Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Harman International Industries Inc. (NYSE:HAR)

F3Q09 (Qtr End 03/31/09) Earnings Call

April 29, 2009 04:40 pm ET

Executives

Dinesh Paliwal - Chairman and CEO

Herbert Parker - CFO

Analysts

Chris Ceraso - Credit Suisse

Scot Ciccarelli - RBC

David Leiker - Robert W. Baird

Jeff Graf - Springhouse Capital

James Lin - Greenlight Capital

Operator

Good afternoon and welcome to the Harman International Industries third quarter fiscal year 2009 earnings conference call. At this point, all of your phone lines are muted or in a listen-only-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 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. Good afternoon, ladies and gentlemen and thank you for joining the Harman third quarter 2009 investor and analyst call. I'm joined in Stamford, Connecticut, today by Herbert Parker, our Chief Financial Officer and Bob Lardon, Vice President, Investor Relations.

Along with our third 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 our discussion.

Ladies and gentlemen, I'm often asked my opinion on whether we have reached the bottom of today's unprecedented economic crisis. I tell you what I hear from many of the CEOs around the world. I cannot answer that. But what I can tell you is that we're doing everything and positioning Harman to emerge from this extraordinary cycle as a strong and profitable competitor. And I hope I am able to communicate those extraordinary initiatives we have that works.

Now, before I ask Herbert Parker to summarize our third quarter results, I'll provide some highlights on the performances of business, and current strategic initiatives.

As you are all well aware, we have experienced an unprecedented downturn in the automotive industry, which represents 70% of our business. We are continuing on aggressive actions for sustainable cost savings and cash management, including the deduction of more than 2,000 jobs during this current fiscal year.

In spite of these challenges and the associated effort, I'm pleased to confirm that we have successfully launched 12 of the 13 very complex highly integrated new automotive audio and infotainment platforms. These are brand new projects introductions, if you like to consider that way.

This all happened in a very short period starting with fiscal 2008. This is particularly noteworthy during a time of aggressive restructuring, and is a testament to the commitment of Harman people by delivering on time and on quality during this economic crisis. We have earned the confidence of our customers while securing a future stream of revenues.

Now I'd like to draw your attention to slide number nine that provides highlights of our recent automotive launches. During this quarter, we launched new systems for Porsche, PSA, Peugeot, Hyundai, Toyota, and Lexus.

We are particularly proud to report that BMW's flagship 7 series featuring complete Harman infotainment system offering was named world's most technologically advanced vehicle for 2009 by the leading analysts iSuppli. We also launched two partnerships for next generation technologies that will continue to differentiate Harman's offering in the marketplace.

The company's GreenEdge technology, which combines exceptional energy-efficiency without compromising performance was introduced at the Geneva Motor Show in cooperation with Intel and leading Swiss concept car pioneer Rinspeed. I was personally there to witness this introduction.

We also announced an exclusive partnership with Lotus Engineering of the UK, to develop Active Noise Management applications including innovative noise propagation technologies for electric cars to improve pedestrian safety. I believe this is a ground-breaking area and we have taken a massive lead over competition.

Moving on to slide number 10. Our consumer division continues to leverage a strong brand recognition with alliance and partnerships. The JBL luxury speaker Project K2 was launched in February achieving more than $1 million in a short period of four weeks. It was featured in the cover of Japan's most prestigious audio magazine.

Harman Consumer also announced a partnership with style leader Roxy to introduce a new market category of fashion, fashion headphones in this case and portable audio products co-branded with our leading brand JBL. The first products include a line of co-branded headphones in fashion colors to be launched in the third quarter of 2009.

The company's JBL Control Now, that's the name of the product Control Now Speaker series and two of the AKG Headphones received the international "Red Dot" prestigious product design award from one of Germany's top design centers. These Harman products were selected from among more than 3,200 nominations, spanning 1,400 suppliers from 50 countries.

We are also implementing a program with leading retailer in Europe named [Metro Saturn Group] to increase bundling of our home theater systems with flat screen televisions.

As shown on slides 11 and 12. Professional division launched more than 50 new Harman product categories at trade shows in the US and Europe, including the world's largest annual gathering of music professionals at Prolight and Sound/Musikmesse in Frankfurt, Germany earlier this month.

New Harman professional systems also performed for opening day crowds this month at the New Yankee stadium, Mets Stadium and also legendary Baltimore Orioles' Camden Yards stadium. A leading West Coast tour sound provider has placed a very large order for 800 units of our latest Crown amplifiers, and our new ScreenArray cinema systems featuring JBL speaks actively powered by Crown amplifiers is being rolled out by one of North America's largest theatre chains.

As shown on slide 13, Harman's QNX Software Systems division announced a launch of its new Connected Automotive Reference, we call it CAR program for the automotive market. This is fundamentally changing the rules of the game. The new program integrates embedded QNX products with third-party technologies enabling the rapid development of advanced technologies applications for automotive sector.

