Harley-Davidson, Inc. - Analyst/Investor Day

| About: Harley-Davidson, Inc. (HOG)

Harley-Davidson, Inc. (NYSE:HOG)

August 19, 2013 11:30 am ET


Amy Giuffre

Keith E. Wandell - Chairman of the Board, Chief Executive Officer and President

Matthew S. Levatich - President of Harley-Davidson Motor Company and Chief Operating Officer of Harley-Davidson Motor Company

Mark-Hans Richer - Chief Marketing Officer of Harley-Davidson Motor Company and Senior Vice President of Harley-Davidson Motor Company

Lawrence G. Hund - President of HDFS and Chief Operating Officer of HDFS

John A. Olin - Chief Financial Officer and Senior Vice President

Amy Giuffre

So I hope you all enjoyed the product show. As I mentioned, today's presentation is being recorded and the audio will be available later today. The slides have been posted, so you can hop on your phones and text that back at the office that the slides are up that you'll see today.

And because it is being recorded, I am going to read the Safe Harbor statement, so bear with me. And we'll get -- Keith -- myself, regarding myself. I'm ready to go. And we'll get back on schedule. We may tweak things around a little bit. We got started late with product presentations, so we're going to -- on our schedule, but we'll begin shortly. And for the recording, Steve, are we ready to begin recording? Okay. So we're all set. So I'll read the Safe Harbor.

This presentation includes 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 and those we have included in the end of this presentation.

Statements made with respect to periods in the second half of 2013 or relating to full year 2013 are guidance that is consistent with the guidance provided during our earnings call on July 25, 2013, but we are updating that guidance. All statements with respect to periods after 2013, including those that relate to the next 3 to 5 years, are forward-looking statements. They include forecasts, aspirations, targets, assumptions, objectives, potential scenarios and management intentions regarding the future.

Investors should not assume that all are guidance or that they represent management’s current expectations or management’s belief as to the most likely scenario. Rather, they involve matters that management believes may impact or guide the company’s longer-term direction and performance. By their nature, the risks and uncertainties associated with these statements are greater than that associated with the 2013 guidance. Harley-Davidson disclaims any obligation to update information in this presentation.

Thank you. And now we'll begin our presentations and I'd like to -- before Keith sits down, I'm just going to invite Keith right up. So here we go. So Keith?

Keith E. Wandell

Okay. Where do you want me?

Amy Giuffre

Right up here in front. Fine. Thank you.

Keith E. Wandell

So how many times -- all right. How many times have you folks heard that disclaimer? We ought to have an opt out; just click I agree, right? Well, welcome, and thanks for being here. What do you think about the new bikes? That's it?

And how about old Scott got up there? He was on fire. He's on fire, wasn't he? He delivered the message really well.

Well, anyhow, thanks for taking the time to be here right now. It's a big commitment on the part of all of you. You have to travel and be away from your families and the like. So we really appreciate it. We -- I think you can tell we're really excited about this dealer show, and I hope you can see, or as you spend the next hours or however long and get a chance maybe to go to the expo floor, which is just -- I saw it yesterday, off the charts. I mean, it's -- I was like -- I was like, wow. This is just incredible. I mean, it's totally integrated, it's all new, it really -- it really speaks to the one company, one team approach that we've been sort of -- I was going to say harping on, but I guess really hammering on in terms of some of the cultural change within the company. And I'll talk about that a little bit. Because really at the end of the day, that's really what's most important, right?

But if you think back -- and how many of you were here in 2009? Because we had an Analyst Day then. And kind of like what we talked about last night with our dealers, things were very different then, right? And for me, personally, I'd only been on the job for 2 months. So I started May 1 of 2009, and actually -- actually the dealer show then was in July, right? So May to June, June, July. So it really wasn't even 2 full months, right?

And so here we are -- credit crisis, sales are off roughly 35% to 40%. Our dealers -- the profitability of our dealers had plummeted significantly. As you might imagine, we do see all the financials of all of our dealers. We look at it by month, by quartile, by quarter. And most of them have gone to either breakeven or probably a loss kind of situation. And they were obviously nervous because a lot of our dealers had been dealers for a long time and had been through sort of the unbridled success of the year-over-year sales increases. And the fact that we had waiting lines at the dealership, that if I didn't sell the bike to Joe, I'd sell it to Bill. And if Bill didn't want to buy it, Frank would buy it, and blah blah blah. By the way, we could also sell majority of the bikes over MSRP and life was great, right?

And so now all of a sudden, the world's different. And here I am, and we're going through changes in the company. And these folks were just beside themselves, right? And what's going to happen? And oh my god, this guy comes from outside the industry. This is impossible. He certainly -- and what they didn't know was, see, I'm not as -- I'm not the smartest person in the room, right? And I mean that sincerely. But I learned a long time ago that if you listen to folks, right, and you talk to enough people, and you find the people in the organization that care, that want to make a difference, that understand the things that are wrong inside of a company, the fact -- the things that leadership isn't providing, right, to the organization. And so all we did was you'll get together, talk to each other, work hard, put together a strategic plan that we launched, I think, in September of that year. That was really based on 4 pillars. You've heard it before. It's really about growth. How are we going to grow the business? We're going to focus strictly on the Harley-Davidson brand. Why are we going to do that? Because we believe there is tremendous upside with our brand throughout the world, and that we were, in effect, diluting the effort and the investment in Harley-Davidson by trying to become sort of a house of brands, right? So we changed that, number 1.

Number 2, we said we had to do a better job of being more inviting to customers who we have not been as inviting to in the past, such as female riders and riders of other ethnic minorities as well as younger riders. And we thought there was upside to grow in North America in those markets. And then we also understood that we hadn't done as good of a job internationally, and we had an opportunity to grow internationally, and that was really how we thought about our growth strategy.

The second pillar was really continuous improvement. And I don't really need to say anything more than just what you heard today, right? We have an organization that's all in, all in. And they're all in on coming to work every day. And you heard Scott say it: not resting on our laurels no matter how good we do or how successful we are. We're going to come to work every day just like we're in combat. And that we're losing and that we've got to do better to win. And that every single thing that we do in our company, whether it's in finance or whether it's in sales and marketing or engineering or manufacturing or whatever it is, that every person comes to work with their heart and their mind in understanding that we can do better. And this is part of the culture, right?

And this is the thing that you folks should know as you think about different companies and you try to figure out what's going on and you can always see the numbers. And you can always listen to the rhetoric. And you can always see the forecast. But what you can't see is the leadership of the company and what they're doing to make the company better every day. And that's really a big differentiator, right?

And I'll tell you what. At the end of the day, the only thing that matters is leadership, the only thing. And aren't our leaders servant leaders? Which means are we humble? Do we come to work every day not because of what's in it for me but what's in it for us? Do we come to work every day to make everybody better and help them be better and achieve the goals that they want to achieve in life? And if you have that kind of a culture, then all the numbers you see and all the forecast you hear, they have credibility. And if you don't, then there's no credibility. And that was the third pillar. It was all about leadership development.

And I'm always asked a lot about what keeps me up at night and all those kind of things. And I've consistently said since Day 1, 3 things: number 1, the transformation that we had to go through in product development. I was never worried about the transformation in manufacturing because people that -- people that are truly operating folks, they come to work every day, and that's what their life is all about and they get measured every -- not every day, but every minute, on quantifiable metrics, right, about how they're doing their job. But that's not the case in every area of an organization. So I was really never worried about that because I knew we'd get through it one way or the other, whether we had to move plants. No matter what we had to do, we were going to be great in manufacturing, and we are.

And I don't know how many of you have been -- how many of you were at the York plant when we -- you saw the new York plant. It went from 43 buildings to 1, and we've got 2/3 the square footage. We've got flexible assembly lines. We've got flexible workforce. We've got 5 job classifications. We've got people coming to work every day, building the highest quality, the highest -- is that right, Matt -- the highest levels of quality, as we've measured it historically in the history of our company. We have the best safety performance, and it's world-class today, best safety performance in the history of our company.

And you know a question you always want to ask people when you talk about manufacturing, you want to ask them, what are the means to the end? What are the means to the end? Because you know we come to work every day to make motorcycles. That's a given, right? And we're going to make them. The question is how are we going to make them? Are we going to cut corners, lie, cheat and steal to make our numbers? -- which companies do, a lot of companies do. And I'll tell you something: that's not how we operate. The only thing that matters with us is the quality, the productivity of the effectiveness of how we're doing it, the health, safety, and well-being of our employees. And we expect, right, the outcome to be great bikes, and that's exactly what you see today: highest levels of quality ever.

