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

Gerrick Johnson - BMO Capital Markets Sharon Zackfia - William Blair Felicia Hendrix - Barclays Capital David MacGregor - Longbow Research Adam Jonas - Morgan Stanley Rod Lache - Deutsche Bank Craig Kennison - Robert. W.

Baird David Beckel - Bernstein Jaime Katz - Morningstar James Hardiman - Wedbush Securities Greg Badishkanian - Citigroup Seth Woolf - Northcoast Research David Tamberrino - Goldman Sachs Joe Spak - RBC Capital Markets.

Good morning. My name is Emily and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2017 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.

If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Amy Giuffre, Director of Investor Relations, please go ahead. .

Thank you, Emily, and good morning everyone. You can access the slides supporting this call on harleydavidson.com. Click Company at the top 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, let’s get started..

Thanks Amy, and good morning everyone. Thanks for joining us. Today I’ll provide you with context on our quarterly results as we work our long-term strategy to build the next generation of Harley Davidson riders. John will then review the financials and forward expectations in greater detail. Overall, our third quarter results demonstrate ongoing U.S.

industry headwinds persist as the U.S. industry continued to decline. There is no doubt that our focus on building new riders and accessing new markets globally is key to our success long term, and we’re increasing the focus and intensity of our work to these ends.

While this is clearly our true north, we’re committed to making the critical business decisions necessary to manage through the prolonged weakness in this key market. Our international performance in the third quarter was also down as we continued to weather isolated issues in some of our larger markets, particularly in Asia Pacific.

Last quarter, we outlined three distinct actions we’re taking to position the company strength despite the global industry trends. First, we’re addressing issues in the U.S. through disciplined supply management. Second, we’re aggressively managing our business cost structure; and third, we continue to invest in our long-term strategy.

I’ll provide an update on these three actions and talk about where we stand today. First, we pulled back on shipments in a very measured way to help dealers focus on selling through model year 2017 bikes to be sure they had appropriate levels of carryover inventory as we launched the most significant product development project in our history.

While we believe limiting model year 2018 product had a negative impact on retail sales in the U.S., we could not be more pleased with our U.S. retail inventory position. Discipline to this principle is not easy, but maintaining channel profitability and customer value is a key part of the loyalty that’s so important to our company and brand.

Importantly, we see tremendous interest for our 2018 models and we expect that there will be lasting positive impact. Second, we reduced our production rate in line with forward demand projections, and we continued to aggressively manage our cost structure with a focus on our SG&A investments.

Third, we’re all in on our quest to build the next generation of Harley Davidson riders globally. We have the strategies, the plans and the people to drive our singular imperative and grow our business long term. Now, I’d like to highlight a few actions we took in the quarter to drive performance in line with our five key objectives.

Let’s start with high impact new products. Our model year 2018 line-up features the new ground-up redesign of our large cruisers, the all-new Softails, the most significant new product investment in our 115 year history.

The eight potently styled 2018 Softail models merge the hard-hitting performance of the Dynas with the unmistakable custom look of our Softails and take both to a new level.

Featuring a significantly lighter chassis to harness the power and torque of the new smooth-running dual counterbalanced Milwaukee-8 107 and 114 engines, each bike offers a meaningful performance enhancement for every rider need, acceleration, cornering, braking speed, comfort and confidence-inspiring handling.

These bikes were built to make the ride that much better for riders. Our bikes are the cornerstone of our strategy to build riders, built to inspire existing riders to ride more, competitive owners to join our brand, and the next generation of riders to join in. The press has been amazing.

We reached more than 150 million impressions across traditional and social media channels and garnered positive coverage and buzz from the mainstream to industry media and from the critics to the converted.

We received universal praise, like the coverage from Maxim which said, new technology with trademark heritage style has long been Harley’s recipe for success, and the 2018 Softail family looks like a great dish from that cookbook. We didn’t stop with Softail.

We also launched two new touring bikes, three new CVO models, and a sportster for a total of 14 new high impact motorcycles in model year ’18 alone.

Add to that our 115th anniversary bikes offered in limited quantities and two statement paint schemes, and our commitment to product to drive ridership has never been clearer, never been stronger, never been higher impact.

Our entire 2018 line is geared toward inspiring the next generation of Harley Davidson riders because great product is the foundation of a great ride, and while new product is certainly a highlight for all of us here at Harley, what we’re really about is riders and creating opportunities to inspire and build that next generation.

The Harley Davidson Riding Academy is a direct investment in creating new riders in the U.S., and it augments the efforts of the Motorcycle Safety Foundation and state-sponsored rider training courses. In the quarter, we trained more than 19,000 riders, which brings us to just over 51,000 year-to-date.

One of our key goals with Riding Academy is to enhance its effectiveness at creating active riders, and we’re thrilled to see sales of motorcycles to Riding Academy graduates in the third quarter are up double digits over prior year.

