Harley-Davidson, Inc.
Q3 2012 Earnings Call Transcript

Published: 23 Oct 2012

[Operator:]

Good morning, everyone. My name is Sarah, and I will be your conference operator today. At this time, I'd like to welcome you all to the third quarter 2012 earnings conference call. [Operator Instructions] I'd now like to turn the call over to our host, Ms. Amy Giuffre, Director of Investor Relations. You may begin your conference.

[Amy Giuffre:]

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?

[Keith E. Wandell:]

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

[John A. 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

[Amy Giuffre:]

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.

[John A. Olin:]

In the fourth quarter, sorry.

[Keith E. Wandell:]

That was Slide 26.

[John A. Olin:]

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.

[Operator:]

[Operator Instructions] Your first question comes from Ed Aaron of RBC Capital Markets.

[Edward Aaron:]

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.

[John A. Olin:]

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.

[Edward Aaron:]

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?

[John A. Olin:]

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.

[Operator:]

Your next question comes from Sharon Zackfia of William Blair.

[Sharon Zackfia:]

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?

[Keith E. Wandell:]

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.

[Operator:]

Your next question comes from Tim Conder of Wells Fargo Securities.

[Timothy A. Conder:]

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.

[John A. Olin:]

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.

[Keith E. Wandell:]

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.

[Operator:]

Your next question comes from Craig Kennison of Robert W. Baird.

[Craig R. Kennison:]

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?

[John A. Olin:]

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?

[Keith E. Wandell:]

Used bike prices.

[John A. Olin:]

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.

[Operator:]

Your next question comes from Felicia Hendrix of Barclays Capital.

[Felicia R. Hendrix:]

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?

[John A. Olin:]

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.

[Felicia R. Hendrix:]

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?

[John A. Olin:]

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.

[Keith E. Wandell:]

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?

[John A. Olin:]

Yes.

[Keith E. Wandell:]

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.

[Operator:]

Your next question comes from James Hardiman of Longbow Research.

[James Hardiman:]

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?

[John A. Olin:]

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%.

[Operator:]

You're next question comes from Patrick Archambault of Goldman Sachs.

[Patrick Archambault:]

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?

[John A. Olin:]

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.

[Operator:]

Your next question comes from Rod Lache of Deutsche Bank.

[Patrick Nolan:]

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?

[John A. Olin:]

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.

[Patrick Nolan:]

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.

[John A. Olin:]

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.

[Keith E. Wandell:]

Used than new.

[John A. Olin:]

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

[Operator:]

Your next question comes from Jaime Katz of Morningstar.

[Jaime M. Katz:]

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?

[Keith E. Wandell:]

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.

[John A. Olin:]

86.

[Keith E. Wandell:]

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.

[John A. Olin:]

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.

[Operator:]

Your next question comes from Joe Hovorka of Raymond James.

[Joseph D. Hovorka:]

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.

[John A. Olin:]

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%.

[Operator:]

Your last question comes from Robin Farley of UBS.

[Robin M. Farley:]

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.

[John A. Olin:]

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.

[Operator:]

There are no further questions queued up at this time. I turn the conference over to Ms. Amy Giuffre for closing remarks.

[John A. Olin:]

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

[Amy Giuffre:]

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 [phone] or [phone] in the U.S. The PIN number is 32462414#. If you have any other questions, just give us a call at [phone]. Thank you.

[Operator:]

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