QNX also announced new design wins across several industries, including digital instrumentation for automotive supplier, Visteon for Ford F-150 trucks. That's an instant validation of QNX Connected Automotive Reference program called CAR.

QNX will also provide new software systems for 3,500 public transit buses in Singapore for remote maintenance and monitoring. So ladies and gentlemen, I want you to know this business of ours is now starting to show the growth potential and is starting to tap into those very aggressively.

Let's move now to other slides 14 and 15 for an update on our $400 million STEP Change cost savings program a. What have we achieved thus far? We are ahead of program targets year-to-date across each of our cost categories with $150 million in aggregate cost savings against a plan of about $100 million. I'm very pleased with the effort this company's resources have put in and we've taken the lead, and I intend to keep it that way.

Moving to slide 16, you will note that by the close of this fiscal year, the company will have eliminated more than 2,000 jobs, primarily in high cost countries, representing nearly 20% of workforce. More than 1,800 of these reductions have been implemented.

Please move now to slide number 17. In addition to aggressively reducing our capacity in high cost countries and saving costs, we have been carefully adding capacity in high-growth emerging markets as part of the company's global footprint optimization.

Realize now when the demand comes back, which it will, we will be, and we are well-positioned to realize the benefits of higher productivity combined with lower costs in these geographies like China, Hungary, Mexico, India and other places.

Slide number 18 summaries the key factors that we believe will help us to reach the rewards of pent-up market demand once the economy improves. Let's take a look at it. Our balance sheet and liquidity remain healthy, including cash and cash equivalence of more than $330 million at the quarter end.

We have demonstrated that we can execute on an exceptional backlog of large projects while dramatically improving our capital efficiency and cost structure. This has never been done by any of the company in our space. I mean 12 complex SOP, that is automotive platform launches out of 13 successfully done on quality and getting rewards, that's very unique value proposition we brought.

We have maintained our sharp focus on innovation, earning the respect of leading customers and partners. We are moving forward with our growth strategy in the emerging market with new resources and experienced managers on the ground in these areas of untapped opportunities.

Our board and management have shown the capacity for hard work combined with a sharp focus on governments and continuous improvement. Ladies and gentlemen, I can go on the good work this company is doing. I wish we could show the true translation of that into bottomline and in sales, but this unprecedented historic time we are all going through, we're learning, as all of you are, as anybody else, because none of us had ever been through this in the world. And we are learning a great deal, we are getting a fantastic cost base in place, and we're know waiting for sales to come back to become profitable. That's the bottomline.

I'm determined, this company is determined to achieve cost base, which will create profitability at this level of sales. It's a timing issue. We're getting there. We're working with a laser sharp focus to achieve that milestone very soon.

With that, I'd like to thank you for your attention, and I will ask our CFO, Herbert Parker, to provide a closer look at our quarterly results.

Herbert Parker

Thank you, Dinesh. Good afternoon, everyone. As mentioned in our previous call, Harman has incurred significant restructuring costs over the last few quarters and we expect more in the coming few quarters as well.

As noted in our second quarter results, we also incurred a large one-time goodwill write-off. And in order to give you a better understanding of our results, when restructuring cost and goodwill-related charges are excluded, we will continue to provide you with certain information on a non-GAAP basis.

You can find a reconciliation of our GAAP to non-GAAP results in our press release, which was released earlier today. But for your easy reference, the restructuring costs included in our third quarter results totaled $18. 5 million and goodwill impairment charge was $2.3 million.

In the third quarter, our sales declined across all segments, primarily due to the continuing global economic downturn. Our sales for the third quarter were $598 million, which is a 42% decrease compared to the same period last year. Excluding foreign currency translation effects, our sales declined 37% compared to the same period last year.

Our gross profit margin for the third quarter was 18.9% compared to 25.3% in the same period last year. This margin declined was primarily due to production under absorption and lower contribution margin related to the ramp-up of new infotainment product launches.

We anticipate that the margins of these next generation products will improve over time as the platforms mature, allowing for greater cost and productivity efficiencies. Additionally, our STEP Change program, which is focused on sustainable productivity improvement, is establishing a more competitive production cost base and greater benefits will be realized once automotive demand improves.

Now, moving on down below to the gross margins levels, SG&A expense for the third quarter was $181 million compared to $234 million last year. Of which R&D costs were $79 million and $104 million, respectively. Excluding the effect of foreign currency translation, SG&A expense was reduced by $35 million. Then despite these cost reductions, we had an operating loss of $68 million during the quarter compared to a profit of $27 million for the same period last year.

Our net income was negative $49 million and loss per diluted share was $0.84. As we have reported a net loss, our effective tax rate for the third quarter reduced a tax benefit of 29.8%, which includes the effect of operating losses, restructuring expenses, and goodwill charges.

