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

Harman International Industries, Inc. (NYSE:HAR)

F1Q10 (Qtr End 09/30/09) Earnings Call Transcript

October 29, 2009 4:40 pm ET

Executives

Dinesh Paliwal – Chairman, President and CEO

Herbert Parker – CFO

Analysts

Chris Ceraso – Credit Suisse

Scot Ciccarelli – RBC Capital Markets

Himanshu Patel – JP Morgan

David Leiker – Robert W. Baird

Tim Garry – Pzena Investment

Darren Kimball – George Weiss Associates

Brian Gustavson – Balyasny Asset Management

Jim Peters [ph] – Sigmet [ph]

Operator

Good afternoon and welcome to the Harman International Industries first quarter fiscal year 2010 earnings conference call. (Operator instructions)

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 to 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 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 first quarter 2010 investor and analyst call. I'm joined in Stanford, Connecticut today by Herbert Parker, our Chief Financial Officer, and Bob Lardon, Vice President, Investor Relations.

Along with our first quarter results outlined in the 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 our company's website, harman.com. I will mention several of these slides during our discussion.

Ladies and gentlemen, you have heard me state on previous calls that good companies find ways to capitalize on difficult times and strengthen their competitive position. That is exactly what we have been doing and it is clear that our efforts are bearing fruit.

We entered this fiscal year with a strong cash position, a robust pipeline of product innovations, loyalty from our customers, and an intense focus on continuous improvement. These factors reflect not only the hard work we have done, but also what we intend to deliver as a company.

As I said to you on our last earnings call, the recent economic climate does not allow meaningful year-over-year comparisons in most cases, but on a sequential basis we continue to be encouraged by the quarter-to-quarter improvement. We once again saw an increase in net sales, up 13% from the previous quarter and our company turned profitable.

We continue to successfully manage our liquidity through aggressive cash management and the contributions from our successful public offering in June. We ended the first quarter with $540 million cash balance. Our STEP Change permanent cost savings program remains ahead of schedule, delivering $243 million in permanent bankable savings through the end of the first quarter.

Our intense focus on operational excellence is reflected both in our financial metrics and in the spirit of our team. Our balance sheet is healthy and our loyal customers have rewarded us with significant new business. We are energized and well positioned to seize the right opportunities when the economic climate improves, emerging as a much stronger and more profitable company.

Now before I asked Herbert Parker to provide you a closer look at our first quarter results, I will share some other highlights on the performance of our business and current strategic initiatives. I'm pleased to say that our automotive division achieved double-digit sales growth on a sequential basis, obviously aided in part by previous government and automotive stimulus programs during the quarter.

As shown on slide eight, our track record of successful execution and innovation also earned us several significant multi-year audio and infotainment awards during the quarter. We announced in early September that Daimler had selected Harman to provide the premium infotainment systems for its future S Class models and C class models. At C class models, where we took business back from a major Japanese competitor, I must add.

We also announced that BMW has selected Harman as its supplier for infotainment across its full range of future models, including Mini Cooper and Rolls Royce. I will remind you that these new repeat orders come on the heels of our successful platform launches. Today I'm pleased to share some breaking news that Harman has been selected by Toyota to provide infotainment system for its vehicles sold in Europe beginning in 2011.

Ladies and gentlemen, let me stress this, this is history in making. This is a real game changer and marks the first application of our new scalable, next-generation infotainment system. I must also add to it, this is the first time a non-Japanese company has been awarded an infotainment business to go on Japanese automaker. I'm very proud of it.

In addition, we have expanded our long-term branded audio relationship with Toyota and have been selected to provide our premium JBL branded audio for Toyota 4Runner and Land Cruiser models in the US, Europe and Middle East.

Well, while others were cutting back, our continued investment in technology and a strong execution have earned us more than $10 billion in awarded automotive business. As our Toyota infotainment award evidences, we have completed the successful market introduction of Harman’s scalable next-generation infotainment platform.

During this launch, my team and I personally met with our current and prospective European, Asian and US customers. To recognize China's growing importance to the global automotive industry, we choose Shanghai as our global launch location, and we are continuing the roll-out across Asia, Europe and the United States.

This new system was developed in record time by drawing upon our expertise in the US and Germany and leveraging the engineering and speed, I add, the speed of our development centers in China and India.

Please move now to slide number nine for a recap of our professional division achievements. We were awarded contracts to provide the audio systems for seven key venues at the 2010 Commonwealth Games in India, and all permanent venues at the World Expo 2010 in Shanghai. We also received a major contract to provide more than 80 digital audio mixing consoles for the British Broadcasting Corporation, BBC.

Harman Systems was also used this quarter by leading artists including Eric Clapton, Steve Winwood, Deep Purple, and at very prestigious venues such as the House of Blues, Georgia Tech Stadium, and the Darmstadt National Theater in Germany.