We also activated our partnership with Eagle Rider to enhance the way a newly trained or returning rider can seek out their perfect bike through an extended trial while also providing riders from around the world enhanced rental, travel and tour experiences. The Eagle Rider rollout is well underway with more dealer locations to come.

We also have several pilots in place to evaluate how we can enhance the rider development path. We know that becoming a rider is a journey. It takes inspiration, dedication, and a community of support.

We already have ingredients at the ready through our dealer network, including training, financing, great gear, availability of affordable new and used bikes, and importantly our community of passionate riders. These pilots are helping to validate our thinking for how best to pull the ingredients together to accelerate our rider creation efforts.

Internationally, our focus remains on growth through extended market reach and greater impact with brand awareness and product. One way we’re driving brand reach and impact is through our Battle of the Kings customization competition in Europe.

This contest promotes our incredible dealer network and vast range of parts and accessories, and reaches a younger demographic all while driving sales. EMEA dealers collected more than 12,000 leads and drove customer engagement through 80,000 votes online.

We also reached riders and demonstrated the strength of our model year 2018 line through demo rides at the 20th anniversary of European Bike Week. The event had record attendance of more than 125,000 people and more than 70,000 riders. I was a the inaugural event and it’s staggering to see how it’s grown in both numbers and passion over the years.

To reach new and existing riders internationally, we continue to increase access with capable, brand dedicated dealers in more locations. Fifteen new dealerships opened this quarter in South Korea, Thailand, El Salvador, Germany and Russia, to name a few.

Broader brand awareness through emerging Asian markets is also well underway with our new apparel partner. Plans are in place to open more than 100 stores over four years, beginning in 2018 with the first locations opening in China, Malaysia and India. While our industry here in the U.S.

is facing some significant challenges, we see opportunity to better leverage our substantial strengths to move forward at full throttle. Our goal to build 2 million riders over the next decade is a clear and powerful motivator for our company, dealers and passionate riders. While the U.S. is a mature motorcycle market, we’re investing to grow it.

As the motorcycle industry leader with 115 years of experience, we believe we’re well positioned to build ridership and strengthen the sport of motorcycling over time.

We’ll continue to advance our reach and impact internationally where the biggest opportunity for long term growth for our brand and company clearly resides, and we’ll continue to make whatever tough calls are necessary to optimize near-term business performance while remaining clear, focused and driven to invest wisely for the long term health of our brand and company.

Success in this effort is critical to all stakeholders and we certainly know that it is for you, our shareholders. Now John will walk you through the financials and the details on the quarter. Thank you. .

first, the provision for retail motorcycle loan losses decreased by $7.3 million from last year, driven by a smaller increase in the allowance as compared to Q3 of 2016. It is important to note that we expect credit losses to be incurred because of the impact of the hurricanes.

We would expect these losses to be largely reserved for in the fourth quarter. Next, HDFS experienced positive results in other income largely due to higher licensing revenue. Finally, HDFS incurred higher operating expenses during the quarter. HDFS’ operational results are on Slide 21.

For the quarter, originations were down 7.5% compared to last year, and market share was down 5.7 percentage points during the quarter as we lapped a significantly higher level of finance offers in Q3 of 2016. At the end of the quarter, we had $372.1 million of cash and cash equivalents at HDFS.

In addition, HDFS had $1.32 billion of available liquidity through bank credit and conduit facilities. During the quarter, HDFS paid HD Inc. a dividend of $90 million.

On Slide 22, you will see the 30-day delinquency rate for retail motorcycle loan receivables on our balance sheet at the end of September was 3.72% or 11 basis points higher than Q3 2016. The annualized retail credit loss rate for receivables on our balance sheet was 1.73% or 14 basis points higher than Q3 2016.

Overall, credit losses continue to be higher across the portfolio, which is consistent with vehicle financing industry trends. While both 30-day delinquency and credit losses were up in the quarter, we are pleased that the rate of increase for both tempered from last year.

HDFS continued to maintain a robust liquidity position and contributed strong profitability to the company. The remaining Harley Davidson Inc. financial results are summarized on Slide 23. A few things to note - year-to-date operating cash flow was up from last year, driven by lower wholesale financing partially offset by lower net income.

The year-to-date tax rate was 33.2%, down from the second quarter of 2017 due to reduced tax reserves as we realized a higher percentage of spending qualifying for the R&D tax credit and behind the successful completion of two audits in the quarter.

The company has and intends to continue to maintain a minimum of 12 months of projected liquidity needs in cash and/or committed credit facilities. Turning to Slide 24, returning value to our shareholders is a top priority.

We are committed to delivering motor company ROIC in the top quartile of the S&P 500 through disciplined investments and a best-in-class ROE at HDFS.

