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Harman International Industries Inc. (NYSE:HAR)

Q1 2010 Earnings Call

April 28, 2010; 9:30 am ET

Executives

Dinesh Paliwal - Chairman, President and CEO

Keith Rattie - Chairman, President and CEO

Chuck Stanley - EVP, COO and Director

Analysts

Chris Ceraso - Credit Suisse

Himanshu Patel - JPMorgan

Scot Ciccarelli - RBC Capital Markets

David Leiker - Robert W Baird

Operator

Good morning and welcome to Harman’s third fiscal year 2010 earnings conference call. At this point, your phone lines are muted and in a listen-only mode. However, during the conference, there will be opportunities for questions and those instructions will be given at that time. As a reminder, today’s conference is being recorded Thursday April 29th 2010.

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 with the Securities and Exchange Commission, regarding these risks and uncertainties.

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

Dinesh Paliwal

Thank you, good morning. Good morning ladies and gentlemen, it is a new day. It’s a new day for all of us in Harman and for all of us outside of Harman. With a new and confident face of the company we just launched this morning I am so delighted to host this conference today and I would like to thank you for joining Harman’s Third Quarter 2010 Investor and Analyst Call.

I am joined here today by Herbert Parker, our Chief Financial Officer, and Bob Lardon, our Vice President, Investor Relations. We look forward to meeting many of you in person later today at our Investor and Analyst conference which is first ever hosted by Harman. And again all of us in management team of Harman are looking forward to having this dialogue with many of you.

Ladies and gentlemen, Harman’s performance in the third quarter is very encouraging and it demonstrates that our efforts to increase operational efficiency, accelerate product innovation and optimize our cost structure are delivering continued results. We grew sales by 42% year-over-year and we improved our operating income by more than $100 million. Prudent cash management, you heard me say cash is king and that will always be our mantra. Prudent cash management has helped us generate $106 million in cash from operations year-to-date for the first nine months of the year.

Our STEP Change program has delivered $321 million in permanent cost savings through March 31st 2010 and it remains ahead of targets we set ourselves. Our rigorous measures to reduce cost and improve productivity have helped us achieve a dramatic turnaround and we are not done yet. We now have the foundation to drive profitable and long-term growth. Since many of you will hear directly from my colleagues, division heads later today and also our Chief Technology Officer later today. I will therefore focus this morning's comments on four major initiatives.

Taken this quarter to support Harman's growth strategy for profitable growth, portfolio management, technology leadership and partnerships and brand penetration. We are taking many proactive steps to further improve our business. Throughout the day, you will hear us reference four strategic pillars. We will stay on the cutting edge of smart infotainment solutions. We will increase market penetration of branded audio solutions. We'll continue to achieve our industry's best-in-class capital and cost structure and very important personally for me, aggressively grow in the emerging markets, that’s where the largest growth opportunities for any company is out there.

So we’ve gotten off to a great start. On the growth front just this morning we announced our first acquisition in the emerging markets, the Brazilian company Selenium is the Latin American leader in the professional and consumer audio markets. This acquisition will give us an instant access to this fast growing emerging market through very well established sales channels, manufacturing footprint, both in the south and north of Brazil and of course a well functioning, extremely efficient engineering centre and I've personally visited this sites.

In addition to Latin America, just last week we opened a joint research and development centre with China’s largest software technology company. The company is called Neusoft and our Chief Technology Officer Sachin Lawande whom you will hear later today personally was on the spot to cut the ribbon with hundreds of industry leaders as well as customers. This collaboration with New Soft which starts with over 500 engineers will accelerate our innovation and technology development activities and also allows us to expedite our growth in the Chinese automotive market.

These two agreements set the stage for our achievement of our emerging market strategy. As you know connectivity has and will continue to play a major role in the development of cutting edge infotainment solutions or in professional audio or in consumer audio. Recently we announced the sale of operating systems unit QNX to Research In Motion or RIM. RIM is a worldwide leader in mobile connectivity solution. This not only monetize our investment in QNX, but it also accelerates our collaboration with RIM to develop mobile connectivity solution for the automotive and audio space.

