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

Harman International Industries Inc. (NYSE:HAR)

F4Q10 (Qtr End 06/30/10) Earnings Call

August 05, 2010 4:40 pm ET

Executives

Dinesh Paliwal - Chairman and CEO

Herbert Parker - CFO

Analysts

Himanshu Patel - JPMorgan

Chris Ceraso - Credit Suisse

Michael Novak - Frontier Capital

Himanshu Patel - JPMorgan

Chris Ceraso - Credit Suisse

David Leiker - Robert W. Baird

Darren Campbell - George White Associates

Operator

Good afternoon and welcome to Harman's fiscal 2010 fourth quarter and year-end earnings conference call. At this point all of your phone lines are muted or in a listen-only mode. However later during the conference there will be opportunities for questions and those instructions will be given at that time. As a reminder today's conference call is being recorded.

Please note that certain statements made by the company during this call are forward-looking statements. These statements include the company's beliefs and expectations as 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 Securities and Exchange Commission, regarding these risks and uncertainties.

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

Dinesh Paliwal

Thank you. Good afternoon ladies and gentlemen and thank you for joining the Harman fourth quarter and full year 2010 investor and analyst call. I'm joined in Stanford today by Herbert Parker, our Chief Financial Officer and Bob Lardon, Vice President, Investor relations.

Ladies and gentlemen Harman's performance in the fourth quarter shows robust continued progress and rounds out a fiscal year of dramatic transformation. Our progress has been extremely encouraging; with all key performance indicators are improving. While navigating a deep and persistent global economic downturn, we have clearly demonstrated that our efforts to optimize our business portfolio and global footprint, accelerate product innovation and transform our cost structure are delivering results.

On a year-over-year basis, we grew sales for the quarter by 29% and by 18% for the full year. We are also proud to report that we ceased new growth opportunities in Brazil, India and China, where we grew combined our sales by 330% to more than $0.25 billion level.

Our order backlog now stands at $12.2 billion, driven largely by increasing demand in the automotive market for our next generation technology platforms we launched in last few quarters. Our non-GAAP operating income of $30 million for the quarter contributed to an increase of more than $200 million for the full fiscal year. And I'm pleased to report that we are ending the year in an extremely strong cash position. Our prudent cash management and the successful sale of QNX Software Systems has helped us improve our cash position to $646 million. While we're still financing the recent acquisition of Selenium, in Brazil, and fully paying down our revolving credit facility, it is quite remarkable.

We have increased our total liquidity by 48% to $871 million level on a year-on-year basis. Once again, that is a remarkable achievement. That gives us plenty of flexibility for the strategic initiatives we see ahead. As reported in the news, many large electronic component suppliers in Japan, Germany and the United States struggled to meet an unprecedented increase in demand and obviously the life on these suppliers. In order to meet our own production needs, so that we can keep our customer's production lines humming without any interruption, we made the decision to incur additional cost in procurement and logistics during the quarter to ensure that we have sufficient allocation of electronic components and we were successful in making sure our customers had full production lines running 24 X 7 as they desired.

This upsurge in demand also increased our confidence to accelerate investments in additional production lines, sales, marketing and business development to continue our market share gains. Harman's STEP Change program remains ahead of target and it delivered $350 million in permanent cost savings which is nearly 90% of our total program and those $350 million permanent cost savings were achieved as of fourth quarter and that positions Harman for a new and of best-in-class cost and capital structure.

Herbert Parker will provide a closer look at our quarterly and full year results in few minutes. Meanwhile, I will share a few strategic highlights of our recent activities. I am very pleased to announce two significant new automotive awards worth $1.8 billion as reported in our press release today and it's also on our slide back you might have seen by now.

Our scalable next generation infotainment system which we launched fall of 2009 calendar year, has scored another big win. With the announcement today that Harman will supply future vehicles worldwide for Chrysler Group and for Fiat Group. This award complements our long standing branded audio and infotainment relationship at Chrysler and brings another exciting global automotive award with Fiat.

We are also pleased to report another strategic win with the news that Toyota will offer Harman infotainment on its vehicle sold in North America. Ladies and gentlemen that is again a big game changer. This follows a similar Toyota European award that we announced earlier. We are extremely pleased. We are very pleased to win this new comparative infotainment business at Toyota as well as Fiat and Chrysler. And that complements our successful branded audio relationship with Toyota and Chrysler.

