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Harman International Industries Inc. (NYSE:HAR)

F1Q09 (Qtr End 9/30/08) Earnings Call

October 29, 2008 4:30 pm ET

Executives

Dinesh Paliwal - Chairman and CEO

Herbert Parker - CFO

Bob Lardon - VP of Strategy and IR

Analysts

Chris Ceraso - Credit Suisse

Scot Ciccarelli - RBC Capital Markets

Peter Friedland - Soleil Group

David Leiker - Robert W. Baird

Operator

Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the Harman International Industries first quarter fiscal year 2009 Earnings Call. At this point, all of your phone lines are muted or in a listen-on-mode. However, later during the conference there will be opportunities for questions and those instructions will be given at that time. As a reminder, today's conference is being recorded.

Please note that certain statements being made by the company during this call are forward-looking statements. These statements include the company's beliefs and expectations as the future events and trends affecting the company's business, and are subject to risks and uncertainties. Persons participating on the call today are advised to review the reports filed by Harman International with the Securities and Exchange Commission regarding these risks and uncertainties.

With that being said, here with our opening remarks is Harman International Industries' Chairman and Chief Executive officer, Dinesh Paliwal. Please go ahead, Mr. Paliwal.

Dinesh Paliwal

Thank you, Lea. Good afternoon, ladies and gentlemen, and thank you for joining the Harman first quarter 2009 investor and analyst call. I'm joined here in Stamford, Connecticut, today by Herbert Parker, our Chief Financial Officer, and Bob Lardon, our Vice President of Strategy and Investor Relations. We look forward to talking with many of you in the weeks ahead as we continue our candid dialogue.

Along with our first quarter press release issued this afternoon, I would like to call your attention to a set of supporting slides that has been posted with the press release on both our company's website, harman.com, and the business wire. It would be very handy if you have it with you, but if not, you can always follow up later.

I will refer to these slides during my discussion. Please note that I will also provide some information on a non-GAAP basis to give you a better understanding of our results, exclusive of restructuring and merger related costs.

We are operating in an unprecedented economic environment, and the current turmoil in the global credit market has badly shaken both investor and consumer confidence. Although the top-line impact of this downturn was limited during our first quarter, we're not immune from the pressures felt by most companies during this difficult time, and we have started to feel the impact.

Net sales for the quarter ending September 30, 2008, were $869 million, an 8% decrease compared to $947 million for the same period last year. Net sales were down 13% when adjusted for constant currency.

Earnings per diluted share for the quarter were $0.51, on a non-GAAP basis and $0.40 on a GAAP basis, compared to $0.62 and $0.55 respectively for the same period last year.

The Harman automotive division's net sales declined 8% to $617 million. Our consumer audio division was down 11% to $106 million, and the professional audio division declined 6% to $137 million.

In spite of the sales and pricing pressures associated with these top-line challenges, we posted a gross profit margin of 28.5%, which is up from 27.9% for the same period last year on a non-GAAP basis.

As a percentage of sales, our operating income of 4.9% was unchanged from the same period last year, but the lower sales volume resulted in operating income declining to $43 million, compared to $46 million for the first quarter last year, again, stated on a non-GAAP basis.

These numbers are in part a symptom of a very difficult environment that is facing every business. We are fighting back very aggressively, accelerating the many strategic initiatives we have shared with you in previous calls and that are beginning to make Harman more competitive for any market cycle.

Before I offer some additional comments on these initiatives, I'll ask Herbert Parker to provide a closer look at our quarterly results.

Herbert Parker

Thank you, Dinesh. I will provide certain information on a non-GAAP basis to give you a better understanding of our results, exclusive our restructuring and merger related costs. We will be executing major restructuring projects over the next two years; my comments to the external markets would normally reference financial details excluding these restructuring costs.

As such, the information that follows would be on this basis. A reconciliation of our GAAP to non-GAAP results was included in our press release earlier today, but for your easy reference, restructuring costs included in our first quarter results total $10.5 million. And as Dinesh noted earlier, our net sales for the first quarter were $869 million, which is an 8% decrease compared to the same period last year.

Gross profit was 28.5% compared to 27.9% in the prior year. Operating profit was $43 million versus $46 million. This results in a 4.9% operating margin for the current and prior year. Our net income was $30 million, and earnings per diluted share were $0.51.

Foreign currency translation had a positive impact on our first quarter net sales by 5% compared to the same period last year, which resulted into an improvement of $48 million. The sales decline in the first quarter was primarily related to lower sales across several major automotive division customers. This decline in the automotive division was partly offset by higher sales to Audi, BMW and Hyundai.

In spite of these lower sales, volume operating profit margin was the same as last year, which was primarily the result of improved margins in the professional and consumer divisions.