During our annual customer event last week in Los Angeles, we announced that Harman has accepted an invitation from the Grammy Awards Organization to serve as their long-term official sound partner. Harman International also received a special Grammy award in recognition of our decades of contribution in advancing sound technology. More than 50 top executives from the automotive industry, retail and entertainment industry joined us for this event, along with our friend, the legendary producer and performer Quincy Jones and many other Hollywood celebrities.

Please refer now to slide 10 for some highlights from our consumer division. Well, let me start with a great breakthrough. The ABC channel, ABC Good Morning America, and Life & Style weekly magazine both declared our consumer division co-branded JBL/Roxy or QuickSilver headphones as “must have” products. Well, all those parents and siblings listening tell your teenagers you got to have the “must have”.

German consumer products earned several other industry awards including Japan's “Design Excellence Award”, Germany’s Red Dot [ph] design award, and the European Imaging and Sound Association award. We launched these award winning new products at the IFA Consumer Electronics Trade Fair in Berlin, Germany, and we received more than 30 million orders on the spot during the show.

So ladies and gentlemen, you know, I had been talking about improvement, innovation and operational excellence, and I think we're starting to see it is ticking, it is starting to make the difference.

Moving on to slide 11, our QNX software systems unit continues to lead the industry as a software innovator. QNX was recognized at the recent Adobe developer conference with the prestigious Adobe MAX award for advanced mobile software application, and the leading power and transmission distribution company AREVA, who I used to compete by the way (inaudible) has selected the QNX operating system for high voltage protection and control systems, substations. That is a new field that QNX has entered in and (inaudible) President Obama has just announced $3.4 billion award – subsidies for the smart grids and the high voltage protection and control business is very large. It is 20 billion, 30 billion and imagine we are going to be playing a role there too.

Let us move on now to slide 12 for an update on our $400 million STEP Change cost savings and productivity improvement program. We have now achieved 243 million in permanent savings. It is in the bank compared to a target of $197 million through the first quarter. We are proceeding with our aggressive restructuring initiatives. We have announced Bridgend in the UK and Vienna in Austria as our focus global research and development and engineering centers for sound mixing and headphone technologies.

We will consolidate manufacturing operations from these sites into our newly expanded plant in Hungary. Ladies and gentlemen, it is clear that Harman’s aggressive initiatives to reduce costs, improve productivity and drive new innovation are bearing fruit. We are encouraged by our double-digit sales improvement on a sequential basis, our operating income has turned positive and our strong execution has produced a record level of awarded business that will benefit Harman for years to come.

Before I turn it over to Herbert let me recap our position. Our strategic investment and innovation are paying off, our competitive position has never been stronger, the wins we announced this quarter are a testament to our technical leadership and our ability to maintain customer confidence even during the most challenging economic climate I have ever seen.

Our cash position remains strong giving us the means both to execute on our STEP Change program and to seize new opportunities for profitable growth. We have achieved $243 million in permanent cost savings to date, and we're ahead of schedule towards our $400 million permanent savings target. Our strategic focus on the emerging market is demonstrating early results and we will continue to deepen our roots in these very importantly geographies.

Well thank you for your attention, and I will now ask our chief financial officer, Herbert Parker, to provide a closer look at our quarterly results.

Herbert Parker

Thank you, Dinesh. Good afternoon everyone. I will now present a few details on the financials, so that this will hopefully give you a better understanding of our developments during this quarter.

As mentioned in our previous calls, and for the benefit of new investors, most of my financial comments are provided on a non-GAAP basis, which excludes restructuring costs and goodwill write-offs.

You will find a reconciliation of our GAAP to non-GAAP results in our press release, which was published earlier today but for your ease of reference, these non-GAAP costs totaled $7 million for the quarter.

Now starting with the top line, as Dinesh has said, in our first quarter, our sales declined across all segments when compared to the prior year, as we continue to feel the impact from the economic downturn. Specifically, sales for the first quarter were $757 million, which is a 13% decrease compared to the same period last year. Excluding foreign currency translation effect, our sales declined 10%. We are encouraged, however, that on a sequential basis our first quarter sales increased 13% compared to the prior quarter. This sequential improvement was led by the automotive division, in which we reported a 17% increase.

Moving on to gross profit area, we reported a gross profit margin of 26.4%, compared to 28.5% in the same period last year. This margin decline was primarily due to the decreased factory utilization associated with low sales and unfavorable product mix. Our SG&A expense for first quarter was $195 million compared to $205 million last year, of which R&D costs were $81 million and $87 million respectively. Excluding the effect of foreign currency translation, SG&A expense was reduced by $4 million.

Now, as Dinesh noted earlier, we turned positive this quarter with operating income of $5 million. Even though this compares to a profit of 43 million on a year-over-year basis, it represents a significant improvement from our loss of $34 million in the prior quarter.

