Good morning. My name is Heidi and I will be your conference operator today. At this time, I would like to welcome everyone to the 2018 Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Shannon Burns, Director of Investor Relations, you may begin your conference.

Good morning, everyone. You can access the slides supporting this call at investor.harley-davidson.com. Click the Earnings Materials box in the center of the page. Adjacent to that link, you can find our More Roads to Harley-Davidson plan support materials. 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. Joining me this morning are President and CEO, Matt Levatich; and CFO, John Olin. Matt, let's get started.

Thank you, Shannon. And good morning, everyone. In July, we announced the More Roads to Harley-Davidson plan, the acceleration of our strategy to build the next generation of Harley-Davidson riders, grow motorcycling and return our business to growth through 2022. During 2018, we met or exceeded all stated planned milestones [here] [ph]. Our execution is on track and we are energized that we are getting new and different people, riders and non-riders, stand up, take notice of Harley-Davidson. We're equally energized by our current riders who are deeply engaged in the brand and tell us they too are excited at the direction we are headed. It's clear that for riders today and Harley-Davidson riders of tomorrow groundwork for an exciting future is being built real time [Technical Difficulty]. Our plan to step up our strategic efforts reinforced throughout 2018 as the industry in the U.S. and certain developed international markets continued to be challenging. While most of 2018 played out largely as we expected, the declining industry performance in the fourth quarter prompted key business decision, including pulling back on shipment to drive even lower than planned [brand] [ph] inventory. We also took further belt-tightening restructuring actions in addition to our planned cost savings related to optimizing our U.S. manufacturing footprint. Our efforts to transition U.S. production to our expanded operations in York remain on track and our 2018 program costs were lower than originally planned. Through our actions and keen focus on working capital, we delivered improved year-over-year earnings and cash from operations and importantly we maintained our ability to invest in the future. We dug deeper and found ways to go faster, while continuing to deliver strong cash for our shareholders. [Technical Difficulty]. Each of the three growth catalysts, new products, broader access and stronger dealers. When it…

Thanks, Matt. Our fourth quarter financial results were impacted by first our decision to reduce shipments in an effort to lower worldwide retail inventories, as well as a result of slightly lower than expected retail sales in our international markets. Next we booked two voluntary recalls during the quarter. And finally, we recorded an additional restructuring charge in our efforts to aggressively manage the company cost. In the face of ongoing retail sales headwinds in the U.S., we remain focused and disciplined on tightening U.S. retail inventory, aggressively managing cost and driving improved cash from operations. In fact, in 2018, we increased operating cash by over $200 million, a 20% increase over prior year. Summary of our Q4 results is on slide 10. In the fourth quarter, revenue was down behind lower shipments. Motorcycle operating income was impacted by lower shipments, $19.4 million of restructuring charges, higher year-over-year SG&A, driven by two recalls, and the impact of incremental tariffs. Financial Services operating income was down slightly. Consolidated net income was largely flat to prior year due to lower operating income, offset by the benefit of a considerably lower tax. EPS for the quarter was $0.00 per share. When excluding restructuring plan cost and the impact of incremental tariffs, EPS was $0.17 per share. We remain focused on delivering strong margins and returns over the long-term. On slide 11, worldwide retail sales of new Harley-Davidson motorcycles in Q4 were down 6.7% versus prior year. In the U.S., Q4 retail sales were down versus prior year, driven by significant declines in the U. S. industry and slight market share declines. International retail sales were down modestly in Q4, driven by year-over-year declines in certain developed markets, partially offset by continued growth in emerging markets. While we expect our business to remain under…

[Operator Instructions] And your first question comes from the line of Sharon Zackfia with William Blair. Please go ahead.

Hi, good morning. I guess a question on the used bike pricing, so I think you've been talking at least fairly consistently throughout 2018 about the bike pricing improving in your dealer network and in some other auction sources that you get. But it hasn't really manifested itself seemingly in any improvement in retail sales. So as you've looked at this historically what kind of lag is there normally? I mean when would you expect to see those used bike prices start to I guess narrow the gap so that the trade-off and [to use this] [ph] less attractive to the consumer than it seems to be today?