Our March 31st balance sheet had a cash and cash equivalent balance of $334 million and a total debt of $662 million. Out debt balance includes a $400 million convertible note, which is due in October 2012. The addition of $260 million of debt pertains to the amount drawn down on our $270 million revolving credit facility, which we amended on March 31, 2009.

The amended agreement extended the maturity date from June 2010 to December 2011 and reduced the amount of available credit from $300 million to $270 million. The details of this agreement can be found in the 8-K filing that we submitted earlier this month.

As liquidity is a key focus today for all companies in this weak economic environment, let me now discuss our cash position.

Cash flow from operations for the third quarter was negative $28 million and capital expenditures were $16 million. The negative cash from operations in the quarter primarily relates to the sharp decline in sales in December and January when our automotive customers went to short workweeks and holiday shutdowns.

Even though our cash from operations was negative for the quarter, the month of March was cash positive. We are not suggesting that this one data point is a trend, but hopefully does represent a possible glimmer of hope.

Now, on that positive note, I'd like to thank you for your attention and we will take your questions. Operator, please open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). We will take our first question from the line of Chris Ceraso from Credit Suisse. Please go ahead.

Chris Ceraso - Credit Suisse

You are ahead of schedule on the cost savings. Is it because you've accelerated the plan that you've laid out, i.e., you'll achieve the $400 million sooner or have you broadened what you're doing so that the number will be greater than 400 by the time we get there? How should we think about the trajectory or the cost save in total?

Dinesh Paliwal

First of all, you are absolutely right. We have expedited and we'll continue to expedite achieving the $400 million savings goal. But at this point, I'm not moving the goal post. It is the same goal post. It's a timing issue. Some of the activities were able to push through faster, and some of the activities we get stalled because we are operating in an environment where some of the works council in the world can be real iron curtain, believe it or not. And they force you to slowdown. So it's a combination.

I'm very pleased that in net-net, we were able to move forward faster in some areas. Can I guarantee that will continue that same pace? I don't know. I hope so.

Chris Ceraso - Credit Suisse

Okay. So some of it is you've achieved it faster. You are not going to change the $400 million right now.

Dinesh Paliwal

That is correct.

Chris Ceraso - Credit Suisse

A product question. I noticed that there is a competitor that is now in the market with what they would call a semi-embedded device with Toyota. It's one of these net deal that you can kind of pop out when you get to where you're going with Toyota.

And I wonder if this is particularly troubling or disappointing to you given that you've had such a long relationship with Toyota, but have never really cracked into the Toyota business for navigation. What's your view on that?

Dinesh Paliwal

I'm aware of what you're saying and I won't actually get into the development and the progress we've made with Toyota. I personally have visited them few weeks ago and I'm very pleased with the progress we have made across the work. Toyota is a colossal large organization and they work with multiple mass suppliers as you that, not just one.

We are their preferred vendor for the high-end audio systems, all Mark Levinson, all JBL for Toyota and Lexus products. I continue to have positive hopes to break in. Have any Japanese suppliers very hard to break in for Americans and Germans? But I think we have a fairly good development process and to sort of shed some light on hybrid products you are talking, I believe we are leading that space, too, because we were first ones to announce a very creative solution with Daimler-Benz. We call it hybrid [net] solution, which will be coming online fairly soon in late next year with several of the car models.

I'm not at liberty to talk about models anymore, because our customers do not prefer that we talk. But these are nearly half a dozen cars where simply like you pop-in, more like a cradle black box in the back of the car and it's very easy to pop-in, pop-out, and technologically, you can keep it advanced.

We've got some good development in that area. So in addition to in-dash OEM, where we are clearly world leader, we are also fairly on the cutting edge technology in the hybrid solutions.

Chris Ceraso - Credit Suisse

Just two quick ones on cash. First, what is your total receivables exposure to Chrysler? And second, what would you say is the minimum cash level you need to run the business?

Herbert Parker

Well, sorry, this is Herbert. We've been included in a supplier protection plan from the government, so we think our receivables are all covered. That could be 3 million to 5 million of exposure there from the receivables side. I am sorry, what is your second question?

Chris Ceraso - Credit Suisse

What would you say is the minimum cash level you need to have on hand to run the business?

Herbert Parker

Well, we like to have between $50 million to $100 million on hand to run the business, because we have swings during the month of large, whether they maybe payouts of supplier or their payrolls. So $50 million to $100 million covers us sufficiently.

Operator

We'll now go to the line of Scot Ciccarelli with RBC. Please go ahead.

Scot Ciccarelli - RBC

A couple of questions as well. First of all, can you provide some color on the sales contribution from some of the newer models that have launched? Is there any kind of volume you can kind of quantify for us?

Dinesh Paliwal

You know, I would just go back and sort of refer back, almost a year ago, we knew we will be launching so many of these new platforms and 12 of the 13 has been launched. So as I shared with you last time that 70% of our infotainment revenue will come from brand new launches

You know that because you track this industry longer and better than I know, obviously. That when you launch a new platform, it starts with the lowest contribution margin in its life cycle. So we happen to be in an inflexion point where the 70% of infotainment revenue coming from brand new products just being launched, you can look at it from positive way that for next several years, you've your revenue stream secured. At the same time, you start with lower contribution margin.

