Good morning. My name is Christy, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Harley-Davidson Third Quarter 2016 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Amy Giuffre, Director of Investor Relations. Please go ahead.

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

Thanks Amy, and thanks to all of you for joining us on the call today. Before John goes into the financial results, I’d like to cover the market and company performance for the quarter and provide context on what we see going forward. First, while we recognize that the environment continues to be challenging, we believe we’re on the right course making prudent decisions for our future by focusing our investments on growing the sport and Harley-Davidson’s place in it. We’re focused on influencing customer choice in growing our reach and impact with customers all, while delivering strong returns to investors. We continue to be pleased with our market share performance given the fierce competition in the U.S. market and ongoing global macroeconomic challenges. Third quarter market share was essentially flat in the U.S. as we maintained our strong leadership with over half of the 601cc-plus market. Our overall market share performance in the U.S. and gains in other key global markets like Australia and Japan provide strong affirmation of the progress we’re making with our investments to drive demand through awareness, access, increased ridership, and bold new products to reach more people in more places. An absolute highlight of the quarter was the reaction around the world to our Model Year 2017 new products. One of our key areas of focus is to accelerate the cadence and impact of new products, and in late August we delivered. We could not be more pleased with the launch of and response to our Model Year 2017 lineup, most notably we've had an extremely positive reaction to our Milwaukee-Eight engine, which we debuted on all of our three motorcycles in conjunction with the redesigned upgraded suspension. We know what our riders want and we deliver it with a big step forward that…

Thanks Matt and good morning everyone. Today, I’ll provide additional insight around our third quarter financial results found in our press release and supporting slides. Starting on Slide 8. During the quarter, revenue was $1.27 billion, net income was $114.1 million, and diluted earnings per share were $0.64. As we anticipated, operating income from the motorcycles segment was down 23.9% from last year's third quarter. Segment revenue was down 4.3% in the quarter behind a 9.1% decrease in motorcycle shipments. Gross margin as a percent of revenue decreased versus prior year as a result of higher year-over-year manufacturing cost. SG&A was up in the quarter as we increased our demand driving and product development investments. Operating income as a percent of revenue in Q3 was 10.0%. At HDFS, operating income was down 4.6% year-over-year. We remain focused on driving demand and delivering strong margins and strong returns over the long term as we continue to navigate through the ongoing challenging conditions. Q3 worldwide retail sales of new Harley-Davidson motorcycles are summarized on Slide 9. Retail sales in international markets were up modestly. U.S. industry slowdown continued, driving Harley-Davidson retail sales down 7.1% in the U.S. and down 4.5% on a worldwide basis. Our increased investments in driving demand and product innovation are mitigating the effects of the intense global competitive environment, including the expanded price gaps to the competition in the U.S. and the impact of new product introductions. This is no more evident than with the overwhelmingly positive response to our Model Year 2017 motorcycles featuring the Milwaukee-Eight engine. Our new products drove significantly improved U.S. retail sales and market share in September. We also saw positive retail momentum in EMEA and in Asia-Pacific we are encouraged by the initial customer response as the 2017 models began arriving at…

[Operator Instructions] Our first question comes from the line of Tim Conder from Wells Fargo Securities. Your line is open.

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

Thanks, Tim. When we look at both delinquencies and credit losses, we certainly have seen an increase on a year-over-year basis. And starting with delinquencies, as we've discussed, the delinquencies have been at historical lows. I mean, they have really been low since the last 3 or 4 years. And so with the rise, and we've seen on a year-over-year basis about a 33 basis point increase. That increase has held steady over the last three or so quarters, but is higher year-over-year. But even with that, Tim, delinquencies are near historical lows and certainly still much better than they were prior to the downturn that we experienced. So we're keeping an eye on it. HDFS is doing an absolutely fantastic job, working collections, as well as tweaking the underwriting that we've got. And we talked a little bit earlier, we made some underwriting adjustments in oil-dependent areas in the United States a couple of quarters ago. The other piece of that is credit losses and credit losses are also up in the neighborhood of 40 basis points year-over-year, which is certainly a concern. Still, when you look at credit losses over this period of time, Tim, we are in the 10-year historical average that we've had in terms of credit losses. And both in terms of delinquencies and credit losses, we're certainly within the models in our pricing and within our expectation of overall losses. Similarly, with credit losses, we've seen those rise a little bit more and longer than we have in terms of delinquencies. And that is really due to the softness that we've seen in the auction market that really started back in Q4 of 2014, somewhat aligned with the shift in world currencies. But again, overall, we’re within what we've seen in historical norms over the last 10 years. We're not providing any projections going forward. But again, HDFS is addressing what we've got and making the changes that are necessary to continue to maintain their industry-leading profitability at HDFS.

