Amy Giuffre - Director-Investor Relations Matthew S. Levatich - President and Chief Executive Officer John A. Olin - Senior Vice President and Chief Financial Officer.

Kevin M. Milota - JPMorgan Securities LLC Gregory Robert Badishkanian - Citigroup Global Markets, Inc. (Broker) Craig R. Kennison - Robert W. Baird & Co., Inc. (Broker) Gerrick L. Johnson - BMO Capital Markets (United States) James Hardiman - Wedbush Securities, Inc. Sharon M. Zackfia - William Blair & Co. LLC Patrick K. Archambault - Goldman Sachs & Co.

Felicia Hendrix - Barclays Capital, Inc. Tim A. Conder - Wells Fargo Securities LLC Rod A. Lache - Deutsche Bank Securities, Inc. Joseph R. Spak - RBC Capital Markets LLC David S. MacGregor - Longbow Research LLC Neel N. Mehta - Morgan Stanley & Co. LLC Jaime Katz - Morningstar Research.

Good morning, ladies and gentlemen. My name is Ryan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2015 Earnings Call. All lines have been placed to mute in order to prevent any background noise. After our speakers' remarks, there will be a question-and-answer session.

I would now like to turn our call over to Amy Giuffre. Please go ahead..

Thanks, Ryan, and good morning, everyone. You can access the slides supporting the 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 President and CEO, Matt Levatich; and CFO, John Olin will be hosting the call.

Matt?.

Thanks, Amy, and good day, everyone. Last quarter, I talked about my confidence in the strength of the business, our strategies and our team.

Today, despite some disappointing results, but thanks to a lot of great strategy and planning work we've done over the last several months, I'm even more confident we have the foundation, plan and team in place to compete to win and lead in the marketplace.

I'll talk more about our forward view and actions in a minute, but first I want to share some perspectives on our quarter and year so far. You've read the results in this morning's press release, and it goes without saying the quarter and the year-to-date did not unfold the way we expected.

The marketplace has thrown us some curve balls this year and competition has ramped up, whether it's a currency-driven advantage for competitors in the U.S. or new products from competitors in EMEA. We've also had some headwinds of our own making such as product availability and voluntary recalls. We fully recognize we have to raise our game.

We challenged our playbook, acted to drive demand, reallocated spending and fast-tracked initiatives. Some of our actions, like the U.S. Military Learn to Ride initiative, and the rollout of our new 2016 models, hit the mark and stimulated demand.

Some of our actions did less than we expected, but the bottom line on Q3 is our performance did not meet our expectations. We know we can do better and we will. Moving forward, we're taking what we've learned and are applying it. We continue to refine our investments and sharpen our resolve.

And that's why I'm more confident now than ever in our ability to compete and win. Part of this confidence comes from the nature of the successes we did see, and part of it rests on the incredible foundation already in place and our plans to take it to the next level. In short, we're going to dial things up.

As you know six years ago, we introduced our plan to grow our reach and impact with more customers globally. To do so, we committed to do what it took to be great at our core work of product development, manufacturing and retail. Today, much of that work is complete with fine-tuning ongoing.

We have incredible strengths that we can leverage and maximize. We know how to develop great customer-led products and get them to market in world-class time, and we will do even more in this area. We know how to manufacture to effectively meet dynamic global customer demand.

We know what customers expect at retail, and our industry-leading dealers are equipped to provide best-in-class customer experiences. We have a tremendous brand that ignites passion in every one of our customers. And most importantly, we've proven that our strong appeal with U.S. core customers extends to every one of our U.S.

outreach segments and to our international customers in both developed and emerging markets. As we look to the future, our plan to grow our reach and impact with customers globally has not changed. And at their core, our focus areas I'll be talking about today are natural extension of the strong foundations we have in place.

So let's talk about our path ahead. We've got five clear objectives. One, lead in every market. This means achieving and holding the number one share of the 601 cc motorcycle segment. This is not just about competing, but winning. This is the objective we're all most energized by.

Two, grow the sport of motorcycling in the United States, in part by growing the number of U.S. core customers and growing U.S. outreach customers at a faster rate.

We're already making great progress in this area as we have more than doubled the rate of growth in sales to outreach customers versus sales to core customers in each of the last four years, and are on track to do so this year as well. Three, grow U.S. retail sales and grow international retail sales at a faster rate.

We have a target to grow the international dealer network by 150 to 200 new dealerships by 2020. Four, grow revenue and grow earnings faster than revenue through 2020. And finally, outperform the S&P 500. So, those are the objectives.

Now let's talk about how we plan to achieve them in a market environment we expect will continue to be highly competitive. A minute ago, I talked about dialing things up. But I don't mean just for a quarter or a year. Now is the time for incremental investment to drive demand.

For 2016 and beyond, we've challenged ourselves to reallocate existing spending into demand-driving investments in both customer-facing marketing and new product development. In 2016, we'll increase our investment in customer-facing marketing by approximately 65% above 2015 levels.

We also plan to increase our investment in new product development by approximately 35% from 2015 levels.

To give you a sense of the magnitude of our commitment to new products, we had already substantially increased our investment this year in new product development, which means that our planned investment for 2016 in the next several years would be nearly twice what it was in just 2014.

In dollar terms, these investments and product development and marketing represent an approximate $70 million increase in our investment to drive demand compared to 2015. Our investments will be focused in four key areas. First, increasing product and brand awareness. Second, growing new ridership in the United States.

Third, increasing and enhancing brand access. And finally, accelerating the cadence and impact of new products. Now let's talk about each one in turn, starting with product and brand awareness. We've got fantastic industry-leading products and there's more to come.

We can do more to let people know about them whether it's with people who aspire to take up riding, riders of competitive brands or existing customers who could trade up to a new Harley-Davidson model that has even more of the latest features and technology. Next, grow new ridership in the United States.