SG&A expenses for the first quarter were $205 million, compared to $218 million last year. R&D and engineering costs were $87 million, or 10% of sales, compared to $88 million, or 9.3% of sales, last year. This represents an increase of 70 basis points. Our effective tax rate for the first quarter was 26.5%. Excluding restructuring charges, tax rate for the first quarter was 28.3%.

Our September 30 balance sheet had a cash balance of $195 million and total debt of $428 million. Our debt balance includes the proceeds from the issuance of $400 million of convertible notes, which is due in October 2012.

Cash flow from operations for the first quarter was $18 million and capital expenditures were $23 million. For the first time in several years, our operating cash flow was positive for the first quarter. Depreciation and amortization was $42 million, which included $5.6 million of accelerated depreciation related to restructuring programs.

I will now turn it back to Dinesh for a recap of ongoing strategic initiatives before we take your questions.

Dinesh Paliwal

Thank you, Herbert. Ladies and gentlemen, long before the current global financial crisis hit us, Harman began taking aggressive steps to improve its cost structure and competitive position. Last quarter, we announced that we had launched a 24-month cost improvement and productivity program called STEP Change, which is designed to yield $400 million in sustainable savings by 2011. We are well on the way to achieve this goal as shown on slide 6, page number 7 and 8, which has been distributed and posted on the website.

During the first quarter, we successfully completed the STEP Change definition phase, identifying 240 distinct cost improvement initiatives through a series of intensive workshops, involving hundreds of employees from every functional area throughout the company. These initiatives cover the five general categories of cost, engineering sourcing, manufacturing, sales, and general and administrative, across every Harman business.

Although we will not be giving quarterly or annual guidance, I would like to share some mid-term targets with you. We have identified more than $350 million in savings across engineering sourcing and manufacturing alone.

Dramatic simplification and optimization of our global footprint and rightsizing our workforce in matured markets are common themes across that change. On a companywide basis, we will increase our share of employees in emerging markets from 22% at the beginning of 2008 to 42% by 2011.

Our capital expenditure in emerging countries will increase from 26% to 51%, and outsourcing from 30% to 58%, by fiscal 2011. These targets are also shown on slide number eight. We are now well into the STEP Change execution phase, and key milestones for every initiatives are being monitored through a comprehensive online financial tracking system, which will aggregate and report the actual savings as they take effect.

We expect $55 million in pre-tax savings during 2009, $265million in 2010, and $400 million in 2011. I look forward to providing you with ongoing updates on the STEP Change program execution, and its impact in improving our competitive position.

In addition to the STEP Change program, we have implemented a number of short-term measures to significantly reduce our cost during this difficult fiscal year. The entire Harman Executive Committee and CEO have decided to forego any salary adjustment for the current year. Building upon this leadership, I have asked each divisional and functional head to reduce travel and entertainment cost by 20% from the baseline of fiscal year 2008 for the remainder of this year.

We have implemented a mandatory executive level approval process for such activities as international travel and the use of outside consultants. You will be surprised how much money all corporations spend on such activities if they are not controlled tightly. We have instituted a hiring freeze on all vacant or replacement positions except those which are business-critical or related to our activities in emerging markets.

In September, we opened a new embedded engineering and development centre in Bangalore, India in partnership with leading global solution provider, Wipro Technologies. Beginning with about 250 engineers, we expect to grow our resource footprint in India to more than 1,000 by 2011, significantly strengthening our global engineering capability. I remind you we started with zero in the beginning of 2008.

We have completed a new world class automotive systems manufacturing operation in Suzhou, China. This 130,000 square foot plant is now producing a variety of speakers, amplifiers, and electronic components for auto makers. The Suzhou China site will continue to expand to support our strategy for developing an integrated value chain in China, comprising research and development, product development, manufacturing, marketing, sales, and services.

Continuing the optimization of our global footprint, we recently announced that we will close two engineering sites in Germany by June 30th, 2009. The activities from these sites will be consolidated within other Harman facilities to improve operating efficiency. We have also announced the outsourcing of our automotive warranty service operation in the United States, which will be completed by end of January, 2009.

Combined with the US plant closures that we announced in February, the STEP Change initiatives we have defined will result in a reduction of about 1500 jobs in high cost countries from our 2008 level. About 1000 of these reductions will be completed during current fiscal year. Amidst our actions to reduce discretionary cost, it is important to note that we are maintaining our investments in R&D and innovation at high levels to keep Harman at the leading edge of technology. That's not the area I would ever compromise for the long-term future.

This is evidenced by the more than 50 new products launched during the first quarter, a company record. We are also continuing the sales and marketing activities necessary to communicate our value proposition and seize new business opportunities for the future. We launched a new advertising program during the first quarter, designed to raise our brand profile in our home markets, and in emerging markets where we intend to grow rapidly.