As you know, we also announced a few weeks ago that Harman was selected by BMW to provide the premium entry infotainment system for its entry level luxury vehicles. Many of you know that we have always been the leader in premium high infotainment segment of the market. Now with our successful launch of premium mid, that is our next generation scalable system we launched last year and now the premium entry infotainment system, we have rounded out and expanded our market and we are able to spread now our research and development dollars and engineering costs over a larger base; meaning much bigger scale. That means cost savings and higher efficiencies. This will also mean a significant savings in coming years, not just in this year, and much wider customer in geographic penetration to come. These new projects contribute to an awarded business backlog now at $12.2 billion. That is up by 39% from $8.8 billion at the end of last fiscal year.

As I noted earlier, we successfully completed the sale of QNX Software Systems and we acquired Selenium Company in Brazil during this fourth quarter. That sharpens our portfolio and gives Harman a strong foothold in the high opportunity markets of Latin America. We will continue to look for strategic bolt-on acquisitions that complement our portfolio with new products and new technologies. And we have number of such very good companies which are accretive to our numbers in our site.

Many of you have already seen the efforts of our increased brand marketing activities. At the end of April, we launched a new cost identity program which includes those new Harman brand and co-branding across our portfolio of legendary names. That program was launched through a major advertising campaign in Fortune and Financial Times and Wall Street Journal, New York Times and various other leading journals and magazines, and it will continue to roll out globally in aggressive marketing activities across all Harman brands.

In the professional sector, Harman continues to support leading venues and entertainers while driving customer awareness that carries across to our other businesses. An estimated 70 million visitors are experiencing Harman at the current Shanghai World Expo, where we serve as an official sound partner and our professional audio systems are installed at all of 25 Expo venues. The professional divisions also introduced a record high 100 new products during the fiscal year and several of these products was featured in the very first ever, in the industry, the first ever application of the Ethernet Audio-Video Bridge or which is generally known as Ethernet AVB, for integrated streaming of audio and video. That is going to change the industry we believe. We expect additional opportunities for the professional divisions from our recent acquisition of Selenium in Brazil which makes Harman the market leader for professional loudspeakers in this fast growing region.

The Harman consumer division recently opened a new global product development center in Shenyang, China; putting these operations in close proximity to major suppliers, contract manufacturers and the fastest growing consumer markets. The division also recently appointed China's leading multimedia distributor to support its growth strategy in China. Harman consumer division introduced also record high last five years, 88 new products during the fiscal year, supported by brand advertising and websites of more than 25 languages and new social media platforms; so exciting things to happen.

Looking back to these initiatives, you will again see each of the four strategic pillars that we shared with you earlier. That is number one, including cutting-edge development of smart infotainment solution; number two, increasing market penetration of our branded audio; number three, aggressive growth in the emerging markets; and number four, achieving industry's best-in-class cost structure and capital efficiency.

Ladies and gentlemen, I believe that Harman's fiscal year 2010 performance validates our strategy and positions our company to execute more profitability on its expanding large awarded business and other backlog. We will continue to drive for continuous improvement and we are imagining among the winners as the global recovery finds its footing and Harman delivers on its strategy for increasing shareholder value.

Before I turn it over to Herbert let me recap our position for fiscal year 2010. All key performance indicators are improving. We posted an increase of 18% in sales for the full year and improved profits by more than $200 million. Our automotive order backlog of more than $12.2 billion to be precise $12.2 billion, provides a healthy revenue stream for the next several years and solidifies Harman's position as the market leader in our space.

Our executive innovation programs continue to drive new and comparative replacement wins from major customers and gain market share. We grew our sales in Brazil, India and China or BIC countries, BIC, by 330% to a $0.25 billion level. We are rapidly building full capabilities in these emerging markets to continue to outpace our competition and the market growth by itself.

Our landmark STEP Change program is delivering as expected and both, and we remain ahead of target in achieving $400 million in permanent cost and productivity improvement.

Our balance sheet remains strong and our cash position provides us with plenty of flexibility for the strategic initiatives to create superior shareholders value. I thank you for your attention and I will now ask my colleague 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 goals. To help identifying the specific improvements related to these achievements I will now present a few more details on the financials.

Hopefully, this will give you a better understanding of our developments during the quarter. As mentioned in our previous call, and for the benefit of new investors, most of my financial comments are provided on a non-GAAP basis which excludes restructuring costs and goodwill write-offs. And as usual, you will find a reconciliation of our GAAP to non-GAAP results in our press release which was issued this afternoon.

For your easy of reference, our restructuring charges totaled $4 million during the quarter. We have also reclassified our results to reflect the sale of the QNX business which is now shown in discontinued operations. The estimated earnings per share for QNX is included in our results, would have been an additional $0.02 for the quarter and $0.13 for the year.

I will now focus my attention and the rest of our discussion, focus my discussions on the figures in the results of our continuing operations, unless otherwise noted. Okay, let's start with the top line. In the fourth quarter, our sales increased across all three divisions on a year-over-year basis. Primarily, as a result of improved global economic conditions, but also due to market share gains.