We will continue to look for opportunities to deliver shareholder value by investing to maximize the long-term value of the company and the brand, and by returning excess cash to our shareholders in the form of increasing dividends and continued share repurchases. During the quarter, we repurchased 4.5 million shares for $222 million.

On Slide 25, you will see full-year expectations for 2017. We continue to expect to ship 241,000 to 246,000 motorcycles in 2017, which is down 6% to 8% compared to last year. Our shipment guidance takes into account our expectation of lower U.S. retail inventories compared to 2016.

In the fourth quarter, we expect to ship 46,700 to 51,700 motorcycles, which is up approximately 10% to 22% compared to last year. Given Q3 gross margin results, we now expect full year gross margin to be down versus our previous expectation of down modestly.

Conversely, we now expect full-year SG&A as a percent of revenue to be flat versus our previous expectation of up slightly. We now expect our full-year 2017 effective tax rate will be approximately 33.4%. All other full-year expectations included on Slide 25 remain unchanged.

To wrap up, in the face of current challenges, we continue to execute our strategies and make the necessary decisions to support our brand and profitability into the future.

We are encouraged by the strength of our brand and the appeal of our products demonstrated by the positive response to our 2018 motorcycles, and we were particularly pleased to see the positive results of our supply management discipline.

They are hard decisions, but the third quarter provided solid reinforcement of our efforts to protect our brand premium and maintain appropriate inventory. Finally, year-to-date cash flow from operations was up despite lower net income, highlighting our ability to generate significant operating cash in the face of very difficult market conditions.

To build the next generation of Harley Davidson riders globally, we have the right strategies that are appropriately funded, and we are disciplined in our execution. We will prudently focus on our investments, deliver strong returns to our investors, and sustain the company for the long term. With that, let’s take your questions. .

[Operator instructions] Your first question comes from the line of Gerrick Johnson. Your line is open..

Hey, good morning. You guys have made tremendous improvement in your product and there’s been a positive response, but the conjecture out there is it’s just not working, it’s just not moving the needle.

What do you say to that, and why do you think it hasn’t been driving sales growth for you guys?.

Well Gerrick, as we look at--I would assume that you’re referring to the new Softail models, and to be honest, we couldn’t be more pleased with the results that we’re seeing in the marketplace in the first couple months.

So first to understand exactly what the strategy was behind that product, it was to take three previous platforms, which were the old Softail, Dyna and V-Rod, which we had 11 models of in the previous year, and we came out with eight new Softails that were highly differentiated and covered all the need states that the previous models did without the overlap between families, so we believe that form a customer standpoint is much easier for the customer to understand and choose a motorcycle, highly differentiated versus the three platforms that we had before.

Again, when we look at the initial sales results, we couldn’t be more pleased.

If you look at retail sales of new Softail this year versus last year’s three families of Dyna, Softail and V-Rod, we actually sold double the number of retail sales this year versus last year on a third fewer models; so again, we are very excited as to where we’re at with regards to those models and are not seeing what you had mentioned at all.

From an international standpoint--.

Let me just stop you for a second. I’m also talking about the models that were launched last year. You had a brand-new engine platform that’s been out there for a year, and we haven’t seen much improvement there either on the touring side. .

Well, when we look at overall touring, sales over those quarters that it’s been out have been--retail sales have been up in touring and market share has been up quite significantly, Gerrick.

What hasn’t happened is--well, that’s in an industry and a market that’s underlying been down about 7%, so Milwaukee-8 has done what we expected, dramatically outperforming the industry, gaining market share.

The issue that we’ve been facing, Gerrick, all along is a very soft industry, and the industry has been down for eight consecutive quarters, and in particular the last six quarters it’s averaged down about 7% - matter of fact, it’s 6.75%. So under that backdrop, Milwaukee-8 has performed very well..

I’d just add, Gerrick, too that in both cases, the product plays very strongly internationally.

First of all, the opportunity that we have with growth in touring, that the performance of both the suspension and the engine provides to the more performance oriented European customer, and the current mix of large cruiser sales is much higher internationally than it is in the United States.

The early supply availability lags what it was in the United States, so we expect to see continued good performance as the availability of Softail increases internationally as well as we continue to leverage the touring product in our marketing and in our programs throughout international markets. .

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

Hi, good morning. Two questions, the second is really quick. On the inventory at the dealer level, it’s obviously been really well managed.

I’m just curious, as you end this year, as you look into 2018, do you expect shipments to kind of move lockstep with retail sales, or do you see there’s an opportunity for shipments to outpace what’s happening on the retail end given the inventory being down so much? Then secondarily on the mix, should we assume that mix will continue to be a negative into the fourth quarter on the cruisers being so well received?.

Thanks Sharon, this is John. With regards to the tight situation of inventory, we do expect that to continue into next year. We will continue to maintain a very tight inventory level in the U.S. as long as the industry remains soft and uncertain.