Let me provide you with a few business highlights from our 2009 first quarter. Beginning with slide number four, from the automotive division, Harman has been selected by Mercedes-Benz to supply the branded audio system for its A-/B-Class, SL-Class, and SLK-Class models. We were also selected by Ferrari as a strategic supplier for infotainment and sound systems, replacing a competitor. We have been selected by a leading European automaker to supply the high-fidelity surround sound system for a new model Variant built exclusively for the high-end Chinese market. The system will be built entirely in our new Suzhou, China plant, and we will provide more details in coming weeks.

Following the successful launches of four automotive projects in the fourth quarter, we launched several new platforms this quarter, including production ramp-up of the new Porsche infotainment system for Carrera and Cayenne models; the BMW infotainment system for its flagship 7-series; the new Audi infotainment system for its A6 model; an infotainment system for Ferrari California model; and our Infinity branded audio system for General Motors Europe's Insignia model.

Let's move now to slide number five, which provides some highlights for the quarter in our consumer division. One of our JBL loudspeakers earned the prestigious Best Speaker of the Year Award from European Imaging & Sound Association. We are very proud of that. Another was selected as a Product of the Year for 2008 by a leading publisher in Europe. The third, the JBL Synthesis One System was inducted into the products Hall of Fame by the nation's largest Association of Electronics Designers and Installers, called CEDIA

We also exhibited at the world's largest consumer electronic show in Berlin, Germany, which welcomed more than 220,000 show visitors.

If you turn to slide number six, our professional division continues to innovate, and remains a supplier of choice to world-class venues and entertainers. The new Indianapolis Colts stadium has been fully outfitted with Harman systems, including more than 350 amplifiers and some 4,000 speakers.

We have completed the shipment during this quarter of Harman systems for the new Yankees and Mets Stadiums, in New York. Harman professional systems were also on the job at many celebrated events during the past quarter, including Bruce Springsteen's world tour, the Miss Universe Pageant in Vietnam, the Octoberfest in Munich, and both the Democratic and Republican National Conventions. And hopefully we'll be there when there is Presidential celebration party on November 4th.

Complimenting these divisional achievements, we have completed the consolidation of our corporate headquarters from separate offices in Washington, D.C. and Los Angeles, California, to a new group headquarters in Stamford, Connecticut. This new facility is already producing improvement in collaboration and speed of decision making.

The bottom line on these and other strategic initiatives is that we are fighting back. We are fighting back amidst the current global economic situation with full strength. We are acting responsibly and aggressively to reduce the impact of this environment, and to invest for the brighter future we know will come. It will come to those who are prepared.

In this regard, I believe Harman enjoys some distinct strength. Ladies and gentlemen, let me read these four very distinct strengths we have. We are demonstrating our improved ability to execute on major automotive projects, and customers are rewarding us with new business.

Our balance sheet is strong, although on an annual basis we have always been cash positive. For the first time in several years, return of first quarter operational cash flow was positive during a period of unprecedented economic challenge. I think we are very proud of that.

Third, we had a revolving credit facility for $300 million at attractive pricing, to compliment our conservative cash management policy, which we will stick to. We have taken the actions necessary to dramatically reduce cost and improve productivity, positioning Harman to capitalize on the pent-up demand when global markets reemerge.

I thank you very much for your attention. We will now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We go first to the line of Chris Ceraso from Credit Suisse. Please go ahead.

Chris Ceraso - Credit Suisse

Thanks, good afternoon. As I work through the operating profit by segment, it looks like other expense was a lot lower than normal. Maybe this is a function of some of your cost saving efforts, but maybe you can give me some more detail on that and tell me where you expect that to run because isn't Q1 typically a higher quarter for that line item?

Herbert Parker

Chris, this is Herbert. You may not experience it in our SG&A revenue. We are running at a reasonably low level, we took some restructuring charges as you may be aware of from last year and we're seeing some of the early benefits of that already.

Chris Ceraso - Credit Suisse

Not SG&A per say, but if I look at the results on a segment basis and I add up the operating profit for automotive, consumer and pro, the delta it gets me to the total company operating profits about $7.5 million negative, which is a smaller charge than you typically have in that line?

Herbert Parker

Yes, we had also reduced costs in our corporate level and then the experience that we had in the 401K, our sharing plan.

Chris Ceraso - Credit Suisse

Do you expect it to stay at that level, or was there something in particular in the quarter that helped you there?

Herbert Parker

No. For fiscal 2009, it should stay at that level.

Chris Ceraso - Credit Suisse

Okay, a question?

Dinesh Paliwal

Chris, just to add, I can tell you one thing. Every cost line item is being very heavily looked at and managed extremely tightly. It has never been done in our company before like that. So I am very pleased with the discipline we have. At the same time, we are very generous in terms of our sales people, our service people out there. They should be out there, hold our customers hands and do what they have to do, so we are very mindful, so our costs should be well under control going forward.