Our sales for the fourth quarter were $851 million which is a 29% increase over the same period of last year. If we exclude foreign currency translation effect, our sales increased 35%. This significant improvement was led by the automotive division which had a 35% year-over-year increase or 43% excluding foreign currency impact. On a full year basis our sales were $3.4 billion which is an 18% increase over the same period of last year or 17% excluding foreign currency impact.

Now, moving on to the production cost area. We reported a gross profit margin of 26.3% from prior to 20.8% than the same period last year. This margin increase was primarily due to higher factory utilization associated with increased sales and improved productivity as a result of our STEP Change, permanent cost saving initiatives.

In the controllable cost area, our SG&A expense for the fourth quarter declined 3.3 percentage points to 22.8% of sales compared to the prior year. Of our total SG&A expense, R&D cost represented 9.8% of sales compared to 12% of sales in the prior year.

Moving on to the bottom line, we continued our profitable trend reporting an operating profit of $30 million compared to an operating loss of $35 million during the same period last year. The operating margin for the fourth quarter was 3.5%. Our net income for the fourth quarter was $21 million or $0.30 per share compared to the net loss of $25 million or a loss of $0.43 per share in the same period last year.

This brings our year-to-date earnings per share to $0.85 for the current fiscal year compared to a loss of $1.23 per share last year. And this excludes QNX as I said earlier.

Our effective annual tax rate for the continuing operation was 17.5% which includes the impact of restructuring expenses and goodwill charges.

I would like to point out that as of June 30, 2010, our total liquidity, which we define as cash, plus short-term investments and available revolving credit facility was $871 million compared to $649 million as of the end of the prior quarter. This increase is primarily related to the proceeds from the QNX divestment and positive cash flow from our operating activities, less cash used within investment activities to complete the acquisition of Selenium.

In closing, I would like to say that we are pleased to report a third consecutive quarter of positive earnings per share and we believe this solidifies our commitment to continuous improvement and a culture of accountability. At this point, I would like to thank you for your attention and operator; we are now ready to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) and our first question comes from the line of Himanshu Patel with JPMorgan. Please go ahead.

Himanshu Patel - JPMorgan

Could you give us some more visibility on the launch timing of the Fiat and the Toyota business in North America?

Dinesh Paliwal

Himanshu, we believe this is an area where our OEM customers are not comfortable at sharing. They would rather tell the market when they have the launch. Its standard cycle as you can imagine it's somewhere between two to three years in terms of release and in the ramp-up.

Himanshu Patel - JPMorgan

Okay and then, Dinesh I know you don't want to give specifics but could you at least tell us which one of the two is bigger in terms of dollars? Is it Toyota North America or the Fiat/ Chrysler again.

Dinesh Paliwal

All right, in the absolute amount, the total order of Fiat Chrysler is larger than Toyota North America. One is for the global scale and one is for North America as you recall, consider.

Himanshu Patel - JPMorgan

Okay, that's helpful and then before we leave auto, I just wanted, maybe I missed something but I noticed you stated on slide 14 that the backlog grew from $8.8 billion to $12 billion. I thought the old number was $10 billion. Was that just a definition issue?

Herbert Parker

No. The last one you would have seen would have been $10 billion. When we did our equity raise at the time at the end of fiscal year '09, it was $8.8 at that time and you remember we had logged a couple of other new orders which brought it up to $10 billion.

Himanshu Patel - JPMorgan

Oh I see, okay, and then lastly on the current quarter, you mentioned two items procurement and logistics costs. It sounds like you had the expense in more on that. Which division's margins did that specifically affect and then relatively on the consumer business it sounds like margins were quite soft this quarter. Was there thing, any sort of aberrations there this quarter that are worth kind of highlighting?

Dinesh Paliwal

Yes sure, the two points I would take the most of the additional cost we incurred for logistics and for buying additional allocation, these costs were in automotive sectors and on a quarter basis, we could even give you a bit more highlight. It would easily end up about 1.5% to 2% basis points of EBIT for the automotive business in fourth quarter alone, so it's a significant amount. And when you talk about consumer in the fourth quarter, you see the impact of SG&A. We have started investing in marketing and also in brand building as well as invest as infuse. You heard me say 25 languages, 25 countries. So pretty heavy investment, because we feel that there is a great deal of interest in emerging markets but they don't know how to buy our product and where to buy, so investment in marketing and sales activities.

Himanshu Patel - JPMorgan

Those two are helpful but can you talk a little bit about how sustainable those elevated costs would be? Should we think about the sort of 1.5%, 2% pressure on auto as continuing for a few more quarters and what about on the elevated marketing momentum in consumer?