Now, having said that, when we look at shipments versus retail sales next year, there is an opportunity to ship in at a little bit higher rate just because of the way we’re taking the inventory out this year.

We’ve said that this year, we would finish with inventory down quite a bit at year end and we will, and we would need to ship in a little bit more in terms of a percent next year or we would run inventory way too low at the end of 2018.

But that’s not to be confused with the fact that overall inventory levels will remain tight through the fourth quarter and into 2018. The second question that you had, Sharon, is with regards to mix in Q4.

No, we expect to continue to ship a good level of cruisers in because they’re selling very well, but overall we would expect mix to be favorable in the fourth quarter.

Again, when we took our shipment guidance down in the second quarter and we wanted to get as much of the inventory out in the third quarter, we took a fair amount of inventory or shipments out and production out of touring, and that’s why you’re seeing the unfavorable mix that you’re seeing this quarter - mix was unfavorable about $27 million, and that was largely due to pulling out touring.

We will increase the level of touring in the fourth quarter and would expect positive mix in the fourth quarter..

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

Hi, good morning. Thanks for taking my question. John, I know you broke out and you quantified for us the impact of the hurricanes on retail registrations in the quarter, and I appreciate that that was helpful.

Can you help us understand how Eagle Rider maybe had benefited the retail registrations?.

Sure, Felicia.

I think we mentioned--well, not think, we mentioned on the last call that we entered into a relationship and a partnership with Eagle Rider and with that, we were going to exit our authorized rentals and team up with Eagle Rider and sell--our dealers would sell to Eagle Rider new Harley Davidson motorcycles, which is a tremendous benefit because prior to that, Eagle Rider could not buy new motorcycles.

So a lot of benefits of that relationship, but that was announced early in the first quarter and we saw authorized rentals coming out of the first quarter being down, and in the second quarter is when we finalized--I’m sorry, in the beginning of the third quarter, we finalized things with Eagle Rider and we started to ship to them.

So really, what we saw in the third quarter was their initial fleet being established of new Harley Davidson motorcycles that made up for the decline that we had in the first half as dealers that were part of authorized rentals stopped purchasing because of the transition to Eagle Rider.

So the way to think about it is that in the first quarter, market share was a little bit soft because of the fact that we weren’t selling a lot of authorized rentals as people waited for Eagle Rider, and then in the third quarter we started to ship into Eagle Rider and that did benefit share in the third quarter.

But overall, we’re up slightly on a year-to-date basis. The other thing to note, Felicia, as well, it’s a very important business but it’s not a tremendous amount of overall shipments. You’re talking a few percent on an annual basis that go into either authorized rentals or now Eagle Rider..

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

First of all, a clarification on Eagle Rider. Was that mostly model year ’17 product, or did they take any ’18 product? Then my question is really with regard to the SG&A and the expenses related to developing your marketing and product development capabilities.

Can you break that out for us a little bit? You talked, John, about the fact that you were able to cover that or fund it with some other cost reductions within SG&A, and I know that’s been the messaging on this all along; but can you just help us kind of understand what was 3Q in terms of those marketing and product development expenses and where does that stand year-to-date, and would it be reasonable to assume that it maintains that level into 2018?.

Yes, absolutely. With regards to the first question, the follow-up question in Eagle Rider, those are all model year ’17 motorcycles.

In relationship to SG&A, for example in the quarter, when we look at marketing, customer-facing marketing and product development, they were both up about 10%, and broadly when looking at those expenses from a company-wide standpoint, it’s 40% to 45% of our total SG&A.

So a fair investment has been made in the quarter, and over the last couple years we’ve increased the amount of spending on product development as well as overall marketing. We would expect that to continue into next year.

We are not cutting those types of things that drive our future, drive our growth strategies and current sales, so the magnitude in the quarter was about 40% of our spending, was up 10%, and we ended up coming up a little bit favorable. We’re going to continue to focus on managing our SG&A expenses, given the fact that we’re a smaller business.

We’ve got three main principles when dealing with SG&A. Number one is to protect spending that drives short term and long term sales. Secondly is to get the entire organization focused on fewer, more impactful things; and third, David, is if it doesn’t fit in the first two, evaluate whether we need to spend the money at all or delay it.

Again, that’s been very successful. We’re reduced our spending by $50 million in the first three quarters of this year..

As a reminder, please limit yourself to one question. Your next question comes from the line of Adam Jonas. Your line is open. ].

Thanks. A question for John Olin. Does the support agreement between the motorcycle company and HDFS effectively serve as a poison pill in a change of control event, and what should investors be aware of about this agreement within the context of a potential change of control? Thanks..

The intention of the support agreement is strictly for our banks to pass through the very strong balance sheet that we have in the motor company through to the HDFS, to make sure that we have the credit ratings that we enjoy today that keeps our financing at very reasonable costs. It has nothing to do with change in control in any way..

