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Harman International Industries, Inc. (NYSE:HAR)

F2Q09 (Qtr End 12/31/08) Earnings Call

February 4, 2009, 04:40 PM ET

Executives

Dinesh Paliwal - Chairman and CEO

Herbert Parker - CFO

Analysts

Chris Ceraso - Credit Suisse

Scot Ciccarelli - RBC Capital Markets

Luis Sykes - Pennant Capital

Mike Sheridan - Cobalt

Operator

Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the Harman International Industries Second Quarter Fiscal Year 2009 Earnings Conference Call. At this point, all of your phone lines are muted or in a listen-on-mode. 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, Kathy. Good afternoon, ladies and gentlemen, and thank you for joining the Harman second quarter 2009 investor and analyst call. I'm joined in Stamford, Connecticut, today by Herbert Parker, our Chief Financial Officer and Robert Lardon, Vice President of Strategy and Investor Relations.

Along with our second quarter press release issued this afternoon, I would like to call your attention to a set of supporting slides that has been posted with our press release on businesswire.com and on our company's website, harman.com.

I will refer to several of these slides during my discussion. Ladies and gentlemen, needless to say, we're operating in extraordinary times. Although, Harman International began its deep cost and productivity improvement efforts well before the current global crisis, it is clear that the unprecedented market downturn is now significantly affecting our business as well.

Slide number five in your slide set will summarize the tough market situations that most of you are already all too familiar with. Although, we're not alone in this regards. This environment has brought new urgency to our cost savings program and to managing the strong balance sheet that will help Harman International weather the current crisis.

Despite the relative cushion of our strong balance sheet, we're leaving no stone unturned to preserve cash and manage cost during the current downturn. As we continue to execute on our $400 million STEP Change savings program. We also have a number of liquidity and performance factors in our favor, which our Chief Financial Officer will summarize soon in his discussion.

Before I offer some additional comments on these, I will now ask Herbert Parker to provide a closer look at our quarterly results. Herbert?

Herbert Parker

Thank you, Dinesh and good afternoon to everyone. Well, as noted in my last earnings call, I will provide you some key financial information on a non-GAAP basis in order to give you a better understanding of our results when restructuring costs and goodwill and impairment related charges are excluded.

Since we will be executing major restructuring projects over the next couple of years, my comments to the external markets would normally reference financial details excluding these restructuring cost.

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 second quarter results totaled $25.2 million and a goodwill impairment charge was $325 million.

Our net sales for the second quarter was $756 million, which is a 29% decrease, compared to the same period last year. The decrease is primarily related to the well-publicized economic conditions existing within the markets we serve. Also, foreign currency translations accounted for $67 million of the total net sales reduction. And due to the overall economic crisis, our sales declined across all segments.

Our gross profit margins for the quarter was 23.7%, compared to 28.3% in the same quarter last year. This reduction is primarily a reflection of the de-leveraging impact or un-absorption which the sales reductions have had on our production facilities as well as the effect of new automotive product launches.

As we stated before, typically our margins are at their lowest point at the project launch stage and benefits of component sourcing and manufacturing efficiencies are expected to increase the margins over the lifecycle of these products.

Our SG&A expenses for the second quarter was $195 million, compared to $231 million last year on which R&D costs were $84 million and $100 million respectively. Excluding the effect of foreign currency translation, SG&A expenses was reduced by $22 million.

Despite these cost reductions, the company flows in operating loss of negative $16 million during the quarter, which compares to a profit of $70 million for the same period last year.

Our net income was a negative $10 million, earnings per diluted share were negative $0.18. As we have reported a net income loss, our effective tax rate for the quarter reduced the tax benefit of 13.4%, which includes the effects of operating losses, restructuring expenses and goodwill charges.

As shown on slide number 7, our December 31st balance sheet shows a cash and cash equivalent balance of $182 million and a total debt of some $445 million.

Our debt balance includes the proceeds from the issuance of the $400 million convertible notes, which are not due until October, 2012. The additional $45 million of debt pertains primarily to the amount drawn down on our $300 million revolving credit facility.

