Amy Giuffre - Director-Investor Relations Keith E. Wandell - Chairman, President & Chief Executive Officer Matthew S. Levatich - President And Chief Operating Officer, Harley-Davidson Motor Company John A. Olin - Senior Vice President and Chief Financial Officer.

Craig R. Kennison - Robert W. Baird & Co., Inc. (Broker) Sharon M. Zackfia - William Blair & Co. LLC Felicia Hendrix - Barclays Capital, Inc. James Hardiman - Wedbush Securities, Inc. Tim A. Conder - Wells Fargo Securities LLC Patrick K. Archambault - Goldman Sachs & Co. Gregory Robert Badishkanian - Citigroup Global Markets, Inc. (Broker) Joseph R.

Spak - RBC Capital Markets LLC Gerrick L. Johnson - BMO Capital Markets (United States) Adam Michael Jonas - Morgan Stanley & Co. LLC Rod A. Lache - Deutsche Bank Securities, Inc. David S. MacGregor - Longbow Research LLC.

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I'd like to welcome everyone to the First 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. Thank you.

I'll now turn the call over to Amy Giuffre. You may begin your conference..

Thank you, Lisa, and good morning, everyone, and thanks for joining Harley-Davidson's first quarter 2015 earnings conference call.

We webcast the audio for our call live on harley-davidson.com, and you can access the supporting slides on our site by clicking 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.

Participating on today's call will be Harley-Davidson's CEO, Keith Wandell; incoming CEO, Matt Levatich; and CFO, John Olin. Following our comments, we'll take some questions. So let's get started.

Keith?.

Thank you, Amy. Good morning and thanks for joining us on today's call. As always, we appreciate your interest in Harley-Davidson.

As you know, this is my last earnings before retiring on May 1, so let me just say that it's been a tremendous privilege to work here for the last six years with an outstanding team, from our employees, to our dealers and suppliers. And also to get to know so many of our customers, investors, and all of you who cover us.

During the last six years, our team has made incredible gains in how we bring new products to market, how we produce them, and how we provide the best customer experience in the industry. We've significantly grown our global footprint and broadened our U.S. customer base.

And while first quarter retail results didn't meet our expectations and we are adjusting shipments to manage supply in line with demand and protect our premium brand, the fact remains that Harley-Davidson stands in a position of great strength, thanks to the hard work of our entire team.

We continue to improve our financial performance and operations, reflecting the ongoing power of our transformation and how it drives our operating effectiveness. Just to note a key major of financial performance, the 39.1% gross margin percentage that we reported this morning is the highest in at least the last 15 years.

We are the undeniable market leader in the 601cc-plus segment of the motorcycle market with a broad and outstanding line of products and retail motorcycle sales six times those of the nearest competitor in the U.S. The Harley-Davidson brand is among the most iconic on the planet, a position of strength that we've built over many decades.

We've got incredible breadth and depth in our retail distribution and a compelling strategy that's focused on growing our reach to new customers in the U.S. growing internationally and continuously improving every aspect of how we operate.

As we noted in today's press release, we now have the breakout of Harley-Davidson's market share for 2014 by demographic group. And for the seventh straight year, we remain the number one seller of new on-road motorcycles in the U.S.

to each of the demographic groups that we track, both in the 601cc-plus segment and across on-road motorcycles of all displacements. Turning to international markets, while some parts of Europe were affected by currency and soft economic conditions in the first quarter, other parts of the EMEA region did well.

For example, it was our best quarter ever in our Central, Eastern and Southeastern European markets as well as South Africa. In Asia-Pacific, we had our strongest quarter ever in India and China, as well as exceptional initial demand for the Street 750 in Korea, Vietnam and Thailand.

And Street is doing very well in its initial rollout in Australia and New Zealand, among others. In Latin America, sales were up double-digits in Mexico with about half of the increase coming from the Street 750. Clearly, Street is hitting the mark. I also want to touch on some recognition Harley-Davidson has received in recent weeks.

We're placed in the top 10 in the Forbes ranking of top employers in America based on a national survey of more than 20,000 employees at U.S. companies. And on the brand side, we were named 2015 Motorcycle Brand of the Year in the EquiTrend, Harris Poll annual study of brands that's based on familiarity, quality and consideration.

I mentioned these as a reflection of the passion and dedication of our workforce as well as the power of our brand. Our team's many accomplishments during my time here demonstrate the power of our strategy and being customer-led and I couldn't be more proud of everyone. And I personally believe Harley-Davidson's best days are yet to come.