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

Hi everybody.

Your Q4 production and year-end inventory is obviously based on some preliminary view on 2018, so I was hoping you might be able to give us some high level color on what your expectations are going forward; and related to that, do you have any products in the near-term pipeline that you think change the customer dynamics, maybe appeal to completely new demographics, and if the market remains weak, how should we be thinking about the SG&A opportunities that you alluded to, to correspond with the weaker market?.

Okay, I’m trying to remember the first question. 2018 expectations, we’re not providing any expectations beyond this year. We feel very good about the guidance that we have out there today. We’ll attack that in the fourth quarter, and Rod, as we prepare for 2018, we’ll provide our guidance on our Q4 conference call, which will be at the end of January.

I think the other question, Rod, that was asked was with regards to product--.

Yes Rod, this is Matt.

We’re not going to talk specifically about the future product, but as you can see from the commitment and one of our top five objectives, 50 new high impact motorcycles in the next five years, 100 in 10 years, and the 14 that we have in model year ’18 plus a couple that came early in the spring under model year ’17, the Street Rod and the Road King Special, and as we’ve shared in our discussions in investor days how we’re viewing product from a customer impact perspective, that is best understood as you look at the entire Softail line-up that runs the range of sort of nostalgic traditional products like the Deluxe, that appeal to a certain type of customer, all the way to the Fat Bob and the Fat Bob 114 that are really spiking very highly with people that were maybe more in the V-Rod realm from an adrenaline need state perspective.

These spaces that we occupy with, if you will, the personalities of every motorcycle we develop are an important part of activating riders from every generation with performance preferences and style preferences, and that is the thinking as we approach every new product development investment and how we talk about high impact.

It has to make a difference for a certain type of customer that’s a growth opportunity for the company, and you’re starting to see that unfold as you look at the products that we’ve launched, including by the way the anniversary models.

I mentioned there were two statement paint schemes - there was a paint scheme that skewed towards more traditional tastes and a paint scheme that skewed toward more modern and youth tastes, and this was the first time we’ve ever done two anniversary paint schemes, again because of our focus on appealing to very specific customer need states with every product investment that we make.

So you’re going to continue to see more of that over time as we leverage our product development capability to make an impact with all kinds of customers around the world, a greater variety of customers around the world (indiscernible). .

The final--.

Our next question--oh, sorry?.

I’m sorry. Rod, with regards to your final question on SG&A spending next year as we look forward, again we’ll provide more guidance in January, but just wanted to reiterate what Matt said in the opening.

Since the industry kind of broke through what our expectations are and, quite frankly, everyone else’s in terms of the decline that we saw in the second quarter, which is continuing on in the third quarter, we’ve put together a three-pronged approach to address the very soft industry in the United States.

That was to address the market issues through aggressive supply management, and again, we’re very pleased where we’re at with that. Second, it was to aggressively manage our cost structure without jeopardizing the future, so this is largely aimed at SG&A.

We will continue to invest in marketing and product development at the same or higher levels as we move forward. We will look at all other spending to make sure that we are managing it prudently in an environment of lower revenue, and again are quite pleased with the fact that we are expecting this year to end up flat as a percent of revenue.

If you remember our initial guidance, it was expecting that SG&A would be up a bit, and with the shock that we took, we’re aggressively managing though that. Then third is the unrelenting focus on our long term strategy.

We will not pull back on the investment of creating 2 million riders as we move into the future and creating that next generation of riders, so that’s a little bit of context around what you’ll see when we talk about SG&A in 2018..

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

Thanks. You’ve addressed a lot of my question, but Matt, you mentioned that Rider Academy conversion improved, and I’m curious what drove that and whether it’s sustainable..

Yes, thanks Craig, a number of different things.

First of all, a lot of training and different thinking with respect to the dealers, and understanding that there is a rider development path and rider training plays a role in it, but getting the right people into the course and making sure not only that they have a good experience in the training class itself, but on the back side of that training class, what do we offer for them to continue their journey to becoming a confident rider.

We’re piloting a number of different programs in the marketplace.

One in particular allows a recent Riding Academy graduate to get into a very cost effective short-term lease, if you will, on a used motorcycle on the dealer’s floor, so that once they finish the class, they're able to quickly get into a motorcycle and continue their on-road riding experience.

We’re looking at, as well, different pilots where we pair experienced riders with newly minted Riding Academy graduates to help mentor them in their journey to riding.

So fundamentally, it’s a recognition that rider training is a piece of a much more important rider development journey and what can we do, as I mentioned in my opening remarks, pull together those ingredients to help turn newly trained riders into active on-road riders. We’re very pleased with that number, Craig.