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

Hi good morning. Two quick questions, I guess, on the reorganization during the fourth quarter. Are there any ongoing savings associated with that? And then, secondarily, just wanted to get your thoughts on taking price both domestically and in some of the international markets, given the weakness you're seeing.

Thanks, Sharon. With regards to the reorganization, as we had mentioned, we're recognizing the challenging U.S. industry and taking the prudent actions to appropriately size the organization. With that, we'll have the charge of $20 million to $25 million. And the benefit of that will be the $30 million to $35 million of savings into 2017, and really that will be deployed to protect our margins as we look to move into 2017 in a more uncertain U.S. industry growth profile. And with regards to the overall pricing, we had mentioned that for the Model Year, we increased prices by 2.25%. And when you look at the value that we've added to our motorcycles, in particular Touring motorcycles with our first new engine and design in 18 years and the benefits in terms of power, acceleration, the suspension, heat management, and you can go down the list in vibration and so on and so forth, we believe we've added significantly more value to the motorcycles than the pricing that we've taken. So we're confident with that pricing, and we've enjoyed the ability to price our motorcycles for the last several years. And we feel good about where we're at with this price increase moving into our 2017 Model Year.

Our next question comes from the line of Joseph Spak from RBC Capital Markets. Your line is open.

Good morning, thanks for taking the question. Two quick ones. So, I guess, I just wanted to delve more into the guidance a little bit. And I recognize you don't normally give what you're forecasting for retail, but the inventories in the U.S. are up almost 10,000 units. You're saying it's going to be flat by year end and even the low end of the shipment guidance is only a reduction of 4. So, I was wondering if you could help us square that. And then second would be on those cuts and those savings, I just want to make sure, are those being - you said reinvested to protect margin. Is that different from the actions you took earlier this year, which were to - actually in the $70 million, which was more to try to stimulate demand? I guess, I just want to get a better understanding how you're thinking you are going to reinvest that in the business? Thanks.

Thanks, Joe. With regards to overall guidance, 264,000 to 269,000 units, we are confident. Third quarter was a tough quarter for us, certainly lower than what we had expected, but still confident in hitting our guidance. And you're absolutely right, inventory was up 9,700 units, much higher than we would like at this point in the year, but in line with what we saw in the second quarter. Second quarter, we were up about 8,600 units and put more inventory in the system because of the ERP implementation that we did. We’d hope to burn off more of that inventory over the third quarter. That didn't happen. But we did not take - as Matt had mentioned upfront, we did not take the actions of reducing production at that time because of the fact that we've got our new Model Year 2017 motorcycles out. And to get worldwide dealer fill, it was important that we continued to produce. So as we look forward to the fourth quarter, we are committed to bringing inventories in line with prior year levels at the end of the year. And that will happen in two ways, Joe; one, we expect retail sales growth in the fourth quarter, driven by several things, the Milwaukee-Eight engine; the demand-driving investments that we're making, which have been very effective; the dealer expansion, I believe in the fourth quarter, we got 16 dealerships opening. And as far as I remember, that's the most we've ever opened in a quarter. So that will help benefit it. And then finally, lapping the very soft industry on a year-ago basis. So, retail sales growth. The other piece is we will be taking production down in the fourth quarter. We are absolutely completely committed to managing supply in-line with demand and expect to be flat on a year-over-year basis. Your second question, Joe, is with regards to the savings. Again, Sharon had asked about $30 million to $35 million of savings, and we will use that again to protect our margins into the future. We’ll continue to invest at very high levels of marketing spend, and it will also make sure that in a slower growth environment, we're a little bit more defensive and protective of those margins. And we're looking to maintain them as we move into 2017.

Our next question comes from the line of Rod Lache from Deutsche Bank. Your line is open.

