned it in his prepared remarks as we offered free rider training to all veterans and active military folks and this is an incredibly brand enhancing opportunity for us. And it comes at a very efficient price. So we're not seeing the benefits of that in the first half. We launched that in the middle of May and we've seen overwhelming response of interest and what it's going to take is folks getting enrolled in riding academy, complete the course and then purchase the motorcycle. So this is something that's going to drive more in the second half certainly than it did in the first half and be a very strong brand enhancing point with about a third of our customers buying new motorcycles in any given year.

I will just add. This is Matt. I think the energy that we've put in in the quarter is around really smart creative reinforcing ways to compete. So as an example we've talked a lot internally about the simple truth that $1 invested in pulling forward a sale is $1 wasted. So our energy is around high-quality things that convey the core meaning, the core value of joining the Harley-Davidson brand versus another choice people might have. I think the rider academy veterans program is a great example of the great work that we're doing internally to do smart things to grow the business long-term. As John mentioned, practically none of that investment is in the second quarter numbers yet but we couldn't be more impressed with the response in numbers and in the nature of the response as far as how people are feeling about Harley-Davidson's investment in our veterans.

Your next question comes from the line of Kevin Milota with JPMorgan. Your line is open.

Hi, thank you. Just on the $750 million debt issuance - it sounds like you're in the market right now - what pricing our you expecting to achieve on that debt?

Thanks, Kevin. We are not in the market at this point. We expect to be in the market very quickly in the next couple of weeks. And we certainly look for a price commensurate with our ratings and the team here, the treasury team does a fantastic job but at this time I'm not going to speculate on what we believe we will get. Markets are dynamic and change. But we should be in the market in the next couple of weeks.

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

Thank you and thanks for the color on the gross margin, in particular the FX cadence, very helpful. Mostly clarifications here touring, John, you commented on sort of the cadence of your shipments in there but touring was down noticeably here in the second quarter year-over-year, so some comments there. And then Canada, any additional color you can give there related to the accretion for next year and then finally just as a reminder the HDFS financing promotions, where does that flow through in the P&L? Thank you.

Thanks, Tim. So touring shipments. Tim, what you are referring to is on the shipment slide. When we look at percent of total, Street was basically up 4 percentage points and touring was down 4, and we expected this as we entered into the quarter. We are continuing to grow our shipments of Street as we fulfill the international rollout and when everything adds up to 100, something has to come down and when we look touring is down and the previous four quarters we had our cruiser business about 6 percentage points, so there's a lot of concerned with regards to that. But whenever we look at the total and we're investing in different parts of the business something has to come down. One, we are very thrilled we're seeing stability in the cruiser number in terms of percent of total and there are no issues whatsoever with touring. It's just that as one goes up something's got to come down. And I will say that actually touring is continuing to do very strong. We mentioned that we lapped a 31% increase in the year ago numbers and our Rushmore sales was still up on a year-over-year basis in the quarter, so we're very pleased with that business. The second question that you had Tim is Canada. So in early August, we expect to step in the shoes of our distributor in Canada. Again we would expect from the overall transaction what's going to happen is that we will receive a little bit more revenue and that is the margin that we pay and have paid our distributor in Canada will go away and we'll distribute directly to our dealers in Canada. So we'll see a tiny bit more revenue. You are not going to be able to see it on the - it won't be a big impact on the whole thing but certainly from a Canada perspective. And then the second piece of it is that we will also assume the expenses for running the market, so SG&A will increase in the third quarter and ongoing. Now when we net the higher revenue and the SG&A out over time, that will be beneficial. We'll have more revenue than SG&A and therefore the transaction will be accretive into the future. However in the short-term as we transition there are various things that we need to do from a people standpoint, a systems standpoint, a logistics standpoint, to step into those shoes. And we do expect in the near-term to be - a cost of about $0.04 per share and again by the nature of when we get into this most of that will happen in terms of the third quarter and in terms of higher SG&A spending. And your final question, Tim, was with regards to HDFS and the finance promotions that were in second quarter. When we look at it, the biggest drivers of those promotions on HDFS were really to originations, which were up 7% and the receivables that were up 5%. When we look at the income, which again had a very strong quarter at HDFS, up 10%, very little of that if any is captured in this. Remember these are 60-month loans. They really got in the marketplace in mid-May to mid-June, so you're picking up maybe 1/60th of that loan, so very little if any impact in terms of the overall financial performance is due to that activity in the second quarter.

Your next question comes from the line of Joe Spak with RBC Capital. Your line is open.

Good morning. Thanks for taking the questions. The first one is just again, I'm a little bit confused on the shipment versus retail timing shift you explained. I understand the rationale for trying to balance out some of the production and shipments to get some better absorption in the fourth quarter but if retail seasonality doesn't change, how do you not end up with a higher inventory situation, it was the first question. The second question is can you just go over the net interest margin at HDFS in the quarter. It was up but volumes were down and I don't think spreads are getting better. So is there some mix impact there or is it really what you just said on the question prior, which is there's just not that much impact from the current quarter in the issuance of results this quarter?