What has happened in this last three-four months with unprecedented changes in the volume? We anticipated, obviously, a mix which we reflected in our projections that there will be some contribution margin drop due to higher percentage of newly launched products. At the same time, we had anticipated a fairly decent chunk to come from mature products, which have already gone into their high-end of the life cycle and reached maturity of margins.

Those products have taken such a nose dive, believe it or not, I mean I don't have to tell you. Some of the mature products of highly successful automakers have taken a nose dive as much as 60%, 65%. I know that. You know that. That's not sustainable, where at least we've been hit hard on that. So that sort of changed the mix contribution margin, which is not truly representative of what you should or I should expect.

Scot Ciccarelli - RBC

Okay. Another question kind of related to the same stuff. Is there a certain run rate of automotive sales that need to be achieved for you guys to get to a breakeven run rate on the auto side? What's the best way to think about that part of the equation, Dinesh?

Herbert Parker

Well, we won't give you the run rate on that sort of breakeven, because that would be in difference of our giving guidance. And of course, it depends on the contribution margin. So if you've got the highly mature product that's been running a while, it would be one number versus the new up, new platform that we just started off would be another one. So we've never given out the so-called breakeven number to give that.

Dinesh Paliwal

But, Herbert, let me just add to that, because my earlier statement was we're not going to wait for sales recovery to help our bottomline. We are determined to drive the cost to the level of this sales. So you can assume from that statement that the current sales volume on an annualized basis is the number to breakeven.

We're not there yet because whatever steps massive cost reduction we're doing, it has lagged anywhere from 6, 9, 12 months. So this several programs already started many, many moths ago and several are in works, so I think that's what our goal is. If sales come back, wonderful. Doesn't come back, I'm not going to wait for it. We need to turn us profitable. As I said laser sharp focus is on the sales level. When are we going to turn profitable?

Scot Ciccarelli - RBC

I guess one other question just trying to get little more color on the auto side. Can you tell us how much of the sales drop was due to, let's call it the exit of programs rather than simply decline in overall automotive production volumes, like sharing one of your platforms, et cetera?

Dinesh Paliwal

You have to clarify. I didn't follow you. You said exiting a program?

Scot Ciccarelli - RBC

Well, you have a certain life, right...

Dinesh Paliwal

Yes, sure.

Scot Ciccarelli - RBC

…on some of these programs and some start to wean off after some period of time. Obviously, the dual sourcing you talked about last quarter would be one piece of that. Are there any other programs that can't run the end of their life cycle?

Dinesh Paliwal

I think the way I would answer that answer is yes, because when you have 12 new SOPs coming, they are not totally incremental. Obviously, some of them are replacing the older generation our own program and some are replacing competitor's program, like in case of, well I don't want to name now, but the one which was technologically most advance cost is that company we replacing number of competitive products and some our own. So in net-net, it's a combination.

Second part of your question have been replaced anywhere? No, answer is no. Whatever was happened due to dual sourcing or triple sourcing at one of the German customers, that is not a news. It's not a new news. We're living with that. It happened a couple three years ago. So I don't have that break downs cut, but I can certainly look into it and share that with you. That's not a problem.

Scot Ciccarelli - RBC

The last question just has to do with a little bit on the balance sheet as well. Given the precipitous drop we've seen in sales. I guess I would have expected to see a little bit more tightening on the receivable and inventory side. Is there something else that's going on or are there any kind of extended terms or anything?

Herbert Parker

No. Receivables have gone down. The inventory has gone down. So we're taking action in that and we will continue to do so. So I'm not following your question, you would expect to see more?

Scot Ciccarelli - RBC

Yeah, I would have thought so. I mean typically when companies are in cash conservation mode I mean you are doing everything you can to kind of squeeze the working capital out of inventory, out of receivables, right?

Herbert Parker

Yes.

Scot Ciccarelli - RBC

So I guess I would have thought, having it done a little bit more aggressive than maybe what we saw this quarter.

Herbert Parker

Well, yes, we've done it and we will continue to do more, so you can see more aggressiveness in that area.

Operator

Our next question comes from the line of David Leiker with Robert W. Baird. Please go ahead.

David Leiker - Robert W. Baird

A couple of things on the cost savings and timing on this. You say you're running at $150 million analyzed rate, if I am reading slide 15 properly.

Dinesh Paliwal

Yes.

David Leiker - Robert W. Baird

Can you can you give us a sense how much that incrementally showed up to you in the third quarter? I don't know if you have a number for me. I don't have your slides from last quarter. I don't know if you disclosed it that way or not.

Dinesh Paliwal

No. That's a number which we, obviously, intend to keep it very visible to you, quarter-over-quarter. Let me see if I can find out, because I have the cumulative number here. In the meantime...