Unidentified Company Representative

Let's take automotive first. No, we do not believe that this is a sustainable cost. We believe it was a one-off in fourth quarter. We are putting lot of pressure on our large component suppliers in Japan, Germany and United States and you know who these culprits are. They are good partners, but right now they are having problem ramping up their lines. But we believe based on their commitment that most of the logistics and delivery issues are behind us so we should not have to incur additional cost in supply-chain in automotive.

For our consumer or actually I would say for the whole company, you should expect us to start to spend some healthy money in marketing our products and brand because we have determined the fairly solid correlation when we market ourselves we see gain in our top-line as well as in our gross profit, and we are seeing a significant increase in the hit rate on our web pages as well as the retention of the web pages and our distributor supply fleet, so you should expect that to go up. But that's a very good investment. It's a payback within a year or so.

Operator

Our next question comes from the line of Chris Ceraso with Credit Suisse. Please go ahead.

Chris Ceraso - Credit Suisse

I've got a few things. Maybe first just a couple of housekeeping items what was the story on the tax line? Was there some adjustment to get the full year at your desired rate and if so, what sort of tax rate should we assume over the next few years?

Herbert Parker

Yes the tax was in line with full year rate. We had a number of our foreign benefits that we are able to realize in that particular quarter. But what we expect long term is slightly less than 30%.

Chris Ceraso - Credit Suisse

So I don't follow that Herbert. If the full year came out at about 17.5% and you made adjustments in the fourth quarter to get there, why is it going to close to 30% next year.

Herbert Parker

We will probably have more profitable. We will have a higher tax rate. But right now as you can imagine the normal rate is much lower so the big influence of some of the tax benefits we have in our foreign subsidiaries.

Chris Ceraso - Credit Suisse

Next question, can you quantify how much of a hit to EBIT foreign exchange was in the quarter?

Herbert Parker

It was minimum there. We have got that in the earnings release. We show the translation for both mark, very small is for the quarters itself.

Chris Ceraso - Credit Suisse

On the 12.2 billion, the new cumulative backlog number; two questions, one, how much of that represents replacement business for existing programs that you support and two, what is the terminal date on this is, is this through 2020 or 2021, or what's the timeframe here?

Dinesh Paliwal

Okay, first of all, new versus follow-on. New business into $12.2 billion is roughly about 30%, which is consistent with what we have said. However, if you take the subset of what we've announced today, $1.8 billion, pretty large portion of that business is new, that is a comparative replacement at Fiat as well as Toyota North America. But all-in-all, for the total backlog 30% new, 70% follow-on. Terminal value, now at this point we see most of these arrived going until 2017-18 timeframe.

Chris Ceraso - Credit Suisse

I don't have my model in front of me, but can you, what was the lowest total operating profit adjusted in 2008, in fiscal '08?

Herbert Parker

Just a second Chris, fiscal '08?

Chris Ceraso - Credit Suisse

Yes.

Herbert Parker

Okay.

Chris Ceraso - Credit Suisse

Right. So that's the base year for your step change program, right?

Herbert Parker

That's correct.

Dinesh Paliwal

Right.

Herbert Parker

4.7% was the adjusted rate.

Chris Ceraso - Credit Suisse

Okay, so it's about $200 million positive in profit, right?

Herbert Parker

Yes.

Chris Ceraso - Credit Suisse

Help me bridge this gap and you've gone from 200 million in profit in '08 to $116 million in 2010. You've cut cost by $350 million. So, maybe just to mention broadly the factor that explain their progression. I mean lower volumes has [rubs] in profitability. What about price compression, lost business that E-Class for example. Can you maybe give us some of the big buckets that get you from the $200 million profit to $116 million while cutting $350 million in cost?

Herbert Parker

It's a very good question Chris. Basically we are losing about roughly around $300 million in volume and we are losing around $170 million in annual pricing that we give every year, but of course we make profit quite a bit of that through our supply chain management. But those are two large buckets in the volume as well as annual price reductions.

Chris Ceraso - Credit Suisse

And those were profit figures right not revenue figures?

Herbert Parker

Sorry.

Chris Ceraso - Credit Suisse

Those were profit figures, right not revenue?

Herbert Parker

That's correct. Those were profit figures.

Dinesh Paliwal

But Chris you understood, those two are the reduction from $199 million but then we had $350 million in STEP Change and we also have some supply-chain management savings. In addition to STEP Change so you those four buckets that will bring you from $191 million to $161 million.

