Amy Giuffre Keith E. Wandell - Chairman of the Board, Chief Executive Officer and President John A.

Olin - Chief Financial Officer and Senior Vice President

Edward Aaron - RBC Capital Markets, LLC, Research Division Sharon Zackfia - William Blair & Company L.L.C., Research Division Timothy A. Conder - Wells Fargo Securities, LLC, Research Division Craig R.

Kennison - Robert W. Baird & Co.

Incorporated, Research Division Felicia R. Hendrix - Barclays Capital, Research Division James Hardiman - Longbow Research LLC Patrick Archambault - Goldman Sachs Group Inc., Research Division Patrick Nolan - Deutsche Bank AG, Research Division Jaime M.

Katz - Morningstar Inc., Research Division Joseph D. Hovorka - Raymond James & Associates, Inc., Research Division Robin M.

Farley - UBS Investment Bank, Research Division

Thank you, Sarah, and welcome to Harley-Davidson's Third Quarter 2012 Earnings Conference Call. The audio for today's call is being webcast live on harley-davidson.com.

The supporting slides can be accessed on the website by clicking Company, Investor Relations, then Events and Presentations. Our comments today will include forward-looking statements that are subject to risks that could cause actual results to be materially different.

Those risks include, among others, matters we have noted in our latest earnings release and filings with the SEC. Harley-Davidson disclaims any obligation to update information in this call.

Today, you'll hear from Harley-Davidson CEO, Keith Wandell; and CFO, John Olin. President of Harley-Davidson Financial Services, Larry Hund, is unable to join us for the call this morning, but will be joining us again next quarter.

Following Keith and John's comments, we'll open the call for your questions. So let's get started.

Keith?

Well, thank you, Amy. And good morning and thanks for joining us on today's call.

As we look back at the third quarter and the first 9 months of the year, I'm truly proud of everything that the Harley-Davidson team of employees, dealers and suppliers has achieved so far in 2012. During the quarter, we continued to see evidence of the successful execution of our strategy.

With our focus on leadership in manufacturing and product development and at retail, we believe that we are increasingly poised to provide an even more exceptional customer experience. The entire team is focused and doing a great job of delivering on the many changes underway in all parts of the business.

And together, we're positioning Harley-Davidson for success, not only today, but over the long term. We achieved a pivotal milestone in the third quarter with the launch of the ERP operating system at our York plant.

And we exited the quarter on track with our production targets. Now, our focus is on optimizing the system.

And we're also making final preparations for the implementation of seasonal surge production capacity at York early next year. Implementation of the production changes at Milwaukee, Tomahawk and Kansas City, while not at the same magnitude as York, continue to go very well.

Coming out of 2012, we will be largely finished with our manufacturing restructuring, and we are delivering this massive change on time and on target. And that's great news, and it's a tremendous achievement that will benefit our customers, our dealers, our employees and our shareholders.

We're making steady progress in other areas as well. We continue to grow outreach and core customer segments and expand our global reach.

In the U.S., our strategy calls for us to grow sales to outreach customers at a faster rate than to core customers, and we're doing that. In all 3 quarters of this year, growth in sales to our U.S.

outreach segments of young, adults, women, African Americans and Hispanics, has exceeded growth in sales to our U.S. core customers.

In fact, through 9 months, sales to outreach customers grew at nearly twice the rate as sales to core riders, thus ensuring new riders coming into the Harley-Davidson family. As we noted previously, we continue to hold the #1 market share position in each of our U.S.

outreach segments. And combined retail sales to outreach and core customers are up 6.2% through 9 months, compared to a year ago.

One of the key drivers with outreach and core customers alike is new products. And with our 2013 motorcycles, we believe we are again hitting the mark and expanding our leadership of the custom, cruiser and touring markets.

The knockout 2013 Harleys include 5 new models introduced this year: the Softail Slim and the 72, which were launched in January; and the CVO Breakout and the CVO Road King; and the expansion of H-D1 factory customization to the Dyna Street Bob. There are also 5 models with big metal flake Hard Candy Custom paint and 10 limited edition, 110th Anniversary motorcycles.

It all adds up to a lot of new offerings for both core and outreach customers. And in the years ahead, you can expect to increasingly see the results of our investments in bringing exceptional new products to market.

Let's turn to the international markets for a second. We continue to advance the opportunity we see for sales growth.

We are on plan to open 100 to 150 new international dealerships between 2009 and 2014. And to date, in 2012, we've added 16 new international dealerships.

And in total, since 2009, we've added 78 international dealerships. In Latin America, we've seen 16 consecutive months of double-digit growth, led by Brazil and Mexico.

And in the Asia Pacific region, new motorcycle sales in Japan, Australia, China and India and our other emerging markets, are all up, in each of those markets, for the quarter and through 9 months. In the EMEA region, motorcycle sales grew 1.8% in the third quarter, despite the economic uncertainty in the EU.

So a special thanks to our dealers and employees in the EMEA region for their accomplishments amid these challenging economic environments. We also have seen strong sales in emerging markets worldwide, where Harley-Davidson retail motorcycles are up more than 30% this year.

While today, these markets are a relatively small part of our overall volume, we believe our growth in emerging markets is a great example of Harley-Davidson's global appeal and the opportunity that lies ahead. It's without question that we're making great progress, but we all know there's still a lot more to do.