And the fourth pillar was then sustainability, and that's not about energy-efficient lightbulbs and wastewater discharge from our plants, which are all important things. But it's really about having a sustainable business, having a sustainable leadership, development in place and those kind of things.

And once we went through that, we recognized that there were 3 major things that had to happen in the company, that while recognizing that rich heritage and all the things that made our company great because we don't want to -- you've heard me say this before, we didn't want to change the formula for color. Too many of you are too young to remember, but remember when Coca-Cola made a change at the top of the house, and they changed the formula for Coke, and it was a complete, total, absolute complete disaster, right?

So there's things that -- there's things like the look, sound and feel, the customer experience, personal freedom, all the things that are embodied in that bike. Because that bike to us is -- that's just the product. And we don't just sell products; we sell an experience.

And so we had to change while expecting all that and respecting the company because it's important, we had to change how we manufacture our bikes. We had to change how we manage, design and bring it to market, which we've talked about a lot. And for us -- for us, this is a watershed moment in the company because 4 years ago, we stood in the stage and said, in spite of the fact we don't know a lot, right, we know a couple of things: number one, it's been a great company; and number two, things have to change because the future is going to be different. And those were the things we were going to do. And we're going to get bikes to our dealers when they want them, when they need them, when the customer wants them, not the way we want to manufacture them for seasonal demand and stop the channel when they don't need them, et cetera. And we've accomplished that with Michelle and her team. I mean, Michelle leads all the manufacturing, quality, product development, which includes engineering, procurement, testing. I mean, unbelievable responsibility and, obviously, unbelievable job. And that's under Matt's leadership as President and Chief Operating Officer of the company.

But you know we've accomplished those things. And so for us it's a proud moment. Because there's not a dealer -- and the call to action last night was really about our dealers and our dealers being all in. Because we have 1,500 plus or whatever, how many?

Matthew S. Levatich


Keith E. Wandell

1,600 roughly independently-owned dealers around the world and you can imagine no matter which metric you want to look at, right, whether it's our service or whether it's the sales process or whether it's whatever, there's just an unbelievable tremendous variation in performance. And also, there's just a lot of people that see the glass half empty and a lot of people see the see the glass half full, and so we have plenty of both. But we're really -- the third part of the transformation that Matt and his team are leading and Mark-Hans, and you see it, you saw it, you'll see it on the floor, is this whole idea about being focused on the customer, being customer-led in everything we do and making sure that, just like Scott talked about today, that the bike is representative, the P&A, the MotorClothes of what the customer wants, right? Not -- because that's not always the way -- I think Matt, I think you made a comment at one of your presentations -- was it at Green? -- where you said we used to have the voice of the executive.

Matthew S. Levatich


Keith E. Wandell

That didn't work so well. So now we listen to the voice of the customer. And that works a whole lot better. So anyhow, those are just my remarks. It's really sort of this transformation of sort of where we were and we are. But more importantly, and I said it last night to the dealers, I don't think our company has ever been better positioned. I don't think the brand has ever been positioned for the future. We have beyond the products you saw today, we have a whole pipeline of products coming under our new engineering methodology, which brings a much shorter timeframe to the development cycle, more cost-effective. And we've got more new products coming, and they're going to just keep coming. And our dealers are going to have great products that are going to continue to bring new customers into their showrooms. And we're going to continue to execute on our strategies. And we just really feel good about where we are and where we're going to be.

So with that, I'm going to stop. And I think Matt, I'll turn it over to you. Thank you very much.

Matthew S. Levatich

Thank you. Well, how was the product expo? Pretty cool, huh? This is like Keith said, this is an extraordinarily proud moment for every employee in the company because this represents just the total culmination and the result of what you get when you're focused and you're aligned and you're committed. And a lot of the messages that we have for our dealer network last night, as Keith mentioned, were all about just reiterating where we were 4 years ago: our commitments that we made to ourselves as a company, the commitments we're willing to make to the dealerships and what we need to do to be a strong company, and to Keith's point, all under the strength, the outsized strength of the Harley-Davidson brand.

And I'd add probably, if you look at the Harley-Davidson business, the other outsized strength that we have is our dealer network. And Mark-Hans is going to talk a lot about HDCX, the Harley-Davidson customer experience, how we're bringing Retail 2020 to life in the dealer network to invest in further strengthening that outsized strength that we have. And the point of all of our transformation, which includes Retail 2020 is to do our part as a company in being a strong company. And that's really about the changes that we've driven in manufacturing, the changes that we've driven in product development and the support we're bringing to the dealer network to make sure that they're not just the best motorcycle dealers, which they are; they're not just the best powersports dealers, which they already are -- they're the best retailers. We want people writing about Harley-Davidson as a great retailer, period. No qualifiers, no exceptions, we're going to be a great retailer. That means every one of these 1,600 independent-owned dealerships around the world being a great retailer. And I'd like to say that we travel all over the world, all of us, with a different ground on. And we have some absolutely committed and talented dealers that are passionate about this brand and they do a great job. There is way too much variation in the customer experience across the dealer network. And I'd also like to say that one thing our dealers have in common is they all think they're great. So we have to work very closer with where they are great and where they can be better and what we need to do as a company to help them be better. And there's a lot of that -- a lot of that obligation is ours. To get our house in order to make sure that we're supporting the dealer network. And that's really a lot under the Retail 2020 transformation that we owned. And what you're going to see on the show floor today and what you're going to hear from Mark-Hans is how we're bringing that to life for the dealers so that they can get working on their pieces of puzzle to continue to put distance between themselves and the other powersports dealers and be known as great retailers, period.

And I love Scott Habegger, Dr. Rushmore's comment -- [indiscernible] -- because it doesn't just apply to Project Rushmore. It applies to what this company is doing in every part of its business. We are on fire, and we're fired up, and we're making progress --

So I want to talk a little bit about that progress. And I'm going to start with the core of our strategy in 2009, the actual elemental core is to be customer-led in everything we do, and it's driven every one of our transformation. And I'm going to talk about each one of them. It's the bedrock of our strategy. It's absolutely core of product development, and it is what has led to features and content to an absolutely class-leading motorcycle that is blowing away our dealer network because we understand what we needed to do with it. Over 100 new features and content to this motorcycle because we understand the customer and we know what they're looking for from Harley-Davidson, what we can uniquely empower if we deliver. We know it and we've taken an iconic form and taken it beyond the next level.

And so customer-led product development, customer-led manufacturing is all about becoming a lot more flexible in responses. So we get the products to the people, where the people are, in the type and form and quality that they're looking for.

And then retail and customer reach, which really gets into the global reach that we're developing that I'm going to speak a little about, U.S. outreach and then the Harley-Davidson customer experience that I'll introduce a bit more, and then Mark-Hans is going to talk about it.

But what does customer-led really mean, right? What it fundamentally means is it just acknowledges the first truth. Customers have a choice in what to do with their time and their money. And we want them choosing Harley-Davidson more often, and we want to make sure that they are rewarded. And every turn, with every interaction that they have with our products, our dealers, our experiences, everything, they're rewarded for their choice. And we deepen that emotional connection that is such a powerful piece of our brand.

When you have a mission or purpose, rather, as a company about fulfilling the dream of personal freedom, that is an emotional connection. And we benefit greatly by understanding and building depth in that emotional connection. That's what where customer-led really shines for the company.

So we want to reward them at every turn. Certainly, product is a big part of it. But we do a lot more than just product, as Keith alluded to -- the experiences, the events, the camaraderie, the community amongst our riders. They're like-minded people. They are people that are aligned and committed to the ideals of personal freedom. And those ideals are not just American ideals. They are elemental human ideals that go back thousands of years in the earliest writings from philosophers about human need, personal freedom. And we deliver it, and we're underscoring it, and we're building on it.

So Mark-Hans is going to talk a little bit more about HDCX, which is really the first engagement for the dealer network about understanding how they can take it a bit further.

When I think about customer-led, I go back to about 2007. I was running the Parts and Accessories business, and I did what has now become something we're doing across the whole company. I spent a week working in 2 different dealerships. And we call that Walk-A-Mile now, and we've had over 200 of our senior leaders globally spend a week working at a dealer leadership to understand what retail is like. Because this is where our business comes to life. This is where we deliver or we don't.

And so I remember being in a dealership, watching a customer come toward me at the parts counter, not knowing what they wanted, not knowing what their mood or their attitude was, and I had to deliver. And was I ready? Did I have the parts? Did I have the information? Did I have the excitement? Did I have what it took to, in my word, reward that customer for what they were looking for at that instance every time? And I didn't. And in fact, most of our dealers don't. They do a wonderful job, but we've got to do a much better job supporting them and rewarding them at every turn.