We know the importance of bringing new riders into the brand and into the sport of motorcycling. One of the key ways to grow ridership is to make it easier for people to learn to ride. We've already seen great success with our Harley-Davidson Riding Academy, training more than 220,000 riders worldwide since 2010.

With the rebranding of our program, and the opportunity to learn to ride on a Harley-Davidson Street 500, along with the launch of the U.S. Military Rider Training initiative, we've grown our rider training by 25% over 2014. We've created a pipeline to riding and we're going to do even more by expanding on our successful programs.

We're set to more than double the numbers of riders trained annually through the Riding Academy to over 100,000 globally by 2020 with the majority in the United States. The third area focus is to increase and enhance brand access, increasing customer touch points with Harley-Davidson.

First and foremost, this is about continuing to expand and enhance our incredibly strong global dealer network, which provides one of the greatest competitive differentiators for our brand through the service and experiences they deliver. As I shared, we have a target to grow our international dealer network by 150 to 200 new dealerships by 2020.

Beyond traditional dealerships, we're developing new retail formats for urban centers and urban tastes. eCommerce expansion is also key. Currently, Harley-Davidson products are available via eCommerce in the U.S., India, and China, but look for more markets to come.

Importantly, we'll also accelerate the cadence and impact of new products and extend our leadership in the features and technologies that matter to customers; things like linked brakes, engine performance and environmental enhancements, aerodynamics and electric vehicle technology.

Project Rushmore bikes and Project LiveWire are great early examples of our capability and resolve to deliver technology and innovation to inspire our riders.

I won't go into details about what's coming down the pipeline, but there will be a steady drumbeat ranging from product updates and refreshes to new products and meaningful technology including new engines and all-new motorcycles from the ground up too. So, there you have it.

We're committed to dialing up our strengths in growing Harley-Davidson by increasing our reach and impact. All of this will require smart and strong plans, agility, accountability, and commitment from our entire team. We're ready, and we're committed.

And we know, as we showed with manufacturing and product development, that when we're all committed we do amazing things. I want to be crystal clear. The path forward will play out over a number of years. This isn't about improving results for a quarter or even a year. This is about where we want to be in 3 years, 5 years, and even 10 years.

We'll continue to build on our plans, adapt, and adjust as we need to. So, as I wrap up my comments, I hope you've noticed the common theme, market leadership. The path we're on is all about asserting our already substantial leadership in the industry and continuing to drive sustainable growth well into the future.

We're going to lead and compete with clear purpose and intent. We're going to lead boldly and unapologetically. We're not just going to compete. We're here to win. With that, I'll turn it over to John.

John?.

Thanks, Matt. Today, I'll provide additional insight around our financial results found in the press release and slides. The summary of our third quarter financial results starts on slide 14.

During the quarter, revenue was $1.32 billion, net income was $140.3 million and diluted earnings per share were $0.69, all achieved in an incredibly challenging environment. Operating income for the motorcycle segment was down 2.2% compared to last year's third quarter.

Motorcycle segment gross margin continued to be very strong despite unfavorable currency impact. The motorcycle business operating margin percent was down slightly driven by lower gross margin and slightly higher SG&A spending. At HDFS, operating income was down 6.4% year-over-year.

The quarter also reflected higher corporate interest expense resulting from our recent recapitalization plan. Despite the challenging conditions, we continue to focus on delivering strong margins and strong returns over the long-term. Now, let's look at retail sales on slide 15.

Worldwide retail sales of new Harley-Davidson motorcycles were down 1.4% in the third quarter. Retail sales were below our expectations, and as a result, we are adjusting our full year shipment guidance down by 11,000 motorcycles. We now expect to ship between 265,000 and 270,000 motorcycles, approximately flat to down 2% versus prior year.

It is critical for Harley-Davidson to manage supply in line with demand and protect our brand premium. Looking forward, we expect to return to growth as we benefit from our new 2016 model year motorcycles, increased investment in demand-driving actions, improved product availability and the overall strength of the Harley-Davidson brand.

Turning to the U.S., on slide 16, third quarter retail sales were down 2.5% adversely impacted by continued intense competitive activity, lapping the enthusiastic Rushmore response, and limited availability on certain models. These significant challenges were partially offset by our market response actions initiated in the second quarter.

While we believe these actions were effective, they were not sufficient given the headwinds we face in the U.S. During the quarter, the U.S. industry grew 4.5%. We had a very strong market leadership share position of 52.4%, and we believe the industry's robust growth during the quarter is a sign of industry strength going forward.

However, our Q3 market share was down 3.9 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 four quarters was more severely impacted than we expected as a result of the competitive environment and the inclusion of autocycles in the industry numbers.

Dealers' retail inventories were consistently below prior year levels throughout the quarter, which adversely affected product availability on certain models. Inventories recovered by quarter end and finished the quarter up slightly to prior year.

We continue to expect year-end retail inventories to be flat slightly to up slightly compared to last year, reflecting the incremental new models launched in the 2016 model year. On slide 17, retail sales in our international markets were up 0.9% in the third quarter.

In the EMEA region, retail sales were up despite the impact of new models introduced by competitive brands and currency-driven volume declines in markets where we sell our motorcycles to dealers in non-local currencies.

Year-to-date, Europe market share was down 1.6 percentage points behind the impact of new low-priced models in the performance and standard segments, market segments where we do not compete. In the Asia-Pacific region, emerging markets continue to experience growth.

However, retail sales in the region were negatively impacted as a result of very limited availability of Street motorcycles in August and early September following a voluntary recall initiated in July. The supply of Street motorcycles was largely restored by the end of the quarter.