Harley-Davidson's strategy provides a roadmap for how we deliver exceptional product and brand experiences that foster deep, emotional connections with customers. Simply put, we must continue to be the best at what we do, not just today, but far into the future.

So thanks for your time today. Thanks for your investment, and thanks for your interest in Harley-Davidson.

Now let me turn it over to John Olin.

Thanks, Keith, and good morning, everyone. I'll review the financial results for the third quarter starting on Slide 11.

As we anticipated, our third quarter key financial metrics were down versus prior year. This is the result of significant changes to our historical shipping patterns, driven by the launch of a new ERP system at York during the quarter.

I also want to recognize that it was a critical quarter, as we put in place some of the final pieces of our manufacturing strategy, which will enable us to better meet customer demand in the future. With that as background, let's discuss our third quarter results.

During the quarter, Harley-Davidson, Inc. consolidated revenue was down 10.5%, behind a 14.5% decrease in motorcycle shipments.

Our third quarter income from continuing operations was $134.0 million, a decrease of $49.6 million. Similarly, diluted earnings per share were $0.59 per share, down from $0.78 in the year-ago quarter, a 24.4% decrease.

Operating income from the motorcycle business was $144.8 million, down 19.9% compared to last year's third quarter. The decrease was driven by a planned reduction in motorcycle shipments, partially offset by higher gross margin and favorable restructuring spending.

Operating income at Harley-Davidson Financial Services was up compared to last year's third quarter, driven by higher net interest income as we lapped a prior year loss on bond repurchases. Finally, this quarter's net income was adversely impacted by a higher tax rate as compared to last year's third quarter.

Now, let's take a look at retail sales on Slide 12. Overall, worldwide retail sales of new motorcycles were down 1.3% in the third quarter and up 6.0% year-to-date.

Retail sales in the quarter reflect lower production that affected product availability in the U.S. Also impacting retail sales was the retiming of the new model year launch from July to August, as well as ongoing economic challenges in many worldwide markets.

Let's take a look at U.S., the U.S. market, on Slide 13.

As we expected, retail sales in the U.S. in the third quarter were negatively impacted by limited product availability.

During the quarter, U.S. retail sales were down 5.2%, but up 6.2% on a year-to-date basis.

During the third quarter, U.S. retail inventory fell to extremely low levels, driven by 3 factors: First, planned production was down in July by about 40%, as we cut over to the new ERP system in York; second, the new model year introduction was moved out 1 month to August.

Consequently, there was a longer period of time between ending model year 2012 production and shipping model year 2013 motorcycles. And third, August and early September York production was down from anticipated production rates, as our employees focused on system issues that came up during the ERP implementation.

As we discussed last quarter, we entered the third quarter with 6,800 more units in the U.S. retail inventory than the prior year.

And at that time, we also expected inventory would quickly fall below prior year levels and would remain below prior year levels for most of the quarter. And remember, the prior year inventory level was already lower than desired.

The quarter did play out largely as expected. Inventories quickly fell below prior year levels.

However, as supply of York motorcycles was restored to prior year levels, sales responded positively. As we exited the quarter, dealer inventory ended up about 3,100 units higher than a year ago and retail momentum was strong.

In terms of market share, our U.S. share was down slightly, reflecting limited product availability for most of the quarter.

However, our U.S. market share softened by 0.2 percentage points to 57.7% in the third quarter versus prior year.

Year-to-date, U.S. market share was up 1.4 percentage points to 56.5%, which is our highest September year-to-date market share on record.

On Slide 14, you'll see retail sales at international markets for the quarter grew 7.6%, driven by increased year-over-year sales in all major regions. During the third quarter, Latin America was up over 32%, driven by strong performance in Brazil and Mexico.

Retail sales in the Asia-Pacific region were up 9.8%, driven by strong growth in our emerging markets and in Australia. We continue to be excited about our growing businesses in India and China.

Additionally, we are pleased to see Japan was up 2.5% despite a challenging economic environment and increased competitive activity. The EMEA region was up 1.8% for the quarter compared to 2011.

During the quarter, we continued to see significant softness in the U.K. and Southern European countries, especially Spain and Italy.

While these markets remain down significantly, their rate of decline improved from the previous couple of quarters as they lapped the steep declines which began in Q3 2011. Northern Europe's retail sales continue to grow in the quarter behind strength in Germany and Switzerland.

Through August, our market share in Europe was flat to prior year at 13.1%. We expect continued volatility and pressure on sales in the EMEA region as a result of the extremely challenging macroeconomic environment.

Finally, during the quarter, Canada was up 4.9% from the prior year period. International expansion is one of our core areas of investment for future growth.

During the quarter, dealerships were opened in China, India, South Africa and Oman. On Slide 15, you'll see wholesale motorcycle shipments during the quarter were down 14.5% compared to last year, behind lower production due to the implementation of the York ERP system.

During the third quarter, Custom and Touring as a percent of total shipments, were 3.5 percentage points lower than prior year. This was also a result of the impact of the ERP implementation at York.

International shipments as a percent of the total were up compared to last year as we allocated more motorcycles to international markets. As you may recall, in the second quarter, we temporarily diverted some international units to the U.S.

to meet the strong demand in that market. On Slide 16, you'll see revenue for Motorcycles and Related Products segment was down 11.6%, driven by lower shipments in motorcycles during the third quarter.