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

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

Our next question comes from the line of Craig Kennison from Robert W. Baird. Your line is open.

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

Thanks, Craig. By and large, we're actually very pleased with all of the investments that we made. In particular, you can see the point about the cadence and impact of new products with the Milwaukee-Eight and I would say that, that's the leading edge of stepping up the focus of our product development investments to have that reach and impact. The comments that I made about Riding Academy, and in general, the whole initiative of ridership in the United States and the role that the Riding Academy plays in bringing new people into the sport, in particular to our brand and to our dealership, we're very pleased with those 52,000 new riders that we've trained. And the other - I guess, the third big hitter is access through enhanced distribution and the dealers. We have added year-to-date 20 and expected 16 in the fourth quarter, helps us with our reach internationally. So those to me are the big hitters. In general, the envelope around it is just making sure that we increase awareness of the brand and of the products along the way. All of those have gone really well according to our expectations. Obviously, we learn with everything we do, and we continue to dial in our efforts going forward. In particular, Riding Academy is going to continue to be a high leverage asset for us, how do we make sure that the 52,000 people are the right kinds of new riders that have a long life with us and are going through the class and are high-yield riders coming out the other side and working with our dealers to both expand the number of them that offer the class, as well as the number of classes they are able to offer and the conversion rate of everybody that goes through it is going to be a key focus of Riding Academy going forward. And we'll continue to dial in everything that we're doing, learn from everything that we're doing, as well as exploring new opportunities as they emerge to drive demand for the products and for the brand. So thanks.

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

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

Thanks, Greg. So we couldn't be more pleased with what we're seeing from our Model Year 2017 motorcycles driven by certainly the Milwaukee-Eight engine. Matter of fact is you look at the beginning of the quarter and July and August, we saw the same run rate from the industry, down about 9%. Our sales were down about the same amount, a little bit more and really turned around in the month of September, up 5% United States, also up pretty strong at EMEA. Those are the two markets that we had distribution of our Model Year 2017 motorcycles in. They just started reaching our Asia-Pacific region very late in the quarter. So we expect certainly a lift from the new product in the fourth quarter in those markets, as well as in Latin America. They will arrive even later into the fourth quarter. But the reception has been absolutely fantastic. And so the lift that we're seeing in September, we do believe it will be sustainable in the fourth quarter and drive increased retail sales in the United States, as well as around the world with regards to that. Also had a big impact in terms of market share in the U.S and actually brought the industry to near flat for the month of September. So not only is it driving our sales, but really having an impact on industry sales as well.

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

Hi good morning. Thanks for taking my question. Just kind of staying on that topic, John, on the up 5% in September, I was just wondering was that mostly driven by the bikes with the new engines, or was it driven by the entire new model line. And then also, can you just help us understand what that comped against? It was my understanding that September 2015 retail registrations were down quite a bit. So, I'm just trying to understand the benefit of an easy comp versus the accelerated sales from the new bikes? And that's kind of it.

Thanks, Felicia. Felicia, I cannot remember what the month of September year ago was. The overall quarter for Harley-Davidson was down 2.5%. And I just don't recall the cadence by month. And maybe Amy could help out with that. When you ask about - the driver in the month of September was largely our Touring motorcycles. Touring motorcycles were up double digit, and United States represents a little over 50% of our sales in the U.S. So that was the biggest driver. The other categories, we continue to see the Cruisers doing well with the S models. But the biggest driver in the month of September certainly was the Touring bikes with the Milwaukee-Eight engine.

Our next question comes from the lines of James Hardiman from Wedbush Securities.

Hi good morning. Thanks for taking my call. I maybe wanted to rephrase a previous question, but essentially, it would appear that retail was worse than you expected in the third quarter. Inventories are higher as we exit the third quarter. Ultimately, shipments are towards the - or at the low end of what you guided, and yet your full year guidance is unchanged. So, I guess, the implication is you're more optimistic about the fourth quarter for us to still be able to get to those same numbers. And I guess, second question sort of in the context of the color you gave on September, the math would seem to suggest that the fourth quarter needs to be even better than that 5% growth just to get to the low end of the guidance and probably more like double digits to get to the midpoint. Have your - even within your guidance, are you towards the lower end of those numbers, help us square how third quarter was so much worse than you thought and now you're still maintaining the guidance?