It does reflect a lot of great work on the part of our dealers that have Riding Academy, as well as our teams here, just under the recognition that training someone doesn’t necessarily make them a rider. We have to have a long view of what it actually takes to build confident, safe, avid riders, and in my view we’re just getting started.

We’re excited about the early results..

Our next question comes from the line of David Beckel. Your line is open.

Hi, thanks for the question. I have one very quick follow-up and then another question. The first is with regard to Eagle Rider rental fill. I just want to clarify, rental units is at a few percentage points of annual U.S. shipments.

Is that what you were indicating?.

Yes, David - annual U.S. shipments, a few percent on an annual basis, that goes--retail sales into that avenue, whether it’s authorized rentals or, we would expect, Eagle Rider in the future..

Is that expected to continue in Q4?.

You know, there are minor shipments in Q4 to the rentals program. It’s on the downside of riding, and there’s very few shipments.

Really, (indiscernible) to the authorized rentals or Eagle Rider are much more of a first half event, and again that’s why kind of the Eagle Rider initial shipments stood out in the first quarter as most of those typically ship in the first half as they get ready for the riding season..

Got it, that’s helpful. My follow-up question, or real question, I guess, is one on international sales. It seems like it’s been consistently, or maybe just weaker this quarter than expected. You had expected some weakness in the first half.

But I’m really trying to get at, are these international trends that we’ve seen this year truly sort of idiosyncratic, like related to earthquakes or this, that and the other, or do you get any sort of sense that there has been a negative reaction caused by concerns about U.S.

foreign diplomacy or things of that nature?.

You know, we don’t. This is Matt.

We have a lot of measures of brand health and customer preference for the product and the brand, and there’s actually a lot of really good research on this very topic generally that suggests that the connection between brand U.S.A., if you will, or political or foreign policy interpretations around the world versus American product brands and whether there is any sort of residual tarnishing crossing over, or whatever you might think, there doesn’t seem to be, and there’s some really very smart research on the topic that we’re paying a lot of attention to because clearly the Harley brand is inextricably linked with the ideals of America, which are freedom, independence and strength.

We’re in all of our communication highlighting those core human values of our brand versus, if you will, the flag waving attributes because those are fundamental high impact, high value human needs everywhere we see in the world.

People do make that connection with the Harley brand, and we’re continuing to emphasize those core values in all of our communication.

If you’re able to go on YouTube and watch the All for Freedom, Freedom for All campaign, that’s a new brand identity position that we have that really emphasizes the human connection that people have with riding and with riding Harley Davidson motorcycles, and it’s along the lines of what I just described..

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

Hey, good morning. Thank you for taking my question. I’m curious about gross margins. I think last quarter, you guys thought that they were going to be down, but not nearly by the magnitude that they were.

You had already anticipated that the volume was going to be pretty sizeable impact on that, given that shipments came in where you guys anticipated, so can you talk about maybe where you saw the biggest delta from what your expectations were on the gross margin, not just what contributed the most but where it differed from what your expectations were, and then whether that has been a continued factor into your full-year guidance? Thanks..

Sure Jaime. As we had talked last quarter, we expected gross margin to be down about 2.5 percentage points, driven by unfavorable mix as we focused on the cruisers and on lower absorption. Those both happened. Now, the miss was largely driven by two things. One is a less rich mix of product than we expected, not so much from a family standpoint.

We shipped in exactly what we were expecting from a family standpoint, but when we look at the geographic mix, where those products went around the world, it was less rich than we first anticipated, and overall model mix was a little bit less than expected. We would expect those mix things to work out over the next couple quarters.

The other piece of it was that we had higher start-up costs than we first anticipated.

The magnitude of what we did in the factories, and Matt had mentioned it’s been by far the largest new product launch that we’ve ever had, whether measured by the number of new parts, the number of new models, anyway you’d slice it - engineering hours and so on and so forth, it was of huge magnitude.

The lines didn’t go up as quick as we had wanted, largely because of supply of all the changed products coming in and suppliers didn’t necessarily keep up as much as we’d like. That created a fair amount of overtime and additional costs in the quarter. Those are all isolated, all one-time costs. They will not repeat.

We exited the quarter at planned-on line speeds, quality looks fantastic, and so it was just really the magnitude of the start-up that caused it. So those are the two things that took us from where we were expecting at 2.5 points to a little over--well, about 4.8 points. .

I just want to add too, to just put a little color on that, I think that the mentality within our product development and manufacturing organization is outstanding from the standpoint of making sure that we are absolutely delivering high quality motorcycles in a safe manner, and when necessary, slowing things down to be sure that that’s the case.

This is very much a mindset of an ounce of prevention from a quality perspective on an all-new platform is worth way more than a pound of cure, and that’s what we saw in the quarter, was a lot of good discipline to make sure that we are producing quality products and doing it in a safe way..