Parts and Accessory revenue was down 0.8%, behind a 1.3% decrease in worldwide retail motorcycle sales. General Merchandise revenue was up 9.1%, driven by our sportswear and leathers categories, which included the new 110th Anniversary products.

Average motorcycle revenue per unit decreased $279 compared to last year, largely as a result of unfavorable currency translation in the quarter. On average, our major foreign currencies were weaker by approximately 9% between the third quarter of 2011 and the third quarter of 2012.

During the quarter, we increased our global average prices for the 2013 model year motorcycles by approximately 0.75%. We believe our ability to increase prices for the second consecutive year reflects the strength of our brand and appeal of our new motorcycles.

Slide 17 provides the cadence and impact of our restructuring activities. The big news for the quarter was the York ERP implementation, a crucial milestone in our manufacturing transformation.

While we are very pleased overall, we did experience some minor systems disruptions after we cut over in July. In fact, we lowered production in August and early September as we focused on resolving these system issues.

While there were no major complications, the slower production compounded the already limited product availability during the quarter. By the end of the quarter, we were caught up on the lost production.

However, we utilized overtime to catch up. Today, the York production line is largely running at speed, and we have shifted our focus to system optimization.

We incurred approximately $11 million in temporary inefficiencies during the quarter. We were toward the high end of our range, partially due to the overtime we accumulated as we made up for the slower-than-planned production during the ERP implementation at York.

As a result, we now expect $32 million to $35 million in temporary inefficiencies for the full year. We are very pleased with the new system and look forward to the benefits it brings to our future.

The next step at York is to prepare for the execution of our flexible manufacturing strategy, which will allow us to produce motorcycles closer to customer demand, starting in the first quarter of next year. Turning to the restructuring cost and savings on Slide 18.

We incurred $9.2 million in restructuring expenses during the quarter. We also moved $5 million of expected spending from 2013 -- 2012 to 2013.

We now expect between $35 million to $45 million for the full year 2012, and $5 million to $10 million for 2013. We continue to expect total cost to be $490 million to $510 million.

We also continue to expect total ongoing annual savings of between $315 million and $335 million upon completion of our restructuring activities. We are very pleased with our progress as we enter into the final stages of restructuring.

On Slide 19, you'll see gross margin in the quarter fell $37.5 million behind lower shipment volumes and unfavorable mix, which both were the result of the ERP implementation at York. Gross margin benefited from lower manufacturing cost as a result of restructuring savings.

Gross margin also benefited from the model year 2013 motorcycle price increases and lower raw material costs. Foreign exchange positively impacted gross margin by $1.2 million.

However, revenue was $28 million lower as a result of the devaluation we experienced in most key currencies versus last year, offset by favorable hedge positions and the positive impact of lapping year ago foreign currency losses. Over the next several quarters, we expect downward pressure on gross margins as a result of the devaluation we are experiencing in most key currencies.

The adverse financial impact of devaluation will be somewhat tempered in the near term by our currency hedges. As a percent of revenue, gross margin increased to 34.7% or up 1.0 percentage points versus last year's third quarter.

We are very pleased with our gross margin performance during the quarter and the first 9 months. However, we expect fourth quarter gross margin percent to be roughly in line with last year's fourth quarter.

We expect fourth quarter gross margin percent will include productivity gains and improved mix, but will be offset by unfavorable foreign currency and significantly lower production levels as compared to last year. Operating margin for the quarter fell by $35.9 million, driven by lower gross margin as a result of lower shipments.

As a percent of revenue, operating margin fell 1.4 points during the quarter on lower revenues, with largely flat SG&A and restructuring spending. On a year-to-date basis, operating margin is up 26% to $662 million.

And as a percent of revenue, operating margin was up 2.3 points versus prior year. SG&A was $224.0 million or 0.8% higher during the quarter compared to quarter last year.

For the fourth quarter, we expect SG&A to be modestly below prior year spending of $266 million. Q4 SG&A will reflect the impact of 5 fewer calendar days in the quarter, which equates to roughly $8 million in lower expenses and reflects the lapping of last year's recall expense of $12 million.

Favorability from these items will be partially offset by a moderate increase in spending in the fourth quarter to support our growth initiatives. We continue to expect full year SG&A spending will increase over last year as we invest in growth, but will decrease as a percent of revenue.

Now moving on to our Financial Services segment on Slide 21. HDFS operating profit was $72.4 million, up 16.7% compared to last year's third quarter.

I would like to highlight 2 items on the year-over-year comparison. First, the provision for wholesale loan losses was unfavorable at $4.8 million, driven by a reserve release for last year's third quarter.

Second, the key driver of HDFS' operating growth of $10.4 million in the quarter was an improvement in net interest income. This was largely driven by the lapping of prior year loss of $8.7 million on the early repurchase of a portion of our 6.8% medium-term notes in Q3 of 2011.

Based on continued strong credit loss performance and a more favorable cost of funds, we now believe HDFS' full year operating profit will improve slightly over last year. Now, I will provide more detail on HDFS' operations on Slide 22.