Our net income for the first quarter was negative $4 million and loss per diluted share was negative $0.05. As we have reported a net loss, our effective tax rate for the first quarter produced a tax benefit of 37%, which includes the effects of operating losses, restructuring expenses and goodwill charges.

Our September cash balance was $540 million, compared to $591 million in the prior quarter. This reduction was primarily due to increased working capital and specifically from our increase in accounts receivable as a result of our higher sales volume.

As we said in our previous calls, our goal was to turn positive by the end of this calendar year. Our early achievement of this goal underscores our commitment to continuous improvement and culture of accountability. And at this point, I like to thank you for your attention and we will now take your questions.

Operator, please open the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) First question comes from the line of Chris Ceraso of Credit Suisse. Please go ahead.

Chris Ceraso - Credit Suisse

Thanks, good afternoon. Can you hear me?

Dinesh Paliwal

Hi, Chris, we can hear you all right. Thank you.

Chris Ceraso - Credit Suisse

Okay, great. Thanks. On the Toyota award, what is the kind of the aggregate value of that on an annual basis once it is fully ramped up?

Dinesh Paliwal

Unfortunately, can’t share that because Toyota is not happy that we share that, perhaps you can get it directly from them. I can say it is significant award.

Chris Ceraso - Credit Suisse

Okay. And you mentioned this is one of the new platform, the new scalable platform, which I know as you said, the car company can choose kind of from a menu of the level of functionality that it has. Is Toyota selecting a high level of functionality or does it depend on the vehicle that is going on?

Dinesh Paliwal

I think it depends on the vehicle, but exactly right, this is that brand-new system we just launched, scalable next-generation infotainment, which can go into a fairly large complex system, but also can be a very simple system. It is pre-developed, so the benefits of that system as the press release said that we will start shipping already in beginning of 2011. So that is the beauty of it. That is the game changer. Traditionally it takes three years from the day you get the award to start shipping.

Chris Ceraso - Credit Suisse

It is calendar ’11 or fiscal ’11?

Dinesh Paliwal

I would say, it is a calendar year, and it is a multimedia system. So it is a full-blown multimedia system.

Chris Ceraso - Credit Suisse

And I think, we talked about this scalable multimedia system before with price points in the roughly $500 euro to $600 euro range. Is that about where you are at on these?

Dinesh Paliwal

Yes, sure. I would even go this far Chris that, you know, traditionally the high-end systems are anywhere from 800 to 1600, 1700 and this one would be about half the price. Anywhere from 300 to 800, depending on what configuration our customers would like to have.

Chris Ceraso - Credit Suisse

Is that dollars or Euros Dinesh?

Dinesh Paliwal

Everything is dollars.

Chris Ceraso - Credit Suisse

Dollars, okay. And then, just one last one on the backlog of business, which you have referenced a couple of times at 10 billion. How much of the 10 billion represents existing programs where you have been awarded the replacement like you mentioned on the S class versus new programs that you have conquested [ph] from someone else like to C class, roughly 80-20, or what is the split of that 10 billion?

Dinesh Paliwal

You are ahead of me. You just answered it. It is about 80-20. Yes.

Chris Ceraso - Credit Suisse

80-20, okay. And it runs through what towards 2019, 2020. It is obviously a multi-year period, right?

Dinesh Paliwal

That is correct, Chris.

Chris Ceraso - Credit Suisse

Okay, thank you very much for the time.

Dinesh Paliwal

Sure, you are welcome.

Operator

Thank you. And the next question comes from the line of Scot Ciccarelli of RBC Capital Markets. Please go ahead.

Scot Ciccarelli - RBC Capital Markets

Hi, guys. Scot Ciccarelli.

Dinesh Paliwal

Hi, Scot, how are you?

Scot Ciccarelli - RBC Capital Markets

Good. How are you doing Dinesh? A couple of questions, first, the BMW and Mercedes deals, I guess it sort it applied to Toyota as well, can we assume they are all, is everything exclusive to Harman or there are other vendors involved (inaudible)?

Dinesh Paliwal

That question you have to ask our customers. You know, they will never tell you that. You know, BMW is almost getting there, but all I can tell that we gain market share in this quarter based on quarter-over-quarter sales growth in Western Europe and in America. So we're gaining market share, but I know your question is more towards future. Well, we love to have single sourcing, but we can't ask that and depends on our customers.

Scot Ciccarelli - RBC Capital Markets

So, how do we interpret that? That is just a no comment at this point?

Dinesh Paliwal

No, I'm not saying it is no comment. But you know that, we have BMW, we have Mercedes, and we just picked up a competitor who took this business away, a few years from us. We just got that business back. So that is incremental, obviously, but you know, there is always – automakers like to keep two suppliers. The ratio could be 80:20 or 90:10; we'd like to keep it 99:1.