Operator

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

David Leiker - Robert W. Baird

On slide 13 where you have the chart that shows lots of new programs, it looks like in fiscal year 2004 there's three new boxes there. Is that Fiat, Chrysler and Toyota North America?

Dinesh Paliwal

Fiat, Chrysler would be considered one and the Toyota North America would be considered another one.

David Leiker - Robert W. Baird

Then the BMW must be the third one.

Dinesh Paliwal

Yes, that is correct.

David Leiker - Robert W. Baird

What should we expect to see for SG&A and R&D ramp up ahead of launching those but relative to where your spend is today/ There is some contacts you can give us for that.

Herbert Parker

We expect our SG&A to still stay in the same level of 2010 if not better. We don't expect it to go up and the same for R&D. We've showed you that our long term target is 8% so we don't expect to see one of those numbers to increase as a percent of sales.

David Leiker - Robert W. Baird

With where you finish the full year or where the first quarter finished.

Dinesh Paliwal

Finished the full year.

David Leiker - Robert W. Baird

On the construction side, you continue to do a fantastic job there, pushing the margins higher there. What's the limit on that?

Dinesh Paliwal

David, we have talked about that and I am glad you are asking questions on professional, that's a great business. We believe we have some more room to improve the profitability of this business while we continue to grow and the reason I say so with conviction because professional market is highly fragmented. We are the largest player in this business and now we are decisively going after smaller players and also since we have the total system approach and we are selling the value of the total system approach to many contractors are turning their attention towards us.

Number three, emerging market businesses growing very rapidly, especially all the digital, professional audio systems are being implemented or installed in China, and Russia, and Brazil and India, and we have much in a role to play there and by us investing in local organizations, which we are today we have 1,200 people at Harman level in China alone. So that is going to help us expedite gain market share gain while we continue to inch on competition in our home market like US and Europe. So, bottom-line is we are driven to drive the top-line while we still believe we have room to improve the profitability of professional business.

David Leiker - Robert W. Baird

Okay and then lastly on the electronic component costs. Our analysts who follow that space travels to Asia monthly. We recently came back and downgraded the stocks because the lead times are shortening. Have you seen that at the end of the quarter that those lead times are better now than what they were at the beginning of the quarter?

Dinesh Paliwal

Not at all. In fact, you see, it depends on what you are talking about. There are components, there are lead times for 16 weeks now. Lead times have gone up to 20 weeks. So we are talking silicon and microchip, microchip controllers, those are in great demand David and what's driving the demand curve higher than ever is the smart phone devices. The growth of HTC Smart Phone Evo, iPhone 4G Phone and various other devices, so they are sucking up the demand and the wafer producers in Japan, Germany and US are scrambling to ramp up the lines. They actually slowed down or even brought down their lines faster than they should have. So that's our issue. In our case we had actually more capacity than customers demanding right now, because we have the same capacity or more what we had in 2008 when we had $3 billion worth of automotive business. So we are constrained with our supplier and we are using the leverage of the large OEMs to put pressure on microchip suppliers and gain benefit on that. So, end of the day, we believe the cost is a small piece because we're investing in our long-term relationship with Audi, BMW, Mercedes by being uniquely in front of all others and fulfilling their production requirements while others are struggling. So having said that, I don't know where you heard the cycle times are reducing, we hope that would be the case in coming quarters, but in fourth quarter, certainly not.

Operator

(Operator Instructions). And our next question comes from the line of Adam (inaudible). Please go ahead.

Unidentified Analyst

I just have one quick one, wondering if you could give us any update on how things are going with Audi, Volkswagen, thanks.

Dinesh Paliwal

Things are going good. Actually the co-Presidents of the business and myself we were with Audi 10 days ago, it's the gentlemen that's sitting next to me, and we had a very good discussion not only for the current programs which we are delivering right now for all Audi lines for infotainment but we had discussion for the future and at this point I can say discussions are progressing very well.

Operator

The next one comes from the line of Michael Novak with Frontier Capital. Please go ahead.

Michael Novak - Frontier Capital

So my question is how does the Chrysler-Fiat win combined with the Toyota win impact your longer term goals for your growth rate as well as your operating margins.

Dinesh Paliwal

It just fits in our strategy. I am glad you asked. We launched our next generation scalable infotainment platform which we were so proud that we changed the rules of the game by developing it ourselves absolutely best-in-class and our very first order we won, that was with Toyota in Europe and now we won orders from Fiat, Chrysler and also Toyota, North America. So it's a fantastic news and what it does frankly speaking, when my colleague Herbert and I gave you guy's guidance on April 29. Now we see that these awards we have and the potential upside to our revenue as well as our bottom line for fiscal '13 and of course all the following years because fiscal '13 these things will be ramping up, but they start to get to the full size in '14, '15, '16, so we are going to enjoy some healthy growth with very good margin business we have just won.