During the third quarter, HDFS retail motorcycle loan originations increased 2.5% or $15.6 million compared to the same period last year. The increase was driven by growth in used motorcycle loan originations, partially offset by a decline in new motorcycle loan originations, consistent with lower retail sales in the U.S.

During the quarter, our market share of new retail motorcycle lending was up slightly at 52.3%. Originations in Q3 were approximately 80% prime.

Total finance receivables outstanding decreased 0.2% compared to a year ago, primarily due to a declining retail portfolio. Retail finance receivables outstanding decreased 1.5% compared to a year ago, partially offset by wholesale finance receivables, which were up 9.5% compared to last year.

We are very pleased with the improved retail delinquency rate and the credit loss -- retail credit losses compared to last year, which you will see on Slide 23. The 30-day delinquency rate for retail motorcycle loans at the end of the third quarter was 3.24% or 49 basis points better than the same date last year.

Annualized retail credit losses were at their lowest level in over 10 years. For the third quarter, retail credit losses came in at 65 basis points, considerably lower than prior year of 111 basis points.

This favorable credit loss performance was driven by our continued strong underwriting, collection and loss mitigation efforts, as well as consumer behavior in managing their credit in the U.S. While we continue to be disciplined in how we manage the loan portfolio and the overall business, we have no assurance that the current consumer behavior will continue.

In fact, we expect retail credit losses to increase over time, due to customers taking on additional debt, HDFS' efforts to find more prudently structured loan approvals in the near prime and subprime lending, and lower recoveries resulting from lower charge-offs than prior periods. We remain focused on enabling sales of Harley-Davidson motorcycles and prudently managing the business, while providing an attractive return to Harley-Davidson, Inc.

Now let's take a look at cash and liquidity on Slide 24. You will see that at the end of the quarter, we had $1.93 billion of cash and marketable securities.

In addition, HDFS had $1.55 billion of available liquidity through bank credit and conduit facilities. We currently have, and intend to continue to maintain, a minimum of 12 months of projected liquidity needs in cash and/or committed credit facilities.

We ended the quarter with higher than typical cash balances. This was due to the timing of our funding activities.

During the quarter, we took advantage of the very favorable debt markets and completed 2 transactions, both which represent all-time low interest rates -- interest cost to HDFS. First, in July, HDFS completed a $675 million asset-backed securitization at a weighted average interest rate of 0.81%.

And second, in September, HDFS completed the sale of $600 million of 3-year notes with an interest rate of 1.15%. Through the fourth quarter, we expect our cash balance to come down and be in line with our cash strategy to hold 12 months of projected liquidity in cash or committed credit facilities.

Additionally, we established a $200 million Canadian conduit facility to more efficiently finance Canadian retail receivables, and we renewed our $600 million U.S. conduit facility.

During the third quarter, we repurchased 1.9 million shares of Harley-Davidson stock for $85 million. As we have stated, returning value to our shareholders through increasing dividends and share repurchases is a top priority.

We will continue to evaluate opportunities to enhance value for our shareholders. Now I'd like to highlight 2 items on Slide 25, which provide the remaining Harley-Davidson, Inc.

financials. First, the company provided operating cash of $712.5 million during the first 9 months, compared to $901.6 million provided in 2011.

The decrease in operating cash flow was primarily driven by an increase in working capital and an increase in HDFS wholesale receivables due to the timing of shipments in the third quarter. The motorcycle business generated year-to-date operating cash of $496 million.

Second, the effective tax rate was higher this quarter versus last year's third quarter, which included a favorable settlement of an IRS audit, as well as a favorable change in the Wisconsin income tax law associated with certain net operating losses. On Slide 26, you'll see that for 2012, we continue to expect motorcycle shipments to be 245,000 to 250,000 motorcycles on a worldwide basis, up 5% to 7% from 2011.

During the third quarter (sic) [fourth quarter], we expect to ship 44,500 to 49,500 units, which is down 2% to 12% compared to last year, as we move production closer to seasonal demand. We expect fourth quarter gross margin percent to be roughly in line with last year's fourth quarter gross margin.

As we expect Q4 gross margin percent will include productivity gains and improved mix, which will be offset by unfavorable foreign currency and significantly lower production levels as compared to last year. We expect Q4 production to be down versus prior year for the following reasons: First, we plan to implement flexible production at York in the first quarter of 2013; second, we will not repeat the build of 7,000 additional motorcycles in the fourth quarter of 2011 to support the ERP launch; and third, because there will be 5 fewer days in the fiscal Q4 calendar compared to last year's fourth quarter.

We continue to expect full year 2012 gross margin of 34.75% to 35.75%. Finally, we continue to expect 2012 capital expenditures to be $190 million to $210 million, which includes approximately $35 million of capital related restructuring.

John, let me just clarify quickly. You said that we're shipping 44,500 to 49,500 in the third quarter, it's the fourth quarter.

In the fourth quarter, sorry.

That was Slide 26.

On Slide 26. Thank you.

As we look back on the third quarter of 2012, our overall results were in line with our expectations. We exited the third quarter with good sales momentum in the U.S.

and slightly higher retail inventory than the prior year. We posted strong international retail sales despite challenging world economies.

We kicked off our 110th Anniversary year. We launched an exciting lineup of 2013 model year motorcycles.