Harley-Davidson has a remarkable leader in Matt Levatich as its next CEO. Matt has an outstanding track record. He knows this business in and out and has been a driving force behind our strategy with the vision to take Harley-Davidson to great places. So, with that, let me turn it over to Matt..

Thank you, Keith. I don't want to take too much time because I know there's a lot to get to and I'll be talking with many of you again in the coming days and weeks. I do want to take this opportunity, though, to thank Keith for his inspired leadership.

Keith has always been too modest to take credit for returning Harley-Davidson to strength, establishing a culture of leadership and charting a clear vision and strategy for the future. But everyone associated with this company will continue to be inspired by his tremendous contributions.

And we all have great confidence in the future for our position of strength and industry leadership.

In his comments, Keith touched on a few of Harley's many strengths, from an incredibly talented and passionate employees and our powerful global dealer network to our brand and industry leadership, our manufacturing, product development and retail prowess, our increasingly diverse customer base, and, of course, our unrivaled motorcycles.

We've been in the motorcycle business continuously through all the many ups and downs for 112 years. For the last six, we've built on our strengths and taken our capabilities to a whole new level, with agility to perform in a world and marketplace that is more dynamic and complex than ever.

While our business and industry will always have challenges, Harley-Davidson also has incredible opportunities. We have a clear and compelling strategy and we're running this business for long-term performance.

That means, keeping on the throttle to further leverage our strong product development and manufacturing capabilities even as we increasingly focus on maximizing our potential at retail to grow internationally and to further broaden our reach with new customers here in the United States.

As good as we may be today, we know we can build on our many strengths to be that much better tomorrow. So thank you and now here's John with the details on the quarter..

first, net interest income was favorable to prior year by $4.4 million, driven by higher receivables, partially offset by lower yields on receivables due to increased competition. Second, the provision for retail credit losses was unfavorable to prior year by $5.4 million due to higher retail credit losses and an increase in the reserve rate.

Finally, HDFS had a strong increase in insurance and credit card licensing revenue during the first quarter. We were very pleased with the performance of the Financial Services business. The business remained very profitable with industry-leading returns. Now, let's take a look at HDFS's operations on slide 22.

During the first quarter, HDFS's retail motorcycle loan originations increased 3.2% or $19.3 million compared to the same period last year. The increase was primarily driven by a 1.3 percentage point increase in retail financing market share for the first quarter compared to last year and a higher average amount financed per motor cycle.

Finance receivables outstanding increased 6.6% 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 the prime and subprime segments. In Q1 2015, approximately 80% of our new motorcycle loan originations were prime.

Moving onto credit performance on slide 23. The 30-day delinquency rate for retail motorcycle loans at March 31 was 2.64% or two basis points lower than the same period last year. Delinquency rates across the portfolio continue to perform at record low levels.

Annual retail credit losses increased by 23 basis points to 1.56% compared to last year's first quarter, driven by modestly higher credit losses in line with increased subprime originations in recent years, as well as changing consumer behavior.

During the first quarter, HDFS continued to maintain a strong liquidity position, delivered solid credit performance and contributed strong profitability. HDFS remains focused on enabling sales of Harley-Davidson motorcycles, while providing attractive return to Harley-Davidson Inc. Now, let's take a look at cash and liquidity on slide 24.

You will see at the end of the quarter, we had $1.23 billion of cash and marketable securities. In addition, we had $1.88 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 first quarter, we successfully completed a $700 million asset-backed securitization transaction with a weighted average interest rate of 1.19%. We also completed a $600-million five-year medium term note offering with a coupon of 2.15%. Additionally, in the first quarter, HDFS paid a $100 million dividend to HD Inc.

We further demonstrated our efforts to return value to our shareholders by repurchasing 2.9 million shares of Harley-Davidson stock for $182.5 million during the quarter. Returning values 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 25. I'd like to highlight two items.

First, with regards to operating cash flow, the company generated operating cash of $174.7 million in the first quarter. Operating cash flow was down $28.9 million from last year, driven by higher working capital and higher wholesale finance originations. And second, first quarter tax rate was 34.4% compared to 35.0% in a year-ago period.

On slide 26, you'll see our overall expectations for 2015. In 2015, we now expect to ship 276,000 to 281,000 motorcycles on a worldwide basis, up approximately 2% to 4% from 2014 shipments, but approximately 6,000 fewer motorcycles than prior guidance.