Herbert Parker

Herbert stepping here. Well, the incremental rate is 120. But you know we take our savings base of 2008 and we compare than on a year-to-date to the current number, so it is 120 on the incremental basis is what you can look at as comparison.

David Leiker - Robert W. Baird

That's what it would have been at the end the second quarter?

Dinesh Paliwal

Yes.

Herbert Parker

That's correct.

David Leiker - Robert W. Baird

You've talked about a handful of things here, Dinesh, as it relates to new programs, and I understand is difficulty in talking about specific program. But we come off of this bubble of, these major launches that you've done, and we've been talking about trying to get some visibility into what the ongoing growth of the business is now that those are behind us.

Is there any way you can characterize that? Obviously, the end market are down pretty meaningfully, but just in terms of excluding that, what sense you have that your business can grow?

Dinesh Paliwal

That's a great question, David. And we just finished our board meeting yesterday and that was discussion. Board always wants to know how you are going to grow this company, and so do I. As you know very well, David, you track this industry very well. There are a number of large infotainment bids out there and at least some of them should have been decided in this quarter or soon.

And due to the reduction in our automotive suppliers sales, these being pushed out by a quarter or two, but I can assure you we are participating in all major bids, high-end, where we definitely differentiate and we think we have an excellent position. I'm just hoping that some of these will be finalized in coming quarter or quarters.

Besides that, we've been successful in third quarter winning some business, whatever was awarded. One of the noteworthy item, Harley-Davidson, I won't go in detail but Harley-Davidson decided for next generation fully integrated infotainment system is highly competitive. In the end, we won because of the technological advancement we were able to demonstrate. We won that award.

We have also received some award from many. We were on many one model, now many has expected Harman on all car models, and besides that the number of smaller audio award which I thought was not worthy of mentioning in this script, but that's happening.

And I should also tell you driver assist, mid system. These are two big ones for us. We shared, as you know, I have talked about mid-system. That's my one of the area I am very keen on. We demonstrated to our Board of Directors a live system. We are ahead of our launch date.

Earlier I said fall of 2009, we will launch a mid-infotainment system. And that market, even in today's environment is growing about 25% and is a $5 billion space where we do not play today. So we're going to come in that market, where competitors have been playing with whatever offerings they had. So we're going to come out with absolute technological advancement so that's ahead of the market. That will create new business for us. And the way it's been designed, it would not require two and a half, three years of waiting period for SOPs like we have been. We're going change some ground rules, so if you get the order within 12 months; you're up and running in production plants. That's one.

Second, emerging markets, we were really non-existent. So as you may know, once we started pushing in China and India, but China particularly, we were awarded by BMW, a significant award to be built, designed and delivered out of our China Suzhou plant for 5 series, its actually stretch limo series. So lot is happening there, and now of course, we start to talk to lot of other vendors outside of our traditional domain. So I believe some things are happening.

And then lastly, the pro-business, which I love to talk about, but you guys don't ask questions on because you're all tired of the automotive. The pro-business we have a lot going on there. We have 50 brand new products we launched, in fact, got some awards where we have never been part of, like West Side Story break in first time in Broadway with massive sound craft, sound mixer. And we are working on this large city center project in Vegas. We're working MGM Grand. These are $10 million, $15 million dollar last project with very healthy margins. So there is a lot of work going on in Commonwealth in India and some other work.

So yes, in terms of magnitude compared to automotive, they are not as large but from the profitability which I really care a lot, they are very important for us. There's a lot going on. So to conclude, large bids from automotive, we are in wait and see period, we're working closely with our customers, revising the [business] they ask but they are out and should be finalizing dividend one or two quarters.

Operator

(Operator Instructions) We'll go to the line of [Tim Berry with Siena]. Please go ahead.

Unidentified Analyst.

You've entered into some new covenants with the new credit facility. One of them being a minimum of $100 million of adjusted EBITDA for the trailing four quarters. Can you tell us as measured for this what the past four quarters including this, what the adjusted EBITDA number is?

Herbert Parker

You're asking about the past four quarters?

Unidentified Analyst

Yes, including this quarter, yes.

Herbert Parker

There is one of the covenants that relate to the future, so we haven't been focusing on that one in the past. I don't have that one with me. I can give it to you in a few minutes.

Unidentified Analyst

Okay. It seems to me that unless there is vast improvement in your EBITDA production over the next two quarters that you're going to end up in violation, it's very difficult to see how you get to that $100 million of EBITDA at least if I'm measuring that correctly. So can you tell me what your thoughts were when negotiating and agreeing to that covenants?

Herbert Parker

Well, you're correct. We absolutely expect our improvements over the next few quarters, and our STEP Change program is one of the initiative that would help us get there. In addition to that we're taking the other actions as well. So we definitely feel that we will not be in violation of any other covenants when they become due. So EBITDA that you're hooking at for the four quarters trailing, we expect to be in compliance at that time.