The approximately $200 million proceeds from the sale will give us greater flexibility as we pursue focused bolt-on acquisitions such Selenium this morning we announced. that is to compliment our existing portfolio and offerings we bring to the market. This morning we announced a new initiative to update and energize our corporate identity with a modernized Harman brand. This was done with great seriousness, this was done with terrific market intelligence, customer interviews, stakeholder interviews, various generations and various demographies and we found very conclusive result that there was a need to modernize Harman brand and brand architecture definition.

This will improve visibility for the Harman umbrella and its integrated solutions and it strengthen the associates among our individual brands. This is exciting and I would like to ask you to please take a moment to visit our new website which got a wonderful new look and lot of energy or look into today's Wall Street Journal or Financial Times or New York Times with a full page ad explaining our strategy, our brand architecture, our new energy logo.

And please experience the new Harman brand firsthand. We are excited to share with you that Harman has been chosen as an official sound sponsor of the 2010 Shanghai World Expo, supposedly the largest ever in the history which opens in just three days for its six months run. And my colleague, Division President for Professional Division, Blake Ausburger who some of you will meet this afternoon will personally will be there for the opening ceremony to kick it off.

This will showcase our new brand strategy over 70 million visitors from over 200 countries. Finally I am pleased to tell you that Harman is in advanced discussion with a leading global automaker to finalize the second implementation of our recently launched, scalable new generation automotive infotainment system. I am very excited about that. This is starting to be proven lot more successful than our own targets indicated.

We look forward to sharing additional details when the process permits. Looking back to these initiatives, you will see each of the four strategic pillars that we shared with you last quarter are hard at work including cutting-edge development or smart infotainment solutions, increasing market penetration of branded audio solutions, aggressive growth in the emerging markets and achieving our industry’s best in class structure for capital and cost efficiency. I am firm believer and a long time student of what (inaudible) said “to be the profit leader you have got to become the cost leader” they go hand in hand and that’s where we are headed.

In summary, ladies and gentlemen I believe that we have continued to strengthen our foundation for sustainable improvement and profitable growth. Before I turn it over to my colleague Herbert Parker let me recap quickly our position.

We remain profitable for fiscal year 2010 and improving market conditions are driving sales growth. We enjoy an exceptional competitive position, as illustrated by our more than $10 billion in awarded business from our loyal customers most of the business is a repeat business. And some of the business has come for the first time at the expense of competition an award winning recognition for our premium brands.

Our decision to continue the robust investment and innovation even during times of challenge is driving customer wins. Differentiation and market share gain. We are complimenting our core expertise with new strategic partners. The new day belong to collaboration strategy. No one can do it all, everyone has to reach out for the suitable partners and pick the best they’ve got and put it together the best solution your customers don’t even ask for, but they deserve. We are delivering on our commitment to aggressively expand in the emerging markets, with new products, new facilities, with talent we are hiring, distribution channels and focused marketing activities.

We had ample cash and liquidity to invest in innovation, this is very important to Dinesh Paliwal, innovation differentiated us in the past and innovation will continue to differentiate Harman from the rest of the pack. And real innovation, we will continue to seize new opportunities for growth in our home market and in emerging markets.

Finally, I think that we have and will continue to build the best management team in the industry. I am proud of this team. Thank you for your attention and I will ask Herbert Parker to provide a closer look at our quarterly results.

Herbert Parker

Thank you, Dinesh. Good morning everyone, as you have just heard from Dinesh, we have completed another quarter of good progress towards our call savings productivity program which continues to reflect positive result in our financial statements. And to help you to have identify these specific improvement related to these call saving productivity plans, I would now present a few details of 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 our financial comments are provided on a non-GAAP basis, which excludes restructuring cost and goodwill write offs. And as usual you will find a reconciliation of our GAAP to non-GAAP results in our press release which was featured this morning. But for your ease of reference our restructuring charges totaled $60 million for the quarter.