And so sending our folks out into the field to understand where we can be better at retail is a huge opportunity that we're already putting into and it informs HDCX. And so these are how some of the ideas of customer-led play into the space, not just product, not just manufacturing responsiveness, but what we need to do to the retailer for the retail experience to make sure that every customer every time is absolutely reinforced for their choice in Harley-Davidson.

So I want to talk just briefly about how we're going to do some of these things these things. And I'm going to spend a little bit of time on product development because this is a big day for us, a huge day. So a little bit about where we were and keep talking about it, just to the executives. Unclear customer targets. Who are we going to go after? In product development, any product program is a huge investment. So you got to be right. You got to be on target, you got to know what you're going after and you got to be confident. They cost money, they take time, and you got to be right. We had unclear customer target, we had unclear product requirement and frequent changes. This is when voice of the executive came in. The product planning committee would do a jury ride 6 months before product launch and they say, "you know what, this seat isn't comfortable." Well, maybe it wasn't the seat that was the problem, but the other -- the posterior might have been issue, right?

[indiscernible] figuring out how to see it 6 months before launch. The last time you want to be doing anything like that, it caused delays, excess spending, waste, waste, waste. So we had gut feels, which was [indiscernible] from the executives. We had a ton of [indiscernible] ended up time, money, and missed opportunity in what we're doing with our product development investment, which was significant.

Where we are now, culminating in particular with Project Rushmore; we've got voice of the customer instead of voice of the executive. And Scott talked about it this morning in the session and I want to spend a little bit of time going a little bit deeper on it, with Rushmore, but we've also got our time to market where we needed to be. This is a huge program for us. And in that sense, we get it, in fact, 3.5 years. We could could've done it in 3, but it wouldn't have worked right with the timing of our model launch. We got together in the fall of 2009, understanding that this was a huge opportunity for us. This is a heavy lifting motorcycle platform. It's about 50% of our volume, it's a high-margin program, the dollar margin that comes with it is huge, the actual market share in the United States, the touring vehicles is way over what our aggregate market share is. This is a huge program for us. We have unbelievable customer loyalty, passion and commitment around our touring vehicles. We have over 1 million of them in operation in the United States.

So we were messing with the mother load and we had to get it right. And we put our product development process, all of our -- all under our strategic principles to work on Project Rushmore. And we got together in our proving grounds in Arizona, about 25 of us, we had all the class-leading touring bikes from every manufacturer around the world, put them on the high-speed oval, we were riding next to each other, doing roll-ons at 50, 60 miles an hour. What are the engines like? What are the features like? What about the buttons? What about the interfaces? What about the styling? What about the handling? We took them to the sports course, which stimulates maybe the Alps or Northern California, what are these like under braking and accelerating and cornering? Back and forth, 2 days on all the different bikes, learning. We learn. We have an unbelievably great engine for this application. And what we have in twin cooling is an upgrade to deal with more power where you need it, better power consistency, better heat management. So you get that passing power that Scott talked about this morning, which is where you need it 90 feet at speed. You're on a highway, you want to pass the semi. You want to know you can do it, you want to be able to do it faster, better braking. We have an unbelievable chassis and a frame, fantastic, dynamic handling. You get into a corner on one of these bikes and you're right next to a BMW or a Honda Gold Wing, they're fantastic motorcycles. There's more we could do and we've done it all.

Then we had this really kind of interesting moment, 25 guys, basically, just like that trike discussion that you saw on stage this morning where somebody said, "hey, what about the passenger?" and I asked how many guys have been a passenger on an Ultra, and nobody raised their hand, not surprisingly. I say, okay, put the cell phone cameras away and settle up because we're going to go for a ride and see what the customer feels and we rode all the competitive bikes to understand voice of the customer, voice of the passenger because they're a big part of the purchase decision. This was a breakthrough. Never done before. I'd never been a passenger on a -- one of our touring bikes or any motorcycle. So there's a lot of clearing of throats and bucking up to the opportunity and we learned. We learned a lot. We learned all the opportunities that we had to make our product better and we learned while making it better than any motorcycle out there for passenger comfort, convenience features.

And so this is where the product development transformation is most powerful. It's transitioning from we know everything to we're willing to ask and understand and inform ourselves better, so that we understand who are we going after, what can we uniquely and powerfully deliver, how do those voice of customer needs translate into engineering specifications and targets that engineers can design to and hit? And most importantly of all is doing it at the beginning. So we lock it in and get it done.

That's what gets the great motorcycles to market in world-class time and that's what this Project represents. And Scott Habbeger did a wonderful job for the employees of this company and for the dealer network in recognizing the pride everybody feels in doing it right, and it's just the beginning. This is the first product from the transformation and product development. We have 30% more, and I've said it before, I think to this group, time to market, as you can see, translates into capacity. We actually have a slightly lower product development investment annually now than in 2009, and we've got 30% more on the lifecycle plan. Because that's what time to market bought us. And it didn't just buy us more, it bought us more on target, more for the customer, more confident, better return. So it's a fantastic example of the power that we're building in Harley-Davidson since we're being focused, aligned and committed.

So in the future, again, 30% more, lower total investment, targeted well-understood customer segment and high-impact investment. And that's the product development transformation. What it plays out, we showed this, I think, a couple of years ago the way we look at our customer segments and they break out into these 3 essential overlapping circles: domestic core, domestic outreach and international and we have a line, in particular, distinguishing developed international markets from emerging international markets so that we're clear -- the difference between Western Europe and Southeast Asia as far as the nature of the motorcycle business and how we're looking at that.

And what you have here just conceptually, on this ven diagram that I'm going to show you here in a minute is where our projects are landing on our a 5-year lifecycle plan. And I'd finished with Rushmore, just to put in context where that lands. This is where the big rockstar, the big investment that we have in our 5-year lifecycle plan. So you'll see the coverage that we're getting. We're doing a balanced investment against our stated goals to grow at core, grow at outreach, grow at international. This is our motorcycles product Investment. To get there and to put it in context where Rushmore did. Okay? And Rushmore is a family work motorcycle. I think most people tend to think touring must be U.S, must be core. Touring platform that we just redesigned this Project Rushmore is the #1 seller to core, the #1 seller to African Americas, the #1 seller to Hispanics, the #1 seller to women, the #1 seller to young adults. Okay? This is a heavy listing segment of our business, extraordinarily profitable, very important. So it does a lot for us already. We just made it that much better. But the way it sits on this diagram, it only hit this domestic outreach, but in fact, it does a lot and we expect it to do a lot more. And it's only to say that those other investments are much more heavily geared towards those segment even more than Rushmore already is.

Manufacturing. Where We were, as you all know, dedicated capital, inflexibility, insufficient safety, quality and system. And Keith mentioned quality and safety and how we're world-class. We were -- I don't even know how to describe it, not world-class doesn't seem good enough, okay? But we were way off the mark. And we have made dramatic improvements. We weren't world-class, we were not sustainable. We've made dramatic improvements in our flexibility labor and capital. We have focused factories and their content, we know it's important for us to make. We're committed to being the best at what we do. We're committed to making sure we're working with the best suppliers to get the components we need to make the world's greatest motorcycle every day.

We have ERP now in place at York, as you're all well aware. We have factory customization validated on 2 different models. This is where people can go online, build the bike of their dreams, have it built at the factory and delivered in 3 weeks. We've validated it on 2 motorcycles, we're proving it through the channel to make sure the dealers know how to respond when a customer comes in with a printout from the Internet saying, this is the bike of my dream. And we're training the dealer network on how to operate in this new space because this is what customers want and this is what we can deliver. When you're known as the brand that stands for personal freedom and personalization and customization, this is important and we've validated it. And we have world-class safety and quality. And the progress that has been made in manufacturing is nothing -- in these 2 dimensions alone is nothing short of remarkable. We have a first pass yield within the plant that we've never achieved. And in fact, right now, in Project Rushmore, which is the brand-new motorcycle, with a whole lot of new learning for our employees, we have a first pass yield that's obviously better than what we were achieving with the model we just shutdown. That's because we did design for assembly, we did training, we got our workforce prepared. We have 25,000 motorcycles staged around the world, in essence, ready and delivering to dealers today. I talked

to a dealer this morning. He got a truckload delivered at 6:30 a.m. in North Carolina with 15 bikes on it. And he's pumped because we got our house in order, we have a great motorcycle, we cut over our plants, we maintain safety, we improve quality and we've got 25,000 motorcycles ready to hit the street right now. That's what world-class product development and manufacturing together is bringing us.