Latin America region retail sales were down in the quarter as a result of soft retail sales in Brazil behind a weak economy, consumer uncertainty, and aggressive price competition. Brazil declines were partially offset by strong growth in Mexico. Finally, retail sales in Canada were down modestly in a highly competitive environment.

We believe the market responded well to the change to a direct distribution model, which took effect at the beginning of August and to a reduction in pricing with model year 2016 motorcycles.

Despite the volatility in global retail sales, we believe we can continue to realize international growth by expanding our distribution network, building on our brand experience across the world, and delivering exceptional products that inspire riders.

On slide 18, wholesale motorcycle shipments in the quarter were up 5.5% compared to last year but slightly below our expected range of 54,000 to 59,000 motorcycles in response to the lower than expected retail sales during the quarter.

The overall shipment mix reflects a significantly higher percent of Cruiser shipments behind our model year 2016 product investments.

On slide 19, revenue for the motorcycles segment was up in Q3 compared to last year driven by a 5.5% higher motorcycle shipments partially offset by unfavorable currency exchange, which reduced revenue by approximately 5.2% in unfavorable mix.

During the quarter, the average motorcycle revenue per unit decreased $899 from the year-ago quarter behind unfavorable currency exchange and product mix, partially offset by higher pricing. Motorcycle and MSRP prices for our new 2016 model year motorcycles have increased by an average of about 1%.

After adjusting for the cost of new content, pricing net of cost is up about 0.5% expressed as a percent of revenue. Parts and accessory revenue grew 5.2% behind strong new product sales, while general merchandise revenue was down slightly. Both P&A and general merchandise revenues were adversely affected by unfavorable foreign currency exchange.

On slide 20, gross margin in the quarter was 34.6%, which was 0.3 percentage points lower than last year. Gross margin was very strong during the quarter when considering the adverse impact of foreign currency exchange, which was $29.9 million unfavorable for the third quarter.

This was driven by the significant year-over-year weakening of our key foreign currencies, which devalued an average of 18% compared to the prior year. While manufacturing was unfavorable during the quarter, year-to-date manufacturing was favorable by $7.4 million behind strong productivity gains, partially offset by lower year-over-year production.

Our gross margin performance during the quarter and on a year-to-date basis is evidence of our strong underlying margin structure and flexible manufacturing capability. On slide 21, operating margin as a percent of revenue for the third quarter was 12.5%, down 0.4 percentage points compared to last year.

SG&A spending in the quarter was up on a year-over-year basis due to the consolidation of Canada into our operations, partially offset by other favorabilities. Going forward, we remain intensely focused on an operating investment profile that will drive top-line growth.

Coupled with a continuous improvement mindset, we will drive our business to be stronger, more flexible and more profitable. Now, let's take a look at our Financial Services segment on slide 22. During the quarter, HDFS operating profit decreased 6.4% compared to last year.

Net interest income was favorable to prior year driven by higher receivables, partially offset by lower yields on receivables due in part to the recent low-rate promotional activity. The provision for retail loan losses was unfavorable to prior year due to higher retail credit losses and an increase in receivables.

HDFS' third quarter operations are summarized on slide 23. HDFS' retail loan originations increased 14.3% compared to last year's third quarter, primarily driven by a 9.6 percentage point increase in our U.S. market share and a higher average amount financed per motorcycle.

The strong market share performance was driven by the third quarter promotional offers. On a year-to-date basis, loan originations were comprised of approximately 80% prime loans and 20% subprime.

As a predominant lender to subprime customers, these originations represent a significant amount of retail sales to 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 $405 million of cash and cash equivalents at HDFS.

In addition, HDFS had nearly $1 billion of available liquidity through bank credit and conduit facilities. On slide 24, you'll see the 30-day delinquency rate for retail motorcycle loans at the end of the quarter was 3.16% or 16 basis points higher than the same period last year.

Delinquency rates across the portfolio continued to perform at near record low levels. Annualized retail credit losses increased by 11 basis points to 1.19% compared to last year's third quarter driven by modestly higher credit losses in line with increased subprime origination in recent years, as well as changing consumer behavior.

During the third 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 attractive return to Harley-Davidson, Inc. The remaining Harley-Davidson, Inc. financial results are summarized on slide 25.

I would like to highlight that the company generated operating cash of $1.02 billion in the first nine months of this year. Operating cash was up $54.1 million from last year driven by lower wholesale lending and lower working capital, 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. Now, switching our focus to shareholder value on slide 26. Returning value to our shareholders is a top priority. You will see that during the third quarter, we paid a dividend of $0.31 per share.

In addition, we repurchased 9.4 million shares for $536 million. During the third quarter, we also began to execute our recapitalization plan. Details of the plan are on slide 27. We successfully borrowed $750 million in a combination of both 10-year and 30-year notes.

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.

Before I update our 2015 guidance on slide 28, I want to discuss changes that we will make to the company's motorcycle operating investment profile in 2016 as it will have an impact on our Q4 and full-year 2015 results. As Matt discussed, in 2016, we will significantly increase our investment to drive demand.

We will source the funds by reallocating from our existing spending primarily from support functions and through reorganization of our commercial operations aimed at being both leaner and stronger. And again, we expect to increase our investment in customer-facing marketing activities by approximately 65% from 2015 levels.

We also expect to increase our investment in new product development by 35% from 2015 levels. As we prepare the organization for this new operating investment profile, we expect to incur one-time expenses in Q4 of 2015 of approximately $30 million to $45 (sic) $35 million.

These one-time expenses will largely consist of employee separation and reorganization cost. We expect the significant change will address the current competitive environment, and will accelerate top line growth over the next several years. Now, let's talk about guidance for the full year.

For the full year 2015, we now expect to ship 265,000 to 270,000 motorcycles, which is approximately flat to down 2% versus last year. During the fourth quarter, we expect to ship 47,000 to 52,000 motorcycles, which is approximately flat to up 10% compared to last year's fourth quarter.