Thanks Sharon. This is John. Sharon, coming out of the fourth quarter of 2014, we saw a precipitous drop in used bike prize for about 13 consecutive quarters and we have seen improvement for the last six. But the level that at which it felt for those first 13 quarters is much more than we have seen an improvement in the last several quarters. And we still have a sizable gap and the gap between new and used is at historical levels. We expect first to see the stabilization. We've got stabilization used bike prices, next we would expect to see stabilization in the industry of new motorcycle sales. And as we look forward to 2019, we do expect them to improve part of the reason being is behind a more stable price gap between new and used. But having said that, the gap is still wide and we still would expect the overall industry to be down.

And I'll just add Sharon, this goes back again to the focus on building new rider by creating more riders demand on the side of total supply side. So growing 50,000 additional Harley riders in 2018 is building momentum and obviously continued to invest even more behind that. As we go forward that should help dynamic.

Okay. Thank you.

And your next question comes from the line of Felicia Hendrix with Barclays. Please go ahead.

Hi, good morning. Just one thing I know you've had this issue on other quarters. When you guys have been talking, you've been kind of drifting in and out some things have been hard to hear, so just an FYI,. John, can you just talk for a moment about your outlook for 2019 shipments and the cadence? It seems like your first quarter definitely is factoring in the challenges that you're seeing and that you've discussed on the call and then when we look forward at the second to fourth quarter, does that implies a flattish growth in shipments? So maybe first you could help us just understand, how you're thinking about the cadence throughout the year with maybe second quarter be down and then the second half be up something like that. And then, just why are you confident in your overall outlook given the challenges that retail and the industry both internationally and domestic? And it seems like some of the international pressures are relatively new? Thanks.

Thanks, Felicia. As we look to the - let's start with the first quarter, as we look to the first quarter we expect shipments to be down 7% to 19%. And you're absolutely right Felicia that a portion of that is the fact that we will not be shipping - we do not expect to ship Street motorcycles in the fourth - first, I am sorry, in the first quarter. That represents about 4%, 4.5% of that total. In addition, we expect coming out of the first quarter with lower inventories in the U.S., so we’re going to continue to keep overall inventories very tight as we move into the selling season. What we would expect from there is to see shipments really track well with retail sales and throughout the year we would expect retail sales to improve as we invest in stronger dealers which is part of our More Roads strategy. And in fact, when we look at 2019 overall we will have a significant investment in More Roads in the neighborhood of $100 million. So to get to the final part of your question Felicia is why do we expect - why do we have confidence in the shipment guidance that we've given, is that is a big part of it. We are investing heavily in More Roads and stronger dealers and certainly the new products and broader access. And as Matt has just mentioned, we came off of 2018 creating 52,000 new riders to Harley-Davidson that weren't there a year ago. We’re gaining momentum from ‘17 to ‘18 and we expect that momentum to increase and continue into 2019.

So just as far as the cadence goes, can you give some color there, and can you help us understand how many dealers you are adding internationally this year?

Yes, from a standpoint of the cadence I can't provide a lot more. You've got the first quarter and we will see an improvement throughout the year. In terms of international dealers, we expect to add 25 to 35 more dealers in international markets in 2019.

Okay. Thank you.

And your next question comes from the line of David Beckel with Bernstein Research. Please go ahead.

Hi, good morning. Just had a question about 52,000 new riders that you added this year. Can you provide us some color on maybe demographic aspects of these new riders? How they differ from your existing base and to what extent are they buying new versus used? Anything along those lines would be helpful?

Thanks, David. This is Matt. As I hope we've adequately described in the past, rider migration [Technical Difficulty] actually was last Tuesday and it begins the analysis. What we have right now is that top-level - obviously we have all need to get out of the question you asked, not surprised, the nature of our work and the focus, high leverage [Technical Difficulty] potential customers and [indiscernible] what John talked about on to guidance of sales. So it's work that we're doing right now. Obviously [Technical Difficulty] this year.

Got it. Thanks. And one quick follow-up if I could by what amount do you expect inventories to be down at the end of the year? I think you mentioned you expected that?