Chris Ceraso - Credit Suisse

Okay. When does the E-Class turnover, do that start yet and can you give us an idea of roughly what the revenue amount is that you will lose on that program as part of it gets resourced?

Herbert Parker

Chris, let me walk you through actually first of all, at the full picture level. Since in our 8-K document, we have been sharing very transparent that Mercedes business at its peak. Sometimes in 2006 was about $800 million. And that was also a very unique timing when an automaker was single sourcing. I don't know very many examples of single sourcing, so in about two, three years ago, Mercedes decided, as you know well, but in the interest of others I am sharing. Mercedes decided to do dual-source or triple-source like any other auto makers. And at that time, other partners or peer groups were brought in and our volume has been declining as certain products were completing their maturity life cycle as our competitors' products are ramping up.

So, we believe when it is all said and done that volume which had started at $800 million would settle around $300 million or so by the time it all over, which would be about fiscal '09. At the same time, we have been winning some other awards at Mercedes to partially make up for what we had been losing in the last two, two and a half years. Like I said we have won remaining models. Today we can say all Mercedes models are equipped with Harman Kardon audio. With that said, entire S-Class is with us and we have C-Class and E-Class mid-infotainment system with us throughout Mercedes business. So it's a give and take.

And in addition, the new programs which are being bid now, we are actually working very closely. Our CEO of automotive, Dr Blickle, he is personally engaged in preparing ourselves to bid for very large activities with Mercedes-Benz, which would come, to be decided sometimes in maybe a couple of quarters from now.

Chris Ceraso - Credit Suisse

Okay. A big part of that step down now happens in '09, right?

Dinesh Paliwal

That is correct, Chris.

Chris Ceraso - Credit Suisse

Okay.

Dinesh Paliwal

Just to be on the side of giving you some more transparency, about $100 million is the number in first quarter itself, which is a reduction of Mercedes volume. But we have been making up that volume by growing in other customers like Hyundai.

Genesis has been a fantastic, successful launch for us. And it’s a very nice business for us. We have been very happy with the Audi business being developing. We have been pleasant with the development of BMW launches we have had. So in neck-neck, if we didn't have all of these other activities going on, then Daimler would be a bit more filling, but right now we have been offsetting quite a bit.

Chris Ceraso - Credit Suisse

A similar kind of question in the Pro business. Do you have any kind of backlog number or anything about projects that are in queue or that you have won or been awarded?

Dinesh Paliwal

First of all, Chris, I congratulate you. Because I have been trying hard so that people ask questions on Pro which is our crown jewel in the Company and I am glad you did. Pro business doesn't have at any given time much of a backlog. It is a very quick booking well. And we have disclosed our sale situation, but the good thing in Pro business is and I know I am working very closely with the division president.

There is a slow down in Pro business, but most projects are just sort of slipping away by weeks or months. There would be the infrastructure projects like Commonwealth Games in India. They are not going to away. They are going to happen, they are going to follow what Beijing Olympics did. Or any infrastructure projects in Western markets like US and Germany and UK. They are there, they are probably slipping away.

The same time when you have a downturn in economy, what happens in Pro business, if truly sound comes down or installed sound comes down, all of a sudden we see an emergence of places of worship popping up. So, something or the other we have managed this quite well, although I cannot predict what would the coming quarters bring, but on new product launch which Blake and his company have done in Pro business that is very, very encouraging from our distributors and channel partners' point of view and let's see how this shapes up.

But from the backlog point of view, we don’t carry significant backlog in this business at any given time.

Chris Ceraso - Credit Suisse

Okay. Thanks. I’ll hop back in the queue.

Dinesh Paliwal

Sure.

Operator

Next we go to the line of Scot Ciccarelli from RBC Capital Markets. Please go ahead.

Scot Ciccarelli - RBC Capital Markets

Hi, how are you?

Dinesh Paliwal

Hi, Scott.

Scot Ciccarelli - RBC Capital Markets

The first question, really a clarification to the previous question. When you do your operating income breakout, there is typically a category that I think is labeled other corporate group. And I calculate that was about $7 million in the quarter, down from roughly $22 million last year. Did you say that’s about what the run rate should be going forward, around $7 million a quarter for that category?

Herbert Parker

It’s about the run rate for this quarter. But it is skewed just a little bit because we took significant reversal this quarter in the 401K.

Scot Ciccarelli - RBC Capital Markets

Okay. So that was a one-time number. Can you size that for us at all?

Herbert Parker

You can take that number as that quarter and you can just divide it, it was a one-timer for this quarter.

Dinesh Paliwal

Yes, at the same time as Herbert said and I also reinforced, the numbers in corporate would be in that range because we are also going after some other cost categories. We are becoming very lean in all areas possibly we can.

Scot Ciccarelli - RBC Capital Markets

Okay. But it’s fair to assume $68 million a quarter is kind of the run rate for that at this point, Dinesh? Is that right?