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

Hi, good morning. Thanks for taking my call. I wanted to focus on what strikes me as maybe the best news in the quarter, and that’s that I think you made the point in the prepared remarks that used prices were a little bit better at retail and not just auction.

First, when do you think that translates into better demand for new? What role, if any, do you think that the bigger than normal price increase that you had on the model year ‘18s might play if we’re thinking about the delta between the new bikes and then the used bikes? Then--.

James?.

Emily, did we lose James?.

We have--yes, he was supposed to ask only one question, so he can queue up to ask the other part of his question..

All right. John, why don’t you go ahead and answer, and James, just email me and let me know what your follow-up was, we’ll get back to you. Sorry about that..

So James, absolutely. When we look at the quarter, there was some very good things - new product, market share gains, but you cannot overlook the importance of the used bike prices.

We started talking about this, or first saw the signs of goodness in the first quarter, and we saw the auction or the wholesale markets prices rise on a year-over-year basis.

That held in the second quarter, and in the second quarter we also saw the pricing services start to pick up the activity at auction, and those pricing services published higher prices. At that time in the second quarter, the broader market still was down on a year-over-year basis, and that was 12 quarters of being down.

This quarter, we’re still very firm at auction. The pricing services are still posting much higher prices, in some cases 15% higher on some of our touring product, and then we’ve seen that move into the broader market and we’ve seen used bike prices up on a year-over-year basis.

So we couldn’t be more pleased, and yes, that starts to close that gap a little bit.

Now at the same time, we’ve raised prices in the third quarter, but when we look at that, it was all certainly content driven, and the amount of innovation and content that we brought to the products we believe will not weaken the sales, because it does come with a lot of content.

But we’re very pleased to see used bike prices moving in the right direction, and we’ll continue to keep an eye on it. As that price rises, more people will make the choice to buy new versus used, because with the new they get all the innovation, the new engine, new chassis.

They get a bike with no miles and they get a warranty, a two-year warranty which is worth a lot.

Again, each time we move closer, we would expect that balance between new and used sales to become more in line with one another, and what we’ve seen over the last couple years is used growing much faster than new, and would expect to see that temper and even out..

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

Great, thanks.

Can you talk a little bit about the industry in more detail, since that seems to be having the greatest impact on your results? Is there maybe either some geographies that are negative, oil and gas markets, I know you mentioned hurricanes, and then what’s been the change in the competitive landscape in the third quarter? Anything that you’ve seen this quarter that’s different than the last few quarters, whether it’s domestic, Indian, or it’s some of your international or Japanese competitors?.

Okay Greg. You know, the industry has certainly been the issue. In terms of Harley Davidson, we’re competing well, market share looks fine, products are fantastic. It has been an issue of the industry. The industry has been challenged for eight quarters and down quite significantly for six.

When we look at slicing and dicing it, every quarter is a little bit different, but that core rate has been running down between 6% and 7%. We believe a big factor of that is the disparity between new and used motorcycle pricing.

That has been the constant over this period of time and has been building up for numerous quarters - again, it just switched after 12 quarters, so we believe that’s the biggest piece. But you get into the third quarter and the southeast was down quite significantly behind the hurricanes.

We talked about that, about 2 percentage points of growth, but also out west the extreme heat that they were experiencing in the third quarter, the west was lower.

But you know, those go back and forth, and we’re not seeing any patterns of any of our southern regions that we track that are down more than the average over time, so it is really more driven, we believe, by the soft used bike pricing, and again starting to see a little bit of improvement from that respect.

In terms of the competitive landscape, no big changes in the competitive set. .

Yes, I’ll just jump in here. I think that in a large way, the product quality out in the marketplace from all the competition, and Harley included, has never been better, and that’s good for the industry. We aim to compete on our merits for share with our product and our channel and our marketing, whatever the competition might do.

I do think that the sort of weaker dollar settling in at a weaker level should help with the discounting pressure from the non-U.S.

manufacturers, so that’s a good sign, but we’re bringing everything we have to bear on this marketplace to not only grow ridership but to compete for share and to do it profitably, and I think we’re a formidable competitor..

Our next question comes from the line of Seth Woolf. Your line is open..

Hi, good morning everyone. Thanks for taking my question. A lot of questions on market share this morning. I just wanted to take a step back. If we go to the beginning of the year, we were talking about the long-term plan, and you had updated behind the high impact models slight growth in the U.S., stronger growth in international markets.

Now that we’re coming towards the end of the year, we’ve seen the U.S. deteriorate beyond what you expected at that point, even talked about it quite a bit, and then the international markets, one thing here, one thing there, but it’s been six straight quarters of slowing growth.

So just hoping you could kind of address whether or not there’s any changes to the long-term outlook, you still feel good about that, and then as we get into next year, you said inventory will be tight in the U.S.

Does that mean maybe we’ll step away from these boom and bust quarters where you’re shipping a lot, you pull back, shipping a lot? Thank you..