And then finally, moving forward, we have surge coming to Kansas City and Wisconsin. Again, I think we've said it many times before, we did half surge this year at York, it went great. Next year, we're going to do full surge at York and half surge at Kansas City. And then the year after, we'll get full surge at Kansas City. And just so everybody knows, Tomahawk and Powertrain as supplying plants have already been surging as have all the other 300 suppliers we used for direct material to support the surge at York. So we're learning, we're making sure we get it right, we are stepping into it in doses and increments that assure we get it done and we get it done right. But we're bringing surge to Kansas City starting next spring. We're also bringing in a very important step, which is cross plant assembly capability. So like we've done within the plant, where we've gone from 4 lines at York down to 1 line, and we can build any model on any line, any day within York, building flexibility within the system of York and York does touring and softail. We're building -- we're bringing Softail manufacturing capability to Kansas City next year, which allows us to flex across plants in the platforms that we built, leveraging the capital and the investments that we have in manufacturing to again bring another level of flexibility to deliver what the customers want. And then ERP will be coming into the rest of the manufacturing operations over the next several years, and ultimately, we've got capital utilization and leverage that's going to continue to improve.

Global growth. We were running international markets from Milwaukee in 2009. We had -- 47% of our dealers were outside the United States. We were in 57 countries. In short, we were U.S.-centric. Where we are today? We've got 4 global regions, 2 all new, Asia-Pacific and Latin America, which didn't exist, staffed by Harley-Davidson employees; we have 8 new country teams in places like Russia, Czech Republic, Middle East, North Africa and Dubai, South Africa, et cetera. So country teams, again, great talented employees instead of working through distributors as we've done in the past. 53% of our dealers were international, not -- versus 47%.

We are in the green zone in our stated goal to add between 100 to 150 new dealers for 2014, so we're on track with that goal. And we're in 92 countries, up from 57. So the task of global growth is on process -- on path and we're achieving it and where we're headed. We're going to shift the business more and more to regional accountability for the delivery of the whole business versus having it be sort of functionally driven or center driven out of Milwaukee. The accountability for the business delivery is going to shift more and more to the region. We're going to make sure that we enable and deliver the entire business at every dealer in every region. We're going to focus, and again under HDCX, on the quality of the customer experience.

Every Harley-Davidson employee -- or sorry, customer, wherever they are in the world, needs to walk across the threshold of a Harley-Davidson dealership and get the same high-quality treatment, have access to the range of products, services and experience that makes sense for that market in that stage of development. And so we're shifting our attention much more quality of the experience, the quality of the dealer delivery versus the quantity distribution.

So U.S. outreach. Where we were, we had a recognition of the opportunity, and that was probably when Mark-Hans came in 2007, really kind of keyed in to the whole opportunity that we were maybe not paying enough attention to at outreach, crafted the Dark Custom concept in late 2007. So we were starting on this journey recognizing the outreach opportunity. But I would say, we were just getting going and we are primarily focused on core and primarily focused, certainly, in the U.S. and core. Where we are, we've got a clear strategy. We have targeted segments, we've got -- we've got goals, we've got teams dedicated to outreach success. We grew outreach faster than core in 2012 and we grew outreach faster than core in the first half of 2013. This is our stated goal to grow outreach -- to grow core and to grow outreach at a faster rate, which we've done it and we expect to continue to do.

And we have leadership share. This is an important note. We have leadership share in those outreach segments just as we have in core. So we are building on strength. Where we're headed? Continued focus, obviously, on our core, and Rushmore is a big investment, doubling down on core, continuing to focus on outreach at a faster rate. And we want to grow the size of the outreach segment. So we're doing a lot to talk to these riders in a way that's compelling and powerful. We want to obviously, maintain our leadership share and we're looking for sustainable customer base long term. I think you've heard a lot about the demographic trends that support that. Mark-Hans is going to talk a lot more about that as well. We've got a lot of confidence in the ongoing strength and opportunity within the U.S. market.

And at retail. We had independent hard-working dealers, and as I mentioned at the beginning, we had a fantastic investment in the dealer network, by the dealers, a tremendous curb appeal, and as Keith mentioned, profitability under pressure in a big way. Where we are? We've got a rationalized U.S. networks. We're down about 100 dealers from where we were in 2008. We've done a nice job to basically reset our network where it needed to be from a quantity perspective. We're going to continue to work with them on quality. We launched a premier e-commerce site. You need to go on it, check it out, buy something, all of you. I know you have means, Harley-Davidson.com, check it out. And we're -- and obviously, we're growing our international market with a 100, 150 new dealers that we've added. And our focus since 2008 on dealer profitability has really paid off. In particular, in the U.S, we've got a lot of dealer -- a lot to be proud of with our dealer profitability. We're on solid footing and we're investing in making sure that they continue on that path.

Where we're headed? It's all about a consistent premium customer experience for everybody, every time at every dealership. And that's what HDCX and Retail2020 are all about. And obviously, growing to a more interdependent dealer network, where we know we depend on each other, that we're a team, we've got to work together, not just company to dealer, but dealer to dealer. And this is something that we see over time just continuing to be an important part of how we grow our success at retail.

So in summary, we're driving results as a strong company building on our strength, investing in where we need to go in the future. The top line to me says it all. We're running our business and we're running it well. We know what we're about, we know what we stand for. We stand for personal freedom. It's a powerful statement. It connects with people, it connects on an emotional level, we uniquely on it and we're invested in it and we're paying attention to what we do, how we do it, making sure we're great at it and just nailing it. And what it's driving, obviously, is our building strength top line growth and then leveraged top to bottom throughout the business. You've seen it over the last several years. We expect that to continue. For all of us at Harley-Davidson, we're all in and we're making it slide.

So thank you and I'm going to turn it over to Mark-Hans for a lot of cool stuff, starting with that cool jacket.

Mark-Hans Richer

All right. Okay. And I love it. I hope this is all getting kind of boring because you've heard it a number of times, right? What we're going to do and now that we're actually doing it, it's actually working. It's like, oh yes, I heard all that. Well, you're going to hear some more about the things you've heard before and a little bit more of how that lines up for our future as well. So I met some of you, those I haven't met, I'm Mark-Hans Richer, I'm the Senior Vice President, Chief Marketing Officer. What does that mean? What do I actually do? This is what our [indiscernible] we're at the heart of that. We create customers and serve them well everywhere we engage them with the brand. Everywhere. Every store online, every experience, events, it's all important of that. That's what my team to; create them, serve them well.

And everything I' m going to talk about from this point forward is about creating those customers, lining it up with the products that Matt talked about and the development that allows us to treat those customers even better than we have in the past. The retail transformation that Keith talked about, we are calling the writ of the Harley-Davidson customer experience or HDCX, and this is building off of the thing that we have done, and something we have been calling Retail2020. And when I give you some more details about what we intend from that and how it is also unique to Harley-Davidson and maybe a little different from the things you heard from other brands when they tell you about what they plan to do for retail customer experiences.

You might be wondering, why are wearing that jacket? Well, it is cold in here. So that's one utilitarian reason why I have this jacket on. Plus the other reason is to give you a little background on the purpose of our brand. And Matt talked to you about fulfilling coming dreams of personal freedom. And while that, we believe, has always been true, it really came to life before us at the kickoff of our 110th anniversary, and I have a personal story about it to share with you and I typed [ph] jacket. So a year ago, in August of 2012, we decided to kick off the 110th anniversary with a ride to Tibet. So myself, another gentleman from the company, 4 Chinese dealers and some other support staff, we all rode from Shinning, China to Lhasa, Tibet. And we just thought, let's have an epic experience, let's do something that not everybody would think to do on Harley-Davidson, and, let's just go out and just show what can be done and do something wild to just inspire the imaginations of our customers. And so we did. At the highest point of this ride, at 16,500 feet on the Tibetan Plateau, there's a little -- there's markers, rocks that mark Hades [ph] as the highest point on ride, and there's some statues and other things and it's a beautiful, unbelievable view, unbelievable glacial lakes that you can see all below, just beautiful. And there's a number of people milling around all over the place and a number of us. So I was wearing this jacket. At that moment, it was absolutely blank, just a normal riding jacket, warm, big, with a cold of 16,500 feet. And there's a tradition up there, that I didn't know about, and I noticed that where everyone was painting the symbols on the rocks. For some reason, when you're at this point, they took little cans of red paint and they repaint the symbols on the rocks. So it was repainting some things that were carved in the rocks already. They're doing it interesting, okay. So I asked a Chinese man to paint on a jacket what he thought Harley-Davidson, through his interpreter because I do not speak Chinese, that would have been really impressive, but I don't.