For 2015, we now believe operating margin for the motorcycle segment will be between 16% and 17% compared to 18.0% in 2014. Our lower operating margin expectations are due to lower shipment expectations, one-time charges we expect in Q4, and increased recall expenses during the third quarter.

In 2015, we continue to expect gross margin will be up modestly compared to 2014, impacted by both puts and takes. On the positive side, we expect a 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 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 percentage points.

As we look forward to 2016, assuming that currencies hold at yesterday's exchange rates through 2016, recognizing this is a hypothetical expectation and in a very volatile exchange rate environment, we would expect approximately $45 million of additional unfavorable foreign currency exchange impact to gross margin as we lap the hedge benefits that we expect to realize in 2015.

Looking at SG&A, excluding one-time charges we expect in Q4, we expect SG&A to be up in 2015 compared to last year. This includes the impact from the Canadian distributor transaction which occurred on August 4, 2015. The incremental SG&A impact of the Canadian transaction was approximately $10 million of increased expense in Q3.

In Q4, we also expect approximately $10 million of SG&A expense related to Canadian operations. Our guidance for HDFS and CapEx remain unchanged. We now expect full year tax rate to be approximately 35% versus previously expected 35.5%. So, that's the quarter.

And while the results have fallen short of our expectations, we maintained a strong gross margin percent and delivered shareholder value through a $0.31 per share dividend and $536 million in share repurchases. But what's most important is what lies ahead.

As Matt shared, we have a clear path forward and are making the investments we believe are necessary to drive demand and grow our business and achieve our goals. Thank you for your continued confidence and investment in Harley-Davidson. With that, we'll open it up to your questions..

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

Hey, good morning, everyone. Appreciate the time here. Question on market share losses in the quarter. Obviously, the competitive environment is pretty clear to all of us, but you called out the new product introductions by competitors.

I was hoping you could give some color on where specifically you're seeing the increased kind of competition from either new competitive supply or the competition in EMEA? And then secondly, with the model year 2016 bikes, how do you think those bikes are being perceived by both customers and dealers? How does that play into this market share theme as well? Thank you..

Great, Kevin. This is John. In terms of market share in the United States, we were down 3.9%, pretty much in line with what we've seen over the last four quarters. And again, in the fourth quarter of last year, we saw world currency shift and an incredible increase in overall competitive discounting.

So, that's a big portion of the 3.9 points of share loss. In addition, we've seen more competition in terms of new product. And also, probably the biggest driver of share loss in the quarter was from a new product called autocycles. That's included in the MIC numbers. And we do not believe that they compete head-to-head with motorcycles.

It's a very different product. It's much more car-like. It has side-by-side seating, a gas pedal and steering wheel, but it is classified in the MIC numbers. So, the biggest piece of that share loss is coming from the inclusion of autocycles in overall market share. The thing that we're most excited about is next quarter.

In the fourth quarter, we start to lap the beginning of softness due to the competitive discounting. And so, we'll have a little bit easier comps as we move into the fourth quarter and throughout next year. In terms of EMEA, it's been a highly competitive market there as well.

That has not been driven by price competition as much as it has been in the U.S. In EMEA, it's really driven by a couple new products. They are what we would call a middle-weight displacement in the 700 cc and 900 cc category and they're in the performance and standard segments.

We compete in cruisers and – but these products have had a tremendous impact on the market. They've been very well received and actually driving the year-to-date growth in the European market up 10%. And so, first couple of quarters hit us pretty hard with regards to market share loss in Europe.

Much better in the third quarter, retail sales turned positive 2.4%. The European team is doing a great job that came out with a couple of significant promotions.

Custom Kings, which is a competition of personalizing and customizing our Street motorcycles as well as king of demos (31:23) and they've done a magnificent job in turning that around and very pleased what we are seeing in the third quarter there. And the last question that you asked, Kevin, is with regards to model year 2016 motorcycles.

We feel very good about the model year 2016 launch, and so do our dealers, a lot of times people compare everything going back to Rushmore. Rushmore was an incredible year for us and that about 50% of our volume and half our models were redone. And we're going to see those from time to time, but they're not going to be every year.

And with that, our model year 2016 was focused on our Cruiser bikes. And we added a tremendous amount of power to those bikes by adding our High Output 103 engine. We added cruise control to Softails. And in addition, we added or significantly improved five models.

There was two S models, which include a 110 engine and they have sold extremely well, as well as a new Road Glide Ultra and two refreshes of our most popular Sportsters in Iron 883 and Forty-Eight. As you look at the quarter, we were very light on supply. Our supply could not meet the demand of those five models.

We ended the quarter with about one bike per dealer in the U.S. in inventory. So, still very light as we exited the quarter on inventory for those five models. And that will be replenished in the fourth quarter..

Okay. Very good. I appreciate the details. Thank you..

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

Great. Thank you. Yeah, I just wanted to follow up on the easier compares from the promotional environment. So fourth quarter, it gets a little bit easier.

When do we start to see kind of the really easier comparisons? Would that be by second quarter of 2016 versus second quarter of 2015? When do those compares get easier?.

Thanks, Greg. The full brunt of the discounting was really in the first quarter. We saw – it started up in the fourth quarter and had certainly soft market share and that was the competitive discounting and some new competitive entrants in the fourth quarter of last year.

But really when you look at the full fury of the price discounting, it was in the first quarter. By and large, it got a little bit stiffer in the second quarter, but we would look to the first quarter as being that mark you're talking about..

Yeah. Yeah. All right. Good. And then, just with respect to your investments in consumer-facing marketing by 65% and then product development by 35%. So, I'm assuming that the product development probably doesn't start benefiting you for, probably it's not 2016, but it's more 2017, 2018, 2019 given the lead times.