Cash flow operations for the second quarter was negative $5 million and capital expenditure were $19 million. Depreciation and amortization totaled $34 million of which included $3.1 million of accelerated depreciation related to restructuring programs.

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

Dinesh Paliwal

Thank you, Herbert. Ladies and gentlemen as Herbert mentioned earlier, Harmans' balance sheet is far stronger than many companies facing this environment, including some of our competitors. We have limited long-term debt and we have ample liquidity to execute our plans.

As shown on slide number 8. We are also meeting our commitments and delivering to schedule on our automotive projects backlog. Meanwhile, we have achieved capital efficiency improvements of about 40% since the beginning of fiscal year 2008. These factors have brought, both the respect and continued confidence of our major customers worldwide.

Slide numbers 9 shows some key automotive achievements for the quarter. We received new project awards for a unique hybrid navigation system on eight Mercedes models, which will blend the benefits of a portable navigation device with the functionality of a premium in-dash system.

We booked new branded audio systems for two Range Rover models. We have successfully launched our mid-level infotainment system for the new Mercedes E-Class and a new premium sound system for the Toyota Venza model.

A test phase evaluation of our new infotainment system for BMW 7 Series drew high accolade from customer officials. And on the racing car Porsche, Porsche Communications Management System supplied by Harman was honored by Association of German Engineers for its user-friendly driver interface.

We are ahead of schedule on development of new mid-level infotainment system. That we believe will open significant new market opportunities beginning in the fall of 2009.

Moving on to consumer audio division on slide number, 10. Our premium brands continue to earn high marks from leading industry associations and journalists. These include recent awards from Japan's top audio file magazine. From US consumer reports, the consumer electronic show in the US and the international design forum.

Our global channel partners opened two Flagship Harman multimedia showrooms in Emirates in Dubai and in New Delhi, India. Both of which are the largest in their respective regions.

Please refer now to slide number 11 and 12 for some highlights from our professional audio division. The Harman Professional team launched more than 40 new products to strong reviews from a recent conference of global distributors and representatives, about 400 of them from worldwide and a subsequent appearance at the important NAMM show which is National Association of Music Merchants exhibition.

The division's professional audio systems served such diverse audiences as to us by Bruce Springsteen and Neil Diamond to landmark political events in India and the presidential inauguration in the United States.

Some 70% of more than 300 new cinema screens installed in the United States during the past quarter were equipped with Harman Professional audio systems.

As shown on slide number 13, our industry leading operating system and middleware unit called QNX software systems, continues to expand its market and applications.

QNX has earned several prestigious and highly competitive awards including Intel’s Award of Excellence for Most Innovative Software. QNX has successfully deployed its powerful technology in Harris Corporation’s Falcon III military tactical radios.

The first and only radio to be certified as fully compliant with requirements of the Joint Tactical Radio System.

Other significant QNX orders in the second quarter came from Cisco Systems in United States, Ortho Clinical Diagnostics also in US, Nokia Siemens Network in Germany and Amron Corporation in Japan.

Let's move on to slide number 14, for an update on $400 million STEP Change cost savings program, we announced in August 2008. Under this program, we are tracking more than 240 separate measures on a real-time basis and more than 80% of these are at or ahead of schedule.

We are ahead of target year-to-date with $32 million in realized savings against a plan of $22 million, this puts on track towards milestone end target which we communicated to you earlier $55 million in sustainable pre-tax savings by the end of fiscal year 2009.

Slide number 15, shows the targeted breakdown of STEP Change savings across our major cost categories. As of the second quarter, we are ahead of targets on each, and we will provide you with quarterly update in this format, as we continue to drive the STEP Change program forward.

Ladies and gentlemen, I have listened to you. You wanted more details on the STEP Change I've provided you and I will update you on a quarterly basis. Because that's the way we like to work together, give you as much transparency as we can and still run the business as management wants to, with full governance from the board.

Slide number 16, shows the impact of this program on our headcount where we have raised our improvement targets in response to current market condition. Through various facility closures and capacity adjustments already announced, we have reduced employment by more than 900 during the first half of this fiscal year.