Its okay, just go up with the top line, in the third quarter our sales increased across all three division o n a year-over-year comparison and primarily as a result of improved global economic conditions but also due to market share gains. Our sales for the third quarter were 848 million, which is 42% increase over the same period of last year. If we exclude foreign currency translation also decreed is 36%. This significant improvement was lead by the automotive division which entered 55% year-over-year increase. While reviewing this performance on a year to date for the first nine months of this fiscal year, our sales were 2.5 billion which was a 14% over the same period of last year or 12% when excluding foreign currency impact.

Moving over to the production cost area, we reported a gross margin of 26.8% compared to 18.9% in the same period of last year. This margin increase was primarily due to higher factory utilization associated with increased sales and improved productivity as a result of our stiff change permanent cost savings initiatives.

In the control of cost area, our SG&A expense for the third quarter was 191 million, compared to 185 million last year of which R&D cost were 81 million and 79 million respectively.

Excluding the effect of our currency translation total SG&A expense was essentially flat with the prior year, while R&D decreased by 2%. Now moving on to the bottom line we continue our profitable trend with the reported operating profit of 37 million, compared to an operating loss of $72 million last year. And as Dinesh mentioned earlier, this is a complete turnaround of $100 million improvement from the prior year.

On a year to date basis our operating margin now stands at 3.7% up from the 3.4% reported due to second quarter. Our net income for the third quarter was 22 million or $0.31 per share, compared to a net loss of $54 million or a loss of $0.93 per share in the same period last year.

This brings our year to date EPS to a positive $0.66 for the current fiscal year which is of course the complete turnaround from a lowest of $0.66 per share in the same period last year.

Our effective tax rate for the third quarter was 21% which includes the effect of restructuring expenses and goodwill charges. Now, as of March 31st 2010, our total liquidity which we defined as cash plus short term investments, plus available revolving credit facilities was 649 million, compared to 630 million [as a ]period and ended the last period per quarter that is. Year to date positive cash flow from operating activities contributed to this increase.

In closing, we are pleased to report a second consecutive quarter of positive EPS and I believe this underscores our commitment to continue the improvement and a quarter of account stability.

Visibility into future market conditions has begun to improve we can now make some reasonable assumptions about future performance expectations. As such you have noted our inclusion of mid term financial guidance in this morning’s press release.

In summary, for fiscal year 2013, we are guiding a top line [Cager] between 7 and 10% using our fiscal 2009 sales as our base year. Also we are guiding to an operating profit margin between of 7% and 10% and we are guiding to earnings per share of between $3 and $4.

Now, at this point, I would like to thank you for your attention and before I ask the operator to open the call for questions, I’d like to say that today there is nick of unique opportunity from interview to have a face to face dialogue with our inter senior management team at our Analyst and Shareholders meeting today. Therefore, I’d encourage you’ll, I would encourage all of you to join the webcast for this event.

Operator, we are now ready to take your question.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question from the Chris Ceraso, Credit Suisse, you may proceed.

Chris Ceraso - Credit Suisse

Got a few items first the, maybe a detailed question and then a couple of bigger picture question. I noticed that your operating margin in the automotive division was down versus what you printed in the second quarter and I see the revenue was down a little bit but what else would account for the weaker margin sequentially?

Herbert Parker

We don’t manage on a quarter-to-quarter basis but when you compare year-over-year is significant up. One of the reasons you have to look at it on a year-to-year basis that we have various supplier agreements that we negotiate for price concessions we get from our suppliers and on the other hand you are well aware of the annual price reductions that we have with our customers. The timing of these are normally consistent year-to-year. But they’re not consistent quarter to quarter. So that would be one of the factors that would be a negative and the other one is moving out a higher warranty expense charge in this third quarter compared to our second quarter. So those with distorted numbers. So we feel that our own born was still in [the reasonable good shape] for the margins, in the profit margin area.

Chris Ceraso - Credit Suisse

What was the size of the warranty expense Herbert?

Herbert Parker

It was about 1.2% although the [1% contributed] to that.

Chris Ceraso - Credit Suisse

1.2 points worth of the margin, is that what you are saying?

Herbert Parker

Yes of the margin.

Chris Ceraso - Credit Suisse

Was there anything particular that happened or why change there?