And so he painted these 2 symbols on my jacket, put Chinese symbols for freedom. So I got the wonderful opportunity to ride into Lhasa, Tibet, with the Chinese word for freedom painted on my jacket, which was a little bit nerve-racking, I have to say. However, it does reflect, on a global ideal of the brand, that many people understand very well that there is a higher purpose to the Harley-Davidson brand that's more than motorcycles. And so this is the picture right after it was painted, absolutely fresh paint, the worn-out paint here and then what we decided to do with the jacket is pass it around world to every single 110th anniversary that we had, as you know, this is our 110th anniversary year. We've been celebrating around the world all year long. We've passed this jacket around every single anniversary event over the world and everyone who's had a chance to ride it or ride with it or have at the rally has added something to it. And so there is pieces of our customers' passion from all around the world on this jacket. And now we call it the freedom jacket.

So it's a lot of fun and it reflects something unique about the brand. As a matter of fact, it's such an interesting story about all the different customers and what they add to the jacket itself, serving as a reflection of Harley-Davidson. We shared this story with someone in Rome and randomly down the street, and he thought it was kind of a cool story, so he wanted to touch it because that was -- he needed to see it. So I think he touched it right there [indiscernible] from the finger. He rubbed that fast right there and you'll have some DNA on you.

And he got so jacked about everything, about our brand, freedom and what that does that he decided to leave the party himself later that Sunday with the blessing of the bikes that we did and just off of St. Peter's Square. So I hope you might ask. Well, there is a -- there's a known thing that many riders do when they go on long rides, they have a blessing on the [indiscernible]. So if you have a big, big community riders, you're going off in some long-haul ride, you will many times get a local official or a religious person blessing the bikes.

So when in Rome, what are you going to get? When you're with Harley-Davidson, who can you aspire to get? An archbishop, a cardinal?

Keith E. Wandell

How about the Pope?

Mark-Hans Richer

Maybe the Pope would be interested in engaging with the brand. And he was. And that -- all that gives some weird but interesting proof of the power of our brand and how it comes to life as an ideal, not just as word on a page.

So these are the words on the page. I just shared with you the ideal. Everything we do is meant to deliver on this ideal. Everything. So let's get into that. This Harley-Davidson customer experience. Let's talk about fulfilling those dreams, with who we're serving, what products we're serving them with and how [indiscernible] the experience.

This is a chart that I shared with many of you in the past, what we call the Fatten the Tails strategy. And in a very simplistic look at our customer base, in this case one factor, which is age distribution, we want to fatten the tails of our age distribution. So the orange line reflects what that age distribution is the U.S. is. It's also fairly representative of other places in the world as well. And our goal, very simply, is to fatten these tales, bring customers a little sooner, increase the size of the overall scale, the size of the curve and keep them riding longer. So when we have -- so build it faster, take that peak and have it go longer. It's simple. So our means of doing that is [indiscernible] because what we cared about was the right side of that, that would be one business strategy, a little risky. We need to have the balance of the money that we can make with these customers on the right side to help pay for the customers we need to bring in on the left side. And it balances out our financial posture, but it's all good because it's a sustainable customer base future.

If you look at it in a different way, [indiscernible] customer on the left side is a lot higher than the lifetime customer value of the person on the right. So from a financial perspective, [indiscernible]. Now let's talk about the general concept [ph], let's talk about the who. We've talked [indiscernible] more definitely on that. All the blue segments are outreach, the white is core. We define outreach in young adult as anyone [indiscernible] under age 35 [indiscernible] 35 plus. Our other outreach segments, Women, Hispanics and African-Americans are also defined as 35 plus. When we say outreach, [indiscernible]. Outreach segments bringing you the force [ph], but also helps us with expanded sales strategy of building the [indiscernible]. [indiscernible] One thing that we turn into a methodical thing online [indiscernible]. So we asked the U.S. Census to tell us through their data how many Caucasian men, 35-74, [indiscernible]. How many Caucasian men in the United States are [indiscernible]? There's 50 million? How many are they going to be tomorrow? 50 million. How many will there be 10 years from now? 50 million. How about, 20? 50 million. How about 30? 50 million. So we have $50 million Caucasian men, 35-74, in the United States [indiscernible] according to the U.S. Census. Let's go after 10 years [ph], 2024, and talk about the opportunity within just this customer segment. We have our economic comeback [ph] folks that have a little bit less time in the last 5 years with the economy that made them a little less likely to participate in our sport, and they're coming back.

We have the touring bikes, the Harley-Davidson touring bikes that we've already sold [indiscernible] touring 1.1 million of them. We have another 1.9 Harley-Davidson's [indiscernible] competitive touring bikes already registered, already on the road today. And then you have 1.7 million additional just heavyweight competitive bikes on the road today. Those are opportunities largely within the core customer base, already registered rider, [indiscernible] draw from, with these products and other things you'll see from us in the coming years from now and the next 10 years with a very stable core customer base.

This, by the way, [indiscernible]. And so we're going to start building on [indiscernible] as I've just told you, with a very stable customer base as far as the eye can see and a lot of real near-term opportunities [indiscernible]. We've got 50 million core customers of our population right now to 2042. And then this [indiscernible] Hispanic, African-American, Young Adults, Women. So [indiscernible] this is the opportunity on top of that for again just paying attention to the [indiscernible], nothing more complicated than that. So [indiscernible] demographic [indiscernible]. And this 2008 record [ph], what I hate after this is it always makes it seem like we're accounting something [indiscernible] core customers [indiscernible]. So as you've heard us increase our focus on outreach, perhaps we would lose our focus on core [indiscernible], we're going to be able to walk [indiscernible]. We have found, through that focus that we've already grown our share of core customers by 11 points. At that time we've also grown our Hispanic share, 11 points; we've grown our African-American share, 13.5 points; we've grown our Women share, 12.4 points; and the highest growth of all, in our Young Adult share of almost 14 points during that time period.

So our focus on outreach and [indiscernible] core grew nicely over the last number of years, putting in place the strategies [indiscernible] of letting them come through [indiscernible] and this is the start of taking advantage of that red line, while also maintaining our great strength and strong [indiscernible] on core customers going forward.

So get back to this curve, talk about [indiscernible], talk about fattening the tails, and I will talk about the what [indiscernible] strategy. So each bolded bike here is a bike we're introducing now, starting from the far right: New Tri-Glide and International Tri-Glide [indiscernible] of the pricing on [indiscernible] customers employed everybody [indiscernible] It also does a great job of bringing in new customers who want to come to us [indiscernible] they perceive of being on 3 wheels. So the Tri Glide, it keeps them riding longer. So the New Ultra or CVO does a great job of [indiscernible] that I showed you on the prior chart. [indiscernible]. New Road King and Road King CVO [indiscernible]. The industry [indiscernible] Matt mentioned it. Street Glide and Street Glide special are Harley-Davidson's #1 selling motorcycle in the world. It is also the #1 selling Touring motorcycle in the world as of 2012. No one thinks of it as a Touring motorcycle. They think of it more as just a cool-looking Harley-Davidson or a custom Touring motorcycle or a cruising motorcycle that happens to have a [indiscernible] that the first one -- but if simultaneously, our 1 selling bike for customers [indiscernible] bike to young adults, as well as [indiscernible] new version and then yet another variation of it [indiscernible] offer what and the bikes that we've -- and the new one, the new Fat Bob, still in the other side of it, the current Breakout, huge success [indiscernible] same Softail Slim, the new Fat Bob will slot in nicely along with Street Glide [indiscernible] the Iron 883, one of our own [indiscernible] along with the [indiscernible] and other investments all through this curve.

So the bikes you see moving and [indiscernible] today are meant to simply fill in this curve [indiscernible] at this strategy [indiscernible]. Matt talked about the international [indiscernible] from what was a more than 50% distribution in the United States, now more than [indiscernible]. And as Matt told you here [indiscernible] not just new dealerships because we've now got in that zone of 100, 150 that we have talked to you about, but now more [indiscernible] and new customer growth for all those 92 countries.

One way we see that is already well-known is we have riders in the United States and we expect to expand rider training in the United States. We currently have about 190 locations and we'll expand that in the future. We are also planning on bringing H-D Rider Training specific to Harley-Davidson and expanding it in China, Mexico, South Africa, India and Brazil in the near future.

So our ability to grow across the business, all kinds of places, all around the world, the [indiscernible] about to become a reality. But more powerful than that is Harley-Davidson's customer experience [indiscernible] and this is [indiscernible]. Again, it's not [indiscernible] and by improving that, we want to prove that one day, it will be more than just about products, we also want to prove and it is true that none of our competitors can match that. [indiscernible] it's hard to explain why. The great majority of our market and our dealers' marketing is actually not in advertising. It's in experiences [indiscernible] customers to participate in enjoy with each other, to activate the social networks of the road and then activate them in the virtual space as well. This is us moving to the next phase of [indiscernible] that fashion. This is a sign-in board that we had in our anniversary in Rome. It was a fairly large board and we asked people to just sign it when they got there [indiscernible] like to express themselves with us. They want to -- [indiscernible] it means something to them. [indiscernible] in big ways. We talked about our 110th anniversary events. Everything in this map is where we've had our 110th anniversary or about to with our [indiscernible] coming up in Milwaukee in 10 days.