Although, our STEP Change target is 1500 job reductions by 2011. We have identified actions in response to the current environment that would bring us to a total of more than 2,000 jobs by the end of June 2009.

Together, these will represent more than 15% reduction in our work force during the current fiscal year. Pretty aggressive but absolutely necessary and the management is determined and we are actually ahead of our own plans, so that we can beat this crisis earlier than otherwise we would.

As we continue to right size our staffing for a sustainable comparative position, to conserve cash during the current crisis, we are taking additional actions beyond the STEP Change program. A hiring freeze remains in effect. We have suspended our 401(k) matching contributions and increased employees cost sharing for other benefits.

We continued to enforce strict mandatory reductions in travel cost and we are using other means to communicate videos, telephone and various other means. And we are ahead of target towards our goal of 20% additional savings in theses areas.

As shown on slide number 17, our global footprint optimization is also yielding significant new capabilities in the emerging markets.

These now include three new technology centers, five manufacturing sites and seven sales and service facilities. We have recently appointed seasoned country managers for our operations in India and China to manage our growing footprint in these regions and to capture the large market opportunities.

We have also injected additional energy into Harman Executive Committee with the appointment of two experienced professionals this month. Sachin Lawande, who has been instrumental in guiding Harman software architecture and driving global partnerships was promoted to Chief Technology Officer.

David Slump, formerly the General Electric ADV and Con Edison has taken the dual role of President Consumer Audio Division and Head of Corporate Developments. Where he will help align our overall market and brand portfolio to strategy.

Slide number 18, summarizes the key factors that we believe will help us both to weather the current storm and to emerge as a winner when the economy picks up again which we know it will.

Our balance sheet remains strong. We had a strong cash position and significant credit reserves.

Ladies and gentlemen I stress we have adequate liquidity to execute our plans and move forward. Our relentless focus on operational excellence is starting to pay off as we execute on our large backlog while keeping innovation and new product development at the top of our agenda.

As the right size of our mature market operation, to the current environment, we are investing and building capabilities in the emerging markets.

You might have seen this evening's new flash, China overtook United States on annualized car sales as of this month, as of today. The China has a big future market and we are already present in China and building more capacity because that's what our large automakers have been asking us for past several months.

We have a diverse and experienced board that brings both the highest level of governance and expert counsel to us. I am also proud to have a highly motivated, execution driven management team that is committed to delivering on strategy.

Ladies and gentlemen in closing I hope this brief summary of our second quarter activity underscores that we are taking every action possible both to manage our strong balance sheet for the current environment and to manage our business in a way that keeps Harman top of mind with our loyal customers although.

Although I clearly respect the deep challenges that are facing nearly every company in these unprecedented times, we have many reasons to believe that brighter days still lay ahead of Harman International.

I thank you very much for your attention and we will now open the call, Kathy, for all the there are.

Question-and-Answer Session

Thank you. (Operator Instructions) And our first question comes from Chris Ceraso with Credit Suisse. Go ahead please.

Chris Ceraso - Credit Suisse

Thanks good evening.

Dinesh Paliwal

Hi, Chris.

Chris Ceraso - Credit Suisse

Okay. I have a couple of numbers questions and a couple of strategic questions. First on the numbers, could you help us walk from year-to-year in terms of the decline in vehicle shipments for the key programs that you support, were they down 30%, were they down 25%. And then what kind of an offset did you see there from an increase in penetration of your products?

Dinesh Paliwal

Chris, may I quickly actually answer that, I know Herbert is eager to answer, but I just want to say we obviously have a fairly good knowledge of number cost sold by various OEMs.

I would say it may not be appropriate for us to quote those numbers unless they are already public, but you know yourself the biggest decline we have seen obviously is in Chrysler's number of cost sold and the least decline we are seeing actually fairly stable so far until end of last year was, Audi.

So we have a mixed bag, we have seen decline in Lexus, Toyota. But then we have not seen much decline in other OEM, so like Hyundai. That has done very well. So it's a mix bag. I am not so sure whether we should spit out numbers by OEM. Relatively, I would like to share this. Herbert, back to you.

