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

Harman International Industries Inc (NYSE:HAR)

F1Q07 Earnings Call

October 25, 2006 4:30 pm ET

Executives

Sidney Harman - Executive Chairman

Kevin L. Brown - Chief Financial Officer, Executive Vice President

Bernard A. Girod - Chief Executive Officer

Analysts

Scott Merlis - Thomas Weisel Partners

Scot Ciccarelli - RBC Capital Markets

Chris Ceraso - Credit Suisse

Ronald Tadross - Bank of America Securities

Jon Rogers – Citigroup

David Leiker - Robert W. Baird

Steve Lidberg - Pacific Crest Securities

Douglas Pratt - Mesa Capital Management

Brad Lundy - Ivory Capital

Peter Barry - Bear Stearns

Presentation

Operator

Ladies and gentlemen thank you very much for standing by. Good afternoon, welcome to the Harman International Industries First Quarter Fiscal 2007 Earnings Release Conference Call. [Operator Instructions] Please be aware that certain statements made by the company during the call are forward-looking statements. These statements include the company's beliefs and expectations as of 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. So with that being said, we'll get right to this first quarter agenda. Please join me in welcoming Harman International Industries Executive Chairman, Dr. Sidney Harman. Please go ahead, doctor.

Sidney Harman - Executive Chairman

Good afternoon, everyone. Joining me in Northridge today are Bernie Girod, our CEO, and Kevin Brown, our CFO, in attendance too is Greg Henry, our Principle Officer for Investor Relations. We had a very strong first quarter. The sales totaled $825,543,000, a 9% increase above the same quarter a year ago. EPS of $0.85, represents both a record for the quarter and an effective increase of 20% over last year's first quarter. I’ll remind you the $0.79 reported then included a one time $0.08 tax pick up.

Our earnings exceeded financial community estimates for the quarter by a very comfortable percentage. But I urge restraints. We are operating in awkward times and our expectations for the year remain unchanged. Those awkward days are manifest in the consumer group where operations for the quarter, the first quarter, clearly reflect the difficulties of the time. As we entered the year, we anticipated growth in both our core audio business and in our multimedia businesses and we will see growth. But we encounter increased competition, a stubborn decline in price points for multimedia products and a slower to materialize multimedia niche above $300 than we had hoped for.

Pressure on margins has developed and it will likely intensify through the selling season. We will still do well. We will still be profitable but our earlier enthusiasm needs to be promptly tempered. Our mobile business will be enhanced by the introduction of our first North American PND products in the second half, this too is less than a walk in the park. The dominant players in the space are pushing serious price reductions. Yet, we expect to be a factor in this category, even as we remain focused both on manufacturing and maintaining margins and on providing customers with what they truly value. That is genuine ease of use and the right assembly of functions.

We're confident that our approach to industrial design and a uniquely friendly interface will achieve our objective. Again, moderation is appropriate. We do draw encouragement from our PND success in Europe, where Harmon/Becker has has sold over 250,000 units since we entered the field. First quarter sales this year support our expectation that we will sale well over 500,000 units in Europe this year.

Now, permit me to speak the PND business more generally. In earlier calls, I had said that we regard the PND as complementary to our integrated infotainment system business, and it is. It is added a significant and growing dimension to the consumer electronics world and the opportunities there are very large. The PND is also an interesting development in the automotive OEM world, but its role in that world is relatively more limited and temporary.

Because many car makers have been slow to recognize that buyers of mid-range and entry-level vehicles want and would purchase systems that provide video, MP3, navigation, telephone and bluetooth connectivity, those manufacturers have until recently failed to make infotainment systems available in their vehicles. That has created a real but relatively temporary opportunity for non-integrated PND products and for non-integrating PND manufacturers.

Now as vehicle makers across the world realized that those functions do belong in mid-range and entry-level vehicles, they have committed to such integrated systems and those systems, for the most part, go into production starting in fiscal 2008. Excellent examples of that commitment are Audi across the board. PSA across the board, and Chrysler. And as I will note later, at least one additional major manufacturer is making that commitment now.

When the enormously-important services provided by pedestrian safety and driver-assistance programs begin to appear in automobiles, the limitations of the PND for that environment will be evident. Advanced driver assistance systems will provide night vision, 360-degree visibility around the car and airbag sensor systems that react to who is in the car where those people are sitting, what their personal architecture is. And the systems will automatically adjust their vehicle to soften the impact of a collision.

Pedestrian safety and driver assistance programs will be first introduced at the high-end because that is typical in the auto industry. But pedestrian safety and driver assistance is not only for the rich. I am certain that those systems will move rapidly through the mid-range and entry-level vehicles. Then those systems will provide all of the functionality familiar in present infotainment systems, including control of climate in the car, the behavior of the seats and the behavior of the headlights and pedestrian safety and driver assistance added together and you have the inescapable requirement for a genuinely integrated system, a system that is interoperable with all of the other systems in the car. The PND cannot do it, the PND will not do it. The only way that integration and interoperability can occur without interference is through a factory-installed system of the kind we manufacture.

The PND will serve usefully for the next two or three years in those cars in the low and medium range where car makers didn't have the foresight to provide infotainment systems. That will change rapidly however beginning in 2008, when systems such as those we would build for PSA, Audi and Chrysler are available through the entire range of their cars. Then the sensible choice in terms of technology, ease of use, total facility and cost will be the fully-integrated interoperable system.

Going forward, our integrated systems will be presented in affect in two parts. The base system will provide the access gateway into the car and the PCD, our personal connectivity device, which will provide gateway to the outside world. To manage that connectivity, one must really know both worlds. The car with its networks and infotainment systems and the outside world with its internet access, its protocols, its software stacks.