And then – but the marketing would probably benefit sales immediately.

Am I thinking that the right way?.

Yeah. This is Matt. You are. Product development, and as I mentioned in my comments, we started to increase the investment. In fact, in 2015 it will go even higher again, another 35% in 2016. And the lead time, I'm getting products to market, is a factor and when you'll see the benefit of that.

But as we've discussed many times, we're focused on really reading what our customer is looking for from Harley-Davidson, making smart decisions about the products that are going to drive demand and getting into market in world-class time. And that is embedded now in our product development capability set.

So, you won't have to wait years and years for that stuff to start seeing the market.

And with respect to the marketing investment, our focus on that is that it is discretionary dollars, if you will not embedded in people, so that we have the flexibility to invest that money within the year and across years in the most effective manner to drive the most effective growth, so thanks..

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

Good morning. Thanks for taking my questions. First question is, what is your outlook for year-end inventory in the U.S.

and internationally?.

Thanks, Craig. This is John. With regards to the year-end inventory, we are looking at inventories in the U.S. being up slightly and that would be solely driven by the new models that we added in our model year 2016 lineup. There was three incremental models and the two S models and Road Glide.

So, slight increase in U.S., year-end inventory driven by that. Internationally, we expect inventories to be up slightly versus year ago as well, and that's just based on the growth projections that we have into 2016..

Thanks. And second question. With respect to your plan to spend an incremental $70 million, I'm trying to get a feel for whether you have offsets in the model.

In other words, when we look at 2016, you think we'll be closer to the 18% to 19% operating margin you had previously targeted or closer to the 16% to 17% that you're experiencing this year?.

Yeah. So, when we look at the overall drop in operating margin of 2 percentage points, right, we were at 18% to 19% and we're dropped at 16% to 17%, and there's a couple of drivers of that. And one is the absorption on 11,000 units, which certainly affects our gross margin.

Having said that, Craig, our gross margin, we still expect to be up on a year-over-year basis. And I can't stress enough how important that is and how powerful the margin structure is at Harley-Davidson. So, you look at gross margin, we're going to have well over $100 million hit in currency, which is three-quarters of a percentage point.

We're going to have unfavorable mix as we invest in an incredibly powerful product such as Street. And we've also – we'll have lower year-over-year production, and therefore, a headwind on production and yet still our gross margin is going to grow in 2015.

And that's driven by the ability to price our products and incredible productivities that we're driving out of the plants. So, that will stay with us in 2015 and 2016 as we go forward. Also affecting operating margin this year is higher non-repeating SG&A expenses.

So, what we've got is three SG&A expenses that are affecting our overall guidance for the remainder of this year. One is the one-time expenses of $30 million to $35 million. And this is money spent already as for that new investment profile to significantly increase our investment and demand-driving activities into 2016 and beyond.

The second is incorporation of Canada in the guidance. Remember, we didn't have that in our guidance after the second quarter. And we talked about that being $0.04 dilutive. Well, that's all coming in the form of higher SG&A as we transition that business and size it appropriately size it to gain the synergies out of us managing that market.

And then the third piece of it is certainly unanticipated recall expense of $15 million in the third quarter. So, you take the lower absorption and the SG&A, that's what's driving our gross margins to be down. So, to answer your question, Craig, is the gross margin is incredibly strong and powerful, and that will continue to move into next year.

We will have some headwinds on currency in 2016. But overall, very strong gross margin. And these things that we're talking about affecting operating margin are all non-repeating items..

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

Hey. Good morning. Matt, we didn't hear a lot about resources being earmarked to fix quality. The parade recalls you've been having is limited availability, costs you money, and perhaps sending some customers over to India. So how do you plan to fix quality? And then, second, maybe you can just tell us how much we spent so far this year on recalls..

manufacturing, development and supply management. And, in fact, this intensity got dialed up when we had our first Rushmore-related recall here shortly after launch. So there's nothing from a cost perspective that you're seeing related to those changes, but they are significant.

I would say that in my time here, we've never had a more significant view on all the things we need to do to assure quality. We enjoy incredible loyalty and incredible trust on the part of our riders. We will do nothing to violate that.

It's incredibly valuable to us, and these recalls have been very disappointing to the company and to our riders and to our dealers. There's no question about it. I will say that there's nothing more important than the safety of our riders. They are not sitting in cars with seatbelts and airbags and sheet metal around them.

We understand immediately any safety implications that might exist with the quality problem. We get on it as quickly as we can. And we act decisively in the interest of the safety of our riders.

And meanwhile, we're doing everything that we know and we're bringing all sorts of outside expertise into auditing, assessing and advising us on what we need to do to get out of this state with these product quality issues that we've suffered.

So, again, there's nothing that isn't in the numbers that needs to be in the numbers but there's an incredible amount of intensity going on within the business, and I think, John, you – Gerrick, asked the total number of recalls..

Yes. Gerrick, you asked about the total. It's $32 million of recall expenses in our year-to-date number..

Okay. Great. And I was just wondering when did you guys begin constructing this new plan? It seems to come right on the heels of a brand new launch that was supposed to be a good new lineup for model year 2016.

When did you sit down, say, okay, we need to do something, let's formulate a plan and let's go forward with this?.

Gerrick, this is Matt again. So, coming out of Q4 with the currency driven – this currency-enabled discounting and into Q1, and we started to see the impact on our business. And I'll tell you that, from my perspective, we've had a longstanding commitment and it remains to manage supply in line with demand.

That is to preserve the premium nature of the brand in the marketplace, and that is absolutely critical to us. However, it becomes – I guess, the first quarter, in particular, started really resonate with me from a standpoint of – that's we're only talking about half the side of that equation and what do we need to do as a business to drive demand.