Herbert Parker

No, it's not the run rate. We had forfeitures also, stock option expenses also.

Dinesh Paliwal

Which are one-time.

Herbert Parker

Yes, the one-time event. So you can't take that as the run rate. Although, as Dinesh said, we are watching all the costs very carefully, but what you’re seeing in the first quarter, we did have a one-time reverse in the corporate function.

Scot Ciccarelli - RBC Capital Markets

Okay. Maybe, I'll try and rephrase this one more time here. How big were the one-time items, the forfeiture and the 401K, et cetera?

Herbert Parker

$5 million.

Scot Ciccarelli - RBC Capital Markets

5 million. Okay, that's the number I was looking for. Thank you. Also, Dinesh you mentioned the top line impact was limited in the first quarter from the economic slow down. You are not immune, but you are starting to feel it. Can you provide any more color on that? Obviously, sales were down across the board already, but it sounds like it has taken another step function down. Any other color on that at all?

Dinesh Paliwal

Honestly speaking, that is very hard to speculate. To be honest with you, we are working very closely with our account management team, those who call on all our major accounts. And even our customers are sort of trying to gauge how the market will react. And every day is a different story. What sort of liquidity would come back in the markets? It is very hard, but with that said we are preparing ourselves from the cost point of view, extremely, challenging environment in mind. If that doesn't happen, we'll be happy. If it happens, we'll be prepared.

What we're going after in terms of rationalization, consolidation, three shifts, two shifts, all of those side thing situation. Inventory management, working capital is getting attention like never before, you would not believe. So, all of those things or even going back to some of the large customers in automotive industry, talking to them about credit terms or renegotiating credit terms or working with them on a different forecast so that we can manage our inventory, our supplies inventory, reduce our credit or payable/receivable.

So right now, it is hard for me to say what the net impact would be when reading the same headlines as you are. Whether it is a 5%, 10%, 15%. God knows what the real slowdown would be.

On the other hand, Scot, one thing which is positive and I hope that happens. We're also hearing that once car sales goes down that take rate might go up slightly. So we really haven't been able to sort of finish our math yet. I'm sure we'll have one-on-one meetings in coming weeks by then hopefully we have some more granularity and I will be happy to share with you by November.

Scot Ciccarelli - RBC Capital Markets

Okay. That's great and then the last questions is regarding currency. Currency has been a pretty big tailwind for you for a good year and half, almost two years. But given where the euro and dollar are now, it seems like it will start working against you. What is your outlook or what are you basing your assumptions on? Number one. Number two, what kind of hedging activities are you guys engaging at this point? Thanks.

Herbert Parker

As you know, euro is getting much stronger lately. And we definitely have our hedging policies in place. So the dollar is getting stronger, the euro is getting weaker. We do expect this to turn negative going forward, usually seen the improvement in the first quarter, but going forward we expect the negative effect. But we couldn't give you any guidance as what we think it is going to be. I don't think so anyone can predict what's happening lately in this market, I would be happy to listen to their advice.

Scot Ciccarelli - RBC Capital Markets

Okay. Operating income impact from currency for this quarter was about $3 million to $4 million, is that right?

Herbert Parker

Yes.

Scot Ciccarelli - RBC Capital Markets

Okay thank you.

Dinesh Paliwal

It's not end of the day, so long we always give you and we have always given you constant currency and also nominal and currency adjusted. We give you both and so you can see it as well as what is the impact of the true currency and what has been out?

Scot Ciccarelli - RBC Capital Markets

Right. Got it. Thanks.

Dinesh Paliwal

You are welcome.

Operator

And our next question is from the line of Peter Friedland from the Soleil Group. Please go ahead.

Peter Friedland - Soleil Group

Hi. Another follow-up question on the Mercedes business; there is no secret that Mercedes is dual-source and presumably, you have known about that for quite some time. So why not give the street the heads up that there is going to be a big drop off in revenue in Q1?

Dinesh Paliwal

Hi, Peter, Dinesh here. Peter it's a good point, but my understanding is and I'm actually quite clear on it. We have been talking about how Mercedes volume is declining. This is not news of this quarter or last year, this happened sometime back. I think we had talked about it that a competitor was brought in to do the dual-source by Mercedes. So it is not news now, Peter.

And I have been very clear in my last earnings calls that we're making up for that reduction and right now I volunteered. I said $100 million impact in this quarter, but we picked up quite a bit of that slack in other businesses. And from 800 we might that particular models, which we had two or three years ago would be about $300 million. So yes, 2009 is the year where we get perhaps the hit, but that was reflective also in my slide set of February 5th that how the revenue and contribution margin directionally will shape up and we are absolutely according to that plan nothing had changed there.

Peter Friedland - Soleil Group

Well, that's fair, but if you look at consensus for the quarter is about $1 billion in revenue. And you're coming in dramatically short of that, so clearly the street…?