Yes, this is John. We are not providing an exact amount. We expect overall U. S. shipments to be down and consequently, inventory will follow.

Great. Thanks.

And your next question comes from the line of James Hardiman with Wedbush Securities. Please go ahead.

Hi, good morning. Thanks for taking my call. I just wanted to follow-up on that last point on inventories. Obviously, 350 bikes in terms of a domestic decline is a start, but it kind of feels like a drop in the bucket versus 17,000 bikes that retail was down in 2018? So, I guess, my question John, you don't need to give us actual numbers, but it's pretty clear that inventory turns worsened materially in 2018. Is the goal to get back to the inventory turn number that you had coming into 2018 just given how much of that appears to have changed based on the numbers that you've given us?

Thanks James. I probably wouldn't agree completely with your overall assessment, but you're absolutely right, in the fourth quarter 350 was not enough to hold year-end turns. But when you look across the entire year, actually, over the last - we have reduced inventories in each of the four quarter anywhere between 10% and 35%. And our guidance all year long has been for flat. We came in a little bit below that and at this point we couldn't feel more comfortable with where our inventories are. Certainly our dealers echo that and all the surveys that are run, it’s 80% plus that feel comfortable or that they have too little inventory. So, we have absolutely no issues with where we're at with regards to inventory in the mix considerably better than last year. Again, as I had mentioned to Felicia we'll continue - pressure on overall inventories and we will take inventories down in the first quarter in the United States, but we feel very comfortable where that - we're at. To answer your final question, we'd be looking to hold turn…

I'm sorry you broke up there. Your aim is to hold turns?

I'm sorry, 2019 would be the hold turns constant versus…

Versus 2018 or versus 2017?

No, versus 2018. 2019, we'll look to hold turns to 2018.

Right. But the 2018 turns were a lot worse than 2017, right? I mean, maybe…

Just went through that. There are four quarter of the year. The turns were better in the three of the four quarter. In the fourth quarter, we talked about this as well, push back our surge manufacturing - [indiscernible] a lot of efficiencies plus reductions in our plans. Out of December into January, right now we feel very comfortable where inventories are. Our dealers certainly feel the same [indiscernible] feel pressure that they're too little and we'll continue to manage turns at this rate as we go forward. And…

I apologize. You're cutting in and out John. But it sounds like you're saying that inventory turns didn't get worse in 2018? I mean, I think about 350 bikes that's may be a 1% decline versus a 10% retail decline. Am I not thinking about that the right way?

James I told you that in the fourth quarter turns got worse. In the other three quarters, they got better. We sell products throughout the four quarters of the year. We've kept turns - turns got a little bit worse in the fourth quarter and consequently on a full year basis because of manufacturing. We pushed back our surge manufacturing to gain additional efficiencies and we feel very comfortable where yearend inventories are this year. Next year, we will reduce inventories in United States as we expect shipments to also reduce because of a weak U.S. industry thereby holding turns on a year-over-year basis from 2019 to 2018.

Okay. Thank you.

And your next question comes from the line of Craig Kennison with Baird. Please go ahead.

Good morning. Thanks for taking my question. It's on Thailand. Can you shed more light on the timing of additional capacity in Thailand? What do you think your eventual capacity will be from a unit perspective? How long is that going to take to ramp up? And just remind us which markets you plan to serve from that facility?

Thanks, Craig. Craig we’re currently investing and expanding the capacity of our Thailand facility and we expect to be producing the majority of our motorcycles for the EU, China and Asian markets by the end of this year. Next question?

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

Thank you. John, I don't know if you've cut out there again. But in all honestly you guys the call quality here is pretty poor. There's a lot of cutting in and out on the whole call. But did you say expecting to produce the majority of those by year-end was that your last part of your response to Craig's question?

I'm sorry. Sorry for the poor audio quality. Yes, by the end of this year we will have the capacity in our Thailand facility to be shipping and the amount of capacity to cover our needs in the EU, China and ASEAN markets by the end of this year. Over that, we expect overall tariff cost to be $100 million to $120 million in 2019 and we would expect those to come out in 2020 as we would be producing from our Thailand facility at the end of this year.