And so, beginning really in Q2, we took action. We had a lot of early plans. We were a little bit behind the seasonality curve at that point in time. So it didn't have the effect that we expected and we're driving four for this year.

But as I said in my opening remarks, it taught us a lot about what works, what doesn't work, and where we need to apply ourselves with more focus and more intensity, to drive demand in a quality way globally for the long term.

So, that's what we're about and that's what we've been working on really through Q2 and in earnest in Q3, and we will carry forward through Q4 with the restructuring to get ourselves fully set up to start really delivering in 2016. And I would say that from my perspective this is a pivotal moment for the company.

We've been talking for six years about transformation and we're pivoting from transformation to driving demand and that's Harley-Davidson at this point in time in the midst of that pivot. So, thanks for the question..

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

Hi. Good morning. I had a quick follow-up on Craig's question then I had another question. But I think Craig asked about the $70 million spend for next year, and should we be netting some or all of that out, It sounds like you're making some lay-offs. I'm assuming that's a gross number.

Should we be netting a significant amount out of that or should we be adding $70 million to our OpEx assumptions for next year?.

Thanks, James. So, to be crystal clear, we are sourcing the $70 million. The $70 million is completely incremental to our marketing and our new product development spending.

We are sourcing that from our existing SG&A spending, and largely in areas of the corporate support functions, as well as a complete reorganization of our commercial side of the business, to structure it, to be much more focused, leaner, and direct with our ability to spend the $70 million in the most impactful way.

So, we are not expecting overall SG&A to go up as a result of our increased investment to drive demand of the $70 million..

Got it. And then maybe you could just take us back a few months ago. I think a lot of people were doing the math heading into the second quarter and sort of assumed that you'd lower the guide.

Then you kept the guide unchanged, which really implied an acceleration in the second half, which really left The Street thinking that maybe you knew something about the makeup of the second half that we didn't. What were you seeing back then that made you feel like things were going to get a lot better in the second half? Obviously, they got worse.

But, I guess, another way to look at that, I mean, June, end of June, I think you talked about being really strong.

Did numbers fall off a cliff from there or was it a slow sort of straight line between high-single digits and a decline for the quarter?.

Right. No. Thanks, James. So we had talked about – we started to get money out in the market in mid-May to the mid-June timeframe, if you recall, and we had a three-pronged approach to doing that. And we saw very good results in the month of June. Month of June was up near double digit both in the international markets as well as in the United States.

And that momentum continued into July. Matter of fact, in July, we were ahead of our plan, my retail plan in July, and the growth continued into the first half of August, started to get softer in the back half of August, and September was down.

And so things were going according to plan until about halfway through the quarter, and they turned a little bit negative. And again, the spending that we did was effective but certainly not sufficient given the headwinds that we faced. The comps also progressively got worse through the quarter as well.

And then we had some issues with availability in United States and certainly in our Asia Pacific markets with inventories being down. When you looked at the U.S. inventory, while it finished up a little bit on a year-over-year basis, for 12 of the 13 weeks, it was down quite a bit and a lot of that time up to down 10%.

So that put some pressure on in the United States and certainly with the new products that we came out with for those five models, the demand outstripped our ability to supply those. And again, still a little bit light on those inventories, as we move in to the fourth quarter.

And in addition, the recalls that we had, we had two recalls in the middle of the quarter, and they had an impact on some of our parts, in particular, on our Street motorcycles, the fuel pump, we couldn't produce them fast enough. And we essentially – dealers weren't selling Street motorcycles for up to six weeks during the third quarter.

The biggest impact of that was in Asia Pacific. Even though Asia Pacific was still up, it was certainly hindered by lack of selling Street motorcycles for a period of that time. Inventories are back with regards the Street and looking forward to a better fourth quarter..

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

Hi. Good morning. So, a few follow-up questions on the marketing plan.

I guess, could we get some more granularity on what you think worked and what didn't work over the summer from a marketing standpoint? And then, do you have any kind of examples in the past where Harley has really kicked up the marketing and you've seen the results coming through? And then, lastly, growing the addressable motorcycle base, it seems a little bit like rolling a boulder uphill, and most of the folks we talk to, they get interested in Harley because their friends are interested in Harley.

So, how easy is that? I mean, how are you going to get to that kind of higher cadence of folks going through the motorcycle academy?.

Thanks, Sharon. I can't remember the first question. Let's start with the third question, how are we going to take the $70 million or the 65% increase in customer-facing marketing and drive demand, part of it is through awareness. And you're absolutely right, Sharon, as a lot of this is through the brotherhood of riding and so on and so forth.

But the fact of the matter is our share of voice has never been close to our share of market and that's one of the benefits that we get of having one of the world's most powerful brands.

However, in the last couple of years, we have seen an incredible amount of marketing dollars coming in into the market and it's been diluting our share of voice a bit. Just take the discounting for example.

I mean the tens and tens of millions of dollars of discounts are all being advertised throughout the United States, and so we've lost a little bit on share of voice as well as the new products.

So, we are going to get that share of voice back, and yes, we got tremendous things to talk about in terms of our new products and the products, and the experiences that we offer, and we have fallen a little bit behind on that in terms of us being front and center.

In terms of growing the ridership in the United States, I'm actually getting back to your first question, what's worked very well is things like the Military Rider Academy or free rider training. The response has been way in excess of our expectations.

We've now got a quarter behind us on this and we're getting thousands of people through the Rider Academy program and we're starting to see the fruits of that pay off in a conversion rate which is better than what we would typically see with the military going through and ultimately buying a Harley-Davidson motorcycle.

So what's better than that, that somebody that's never ridden, we're bringing them into the sport of motorcycling and getting them on a Harley-Davidson. So those types of things are what we're going to do a lot more of next year, and you're going to see a lot more of that type of investment. And we'd look at things that maybe didn't go as well.