Dinesh Paliwal

I know you had the consensus, but I couldn't really come out to say that's right or wrong, because to be honest with you, nobody knew six, seven weeks ago this slowdown in car industry would be so dramatic. Maybe we would have hit a $1 billion number if everything was going the way it was six months ago.

Peter Friedland - Soleil Group

Okay, then the next question just on the SG&A line or operating expense line. So if you could trend that out for the rest of the year, the $210 million or so, what does that look like for Q2 and beyond?

Herbert Parker

Well, we're not giving guidance on our numbers, but as Dinesh mentioned earlier, we are looking our costs very, very closely as we would have done in the past, but given the current condition, we're really looking at it closely, but we're not go into any guidance in detail on that level.

Dinesh Paliwal

Peter, is it going to help if I said, look, percent of sales may or may not be in our control because we cannot predict what the top-line would look like? But in absolute terms, you can be sure of we're going to be driving the total SG&A down. That is very clear. Including engineering costs, which we had to build up due to the unprecedented number of SOPs and we told in previous calls, and we also pictorially put it on the slide set on February 5 earlier this year that our engineering costs, which is a big chunk of SG&A would start to decline, not at a fast pace in '09 because we still have a lot of work to do, but we're on track and driving it down.

And besides just the SG&A, we're going after many other things, including trade shows, including travel, entertainment and video conferences are used lot more effectively and everything adds up. We are talking quite a bit of contribution coming from our cost reduction measures, which we have [unleashed] recently and that would help us drive SG&A down for this year.

Peter Friedland - Soleil Group

So I guess maybe a better to ask the question is that you came in just under $210 million for Q1. Is it likely that by the end of the year that one that is below $210 million?

Dinesh Paliwal

Yeah, I mean, I would say based on what I just said that was my point that we will be driving SG&A costs down every quarter. And for the full year I expect it to be lower than last year.

Peter Friedland - Soleil Group

Okay, great, thank you.

Dinesh Paliwal

Sure.

Operator

Next we go to the line of with David Leiker with Robert W. Baird. Please go ahead.

David Leiker - Robert W. Baird

Good morning. I am David Leiker at Baird.

Dinesh Paliwal

Hi, David. How are you?

David Leiker - Robert W. Baird

Hi, I'm doing well, thanks. Just a couple of things I want to follow up on. Will you just refresh us a little bit with the BMW and the 7 Series that is launching now, and what content you have on that versus what you did in the previous version?

Dinesh Paliwal

Say it again, what content we have?

David Leiker - Robert W. Baird

Yes, what you're providing on the infotainment system there versus the previous version?

Dinesh Paliwal

This is for the 7 Series you're talking about?

David Leiker - Robert W. Baird

Yeah, please.

Dinesh Paliwal

Sure. 7 Series, now we have the high infotainment completely with us, which is a replacement of a competitor infotainment. You may know we replaced Siemens video on that. So we have complete high infotainment on 7 series. I'm glad that you asked because this model year 2009 would have a number of features which we have been developing under the name of driver assistance or driver assist, like night vision is something we already launched a couple of years ago. I have it.

But night vision would be enhanced. We can even see a person's profile in our night vision. Various camera technologies would be equipped. So this infotainment is quite advanced, almost three-dimensional navigation, fully-integrated multimedia and very highly connected car. That’s what this infotainment high is for a 7 Series.

David Leiker - Robert W. Baird

Okay. And then if I recall and it’s predated you, but there was a point in time where you have taken over all of the BMW business. Is that still the case?

Dinesh Paliwal

That is still the case. When we say all, we have the high business and again, BMW has always been dual-source. I think some parts of the business for Japan and Asia, they are with Alpine as you may know.

David Leiker - Robert W. Baird

Yes.

Dinesh Paliwal

And Alpine actually is also partner for us because we provide the complete backbone and then they provide part of the infotainment for the cars which are going in Japan and in Asia.

David Leiker - Robert W. Baird

Okay. So, there is no change from what that relationship originally was in that?

Dinesh Paliwal

David, that’s exactly correct. In fact, we have a wonderful relationship with BMW. And of course, when you have such a heavy load, they are under stress, we are under stress. But we continue to enjoy very trusted relationship with each other. And we are on plan, we are on track with their SOPs.

David Leiker - Robert W. Baird

Okay. And then in the context of, understanding you are launching a lot of business here for finish in '08, but then '09 and 2010, you need to be at a position of booking business to keep the growth going in 2011 and 2012.

Dinesh Paliwal

That’s right.

David Leiker - Robert W. Baird

I think you made some comments about building some new business inputs there. Is there anything you can talk about in those out years that you can help fill in some of the gaps of what happens next?