We believe it is prudent to adjust our plan at this time given the increased aggressive price discounting that is occurring in the U.S. market. We believe the underlying worldwide demand fundamentals for Harley-Davidson motorcycles remain strong despite the aggressive competitive discounting that is occurring.

We are committed to protecting our premium brand and will keep our focus on the long-term sustainability of our business. During the second quarter, we expect to ship 83,000 to 88,000 motorcycles, which is down approximately 5% to 10% compared to last year's second quarter shipments.

For 2015, we continue to 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 flat to 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 will be adversely affected by unfavorable foreign currency exchange, increased pension expense and unfavorable mix.

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%, one percentage point worse than we anticipated on our January call as currencies continued to devalue during the quarter.

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.

Looking forward to the second quarter, we expect foreign currency exchange impact to be considerably worse than the first quarter's $39.5 million reduction.

Assuming yesterday's exchange rates hold for the entire quarter, we would expect second quarter revenue to be adversely impacted by approximately 5%, with approximately 60% of the revenue decline adversely impacting second quarter's gross margin dollars.

We believe second quarter gross margin will be down approximately 2.5 percentage points versus last year's gross margin percent, driven by unfavorable currency, lower production as we adjust to lower shipment expectations and unfavorable mix during the quarter compared to last year.

Looking at SG&A, we now expect spending to be flat to down in 2015 as we work to mitigate the adverse impact of lower revenues. In addition, we continue to expect that SG&A will decline as a percent of revenue.

For HDFS, we can – 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 on the quarter, while we are facing significant price discounting in the U.S., we are pleased with our key accomplishments during the quarter.

We successfully increased gross and operating margin percent, continued to grow outreach in excess of two times our core customer growth in the U.S., expanded distribution of Street into many new international markets, expanded our international dealer network and delivered shareholder value through the repurchase of $183 million in company shares.

For the remainder of 2015, 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. And now, let's take your questions..

Your first question comes from the line of Craig Kennison from Baird. Your line is open..

Good morning. Thanks for taking my question. Keith, best wishes from all of us at Baird. First question here, and I'll leave it at one, is on the buyback. I know you've worked very hard to rebuild the balance sheet.

But with the stock under pressure, would you consider adding a turn or two of leverage in order to accelerate the buyback plan that you already have in place?.

Hey, Craig. This is John. We would consider that and the strategy has been to, first, repair our credit ratings, which now we're – are sitting at two AA minuses and an A. But that is something that we would consider as we move forward..

And how much leverage, John, would you consider?.

Craig, that's something that we wouldn't discuss at this time..

Good. Thank you..

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

Hi. Good morning. So, a question on the competitive dynamic, which you mentioned last quarter as well. I don't recall the last quarter you mentioned currency as being one of the dynamics behind the competitive discounting.

So, maybe you could help us think about anytime historically where you've seen competitors use currency to their advantage and kind of the length that that's lasted and then how you assess the risk of really not responding versus the peer group. And then, secondarily, just a quick question on Europe.

Just wondering if there was any negative reaction to the price increase there?.

Okay. The first question, Sharon, is have we seen other times? In particular, when you look back over about the last 15 years, there's two times in which Harley-Davidson lost share largely due to competitive discounting. That was in 2000 and 2008. Now, in 2000, by 2002, market share was back.

And we lost about three points in both cases in 2000 and 2008. And in 2008, we lost three points of market share. And then in 2009, we gained back 8.5 points. So, this has happened before. We expect it to happen again.

And the way that we've managed it is the way we've always managed our great premium brand is that we're not going to jump in and respond to price discounting by discounting on our – discounting our great brand.

We're managing this for the long-term value of the brand and the company and suck industry profits out of it by lowering margin and selling non-full margin product is not the way to do it. Again and history shows that market share will come back in a short period of time.

So, we're going to continue to manage this thing for the long term and do what's right for the brand overall. In terms of, I think, your third question, Sharon, was on Europe. And the price increase took effect about a month ago. It was 1.2% given the overall devaluation in Europe, which is significantly more than that.

We're balancing that with a competitive set there, and we have not seen any – not long enough to get a read on any impact of the price increase..

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

Hi. Good morning and, Keith, I'd also like to add congratulations. It's been a pleasure working with you and I hope you enjoy your next chapter. So, just a few questions. One is just trying to get some more granularity on the guidance reduction.