Michael Novak - Frontier Capital

And how should we think about the incremental flow-through on this business given that you've already put the R&D in place to develop this mid-level infotainment system?

Dinesh Paliwal

See that's the beauty of this development and I wish we can expedite the whole industry to reform and transform the way we are trying. What the idea behind is that this next generation, scalable modular system we launched, idea was that it should give us a bench which is 60%-70% well decisive, well developed, in place, not needing any debugging, then as a patient to the needs of the OEM is what we will do and that's what we will do for these guys.

Now that is an incremental cost but that is nearly 20% of what we would have otherwise spent in the traditional model which we used to use in the past and our competition still does. So we are going to be saving lot of R&D dollars and we are going to bring speed. So traditionally, we used to take three years to develop, now with this new schemes approach we have, we will do that in 12 months, the customers are ready. But generally customers need probably 12 to 24 months, that's why our revenue stream would come little later but faster than traditional model would have allowed.

Michael Novak - Frontier Capital

So when we model the incremental contribution, we should take our assumed gross margins with the product line and multiply it by 0.8 and that should approximately be the contribution margin?

Dinesh Paliwal

I won't calculate like that, but still I don't quite know and understand what you are doing but maybe when we sit together one-on-one…

Michael Novak - Frontier Capital

Okay, with a 20% development cost, what it historically would be?

Dinesh Paliwal

I'll reiterate, R&D is one piece of the total cost right? First of all, R&D is a one piece of SG&A, then we have manufacturing cost, we have logistics, we have other cost associated. So R&D is a big winner within our product. We will have a high efficiency in R&D, but all other aspects also need to be considered when you calculate like the way you are doing.

Michael Novak - Frontier Capital

Okay and then my next question is on the consumer business. My understanding was that I understand you are meeting additional investments in marketing but if that business was going to be run so at least be a breakeven level?

Dinesh Paliwal

You got it right. Under our regime we don't like anything whilst making and we had some struggle due to economy and some problems but I think the worst is behind us in consumer. We hit the lower volumes by design because we wanted to get our R&D processes, our innovation processes, our distribution processes, right and we have those in order and from this point Don, we're going to have only profitable growth. And the marketing benefits on the Harman brand not only helping consumer but helping great deal of branded automotive audio business which is a big chunk of our revenue and is also very healthy business. So to sum it up, consumer business would be profitable and it is profitable today nearly 1% EBIT line. Today we are happy, we made a big turnaround from fiscal '09 to fiscal '10 and you should have absolutely expected to grow further in profitability as well as top line.

Operator

Our next question comes from the line of Himanshu Patel - JPMorgan.

Himanshu Patel - JPMorgan

Just two follow-up questions, you guys mentioned that the temporary logistics and procurement cost pressures put about 1.5 to two percentage points of pressure on that margins for that division. That would imply that the auto division excluding that did about 7% margin this quarter and I am just looking sequentially, the revenue for the divisions are approximately the same as what they were in the March ending quarter when margins were about 4.6% and it seems like on an underlying basis, they sort of increase substantially to somewhere around 7% if you were to exclude the temporary pressures.

Can you just talk a little bit to that? Was there sort of a fundamental improvement in the business either because of mix or cost savings from the March quarter to the June quarter or is it perhaps maybe March had some temporary one time items that were compressing margins back then.

Dinesh Paliwal

I don't think we had any one time items. I think what explains Himanshu I think you already answered is 1.5% to 2 percentage points for the quarter, for automotive division was incurred in additional costs for flying people so that they can carry these electronic components in the suitcase, I am not joking or spending more money in making sure we get the allocation no matter what, even if the expense of some other company and we did secure that, so that was the cost and I don't expect that to carry on in the next quarters. So if you add that back, hypothetically we improved the margin even on sequential basis.

Right now its almost flat which doesn't make me feel bad about because we know what we did and we did right thing by investing this to make sure our customers, our OEMs could produce as many cars as they wanted to produce.

Himanshu Patel - JPMorgan

I agree with that assessment but that's my question though. There seems to be a substantial underlying improvement in margins in the auto business March to June quarter yet the revenues for the division were flat sequentially. So I am just trying to understand what changed to cause that improved underlying margin?

Dinesh Paliwal

That change kicking in, in all areas. The number of things happening, we have now much better global footprint for our R&D engineering. We have some 250 people working full-time on automotive programs in Bangalore, India Research Lab. We have 150 people in Shanghai working on so that the cost savings we start to see more and more as we are ramping up and also manufacturing savings. We have been working hard for almost 2 years to migrate and actually add more capacity in Hungarian plant and in Shanghai plant and also in our Mexico plant. So everything is helping. Its all coming in. In addition, we also have some supply-chain savings coming in, if you leave the logistics cost out for a second. And Herbert do you have something else to add here?