HDFS continues to perform very well, and during the quarter, we repurchased 1.9 million shares of our stock. Today, we are thrilled that our ERP launch in York is nearly complete.

It's a huge step in our progress towards transforming to world-class manufacturing. We remain focused on executing against our strategies as we complete the final activities in our manufacturing restructuring, continue to transform our organization and grow our business, while delivering strong margins, strong returns and value to our shareholders.

Thank you for your continued confidence and investment in Harley-Davidson. And now let's open the call up to your questions.

I apologize if I missed this, but are you still committed to undershipping retail sales in 2012 and then I have just a follow-up after that.

Yes, Ed. We would expect that on a full year basis, our dealers in the U.S.

will retail more than we ship by a slight amount.

Okay, great. And then just as far as kind of Q3 is concerned, leaving some sales on the table just given the production, September production issues, did that meaningfully affect your mix of outreach versus core customers, since core riders tend to be more inclined to buy touring bikes?

And then secondly, when do you expect the lost sales to be recovered? I'm just trying to understand if that business comes back in Q4 or if maybe it sort of just gets pushed into next year?

Well, as we talked about, retail sales in the quarter were certainly affected by the low retail inventories. And basically, we had retail sales down in July, August and the first part of September, and the reason being is inventories were extremely low during that period of time.

As inventories at York came back, certainly retail sales came back as well. Ed, you had asked about the type of mix in the system.

The answer is, yes, the mix skewed more toward outreach customers in the third quarter. So a lot of our touring bikes are sold -- well, some of them are sold to outreach as well.

Actually, the Street Glide is the top-selling bike to our outreach youth, as well as women. Most of the touring bikes are to core customers.

So that would have an impact. We did see sales to outreach customers outstrip that of core in the third quarter.

As Keith had mentioned, we've seen that for the last 3 quarters. And when we talk about the sales, they were clearly affected by retail inventory, and let me kind of put a little bit more to that.

If you look at the 13 weeks within the quarter, and you look at our product of York, the bikes we make out of York in the inventory. Of those 13 weeks, 11 of those weeks were below prior year levels.

And remember, a year ago, we said that inventory in the third quarter was very tight and lower than desired. Of those 11 weeks, Ed, 9 of them were down double digit.

And touring bikes, which has been our hottest seller and the most in demand and the most constrained, inventory fell at one point during the quarter to over 40% down. So clearly, the pump ran dry in the third quarter.

And it took us since the time we started reshipping in the third week of August, about 8 weeks, to catch up on inventory at York. But once inventory started to approach year-ago levels, especially of York product, we saw retail sales really come back.

I think on several of the Analyst Days, Keith, you've talked about kind of getting back to Harley's roots in innovation and kind of how that would impact models in years going forward. And I guess, this model year changeover, it looks more like tweaks to existing models, rather than what I would call real innovation.

So I was hoping you could give us some insight to what we should be expecting in the next 2 or 3 years and whether you think that innovation will be more critical to the U.S. consumer or more geared towards the international consumer?

Okay. That's a great question.

But first, of all, let me just sort of set the backdrop again. So the year is 2009, sales are off 40%, revenues are down significantly.

And so, we've got a reduced budget around spending in the whole business, including product development. So that's number one.

Number two, is we are taking the reduced amount of money that we're spending on product development, and we're developing products for Buell, MV Agusta, as well as Harley. So I think you can sort of get the idea that we were sort of constraining the amount of development, innovation and new products that were pertinent to the Harley-Davidson brand, number one.

And you lay over that the fact that at the time, 4 of these new products that you're talking about, which are the new innovative products, not just the tweaks or the sort of the model refreshes, it was about 5- to 5.5-year product development process. So 2009, that takes us out to 2014 and 1/2 before you would see any new products coming through.

But remember, that we were constrained on what we were developing in that time. So what we've done is, in addition to focusing strictly on the Harley-Davidson brand by getting out of Buell, selling MV Agusta, et cetera, putting more money into product development, we've also shortened the development time through a lot of really hard, diligent work.

And so the answer to your question is, if you think about the timeframe of the new product development process being late 2010, 2011, we're into the 2015 timeframe before we really start to see a lot of these products with the new innovation that are focused on international markets, outreach customers and core customers. And we do have products in development that are exciting, that I think, and we all believe, will inspire every one of those markets that we just mentioned.

And just so you know, Sharon, this is one of our biggest frustrations in the company. Because we would like to have these products here today.

But given all the things that I just mentioned, it just simply isn't possible. All I can tell you is, and while we don't talk about specific products that are in development, all I can tell you is, I think that we, our employees here, I think we're more excited today about the array of products that we have under development, that we're going to be bringing to market, than maybe we've ever been in the history of our company.

John, I just wanted to hit on the inefficiencies. As you mentioned, you worked a little bit of extra unexpected overtime, and you're looking for a $32 million to $35 million.

As you wrap up some on the restructurings looking into next year, should we see those inefficiencies year-over-year largely drop off? I know there may be some residuals, but any color you can give us from that perspective?

And then in the quarter here, your inventories were up, which is just a little confusing at the company level. Just maybe walk us through the whys of that portion.

Okay Tim, with regards to the temporary inefficiencies, again, these are things that are important to our transformation, but from an accounting standpoint, can't be included in restructuring expense. And we expect this year for them to be $32 million to $35 million.