Unidentified Analyst

Can you tell me if you end up violating that particular covenant, what the consequences are?

Herbert Parker

Again, we don't plan on violating it, but if we did, and if we did not receive a waiver from the bank, then the commitment would be due.

Unidentified Analyst

Okay.

Herbert Parker

But we negotiated that amended facility with the bankers and they have seen our plans and we obviously don't expect to violate it. So we believe that the plans we have will ensure that we are in compliance when that becomes due.

Dinesh Paliwal

Tim, this is Dinesh. I want you to know we're not sitting here hoping that window will open up and lot of sunlight will just come in tomorrow. We see the darkness, the gloomness, whatever you see, and we're making our plans based on what is it today. That's where we're going.

It's tough for executing these big initiatives to save costs and improve. As soon as some of these initiatives start to show their full blown effect, I think you'll see. So I totally endorse what just Herbert said. We just negotiated based on visibility in our numbers and as conservatively as we could be, or as aggressive, whatever you say.

I mean, bankers, you don't go without some thought process behind. So I think we are at this point, happy what we negotiated. We negotiated the best deal in this market given the environment. So as Herbert says, we don't plan on violating any of those.

Unidentified Analyst

So in that plan of not violating, do you have an expectation that over the next two quarters, your revenues will increase from the current run rate? Or you assume that revenues would be around the current run rate that you are driving now costs enough that you can produce the EBITDA that's required.

Dinesh Paliwal

There are two things I would like to say. One is expectation, one is the desire. Do I expect? I don't really expect in this environment anything, so I am just basing whatever the run rate of the revenue is, that's what it is. If something happens, great.

What is my desire? I certainly like to see revenues go up, but the plans are not based on desire, plans are based on run rate. And based on that, Herbert's statement I just echoed, that we will do what we can control. We can't control the sales. So we can control the costs and burn rate and everything else. And based on that, we don't plan on violating any covenant.

Unidentified Analyst

Would love to hear what the actual adjusted EBITDA number is for each of those quarters that...

Dinesh Paliwal

Sure, Tim. Robert Lardon will actually follow-up with you once the call is over.

Operator

We'll now go to the line of Jeff Graf with Springhouse Capital. Please go ahead.

Jeff Graf - Springhouse Capital

Just a quick clarification on the savings from the STEP Change plan. On the slide 15, when you say actual savings of $150 million, is that, in fact, actual for the three quarters or is that annualized number?

Dinesh Paliwal

No, this is the accumulated number what we have achieved so far as of March 30th against our target. Fiscal '11 target of $400 million.

Jeff Graf - Springhouse Capital

Okay. So you realize an incremental, roughly $120 million in the quarter?

Dinesh Paliwal

That is correct.

Operator

We'll go to the line of [Leigh McDerra] with Relational Investors. Please go ahead.

Unidentified Analyst

This is [Chris Hedrick] for Lee. I just had a question a couple of callers back about the new credit facility and the covenants around EBITDA. And I just wanted a clarification regarding the $100 million of trailing 12-month EBITDA. That covenant doesn't come into play until the June quarter of 2010, correct?

Herbert Parker

That's correct.

Unidentified Analyst

Because the way that it was worded it seemed like the discussion was around whether you could trip that in the next quarter or two, and that is not a possibility regardless of your level of adjusted EBITDA over the next two quarters at least.

Dinesh Paliwal

Thank you for clarification. I'm glad you did it.

Operator

And there are no further questions in queue. Please continue.

Dinesh Paliwal

That's okay, Rich, we continue to wait because we do have time here, little bit time at our disposal. And we know we have a very high number of participants, number of lines, so give them some time.

Operator

(Operator Instructions)

Dinesh Paliwal

I do understand number of our analysts and investors have also set up meetings in following days, so we'll be, of course, following up going forward. But Rich, why don't we give another moment or two to see if there are any last questions. If not asked, there we go, we have someone in the queue now?

Operator

We do. It's from the line of [Peter Avalon] with SAC Capital. Please go ahead.

Unidentified Analyst

I was just curious. What exposure do you guys have in specifically account receivable to Chrysler and to GM? And maybe your thoughts on what happens when they do file for bankruptcy? I mean it sound highly like if Chrysler does and if GM does, and based on the cuts in their business, how impactful will that be to your business?

Herbert Parker

This is Herbert. Our exposure to GM is immaterial. We do very little sales with GM. So that's not an issue. With Chrysler, we've been accepting into supplier protection program, so all exposures cover that. It could be 2 million to 5 million in Chrysler receivables that are not covered.

Unidentified Analyst

One thing and I don't know how this is going to play out and presumably if the government is doing this addition be problems there are, but I would suspect that it would be inconceivable at least if Chrysler were to file and they go back to other customers or other suppliers and they cannot chitchat with contracts. They can say, hey, this contract I really like, I'm going to assume that one, but this one I really don't like, so I'm going to reject it.