Okay, okay. Thank you. So from a cost perspective is this included within the manufacturing optimization that you all outlined earlier in the call? Those costs for the Thai facility, just want to clarify that?

Thanks, Tim. No, they are not included in that. The manufacturing optimization is largely the consolidation of our two final assembly plants in the United States moving Casey to York and exiting a wheel manufacturing plant in Australia. With that, we are well on the path to completing that project which will be completed later this year and deliver separate savings of $25 million to $30 million for this year and then building up to $65 million to $75 million of savings.

Okay. That's helpful. So with that and what is the cost for the Thai investment ramp what's included in the guidance this year related to the Thailand plant? And again, expansion in the ramping-related costs.

Right. So the Thailand plant again was something that we announced back in 2017 and the plant was completed and came online in the third quarter of last year of 2018. And that was the bulk of the spending on that plan. Given the fact that we are now looking to supply additional markets from Thailand, we're expanding that plant and that's a cost increase in both operating expense as well as capital. The capital investment in 2019 is about $15 million.

And from a ramping cost the inefficiency cost, however you want to frame it any color there John?

It will be a higher cost. I don't have that number in front of me. But it is a manageable cost by the company.

Okay. Great. Thank you.

And your next question comes from the line of Jaime Katz with MorningStar. Please go ahead.

Hi. Good morning. Can you talk a little bit about the financing landscape outside of HDFS that looks you guys are taking a larger share of lending domestically? And I'm curious if that's because it's maybe backed off from other originators or if you guys have seen just a different opportunity set for that part of the business? Thanks.

Thanks, Jaime. We don't see a big change in the competitive set in lending. Remember that most of the people lending on motorcycles are only lending in the top-tier prime segment and not in sub-prime. But we haven't seen a dramatic change and the next largest competitor Harley-Davidson is very small. So I don't think we would really discern a big change. And what you're seeing being at this year and you've seen it for the last three or four consecutive years is HDFS doing an absolute fantastic job of delivering to our dealers, integrating into their business process and being very high-quality at what they do. And that is garnering the share that you're seeing. It couldn't be more happy and for that I'll put a plug-in for HDFS. They had a record earnings year and it was done in an absolutely fantastic way and they grew revenues 2.2% despite the fact that new motorcycle sales in United States were down and they improved the delinquencies as well as credit losses. So we're very pleased with the business there including a market share that they have garnered.

Okay. And then can you guys talk a little about the 52,000 domestic riders. We are now three years into this program to get two million new domestic riders by 2027 and obviously the math gets harder every year you fall short of 10% for whatever if you want to divide it evenly. So is the implication that the market will stabilize and that get much better or that the products was just attracted that many more customers to help you meet your goal as you think about it longer term? Thank you.

Yes. This is Matt. When we put the two million riders goal out it really was a stake in the ground to get the attention of the organization and the dealer network about the work we had to do. It was prior to have any insights that we now are able to gain with the rider migration database, talk a little bit about that earlier. We increased the number of Harley-Davidson riders ultimately what we are after and everything that we doing, the exact math doesn't necessarily correlate to the two million, but to put a little bit of perspective on the next 52,000 increase, it came as a result of people entering the sport on Harley and it came as a result of people exiting the sport. We brought in 278,000 new riders Harley-Davidson [Audio Gap] in 2018 that exceeded the number of people that exited by 52,000. And so when we look at the task that we have and all of our efforts under More Roads, it's really about two things, it's about bringing in new riders inspiring them with new kinds of products like what's represented in our full EV portfolio and the middle-weight platform. And it's about keeping existing riders – and riding longer. I mentioned the ride 365 -- 137 -- number of riders. So we're focused as an organization on the test to build riders. I think the challenge that we have with connecting 2 million new riders the insights we now had about writer migration is something we will continue to dimensionalize for everybody. But I think the important message is, we are making progress, increasing the number of Harley riders and we expect More Roads to accelerate that trend as well as capitalize on global market for the company.

Thank you.