Thanks, James. So number 1 is we certainly do expect a strong and growing retail sales in the fourth quarter. But, James, we do not need the level of growth that you stated. I think you said mid-single digits to high or significantly higher than what we did in the month of September. That is not accurate. So two things you need to go back and look at is when you look at the retail sales and try to equate them to wholesale shipments, the base of those 2 numbers starting the year were different off of a couple of thousand units. And while we'll maintain inventories flat on a year-over-year basis in the United States, we do expect inventory growth in our international markets. We will be adding 36 new dealerships, and we will certainly need inventory to help support that growth, which is about a 5% increase in our international dealerships. So with those two things included in the computation, it is much less than needed, much less to hold the guidance into come in at the low end or the high end of the guidance for the full year guidance. But again, we do feel very good about the momentum that we've got coming out of the month of September and the reaction to our new product from the media, our dealers and customers around the world.

Your next question comes from the line of David MacGregor from Longbow Research. Your line is open.

Yes, good morning. John, you talked about manufacturing being favorable to the fourth quarter gross margins, but you also got a manufacturing curtailment you talked of as well? Can you just help us maybe unpack that number a little bit and help us understand some of the moving parts to get you to that, since it will be favorable? And then just quickly, if you could talk about your 9,700 units of inventory, how much of that's model 2016 versus model 2017?

All right. Thanks, David. Yes, with regards to the manufacturing expense, we have certainly had a tremendous amount of startup cost going on and lower run rates. As we exited the third quarter, number 1 is the ERP system came up flawlessly as did the cutover to the new engine. We spent a lot of money on training our workforce and making sure that things went well. As we exited the third quarter, the plants were up and running at speed, and that will be the biggest driver of our year-over-year improvement from last year. We still will have lower production. So, we'll have a headwind in overall manufacturing expense on lost absorption. But given the running of the plant and the speed that we're at, we would expect that manufacturing expense to be favorable in the fourth quarter. The second question that you asked, David, was of the 9,700 units of higher inventory, what percentage is of carryover motorcycles. I do not know the absolute percentage of that. And it really - it's hard to tell, because that's just the increase in inventory. What I can tell you is Model Year 2016 carryover inventory is a much bigger percentage of the total inventory that we have in the system than we would like at this point, and it is higher than what we had on a year-over-year basis. The dealers are doing a very good job of burning through that carryover. But it is, no doubt, higher than we want, and that is the appropriate level. Remember, coming into the year, we were producing [indiscernible] pull back and as much production as we could in the second quarter. We are cutting over to a new model year. And so we ended up with higher overall inventories. We are helping…

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

Thanks. Just one follow-up. All other questions have been answered, thank you. Can you remind us what percentage of your workers in the U.S. are under temporary contracts and any other details around that?

In temporary contract? What exactly do you mean, Adam?

Not full time, more flexible contracts, where the cost of separation might be different, say, from a permanent hire or full-time worker?

So, there's two avenues to that. There are hourly workers. And last quarter, we announced layoff of a couple of hundred hourly folks. And most of those - we've got a fair amount of casual workers in the workforce, and certainty, we look to lay those off - those folks off first. But we did lay off a couple hundred of our employees. In terms of that workforce, during surge periods, we can surge up to 30%. But in any given period of time, it's much less in terms of casual workforce in the hourly ranks. In terms of on salaried side, I don't know what the percentage is, Adam. But as we look to become leaner and more focused, we will lose some of the contingent workforce that we have working here. And unfortunately, we will also lose some of our full-time employees.

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

Hi good morning. Thanks for taking my questions. You guys talk quite a bit about uncertainty in the economic environment. And with parts and accessories down, I'm curious whether you guys think maybe that consumers are either delaying the corresponding purchases to their bike purchase, or are they foregoing them and they prefer to spend the money just on the bikes? And then second, factory inventory was down pretty well year-over-year. Can you tell us about where you think that might be going by year end? Thanks.