Scot Ciccarelli - RBC Capital Markets

Right, okay fine, and then the gross margin improvement on the auto – in the auto segment. Is that just a function of the improved volume, is it a function of mix, is it a function of the newer program starting to ramp up, can you just kind of give us some sort of gradation as to what the major contributors were there.

Herbert Parker

Hello, Scot. This is Herbert. It is primarily related – you can roughly say it is about 50% related to volume, and 50% related to our STEP Change cost savings program.

Scot Ciccarelli - RBC Capital Markets

Okay, so not necessarily change in mix?

Herbert Parker

No, no.

Scot Ciccarelli - RBC Capital Markets

Okay, great. That's all I had. Thanks a lot, guys.

Dinesh Paliwal

Thank you, Scot.

Operator

Thank you. And the next question comes from the line of Himanshu Patel of JP Morgan. Please go ahead.

Himanshu Patel - JP Morgan

Hi. I have two questions, are you in talks to do Toyota infotainment systems in North America or any other region?

Dinesh Paliwal

Hi, Himanshu. Yes, we are in talks with them for worldwide. We will see what it yields to.

Himanshu Patel - JP Morgan

Okay, and then Dinesh, you know, just the whole process of bidding on additional mid-market, mid-level systems, can you just give us some sort of context as to how close you are with other OEMs, whether it is another Japanese carmaker or perhaps an European brand or is this something that will be very lumpy and we shouldn't expect perhaps to hear anything for a while on this front?

Dinesh Paliwal

Himanshu, it is a tough one, and I want to answer you as directly as possible, I mean we're at. But you know this also depends on the life cycle of the products. We were lucky that this Toyota thing worked out perfect for us. They were looking for a partner who can give them an edge in Europe, and they just got that. And they will get very fast time to market with this, and you know we are exploring that with all existing, European, American, not so much American yet, but Japanese.

But I must tell you, we need to step up on to reach out to new customers in Japan, in America, in China. That part we will get to do. I must say, we just launched it. So you don't want to go to the new customers unless the system is officially launched. So that activity will begin now, and we hope that it will turn into some success in reasonable time.

Himanshu Patel - JP Morgan

And then, last question on the Toyota contract, is this a new product that Toyota is introducing into its European vehicle line-up or are you conquesting this business from another infotainment supplier?

Dinesh Paliwal

It is – it is primarily a new program, but it is a setback for the existing incumbent supplier of infotainment because it was a lock on it. So, primarily it is new. There will be some models, which are existing and we will be replacing a competitor.

Himanshu Patel - JP Morgan

Okay, I am sorry, one last one. With the equity rates behind you and you know the sort of top line improving with industry volumes, what sort of investments where you perhaps deferring in the business over the last 12 months that you had looked to sort of stop putting black in place now?

Dinesh Paliwal

That is primarily in the area of geographic development. We never actually restrained ourselves when it comes to innovation and product development, and Himanshu, I really like to stress that I have seen more new products launched, and I have compared the historic last 10 years of history of this company than never. So I'm very pleased with that. So we never restrained.

What you will see more happening is world-class plants being opened in geographies like China or making more investment in R&D centers or engineering or test centers or product execution capacity or competence because what is going to happen since China is now Mercedes S class number one market, and Audi already announced that it is their number two market. And Porsche said very soon it would be one of their top two or three markets.

So, there is demand now from our existing customers that we must provide, full project management engineering, service, capability. That is a whole new ball game, and that requires investment in people and infrastructure. So we're going to do that and we will also do that in India. And we will also invest in other emerging markets. So with that said, we have also ambition, not just organic but inorganic areas we also like to go after and I have prioritized my sort of wish that we will start with our professional business, but if we see opportunistically good technology assets either in automotive and consumer, we will also take a look at it seriously.

So, we feel very relaxed because we just did the board meeting last week and our board members unanimously very supportive of what we're doing, and they have looked at our capital plan, they have looked at our investment plan. They looked at our organic and acquisition wish list. I think there is a very good balance. We would do things in sync, but organization is not constrained for capital.

Himanshu Patel - JP Morgan

Okay. Thank you very much.

Dinesh Paliwal

You are welcome.

Operator

Okay, thank you. (Operator instructions) You have a question from the line of David Leiker of Robert W. Baird. Please go ahead.

David Leiker - Robert W. Baird

All right. Good morning everyone.

Dinesh Paliwal

Hi, David. How are you? Good to hear from you.

David Leiker - Robert W. Baird

Good afternoon. It has been a long day.

Dinesh Paliwal

Good afternoon to you.

David Leiker - Robert W. Baird

Couple of number questions your, first the interest expense number looks high at least relative to what we're looking for in, I don’t know Herbert if you have an explanation there that I'm overlooking?