And your next question comes from the line of Joe Altobello with Raymond James. Please go ahead.

Hey. Thanks, guys. Good morning. I guess first question is just a clarification on the Q1 guidance and I apologize the call has been going in and out. But I think you guys said operating margin for the Motor Company in the first quarter down 600 basis points. Is that a report number or is that excluding restructuring cost and tariffs?

No, that's a reported number. So all in GAAP reporting we would expect Q1 operating margin at the Motor Company to be down about six percentage points driven by the incremental tariffs in particular, but the shipments being down 9% to 17% as well as unfavorable mix.

Got it. Okay. And then secondly sort of a broader question, this is -- as you mentioned the sixth quarter in a row where the gap between new and used pricing has gotten better, still wide but getting better. How much of that gap is due to a lack of what the consumer perceives as meaningful incremental innovation in the motorcycle industry? And how much of that do you think is an affordability issue where the average consumer just can't afford a $20000 vehicle?

With regards to, I don't know what the separation of those two are. I just think that we're in a situation that when a value buyer is looking at a motorcycle they can receive a 2 year-old Harley-Davidson at a very attractive price. And they're willing to forgo some of the innovation and the larger engines and some of the features and benefits that we've put down over the last two years just because of a very large price gap. And again we are pleased to start to see that stabilize and start to improve a little bit. But there still is, as we talked about before there still is a large gap and value buyers are choosing used motorcycles.

Is there a thought to maybe taking a more drastic approach to pricing; meaning, lowering the price of new bikes to kind of lower that gap and hopefully attract more riders?

This is Matt. I would say the approach is rather continued to invest value of [Technical Difficulty]-really smart content - some of that - that speaks sort of trade-offs existing sort of pool of buyers and then when you look at every More Roads - no way platform and e-portfolios, you're speaking of totally different -- of rider. So this is what, why the strategy going forward and we explained it was products and broader access for stronger dealers. Just to dimensionalize the middle-weight segments that we'll be entering; Adventure Touring and Streetfighter. Today the company's heavyweight cover in major global markets is about 43%. Those are the 43% of the heavyweight segments we participate in with Touring and Cruiser. When we add streetfighter and Adventure Touring to our mix that will more than double or about double our coverage, as far as the heavyweight segment. This is the power of us entering the segment speaking to different rider in addition more interesting to reach out to new riders and inspire people to ride, primarily I would say through the EV portfolio but everything else we're doing with content as well. So product plays a major role, but hand in hand with broader [Technical Difficulty] what we're about and make sure that they are broad in business into the experience, fantastic experience.

Got it. Okay. Thank you guys.

And your next question comes from the line of Greg Badishkanian with Citi. Please go ahead.

Great. Yes. Just on the international side, you called out weak consumer confidence in the U.K. and France. So, when could you start to see some weakness in those two markets and have you seen any stabilization yet?

Yes, thanks Greg. We have been very pleased with our business in Europe. We're picking up market share growing obviously faster than the market and it's been very widespread throughout the European countries. It's really just in the fourth quarter that we saw the softness in the U.K. and we believe that is a function in part due to Brexit and then in France due to the yellow jacket demonstration. So hopefully, this is something that will pass quickly certainly Brexit is still up for decision, but John we're keeping a close eye on them. But other than that Europe continues to perform very strong and we've been very pleased with it and new Softail motorcycles have been really good sellers all year long.

Great. And also just any may be on the feedback on the customer response to LiveWire that launch, anything incremental that you're hiring?

This is Matt. Thanks for the question. I think it's been a fantastic response, as I mentioned in my opening comments. But between Milan than at the [Technical Difficulty] we had not only LiveWire displayed in development prototypes in our lightweight space. And then most recently last weekend at the [Technical Difficulty] significant positive response outside of [Technical Difficulty] in all three cases outside of just the motorcycle space. So people are noticing what we're doing there. They're looking at Harley-Davidson in a different way and that is very important as part of our strategy to kind of change peoples perspectives about how often riding can [Technical Difficulty]. The feedback on LiveWire has been exceptional and people haven't [Technical Difficulty] more excitement about LiveWire and the rest of the portfolio.