Herbert Parker

Nothing particular except that as now we ramp up with some of the new products and the way we charge our warranties, first of all is based on sales but second, it's based on the number of our tickets as we’ve explained before when it's being launched at the beginning. So there’s a number that seem to be a little bit higher than average. We will put a higher warranty and then it balances out over the time of the life cycle.

Chris Ceraso - Credit Suisse

Okay. So do you get that 1.2 points back the next quarter?

Herbert Parker

Well, let's put it this way. We've told you we think how the normal rate will be around 2%. So it's going to vary quarter to quarter but on average you can look at us to be around 2%

Chris Ceraso - Credit Suisse

Any details that you can give us on the acquisition? And I see that you've reported the revenues there for the Brazilian company, but how profitable is it, and what are you spending on the deal, and what do you expect in terms of accretion to your profits?

Dinesh Paliwal

Chris, to be consistent with what both Herbert and I have been telling all of you in the market place we say -- we are a little unique when it comes to the acquisition. We will not acquire a company which is loss making which is in a disastrous situation. We want to pick companies which have unique technology, even distribution channels and most importantly, they are profitable, they generate positive cash and they have to be accretive. So this company qualifies on all counts. This profitable company generates cash, has got excellent distribution channels, highly synergistic. So that many numbers we have given you and profitability, I'll go this far saying it's in high teens

Chris Ceraso - Credit Suisse

What did you spend on this?

Dinesh Paliwal

Well you know what; let’s leave some things for us only.

Chris Ceraso - Credit Suisse

On the QNX deal, maybe you can explain any backend agreements that you have with RIM, because I was a little surprised to see this. I thought that QNX was kind of a prized asset for you and that you were selling that to other players and that was really the backbone of your infotainment system. So give me a little bit more color, Dinesh, on the rationale for this deal?

Dinesh Paliwal

Absolutely. In fact, some of you listening would recall, Paliwal has been on record saying we love to have QNX under our company portfolio, but I could do without it very easily. I’ve been saying that since I came in this company for one reason, very good reason. QNX is a great asset, but QNX really belongs to a very large software house with lot of application to grow. And under Harman, we were the restricting this business to grow.

I mean I already took them out from automotive and have them report almost like a independent division to me and allowed them to grow outside of automotive which they started to do. So by us moving them under a great connectivity software technology company, two things will happen. One, there will start to grow in automotive, much faster than they could with us. We standardized the software operating system. So majority of the cars out there, we’ve a leading position at QNX and we will continue to work QNX. Now our competition, lot of other players, they’re already using it.

By the way, Visteon F150 for Ford, that is the based this. Denso has been using QNX, Conti was trying to use QNX, but due to competitive nature probably have to have a little bit of firewall. All of those silo firewalls go away and QNX can start to really expend like a wildfire in automotive space and in other connectivity spaces, good for QNX, good for Harman.

We continue to have the same in-depth relationship and access to the technology, we have long-term development, arms length relationship like we enjoyed between QNX and our Harman Automotive system. We always had arms length relationship. So this has been just wonderful for our shareholders and by the way, I got so many accolades from our customers, German customers saying this was the best thing you did because now QNX can really nurture and grow in automotive space while you don’t have to say it belongs to only Harman.

Chris Ceraso - Credit Suisse

Do you see any risk that here you are now providing a maker of handheld NAV device with some more robust capability, do you see that at all as a competitive threat for you particularly with lower end vehicles?

Dinesh Paliwal

Not all Chris because if you were to think that and they are not the only game in town, there are other players in Bay area, I don’t have to name them and more to come. Handheld device makers not really are true competition. True competition comes from those who understand the ecosystem of the car and know how to develop and integrate a full functional system with multimedia connectivity, the whole software backbone, the bus which can interact with thousands of sensors in the car which is not the cup of tea for handheld device people. They love to do that business, but they really don’t understand and automakers are not ready to invite them to the party yet. So this is not really in that direction. That’s very, very good thing what we have done from customer’s point of view.

Operator

Our next question is from the line of Himanshu Patel from JPMorgan.

