HOG
#Thanks, <UNK>.
We would look at the securitization that we recently did about a month ago, there were two changes in that securitization from normal securitizations that we execute.
---+ (technical difficulty) pointed out is that they were made up of 100% of prime receivables and the second one is we sold the residual interest that allowed us to classify it off balance sheet.
Your question centers around the prime aspect of it so historically we've sold securitizations that resemble our originations, about 80% prime and 20% subprime.
I've heard all kinds of speculation as to why we did 100% prime.
So let me clear that up.
Some of that speculation has been is we can't sell subprime into the market, and that is absolute untruth nonsense.
For over a decade, we have been selling a mix of prime and subprime into a very robust demand in the marketplace, and that has not changed at all.
What has changed over the last couple of securitizations is that our spreads have widened on the securitization to our benchmark.
Our benchmark is prime auto.
And there is no one else that does a mixture of securitizations like we do so we benchmark to prime auto.
What we have noticed over the last couple of securitizations ---+ (technical difficulty) widening out a little bit, and so the best way to tether them back was to get a comparable securitization to our benchmark, and with that we saw extreme tightening of those margins or of those spreads to prime auto.
As we look forward, whether we decide to do all prime or subprime and prime, kind of the tethering of the investment community to that spread against prime has been very important to us, and we will pay dividends as we move into the future.
That is why we move forward with the prime securitization.
Your second question is with regards to Brexit.
At this point, there is not enough information or not enough time has gone by to understand the impact of Brexit.
I think what we are very certain of is that Brexit does not provide any benefit to retail sales or consumer confidence in Europe, and I think this is what <UNK> talked about a little ---+ (technical difficulty) is I would put it into a broader bucket instead of just Brexit as overall consumer comments driven by geopolitical concerns or macroeconomic concerns.
We are very excited about the momentum that we have in our European business.
As you can see for the quarter, it was up quite significantly.
We will keep a close eye on Brexit but we are going to focus on what we can control and continue to drive a great customer experience for our customers around the world.
All right.
First question, <UNK>, is with regards to Europe.
Again, we couldn't be more pleased.
I think <UNK> mentioned it in his up-front remarks is the focus of our European team on getting people on our motorcycles.
The demos that they are doing has driven a tremendous amount of volume in that market.
Also our product offering, you've got to remember that Europe has got a bigger mix of Cruisers to Touring than we have in the United States.
The product is just as well received in Europe as it is here in the United States.
That is certainly helping to drive some of the performance, and we expect that the team there to continue to focus on getting people exposed to our motorcycles.
And we couldn't again be more pleased with where we are at in growing market share.
Again, and just as a competitive market as the United States, not driven by price ---+ (technical difficulty) Europe, by tremendous addition of the lower displacement motorcycles, and again we are doing well and gaining share in a robustly growing market in Europe.
The second comment is with regards to market rumors surrounding our stock and a potential private equity investor, we don't comment on any stock market rumors.
That would consume our entire life if we did that.
Thanks, <UNK>.
When you look at the second quarter, we did ship a little bit over the high end of guidance, and at the same time during the quarter, we were cutting production quite dramatically and our retail sales were down.
You were saying is, can you help me understand this.
Basically, as we got toward the end of the quarter, we had all of the product made and that was either in retail or in our Company-owned inventory, and typically we have a bit of Company-owned inventory in the United States that facilitates the flow and the orderly shipment of motorcycles.
We made the decision to ship it all out prior ---+ (technical difficulty) the period.
The reason we did that is in the very outside chance that we had any issues with the ERP system.
If they are in our system, we may have trouble getting them shipped, so it was a just a simple after de-risking of the overall ERP implementation.
I couldn't be more pleased to say that the team did a fantastic job.
Everything came up as expected.
The ramp plans are on plan and everything is moving forward.
But <UNK>, it was simply that is we could take a little more risk out of it.
Having said that, overall inventories as I mentioned I think to <UNK>, overall inventories didn't change.
But we had Company-owned inventories lower on a year-over-year basis, and we put a little bit more into the field.