I'm just wondering, is guidance cut more of a proactive move or is it more reactive to something you're seeing so far now? I mean, I know you've given a lot of color about the competition and why you're doing it. But, again, reactive, proactive. That would be helpful.

And then also, you did give some color about this and how you're planning on offsetting the pressures of the deleveraging effect of lower unit sales and effects on gross margins. I'm wondering if you could talk a little bit more specifically about the efficiencies that you're enjoying there to help offset some of that.

And then just finally, now you're back-half-loaded pretty significantly, so what gives you your confidence in that? Thank you..

Thanks, Felicia. The guidance reduction – the first question was with regards to the guidance reduction. Is it proactive or reactive? You know, we had – we'd called out in the fourth quarter that we saw the competitive discounting increase quite dramatically in the fourth quarter.

And at that time, we said two-thirds of our competition had stepped it up. We were seeing discounts up to $2,000. Well, as we move in to the first quarter, we are seeing a couple things happen from what we saw in the first quarter. Both the depths and the breadths of the discounting has increased quite significantly from the fourth quarter.

We're seeing discounts now up to $3,000 a bike. We're also seeing our competition reprice with lower MSRPs, some cases, up to 25%. And so, with that, to answer your question, it is both reactive and proactive. We do expect that this is more of a fundamental change.

There's excess inventory in the channel and there's a newfound money by our competition, which is largely Japanese and European competitors that have seen their economics shift quite dramatically in the last three quarters, so we believe that price discounting will continue for a few to several more quarters, and therefore we're certainly being proactive because we're not going to discount and what we're going to is take down our volume.

We're going to continue to invest in the equity side of the business and build in the brand and the lifestyle aspects of it, but we're not going to participate in discounting. So we're lowering our volumes, 6,000 units, and going to continue to sell full-margin motorcycles as we move into the future.

So a little bit reactive on what we've lost in the first quarter, but much more proactive on what we expect over the next couple quarters. The next question you had asked is about the efficiencies.

So thanks for asking that, don't want it to go unnoticed that we had a record gross margin in the first quarter, 39.1%, which was up 1.4 percentage points and that's despite a currency headwind of what amounted to 1 point, 2 points of gross margin.

So we couldn't be more pleased with the underlying fundamentals of our margin structure and how things are proceeding. A lot of that is driven in the manufacturing line item and the plants are running very well. Continuous improvement here is an everyday thing, and we continue to find ways to take costs out of the business and to drive things forward.

We talked about our pricing and our ability to price, and that's driving a lot of the favorability in the quarter as well..

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

Hi. Good morning. Thanks for taking my call. So if we just do the math on your numbers versus the heavyweight industry, it suggests everybody else is up about 22%. I guess, first, how is that possible? Presumably, you've seen the MIC numbers. I'm assuming that the vast majority of that is Japanese players.

I guess help us understand who's being the most promotional.

And, I guess, secondarily, how that's impacting your model lineup? Is it primarily the lower-end bikes that are getting beaten up by some of this promotional activity given the types of bikes that are being discounted, and are the entirety of your share losses to other manufacturers who are discounting? Thanks..

Great. Great question. And so, in the first quarter, in the quarter where weather was worse on a year-over-year basis, you're right, James, we saw our competition up about 20%. How is that possible? It's possible with an incredible amount of money coming into the category and lowering the average prices of motorcycles.

Again, discounts up to $3,000, re-pricing MSRP, that's the only way it's possible. And, yes, we're seeing the share loss come predominantly to price discounters, mainly the Japanese. And, again, we've experienced this in the past. We'll experience it in the future.

When you looked at what they're doing, and kind of, again, a difference from the fourth quarter to what we're seeing now, is in the fourth quarter, they predominantly were discounting model – old model year products, so 2014, 2013 and 2012's.

Now we're seeing a migration to discounting of more current model year product, again, leading us to believe that this is going to be a few quarters out that it will continue. We are seeing the discounting across everything.

And it's not only the categories which we compete in, which are our Touring and Cruiser segments, but also we're seeing it in performance bikes, we're seeing it in dual, and we're seeing it in standard. So, it is pretty pervasive. When you look at where it's hitting the hardest in terms of Harley-Davidson, that would be in the large cruiser segment.