Chris Ceraso - Credit Suisse

I am sorry, go ahead.

Herbert Parker

Yeah. So your question, Chris?

Chris Ceraso - Credit Suisse

That's fair Dinesh. I think that's reasonable. Can you comment on whether or not you are still seeing an increase in the penetration rate of NAS systems on your vehicles, or has that been casualty of this downturn as well, and we seeing people pulling back on the NAS system take rate?

Dinesh Paliwal

Chris, to be honest with you, we had actually anticipated before this crisis really got hold so tightly that with the reduction in car sales are penetration or take rate might even go up.

Unfortunately, we did not have any proof of that. What I can say to you with confidence it's pretty stable. There is no special causality or special pick up because of the decline. I wish there was little bit of pick up, but it's fairly stable.

Chris Ceraso - Credit Suisse

Okay. Second, number's question. If I look at the change in revenue from Q1 to Q2, it's about $113 million. The change in operating profit ex-items is like $60 million. That suggests the contribution or decremental margin, if you will, of something north of 50%.

Am I doing the math right here? Is there some other items or expenses that you have absorbed and didn't call out that that would have made that margin even worse this quarter or how do you explain that?

Herbert Parker

That's correct, Chris. If you were to simply use the margin year-over-year, we should have been down $34 million, because we had huge under absorption. The contribution margin didn't go down as much in that point. So it's mostly under absorption in our factories was the main reason for that decline. And of course, we lost a few percentage points were due to product mix.

Chris Ceraso - Credit Suisse

Okay, so that could concievably continue at that level over the next couple of quarters if we are going to under absorbed like this?

Herbert Parker

Well as you know we have STEP change plan. We talk a lot about so, we will see savings eventually. But when that savings kick in, I cannot say. So you maybe in the ballpark for the next couple of quarters.

Dinesh Paliwal

Chris, if I may just to qualify additional comment. As Herbert talked about sequentially from Q1 to Q2, we have nearly five points drop, right? And it's a substantial drop is due to the mix issue, because we have now nearly 70% of our revenue coming from brand new launches, new products. And Herbert said that new launches start at the lowest contribution margin of their lifecycle.

As these start to ramp up, which they are in Audi and BMW and others. I think our margins will improve there. That's just the way it works, but manufacture related under absorption is yet to be seen. We obviously will do everything to right size and we are actually getting there, but it has really got us by surprise too just like any automaker how fast that came down.

Chris Ceraso - Credit Suisse

The strategic question, you mentioned that you have got a new mid-level system that you are getting close to delivering. Is this going to be design, engineered, manufactured in China? And what do you anticipate as the sort of the normal margin level on something like that? Back in the day, you talked about a 16% EBIT margin on these programs, is this now 5% margin product for a mid-level system, what can you say about that?

Dinesh Paliwal

Hi, Chris, if I told you the margin publicly, my customer may not actually negotiate well with us. I have to tell you something more, because this is one of my favorite topic. Mid-system you have heard from me before.

This has been my craving, we wanted to have a cutting edge, mid-system which will open up, nearly $4 billion to $5 billion new market where we are really not sort of present and we are not playing in that.

I mean so far we have done mid-level basically are high-end systems, strip down a little bit side of does it met. Just to be very frank with you. So, what we are doing as far as you development question, we're going to take full advantage of our expertise in Germany and Farmington Hills in US.

So we have created a team, which is actually headed by a German, sitting in United States for long time. He is the overall program manger, but a lot of software work and lot of hardware work would be done in our R&D labs in India and in Shanghai, Bangalore and Shanghai.

So, full capability, learning lessons from what we have, but the speed is the key. If I were to give this project to out German team or American team, just individually, you can imagine it'll probably take two years, because that's how long it takes for regular projects in this environment.

Now, by giving it to the new Chief Technology Officer as his the number one priority, because we want to bring this to the market and fall of 2009, we are well underway with the best expertise and the best-in-class connectivity, to launch in fall.

And as far as margins are concerned, you can be assured of, I'm a very margin-driven guy. We would price it. So, that it is comparative, take market share and still be able to have decent margins at the bottom line.