Dinesh Paliwal

Yes. David, we win actually quite a bit of the business. But that may not pass the test for the group press release, because it may not be large enough or sometimes a customer may not allow. But three of all I can share with you, we got SsangYong in Asia. We got BMW Mini, which is a hot-selling car right now and we are happy this is the Harman/Kardon branded audio in Mini which is a good business. We got Daimler new order for A/B class Harman/Kardon-branded. That was the last piece.

In addition, I mentioned one European auto-maker for stretch, high-end, very high-end car for China market, exclusive for the high end. We have got that car which we are very happy. And in addition as I alluded earlier, our CEO of automotive business, Dr Blickle, he is engaged and I am engaged with him. We're working on a couple of very significant bids, which would or should decide I would say in next two to three quarters. With this slowdown, with this economic change in environment, it might have been pushed by a quarter. But they are happening and we are very well placed on those.

David Leiker - Robert W. Baird

Okay. Great.

Dinesh Paliwal

And one more thing, David, I should say. Besides this, we have also been selected. You know how badly I have reacted to the loss making Chrysler business when I inherited this business here when I came. I have given marching instructions to the sales force. I don't want any loss making business ever again.

And we were asked to continue that business as a new award by Chrysler and I personally was involved. We walked away, we were not interested. So, that's another thing. That business we didn't take. We are very selective as well.

David Leiker - Robert W. Baird

Is that just that low-end piece of that of that system or is that the entire Chrysler business?

Dinesh Paliwal

No, that was the low end. No, we have two businesses. One is high end business which is a nice business for us. We make money on it. Another one is the low end, which is where we don't make money. And that was the business offered us to continue another five years. And we said thank you, but no thank you.

David Leiker - Robert W. Baird

So when does the existing business roll off for you?

Dinesh Paliwal

Say it again?

David Leiker - Robert W. Baird

That there existing, the low end business at Chrysler?

Dinesh Paliwal

That should go away, latest June 2010.

David Leiker - Robert W. Baird

Okay.

Dinesh Paliwal

But, we might work something out and let's see if we can even make something happen to get out earlier.

David Leiker - Robert W. Baird

Okay, great. Thank you very much.

Dinesh Paliwal

You are very welcome, David.

Operator

(Operator Instructions). And we go to a follow up from Chris Ceraso from Credit Suisse. Please go ahead.

Chris Ceraso - Credit Suisse

Yes thanks, Dinesh. One of the issues I think that you had in the past couple of years with the increased R&D is the function of the level of commonality in the software from one vehicle to the next. Can you comment on where you stand on that and maybe the next generation vehicles and what you are targeting in terms of software commonality?

Dinesh Paliwal

I certainly can. This is very near and dear to my heart. I come from software environment and we have some way to go because this is not necessarily controlled by us, as a supplier. We also have to educate our automotive customers, because they always demand on one hand, very custom, very proprietary, everything. At the same time, they themselves are recognizing that they have a number of models out in the field with completely different software backbone and lot of custom features.

And then they have to maintain, we have to maintain and that’s a huge cost. So, we have been working together very good, very collaborative environment. As a matter of fact, in September my entire Board of Directors and Management Team had a very nice evening with our top European automotive customers.

And we had a very candid dialogue on that and there is a change. In automotive industry, they expect us to lead the software evolution, not revolution. To come back to your specific question, we would love to see as open and standard software architecture as a platform of anything we do as possible. We do have a great open architecture software in QNX, which is doing great things for us and we continue to open it.

In addition, we are also moving ahead more than ever to decide why do we have to develop every single piece of application? Like the multiple examples which we could reach out to experts, those who develop certain things for multiple industries. We can buy those applications and integrate because our strength has always been the number one best integration job we do. So that would also allow us to bring some standardization therapies.

You heard me say India, development and engineering centre. You will see lot more work done, which would apply to more than one platform, jointly by our German and Indian engineering team. And a new platform we are launching these SOPs, there is a lot more commonality than in the past. And new business which I mentioned Dr. Blickle is in a process of bidding, there you will see a lot more commonality and standardization of backbone type of things, but still clear differentiation for our customers where it counts.

Like HMI or multimedia or graphic engines or various other unique features. So, that will continue to create differentiation. But, this is something we have appointed a full-time exec, a person and Chief Innovation Officer. His background is software and he is driving standardization process improvement in software and software architecture. A lot of good work is underway here, but you probably won't see an impact of that in short-term. This is something has to wait for the new awards which we will apply our new strategy.

Chris Ceraso - Credit Suisse

That brings up another question. We have heard that BMW is pursuing an open-source operating system with a couple of other companies, including someone like Intel. Is Harman involved in this effort?

Dinesh Paliwal

Absolutely, we are in the forefront. In fact Intel and Harman, there was a memo written for some automotive clients that we were their unique and preferred partner. We actually were the first company to develop alpha and beta version of infotainment system, which was all Intel and our systems software and applications. And we actually showed that to multiple clients and got varying comments.