Himanshu Patel - JPMorgan

The second potential midmarket system contract you alluded to, I know you can't get into too much details, but could you at least help us understand the materiality of that contract? Would it be just directionally about the same size as the Toyota European business you won or smaller or larger?

Dinesh Paliwal

Himanshu, we like to have big things. So this is definitely much larger than the earlier contract as we expected. That’s why if you picked up in my comments, I said this success of ours midsystems, scalable (inaudible) has positively surprised us with the growth. So we announced $1 billion revenue target for five years and we feel that we will exceed that. When? I don’t know yet. But at this point, we have certain limitations not to reveal the size but this is a good size business which we are very proud of. And this is a global customer, someone we are picking up first time.

Himanshu Patel - JPMorgan

Okay, and then on the guidance for 2013. Dinesh, I think you've perhaps informally stated in the past that you think there is the potential to get the business back to double-digit operating margins, and I'm just kind of wondering, how should we think about the midpoint of your guidance at around 8.5%? Is there something that has changed in your view of the business' underlying earnings power that would suggest that it's not double-digit in terms of the midpoint of your guidance or is it that you're just trying to be conservative on the guidance?

Dinesh Paliwal

If I agreed to any of these things, that would constitute guidance too. Let me see if I can shed some more light on it. Well market is what market is, you know that. If we did not have to go through this unprecedented recession, we would hit the double digit margin perhaps sooner in out years than we will now. The market is what market is as we say. Now we have also said and I repeat, we do believe and we will achieve double digit margin. When that happens that’s a question which we are not obviously guiding.

We say it by 2013, the range is 7% to 10% because a whole lot can happen during that period. We will invest very heavily in emerging markets. I have said I'm prepared to invest another $100 million just in China alone because China is a big, big place for all of us and we have to make up for the lost ground. We have been rather slow in the former years to go in China.

But a good thing is this management has a lot of experience. Personally, Herbert and I both have worked in China. So, we know what it takes. So we are going to invest heavily and you’ve seen the signs we formed the partnership with Neusoft. So a lot of those investment will also happen and I repeat what Herbert said. That is our underlying philosophy. Yes 2013 is few years out, but we are really investing in this business for long term and double digit is our goal. So should you look into midpoint? No, that would be too simplified for Himanhsu Patel. You do better job than that. So we let you sort of draw your own conclusions and see how business develops. But from all the signs you are seeing, we are going in that direction.

Himanshu Patel - JPMorgan

Just a clarification, Herbert on the current quarter, the warranty charge just so I understand that you said it was worth 1.2 percentage points on this quarter’s margin so meaning like roughly $10 million is that?

Herbert Parker

What we said is that look, the quarter was just spoke of 15 million in the third quarter is 11 million in the second quarter, but when you look at automotive, it had, it kind of reflected through the numbers when you look at the margins

Dinesh Paliwal

Meaning add more details. Himanshu, as we said to earlier question. It’s a ramp up phase. So, you should not have any concerns whatsoever. This is a normal ramp up during ramp up when you have so many starter production going on, you have a bit of the higher warranty cost to support the customer’s ramp up plan, but what Herbert said earlier and I reinforced, is going to average out based on what we’re seen in the next cycles of the production ramp ups because we have the bulks of the things, customers picked, customers wanted to make certain changes. So I think we are in a good shape here.

Himanshu Patel – JPMorgan

Yeah. I was just trying to understand the sort of recurring nature of this up tick in warranty cost or maybe the lack of a recurring nature, is this sort of a one or two quarter up tick in warranty expense that you would then subsequently expect to see moderate or this kind of beginning of a higher level of warranty expensing?

Dinesh Paliwal

I don’t think you should look into. It’s the beginning of the higher warranty. We have been industrial space for long time. We have said 2% to 2.5% off sales is the sustainable warranty cost. In our company by the white line, we have seen as low as 1.5 percentage point and there’s highest 3.5% percent point.

So that is not what we want, that is not good for our shareholders. As we want to streamline it that means lowest quality processes which I'm very happy we do have. So with the kind of number of launches we are having and will continue to have, not like one or two a year. Now, we’ll have at least 5 6 even 7 a year. So warranty cost should vary between 2% and 2.5% off sales and that’s a pretty normal warranty, good benchmark.