In the meantime, our auto book is full for the 2007, 2008, and now 2009 years. And our backlog is now well over $14 billion. We have confidence it will continue to grow vigorously. Our traditional consumer business continues healthy in a generally softer market. Considered in Japan we're launching our new top-of-the-line JBL Everest, a $60,000 pair of loudspeakers. We introduced Everest in a special showing in Japan during the quarter and we welcome the members of the Toyota team as we did so that. That introduction of the Everest generated firm purchase commitments for well-over 300 pair of a $60,000 loudspeakers set. I find that remarkable.

In summary, the consumer business continues that interesting combination of difficulty and progress. As of today, we expect it to grow 10% from last year's total revenues of $493 million to an expected $540 million. And we expect consumer operating profits for the year to be above 8%, our professional group reported another excellent quarter. Sales were 7% above the year ago. Where this time last year, both the Soundcraft group and AKG represented significant burdens in this year's first quarter they were both profitable. We expect that progress to continue.

In total pro produced 13% of operating profit in the quarter without question, it's headed to a really splendid year. As it has been, our automotive group was the primary engine in the first quarter and will be so through the year. Sales in the quarter were over 15% above a year ago and operating earnings kept pace. In recent earnings calls, I have emphasized two significant growth and development levers for our OEM business. I noticed that our success in infotainment was driven by our commitments to integrating in the single, coherent digital system that growing body of functions which had earlier and in some regions of the world, continue to simply be patched together. That integration and the company's unique ability to thoroughly debug the systems before production has made us the truly reliable supplier.

I commented that the growing interest in driver assistance and pedestrian safety carried the promise of the new overlay of business, which in the years upcoming could match the revenue levels of infotainment that is our Dr. Eric Geiger's vision for the next generation and we're making significant progress in realizing that objective. We had, for example, completed the prototype of a pulse modulated detector which, generates a 3-dimensional video image and provides full visibility and control of the spatial environment, both inside and outside of the vehicle. As we moved along that path, the result will be a system of virtually unlimited scalability, functionality and connectivity.

My second emphasis in recent calls is been on what I can safely call a new automotive paradigm. We are convinced that the work we have been doing will encourage more automotive companies to overcome their historic reluctance to concentrate a serious majority of their awards in one source. The scalability, which we pioneered, encourages the adoption of a common electronic platform and with it the special benefits arriving from enhanced and elegant scalability. Those very benefits moved Audi and PSA to assign their business across the board. Those special benefits persuaded Chrysler to concentrate its new infotainment activity with Harman and I'm pleased to tell you today that we have been notified of a major new award from a major European automotive maker. I am not free to identify the company but the award will represent incremental business of 200 to $250 million and the start of production will be scheduled for September 2008. I mentioned the award today. Because of the striking confirmation of the earlier predictions. We have no doubt the word of it would be widely disseminated before our next call.

In summary, our year is off to a good start. We reiterate our guidance for the year at $4.25, and sales of $3.5 billion. Now, just a couple of personal personnel highlights. Greg Henry has been promoted effective November 1 to Chief Financial Officer of the professional group. He will be moving from Washington, D.C. to California to assume his new duties. Rob Brian, who has done a superb job heading our internal audit group, will succeed Greg as Treasurer and Investor Relations Officer. Rob is with us today.

Finally, a note on succession. This will be Bernie Girod's last earnings call as he moves to retirement on December 31. Our search for his successor is in full process now and we intend to do it thoroughly and to get it right. Here now is Kevin Brown.

Kevin L. Brown - Chief Financial Officer, Executive Vice President

Thank you, Sidney. Net sales for the first quarter were $825.5 million, an increase of 9% compared to the same quarter last year. Gross profit margin was 34.8%. Operating income was $886.9 million, 11% higher than the first quarter last year. Earnings per share were $0.85 compared to $0.79 in the prior year and an increase of 8%. The tax rate for the quarter was 34.5%, compared to 26.8% for the first quarter of last year.

The tax rate for the prior-year first quarter included a $5.3 million tax credit, due to a joint committee on taxation approval on an IRS audit settlement, which improved quarter results by $0.08 per share. Foreign currency translation had a favorable affect on our first quarter results, due to the weakening of the U.S. dollar versus the Euro, the Euro averaged $1.27 during the first quarter, compared to $1.22 during the same period last year. This contributed approximately $20 million to first quarter sales and improved EPS by $0.02 per share.

Our balance sheet remained strong in September 30. Inventory was 379.3 million and accounts receivable were 461 million. Accounts payable were 251.7 million. For the first quarter, capital expenditures were 12.4 million, while depreciation and amortization were 29.9 million. Cash at September 30th was $135 million despite $73 million of share repurchases and a $24.8 million reduction of debt during the quarter.

Total debt was $172.8 million at September 30th. We repurchased 921,100 shares of common stock during the first quarter or $73 million. We plan to continue our share repurchase program, evaluating the bi-levels on a quarter-by-quarter basis. The company has expensed employee stock options since fiscal year 2003. We expensed $3.7 million for stock options during the first quarter, equivalent to $0.04 per share. I now turn the call to Bernie Girod.

Bernard A. Girod - Chief Executive Officer

Thank you very much, Kevin. We had a very good first quarter we were all, it was ahead of street estimates and ahead of our own expectations. As stated previously taxes and currency affected our results. During the prior-year first quarter, we recorded a tax credit which increased earnings per share by $0.08. Favorable currency translation contributed $0.02 per share this year adjusting for both earnings per share increased by more than 16% compared to last year.