[indiscernible] over 1.5 million people with an experiences from the 110th anniversary. And that's every 5 years. So that seems a great accomplishment to be able to touch 1.5 million people in the anniversary. [indiscernible] but it's actually not unique. Because every year with annual [indiscernible] just what we do, not with what our dealers do, because this is 2.8 million people per year for the stuff we do. So anniversaries aren't actually [indiscernible] it is part competitive advantage and part of our marketing strategy. So with that, we come the life story of Faaker See. Has anyone [indiscernible] Faaker See? [indiscernible] because it sounds like you're saying something a little bit professional. You know what I was saying when I was saying that. It's a town [indiscernible] for various reasons until they [indiscernible] my gosh, what are we going to do now [indiscernible] from the town [indiscernible]. Got it?

Okay. Now what?

Amy Giuffre

Now you're telling why your [indiscernible] if that's all right.

Lawrence G. Hund

All right. And we're back. Much out there. All right. Good. So say -- back to that. I just had an experience myself up here. We're looking for a place to hold an anniversary event for Harley-Davidson. This is what it looks like today. Thousands of thousands of riders riding in from all over Europe, celebrating our brand and the sport of motorcycling. And it's now known as European Bike Week. And it's been going on every year now for 15 years. It is now the biggest rally of any kind in Europe. Started from nothing 15 years ago as an idea to satisfy an anniversary party for Harley-Davidson, and it's now European Bike Week and the biggest rally in Europe. Why should you care? We can't prove causality here because an interesting parallel in the curve between the market share that Harley-Davidson possesses in Europe and the number of attendees that come to Faaker See. I can't tell you if it's because we sold more bikes that created more passionate riders to come to European Bike Week, or if it was because people came and saw what we were all about and wanted to own part Harley-Davidson bikes all of a sudden that cause these curves to be parallel. But it's a very interesting parallel. And so as you see us planting these experiences all over the world, these are the results we typically see is the way to introduce our lifestyle to new customers all over the world, year after year after year. And as our products improve, it just accelerates. And then it becomes a global competitive advantage because this is from Faaker See a few years ago, a picture I took myself flying the HOG flag from a chapter in Brisbane, Australia. So these events that we hold all over the world are actually global events, just like our anniversaries are, just like European Bike Week is. We now have a competitive advantage for people who buy our bikes in Australia, have brothers and sisters that they can hang out with in Faaker See Austria. Very few brands can do that, so much so that this town of Faaker See built a statue in our honor, which is a little weird. To put a fat boy in metal in the middle of your town, but they did, because it meant that much to them and the local economy. So that's one definition of experience. The other definition is what actually happens in our stores. The HDCX Customer Experience has a simple goal, which is to increase the quality, both emotionally for our customers and financially for our businesses, our's and the dealers', of our customer experiences all around the world. There's really 3 nested parts of this. Let's start with that why, that simple purpose: Fulfilling dreams of personal freedom, doing things that are on brand for Harley-Davidson and then taking dedicated actions to satisfy customers at a very, very high level. That's what those 3 circles represent. The one thing that I mentioned to you earlier is that we're not going to do this exactly the same way that you may have heard us from other investor meetings. As usual, Harley-Davidson is rebelling a little bit. This is not about enforcing some radical consistency around all of our global retailers. This is not an Apple Store strategy or a McDonald's strategy or a Walmart strategy or any other example you could think of. Our brand is about individuality and customization. Our dealers' strength is in their own individuality and customization and on actually one-on-one customer experiences. So we're not -- we don't want to be consistent in ways that are cookie-cutter. We want to be common in our brand meaning and bring that to life on an individual level, and let our dealers understand that's how to do that through the standards of the brand that we train them on that and give them license to be individuals and to treat our customers as individuals. So it's not about radical consistency of anything else than the radical consistency of the common meaning of the brand and bringing that to life all around the world. So one way to get started on that, and we're also introducing this at the show this week are what we call the HDCX workshops. And these are dealer-by-dealer, site-by-site workshops that have happen with the dealer and their staff, and we train them on the standards of the brand and where we want them to take the brand and then let them identify how they're going to do that unique to their locality for their customer set, for their employees. And focus on the brand principles and behaviors that we want, keep talking about behaviors in our company, our behaviors in our dealerships are equally important and powerful for our customers are part of what differentiate us. And this dealer show is a way to get them inspired. When you hit the Expo floor, you will see inspiration galleries that are meant to inspire dealers to understand more of what it is that we're pushing them towards. And these galleries look a little something like this. This one is called the Bike Show. And the reason why we call the Bike Show is the emotional benefit for any customer walking into a Harley-Davidson dealer ought to be, "I just showed up in a bike show." The word "show" being the critically-important word. They have a showroom. It shouldn't feel like a car dealership. It should feel like I just went to a bike show. It should be should be fun. It should be interactive. I should be able to sit on things. I should be able hear things. I should be able to experience things. Even in the dead of winter. Even in Wisconsin. It should always be alive at some level, brought to life by the things they have on the floor, by the way they use the bikes, display them, interact with customers with them, anything. Bring it to life however they want, just keep the experience and level of the show. That's what we want them to do. And so we've given them some ideas, just ways that they could start seeing this up. Again, not fixture packages, not big capital investments, just inspiration for them to use their own creativity to bring this to life. Here's another example, the Gear Show. In terms of thinking of the MotorClothes department, what is the emotional state of someone there shopping for clothes? We know that most transactions, first transactions Harley-Davidson actually come through clothes before they come through bikes. So this is a way for us to get them into the emotional state of Harley-Davidson, not just from the t-shirt.

And it's that higher level of emotional engagement we want everybody at the dealership to be focused on and bring it to life in every single area. And that's what we're inspiring them to do with HDCX.

So in summary, everything that I've just reinforced from what Keith and Matt said, we've been investing and are currently investing, continue to invest in customer and retail transformation and it is paying off. We have a strong and sustainable customer base, both in the United States and internationally, and we see additional growth opportunities, a lot of them. And the Harley-Davidson brand, we are happy to report, is alive and well and relevant and powerful. You can just ask the Pope. So thanks for your time. I'm actually a little hot now. I'm going to take this jacket off. You can see it up close later after John's done. And I'll pass it to John.

John A. Olin

Thank you. Nice job, Mark-Hans. Good morning, everyone, and welcome to Denver. Good to have you here and I can tell you how unbelievably excited we are to be able to share this product with you, our shareholders. And as I look at it and all the excitement, I really boil it down to 3 things, when we talk the model here. One, we took the gold standard in product and made it exponentially better and couldn't be more excited about that. The finance guy and me also says that, hey, this is over 40% of our shipments and a lot more as a percentage of over multiple cycle products that we're revamping and there's, as Mark-Han has pointed out, a tremendous amount of trade-up opportunity that we have for the opportunity. But the thing that's most exciting to me is what this represents going forward. This is one model year, and as Matt has said, we have a whole life cycle planned many years out to bring dreams to our customers all over the world and they couldn't be absolutely more excited than I am right now, with regards to the pride that we all feel. So what I want to do is get my mic. This is certainly not one touch.

What I'd like to do is spend the next 20 or so minutes with you and kind of translate with Matt, Keith and Mark-Hans said in terms of what the future looks like and directionally where we're headed in the future. And the #1 takeaway that I want you to walk out of here with is the company is strong, right? The brand fundamentals are extremely strong. The strategy is on point, it's working well and it's delivering what we had intended. We don't have any huge shift in strategies. We're going to continue to bang away at what we've got because we believe there's tremendous opportunity out there. Okay?

We're leaner, we're more flexible and we're more focused than we've ever been as we take this thing into the future. Right? So with that, actually Mark-Hans did a nice job on the charts and graphs. I got to hand it to you. I thought I was the only one with any charts. I don't have a lot of pictures though. So I do have a few numbers here for you just to make you feel a little bit at home. What I want to do is spend 2 slides and talk a little bit about grounding us in the past, and what we're looking at here is 2008 to 2012. And the reason we chose 2008 is, one, is it really marks the beginning of the downturn in a meaningful way and secondly, kind of the base from the time the peak came and the new leadership team came together.

Anyhow, on the upper right-hand corner, you're looking at retail sales of new motorcycles. And we can see, as everyone knows, from 2008 to '09 to '10, it dropped and then we started to build up. And that buildup started to happen once the pricing in the marketplace came more in line in new and used bikes.