Himanshu Patel – JPMorgan

And that’s a normalized level and so is the implication that in the current quarter, it was above that 2% to 2.5%?

Herbert Parker

Right. In the normal area is around 2%. Just to clarify the 1% I'm giving is revenue is 1% of revenues for automotive, not the entire company.

Operator

(Operator Instructions). Our next question is from the line of Jason hope from Valiance Advisors. You may proceed.

Unidentified Analyst

Thank you for taking my question. I'm kind of looking at your trend and receivables. It looks like receivables compared to sales has just been at an elevated level now for the last several periods, even looking back to 2007, 2006. Obviously on a year-over-year basis, you would expect maybe some differences, just given what happened last year, but relative to historic levels, what's causing the build in receivables?

Herbert Parker

Well what’s going up slightly (inaudible) slightly you know we look at March of last year were more 56 and on the days starting now we are around 61 but as things have gone and we are picking up the revenues its been a slight pick and there has been nothing unusual happening in that area. We have as you noted this bit of tough environment in this area but we have made great progress on the accounts payable side. We have increased the days some 5 to 10 days over year basis and accounts payable, so the working capital at the [point] we control more with the receivables that were very specially because a large proportion of it is with the automotive division. So it appears that when we get to pay much but there is significantly change and they could keep increasing

Unidentified Analyst

So the increase from 56 to 61 days is that just a function of customers paying more slowly or you offering longer terms?

Herbert Parker

No, not paying slowly, it just the time and effect, it just come back down to the normal level overtime.

Dinesh Paliwal

See when you get higher sales in the period just finishing, the end of quarter you don't necessarily pick up all of those money doesn't come in so it is (inaudible) that goes up so it's a periodization issue, it also added it about if you take two quarters in a row as an average than it averages out, there is no [reck slide] here whatsoever.

Operator

Our next question is from the line of Scot Ciccarelli from RBC Capital Markets. You may proceed.

Scot Ciccarelli - RBC Capital Markets

My question is kind of relate back the auto margins and the auto margin targets. Just so I understand what you're trying to describe, for top line in the auto division, you expect a category of 8% to 11% in terms of top line revenue growth, and an operating margin of 7% to 10%?

Herbert Parker

That's correct, yes,

Scot Ciccarelli - RBC Capital Markets

Okay, now what doesn't make sense to me with all due respect is kind of math around that. Basically I am looking at an auto business that's doing $2.5 billion of annualized sales. I probably taken out almost $250 million of sustainable cost based on the step program, that’s roughly 10 points of margin. I used to have an operating margin of kind of 15% to 16%. So theoretically, my old peak would have been around 25 to 26 and like you guys are saying 7 to 10. Can you help me kind of reconcile those differences?

Herbert Parker

Yes, that [over here]. Okay, what your first start off with the historical number is what I understood from your math and where we used to be. What we are giving is look to see base of that today and what we see it as in the future. You and several, [Alice] just stated that the landscape and automotive has changed from a contribution module point of view meaning the selling price that we get less material costs. Now what we’ve done, we’ve taken a lot of calls out to mitigate some of those losses we lost in price because it is true that we do not enjoy the same margins in today’s time that we did in 2007 and 2006. So you can't take that number and do the math and get to the historical level, to the future on based on the history. What we’re doing is taking it based on the prices we have today and the players we have today to improve our margins. Now of course a lot of that depends on the revenues and our high goals, so that would obviously give us more leverage and it could be to the higher end, if the revenues are lower then it be at the lower end

Scot Ciccarelli - RBC Capital Markets

Yeah. I do understand I know I have talked about it in terms of the changing landscape, but it just seems 15 to 18 points of margin is pretty big, but is that actually in the ballpark of kind of what the expectation is, or am I doing something wrong with my calculations?

Dinesh Paliwal

Well, I don’t want to say you are doing something wrong, but let’s clarify a couple of more things here. You say 15 to 16 points or whatever number you used. You should realize that as a year, there is an APR, annual price reduction, anywhere from 3% to 5%, 3% to 6% point that gets deducted from the prices right at the beginning of the year, so you got to make up for that.