Herbert Parker

Yes, Himanshu, also please not that we are up about 7% when you exclude the foreign currency pack but we've always there, we get a pretty good bomb.

Himanshu Patel - JPMorgan

You mean top-line?

Herbert Parker

Yes, top-line in automotive when we increased revenue. Also you may recall back in Q2, when you exclude the one-time items we had, we were pretty close to that 7% at that time as well. So when we get a pretty good revenue, we get great leverage in automotive division.

Himanshu Patel - JPMorgan

Okay and then, just the last question, maybe I'm just kind of reading it a little bit to strangers. I am just noticing the banners on slide seven and slide eight, at the top you mentioned, double-digit ROS. Just going back to your late April Analyst Meeting where I think the margin was just sort of, if I remember 7% to 10%. Was that an intentional piece of communication that you are doing here or am I just kind of over-reading it?

Dinesh Paliwal

No you are not over-reading. In fact, it's the slide from the same quarter last year. Last quarter we had the same slide Himanshu, if I recall correctly. In fact, we have said almost two years ago that our goal is to achieve double-digit return on sales and that has not changed. Unfortunately this is unprecedented recession that timing got pushed we would have achieved that if we didn't have this once in a life time for me at least, the recession. We would have achieved in fiscal 11 double-digit. So now when we give you the targets on April 29, we say its seven to 10. We say its seven meaning if really things get worse, 10 meaning if this is the norm we are living in we should achieve 10 if things continue to be what we felt they are.

Now, I mentioned to you earlier, with the new orders we have especially for the next generation scalable and hopefully if schedule perhaps would be hold and I'm not at the liberty to say the timing. We do have a potential upside for the top-line as well as on bottom-line. So we might actually achieve slightly better result if that potential upside comes in. But definitely for the out-years beyond the guidance we have given, we expect that upside to come in.

Himanshu Patel - JPMorgan

Okay, and then last housekeeping question for Herbert on the income statement. I notice the miscellaneous expenses were $2.5 million. That's a little bit higher than we think quarters in year ago. Was there anything funny in that line item?

Herbert Parker

No. The FOREX, the foreign exchange had an impact in that. That's a piece of that. And the hedging, we did a bit more hedging than normal due to the volatility going off.

Operator

Our next question is a follow-up question from the line of Chris Ceraso with Credit Suisse. Please go ahead.

Chris Ceraso - Credit Suisse

I have just one quick follow-up on the Toyota program. I am not sure if you said this explicitly but just to confirm, is this also on the new scalable architecture or does the Toyota business in North America also include some higher level, more traditional systems.

Dinesh Paliwal

It is based on our next generation scalable platform. We are not at the liberty to elaborate more what the feature functionality would look like but we will do the necessary adaptation to meet Toyota's requirements in time.

Chris Ceraso - Credit Suisse

Okay, and then both of these, the Toyota and the Fiat, Chrysler, once they are fully ramped in the next two three years, can you tell us what you are expecting the revenue to be on an annual basis once they are fully ramped?

Dinesh Paliwal

Well I would say you can do the math. I mean once you're fully ramped up; first year you are ramping it up but second, third, fourth years, the lifetime you can divide that by 3 to 3.5 that's what the number would be.

Operator

Our next question is a follow-up question from the line of David Leiker with Robert W. Baird. Please go ahead.

David Leiker - Robert W. Baird

I just had one follow-up item. As we look at the order that you announced with Fiat, Chrysler, just I think the answer is obvious but just explicitly ask it, is that the mainstream OE you are talking about that you were looking to get an order permit when you did your Analyst Day.

Dinesh Paliwal

That is correct, David. But I will also remind all of us on the call, I will also ask the question that your guidance does it include the awards which we have not announced and we said categorically that our guidance did not include awards we have not secured yet because we don't count chickens until we have one. So these awards are obviously outside of our guidance that's why I keep bringing up that we have potential upside, once they start to ramp up.

David Leiker - Robert W. Baird

We live in a world that what's next year? I think you can talk about what's next?

Dinesh Paliwal

I think you should leave something for us to talk about next year.

David, I'll tell you one thing, it is exciting I hope you see and feel in our tone; a number of things happening and you are seeing we are winning competitive wins here. We are doing some incredible innovation work here. We have got team fully aligned here. Pipeline is rich. I'm out our CTO defies it. So a lot of things happening right now. I think we are on a good path here.