So if you look at from 2008 to 2012, we're down 20% at retail sales of new motorcycle. And if you go back to our peak in 2006, we're down 27%. But that doesn't really tell the whole story. I'd ask you to look to the charts to the right and what we're looking at here is what we call total demand. New and used, all the registrations that happened during this period of time. These are customers, these are new customers or customers that we need to sell motorcycles to and again, the picture is very different. If you look at 2008 to '09, sure, it dropped. Not nearly as deep. That recovered quicker and the recovery was more robust. In fact, in '11 and '12, we're up about 9%, 8% to 9%.

And if you go back and you look from 2008 to 2012, we're actually up about 6.5% in total customers coming into Harley-Davidson. Going back to the peak, we're up about 3%. And this is similar to what we see in the industry as well. The industry, our new bike sales is down quite dramatically. However, when you look at total demand, the industry is within 2% of its peak in 2006. So Harley-Davidson and our customers are alive and well and growing.

Focus at the bottom. Market share. Couldn't be more proud of this. In 4 years, we've gained 12.4 points of market share in the United States. Put that in perspective on a base of about a 42 share, we've increased our share by 30% in 4 years. Not to be outdone by Europe 8% or not to outdo Europe. Europe, out of smaller base, is up about 35% in overall share or 3.1 points.

Let's shift gears and talk a little bit about the financials. If we look at gross margin, still using 2008 to 2012 as the base, we'll see that gross margin has improved slightly during that period of time. The line there though represents our shipment volume, which is also down 20% in those 4 years. So we're delivering a little bit more margin on significantly less volume. And the story holds true when we talk about operating margin, slightly higher operating margin and certainly very good improvement over the last several years. All right. A little bit about the past.

Let's move into the present and spend the minute here. What do we expect in 2013? We expect our shipments to grow 4.5% to 6.5%. We expect gross margin to grow between 0.5 to 1.5 points. So our mid-year report card through 6 months, how are we doing? Looking our at retail sales, down 6/10 of a percent. Actually this is a little bit behind our expectation. Had a tough second quarter even though the company grew retail sales over 5%, we were expecting a bit more and that was hampered by unusually long and prolonged wet and cold weather throughout 2/3 of the United States. What does that mean? It means we've got a back -- on a strong back half coming. And that back half is going to be driven by 3 things: One, increased availability, especially in the third quarter. As you guys may recall, we put in an ERP system at York and really ran the pump drive a year ago. We've got vehicles out there today, we've got more inventory today and as Matt had told you, we've got 25,000 ready to go that are rolling today. Secondly, is the year-over-year comps are much easier in the back half than the front half. And third is right here with Rushmore and ABS on Sportster and the new Fat Bob. We believe new product will drive incremental sales for the remainder of this year.

Next, market share. Not to be outdone by the first 4 years but we're continuing the trend in the first half of this year with very strong market share gains and we look at gross margin, the same holds true there. We're up a fair amount in gross margin even though that through the first half currency took about 0.5 point of gross margin away and we still delivered gross margin line 9/10 of a point increase. And again, this year marks a lot of milestones that we're very proud.

All right. For the next several minutes, let's talk about the future. Mark-Hans did a wonderful job of setting us up. We feel great about the markets that we participate in, both in the United States and international markets. Internationally -- about 35% of our sales are international and we believe we're somewhat underserved there. We've been investing heavily in people putting the people in place that Matt has talked about to drive us into the future. And I look at this and you just think about 3 markets -- our emerging markets -- of our emerging markets. You take Brazil, India and China. It's got a large share of the world's population and certainly very many of them familiar with 2-mile -- our 2-wheel variety. Within those markets, we've got 40 dealerships today. And when you look at retail sales, it only represents 2% to 3% of our total retail sales. You talk about opportunity going forward, and we believe we're well positioned to continue to build out those dealer networks. Not going to happen overnight but we couldn't be more thrilled as to where we're at along that journey. We also bring to bear every day we come to work, competitive advantages that only Harley-Davidson has and again, we're going to take those into the future.

It is hardly had a conversation about the future without talking about the brand. And the brand has never been stronger than it is today, the fundamentals are very strong. Various ways to measure a brand, right. Mark-Hans talked about a lot of customer experiences. Those aren't included up here but some of the result of the customer experiences hours. When you look at market share, again, we're at all-time high in the market share in the United States and in Europe. We gained 12.4 points a share in 4 years. To put that in perspective, our largest competitor has an eighth share. They've been at it for 40 years in the United States, highly-competent dealer network, highly-competent product. And in just 4-year period of time, we gained over 1.5x a share of the entire size of their company. Most of our competitors are under a 3 share. You can do the math on that one. When we look at new to Harley. On a worldwide basis, about 1/2 of every customer that comes in is new to the brand, a mark of a very strong and vibrant brand is the new people that can bring in. We're certainly doing that. Trade-up metrics, we'll you're looking at repurchase intent or the repurchase cycle and then we've talked about a lot about the outreach segment. All right? So what we want to do is talk a little bit about the next 3 to 5 years and how we're going to drive growth.

Number one is we're going to invest in the future and continue to invest in the opportunities that we have. We're going to be very focused in how we invest and they're going to be largely around these 3 things: New products, you're seeing today but you're only seeing the start of it. We'll be rolling it out over the next several years, incredible products that expanding the relevance and outreach. And that's not only a U.S. concept, it certainly every one of our international markets has an outreach group that they're aimed at as well. And then finally, international expansion. Mark-Hans went into a little bit more detail on our sustainable customer base.

In the U.S, we've got economic comebackers, 9 million people lost their jobs between 2008 and 2010 and a lot of them were a lot of customers and they lost their bike or they lost one of their many bikes. And we do believe they will come back to the brand because it represents such an important part of their lifestyle as their jobs return. Trade-ups we talked about, about 1/2 of our volume is through trade-offs. Rushmore is directly aimed at that, and then we outreach and you've heard about the success there. When we look at international, we will continue to expand the dealer network, but we will have a lot more focus on 3 things as we look at international. One is the customer experience. You'll see more about that when we go out on the floor. Mark-Hans talked a little bit about it. Two is throughput international dealerships. On average, an international leadership is about 1/2 the size of the United States United States so we feel there's a tremendous amount of opportunity to increase our -- build the throughput through our international dealership. And then finally, to increase the penetration of our businesses. That's Parts and Accessories related and MotorClothes. When you look at them on an average point basis, they're are about 1/3 smaller than in the United States. So tremendous amount of opportunity internationally.

And then finally, we're going to continue to build our margin, both gross margins and operating margins. I'll talk a little bit about that in a second.

All right. What I would like to do over the next couple of pages is talk about the companies that drive all this wonderful stuff you're hearing about. We're going to talk about the motor company, Financial Services and Inc. Kind of the world that they played within the organization and the growth gross growth prospects look like for those entities. All right?

Let's start with the motor company. Plain and simple as far as an objective, it's to drive growth and profitability. I mean when we look at that and we look at growth, it's going to be largely through new products. We've always been a product company. We'll continue to be that, whether it be motorcycles or again, related businesses in Parts and Accessories and General Merchandise. And there'll be a lot more renewed focus on that retail experience or that retail transformation that we've been talking about. Also when we talk about growth, we'll be looking at over the next 3 to 5 years, that we will grow international at a faster rate than domestic. We'll grow outreach at a faster rate than core. When you look -- talk about market share, when you look the gains that we've had over the last 4 years and as we look out over the next 3 to 5, we would expect market share in the United States to be stable to down slightly. We would expect the industry on new motorcycles to accelerate from what we've seen in some of the previous slides.

Internationally, we would expect market share to be stable to strengthening. I'll talk a little bit about margin. Over the next 3 to 5 years, we expect our gross margin and operating margins to expand. What I would like to do is talk a little bit about some of those key components to give you a feel for how we look at things over the next 3 to 5 years when we talk about margin.

So let's start with gross margin. First, let's talk about pricing. We do believe we possess a lot of pricing power into the future, right? We talked about how strong the brand is, how strength -- strong the overall company is. We expect us to be able to use that into the future and take advantage of some of those pricing opportunities. We'll be judicious and we'll be prudent and we'll certainly make sure that we're keeping in touch with the competition. But when we think about pricing, we think about it in 2 ways: One, we'll be able to price for added content. The features and benefits that our customers are asking for or wanting that will deliver added value to the overall experience as a Harley-Davidson customer. And then secondly, we believe we'll be able to price in excess of cost. When you look at the model, year 2014 motorcycles, certainly led by Rushmore here, we're doing exactly that. As a matter of fact, when you look across our entire line of motorcycles, MSRP is an increase about 3.5% with this model here. And that's driven by a tremendous amount of content and value to our customers. And with that, comes additional cost. So pricing in excess of cost is about 0.75%, which is similar to what it was the last model year and a little bit more than the model year before that. So we feel real good about that, but you need into the future and certainly with this year's model year.