And again, to give an example of dimensionalize it, if you look at the large cruiser segment, where we have our Softails, Dynas and V-Rods competing, the competition grew that segment about 70% in the first quarter. And again, that doesn't happen in a mature category without a shock to it.

And that is the favorability that they are receiving on foreign exchange being spent in that way..

As a reminder, limit your questions to one question. Thank you. Your next question comes from the line of Tim Conder from Wells Fargo. Your line is open..

Thank you. First of all, Keith, thank you for everything, contributing to the company and best of wishes on your retirement, Sir. John, just to follow on to the previous question. As you said, we've seen this discounting in the past. And Harley has rebounded from it.

From what we hear from the dealers though also, it would appear that within the Custom category and especially the Sportster category, it's a matter of those products being a little longer in the tooth. You guys have done a lot of innovation obviously in the touring with the Street. But you can't do everything at once.

But it would seem that the Sportster and the Custom are little long in the tooth. Could the combination of that and the discounting be the root of the issue here? And then again, maybe as you guys bring innovation as you've done in the past, that could help turn the tide here..

Tim, the root of the issue is the discounting. We're always focused on product. We got a great product lineup over the next several years. And we're going to continue to execute it. But what we're seeing in the near term is an incredible amount of money coming in and reducing prices in the short term.

And again, we have been through this before, our brand and our brand power will get through it again, and it is all about the discounting..

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

I hate to beat a dead horse on the products side, but I also have some questions just following up on that. Really two specifically – I should know this, but I don't.

The Japanese competitors, do they manufacture at all in the United States or is this entirely kind of a transactional benefit that they're getting from importing bikes? And my follow-up question is, is there also a new product angle on this? I feel like there have been some refreshes at the competition, Honda and Yamaha recently.

Is that correct and is that having an impact as well?.

Thanks, Patrick. There is no manufacturing in the U.S. by the Japanese or our European competitors. In terms of new products, there are some new products out there, but that's not the driver. The driver is clearly the discounting that's going on.

There's no significant new products from certainly our Japanese or our European competitors that are driving market share..

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

So just a question for Matt. I'm just wondering if there is any changes in terms of the near-term or long-term strategy that you plan to implement once at the helm..

Yeah. Thanks for the question. As I mentioned, one of the great things that we have in the company is a very clear and compelling strategy, and whole organization is focused on executing, as John has pointed out.

So clearly, we have some headwinds in the business that we're going to have to deal with and that will bring more focus and energy to the areas where we can best impact that, but as far as the strategy and our direction, we're doubling down and accelerating on it..

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

Thanks. Good morning.

The first question would just be, can you just provide a little bit more color on what gives you confidence for that big implied ramp in the back half of the year on the shipments? And then the second and related to some of the challenges you faced earlier, one of the things we've picked up on is a big discrepancy between some of those dealers in the north and dealers in the south and the dealers in the south actually I think reported some pretty decent performance.

So I'm wondering if there's a product mix issue there versus the competition where some of those, some of your product weighed a little bit more in the south that caused you to lose share. And as the northern weather warms up, we're going to see any of this abate..

Thanks, Joe. So, the shipment ramp in the second quarter, so let's kind of run through where we're at. Where shipments were down 1.4% in the first quarter, our guidance for 83,000 to 88,000 motorcycles in the second quarter is down 5% to 10%.

So, if you work that math out, you're down about 3% to 6% in the first half, which has an implied growth in the back half of about 16% on average.

So, we are backloading the second half, the reason being is all of the, basically, the 6,000 units are coming out, we're taking out in the second quarter, another opportunity to exercise our flexible manufacturing.

If you remember a year ago in the second quarter, weather was very difficult and we ended up with higher inventories than we had wanted at the end of the second quarter. And we fixed that in the third quarter. And at this point, we will bring inventories down in the second quarter.

So, taking the $6,000 guidance reduction out in the second quarter and fixing inventories or bringing inventories where they should be at the end of the second quarter requires us to have more shipments in the back half. We feel very comfortable with that split.

And, again, as we've always said and we've certainly demonstrated, we're going to aggressively manage supply in line with demand and make sure that the marketplace is clean as we move forward.

The second question that you had, Joe, is with regards to the north and the south and weather and so on and so forth, if you look at – the overall weather from the weather services was pretty even on a year-over-year basis, both in terms of average temperature and precipitation.

But when you look at it, this winter was a harder first quarter than last year because of the timing of when the weather hit and certainly the excess of snowfall in the northeast. We have seven sales region and of those, seven three of them were down considerably.