Operator

(Operator Instructions) Our next question comes from the line of Darren Campbell with George White Associates. Please go ahead.

Darren Campbell - George White Associates

Hey just two quickies; one, can you help me find the slides that you are referencing?

Dinesh Paliwal

Sure. Darren, actually we put these on the Business Wire as well as on our company's website, so I'm sorry if you could not locate them but they are on the Business Wire. They were posted around 4.10 PM this afternoon.

Darren Campbell - George White Associates

Just so you know, I'm still not seeing them on your website and I've emailed a couple of people that are in the same.

Dinesh Paliwal

Did you go to the Harman home page?

Darren Campbell - George White Associates

You know what, let's talk about it after that.

Dinesh Paliwal

Yes. Sure.

Darren Campbell - George White Associates

I'm sorry to mention it in case there was a technical glitch. But the other fundamental question I had, I just want to confirm what you just said. If you talk about the $1.8 billion in incremental revenue associated with these two awards, those programs have a life expectancy of 3 to 3.5 years, is that the divisor?

Dinesh Paliwal

It's typically four to five years life cycle for these awards, for typically all awards.

Darren Campbell - George White Associates

Okay, so what was the 3 and 3.5 figure that I thought you said?

Dinesh Paliwal

I did a quick math because we are ramping up during first year, all right. So first year goes away, then you have got two, maybe three, maybe four depending on the OEMs. So give and take you are talking about four to five years. The full ramp up happens in second year. First year they are ramping it up. So if you add another 3, 3.5, 4 years, that's the life cycle is.

Darren Campbell - George White Associates

Okay, because we're all obviously trying to get to the same place as we're trying to figure out once it ramps, what the revenue is and nobody really knows exactly what's in your top relation? Did you get it?

Dinesh Paliwal

Without getting into the area there our customers would not be happy. The way it was, the first year of ramp up, you are talking about 25%, 30% of the full scale volume, then second and third years are really the adulthood of the programs. They run really full speed. Then the fourth and fifth year the stock too declined because by then they are already either doing some sort of a refresh or there is a new technology being worked on. So there is stock to do some other programs with that.

So the second, third year are the best year symptoms of revenue. That's why these days' life cycles are starting to shrink. It used to be seven year life cycle five, six years ago. Now life cycles are running four to five years. More and more we predict technology leader will drive ourselves the lifecycles to three years, because technology is moving so fast, we will push them and that would work to benefit because if we bring to them new technology online, upload solutions then we have more revenue to gain and we can launch those. So right now four to five years for second and third year is the full, so if you have a full year revenue on a $1.8 billion program, you might be running $500 million to $600 million revenue when fully ramped up. The declining starts with $400 and go down to $300 million something like that. Pretty cloudy (inaudible)

Operator

We are not seeing any further questions at this time.

Dinesh Paliwal

All right give us a couple of more minutes, then we can bring it to closure because we still some 90 participants listening and digesting. You can ask one more time Nancy, announce if there are any other questions.

Operator

Very well sir. (Operator Instructions). At the moment we still do not have any more questions.

Dinesh Paliwal

All right Nancy. In that case I would like to say a few concluding remarks. First of all, I would like to thank you all ladies and gentlemen for taking time to listen Harman's fourth quarter and full year earnings call. I am very proud of that. First, our team has made (inaudible) in this past year. We took the defensive steps necessary to weather an unprecedented economic cycle while keeping on the offence with innovation, execution and continuous improvement and that has paid off pretty handsomely and we're just beginning I think in my view. The caliber of our management team has improved dramatically. We have the team which is robust and veterans in this company from just a couple of years ago and their unrelenting commitment to Harman's success is very clear. Our employees are energized with the progress we are making and they are embracing the new performance culture with confidence. As always, I recognized, my team recognized that much hard work remains and we are prepared to complete the actions that would completely transform our company to truly best-in-class and with that, I like to thank you all for your attention and wish you a pleasant day and happy investing.

Operator

Ladies and gentlemen, that does conclude the call for today. A replay of this call will be accessible for 90 days starting at 6.40 Pm Eastern daylight time today to November 4th. To listen to the replay, simply dial 1800-633-8284, toll free in the US or 1402-977-9140 international and enter access code 21477075. In addition, replay information will be available at approximately 6.40 pm today via Harman's website at www.harman.com. This concludes Harman's fiscal 2010 fourth quarter and year-end earnings call. On behalf of Harman, thank you very much for your participation. You may now disconnect.

Dinesh Paliwal

Thank you Lincy.

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

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

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

Source: Harman International Industries Inc. F4Q10 (Qtr End 06/30/10) Earnings Call Transcript
This Transcript
All Transcripts