So, this is not one of those which will bring in 15%, 20% margin, it will bring in very healthy margins and let's leave it there until we have the product out and lets see where we end up.

Chris Ceraso - Credit Suisse

Last question, I apologize for taking so much time.

Dinesh Paliwal

No, you don’t apologize, you asked good questions. Please go ahead.

Chris Ceraso - Credit Suisse

See, one of the problems that has hurt you over the past year is the low level of software commonality, and I know we talked about this and that is driving an increase in your engineering spend, where are you in the new developments of new programs and getting that commonality out and how long will it take before you start to launch new programs where that it will be more appropriate.

Dinesh Paliwal

Unfortunately, this is a one area where it will take long time, longer than one would like to see and longer than I say it's not one year, it may take more than two years to get to a desired level of standardization. And that is primarily driven from, we are already launching 13 brand new SOPs and more to come in fiscal '10.

These are already designed three years ago or two years ago by our customers jointly with Harman. So, they have their own unique, in nature and lot of proprietary applications written in various ways and means, which do not necessarily allow us to port these applications from one platform to another. And secondly, to give us the necessary capability to scale the system, so that is a present or even the immediate past.

The new mid-system we are developing that is going to be something which will also help us learn something and use part of that in our high-end systems in terms of scalability and standardization.

I would like to add one more thing. QNX has continued to prove as the most robust software system, most reliable. We believe it's most open system. Now more and more we are opening, we have opened it just like Linux to the software community worldwide, so people can come and write their software which will benefit us and benefit others.

So we are opening this more and more QNX standardization will allow us to have more standardized platform software and more middleware applications, then we can leave the HMI the human machine interface and graphics and some unique feature functionality to be tailored to the OEM’s taste and that's where we want to be and also hardware point of view, I mean Intel is one, NEC, NSR are the few others.

The fact is the automotive industry by itself has also not come around to sort of collectively, unanimously say let's standardize on hardware, that's not where we want differentiation, we want differentiation in applications HMI. But good work is going on and we are playing a lead role together with German automakers. So I keep actually high hopes that we will get some help fro German automakers and Japanese as well.

Chris Ceraso - Credit Suisse

That’s great, thank you so much for answering the question.

Dinesh Paliwal

Very welcome.

Operator

Thank you. We will now next to Scot Ciccarelli with RBC Capital Markets.

Scot Ciccarelli - RBC Capital Markets

Hey guys Scot Ciccarelli, how are you?

Dinesh Paliwal

Hey Scot how are you?

Scot Ciccarelli - RBC Capital Markets

Alright, couple of questions here, Herbert, can I get verification on one of Chris's questions, he was talking about the gross margin on auto? Did you say you expect the current run rate to be kind of in the ballpark for the next few quarters?

Herbert Parker

Yes.

Scot Ciccarelli - RBC Capital Markets

Okay, I just want to try and understand that. Second question is any reason that the pro business doesn't continue to climb at a comparable rate just given the massive attraction, we are seeing in capital projects. Is there anything else that could be an incremental driver to that or is kind of what we see is what we get at this point?

Dinesh Paliwal

To be honest with you. You answered it, what we see is what we get. I mean we continue to hold very high hopes because in the Professional business is about taking market share because we are leader and there is a lot of fragmented players out there and we launched 40 plus new products. and I tell you I was really elated when I mingled with some 400 distributors from around the world, they were very upbeat. Although I had sort of calm them down because I do not know why they should be so upbeat when economy is down.

But so we had to see in coming few months how the Pro business will emerge. The fact is some of the business in Professional will do well like touring business is actually still doing very well. What has hurt is musician business retail, retail has been hit hard. Installed sound business has not gone away, it's been put off. So we think its going to happen, its pent up demand like you are going to build some temples or churches or places of worship or stadiums. These are strategic projects already approved, seldom they get cancelled, they get differed due to cash flow or political sort of leverage in the community.

So our people believe that this is out there, but when would it start to unleash we do not know really for the timing.