That represent about 40% of our volume, and the Northeast being down the most, which was down double digits. Now, in the areas that didn't have the weather issues, sales were very strong, and we feel great about where we're at. And that was led by the West, which was up double digits.

And that's a second year in a row that the first quarter was up over double digits in the West. So, again, it was clearly a weather issue. It was not a product or mix or the inventories that we had in those markets or uneven competition. It was clearly the weather..

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

Hey, good morning. I have two questions. First, on FX. You mentioned there was a $35.5 million net impact to gross margin.

But could you explain what happened to the top line? And then also, if there might have been a positive to cost of goods sold from production, in, say, Brazil, India, sourcing in Japan? And secondarily, when you do talk about competitive pricing, it seems like you're only referring to the foreign competitors.

But are you also talking about Indian, they had a $1,000 off if you traded in a Harley. Do you think you're seeing some impact from that? Because I honestly think you'd probably see more of an impact from Indian as opposed to the Japanese, just my two cents..

Thanks, Gerrick. So, the first question was to expound upon a little bit more on the currency in the quarter. So, what we had at the top line, our revenue was impacted by $53.8 million. And that was that 14% devaluation, which is the average exchange rates between the first quarter of this year versus last year.

And so with revenue down $53.8 million, which is equivalent to 3.5%, we did have a pickup in cost of goods sold of $14.3 million. And that was a result of the natural hedges that we have. So, some of our parts that we make motorcycles in the United States would come from foreign markets.

And so, there's a natural hedge there, and then also financial hedges that we had. But those two gains were largely offset by the revaluation of our assets. So, we have to look and we mark our assets from the beginning of the quarter to the end of the quarter.

There was an 8% devaluation within the quarter, and that generated a significant loss on the revaluation of those assets. Now, that's more of a one-time loss and then will reverse itself when the currencies come back, but that minimized the impact of those hedges.

Therefore, that drove the $39.5 million hit to gross margin, which equated to one point, two points of gross margin and about $0.10 of earnings per share. The other question that you had asked is with regards to competitive pricing. Yes. We're well aware that Indian is discounting a fair amount as well.

Most of the conversations that we've had has been currency-driven discounting. But all of our competitors, or most every competitor, is discounting including Indian, and they're at probably similar levels to the Japanese in a lot of respects..

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

Hey, everybody. So we get the message loud and clear that you're not going to keep up with the discounting. You're going to protect the brand for the long term. That's great.

But I think you also alluded to doing some other things with the ownership experience or perhaps some other non-discounting items that could help continued engagement and give your rider community reasons not to switch, because it seems like these discounts are frankly working really well.

So, could you elaborate on what those things are? What those other non-price efforts are, and how much they could be a burden near term on results this year? Thanks..

Thank you, Adam. What we think the burden is is 6,000 units and that's what we're taking out of our guidance. We are doing things. In the first half we've stepped up some of our advertising.

We've got a young adult campaign going on and a competitive core customer campaign going on; and also to work to mitigate it, we've taken pricing action in Europe and you're looking at actions in Canada as well.

So, again, we're going to continue to do what has made our brand great in the past and continue to invest in that brand, but not tear it down by discounting it..

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

Thanks. I had two questions.

One, is there anything specific that you can point to on the manufacturing side that drove that $19 million positive and should that continue? Any additional commentary there? And then secondly, if the currencies stay where they are, you said that would be about a 4.25% impact on revenues, so about $240 million headwind on the motorcycle business.

And presumably that would be where the earnings impact would be if you didn't have these hedges. You indicated about a 50% pass through, so $120 million. But it sounds like, based on your guidance, you're seeing about $95 million in the first half, which leaves only about $25 million in the back half.

I'm wondering whether I'm misinterpreting what you're saying or whether that's correct..

Okay, Rod, the first question is, is the manufacturing, is there anything in particular? Again, as I had mentioned, the ongoing continuous improvement, the way we're operating the plants is all going very well. There is a one-time that we're lapping in our manufacturing expense, and that's the Street start-up costs.

If you will remember a year ago, we had a fair amount of start-up cost with Street. That was about $4.7 million, $5 million. And so, we are lapping that. So that would provide some of that benefit that we saw in manufacturing. But that's the core level of profitability, and we're just lapping that piece of it.

