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

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

Thanks, Amy, and thank you everyone, for joining us on the call today. As you know, this is my first earnings call as President and CEO of Harley-Davidson, but this is far from my first earnings cycle here. As a longtime member of the Harley-Davidson team, I'm not only incredibly proud of where this company has been, I'm incredibly excited about where we are going. You've all read the headlines and results in the news release this morning. Sales, shipments and earnings are in line with our expectations. As always, John will go into the detailed financials behind that in a few minutes, but first I want to take a second and talk about the big picture of the quarter, the environment we are in, and why I'm encouraged about both our performance and our prospects. In April, we acknowledged the environment was going to be difficult in the face of currency and discounting by competitors. But we didn't sit on our hands, we leveraged our strengths, pulled together as a team, and came to the table to compete and win. The tough call in April to take down shipments was the right call, and reflects our long-standing commitment to manage supply in line with demand. The fact that we delivered shipments in line with that guidance in the second quarter, while maintaining near record gross margin, shows the strength and flexibility we have built on the operations side of the business. But of equal or greater importance in my mind is our commitment to drive demand, and do so in ways that are reinforcing of our premium brand. Harley-Davidson has powerful fundamental strength and assets, and we leverage some of the many competitive advantages we have like HDFS, our riding academy, our richly iconic brand, and our great dealer…

Thanks Matt. Today, I'll provide additional insight around our financial results found in the press release and slides. The summary of our second quarter financial results starts on slide 10. Results were in line with our expectations, given lower shipments in the quarter following the shipment guidance reduction we took in April. During the quarter, revenue was $1.82 billion, net income was $299.8 million, and diluted earnings per share were $1.44, all down on lower shipments and ongoing pressure from unfavorable currency exchange. As expected, operating income from the motorcycle segment was down 19.6% compared to last year's second quarter. Motorcycle segment operating performance continues to be very strong when considering the lower volumes and unfavorable currency impact. The motorcycle business operating margin was down 2.7 percentage points, driven by higher SG&A spending on lower revenues, while gross margin remained very strong at 39.2%. At HDFS, operating income was up 10.0% year-over-year. Despite the challenging conditions, we continue to focus on delivering strong margins and strong returns over the long term. Now let's take a closer look at Q2 performance, starting with retail sales on slide 11. As we continued to face a very challenging retail environment in many markets, worldwide retail sales of new Harley-Davidson motorcycles were down 1.4% in the second quarter. In the US, retail sales were down 0.7% as we continued to experience pressure from foreign exchange driven discounting by other brands, and as we lapped last year's strong Rushmore sales. Internationally, retail sales were mainly impacted by new low-priced models from competitors in Europe, currency driven volume declines in markets where we sell in non-local currencies, and challenging economic conditions in some markets. As we exited the second quarter, our business remains under pressure from increased competitive activity, including aggressive price discounting in the US…

John, that was retail inventory.

US retail inventory was down approximately 1600 motorcycles on a year-over-year basis. Excluding incremental retail dealer fill of Street motorcycles, Q2 retail inventory was down significantly as expected. We were very pleased with inventory levels at the end of Q2. This reflects the benefits of our flexible manufacturing capability, and our commitment to manage supply in line with demand. On slide 13, you'll see retail sales in our international markets were down 2.7% in the second quarter. We initiated market actions to counter increased competitive activities and weak economic trends in certain international markets. Similar to the US, we initiated these activities in mid-to-late second quarter, and we were very encouraged by June's retail sales results. In the EMEA region, retail sales were down as the region experienced the impact of several low-price models introduced by competitive brands and lapped strong year-ago retail sales of 7.0%. In addition, we experienced currency driven volume declines in markets where we sell our motorcycles to dealers in non-local currencies, such as in Russia. Year-to-date Europe market share was 10.2%, down 1.9 percentage points behind the impact of low-priced models introduced by the competition in the performance and standard segments, market segments where Harley-Davidson's motorcycles do not compete. In the Asia-Pacific region, retail sales were up 16.6% in the quarter. The region experienced growth in all major markets, and in particular in our emerging markets led by India and China. Driving these results is the Street motorcycle, which launched in many Asia-Pacific markets in the first half of 2015. Street makes entry into the Harley-Davidson brand more attainable for riders around the world, and the early results are very exciting. Retail sales in Japan were up, and they were impacted by the restructuring of distribution in that market, including a new pipeline distribution process…

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

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

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

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

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

A little of both.