The consumer group had a tough quarter with a loss of $4.4 million compared with a profit of $10.6 million last year. We did not expect to achieve last year's exceptional results in the first or second quarter but Q1 results were below our own expectations. Sidney described the reasons for this loss in his presentation.

The consumer group for the next 9 months is good. Fueled by a large number of new products; We expect the group to return to profitability in Q2 with double-digit operating profits, but somewhat below last year's exceptional performance of 14.2% operating profits. The group should exceed last year's results in the second half.

The automotive group had a great quarter. Sales were up 16%. Sales to Mercedes were particularly strong, driven in part by strong S-class sales. Sales to Audi were up more than 30%. Sales to Toyota-Lexus, Hyundai Kia, and Harley-Davidson were up a double-digit-rates. After-market sales were also robust. We sold 95,000 PNDs in the quarter, operating earnings for the group were up 22%, representing 15% of sales, up 80 basis points over last year.

R&D expense for the group represented 10.9% of sales, up 100 basis points from last year to resource a large number of new programs launching in fiscal '08 and '09. The professional group also had a very good quarter. Sales were up 7%, operating profits was up 33% representing 13% of sales up 250 basis points from last year. The largest improvement came from European operations, both AKG and Soundcraft reported a profit this year versus a loss last year.

Both units are launching significant new products this quarter. We believe that pro group will achieve excellent results again this year. So, our overall expectations for fiscal '07 have not changed. The sales should grow close to 10%, operating profits should increase 50 basis points resulting in earnings per share of $4.35. We expect continued control of working capital and capital expenditures, and therefore, good cash generation and we will continue to buy back our stock. And we will now take your questions.

Question-and-Answer Session

Operator

Indeed, thank you very much, Mr. Girod, Mr. Harman and our panel for your time, we do appreciate that. [Operator Instructions] And representing Thomas Weisel Partners, our first question go to the line of Scott Merlis. Please go ahead, sir.

Scott Merlis - Thomas Weisel Partners

Thank you very much, congratulations, Greg and Rob and Bernie.

Kevin Brown

Thank you.

Sidney Harman

Nothing for me, Scott?

Scott Merlis - Thomas Weisel Partners

And Sidney. Always.

Sidney Harman

All right. All right.

Scott Merlis - Thomas Weisel Partners

Good quarter. The -- just one bookkeeping question to get out of the way, the 16, the sales growth in automotive, did you mention what portion of that would be currency or what percent growth on a constant currency basis?

Sidney Harman

That's 15.5% sales growth in total, would have been about 13% excluding the impact of foreign exchange.

Scott Merlis - Thomas Weisel Partners

That makes sense. And the congratulations on the new business, the European business. Does that starts in 2008?

Sidney Harman

Fiscal 2009, in September of '08.

Scott Merlis - Thomas Weisel Partners

That answers my question there. And getting back to the double-digit-growth at Lexus is -- is that mostly Marc Levenson adding 19 speakers per vehicle or go into surround sound? Is it penetrate, more penetration of Toyota?

Sidney Harman

It's more penetration of Lexus. It's more elaborate system. It's the serious engagement of Lexus in Europe.

Scott Merlis - Thomas Weisel Partners

And the more general question I had about the legacy. The legacy audio business growing faster and becoming more attractive because of surround sound and the digital enablers that go with surround sound. You read about the 19 speakers of Marc Levinson.

Sidney Harman

It's growing not only because the systems are more elaborate, and that more elaborate is always, invariably more service. Not just cosmetics, but it's also growing because there is a broader recognition and acceptance of those superior systems in the cars.

Scott Merlis - Thomas Weisel Partners

And it's, you know, to sum it up -- up, is the speaker business becoming more attractive fundamentally and a better growth business?

Bernard A. Girod

Yes, although it's more than speakers as you well know.

Scott Merlis - Thomas Weisel Partners

Right. Right. But -- and the final question, more of a big-picture question, you, you have had a very significant lead over your competitors in the integration of most and the, especially execution Siemens have slipped up and the Japanese just haven't done a lot of that. Does one argue that over time they're catching up with your integration capabilities with most or can you build a case that most has become more complex for different reasons with our disk drive that your gap, your le ad is widening, Is your lead widening on a cost basis because of the scalability that you mentioned? There is two ways to look at what is going on, given the passage of time.

Sidney Harman

Well, as you report your report indicated, Lexus decided to adopt the electrical version of our moes system and what that gives them and their suppliers is more access to the network. Now we had over 10 years of experience riding software to work with that network and as soon as they catch up with that, they will have the same capabilities that we have. Of course, we're not going to stand still over the 10-year period. It's a wonderful system that mostly a wonderful system, gives them greater capabilities and gives them the potential of eliminating all the duplication that they have in their systems, which are largely stand-alone at the pleasant time.

Scott, let me add in particular response to the central question, I would say that we're number one in gaining. I don't mean that to, vis-a-vis, be too clever, certainly not to be arrogant, but the very fact that an increasing number of major automakers are ready to commit the vast majority of this business to us and over the full-range of their lines is the most powerful evidence we or you could find of the fact that we're getting stronger, other competitors, some of whom you named, are losing traction.

Scott Merlis - Thomas Weisel Partners

Well, the new European business certainly did just that. Congratulations.

Sidney Harman

Thank you again.

Scott Merlis - Thomas Weisel Partners

Thank you very much.

Operator

Thank you Merlis. Next in queue, we go to the line of Scot Ciccarelli with RBC Capital Markets. Please go ahead, sir.

Scot Ciccarelli - RBC Capital Markets

Hey, guys, how are you?

Sidney Harman

Good, Scot.