Thank you.

And your next question comes from the line of Gerrick Johnson with BMO Capital Markets. Please go ahead.

Hi, good morning. I just wanted to be clear about the tariff impacts that you're excluding from EPS in the quarter and going forward. Is this the gross impact or is this the net impact of pricing and other actions? Is it just 301 and reciprocal does that include 232 and if it does include 232 how do you estimate that? Thank you.

For the quarter, we had approximately 20 -- I'm sorry, 2018 approximately $26 million tariffs. Those will be 301 and reciprocal in your terms Gerrick. That does not include metals. We do believe that we experienced higher metals costs. Overall raw material costs were up $17 million on the year. We believe the primary driver of that was the tariffs, but that's not included in how we are defining our actual tariffs for 2018 of $26 billion and on a similar basis, we expect that $26 million to be between $100 million and $120 million in 2019 when we look at the full year impact of tariffs of our products through the EU of our shipments to China and of tariffs that are coming back from international markets primarily China in the United States on the incremental tariffs that have been placed on those products.

Okay. So just one more point of clarification. Is that a gross number or are those that number after pricing actions and other actions?

That's a gross number -- gross amount of incremental tariffs. That's not the total tariffs. That's just the increase, largely of the 25 percentage points in the EU and in China and in a lot of cases 10% to 25% back in the United States. Not the entire tariff, but it's just the incremental piece and it does not include any other items in there such as pricing.

Okay. But when you report earnings going forward, you're going to report earnings excluding the total impact of tariffs not the incremental. So can we talk about the total gross impact?

The amount of tariffs going forward will be reported - estimated at $100 million to $120 million. That is 301 tariffs of our shipments into the EU into China which have incremental tariffs of 25 percentage points. We are only reporting the 25 percentage points incremental. And for the tariffs coming back largely from China and in United States those tariffs range from 10% to 25% increase. We're only going to report that increase. We are reporting it the same way that we reported $26 million in 2018 to 2019.

Okay. Thank you. That’s very clear. I’ll get back in queue. Thanks.

And your final question comes from the line of David Tamberrino with Goldman Sachs. Please go ahead.

Thank you for taking my question. Just wanted to understand on the international dealer build out, it says 56 new dealers. Is that a net increase or were there some that closed? I'm asking because I'm just trying to understand the average inventory levels internationally as full year retail sales were essentially flat at 95000 units, international shipments were essentially flat may be down a touch at 96000 units. But you added 56 new dealers. So has there been inventory reduction at the existing international dealers and is that finished? Thanks.

Yes overall, David, the 56 dealers that we opened internationally, there is a limited number of offsets to that, a handful or two offset to that. Overall, when we look at international inventories, we are up on several hundred units on a year-over-year basis and that would imply that overall inventories are down in the same stores internationally.

Okay. I mean is that -- do you feel like you're right sized for your inventory internationally given what you're seeing from a retail sales perspective or could that continue in 2019?

We feel good about where the overall inventories are. The fourth quarter was a little bit lower than what we expected on retail sales and instead of shipping in those and holding on to guidance, we decided not to build inventory beyond what we had planned which was up. And in addition to that we decided to take down primarily our international inventories as well and that's why we missed our shipment. So it's good about were inventories are internationally. And when will look to 2019 we would expect international inventories to be largely flat on a year-over-year basis despite us adding 25 to 35 new dealerships. And remember in six short quarters we're going to be adding a plethora of new products under our More Roads plan or an as Matt had mentioned and Adventure Touring, Streetfighter and the traditional segment we want to make sure that our dealers are ready to receive those vehicles.

Understood. Thanks, John.

All right, thanks everyone. There are a few questions remaining in the queue. And I will follow-up with each of the analyst we did not have a chance to get to. Due to some sound quality challenges we will post our comments on the website before transcripts are available. The audio and slides for today's call will be available at harley-davidson.com or for the audio call 855 859-2056 or 404-537-3406 until February 12. The ID is 1474809. We appreciate your investment in Harley-Davidson. Have a great day.

And this concludes today's conference call. You may now disconnect.