So overall inventories are where we would have expected them despite the lower unexpected sales based on our production reductions and lower Company-owned inventory.
The second question that you asked is with regards to our revised guidance, which is down 1% to up 1%.
We go through a robust process looking at all factors and everything we know in the marketplace, which is centered around new dealerships coming up in the international markets.
We will have more dealers in the back half ---+ new dealers in the back half than the front half.
We look at the performance of outreach in the United States; that's performing extremely well.
We look at the investments that we made in the demand driving activities, what we expect to come out of those.
And certainly and most importantly, we look at the new models we're going to be launching here in three to four weeks and we couldn't be more excited about that.
You take all those together, <UNK>, we are very confident that we are going to ship from 264,000 to 269,000 motorcycles for 2016.
Yes, with regards to inventory retail sales, we talked a little bit about that.
We feel that we are at the right spot given our forward look at retail sales given where we expect inventories to be.
If we haven't shown our resolve to manage this Company for the long-term value of our shareholders in the actions that we've taken to keep the marketplace, aggressively manage supply in line with demand, or to hold to ---+ we're not going to discount our way out of this soft spot that we are expecting.
People aren't looking.
We have got tremendous resolve, and we will manage the inventory at appropriate levels.
With regards to pricing, I'm not going to speak a lot about that because in three weeks, you will see the new models and you'll see the pricing and you can answer that question for yourself, <UNK>.
Again, we feel very comfortable where we are at with regards to the market, and we will continue to manage it very tightly.
I'm glad you asked about share gains in the United States.
I couldn't be more thrilled to answer this question.
A year ago we sat here, <UNK> and I, and <UNK>'s first conference call, and we said that we had an issue giving the shift in world currencies and the incredible competitiveness that came out of it, in particular in discounting, and we said that we were not going to discount our way out of it.
We were not going to drain the industry of profits and chase this thing, and it was going to take us some time but we were going to spend more time understanding what we need to do and how we can compete in the world of expanded price gaps without cheapening our brand.
And now dial forward a couple quarters, we are there, and we delivered 2 points of market share gains, so let me talk a second about those.
The gains were very strong and wide.
Number one, they came in all of our segments, our touring segment, our cruisers, and our street Sportster segment size of motorcycle.
They came in the seven sales regions that we have in the United States.
We gained share in each and every one of them.
Our gains were over double the nearest competitor.
When you look broadly at those share gains, what we saw is the biggest loser were in aggregate Japanese competitors.
We also saw while we had mentioned in the preamble that overall discounting was higher on a year-over-year basis, we did see the Japanese discounting be down a little bit versus a year ago and it seems to be reflecting in their market share.
With that, we saw rotation in the brand discounting from the Japanese to the American brands in the second quarter, and we are seeing some of the share gains in there.
Overall, European's market share was down a little bit but we had some big winners and big losers in the segment.
Hopefully that helps, <UNK>.
Thanks, <UNK>.
I appreciate the question, and actually we are incredibly pleased with the model year 2016 products and how they drove the market globally.
This is a lot of the S models that we launched a year ago basically as well as the products we introduced during the model year.
Clearly, there are a lot of constraints in this competitive environment that we are in but our product drives customer passion, customer loyalty, and sales and market share.
We saw that with the shift in sales to large cruisers, which helped us gain share.
Those large cruisers are a little lower margin than our touring motorcycles so that is part of the gross margin deterioration that we just spoke about on the call today.
But product is a very key lever for us, one of our four focus areas to increase both the cadence and the impact of the product, and 2016 is a good example of both.
High impact product at an increased cadence and 2017 is going to be no different.
It is a formula working for us, and we have invested more heavily, both capital and expense as part of the demand driving shift to make sure that the product that we deliver makes a difference in the marketplace and that we do it well and we do it more rapidly.
So that's a new pattern for us that we can expect rolling forward in 2017, 2018, and beyond.
Thanks, <UNK>.
Good question.
In the 8-K that we put out, we talked about this overall transaction is neutral when you look at the present value of earnings per share so it is a great question.
Basically, here's what's happened ---+ what happens is in a securitization, we sell off a bunch of bonds to investors and it goes into a trust and all the residual earnings that we get off of that, we keep because we keep the risk and we keep that reward.