Scot Ciccarelli - RBC Capital Markets

Good. One clarification. Bernie, could you say what the operating margin in auto was? Was it 15%?

Bernard A. Girod

Yes.

Scot Ciccarelli - RBC Capital Markets

Okay. What was the 22% then?

Bernard A. Girod

It's a 22% increase in operating profit from last year. Last year's operating profits, automotive was $73.9 million. This year it was $90.2 million, an increase of 22% and the $90 million represents 15% operating profits.

Scot Ciccarelli - RBC Capital Markets

I got it. I apologize for that.

Bernard A. Girod

No problem.

Scot Ciccarelli - RBC Capital Markets

Regarding the commentary about the personal safety systems, I just want to be clear that I'm understanding that Sidney, are you suggesting these personal safety systems will be integrated into the infotainment, so you'll be moving out of multimedia type applications into safety?

Sidney Harman

Not at all. What I'm saying is that it's important, new additional layer. That increased functionality is extraordinarily promising from my point of view, both in terms of the amount of business that it will represent and in terms of the fact that it responds to our particular unique capabilities of integration.

Scot Ciccarelli - RBC Capital Markets

Okay, you're suggesting you will participate on the integration process of these personal safety systems.

Sidney Harman

I am saying that absolutely and I'm saying that there is an interesting parallel here, Scott. You will remember that this infotainment business was really in affect invented on the basis that originally there existed a number of relatively small companies doing just pieces of this work. The particular facilities that this company brought to that work at the time was the bringing into house of the many areas of technology that in total represent an infotainment system. But more important than that, the particular – the peculiar ability to integrate them to make them whole and debug the systems.

When this additional layer of driver assistance and pedestrian safety is built into the systems, the need to make those systems compatible with all the other electronic systems in the car gets to be crucially important. Our experience, the first time around, in bringing together and integrating those many functions which were if you will, multimedia functions, audio functions, video functions and the like is going to be duplicated as we bring additional processes such as the kind of camera and processing units that I referred to in my original set of observations, integrating all of that into a single comprehensive system is going to be our big future opportunity and we're getting ready to do it.

Scot Ciccarelli - RBC Capital Markets

All right, so this is something that you guys have been working on for a while and unveiling it to the investment community at this point. Is that the right way to interpret it?

Bernard A. Girod

We've been working on it for awhile and we’ve made some reference to it before. We'll make continues reference because it takes years for this kind of work to fully develop, but we're at it.

Scot Ciccarelli - RBC Capital Markets

Understood. And the last question, if I may, you know, the estimates. Obviously you guys had a nice quarter, you beat the first quarter by a couple of cents, maintain the full-year, even though it sounds like the rest of the businesses are doing pretty well. The share count's down. Is there something else we should be looking out for or is it just kind of taking a cautionary stance at this stage?

Bernard A. Girod

No, I think the precaution has been quite particular. Although we expect good year consumer, that's a rough, rough field and exercising caution is appropriate for us. It's appropriate for you. I think we were probably $0.04 above the street estimates for the first quarter and I don't expect to be $0.04 above the street estimate for the year.

Scot Ciccarelli - RBC Capital Markets

Fair enough. Thank you very much, guys.

Sidney Harman

Thank you, Scott.

Operator

And representing Credit Suisse, we go to the line of Chris Ceraso. Please go ahead, sir.

Chris Ceraso - Credit Suisse

Hi, thanks. Good afternoon.

Sidney Harman

Hi, Chris.

Chris Ceraso - Credit Suisse

First, can you remind us of the R&D level and how much above normal it's running currently to Europe for all of these programs and if and when that should come down to a lower level and by how much so we can frame what the potential there is?

Bernard A. Girod

Okay, our R&D expectations really are unchanged from what we talked about last quarter. For the quarter in total, we ran at 10% of sales in R&D compared to 9.1% in the first quarter of the prior year. So that was up, by the way, sequentially, it was about flat with the fourth quarter of last year. We have previously said we expect the full-year of this year to be about the same as last year. Last year was about 9.3% of sales and on a percent-of-sales basis, that's the neighborhood we expect to be in this year and then we have said as the new business that we're engineering now comes onscreen and fiscal a wait, we expect that engineering as a percent of sales to start to fall.

Chris Ceraso - Credit Suisse

To what kind of range?

Bernard A. Girod

We said 100 basis points. We would expect that to come down in fiscal '08.

Chris Ceraso - Credit Suisse

Okay. Very good. Can we get some update on the restructuring efforts as they progressed so far, have these efforts yielded cross savings to date and as you go through this process, are you finding more opportunities?

Bernard A. Girod

We initiated the restructuring efforts in the fourth quarter as you recall. There have not been significant savings to date as many of these efforts were in Europe and the notification period in the working with the union periods that are required, it takes time to work through those and then actually effect the actions, so I don't anticipate we'll see significant savings really until the second half of the year as we work through that. We'll continue to have some low-level restructuring activity that goes on in this year as well, but nothing worth talking about explicitly. So, I would say we're on track, we're where we expect to be. I don't look for significant savings. There were not any in the first quarter and there will be little in the second quarter.

Chris Ceraso - Credit Suisse

Okay. Can we get a little more color on the strength in the automotive business you referenced, the S-Class Dr. Harman, the revenue strength at a bunch of different makers. Maybe if we can drill down one level and talk about some specific vehicles where things were strong or where penetration rate let's were better than you thought?