Herbert Parker

Well, historically we haven't been – we haven't had as much drawn on our revolver. So we are fully drawn now with $230 million and we are [ph] LIBOR plus 4% and 1% fee, but in addition to that, you may be aware of APB 14-1 where we have to now charge-off sales interest as if it more like the market rate, but at 1.25%, which we plan for the $400 million convertible debt is now being charged at a higher rate. So that is the biggest difference you are seeing.

David Leiker - Robert W. Baird

So, that number missing in there. So that is the reasonable number going forward then.

Herbert Parker

Yes, that is correct.

David Leiker - Robert W. Baird

Okay.

Herbert Parker

(inaudible) is a non-cash number though. So that is important.

David Leiker - Robert W. Baird

No, that is fine. I realize that. No issue there. Dinesh if we look at page 7, where you have surely launched a ’05 through ’09, if you were to draw that 10 or 11, and 12, what would it look like today?

Dinesh Paliwal

You know, first of all I wish to show actually for fiscal ’10, but the industry we deal with, they are not very happy to show their timing, but at least I can give you quantifiable estimates. You should expect 4 to 5 SOPs every year, which is fantastic because on an average if we can do 4 to 5; first of all, we have a good organization synergy in place. We're not rushing out to external consultants, and it is much better than in the past when had zero in 2006, two in ’07, two in ’05.

So, it is pretty patchy. So, 4 to 5 is the number I am looking for every year.

David Leiker - Robert W. Baird

Okay, I'm just following up on Chris’ comment where you said replacement and new, that was an 80% replacement mix, 20% new?

Dinesh Paliwal

Yes, that is about right at this point at least. David as you know well, because we came – it is all coincidence obviously. Most of our running business, we have been replacing. So, BMW all the 5, 7 series, 3 series, that is all brand new just launched. Mercedes S-class newly launched. Audi is being launched. So most of that – so 75% of our infotainment revenue is actually coming from brand-new launches.

So, it is about right, 80% replacing our own business and 20% is new, and part of that is competitive and part of that is just the new business we have.

David Leiker - Robert W. Baird

And then, if you look at the BMW launch and the Mercedes S class, and I guess half the C that replacement piece out of that, is that where you will have more content in the next version or do you think you have more content but the dollar value is about the same?

Dinesh Paliwal

It is both, I hope, but that is the design. First of all, I want you to know anything we do, have been doing it. It has to be profitable business, and we are not ashamed of that. We make it very clear to our automakers that we're not just another infotainment supplier, who will buy the business. So if it is a profitable business going forward, and you know all C class will be done by us now. So that is one point to tell you, and C is bread and butter, flagship in terms of very heavy sort of take rate, but the content point of view, only S.

The new S class and the next command system we will have that would have a lot more content, lot more connectivity, lot more multimedia to it, full Internet, full all kind of activities and the speech products are built into it.

David Leiker - Robert W. Baird

Yes, what I am – I understand that, but I'm trying to get at us if you go back four or five years echo the model that has been the next generation vehicle you have more content in that. It allows you to maintain your 1500 of content.

Dinesh Paliwal

Yes.

David Leiker - Robert W. Baird

For both that 1500 going down to 1000 because of pricing or (inaudible) and things like that.

Dinesh Paliwal

No.

David Leiker - Robert W. Baird

(inaudible).

Dinesh Paliwal

You are absolutely right. We have much higher content. And that would allow us to keep the price feature, price functionality ratio, maintain that. It may not apply to every single launch we do, but in general the high-end investment we have and that is where our per unit pricing is being done.

David Leiker - Robert W. Baird

Okay. Two last things here, as you look at the competition, particularly the folks over at Tom-Tom [ph] with some of their announcements with other customers, are those – do you view those as head-to-head, that as head-to-head competition for you or you view them as doing something that is a step or two down from where you are?

Dinesh Paliwal

David. Actually, I never treated them as head-to-head competition. We watch them very carefully, actually if you remember, and you do. I respect you immensely for your research. Within nine months of my coming in this company, I actually said, “Hey, this P&D business doesn’t look good.” We announced the profit warning because of P&D, remember January 14, 2008; I recall that day very well.

And since then I started to sort of trim down this business. It is a scale business. That is not where we are and it is a different sector. No, we don't compete. We have developed our own sort of hybrid products for Mercedes, where we have something, a combination of between in-dash and handheld device and that has been successful. But no, we don't see them head to head competition. In fact P&D business right now looks in a very difficult situation.

David Leiker - Robert W. Baird

What about in the context where they seem to be developing products, and I think have some awards, where there have partnered with some audio companies to do in-dash navigation, audio infotainment with a pop out unit. Is that close to what you guys are doing?

Dinesh Paliwal

No, that is, of course, we keep an eye and if you are referring to one of the competitor in Nordic countries. It is a very small volume, some 15,000, 20,000 cars. We go for high-end, but we also want to go for volume, because you don't make money, and trust me, those business models, I watched very carefully, they are a money-losing proposition, and I don't think you guys or our investors would be happy if we take those 10,000, 15,000, 20,000 unit business, but those are the noble attempts [ph], and they have happened in the past, and they will happen in the future too.