And last year, they were $32 million. Next year, as the restructuring ends, we will start to see these dissipate over the next 2 years.

And so, we would see, call it, 1/2 of them fall off next year and then the other 1/2 in 2014. The second question is with regards to inventories, and inventories on a year-over-year basis were up a bit.

And that's driven by a couple of things. One, our related business' inventory is up, in particular on General Merchandise.

And remember, we entered the year in the third quarter with our new 110th Anniversary product. So that's driving inventories up as we supply the world with those highly-desired products.

As well, as inventory is up a little bit in international finished goods motorcycles, roughly 1,000 units. And we've had strong sales in international in the third quarter.

Tim, let me -- this is Keith. I just want to add something here too, because I know there's this question about inefficiencies, et cetera, in York, and I just want to make sure that I'm clear about what we're doing there.

As you know, I've personally been involved in many new systems implementations. Not just SAP, but Microsoft and -- I mean, not Microsoft, but PMFG Pro, et cetera, over the years, and I have never seen an implementation that has gone even remotely as well as what's happened in this company.

I mean, it's absolutely a tribute to all of our employees, the focus, not only of our employees, but also the folks from SAP and other consultants that were involved in the process. And I would say that on a scale of 1 to 10, with 10 being an absolute perfect launch, we were at 9.2.

And we had some issues, certainly, coming out of the launch that caused issues to slow down production. Our folks have worked hard and diligently to fix those as we've gone along, a very methodical and focused initiative and effort.

And we're beyond that. And our run rates are where they need to be, and there's only upside in our manufacturing plants going forward.

Two quick ones. Did the delayed model year 2013 launch impact international demand in the same way as it did in the U.S.?

And could you also address used bike prices?

Yes, the pushed out model year would have some effect on international. But remember, the distribution system is a little bit different in international.

We have pools of inventory in our international markets. But as we delay the model year launch, it did push out -- I'm sorry, as we retime the model year launch, which is now going to be in August in the future as well, is that just pushed out the shipments of those new models, and it takes about a month for them to get into market.

So yes, it would push out sales in international markets as well. Yes?

Used bike prices.

And I'm sorry, used bike prices. From the fourth quarter of last year, used bike prices have been very stable, and the gap between used and new bikes have been stable in the first, second and third quarter -- I'm sorry, in the fourth quarter of last year, first and second.

Also during those 3 quarters, we've seen used grow faster than -- I'm sorry, new grow faster than used. We did see a reversal in that in the first 2 months of the third quarter, where used grew faster than retail -- I'm sorry, new.

And that was because new fell, and we continue to sell a fair amount of used bikes. But overall, we feel very good about the gap between new and used bike prices and do not think that, that's going to hinder us in growing new bike sales into the future.

Regarding the cadence of the retail sales in the quarter, obviously, very positive, and I understand the alignment of distribution [ph] there. But there has been an argument that September picked up also because of pent-up demand.

So I'm just wondering if you can provide any color of what you've been seeing lately in October and maybe your expectation for the rest of the year?

Well, we clearly saw a pickup in retail sales in the last 3 weeks of September. And again, as I had mentioned, as the York inventory in particular got close to year-ago levels, sales began to certainly rise.

Felicia, we feel great about the brand. We feel great about the brand's strength.

To tease out what piece is what, it's really hard to do. Clearly, our retail sales during the quarter were affected by lack of product availability.

When the availability was restored, retail sales came back quite strong, and we exited the quarter with a fair amount of momentum. And when we look forward, it's also hard to tell.

In the first quarter, we pulled sales into the first quarter given the good weather. And in the third quarter, we may have pushed some sales out of the third quarter, and we may pick those up in the fourth quarter or people may wait until spring.

But the point is, is that the brand is still very strong. Our market share position is still very strong and there's a lot of demand for the product.

And we don't provide a future look at retail sales. So right now, we feel good about where we're at on a year-to-date basis.

Okay. Okay.

And then, I was wondering if you could just help us think through this surge capacity and how to model for it. Should we assume that the historical quarterly changes in the -- I'm sorry, the historical sequential quarterly changes in dealer inventories declines or even gets close to 0?

And then you said that the surge will be up in the first quarter, but is it -- how should we think about that in terms of timing within the first quarter, like should we credit our first quarter model for that?

Okay. Let's take a step back on everything that we're trying to do here.

Is given the fact that we've now got new capabilities from a manufacturing perspective, and that's what the restructuring has been all about, we've got the capability to produce much more flexibly and produce when our customers want the product. So this year, 2012, we took the opportunity, and we shipped in the first half more motorcycles than we retailed.

That is the first time that, that's happened in well over a decade. Typically, what we do is retail about 57% of our year's production, and we ship in only 50%.

So in 2012, we took the first step toward realizing our new capability, and we shipped in more bikes in the first half. A lot of those came from inventory.

The next step is what's going to take place at York in the first half of next year. And we will now produce the same way that we ship.

So we'll be able to -- and be capable of producing a lot more in the first half as we bring on flexible workers and get more capacity utilization out of our facilities. And what that will do is have somewhat of an impact on gross margin between quarters.

But next year, we would expect to link our shipments and our productions pretty tightly. The third piece of it is making sure that inventories are also in line with our new flexible manufacturing capability.