Sidney Harman

Okay, let's start with the S-Class. The S-Class as you know last year was just launching and it's terrific. And our installation rate is virtually 100%. We benefit from the success of the vehicle and it's been above expectations. The E-Class has been refreshed and is also doing very, very well. The E-Class was above our expectation as does the M-Class. They're strong vehicles where the S, E and the M with some moderation of the old C-Class is being replaced. At Audi, the big improvement is in the Q7. It's doing very well worldwide, its actually doing better in Europe than it is in the U.S., more expensive than Europe than it is in the U.S., interestingly enough and it's been a real strong vehicle for them. Other than that, Toyota, Lexus continue to gain share and recited Harley-Davidson, Hyundai-Kia, Toyota-Lexus. These are very strong players right now.

Chris Ceraso - Credit Suisse

Okay, and then lastly the new business award that starts in the second half of calendar '08. Is that with an existing customer along the lines of what you said about growing your, your business across regions with existing companies or is that with new customer?

Bernard A. Girod

Would say that is an absolutely wonderful -- we said everything we're going to say about that award.

Chris Ceraso - Credit Suisse

Very good. Thanks.

Bernard A. Girod

You bet.

Operator

Thank you very much, Mr. Ceraso. Next, in queue we go to the line of Ronald Tadross representing Bank of America Securities. Please go ahead.

Ronald Tadross - Bank of America Securities

Good afternoon.

Bernard A. Girod

Hello, Ron.

Ronald Tadross - Bank of America Securities

Hi. Maybe I can finish off on that point as two others, too, but I know you don't want to talk too much about that program. But you did say, Sidney, the confirmation of earlier predictions. Can you just be little more specific about which earlier predictions?

Sidney Harman

Yes, the earlier predictions was that manufacturers would move against, if you will, the historic culture of the automotive industry to concentrate the majority of their infotainment awards in a single supplier. That's the confirmation I am talking about. PSA did it, Audi did it, Chrysler did it in infotainment and now this new award represents and affect such a commitment from another major automotive maker.

Ronald Tadross - Bank of America Securities

That's, that's great. Congratulations. A couple of other quick things here, on the automotive revenue unit with a 95,000 PND units in automotive?

Bernard A. Girod

Yes.

Ronald Tadross - Bank of America Securities

That's pretty much from 0 last year?

Bernard A. Girod

Yeah, that's about right. As I indicated, our expectation this year is going to be for half a million units there.

Ronald Tadross - Bank of America Securities

Okay. And then, you know, I agree with you on the PND picture you laid out. I guess the issue is that that market is a very fragmented market, at least more fragmented that the in-dash market and it does seems like the growth rate is slowing a little bit and NAVTEC kind of indicated that. And I am wondering it looks like the price war has to be brewing in that market and I'm wondering if that happens what, does that mean for pricing (inaudible) If we do get a price war on PND, just assuming we do.

Sidney Harman

If you do, and I think there is still evidence of that, whether it's price war or simply a vigorous and even reasonable driving of the prices down that. That will have some influence but I note for you that part of the infotainment system is part of a more complete, fully-functional and elaborated system and those elaborated systems are going to include the kind of functionality, the PND has no place in. Not because I say it has no place in it, bah -- but because that's simply not the world of PND. That's the world that requires the interoperability with the other activities, the other systems in the car. That's particular to our special.

Ronald Tadross - Bank of America Securities

I'm just wondering more little specifically on your contracts, would it, could it affect the pricing on your existing contracts or would we be pricing three and four years out, as it relates to?

Bernard A. Girod

I would say you're talking about tracing to the extent that this conversation has any relevance; you're talking about pricing well-beyond three years out.

Ronald Tadross - Bank of America Securities

You don't have an opportunity to respond on the call side, hopefully.

Bernard A. Girod

Of course. We have our commitments for, as I pointed out to you, our book is full for seven, for 8 and for 9 and those commitments are reflected in the pricing that the automakers are themselves committed to and in terms of MSRP I think that's in close to enviable as it gets. You're talking about the possible affects in the out years, 10 and out.

Ronald Tadross - Bank of America Securities

Just a few other quick things, do you have -- are you working on a prototype of the safety system integrated with the infotainment?

Bernard A. Girod

Yes.

Ronald Tadross - Bank of America Securities

Have you started showing that to customers?

Bernard A. Girod

They know something about this, that's about as much as I should we -- see.

Ronald Tadross - Bank of America Securities

And then just one last thing on the consumer segment. This is the first quarter we have seen down year-over-year revenues and it looks like the profits are lost in this quarter. I'm wondering what is beyond like a new product rollout gets revenue going over the next few quarters?

Bernard A. Girod

Well, first let me point out that the quarter of reference, the pace was remarkable --'s remarkable quarter and the quarter at the time that we cautioned about using as a base. But the anticipated business is both a reflection of business we know we have surrounding a whole series of new products and the reasonable expectations we have for other of the new products in the realistic world that we now confront. I don't think you hear in us any unsophisticated, understanding of that consumer space, so it's a combination of commitments that we've got, new products that we have weighed very, very carefully in the multimedia arena. On top of that new media servers, new products in our legacy world and a growing custom business.

Sidney Harman

I would also add, Ron, that seasonably the second fiscal quarter is by far the strongest quarter for the consumer business. The Christmas season is included in it, so you will see much more vigorous number just because of the seasonal factor, in addition to all the factors that Sidney stated.

Ronald Tadross - Bank of America Securities

Is that when most of the new products hit?

Sidney Harman

That's when 14 new products hit and there are another 12 behind that with a balance of the year.

Ronald Tadross - Bank of America Securities

Great. Okay, thanks. Congrats, Bernie and Greg. Thank you. And then Sidney.

Sidney Harman

Thank you, Ron.

Operator

And representing Citigroup, a question now from the line of Jon Rogers.