Is it your belief that they do anything like that or is it your belief that all contracts with Chrysler, if they were to file would be assumed?

Dinesh Paliwal

You know, who knows? That's my answer first. But then I can tell you what I think. In our case, when we were accepted in this receivable protection program, we worked out an arrangement, which I'm also very happy to share with all of you, that same time as we were given the protection for our receivables, we are also making an exit of our loss making business with Chrysler, which many of you, those who have been tracking our company for some time know that.

So we would be exiting that starting this summer and complete as it will happen by end of this calendar year. That's a great news. At the same time, our rest of business with Chrysler, we have been awarded a firm order for extension beyond 2011. So a couple of good news. What would they do with what suppliers? I don't know. What we do. We are pretty much critical supplier to them. They do not sell a car without MyGIG, wherever they have. MyGIG is our product, as you may know.

Unidentified Analyst

Second question and I'm very glad to hear that we have no issues with covenant breaches, and I also wanted to compliment, yes, at least it's a very positive thing. I think that...

Dinesh Paliwal

At this point, that's how we feel. I mean who knows what happens in the future.

Unidentified Analyst

Right. Well, and then it's also nice to hear that you generated cash in the month of March. But did that mean that you actually saw sequential improvements in orders or was there some working capital benefits that accrued to you in the month of March versus the January and February timeframe?

Herbert Parker

You have both. The month of December, January and February were unusual months. The automobile industry pretty much shutdown a couple of weeks in December. That lagged into our January and, of course, February is a very short month in addition to holidays. So March was better.

As I was indicating that while March was better, we're not saying that this is any positive trend yet, it just had about three more working days in March. So what contributed was that March was better as well as the fact its working capital. Because keep in mind, what we did, we built up inventory towards the end of the year to get ready especially in consumer for the Christmas sales.

Even if you look at automotive and professional, the amount of inventory that we had was not so because December and January dropped off so fast. So we are starting to have all sorts of cash from our working capital starting from March. As a matter of fact, it's down 21% year-over-year, March-to-March, the working capital.

Unidentified Analyst

So I mean the one thing I did gave and this is rough numbers, so it may not be exactly right. But I was looking at your sequential move in your debt levels and your cash balances, and it would like you burned roughly $66 million in give or take a couple bucks in Q1. To the extent that this is a run rate, that would be modestly troubling for the course of the year. Is there any reason to think that your cash would improve?

I mean because I know you're planning for a certain level of sales which is the current level of sales and you're hopeful that things will get better, but I know you do have a lot of costs that you're trying to take out and I know that's costly to do. But this cash burn rate, I mean your liquidity could be a constrained fairly quickly. Can you walk us through kind of how you think about your cash burn and what the magnitude is if the Q1 is something that we should annualize?

Herbert Parker

Let me start off, but I think as you indicated you were happy to see that our March was positive, and it was. I mean we had to do your numbers and you roughly are right in the ballpark and March was a positive month. So you cannot draw the conclusion that's the [66.6] number that you came up with is an annual burn rate.

So, we do believe that we will have improvements. Also, we are drastically reducing our costs. So I don't think we can extrapolate that burn rate going out several quarters. I mean there's obviously…

Unidentified Analyst

I'm assuming in a year's time, your burn rate will be down a lot. I guess to get there, you have still lot of costs to take out and I know that taking out costs are sometimes costly, too.

Herbert Parker

Yes, you're correct and savings at the same time. So some of it is payback within a quarter, some of will payback within a year.

Unidentified Analyst

Right. That's what I'm trying to understand because this environment is so fragile. And just order of magnitude, I mean how much under draconian case and under a base case and under a positive case, what you do you think the swing would be in cash over the course of the remainder of this year?

Herbert Parker

In this environment, I couldn't get that. I mean any number I gave you, your guess would be as good as mine. All we can do is continue to address in calls in a manner we're doing because we can't control the economy.

Dinesh Paliwal

You know, Peter, if I may, I hear you, and I wish I could say some things in this steady state. I would be tempted and I would have say some thing, but this is not a steady state. That's why I believe we should not speculate. What I like to say though, I think you should look at how we have managed our camp capital expenditures. That's a success story.

From $175 million in fiscal 2007 to significant reduction 2008 and 2009, you see the slide, ask for doubt, is less than $80million. While we have all-time high activity in the company, we produced six or will produce six additional infotainment platforms. While other seven we've been ramping up. That's the all-time activity this company had ever seen.

We produce brand new 50 products control. So there is a lot of tooling costs, lot of innovation money we have been putting in, but it's a tremendous fiscal discipline and efficiency game we have. So capital expenditures one thing, second, sourcing.

We are getting smarter. We have centralized our sourcing. Your point is valid when you say to take out costs, it cost you costs. You are right when it comes to people. But when it comes to supply and sourcing side, if it doesn't cost, it just takes discipline. So we are targeting cash P&L effective savings in our sourcing approach.