That's not just applied to Harman, it's applies to everybody that's why most of the players in infotainment don't even make money, we do make money. So that's the environment we are in, second technology complexity is only going in one direction which we love because that suits us because we are highly innovative, so with that environment and also the price pressure overall in the market place with the economy, it's harder for car manufacturers to sell car at the price they used to. So they are looking for health every year, so that's all compounded into add pricing pressure which we realize and Herbert just mentioned.

Now, we are offsetting that, we are countering that and on top of that we are bringing double digit margin this is what we said, I said when I came in here and we are delivering on that in mid-term guidance. That's what we are and I also say one more thing. I don't think there is any other company who can even come close to that in terms of profitability in our space. So, but again you should expect from us because we have said, and we have always delivered superior shareholder value and we will do that and we are doing right now. So it's a new environment and we are dealing with it and dealing very successfully.

Scot Ciccarelli - RBC Capital Markets

Okay, I’ll take the rest of that convo offline, the last question, can I just ask for clarification, did you say that the current contract that you are currently negotiations with, that your reference in the press release, is much larger than the previous announced with Toyota?

Dinesh Paliwal

It is larger than Toyota that's what I said yeah.

Scot Ciccarelli - RBC Capital Markets

And it’s with the new customer

Dinesh Paliwal

That is correct

Operator

Mr. Paliwal, there are no further questions at this time. You may (inaudible) your presentation or closing remarks.

Dinesh Paliwal

I think [that] we are going to wait a couple of more minutes because there are number of people I have seen dialing in from Europe and some of the new people had just joined probably 10 minutes ago, so they may still be looking at some of the question, we’ll see if they have any.

Operator

(Operator Instructions). Our next question is from the line David Leiker from Robert W Baird. You may proceed.

David Leiker - Robert W Baird

If we could talk about the midterm targets here a little bit. What are you using for your base year in terms of the revenue growth?

Herbert Parker

We're using 2009 as our base year.

David Leiker - Robert W Baird

2009?

Herbert Parker

Yes.

David Leiker - Robert W Baird

What sort of production assumptions are you using in those numbers when you get out to 2013? In terms of auto production, global production, or Europe, North America?

Herbert Parker

Well David, we looked at the production that they’ve given. But of course what we do is go to the customers. So we'll not give an exact range in that. If you look at any production you’ll see you'll see that they have used JD Powers data, what they’re looking at it. So we’ll use that as consistent. And they’re showing a range of around 7% to 8% in that same period.

David Leiker - Robert W Baird

I guess that would mean that your guidance here is, the increase in revenue here is pretty consistent with what the end market is doing, is that a fair assumption?

Herbert Parker

On the mid range you could say that but overall our top end is higher. We’ve gone up to 11% on the automotive segment.

David Leiker - Robert W Baird

Then the other item is that, if I did my math correctly here, the midterm target, I end up with an EBIT number of somewhere around $350 million or so, and that's less than the $400 million in the Step Change off of that 2008 base. Can you reconcile that? Maybe my math's wrong, but if you could help reconcile, that would be great.

Herbert Parker

You're taking the low end?

David Leiker - Robert W Baird

The midpoint?

Herbert Parker

Yes, well you have taken the midpoint, you could be there. That's why we've given a range because I think you're one of the people that's pointed out the big change in the landscape in the margins and of course, we have to make up for that in addition to what Dinesh has mentioned about the price reduction. So it's not going to be simple math of adding $400 million to it as if we didn’t have to offset anything.

Dinesh Paliwal

And also Herbert it will be fair since David, like David I truly appreciate and respect you, your knowledge. you know that longer than even I do in this industry. We are not adding $400 million to zero or 2008 EBIT line. We are adding $400 million to 2009 ,without STEP Change that would have been a sheer disaster that would have been a message lost. so we are coming from a very negated negative hole and so you cannot simply add 400 to it and some 400. so let's say you add a hole off to $150 million to $200 million loss without STEP Change in '09 and add to that $400 million only brings you $200 million. So there is a lot operational excellence coming in, a lot of new product related margins coming in to bring us to 7% to 10% EBIT margin whether you pick a mid range or high range. So as Herbert said David we can walk you through the whole walk from 2009 financials without STEP Change, bring it to the 7%to 10% range and then you can see there’s a whole lot more than just STEP Change going in.