Thanks, Joe. The first question is very simple. We would expect Q3 inventories to be down more than they would have been, and Q4 inventories will end up similar to where we always expected. So we'll balance some of that with just lower inventories going into the fourth quarter, retail inventories. The second question, Joe, was with regards to HDFS results. We're continuing to see attractive spreads in our business there. If you look at the bridge there you're seeing that net interest income is up I believe $4.6 million and that was due to higher receivables offset by a little bit of lower spreads on the competition, and we've seen that for the last four quarters. We are not seeing the 0.99 loans that we have in the marketplace playing out in that. As we go forward, we will see a contraction in spread as some of those loans move through. Now some of those loans are also subvented by the motor company. So HDFS is not going to feel the full impact of that. We do very little subvention between companies. I don't think in 2012 or 2013 we did any. Last year we did some because of the excess inventory due to the weather. I think it amounted to about 3% of the overall loan. So we will see a little bit of tightening of spreads as those loans move through the portfolio but we are not seeing any of it in the second quarter and again overall we feel very good about the business at HDFS. Hopefully everyone caught the fact that we changed our guidance to be down modestly on a year-over-year basis to be up modestly on a year-over-year basis and the team at HDFS has done an absolutely fantastic job managing that business.

Your next question comes from the line Rod Lache with Deutsche Bank. Please go ahead.

Good morning everybody. Just two things. One is a lot of talk about the competitive behavior that you are seeing and you stepped up some marketing and maybe subvented financing. But you are seeing still positive pricing of $19 million year-over-year and you saw that in Q1 as well. Just could you help us reconcile really what is happening here that despite the competitive dynamics you were actually still experiencing some positive on the pricing, is the pricing mostly international to mitigate FX? Are there some opportunities in North America that you are seeing as well?

Thanks Rod. The pricing where - we typically take pricing at model year, so the bulk of that $19 million you were seeing on the bridges from pricing that we took last August. Over the last several years we've been taking pricing with the exception of the Rushmore year but net pricing in excess of cost has been about half a percentage point for the last several years and that's what you were seeing in the $19 million. Last year August pricing increased revenue by about 1 percentage point, cost of goods sold increased by about half a percentage point and gross margin was up about half a point. That is simply playing out. Now interim we did take a little bit of pricing in Europe. Not that much to drive that $19 million, but we raised prices in Europe I believe in late March by 1.2 percentage points and that was to help mitigate some of the currency actions that we saw but the bulk of what you were seeing was done a year ago and again we'll look to provide the market, and you guys with what our pricing looks like for our model year 2016 on August 24.

Your next question comes from the line of Jaime Katz with Morningstar. Your line is open.

Good morning, thanks for taking my question. I just have a quick one. The HDFS share of motorcycle sales financed was significantly higher than it has been in the past. Is there some level of motorcycle financing where you guys get uncomfortable with bearing sort of most of those loans or where it starts to constrain sales or is there sort of no bound on that?

Hi, Jamie. To say no bound on that, I don't know how to answer that. Everything we do at HDFS certainly goes through a rigorous underwriting process. We feel very good about the returns on the loans that we take, and we've been very consistent in terms of the financing over these last 10 years. Our market share usually is in the 50% to 55% range. Now having said that, in this quarter given some of the response to the competitive activity we certainly took on more loans. Now to make sure that everyone understands that 0.99 is our very top prime customer, we have three tiers of prime customers and they don't all receive 0.99, that is the FICO scores that are extremely high and losses are extremely low. We do not offer those finance promotions to near prime or to subprime customers. So no, we are not concerned about the credit value - credit aspect of those loans in a way, shape or form as they represent our top customers.

Your next question comes from the line of Adam Jonas with Morgan Stanley. Your line is open.

Hi this is [Neil] on for Adam Jonas. I wanted to ask about the recent - your views on the recent CFPB ruling on expanded oversight of captive subs. Do you foresee that having an impact on HDFS? If so, could you talk a little bit about that? And then also wanted to ask about residual used car prices, where those have been heading. Thank you.

Thanks Adam. So first question on the CFPB. Recently within the last quarter the CFPB made a ruling that finance companies with loans over, I believe, 10,000 in loans would be under the authority of the CFPB, so we fall within that jurisdiction. So we've always been regulated by the FDIC and others and now we will add CFPB to folks that provide oversight to us. That's the biggest change that we see at this point. We'll continue to monitor it and otherwise shouldn't be any big change. The second question is with regards to use by pricing. In the first half of this year within our dealer network and as we've talked before it's very difficult to really put your finger on used bike pricing. There are 40 or so models, they span over a ten-year period of time and there's all kinds of customization, different levels of customization within models, so it's not an easy thing really to ferret out but the best that we can tell within our dealer network in the first half is that used bike prices are stable. Now within that we're seeing used bike prices firm up a little bit in touring, largely flat in sportsters, and down slightly in our large cruisers and Dynas and Softails. But in aggregate, we're very pleased that used bike prices are holding to year ago levels.

Your final question today comes from the line of David MacGregor with Longbow Research. Your line is open.

Yes good morning everyone. John, just a question on growth and non-growth in touring. I guess the question is how confident are you [indiscernible] in fourth quarter you can get back to growth?

In terms of overall Rushmore, David, we couldn't be more pleased and when we look at just the quarter we're lapping a 31% gain and growing on top of that. Now Road Glide is helping with that. Road Glide represented about 12% of US sales in the second quarter so that helped with that, but in aggregate we feel great about Road Glide. We feel great about the continued sales of Street Glide and the Limited and Road King is in that family as well. And again we're lapping huge numbers and beating them.

Thanks everyone for your questions. The audio recording and slides for today's call will be available at Harley-Davidson.com. The audio can also be accessed until August 4 by calling 404-537-3406. The pin number is 71105885 then #. If you have questions please contact Harley-Davidson Investor Relations at 414-343-8002. Thanks.

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