Scot Ciccarelli - RBC Capital Markets

Okay so given the comment on the Pro and what's going to happen with the auto margin, even with cost cuts as aggressive as you guys have been. It sounds like you guys are going to loose money for the next couple of quarters, is that at least a fair assumption?

Dinesh Paliwal

You are so good you ask a question, you answer it too, so I don’t have to do it. But I just have to say you are right we had been most aggressive in taking control of our cost. But realization of savings especially when you are taking people out, it takes good nine to 12 months. So we will have to wait that's why even if you saw a STEP Change slide, $32 million in cost and $32 million savings because it takes time. So we will have to wait, if sales remain at such a low level I think it would be very challenging for us to do something magical here.

Scot Ciccarelli - RBC Capital Markets

I just want to make sure I was not missing something. Then the last question is the Mercedes portable in-dash can you just kind of describe what that project is?

Dinesh Paliwal

You know what, it's actually something which German automakers have been talking discussing. What it is, it's in between a fully integrated designed in three year before the car is launched like we do in-dash system. It is not that but it is not PND either which, PND suppliers are selling like a loose pieces which hit you on your head then car hits the bump.

So this is going to be mounted on a cradle. It would have its own processing box in the trunk of the car and it will have all sorts of connectivity and connections, hands free operation and the music and everything else built in to it.

So it's a portable device from that point of view but it can be mounted on a car without designing in three years in advance. So it's a hybrid system we call it and Mercedes loves it and we have lot interest from some other OEMs on that product solution.

Scot Ciccarelli - RBC Capital Markets

But I guess the question is, Dinesh, one of the strengths of this company historically has been your ability to kind of integrated into manufactures. If this is the route that automaker start to go does that kind of open up the competitive door a little bit?

Dinesh Paliwal

Actually to the contrary if you allow me to say, because automakers would love to see PND suppliers go away. That's my view because they like to sell fully integrated systems with every single car. And I think there is an scenario in five years every car would have a five to eight inch screen built into a car, and now its up to technology to use that. So they like to sell it because that's how they make money. What they are doing is since this PND market is developing which is good, I like it too because we have PND product our self.

There are tens of million of cars out there and there will be many million sold in future, which will not have fully integrated in-dash system. Therefore that market is out there, so rather than leaving it to some XYZ or Tom, Dick and Harry to go after, automakers want to take control of that market as well. And they are turning to us because they trust us on integration capability that we give this product as a teaser to those who can not afford fully integrated in-dash system. So next time when they buy car or someone in the family, they go for integrated and this is what I have heard from Mercedes and others and I can understand the rational.

Scot Ciccarelli - RBC Capital Markets

Okay. All right, good luck, thanks a lot guys.

Dinesh Paliwal

Sure, thank you.

Operator

We will now have a question from Luis Sykes with Pennant Capital.

Luis Sykes - Pennant Capital

Hi, Dinesh and Herbert.

Dinesh Paliwal

Hi Louise.

Luis Sykes - Pennant Capital

Thanks for breaking out the STEP Change program savings to date very helpful.

Dinesh Paliwal

Well, we are delivering on our promise, we told you, we will share it and we will share it every quarter.

Luis Sykes - Pennant Capital

Now, but it is never enough and so with regards to the right sizing beyond the STEP Change program, can you try to quantify you targeted savings for that.

Dinesh Paliwal

We have actually quantify targeted savings and this is $400 million savings plan, it's a sustainable $400 million savings by 2011 and actually its on slide 14, right.

Luis Sykes - Pennant Capital

Right, Dinesh what I meant was so the STEP Change program was basically in place before the economy fell off the cliff and now my understanding is that you are pursuing some initiatives to right size the business just to reflect the new revenue environment that probably has not been contemplated in the original STEP Change program.

Dinesh Paliwal

Louis, you are absolutely right, first of all a STEP Change becomes harder in terms of some elements like if you go to next slide, which is slide number 15, the manufacturing and sourcing which is $244 million target, that has clear associations with the volume. If volume comes down, it would be harder for us to achieve that target. So that basically pushes out in time by a year or so.