Next as we look at gross margin, next comes up is mix. We talk about mix. What do we expect over the next 3 to 5 years? As we expect mix to be largely flat. And that goes back to our fatten the tails conversation, right? And what you're seeing today at this dealer meeting is the focus on that core customer, which comes with higher profits and higher margined and we would expect that to improve a little bit here. But over time, we'll have investments on the other side and we expect the balanced amount of mix going forward over the past 3- to 5-year period of time. All right?

The next 2, let's talk about raw materials and currency. Not a whole lot of control over them, right? They're market-driven, so they can go up or down. Don't know where they're going to go. But if we look into the next 3 to 5 years, we would expect both raw materials and currency to be headwinds, to be flat to unfavorable. And we'll see how it turns out, but that's what where we're looking at when we talk about this overall guidance is that we're going to have to work through some issues with those 2. And then finally, as the manufacturing line item of gross margin, right? A lot of things in there. And we expect that to be flat to favorable as we move forward.

So let's talk about some of the components within that manufacturing line item. First one is productivity. As Matt talked about, we are completely wired for productivity and continuous improvement. It served us very well over the last several years. And as we move forward, we continue to expect to generate a fair amount of productivity. And we would expect that productivity to largely cover our manufacturing inflation over that 3- to 5-year period of time. Next is incremental margin behind higher volumes. That will be a strong driver of our gross margin growth over the next 3 to 5 years, right? So as we talk about our gross margins around 35% to 36%, each incremental unit that we put through is about 50% in incremental margin.

And then the final piece of looking at that manufacturing line item are a couple of headwinds. One is supplier cost. About 75% of cost of goods sold is from supplier cost, and that's components for the motorcycles that you see here. It includes parts and accessories and certainly general merchandise. And there's always cost pressures on there. The operations group does a wonderful job managing those costs every day, day in and day out. As we look forward, they're certainly going to be upward pressure on those costs. And then secondly, as we expect to have increased investment and as we move into the future on regulatory compliance issues around the globe, certainly emissions and noise comes to mind. ABS, you saw that we just rolled that out. That's a requirement in Europe. And we just completed our line with ABS. So those costs are coming at them. Some we'll be able to price for, but a lot of it we might not be able to. And so that's how we're kind of looking at the overall manufacturing, flat to being favorable as we go forward. Okay?

So that's kind of rounds out gross margin. As we look at operating margin, we would expect that type to expand as well, driven by 2 things: 1, is the higher gross margin; and then 2, is managing our SG&A spending at a lower rate than our revenue. We're picking up on some points of gross margin in -- or operating gross margin through the SG&A line. And it is tough to have a conversation about the motor company without talking about strong returns on investment capital. You know, we're blessed with a company and the brand that allows us to have a fairly high margin, and we're very focused on limiting that amount of investment to drive those margins and we would expect as we move into the future, that we'll retain or maintain a very strong return on invested capital. Okay?

Let's switch gears real quick. And let's move into the Financial Services business. The role of HDFS is to enable the sale of motorcycles, as well as deliver an attractive return on the equity that is deployed. And they have done just that. They've done a wonderful job of enabling the sale of motorcycle and we view them to be a highly-strategic asset. And I don't think that's ever moved out more than during the downturn. And certainly the downturn cost us a little bit of money because of the liquidity crunch and the fact that we weren't as well prepared for it as we are today moving into the future. But HDFS served us very well, and we're a much better off company today because we had them through the downturn. And today, as everyone knows, we're driving a tremendous amount of profitability. So as we look forward with HDFS, we expect them to be highly profitable and again, deliver that attractive return on equity.

So let's look at a couple of pieces of that. Number 1, in terms of revenue. We expect revenue growth to generally track U.S. retail sales as we look over the next 3 to 5 years. Now that's not been the case over the last several years. We've been actually been kind of swimming upstream with regards to revenue growth at HDFS and that's because during that 2008 to '10 period, as volumes dropped, it takes time for us to work through the debt -- the receivables portfolio and we've actually seen revenue coming down prior to this through 2012. This year, we expect revenue to be flat and again, as retail sales grow, we would expect it to generally track -- the revenue to track, so that will be a nice positive as we move forward.

Also as we look at HDFS, we do expect some tightening of the net interest rate on spreads. So I like to call your attention to the chart to the right. So what you're looking at here is return on assets. And HDFS has typically and historically generated a very strong return on assets. And as you can see prior to the downturn, we had an average of about 3%. Very nice return on assets for any organization. And that has been stepped up over the last couple of years to around 4%. Various reasons for that. One being as HDFS has done a tremendous job on the underwriting aspect of the business, and they've really taken the use of data and done a wonderful job of analytically looking at the loan and making sure that we're writing better loans into the future. Nobody writes more motorcycle loans in the entire world than we do. And we've got all that data to pull from, and Larry and his team have done a wonderful job of understanding that moving forward. But there are other reasons for that 4%. One, consumer behavior. And consumers focusing on paying down debt, less competition maybe than in the past. So again, as we look forward, we do expect some tightening of net interest rate spreads, driven by, one, that increased competition. And we're seeing a little bit of it while we're seeing a fair amount of competition in a very high prime segment of our business, and HDFS has taken action on that. And in the first half, we've reduced rates in that -- in those tiers a bit.

Secondly, we expect some normalization of credit losses, which has been at historical lows for us, again partly due to that consumer behavior. And as consumers take on more debt perhaps in the future, we've certainly seen it in the last couple of quarters, we would expect credit losses to rise a little bit. And then finally, rising interest rates could to put pressure on our margins going forward. The good news there is we feel very good about how we're positioned today to manage rising interest rates in the future. And that with over 1/2 of our debt portfolio being in fixed notes that provides us more time and kind of stretches out the impact of any rising interest rates.

So again, HDFS expected to be highly profitable as we move forward. And I feel very good about that business.

All right. Let's bring us home and let's talk about Inc. The role of Inc. is very simple and straightforward as the other 2. It is to drive shareholder returns. We've been focused on it. We'll continue to be focused on it, and we've got a business that delivers a tremendous amount of cash. And if you're going to look over to the right, even in the downturn, while cash fell the orange line, it didn't fell nearly to the extent of net income or revenue and it's generated a fair amount of cash. And actually, if you look at that chart, the 2 bars to the right the last 2 years we had significant contributions to our pension plan during that time as well. So as we look forward over the next 3 to 5 years, we would expect to continue to drive very strong cash flow as we move forward.

Now in terms of pension expense or pension contribution, we do not expect to be able to be contributing to the pension plan to the same extent that we've done over the last 3 years. The third year being '11, '12 and then the first quarter of this year, we contributed $175 million. And then secondly, when we look at capital, we expect them to certainly continue to invest in our business and the capital to be in a range of our 2013 guidance to slightly higher. Okay?

Now capital allocation. Again, we will continue to invest in the business and make incremental investments because we have current opportunity for growth in the United States and around the world. But that will all be internally funded by the cash that the business generates. All excess cash we're looking to return to you, our shareholders, through one of 2 vehicles: Increasing dividends and share repurchases. Okay?

What I want to do again is to tell you on behalf of Keith and Matt, Mark-Hans, myself, the entire leadership team, the 6,000 employees that come to work every day and the tens and tens of thousands of dealers that come in only focused on one thing: one brand, one product as we couldn't be more excited for the future. And I want to thank you again for joining us, and more importantly, I want to thank you for your interest and your investment in Harley-Davidson. All right? Great. With that, Amy.

Amy Giuffre

Thank you, John. Thank you, and thank you to our presenters today and for putting up with our audio issues. Okay. So we're going to keep you moving. We're going to come back and do a panel discussion and Q&A after our tour and during lunch. So the next stop is going to be to the Expo show floor. So again, we're going to be on the move. We're going to split you up into 2 groups. So on the screen, you see the places where we're going and the people that we're going to meet with, and I'll put that back up and provide that information so you know exactly who you talk to. These are going to be the 4 groups. So we have Janet right here and we have Bob Klein back in that corner and Steve Bettinger, will be up in the front corner over there and I'm heading up towards the motorcycle. So those are going to be your hosts. We are going to get you around to 4 different stops, so please try and stay with your host and will a specified amount of time and we have appointments for folks that we're meeting with in the Expo show floor so we're going to be moving rather quickly towards that direction. So if you just gather up into your groups and we'll head that way and then we're meeting back here. So you can feel free to leave your things and we'll have lunch and Q&A and access to management following that.

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