We watch them, and it is a pretty high entry barrier for new entrants and come in and come up with a very solid, fully integrated audio, multimedia and infotainment solution to provide. It hasn’t happened, but we keep an eye on it.

David Leiker - Robert W. Baird

One last thing is on slide 12, where you match up [ph] net markup what your investments are? You are ahead of the curve in terms of keeping your costs down below what your targeted levels are. Can you give us a sense of what that trajectory might be like for the next several quarters in terms of ongoing charges to actually get the STEP Change?

Dinesh Paliwal

Well, charges you can see, even from our one-time investment, we are running lower, while producing higher benefits. So as Herbert has actually alluded in earlier calls that we are around 60% to 70% of what we plan as a investment to be, and I feel comfortable that we will complete our $400 million permanent savings initiatives for execution at about 60%, 70% of $220 million. So if you take that, you know, we will be what 160, 170, somewhere around that.

Herbert Parker

150, 160.

David Leiker - Robert W. Baird

Okay, great. Thank you very much.

Dinesh Paliwal

You are welcome.

Operator

Thank you. And the next question comes from the line of Tim Garry of Pzena Investment. Please go ahead.

Tim Garry - Pzena Investment

Hi.

Dinesh Paliwal

Hi, Tim.

Tim Garry - Pzena Investment

A couple of questions, one just again on the Toyota contract, is that for new models or are you also going to be putting for refreshers on models?

Dinesh Paliwal

Tim, it was a question asked earlier, and I tell you it is for some of the new models and some existing models. So we will be replacing competitor as well as going on to the new models being launched in Europe by Toyota.

Tim Garry - Pzena Investment

Okay, so in other words it becomes an already existing product, it is far more easy, and it is actually possible to do it in a refresh mode, I guess because you know…

Dinesh Paliwal

No, no. Tim, you misunderstood me. It is not our existing product. It is competitors’ product, if it is. So either they are new models, brand-new models being launched in Europe, or they are existing car models with competitor’s product. So it is not about refresh. It would be a replacement of competitive products with our new infotainment system.

Tim Garry - Pzena Investment

Right, right, okay. But I guess what I meant by refresh is its in terms of the model itself the Toyota model itself, you are coming in at year three as opposed to year 6 or 7 when it is actually coming…

Dinesh Paliwal

Not quite, not quite, no, we will go on 2011 as a brand new product cycle. That is why we are not going in now. We're ready to go now. So 2011, it is the full life cycle we will go with.

Tim Garry - Pzena Investment

Okay, pretty good. Okay, and then in terms of just looking at your sales in auto. Did you – the improvement in sales, was that primarily just improvement in auto sales at the companies you are supplying, or did you actually have some new models coming or you put on some new models that came out during this quarter that costs an improvement. Could you just give us some color on that?

Dinesh Paliwal

Sure. You know, quarter-over-quarter you don't really change model to model, so it is all – predominantly all existing models, where we were. So when they start to sell more cars, we sell more cars so it is pretty much with the exception of perhaps BMW L6, which is an exception, but predominantly, all the existing cars, and existing customers.

Tim Garry - Pzena Investment

Thank you very much. And actually one last question just going back to Toyota, can you give us some color as to why you are starting, maybe why you are starting in Europe as opposed to elsewhere in the Toyota system. What did they find attractive about Europe in particular for you?

Dinesh Paliwal

I would say first of all it is a Toyota decision. We obviously go for the global launch. Toyota is a home market in Japan, and they have actually a well-established brand in US. So you can read in between the lines, and Europe is the market they want to win over. So they have teamed up with us.

Tim Garry - Pzena Investment

Thank you very much.

Dinesh Paliwal

You are welcome.

Operator

Thank you. And the next question comes from the line of Jim Smith [ph] of Smith Capital [ph]. Please go ahead.

Darren Kimball - George Weiss Associates

Hi, it is actually Darren Kimball from George Weiss Associates.

Dinesh Paliwal

Hi, Darren.

Darren Kimball - George Weiss Associates

Good quarter guys. I apologize if you already spoke to this, I did miss the first 10 minutes. But I'm just wondering if this Toyota win changes at all your view on this $1 billion opportunity in the scalable system and just the speed of the win. Does that in your mind suggest that this could be a bigger opportunity?

Dinesh Paliwal

It may very well be, but at this point there is no change in our projection and in our forecasts and in our ambition. 1 billion out of 5 is pretty ambitious to begin with. So I will be happy if my team can get 20% of that 5 billion new market in 5 years. So, we will leave it there.

Darren Kimball - George Weiss Associates

I'm just curious about the circumstances because you were just launching this product, this is obviously, these guys were very anxious to sign on to the contract, but can you shed any additional light of how you were able to take this award so quickly after the launch of the product?