David Leiker - Robert W Baird

I want to follow up on Chris' question earlier as it relates to QNX. It seems to me that, Dinesh, if I understood correctly, you're saying QNX couldn't grow their business, they were somewhat constrained because of conflict of you owning them and this allows them to go out and pursue more business on their own. Isn't that effectively making your competitors stronger as opposed to keeping QNX internally and use for yourself?

Dinesh Paliwal

I don’t believe so David because we even tried under my time here to allow QNX to reach out to competition because we wanted to create industry standards. The single biggest problem this industry has is everybody wants to do their own little thing and not just operating system, but different graphics engine different this, different that. And unless we standardize like most of the industries have, look at GE, look at ABB, look at Siemens, there are certain standards where they create differentiation in the middleware, is in the application, is in the solution.

So operating system doesn’t really make or break in terms of your differentiation, we would like to see this become standard but what we had already achieved with QNX under us for five years or so is in-depth knowledge of QNX, we know the [panel]. We can dig up this damn thing all the way to the source code level which will take several years for anybody else to figure it out.

So with that knowledge, we all will have that unique advantage but now as it spreads, in auto industry and outside, they can invest more into R&D of QNX to give us faster, better products which probably we would have not been able to do ourself. So that’s the bottom line and as I said, I believe what customers say, talk to top three German customers, all in unison said the same thing. Mr. Paliwal you should have done that when you came in this company first. I said no I had to understand the company, so we have made the right choice.

We continue to support QNX very strongly but this doesn't really affect our competitiveness or it doesn't create any competition. Plus we are not afraid of competitive environment because of the QNX. if we are afraid of, we are afraid of is someone going to do better system integration, better application write-up, better connectivity in the car, better multimedia, better sound system, so the whole lot more than just QNX

Operator

Mr. Paliwal, there are no further questions at this time.

Dinesh Paliwal

Friends, I would like to then bring this to a close up because many of my colleagues listening out there, they have to report to the market now soon. So I would then say a few closing comments very quickly.

Ladies and gentlemen, as I said earlier, the past few quarters have produced challenges unlike many of us have faced before. But I am very proud of the response to these by Harman and our team here. Our management has shown a firm hand in driving a new culture of execution and commitment at every level of the organization. Our employees have stepped up to the place with extraordinary hard work and fresh ideas. Our customers have embraced the spirit and awarded us with repeat business and we are also winning new competitive business.

We fully recognize that we must not become complacent and you can count on it that will never happen. And we intend to aggressively apply the strategies that had served us so well this last year or even before and we’ll continue the improvement in our journey through sustainable and profitable growth.

That’s what we owe to all of you investors. I am very grateful to all who have supported us during the journey, started with our owners, I call all of you listening. Investors are our owners. And I personally drive this spirit in the company that we all believe in Harman and we all believe in creating a new value of stakeholders, new and better value. That’s the mantra.

So with that, I look forward to seeing many of you this afternoon for a dialogue. Thank you all for the attention and I wish a very good day. Thank you all and good afternoon and good morning and good evening.

Operator

Thank you very much, Mr. Paliwal. Ladies and gentlemen, a replay of this call will be accessible starting at approximately 10:15 a.m. eastern daylight time through June 28th. To listen to the replay, simply dial 1-800-633-8284 toll free in the US or 1-402-977-9140 for international and enter access code 21464359. In addition, a replay information will be available at approximately 4:30 PM via Harman’s website at www.harman.com. That does conclude Harman’s third quarter fiscal year 2010 earnings call. on behalf of Harman, thank you very much for you participation. You may now disconnect your line. Have a great day everyone.

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Source: Harman International Industries Inc. Q1 2010 Earnings Call Transcript
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