With that said, with demands coming down, we are taking the steps beyond STEP Change. STEP Change headcount target is 1500. We already announced today that 2,000 people are already targeted, identified, will be out by June 30, 2009 and that's a very aggressive action we are taking and hence, not taking, executing, I do not know any company is that aggressive for the size of our company.

So that is already including those additional measures, and Louis, we are also doing things which I wish the three automakers in Detroit or banking sector New York did it. We have cut out all the frills in this company, we are traveling economy or business at best at times. We are doing video conferencing, believe me everything counts.

Herbert has $53 million savings in last quarters because of the steps we have taken including STEP Change. And some, $9 million came from immediate measures we put in place on travel and hiring freeze, cutting out some consultants and more consultants will be cut out. And you'll surprise yourself at how much can you do in lean times and make it stick, before people see it. So, we are going be doing lot more than a STEP Change to deal with this immediate crisis.

Luis Sykes - Pennant Capital

But can you sort of quantify that in terms of what you are thinking about there order of magnitude?

Dinesh Paliwal

Well, I think the biggest quantification we've already done is we said we have taken 900 people already. By December 31, we are going to take 1100 more people out. If you do very simple quick math 2000 people, if they are not with you year-over-year by any calculation these are the people in mature markets. You are talking $150 million at least. Your year-on-year savings once you have sort of let it happen.

So, that's a big number and of course there are few other things which will go on top of that, so a number of things happening.

Luis Sykes - Pennant Capital

But the 2000 includes some of the STEP Change, people, right?

Dinesh Paliwal

You got it. 2000 includes 1500 people with STEP Change which would have gone until 2011. Now we are doing 2000 people already in 2009, so 500 jobs are associated with the sudden decline in revenue.

Luis Sykes - Pennant Capital

Okay.

Dinesh Paliwal

On top of STEP Change and lot of other things happening at same time. Louis I would remiss if I did not say. Cost cutting is not just headcount, cost cutting is forcing and teaching our own people to move on, not to hold on to separate cost of factories or locations which had been making losses for years. We had been fast in doing those things which in this company not done in the past. Also sourcing is a big opportunity. We are able to negotiate or will negotiate with fewer suppliers better deals in this time otherwise we have better choices to go other people.

We are also in serious discussion. I was in Germany last week, just come back serious discussion with OEM suppliers that we can not, we are requesting them at this point, but I am going to get little more tougher that they should suspend annual price reduction whereas because we can not afford to pay them annual price reduction then we are making loss that's not in our shareholders interest. And I will stay on it very firmly until we get something out of it, but we are so far working very well with our automakers. They are very receptive to everything we have said, they are discussing with us.

So number of things, not some many levers we can pull, and that's where this executive team is pretty active right now.

Luis Sykes - Pennant Capital

Okay. I will follow-up offline to try to get a little more clarity. Thanks.

Dinesh Paliwal

Alright, thank you.

Operator

(Operator Instructions). We will go next to Mike Sheridan with Cobalt. Go ahead, please.

Mike Sheridan – Cobalt Capital

Good evening, gentlemen. How are you?

Dinesh Paliwal

Could be better, Mike how are you?

Mike Sheridan – Cobalt Capital

The same, thank you. Couple of quick questions, I wondered you guys did the Beijing on the professional side, the Olympic sound system?

Dinesh Paliwal

Yes we did.

Mike Sheridan – Cobalt Capital

How did the EBIT contribution to professional fall over the last 12 months? I assume it's a thing of the past, but I don't know whether you have talked about that, but do you see a recurring contribution from something else or is that kind of what we are seeing showing up in profession now?

Dinesh Paliwal

Sorry, let me understand. You talked about Beijing Olympics first. Are you asking that do we know what the EBIT contribution for Beijing Olympics professional?

Mike Sheridan – Cobalt Capital

Yes, standalone.

Dinesh Paliwal

No, you know what? We will not go down to that level.

Mike Sheridan – Cobalt Capital

Okay.

Dinesh Paliwal

That would be actually pretty unfair to competition as well. So to be fair I would not, but professional has been and continuous to be our shiny star. I have lot of time for this business, I am glad you asked question, because this business has lot more to deliver for us because we are clear leader and we have taken market share.