Dinesh Paliwal

Well, it happened to be that the timing was just right after the launch, but as I said in my earlier call that we had been working with European, Japanese and American existing customers because we did not want to develop anything in isolation. We wanted to show them what we are doing. We wanted to get them excited about what is coming. So this has been a building up.

So our sales force has been very active in demonstrating the feature functionality, the ease of use, the scalability, the next generation capability. So just Toyota happened to be the first one to sign on, and we're so happy about it.

Darren Kimball - George Weiss Associates

That is great, and if I could the other thing I wanted to ask you about, and again I apologize if you had mentioned this in your opening remarks, but I have read some statements that you had made a few weeks ago talking about emerging market opportunities and some pretty big revenue numbers in China and India going out a few years. I was just wondering if that was – those were market opportunities are or if in fact you had started to book business in relation to those numbers that you were talking about.

Dinesh Paliwal

No, that is not the market opportunity I talked about. We talked about $1 billion revenue ambition. It is not in our target. So it is not something which we have presented to the board. But $1 billion is our ambition in China in five years, and $250 million revenue ambition in India. So markets are much larger than that obviously. And have we started booking? Well, we have just established our center of R&D, center of manufacturing, center of engineering, so it is fairly soon, but we have been booking. I mean we have booked Commonwealth Games.

We have booked BMW business in our China plant. We have booked the Shanghai exposition business. So I am quite pleased how market is responding to our investment, and also market is responding to experienced hands. Those who know China, both Herbert and I are old China hands. We spent lot of time there and we know the market quite well. So I think it is a combination of great technology and also their understanding that, when we talk some numbers, we mean it and we're going to get there with investments both in organic initiatives and in acquiring either channel presence or technology or assembly plant or what have you. But that is something we will be looking, we have time to work on that.

Darren Kimball - George Weiss Associates

Terrific. Thank you.

Dinesh Paliwal

You are welcome.

Operator

Thank you. (Operator instructions) We do have a question from the line of Brian Gustavson of Balyasny Asset Management. Please go ahead.

Brian Gustavson - Balyasny Asset Management

Hi guys. Congratulations on Toyota.

Dinesh Paliwal

Hi, Brian, thanks.

Brian Gustavson - Balyasny Asset Management

I'm just curious I mean given – is there a ramp up on the cost side to kind of get ready for Toyota that might be incremental to what you were thinking before?

Dinesh Paliwal

Sorry, Brian, did you say -- can you repeat your first part again?

Brian Gustavson - Balyasny Asset Management

Is there an investment cost or ramp up I mean these new contracts that might be incremental to what you were thinking about before?

Dinesh Paliwal

That is a great question. Typically, when you get an award in our environment there is a cost associated because you develop that whole program, and depending upon what program you have, but a high-end program anywhere between from $30 million to $60 million development costs associated, but the beauty of this next-generation scalable platform, which we have launched is, we have – I think is a game changer again because we have developed on our own based on our knowledge what market has the bit, and what market would like to have and prepackaged all feature functionality.

It is scalable, you can peel the onion and have the core, or you can have the full onion with 20 layers on. So, it is a very considerable software system, which is not the way the industry works. So, I think we are changing the industry. The development cost is pretty much already taken care of. Now you will see some cost adapt this mechanically to fit in the car chassis and other areas a little bit, some basic very aesthetics driven, but nothing significant. All that is already taken care of.

Brian Gustavson - Balyasny Asset Management

That is great. And you mentioned in the release that you guys were ahead on the cost side, your goal of $400 million, can you just talk about your thoughts on becoming profitable and is that goal still some time in the December quarter or has that changed at all?

Herbert Parker

This is Herbert. Hello, First of all we did become profitable at the operating level excluding the non-recurring charges as you know. And of course, our goal is to maintain that as much as we can, but we don't give guidance as to where we would be at the end of the year. We are taking a step at a time. We told you we will be profitable. We have done it. Another thing that we said at the last quarter was to be profitable, at least break even at that level. And that was just under $700 million revenue. That is about as much guidance as we would give at this point.

Brian Gustavson - Balyasny Asset Management

Okay, so profitable on the operating income level.

Herbert Parker

Correct.

Dinesh Paliwal

If I may, if I may just add to what Herbert said exactly what he said plus, you know, we have the STEP Change permanent savings program going on. So we have 243 in the bank, and the remaining left from 400 million is to come. So imagine that would also help us put the bottom line here.

Brian Gustavson - Balyasny Asset Management

Great. Well, thanks a lot.

Dinesh Paliwal

You are welcome.

Operator

(Operator instructions) And gentlemen, there are no further question in queue. Please continue.