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

Thank you, Felicia. So two pieces - let's separate two pieces of the first question, is retail and shipments. So retail sales were down 1.4% in the first half and we are expecting retail sales certainly to accelerate in the back half of the year that supports our shipment guidance, which is up to 2 to 4 percentage points. But shifting to the specific question, Felicia, on shipments, if we look at overall shipments in the first half of this year, we were down 4.7% in shipments and as you look at year-to-date, year to go to hit that 2% to 4% shipment growth guidance, we would need our shipments to be up in the back half of 14% to 19%. So let's start out with the half and then we'll get into the two quarters in the back half. The reason that we're looking to ship more in the back half of the year is not really related to retail sales, it's related to what happened last year. Felicia, if you remember last year we had very tough weather in the United States. And consequently we ended up shipping in more motorcycles in the first half than retail sales warranted. Then we spent the second half taking production and shipments out of the back half to get inventories back in line. Consequently, last year at the end of the second quarter, our retail inventories were up too high and resulted in more carryover units than we would have liked. So, again our focus is always on aggressively managing supply in line with demand and making sure we're adequately supplying the market. So what we did this year is just to reverse out what happened last year. So we shipped in less this year than we retail in order to…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

You know, we exited the quarter with good momentum, and we're very pleased with that. We are reporting results as of the end of the second quarter, and we're not going to go beyond that. But again what we saw in the first quarter and the change and shift in momentum we feel very good about the overall second half. The second question is with regards to what we had talked about in addressing some of the competitive issues. We've got a three-pronged approach, and you can see most notably in there is brand damaging discounting is not a part of it. So we're very pleased with what we've got. It's not as easy, it's not as quick. We've got to be a lot more creative in how we do it, and the results are very strong. But when we look at the various pieces, they all work in concert with each other. When you look at the lifestyle and brand advertising, that's an investment in the future and an investment in the brand, in the brand premium. Hard to measure what that does on a day-to-day basis. The second piece of it is targeted finance offers. That is trying to close some of that competitive gap that we have in the marketplace. No, we haven't talked much about discounting but it certainly has not improved on a quarter-over-quarter business. It remains consistent to a little bit increased. We are seeing a couple more competitors and we're also seeing the level go up a little bit, now the top discount out there is $4000 a motorcycle. So the targeted finance offers are just that, very targeted and they allow us to work on some of that price gap. I will also say that being able to do this with HDFS…

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

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

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

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

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

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

Thanks, Tim. So touring shipments. Tim, what you are referring to is on the shipment slide. When we look at percent of total, Street was basically up 4 percentage points and touring was down 4, and we expected this as we entered into the quarter. We are continuing to grow our shipments of Street as we fulfill the international rollout and when everything adds up to 100, something has to come down and when we look touring is down and the previous four quarters we had our cruiser business about 6 percentage points, so there's a lot of concerned with regards to that. But whenever we look at the total and we're investing in different parts of the business something has to come down. One, we are very thrilled we're seeing stability in the cruiser number in terms of percent of total and there are no issues whatsoever with touring. It's just that as one goes up something's got to come down. And I will say that actually touring is continuing to do very strong. We mentioned that we lapped a 31% increase in the year ago numbers and our Rushmore sales was still up on a year-over-year basis in the quarter, so we're very pleased with that business. The second question that you had Tim is Canada. So in early August, we expect to step in the shoes of our distributor in Canada. Again we would expect from the overall transaction what's going to happen is that we will receive a little bit more revenue and that is the margin that we pay and have paid our distributor in Canada will go away and we'll distribute directly to our dealers in Canada. So we'll see a tiny bit more revenue. You are not going to be able to see…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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