Sidney Harman

Jon, you got out of the traffic?

Jon Rogers – Citigroup

Yes, I have. How are you, Sidney?

Sidney Harman

Fine, Jon.

Jon Rogers – Citigroup

I am just wondering, maybe the follow on Ron's question, was there something unique going on in this quarter and is a portion in addition to the new products and the consumer group is a portion of the snap backs that you expect, just add some of Apple's new products? How does that docking station this quarter?

Sidney Harman

Okay, the only unique one-time event for the quarter is our withdrawal from Circuit City. We don't think Circuit can really provide the kind of distribution that we are looking for longer-term. They returned inventory and actually we did not sell to them. We'll recover all of that volume and more by the time we finish the year, but it caused a one-time impact in the first quarter. Other than that, it was pretty much of a normal quarter as expected and we're confident our new products will drive our business well in the second quarter.

Bernard A. Girod

You're aware, too, I'm sure, in addition to the magnificent performance at Apple, Microsoft, new zoom entry is on the Horizon and we're going to be considerable players there and that’s something we are certain and that’s built into our expectations.

Jon Rogers – Citigroup

And then Bernie can you give us what the impact of the consumer business to the circuit city inventory issue was?

Bernard A. Girod

Yeah, it hit sales by about $6 million.

Jon Rogers – Citigroup

Okay. And then if we switch gears to the automotive business, it seems like this, and congratulations on the new award. But it seems like this is potentially a little bit earlier than what we would have seen for a total new award. Have you guys just been working on this for a longer-time and you're announcing it now or is there something in the sales cycle for these awards or maybe in the complexity of the particular new product that would leave the lead time to be be shorter than it usually usually is.

Bernard A. Girod

I think the best answer I can give you there was what I'm free to. If we're work -- working on this and other stuff all the time, some expressions of product require a longer lead time than others. Others require somewhat lesser lead time. Ron, I would love to tell you more. I'm constrained and really shouldn't be pressed any further. We would tell you everything we know if we can. And when we can.

Jon Rogers – Citigroup

Okay. Thank you very much.

Bernard A. Girod

Best to you.

Operator

Representing Robert W. Baird, a question from David Leiker. Please go ahead.

David Leiker - Robert W. Baird

Hi, good afternoon, everyone. When -- your backlog number Sidney as you talked about is $14 billion, could you remind us what that number was prior to this?

Sidney Harman

It's well over 14 and it was 13 the last time I spoke of it.

David Leiker - Robert W. Baird

Okay. And is that, that's probably out in the '09, '10, '11 time period?

Sidney Harman

It lease -- goes through fiscal '13.

David Leiker - Robert W. Baird

In terms of the incremental business, that's probably not enough to hit '08 at all, is it?

Sidney Harman

No, not '08. The incremental business hits in '09 and beyond.

David Leiker - Robert W. Baird

Okay. Great. Thank you. Where are you in the process of kind of the renewal of programs that you have launched three or four years ago. The initial programs of BMW and Mercedes.

Sidney Harman

Well, they come one at a time. We announce the extension of the S-Class in our last conference call, I believe.

David Leiker - Robert W. Baird

Right.

Sidney Harman

That's a done deal.

Bernard A. Girod

By the way, the S-class has been every bit the success we predicted it would be: BMW, you know that we announced being the award, the DL 6 award, which is the large car platform and we picked up some pretty good shape. We haven't yet say Audi, we also announce that if we have all of their business and that Audi really ramps up significantly a -- in '09, so we haven't yet begun that cycle. Chrysler begins later this year. We haven't yet begun to play. Well, PSA hasn't yet begun to launch. We launch in late '08 and we'll see the impact of the volume, primarily '09 and we sit in pretty good shape in terms of the renewal and that's why we're so confident about our book for '07, '08, and '09 and frankly beyond.

David Leiker - Robert W. Baird

You have done an impressive job of building that fire. What do you think the timing is of adopting these new functions into the most infotainment unit. Is that something that’s out in 2010, '11,'12?

Sidney Harman

In '09, yeah it beginning -- begins really in '09. But you will see it's a real emergence in 10 or 11.

David Leiker - Robert W. Baird

In this backlog and new business, is there anything that would incorporate those types of functions or is that not yet awarded?

Sidney Harman

Modest. Modest piece.

David Leiker - Robert W. Baird

Okay. And then the last question here is obviously the functions that you have integrated within your most infotainment units, there are multiple ways of delivering the same function in the vehicle. You just talk about other technologies and where they are in the competitive landscape? Is there any advances there for people like Microsoft or folks along those lines?

Sidney Harman

In fact, this is an arena that our guys not only watch very carefully but for various reasons, find themselves engaged in. Probably the most important development in that world in current and recent times has been the remarkable development of Qunix. I think it's recognized today as the most relevant, most affective operating system for the automobile. With all respects and mighty Microsoft, there has been interest in this world a very, very long time. Go -- further engaged now than they were several years ago.

David Leiker - Robert W. Baird

Okay. Thank you very much.

Operator

And thank you, Mr. David Leiker. And next, representing -- Pacific Crest Securities, we go to Steve Lidberg. Go ahead, sir.

Steve Lidberg - Pacific Crest Securities

Good afternoon. First of all, with regards to the PND and the success you have seen in Europe, have you any new thoughts with regards to the introduction of PND products into North America?