Thanks, Jaime. Parts and accessories and general merchandise were both soft during the quarter. P&A was down, I believe, 8.3% and general merchandise 5.5%. But, Jaime, you also have to look at that in context of kind of what they track to. Our overall shipments were down 9.1%. And some of our parts and accessories business tracks pretty well with shipments, as dealers get motorcycles in and make changes to them. And then they also both track pretty well to retail sales as well, which on a worldwide basis was down 4.5% and 7% in the United States. So when you look at both P&A and general merchandise, they're down, kind of straddling between what we were down in retail for the quarter in wholesale. So on a year-to-date basis, parts and accessories, I think, is down about 2.5%. And we've got retail sales down about that same amount, 1.9%. So on a year-to-date basis, they're tracking pretty much what we've seen in that relationship historically. I’m sorry. Jaime, the second question was with regards to overall inventory. If you remember, going back to the fourth quarter, we had inventory up quite significantly. Matter of fact, it was up about 33%, and that was to get a quick start in supporting the marketing spending that we were doing in the first quarter. And at that time, we said we would burn that inventory off throughout the year and each year - each periods come down. And I'm certainly happy to say that in the third quarter, overall inventory was down about $40 million, driven largely by finished goods inventory, partially offset by a little bit of rise in parts and accessories and general merchandise. And so overall inventory is down about 9%. As we look to the fourth quarter, we would expect overall inventories to be down as well on a year-end basis.

The next question comes from the line of David Beckel for Bernstein Research. Your line is open.

Hi thanks. Thanks for taking the question. I have a bit of a high-level question that sort of affects not only this year but next. I had a question, if you had to itemize the sort of negative drivers that you've experienced throughout the industry for this year, what have been the most significant factors affecting U.S. sales? Because it seems like the trend is decidedly departed from the last 3 to 4 years. And following on that, to what extent do you see the current year's weakness as being more cyclical or secular in nature? And a quick follow-up. You mentioned you're going to be helping defray the cost of trading of used bikes between dealers. I was just curious what exactly or the extent to which those costs are material or nor or any additional detail you could provide there? Thanks.

All right. Thank you, David. So when we look at the year and the negative drivers are all based on the industry, David. Market share, we couldn't be more pleased with. Again, coming into the year, our direct objective was to stabilize market share. On a year-to-date basis, market share is up 0.8%. And even when you look at the third quarter, market share was flat. But if you peel back a little bit further than that in the categories that we compete in, in the third quarter, that being Touring large cruisers and small cruisers, our market share was up quite significantly, up a full percentage point in those markets. And we gained market share in all three segments. So, we're competing extremely well without discounting. And that is the equity spending that we're going on brand-building activities Matt had talked a little bit about before. So that aspect is going very well, going better than what we had expected. What the negative drivers are is clearly around the industry. And we've seen the industry that's performed very well over the last 5 years up through 2015, a CAGR of 2.9%. And we got into this year and we had about a percentage point increase in the first quarter. And then again toward the end of April, things really started to fall out. When you look at what's driving the industry, one is up through three quarters is lapping very strong year ago numbers. On a year-to-date basis, the industry was up about 6-point-something percent, and that was driven by the onset of discounting. So last year was the first benefit that the competition got from significant price reductions. So we are facing that headwind. That will start to reverse, David, in the fourth quarter as a year-ago's fourth…

We have time for one last question. And our last question comes from the line of Joe Altobello from Raymond James. Your line is open.

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

Thanks, Joe. The finance promotions on a quarter-to-quarter basis are down quite significantly in 2016 versus 2015. 2015, we were running deeper offers at 0.99% and much broader across our model lineup. Remember, 2015 was the first year and the first impact that we were feeling of the significant discounting, which was currency-driven by the competition. And we did more finance offers last year than we did this year in general. And the spending is down quite significantly on a year-over-year basis. So when we talk about some of the things that we're doing to help with regards to that is financing is actually lower on a year-over-year basis, but we are very focused on helping move some of those models that we are long in. Manufacturing cost?

Yes, when we look at overall manufacturing expense line of our gross margin, we have seen a significant amount of cost over the 3 quarters. A significant portion of those are driven by the investments that we're making in ERP system and all the retooling and training that we've done to bring the Milwaukee-Eight to market. There is also other costs in there, lost absorption. Production is down on a year-over-year basis as well as in the second quarter, we had a fair amount of obsolescence as we tried to pull back just before the new Model Year came out. So we would expect the majority of those not to repeat next year. And again, as I had mentioned, that number will become smaller, because we will be favorable on manufacturing expense in the fourth quarter.

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

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