Dinesh Paliwal

Sure. Michelle, we have number of our guests and participants joining in late. So we're going to allow them an opportunity, and so we will allow them to think. Some of them actually just got the press release, some of them are reading. So I will wait. We have time.

Operator

Okay. (Operator instructions) And we do have a question from the line of Jim Peters [ph] of Sigmet [ph]. Please go ahead.

Jim Peters – Sigmet

Hi, Dinesh. I'm just interested to find out, where does your professional business fit in with your business model and you know as far as your tier ranking and how do you feel that it is progressing and coming along? Can you elaborate?

Dinesh Paliwal

Sure. Well professional is more like a nucleus. This brings all the star power, which Mercedes, and Lexus and BMWs of the world and consumer division enjoy. So in terms of how it fits I mean when you talk to people, “Hi, we are the exclusive partner to Grammy’s. We are the one who do Oscars. We are the one who did the Yankee Stadium, MAX Stadium, Dallas Cowboys new Stadium, (inaudible) Stadium. We are doing Chinese Olympics. We are doing EXPO. We are doing Commonwealth Games.”

We have done more than half of Las Vegas. 70% of the US cinema theaters are with Harman. So, that is the star power. It is too bad that we have not really sort of let the secret out, which because of the money we didn't have to put in marketing, but as we start to improve our bottom line, we will make sure that average people like you and me can also understand what Harman does. So that is in terms of the star power what it brings.

And how it fits and how it will grow? We have very clear six verticals in our professional business and the largest vertical is installed sound. That is where all these names I mentioned to you, the large projects which are planned in advance like big theatres like Kennedy Center, Carnegie Hall, Lincoln Center, big night clubs in China or other places. So that is the installed sound. That has been hit hardest by this recession and that is where we are still hoping to see recovery and that is our largest business.

Then you have got the touring sound and touring sound has picked up. That is where all these celebrities going on tour and that business has picked up. Then you have got broadcasting, radio and broadcasting. And that business has picked up. You heard me say 80 consoles to be shipped to British Broadcasting Corporation, and the hundreds of thousands of radio stations and TV stations are just popping up like crazy.

So we're playing a key role there. The cinema business is picking up, and then magician's business and personal PA business. So I would really appreciate if you could take time, because we just made some significant investments in our website because for a company like our type of business we did not do justice to our website. So it is a brand-new website, where we have explained our business well. You can actually listen to some of the things we do, how we do. It is very nicely done. So I appreciate that if you did.

So that is why in my closing for professional business, we saw sequential improvement in consumer and in automotive, but professional was almost flat from last quarter to this quarter, which is because the installed sound business is recovering, but that is a lagging indicator typically in the economy, you will see that business tapers down the last and it picks up the last.

But we remain very excited about this business. You say what Grammy just did, so stuff like this.

Jim Peters – Sigmet

Okay, thank you.

Dinesh Paliwal

You are welcome.

Operator

(Operator instructions) One moment. And there are no further questions in queue gentlemen. Please continue.

Dinesh Paliwal

Well, how are we doing with time? All right, you know I have to respect our listeners’ time. Many of you had to probably go for other commitments. Allow me to say a few words in closing. First of all, I am very thankful to all of you listening. We are making progress. So ladies and gentlemen, I believe you felt it, you saw it, that we’ve made a strong start to this fiscal year, and despite the challenges we continue to face from the economy like everybody else, we are emerging from this recession strongly because of what we have been doing.

We have made significant improvements in the structure and the composition of our business, achieving equally significant and sustainable cost savings, which are hard to copy. I remind. It is hard work to do it and hard to copy by other companies. And at the same time, we continue to make the strategic investments necessary to support our long-term goals.

I'm a big fan of innovation and strong pipeline. That is the company I came from. So you can imagine that would never be sacrificed no matter what. So while I'm pleased by many aspects of our first quarter performance, the external environment remains challenging. I don't have to remind you. We read everyday the Wall Street or Financial Times, and we will continue our relentless focus. That is my promise to you. Focus on cost, focus on cash management, and focus on driving the growth by leveraging our strong innovation pipeline.

That is the way to do it. You need to push innovation to get market share, and that is what we are starting to see. So this strategy has served us well through difficult times, and I feel very confident that it will remain our focus going forward. So there is no change in our strategy. It is just about execution and we're doing it. So with that I thank you for your attention, and wish you a very good evening or good afternoon wherever you happen to be.

Operator

Okay. Thank you, Mr. Paliwal. Ladies and gentlemen, your host is making today’s conference available by digitized replay for a week. The digitized replay is available starting at 6:40 p.m. Eastern Daylight Time today. Simply dial 800-475-6701 or 320-365-3844 for international, and at the voice prompt enter the conference confirmation number 119850. And 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.

Dinesh Paliwal

Thank you, Michelle.

Operator

Thank you.

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. F1Q10 (Qtr End 09/30/09) Earnings Call Transcript
This Transcript
All Transcripts