Sidney Harman

Only that they will be introduced as we have indicated. We think we have a combination of good things going for us. Is they include what we have learned and continue to learn through our work in Europe. Things we learned that we should be doing and things we have learned we shouldn't be doing. Things we recognize are particular to Europe as distinguished from emphasis required in the United States. I said in my formal presentations that we placed particular emphasis on a highly, friendly HMI and on the industrial design of these products. And we bring some very special brand recognition to that world. We're entering the PND business in the states with a -- appropriate caution and I would suggest it's much too early either for us to hang very solid numbers around the scale of it or to encourage anybody else to. When we're more sure-footed about it, we'll speak with much more certainty.

Steve Lidberg - Pacific Crest Securities

Great, and Sidney was wondering, we're starting to see you some initial thoughts in the press with regards to new Chrysler models that we'll start to introduce the Harman infotainment systems. And was wondering if your observation Chryslers planned rollout through the back half for this year have changed or what do you think of, kind of the initial push on Chrysler's part?

Bernard A. Girod

Our expectation is they're enhanced by two things. First by the tests that have been underway in Europe. They are the preliminary tests of the launching of the European version and they have gone very, very well. Second, by the growing awareness through the Chrysler organization of the powerful importance of these new systems. You see that in the launch of their Sebring. You see in every discussion and conversation we have with them. These guys as -- everybody certainly on this side of the Atlantic on the automotive business are struggling for sales. They placed every emphasis on the increased value of the cars represented by the systems and I tell you I think they're right.

Steve Lidberg - Pacific Crest Securities

Great. Thank you.

Bernard A. Girod

Good to talk to you.

Operator

And thank you very much, Mr. Lidberg. Next to go to the line of Douglas Pratt, representing Mesa Capital Management. Please go ahead.

Douglas Pratt - Mesa Capital Management

Thanks very much, a few quick questions. The first, there was a great increase in Audi, was that up -- was last year first quarter unusually low?

Bernard A. Girod

The, the increase in Audi was really driven by the Q7, which was not launched in last year's first quarter, so almost all that Q7 volume in this quarter was incremental on a year-over-year basis.

Douglas Pratt - Mesa Capital Management

I meant the Audi last year in the first quarter, was that down prior to the September of '04?

Sidney Harman

It was, it was way up. You than we have been launching Audi vehicles.

Douglas Pratt - Mesa Capital Management

Right.

Sidney Harman

About every nine months or so we started with the auto Audi A-8, a very good vehicle and then the A-6 has been an extraordinary vehicle. Setting new sales records, a recorder and those volumes have stays solid through the period. So as we launched new vehicles like the Q7, we obviously -- we obviously get nice incremental volume because the basis are strong.

Douglas Pratt - Mesa Capital Management

Okay, and on the consumer side, should we expect that to be up year-over-year in the December quarter? I know it's strong and seems like going from third quarter to fourth but year-over-year, you think that will be positive growth?

Sidney Harman

The -- I'll give you an informed response. In the second quarter, the top-line will be up over the prior year. The bottom line will be close to where it was last year.

Douglas Pratt - Mesa Capital Management

Okay. And was there anything unusual in the interest expense line? Was it only a hundred and some thousand dollars, looks like it was barely a 0.5% on the average debt. Was there an offset to that or should we expect that level of expense going forward?

Bernard A. Girod

The unusual activity actually occurred in the fourth quarter when we bought in the vast major of our public debt. So our interest expense is lower than it was and should stay low going forward.

Douglas Pratt - Mesa Capital Management

So it -- okay, I think even using the lower debt for the full -- full quarter, that is only like 40 basis points interest rate.

Bernard A. Girod

Keep in mind we have -- we also have a lot of cash that’s working for us.

Douglas Pratt - Mesa Capital Management

Okay. The net number. Okay.

Sidney Harman

That's right.

Bernard A. Girod

We have more cash than debt.

Douglas Pratt - Mesa Capital Management

Right. Great. Thank you very much.

Sidney Harman

You bet.

Operator

Next, we'll go to the line of Brad Lundy, representing Ivory Capital. Please go ahead.

Brad Lundy - Ivory Capital

Yes, my questions have been answered. Thank you.

Operator

Okay. Thank you.

Sidney Harman

Since Brad’s questions have been answered, I wonder whether the old lion is in the queue? I would welcome questions, comments from Peter Barry as we bring this session to a close if he's with us.

Operator

Well, your technology just amazes me, doctor in fact, Peter Barry is the next participant in queue. How can you see through the mobile network, I'll never know but that's why you're where you are Peter Barry with Bear Stearns, you’re next.

Peter Barry - Bear Stearns

Thank you very much. And thank you for this opportunity because I did want to, before I go to questions, I wanted to extend my sincere congratulations to Greg, Rob, I hope to meet you in the not terribly distant future, but especially Bernie, after all of these years, I wanted to wish you god speed. It's truly has been a privilege.

Bernard A. Girod

Thank you very much, Peter, likewise.

Peter Barry - Bear Stearns

Kevin, if I could ask you to repeat the Q1 Cap Ex, maybe give us a sense of what the year looks like and how might that number change as we look out over the next couple of years.

Kevin Brown

Okay, first quarter was low for capital expenditures as it typically is for us. It was 12.4 million and actually that was even lower than the prior-year's first quarter, which was 21. We gave guidance last quarter, which is still valid for Cap Ex. And typically as you know in the past, we targeted about 5% of sales. We ran less than that last year. We're probably going to run more than we spent last year. Last year, we spent $130 million or 4% of sales. I think we're go to be between 4% and 5% this year and a good number is about $150 million for the year, which replaces in the mid-4% range.

Peter Barry - Bear Stearns

That's probably that – the percentage is the operative number, I would gather.

Kevin Brown

Yup.

Peter Barry - Bear Stearns

Sidney, just to focus on PND for a month, is the Harman becker brand going to be the identity for the product in North America?