Thanks Seth. Just a correction - we expected the U.S. to be down slightly, offset by international at the onset of the year. We expected the industry to be down, but it was down significantly more than we expected, and that’s really driving everything that you’re seeing with regards to retail sales.

As you talk about boom and bust, as we entered into the year, we were looking to take a lot of inventory out, and we did in the first quarter. The second quarter, we would have taken out more had it not been for the industry being down, again lapping itself in the fifth quarter, down that additional 7--I think it was 7.3% last period.

So yes, with the tighter inventory going forward, we would expect the predictability to be a little bit better and that we would not have to make as big of adjustments. In the United States, the industry continues to be down that core run rate, and we do expect that to dissipate. Right now, it’s very difficult to call.

It’s much easier to forecast when you look at new and used combined, but given the divergence that we have in growth rates between new and used, it’s become very difficult to forecast. We understand the pain that that’s causing for our shareholders and others, but I don’t know anyone that has called the industry right at this point.

It’s an industry that has grown 28 out of 33 years, and there’s only been two periods in three decades where it’s been down - one was in the recession in 2009 and ’10, and then over the last two years here, so we’re doing our best to forecast it.

I think what you can count on is the fact that we continue to address the issues that we’re facing from a principled standpoint, making sure that we do not discount, we do not cheapen the brand, and we take the hard actions in terms of managing the inventory in the system.

It’s been difficult and it’s been painful, but again we’re going to continue to manage on the business for the long term. We’re going to continue to invest in the future and growth, and we do think that there is a very vibrant growth prospect for this company, in particular in the international markets.

Similarly, the international markets have been up for Harley Davidson for an extended period of time, and we are in a trough with our international markets. It was first driven by emerging markets that ran into some troubles, spurred on by India and demonetization and the GST, but also in China.

We’re starting to work out way out of that, and we saw emerging markets, with the exception of Mexico, gain momentum and turn positive, and established markets with the exception of a couple have been performing well. In Europe, we feel very good - we’re up on retail sales in core Europe.

So overall, we feel good, but it has been a tough four or five quarters in international markets. We expect international to grow as we go forward. .

Our next question comes from the line of David Tamberrino. Your line is open..

Great, thank you. Just a question on HDFS - better in the quarter on lower provision for retail loan losses.

Do you feel as if you’ve kind of hit a plateau with where you are from your 30-day delinquencies and your loss experience, or do you think that continues to drive higher?.

Well, we are very pleased just more broadly, and thanks for the question, David, HDFS is having a very good year and providing a lot of opportunities to sell motorcycles, incremental motorcycles for us. What you’re seeing in the quarter is just a slapping--a bigger provision on a year-over-year basis.

As you saw, the delinquencies are up still a bit, 11 basis points, and losses are up 14 basis points, so they continue to rise.

They’re in line with what the industry is seeing and certainly in line with our expectations, and much improved from last year where we saw delinquencies up 45 basis points and credit losses up about 40 basis points, so that’s the financial impact of lapping--or that slowing delinquency and credit loss rate.

We’re not going to project what we think it will do going forward, but just to say that we’re very pleased to see that it is mitigating. The team at HDFS is doing a fantastic job.

As we’ve talked about, we’ve tightened some of the substandard underwriting that we’ve had, and we’re very pleased with where we’re at and the momentum and the direction that we have..

Our last question comes from the line of Joe Spak. Your line is open..

Thanks, just some quick follow-ups.

One, how much of the lower SG&A is actual cuts and savings versus just delayed spending, and second, can you talk about the mix of bikes on the rentals? Are those fully contented, like they would be a normal retail sale?.

Joe, I am not prepared to talk about, because I don’t know the answer right off the top of my head, on SG&A versus being cut or delayed.

The vast majority of it would be money that we’re not going to spend given the environment that we have and don’t expect it to come back, but in terms of an overall percentage of the $50 million that we’re favorable, I just don’t have that answer.

We’re going to continue to manage the company in line with what our revenue gives us, and we’ll continue to respond against those three--that core three-pronged approach that we have. Secondly, the mix on Eagle Rider bikes skews heavily toward touring bikes, and so they’re mainly the core OE touring bikes.

As people rent, they typically--a lot of people are coming in from tours internationally or riding different parts of the country and rent touring bikes. The next most popular models would be cruisers, but they’d be well behind touring, and there’s very few rentals in the small cruisers, when you’re talking about sportsters and street motorcycles. .

There are no further questions. I will turn the call back over the presenters for closing remarks..

Thank you, Emily, and thanks everyone. I know there are some additional questions, so I will follow up after this call. Thanks for your time this morning. The audio and slides will be available at harleydavidson.com. The audio can also be accessed until October 31 by calling 404-537-3406 or 855-859-2056 in the U.S. The conference ID is 87422065.

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

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