With that said, we are not living in any flux. We believe and we continue to be very happy and proud of what we have because having a robust open operating system is a necessity for the environment of automotive systems. So we have it, but we are also at the same time always looking at how can we improve and looking at various other softwares and platforms.

So Linux is an example. We have a team working also on Linux to see what can Linux do better what we don't know today. Linux has not done any commercial grade infotainment system. So therefore it needs a lot more evaluation, but we are already doing that because we have a lot of expertise in that area.

But QNX remains to be the backbone for majority of the systems being launched, whether it's a Audi, whether it's a BMW, whether it's a Daimler, whether it's Porsche. These are all new 13 SOP you heard, so it will be a lot of installed base with the latest technology coming out.

In addition we'll be looking at whether it's a Windows CE, whether it's Linux, whether it's anything else. So very open up about that there is nothing which is holding us to be confined to one thing.

Chris Ceraso - Credit Suisse

Last question if I could, your target of delivering $55 million in cost savings in '09. Your ability to achieve that depends to some degree on what volumes are for the vehicles that you supply right? So can you give us an idea of either for the overall European market or for your key vehicles, what is your expectation for 2009 volume change on your key programs, '09 versus '08?

Dinesh Paliwal

Chris, let me come back to 55 first. This $55 million savings I feel pretty comfortable about with or without the volume of whatever happens. We took $46 million restructuring last year. We track financially every single million we spent where are the returns. So returns are starting to come in. We had in first quarter less than $10 million savings from our restructuring we did last year.

Remember we shutdown couple of plants in the US. We also consolidated Bedford, Massachusetts third facility. We've been at work. We do some work in South Africa, we did some work in Sweden last year. So that is that $55 million.

Then I also mentioned next year and year after that is where the STEP Change kicks in. It is true, if the situation gets extremely catastrophic, I hope not, that would have impact on timing of it, number one.

Number two, you see when I say savings, for me my CFO is very religious about it, that savings has to be EBIT applied, otherwise it is a counter savings, so $55 million has to be EBIT if applied. So if the situation gets worse, the question would be out of $400 million STEP Change, how much of that savings would not go to the bottom line of the EBIT. That’s a question we cannot answer right now.

Chris Ceraso - Credit Suisse

Okay, thanks again.

Dinesh Paliwal

Sure.

Operator

And we have a follow up from the line of David Leiker from Robert W. Baird. Please go ahead.

David Leiker - Robert W. Baird

Yes, just one additional thing.

Dinesh Paliwal

Hi, David.

David Leiker - Robert W. Baird

Okay, we talked to some of the other companies in here. What’s happening in Europe, obviously it is slowing down pretty quickly and seeing some pretty meaningful cuts at BMW and Mercedes as they correct inventory. When you layer on top of that currency, it seems quite possible that we could see a revenue decline of as much as 20% here, in what the next couple of quarters? Is that in the realm of possibility here on the automotive business?

Dinesh Paliwal

David, you might have information. My numbers, my assessment through our account managers who are on an almost daily basis in touch does not support that deep slowdown. There maybe a 20% vehicle sales reduction, but it does not necessarily translate into the take rate or the penetration of infotainment.

I'm not denying that. You never know what might happen. It could be 20%, it could be 30%. But right now that's not the number we have. Although we will prepare for whatever happens. Right now, we are already preparing pretty drastically for anything and everything.

David Leiker - Robert W. Baird

Okay. Great. Thank you.

Dinesh Paliwal

Yes. Sure.

Operator

And there are no further questions.

Dinesh Paliwal

Very well. Well, the timing is perfect. We will give 30 more seconds to see if there is any other questions. If not, I'll make my closing comments. Lea, we give 30 more seconds.

Operator

Okay, sir. And we have no further questions, sir.

Dinesh Paliwal

Very well. Well, ladies and gentlemen, once again I first of all thank you. I know how busy you are, especially in times like this. We really appreciate that. I should also say again, we are operating in a period of unusual challenge and uncertainty. But I believe we can all take some important lessons from this period.

We are, that is, accelerating the decisive actions we know are necessary to compete most effectively in any economic climate. I think personally what we are doing is going to make us and our company lot more stronger, competitive, feisty and allow us to be more competitive for business segments which we were not in the past.

With that said, I reassure you, we remain committed to leveraging Harman's prominent market positions, respected brand portfolio, talented people towards this goal. And most importantly, innovation and new products pipeline remain number one priority for our organization. That we believe is going to differentiate, has differentiated us even in difficult times. That is one thing which will allow us to take market share away from others.

With that, I thank you for your attention and candid questions. And I look forward to talking with many of you soon as we continue to execute on Harman's decisive strategy.

Thank you again.

Operator

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Source: Harman International Industries Inc. F1Q09 (Qtr End 9/30/08) Earnings Call Transcript
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