By the way after Beijing Olympics, we are on the very good footing, winning bunch of common wealth games business in India. And many such installed sound projects are on horizon. As soon as these projects start to sort of get moving, we are on the forefront.

Mike Sheridan – Cobalt Capital

Thank you, just a couple of other quick questions. In the next 12 months have quantified what the total cash cost of restructurings will be, at least closures, headcount reduction related payouts. And if you could also talk about how that has changed the under funding of your pension?

Dinesh Paliwal

Okay. Let me take the first one on the cost.

Herbert Parker

I can take it all.

Dinesh Paliwal

Yeah, it's actually on slide number 14.

Herbert Parker

Yeah, in slide 14, for the STEP change our total was $220 million.

Mike Sheridan – Cobalt Capital

Okay, I am sorry page 14.

Dinesh Paliwal

That’s okay, Mike.

Mike Sheridan – Cobalt Capital

Thank you.

Herbert Parker

That's the current one, and we are fully funded on our pension plan.

Mike Sheridan – Cobalt Capital

Okay, great. And I am sorry the cash out the door is $220 million total in the next 12 months, is that correct?

Herbert Parker

Not in the next 12 months, but that's the total STEP change program.

Mike Sheridan – Cobalt Capital

Okay, and I am sorry. Last question, I see that year-over-year receivables came down pretty sharply. I wondered whether that was just a function of obviously demand going down and revenue going down, or was there something exceptional going on there as the sale of receivables or some kind of internal action that we should know about?

Dinesh Paliwal

No, nothing exceptional going on, I will tell you that immediately, I will tell you I am very proud of our global finance team. They are working very closely with our customers and dealing with receivables on a daily basis. Classic example is Chrysler. There if we did not do what finance team has done, we would be sitting on some risky situation, we are not.

We are fairly current with them and we are current with all other big companies we deal with and I am very happy with that situation. But that takes effort, that take relationship and I think is a validation of our relationship. Customer’s see us as their strategic partner which by the way, I hear that every time I am traveling to see customers they say you are strategic partner. I always remind them, if I am your strategic partner, treat me with strategic nature, which means pay me on time because I need cash to feed my company. So, it's been working well but it's hard work Mike.

Mike Sheridan – Cobalt Capital

Sure.

Dinesh Paliwal

Continues battle because the day you move your head away then don't want to pay you. So it's cost of battle but we are on it.

Mike Sheridan – Cobalt Capital

Great. Thanks for the clarification.

Dinesh Paliwal

Sure.

Operator

Thank you. (Operator Instruction) Mr. Paliwal we have no further questions. Please go ahead with your closing remarks.

Dinesh Paliwal

You know Kathy I think we should give another minute.

Operator

Okay.

Dinesh Paliwal

This is a very important meeting for us with our key stake holders. So let's see if there is any question. Although we have covered lot of ground here, I am happy but let's see if there is any question.

Operator

Thank you. (Operator Instruction).

Dinesh Paliwal

If not I would respect the time all of you have taken let me say ladies and gentlemen. We I speak now in behalf of the Board of Directors and the management team. We recognize that much hard work will be required to sustain Harman's fighting sprit in this unprecedented economic environment. We are responding rapidly and aggressively. We are investing for the brighter future that we believe will come.

And we want to be ready when it comes. And we will take every action necessary; I assure you as our investors and as our analyst community every action necessary to continually strengthen Harman International balance sheet and our economic situation for now and for long term.

With that I thank you for your attention and candid questions and for your continued support.

Operator

Thank you, Mr. Paliwal. Ladies and gentlemen your host is making today's conference available by digitized replay for two weeks. The digitized replay is available starting at 6:40 PM Eastern Daylight Time today. Simply dial 800-475-6701 within the US or 320-365-3844 for international and at the voice prompt, enter the conference confirmation number 983450.

That does conclude our earnings release call for this quarter. Thank you very much for your participation as well as for using AT&T Executive Teleconference Service. You may now disconnect.

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Source: Harman International Industries, Inc. F2Q09 (Qtr End 12/31/08) Earnings Call Transcript
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