Sidney Harman

In Europe, it's the Becker brand and in North America, it will be the Harman -- harmon cardin bond and they're different products.

Peter Barry - Bear Stearns

And certainly differentiable from -- .

Sidney Harman

From each other and from other competitors.

Peter Barry - Bear Stearns

Is a $400 ASP still a good target?

Sidney Harman

Well, it's a good target. I think by the time we launch, that might be somewhat modified.

Peter Barry - Bear Stearns

Bernie in your discussion about automotive, you mentioned Toyota ,Lexus, Hyundai, Kia and Harley-Davidson. Some of those we do know are infotainment users, but others are not. Could you clarify the role that these companies are playing, these are the infotainment if any?

Bernard A. Girod

Sure, Toyota, Lexus is all audio but its very high-end audio, as you know it’s a Mark Leinson system, the average selling price is quite high, because of the content of the system and what it is but it's all branded audio. As far as Hyundai Kia, currently, it's branded audio but quickly moving to infotainment into next couple of years. We have announced the awards from Hyundai of two very high-end systems, which were launched beginning in '08 and Harley-Davidson is also next -- a mix, it’s a mix of audio and infotainment as well.

Peter Barry - Bear Stearns

As it relates to forecasts, you, you re-enforced your 435 but I didn't hear any mention of 525 for fiscal '08.

Bernard A. Girod

That remains unchanged.

Peter Barry - Bear Stearns

In tact. Today, I don't want to split hairs on backlog but, you know, $14 billion plus versus the earlier 13 billion gives us a $1 billion worth of wiggle room and I was wondering if there were any -- and the only, I assume the 200 million to 250 million of new business is in that 14 billion plus. Are there some other contracts, agreements that have been added to the backlog number that we haven't heard about.

Sidney Harman

Not anything of real consequence and to split a hair with you, if that's your closing thrust, my friend -- [ Laughter ] -- I'll put it to you this way: Our backlog has increased over 10%. Do the arithmetic. By the way, $200 million in four years, $200 million to $250 million times four years gets pretty close to a $1 billion.

Peter Barry - Bear Stearns

Yeah, and starts that up to real money.

Sidney Harman

Money.

Peter Barry - Bear Stearns

That major European manufacturer.

Sidney Harman

That's correct.

Peter Barry - Bear Stearns

Gentlemen, I thank you so very much and we'll see you soon.

Sidney Harman

Thank you.

Bernard A. Girod

Thank you, Peter.

Operator

And thank you, Mr. Barry with that -- that, Dr., I would turn back to you for your closing remarks.

Sidney Harman

Thank you, Brent. I have a few things I would like to say. First, I think it's worth noting that over the years we have on occasion made predictions about upcoming significant trends. And I think our record of delivering on those predictions has been pretty darn good. I make a -- another prediction today and it is, as you know, that this important new overlay of driver assistance and pedestrian safety is going to be big time and we are going to be its principle proponents. If anyone had any questions about where this business, this industry is headed in the next decade and more, you will find it -- its answer there. These are vibrant times, there are big challenges and I think I am more than comfortable that we have the right answers to those challenges. And make a further point that there are -- there are useful lessons in history, they are not always absolutely valid, but there is a remarkable echo in this PND infotainment conflating that is worth noting. I think for all of us.

I have no difficulty remembering the time when the audio after market business was vibrant. He had a stereo shop on virtually every corner and it came into existence overwhelmingly because the automakers continued to provide very modest radios in the cars and nothing else. Once we and others finally persuaded automakers and some automakers independent of our assistance, and our encouragement, came to the conclusion themselves that there was serious business for them to be had in offering serious audio systems in the cars, those two worlds have changed. The audio business for the automakers has been a very serious moneymaker and that after market industry that flourished because the automakers made it possible, if it's not disappear is now very much a niche activity.

The PND has been given an opportunity by the fact that automakers have been slower to come to the decision that infotainment systems should be available through the range of cars, but as we pointed out, the carmakers overwhelmingly have concluded that infotainment systems are not just for the luxury cars, not just for the rich, they belong to the full-range of cars and when they are available, they make ever much -- more sense than and the PND and when the new layer is added, that layer of driver assistance and pedestrian safety, then you will be looking at the PND world as I think it properly should be seen and absolutely wonderful consumer opportunity and one in which we have every expectation that we're going to be a vigorous player.

I'd close my comment by one last time saying to Bernie that it's been a pleasure and it's been wonderfully profitable for all of us to, as we engaged them over the years, he ain't going too far. We'll have our hands on him as he sales the Mediterranean, so all of us give him our love and wish him our best. And I thank you all for staying with us through, I think, a very interesting earnings call.

Operator

Indeed, doctor. Simply stellar as all, very nicely said and Mr. Girod, I know all the analysts and private investors and employees joining us on the call today join me in congratulating you on your stellar career and all of the good work that you have done. It will stand the test of time and be felt for many, many years to come. We do congratulate you, sir.

Sidney Harman

Thank you very much, Brent.

Operator

And, Ladies and gentlemen, Dr. Harman's making today's conference available for digitized replay its for one full week and also by the web for seven days. The digitized replay is available starting at 5:00 p.m. Pacific time October the 25. Please dial 800-475-6701 and at the voice prompt enter today's conference access code of 845306. Alternatively, you may go to www.harman.com to listen to the web replay. You will need to enter the access code again of 845306.

And that does conclude our release for this first quarter. Thank you very much for your participation as well as for using AT&T's executive teleconference service. 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 F1Q07 (Qtr End 9/30/06) Earnings Call Transcript
This Transcript
All Transcripts