And as we look to next year, we would expect to put more inventory in the dealer channel in the first, second and third quarter and take some out of the fourth quarter of next year. Just like we are this year, and that's because Kansas City will also be moving to flexible production in the beginning of 2014.

I'm going to jump back in here, John, because I'm excited. And I'm going to say it again, I've been in this thing for 38 years.

I have never seen an effort like what we've had in this company in the last couple of years to get us repositioned in manufacturing for the future. And it's now our labor unions that have stepped up and in spite of very difficult changes, have been all-in.

Our employees, all-in, our leadership. And I mean what's been accomplished here is exceptional.

And I'm just going to keep saying that because we're -- 2 years ago, we were on a call with the same folks here, we were asked about the restructuring, and in spite of the unbelievable amount of work that needed to be done, what we said was, "Coming out of 2012, we would be completed." Right?

Yes.

And that's exactly what happened. And there's been some puts and takes along the way, as you might expect, but it's absolutely awesome.

A question on gross margins. You said you expect that to be flat in the fourth quarter.

I think all the color that you gave on that front was really helpful. But that basically gets me, I guess, at best, to the very low end of your guidance for the full year, if I'm doing the math correctly.

I guess versus where you were coming into the year, how have gross margins trended? It seems like maybe a little bit worse?

Did that ultimately get affected by the production shortages we saw in the fourth quarter? But ultimately, how should I think about that?

Overall gross margin, again, is expected to be 34.75% to 35.75%, James. As we exit the third quarter, we're sitting at 35.6%, which is toward the high end of the range.

But you got to look historically at our gross margin percents and the fourth quarter is always our lowest gross margin quarter. And it's typically down anywhere between 2 and 5 percentage points from the previous 3 quarters' run rate and next year is no different.

The fourth quarter will fall off, and that's because of the fact that we produce much less. And as we look at the fourth quarter of this year, the growth that we've been experiencing through the first 3 quarters of this year, which is up 1.6 points of gross margin, we don't expect to be there, because of the fact that production will be significantly lower and foreign currency will be lower.

But again, we do expect to be in the 34.75% to 35.75%.

I guess I just have one housekeeping and maybe one slightly longer question. You went through the temporary, John, you know what you expected for the year for the temporary inefficiencies, and what you had done year-to-date, or I'm sorry, for the third quarter.

Can you just remind me what that implies for the fourth? Just one little housekeeping item there.

And then second question is on international inventories. You've been shipping, I believe, if my numbers are right, ahead of sales for the first 3 quarters of the year, and correct me if I'm wrong on that.

How do you see the balance between shipments and retail sales playing out, maybe for the fourth quarter and then beyond the fourth quarter? Are you still building a lot of inventory because you're opening a lot of dealerships there?

Or should we expect the sales and the shipments to be sort of similar on a go-forward basis?

Thanks, Patrick. Temporary inefficiencies, I think was the first question.

And we expect temporary inefficiencies of $5 million to $8 million in the fourth quarter. Secondly was a question on international inventory.

I think as we ended the quarter, we're up about 800 units in international inventory based on, one, increasing dealerships; and two, the growth that we expect out of international. International is no different than the U.S.

We're going to continue to aggressively manage supply in line with demand, and we feel very good about our overall inventories in the international arena. Again, they're up slightly in the third quarter, as were the domestic inventories, up about 3,100 units in the quarter.

It's Pat Nolan on for Rod. Most of my questions have been answered, so just 2 follow-ups.

On the surge capacity, I think it's pretty clear that you'll be able to take down your inventories on the corporate level, based on being able to clearly match production to your shipments. But on a full year basis at the dealer level, would you expect that you would grow dealer inventories in 2013?

No. We would expect dealer inventories to be down a little bit in the fourth quarter.

But Pat, we expect them to be higher throughout the first 3 quarters. And so, we've been working through limited supply of motorcycles, and we would expect to replenish those in the first, second and third quarters.

But given the fact that our fourth quarter -- is only about 17% of retail sales happens in the fourth quarter and 22% in the first quarter, we don't need as much inventory sitting in dealers. And when you have inventory that you don't need sitting in dealerships, it's inevitably going to end up being the wrong inventory.

So that's what we're doing in terms of our flexible manufacturing, is we're going to wait longer to read the market better and to put inventory into the dealerships when they need it and in time for the spring selling season. So ultimately, we would expect dealer inventory to come down slightly this year, 2012, and slightly in 2013.

We're not talking huge moves, but it will be down a little bit because we have the capability of making the product when the customers want them.

That's helpful. And on retail sales in the quarter, I think it makes a lot of sense that you're inventory constrained, but it's a little bit surprising that the overall industry was down 5%.

I know you're a high 50% of the industry. But I'm surprised the rest of the industry wasn't positive in the quarter.

Could you maybe give some color about what's going on within the industry? I would've thought with what's going on in the credit availability, that would've helped demand, but it seems that the overall industry was kind of weak in the quarter as well.

I think the first comment that you made, Pat, is the most important. Is we're at 57% of the market.

And with us being down 5.2%, used bikes, overall industry is going to fall a fair amount as well. If you look at total demand, overall industry through August is up about 6.5%, so very healthy.