What we ---+ (technical difficulty) into a slightly different market and we found an investor to buy that.
What they did is they paid us a bunch of upfront cash to buy that residual interest in the trust or those trailing earnings.
We believe that the opportunity cost of the transaction that we did is about $7 million of those trailing earnings.
So to do broad math, we took a $9 million gain, gave up about $7 million of opportunity costs, so they would've earned about $16 million.
We took $9 million today.
If you take and you discount over the next seven years that $7 million that would've come in, bring it to the present value and net impact on EPS, along with the fact that because it is off balance sheet, we have freed up equity at HDFS to maintain the same debt to equity.
We have now got more equity, so HDFS wrote a check that works out to be $43 million and we bought shares back with that.
If you take that impact on EPS, they are about neutral.
The question is, is well why did we do it if it's neutral.
Number one is once you get into market, you don't know how the market is going to exactly respond but there are two reasons that we did this.
Number one is it's an additional source of liquidity so we are always looking for opportunities, more investors, more liquidity, and this is a great opportunity.
The other thing, with the additional liquidity opportunity, we also learned that we can monetize the assets on our balance sheet to some extent, and that is very important to know.
That's number one reason.
Number two and the more important reason is, is we talk about it at every conference call, a top priority of ours is to return value to our shareholders in the form of rising dividends and share repurchases, and we will look at every opportunity to do that with the caveat that were not going to do anything to damage the long-term value of the brand or the Company.
This transaction fits squarely in there.
There is absolutely no extra ---+ (technical difficulty) the Company or anything like that.
What it did is it liberated $43 million of excess cash.
That excess cash was used to buy share repurchases.
And even though again, from a present value basis, we're neutral on EPS, we believe that our long-term shareholders would prefer to have at this moment in time, more equity in our Company given the historically low PEs that we are trading at.
And so they get the ownership today versus waiting over that period of time for the opportunity cost of that money.
Sure, <UNK>.
Internationally, we do expect to grow modestly as well.
We'll be adding a lot of dealerships this ---+ (technical difficulty) year, and they are growing markets and we would expect to add a little bit of inventory internationally.
Your second question is on oil dependent areas.
Again, we talked about this last quarter.
It is certainly a headwind to the industry and what we saw about a year ago, first quarter 2015, we first noticed that those areas were declining more than other areas in the United States, obviously driven by the depression in the oil prices.
We saw that increase from a modest amount in the first quarter.
It increased through the second and third quarter and it hit about a 10% rate in the fourth quarter.
We've seen that hold at 10% in the fourth quarter of last year, the first quarter of this year, and on the second quarter was also a 10.
And as we look forward, we're going to start to lap on more significant rises on a year-over-year basis.
Hopefully, we will start to see it temper a little bit but at this point, it is not getting worse but it is not getting better either.
Thanks, <UNK>.
Great question.
Again, going back to a year ago, we tried some things in the second and third quarter.
Some worked, some didn't.
We kind of regrouped, looked at what was working, what wasn't, and we sized the overall opportunity.
We came back as a Company and said we needed $70 million to really address the widened price gaps, which is a headwind to us, and compete without lowering price or discounting.
We got into the marketplace early in the first quarter, ---+ (technical difficulty) $70 million and again, we are very pleased with what we're seeing in terms of new people coming in and being trained through our Rider Academy.
The motorcycles that they are buying with that, the demos that are going on, Live Your Legend campaign, again, Heroes Ride Free, that promotion that we're getting, people that identify very closely with our brand, getting them free training to get on motorcycles.
All of that is working well and you are seeing that manifest itself in our competitiveness with expanded price gaps in the second quarter.
In terms of where we go with the $70 million, that is something that we evaluate on an ongoing basis.
Not only the overall dollar amount of the $70 million, we will look at and change when need be whether that be more or less.
We are also looking at what is working and what is not and trying to become very nimble on how we redirect the money in the right spots, whether that be within a market or between markets or within a promotion or between promotions.
There is nothing but single-minded focus here on driving demand.