On the second question that you had is with regards to our full-year guidance in terms of revenue, 4.25%. You had used the number of $240 million. We won't comment on that, but 50% of it will fall down and hit gross margin in an adverse fashion. We'll pick up some of that in SG&A.

The question that you asked is with regards to the magnitude of I guess the first half revenue hit and gross margin hit versus the back half. And the worst quarter that we're going to have, if everything again remains constant, is the second quarter.

And that's because a year ago our foreign currencies were the strongest in the second quarter, and then we saw late in the third quarter that the currency started to devalue, so we'll be lapping that as we get toward the end of the year.

So, yes, you're right, the biggest magnitude of impact of foreign currency will be in the first half of the year, and more specifically in the second quarter..

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

Yes, thanks for taking my questions. Just couple questions on the international side of the business.

Can you just talk a little bit about dealer inventories internationally and where those stand? And it sounds as though the price competition might be global, but if you could just address that and confirm that if that's accurate? And then just finally on the finance business, how much international is in your finance portfolio? And are there any concerns that we should have with respect to change in the threshold at which you're granting credit?.

Thanks, David. The first question is international dealer inventory have been pretty consistent on a year-over-year basis. But international is on a different inventory system. Our dealers pull – when they sell one they pull one. We call it pipeline. So inventory is more company-owned internationally than dealer-owned.

And we have very little change in dealer inventories from period to period just because of the way that we supply our dealer network. And any inventories would be more company-owned inventories as they fluctuate up and down.

So, inventories are just different than in the United States where we push the inventory out to the dealers after we manufacture them..

Got it..

Second question, is price competition global. No, we're not seeing global price competition. Our competitors are largely Japanese and European. They're certainly realizing a strong benefit when they sell in the United States. But otherwise, we're not seeing any huge price competition outside of Brazil in our foreign markets.

The final question was, is the percent of revenue at HDFS, should you be concerned with regards to that and the currency impact on HDFS. The answer is no. HDFS is predominantly in the United States and Canada. They do help with arrangements around the world, but the vast majority of revenue is here in North America..

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

Hi. Thanks for taking a quick follow-up here. So, loved the commentary on the regional disparities in demand. But almost seemed to suggest with Northeast way down, West Coast way up that there's an opportunity here in the second quarter and beyond that things could get a little bit better.

I guess are you thinking about things that way? It wouldn't seem as such given the reduced guidance or do you think that some of these other offsets are only going to get worse, like do you think that from a competitive perspective the second quarter is actually going to be a little bit worse than the first quarter? Thanks..

Thanks, James. We are very confident in our shipment guidance of 276,000 motorcycles to 281,000 motorcycles. We've talked about weather before. If it happens early in the season, we believe it's more timing. And if spring doesn't happen or gets pushed out, we do believe there's a larger impact on a year-over-year basis.

And at this point on the weather, we would believe more timing. The 6,000 units that we took out are driven by the competitive discounting that we're seeing in the United States. Internationally we feel very good about our business there.

And in United States, we're under pressure from the price discounting and we're dealing with that by taking 6,000 units out and tightening up our inventories here a little bit. But we feel very good about our 2% to 4% shipment growth as we move forward..

And our last question comes from the line of Gerrick Johnson from BMO Capital Markets. Your line is open..

Hey, thanks for the follow-up.

Do you feel you were negatively impacted in the quarter by not having any new mid-year models like you did last year and also did you ship any Streets to Riding Academy this quarter?.

To start with the second question first is, no. Predominantly, the dealer fill for Rider Academy happened in the first and the second quarter of last year. It was about 2,200 units.

There could be a couple replacement units going into the market now, but it was largely a one-time dealer fill and that was about 600 units in the first quarter and 1,600 units in the second quarter. The second is, in terms of model year launches, from time to time we've come out with a mid-model year; I think the last couple years we have.

And it's all part of the broader plan on product development. We've got that sketched out for the next five years, so we do not intend to have a product in this quarter. And we do not believe it had a dramatic impact on our volumes in the first quarter..

Thank you, John, and thank you, everyone, for your time this morning. Thanks, everyone, for your time this morning. The audio recording and slides from today's call will be available at harley-davidson.com. The audio can also be accessed until May 5 by calling 404-537-3406 or 855-859-2056 in the U.S. The pin number is 11254202#.

We appreciate your investment in Harley-Davidson. If you have any questions, please contact Investor Relations at 414-343-8002. Thanks..

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