We're up about 9% in total demand. So the industry, the competition is still selling a lot more bikes.

They're still selling though, more used is growing faster than their new. And again, we hit an inflection point about 3, 4 quarters ago, and they haven't reached that point yet.

So the competition is selling a lot of motorcycles, more of them being new than used.

Used than new.

I'm sorry, more of them used than new.

The first question I have is, you guys talked a little bit about how you're expanding the international dealer base, but can you talk about how you feel about the domestic dealer base and whether or not you're looking to continue to kind of weed out any sort of underperformers or improve them? And then also, any insight on what you've had to do to keep EMEA sales decent or robust, however you'd like to look at that?

Let me take the first part of that, John, on the dealers. Jaime, we've, over the last 2.5 probably years, we recognized early on, particularly in light of the fact that sales had fallen from the 2006-2007 timeframe significantly, that our dealer network was, particularly in the U.S., was somewhat under stress financially, and that we probably had too many dealers, and particularly, we were over-dealered in '09 or '10 or '11, whatever it was, major metropolitan markets.

So we worked extremely hard with our dealer network and have been successful in probably closing maybe 100 or so dealer points.

86.

86, okay. So in that timeframe.

So given sort of where the market is today and that restructured dealer network, we feel pretty confident today that we're appropriately dealered in the U.S. Now I don't know what that means a year from now or 2 years from now, but that's something that we have to continually watch and monitor and make sure that we're working hard to maximize our dealer network, because it's extremely important that we have a financially sound dealer network so that, that translates to every day, a great customer experience.

And we do know, because we have access to all of our dealers' financials, that there has been significant improvement over the last couple of years in terms of dealer profitability, et cetera. On the other hand, we also knew that there was untapped potential in the international markets, and not just in the developed markets, but also in the emerging markets.

And so, as early as 2009, we said we were going to add 100 to 150 dealerships between then and 2014 in strategic areas. We've been doing that.

We're on track. And it's paying dividends in terms of better penetration in the international markets and getting greater access to the brand for the customers around the world that are desirous of participating in the Harley-Davidson brand.

And the other question that you asked was on EMEA sales. We're clearly actively managing the situation.

It is very volatile, and we saw sales down in the first and second quarter, we're pleased to see them up in the third quarter. But the team there is actively managing from an inventory standpoint, and our pipeline distribution system helps that, to make sure that we've got the right motorcycles at the right place and the motorcycles out where they're selling.

And again, we have got the tale of 2 markets in Europe. The north seems to be continuing to grow very well, and the south is very soft.

So they're working on making sure that inventory is in the right place. They continue to fuel the emerging markets and adding dealerships and filling out in emerging markets.

And then finally, allocating overall resources and rationalizing where appropriate. So the situation is difficult, we don't expect it to go away.

We expect it to continue for some time, and the team there is doing an absolutely fantastic job of managing the situation the best they can.

Just a couple of quick questions. First, just a follow-up on what James was asking about the gross margin.

It doesn't seem like the fourth quarter guidance and in the full year would be [indiscernible]. If you use the -- the low end of your production guidance would get you to about 34.75% in gross margin, if gross margin was flat quarter to quarter, to the extent that production would go up on that, you'd be below that for the full year.

So it would seem that it would have to be up in the fourth quarter to hit your full year guidance.

Well, on a weighted average basis, we will be roughly in line with Q4's last year's guidance and that will equate to a gross margin of between, on a full year basis, of 34.75% to 35.75%.

I have 2 questions. First is, the last couple of Q1s you've made pension contributions around $200 million each year.

I was wondering if you have a sense yet of how much of your cash may go to that in Q1 of 2013? And then my second question is, just trying to get clarification on your comment about the uptick in sales in the month of September versus how the full quarter came in.

And you said the model year, the retiming hurt sales early in the quarter, and then you mentioned this momentum in September, are you suggesting the increase in September is more than just a model year shift? In other words, are you thinking or should we be thinking about it as an inflection point?

Or are you saying that was the model year shift that helped September after hurting August? And then the pension question.

Okay, Robin. From a pension standpoint, we haven't marked the assets.

So what happens in the pension accounting is, is we will mark at the end of the year and given where current discount rates are, we would expect the liability to increase as we exit this year, because the discount is a huge driver of that liability. At the end of the year, we'll evaluate what pension liability looks like, what we're obligated to do.

Right now, our pension plans are well-funded. We feel very good about where we're at, but we do expect that liability to increase.

And at that time, we'll evaluate it, making sure that we keep a very strong and healthy balance sheet. And at that time, we'll decide if we need to contribute more funds.

The second is the uptick in September is -- the majority or -- it's hard to segment how much is due to the underlying momentum and demand for the brand versus some of the sales that were pushed out of July and August into later September. So there's no way for us to exactly quantify it.

What we do see is that we've -- in the last 3 weeks of September, in particular, as York inventory or product of York inventories came back to year-ago levels, we saw very strong momentum as we exited the quarter in the back half of September.

I want to thank everyone for your time this morning. We certainly appreciate your investment and interest in Harley-Davidson.

Thanks, John, and the audio and visual support for today's call will be available at harley-davidson.com. The audio can also be accessed until November 6 by calling (404) 537-3406 or (855) 859-2056 in the U.S.

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