So number of initiatives, some require lot of costs, upfront some requires very little costs depending on what we are doing. It's a combination. Therefore, best case, worse case, putting out there probably be a little unwise for us at this moment. As Herbert said, I'm very much driven. Herbert is watching his cash profile every day by unit, by division, by country.

I'm just spending my time several hours every Friday to review the whole cash profile. What did we use for? What is our next eight weeks cash profile, while also taking a 12 months rolling. So the discipline we are bringing right now in this company, I don't know whether we had it before like that, but you know, a situation like we are in, that teaches you wonder. So anyway, with that said, we have to just watch and keep on doing what we are doing right now.

Unidentified Analyst

I am going to have to just add one. You did mention that you do have a 12-month rolling, so that would suspect that you do have some indication of where your cash is going to be but...

Dinesh Paliwal

Of course, we should have indication, but I'm not so sure. It was been wise for me to put it out not knowing what this market would look like on a quarter-over-quarter because we just don't know that.

Unidentified Analyst

But based on those numbers, I suspect you think that you have sufficient liquidity.

Dinesh Paliwal

We have said we have sufficient liquidity to run operations, I will confirm that statement.

Unidentified Analyst

For the next 12 months at least.

Dinesh Paliwal

I never said that.

Operator

We have another question from the line of James Lin with Greenlight Capital. Please go ahead.

James Lin - Greenlight Capital

Did you guys give a forecast for the number of infotainment platform launches you expect in 2010? I'm on page eight of the presentation. I assume these are your fiscal years that you are talking about.

Dinesh Paliwal

James, hi, this is Dinesh. Answer is no, we had not given any forecast for fiscal '10, '11 or '12. You should know little background of these 13. These famous 13 became such an important news in the industry because no supplier in the history of automotive companies has delivered 13 and 24 months. So that's why this became so popular, so famous.

Can Harman really pull it off, because even Harman has never done it? So that's why we gave it. We generally don't give out forecast for SOPs in a year. And reason for that is most automotive customers are very uncomfortable when we quote their names, we quote the timing of their SOP. They would rather be left alone. And they would rather announce when the SOP is launched of what car and which model.

James Lin - Greenlight Capital

Then how should we think about this CapEx level that you have here for 2009, which is...

Dinesh Paliwal

Would you come again?

James Lin - Greenlight Capital

How should we think about the CapEx then? I mean is this less than 80 million numbers for 2009? Is that a sustainable near term level or should we expect to see that move up hire?

Dinesh Paliwal

James, if in future, in coming years, if we double the company sales, you would expect capital expenditures to go up, but not double. The world I come from, I was trained absolutely fiscally tight when it comes to capital and I come from very technology-driven company. And we were running or company at 2% of sales. That's my discipline. That's my training.

As per I am geared here, so I like to sort of bring in how much you can do, the [parative] usage of what you've done, how much can you reuse the lines, how much can you run three ships on a line. And then all of those when going is good, people don't worry about capital. They just keep on adding things.

So to answer you, you can expect such levels if the sales are at this level, you can expect these capital expenditure levels. When sales start to go up, then I'll thing about increasing. I'm not ready to increase any capital expenditures. And this is sustainable, this is not compromising anything. I mean it, because we have just invested heavily in our new products in automotive. We've invested heavily in this year in our pro and more than ever professional has never invested so much in innovation. And consumer is doing it and we will do that again next year.

But how you put through a rigor of reviewing what is this project, why are you spending 100,000, 10,000 million which we did not have in our company prior to the Herbert and my arrival that's a fact.

Operator

This time we have exhausted all questions in queue.

Dinesh Paliwal

Are you sure about that? Very well, which I think we have if you don't see any question in the queue, then let me take a second here.

Ladies and gentlemen, those of you who are still listening, I hope during our call now, we have demonstrated that we are taking every action possible to manage our business for the current environment, while positioning Harman to emerge as a truly best-in-class competitor.

The challenges are clear and our fighting spirit is strong. We have proven that we can execute. That is clear. I'm very happen with the execution we have shown and we have proven that we can innovate.

I don't know anybody in our peer group who has innovated so much in last 18 months like we have. And I am pretty sure that we intend to prove that we can win. And we can win with the current sales levels by doing what we are good at doing, that is execution of our plans.

So with that, ladies and gentlemen, I sincerely thank you on behalf of my Chief Financial Officer and rest of the team here for listening, and for your questions and your continued interest in this great company.

Have a great afternoon, great evening. Bye-bye now.

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 P.M. Eastern daylight time today.

Simply dial 1-800-475-6701 in the U.S. or 1-320-365-3844 for international. And at the voice prompt, enter the conference confirmation number of 997165.

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 and you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Harman International Industries Inc. F3Q09 (Qtr End 03/31/09) Earnings Call Transcript
This Transcript
All Transcripts