I wouldn't say it's go as well, but they were much more short term in nature, for example, the financing. The financing drove incremental sales in the beginning of the quarter and we expected that and it did that.

However, there is certainly diminishing returns on that type of investment and we never intended that to go into our model year 2016 motorcycles. And so, the financing ended with the new model year. And again, that's not the way to build into the future is training customers for discounts.

But it does – it is an important tool and it provided an opportunity for us to clear out some of the model year 2015s. So we've learned from all of those things. We're going to do a lot more of the things that work next year, and we're going to bring, more importantly, a tremendous amount of more resources to do that.

And we're also organizing our company to be much more demand-focused in how we go to market with our dealers and our customers..

So, this is Matt. Sharon, I'd just add the comment about that we have examples of this in the past, not to this degree. So we have – this is a significant shift for the company as I indicated. We're dialing things up. We're dialing things up in the area, in principle, to compete more effectively in the marketplaces around the world.

So we learned a lot this summer. We're going to continue to learn things. We're going to get some things wrong. We're going to have to continue to dial things in.

But you can't do what we're talking about doing without putting dollars on the table and smart investments into the marketplace that drive sustainable, profitable, brand-enhancing growth for the company. And that's why in my comments I indicated that you're not going to see necessarily a pop in the next quarter or even next year.

Some of this stuff is planting seeds for the long term. And just to add to John's point, getting people in the United States continue to be interested and passionate about motorcycling.

As a leader in the marketplace in the United States, as a significant leader that we have been for decades, we need to play more of a role than we have historically in that and we're putting money on the table to do that..

Ladies and gentlemen, we are approaching the end of our call. In order to provide more time for others to ask questions, we ask that you limit yourself to one question. Your next question comes from the line of Patrick Archambault from Goldman Sachs. Your line is open..

Thank you. Good morning. I don't want to beat a dead horse on the market share thing. But one of the things that surprised us was not necessarily the share performance.

I mean, as you mentioned yourself, right, year-on-year, the share decline has been somewhat sort of similar for the last three quarters, which one would expect, right, unless the conditions, competitive conditions have changed.

But the definition of the market declined, right, from up 9% in Q1 to up 6% I think and then up 4%, and that was also another potential headwind there.

And I just wanted to ask you, is there something you're seeing that's kind of starting to weigh on the growth of the market itself?.

This is John. I don't think so. So, you're absolutely right, Pat. First quarter we're up 9%, I think the industry was up 7% in the second quarter, and this quarter 4.5%.

I think you're starting to just see some of the pull forward of the discounting that was done in the first quarter and probably should be looking more in an aggregate on a year-to-date basis. The overall market is up 6.6%, which certainly we're very pleased with, a lot of new people coming in to motorcycling in general.

I don't – I just think you're seeing some of the initial impact of those tremendous discounts and some volumes pull forward..

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

Hi. Good morning. Thanks. Matt, you gave a number of examples of enhancements you're planning to make to your product line to be more attractive to customers, but that's going to take some time.

So I'm wondering, do you think you can grow – when we think about next year, do you think you can grow unit shipments next year? And, John, I need to ask this question for you. You talked about how your financing drove retail sales in the quarter, and then you didn't apply that to the 2016 model year, which is understandable.

Just, can you help us understand how much of the financing promotions drove the retail sales in the quarter? Thank you..

Thanks, Felicia. I'll just comment quick on product development. This is not new thinking, right? There's new investment, but thinking around customer-led product development is embedded in the product development transformation. You started to see that with Rushmore, with things like LiveWire.

Really understanding what people are looking for from Harley, what is a unique and powerful product feature or technology that matters to riders. So, these ideas are already inherent in the pipeline of new products.

So, what was referenced for the investment isn't so much of a capability or impact of the product, but the capacity, the quantity, if you will, for new products that will be increasing over time..

Felicia, John. When we talk about looking forward 2016 and what we expect in terms of the delivery of the dollars and marketing and certainly the product is – number one, as we look at the – next year, much easier comps. So that starts it. But model year 2016 and 2017 is certainly going to drive volume for us.

The continued rollout of Street outreach growth, through the year-to-date, outreach is up 7%. Even the overall volumes are down. We've been very successful in that avenue and continue that in 2016, and then finally, international expansion.

This quarter alone, we've put up 14 dealerships internationally, which is a 2% increase in our overall international dealerships. And as Matt mentioned upfront is we look to put up 150 to 200 new dealerships over the next five years, which represents a 20% to 25% increase in our international dealerships.

So, with all of that, we expect growth in 2016. And while we don't provide our guidance until January, I think you can expect that you'll see in the neighborhood of 3% to 5% shipment growth as we look to 2016. The next question you asked is with regards to financing. It is very difficult to pull out how much exactly is driven by the financing piece.

When we initiated those projects, the successes and the take rate is very high. You can see our market share at HDFS was 70% in the quarter, certainly driven by an increased amount of financing. Difficult part is to see how much of those are incremental units.

Again, at the onset, we felt it certainly drove some of the performance that we had in the first part of the quarter, but again, not the way we want to go forward as training folks to buy unfinanced (58:53) promos..

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

All right. Tim, I'm going to take a stab at these four questions. I'm not sure I'm going to have them all, but Amy can help. Number one is, the hypothetical would certainly include all of our currencies. And, again, this is largely the lapping of the gains that we experience next year.

So, specifically, with regards to Canada, Tim, does it include it? Yes. But the hypothetical is that the rates stay exactly as they were today through the 2016. So, we wouldn't have any impact on Canada because we didn't have Canada in the previous year and didn't have those risk exposures.

But we're looking at it, that $45 million is basically the gains that we took on the financial hedges that we had this year, we will lap next year as those hedges will dissipate and go away. So, we would expect that to be the headwind that we face in terms of foreign currency for next year.

But, yes, everything that we talk about at this point is inclusive of the Canadian dollar as we now are the owner of that risk..

I'll follow-up on the next few, Tim.

John, if you just want to get into the shipments question?.

The shipments questions are, do we expect any particular skewing of those models coming out, the answer is no. We'll be pulling them down. What you should expect to see in the fourth quarter in terms of mix is somewhat similar to what you saw in the third quarter is that the Cruiser as a percentage of our shipments will be up.

We've invested a lot of money, having good success with the power that we're bringing to that line, and so, you should see that be up. You'd also should see the Street, Sportster category in segment be up. Again, we had some delays in some shipments of Street motorcycles.

And so, those will be what you would expect to see up in the fourth quarter similar with what you saw this quarter and Touring down, but they're coming out of all models..

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

Just a couple data point questions.

First, is that – I think, this was just asked, is the 50% contribution margin on volume changing? Second, what was the motorcycle company operating cash flow and CapEx in the quarter? Third, can you just specifically tell us how much annual benefit you expect from the $30 million to $35 million of restructuring spend?.

The – so, we still expect, going forward, 47% incremental margin on any additional unit that we put through the company, that does not change. Our overall cost structure does not change. Again, we talked about gross margin as very strong, not a lot of overall changes to that.

When we look at, Rod, I think your next question is on the one-time expenses of the $30 million to $35 million. They would all be cash expenses. There are no write-downs in that number..

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

Good morning. Thanks for squeezing me in here.

I guess I just wanted to talk about the new product initiative again and how you have confidence as you think that consumers to consistently pay for that innovation in what you, yourself are categorizing as increasingly competitive environment, and maybe tying that into – I think you made a comment about how price net of cost for 2016 would be 0.5 percentage point, which is below what it's been in the recent past.

Is that the new normal level to think about what you can really get in terms of pricing for the contents you have to add?.

Hey, Joe. This is John. Joe, actually, the – about 0.5 point net of price is really what we've been doing for the last several years. I think we've ranged from 0.5 point to 0.75 point. In the Rushmore year, it was 0.75 point net of cost and net revenue was up about 3.5%. But overall, we've been in the same channel of 0.5 point to 0.75 point net of cost.

Joe, what was the first part of the question?.

Sorry. Joe's line is already closed..

Okay. We'll move on to the next question. Sorry about that, Joe..

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

It's late in the call here, but I'm wondering if I could get you to just talk about the dealer network specifically here as it pertains to the plan for 2016.

Are there ways to leverage your dealer network as a market research asset, I guess, that you're not pursuing now, and how specifically do you go about doing that?.

Yeah, this is Matt. I appreciate the question. The dealer network is absolutely an integral part in every market, not just the United States.

So, part of our plans and approach include how do we engage the dealer network and continue to engage quite frankly, the dealer network in the right way to identify customers, nurture, develop, serve, and support those customers.

John's comment about outreach is actually a great example of, in the U.S., the capability of the dealers growing over the last several years to understand that there's a whole world of people out there that are interested in Harley-Davidson, what we stand for as a company, how to talk to them, how to work with them, how to engage them, and continue to keep them in the family.

And so, we – our dealers, as I mentioned in my comments, are second to none in the industry, just fantastic, they're committed. What more we can do with them is absolutely part of our plans..

Your next question comes from the line of Neel Mehta from Morgan Stanley. Your line is open..

Thanks and good morning. I was just looking for an update on the Street in places like India and the Emerging Markets.

Do you think we're still in the very early stages of the rollout, and are you able to put some numbers around the progress that we made in those regions?.

Yeah. The rollout of Street began late in the fourth quarter of last year. Remember we started out in four initial markets, late in the fourth quarter of last year in Europe and then throughout the first half of this year largely in Asia Pacific markets. And we couldn't be more pleased with the way that's going.

To pick a couple examples, Street is the number one selling motorcycle in Australia, the number one selling motorcycle in India. When you move around the globe, it's number two in Mexico. In EMEA, it's number six, most popular selling motorcycle. In United States, it's number 13.

And, again, to put it in context, in the United States, there is no other Cruiser, by any competitive – any competitor out there that's selling more than Street in the United States, again, to give you an example of the size and the ability to bring new people in on that bike. So, we couldn't be more pleased with the overall rollout of Street.

We do have a little bit of lapping of opportunity in the first half of next year in terms of Street growth..

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

Good morning. Thanks for squeezing me in. You guys have touted your flexible manufacturing as sort of a competitive advantage in the past.

And I'm curious what lessons you've learned in the last quarter as demand has contracted a little bit to better position the company to stabilize those operating margins going forward?.

Yeah, I'll start. John can jump in. I actually think John's comments about the performance in manufacturing are an absolute confirmation of the strength of the system that we built. We've been able to read markets, not just globally, but internal to the United States in the spring as weather unfolded differently than we expected.

For example, California is an entirely different specification that we build. So, it is, in effect, feels like a different country to us from a manufacturing perspective.

We're able to shift demand from the 49 states back to California specification motorcycles during the spring season when demand was far ahead of our expectations there versus the rest of the country.

So, to be able to do all that and deliver these kind of gross margins in down volume years and stuff is an absolute testament to the strength of the capability..

All right. Thanks, Matt and John, and thank you, everyone, for your questions and for hanging with us for a few extra minutes for today. The audio recording and slides from today's call will be available at harley-davidson.com. The audio can also be accessed until November 3 by calling 404-537-3406. The PIN number is 435-895-74#.

If you have any questions, please contact Harley-Davidson Investor Relations at 414-343-8002. Thank you..

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