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Harman International Industries Inc. (NYSE:HAR)

F1Q 2012 Earnings Call

October 21, 2011 11:00 am ET

Executives

Dinesh C. Paliwal – Chairman, President and Chief Executive Officer

Herbert K. Parker – Chief Financial Officer and Executive Vice President

Analysts

Himanshu Patel – JPMorgan

Christopher Ceraso – Credit Suisse

David Leiker – Robert W. Baird

Adam Brooks – Sidoti & Company

Michael Razewski – Douglas Lane

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Harman’s Fiscal 2012 First Quarter Earnings Call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded Friday, October 21, 2011. I would now like to turn the conference over to Dinesh Paliwal, Chairman, President and CEO. Please go ahead.

Dinesh C. Paliwal

Good morning, ladies and gentlemen, and thank you for joining the Harman's first quarter fiscal 2012 investor and analyst call. I’m joined in Stamford today by our Chief Financial Officer, Herbert Parker, and our Vice President, Investor Relations, Robert Lardon.

In our earnings release published this morning, we shared with you positive financial results making it eighth straight quarter of year-over-year improvement to the top and bottom line.

Our sales increased 26% and our earnings per share 72% up. Operating income was up 74% and our total liquidity stands at $1.2 billion. Our last 12 months EBITDA was $366 million or 9.2% of sales.

Regardless of current market dynamics, we remain laser focused on executing our growth strategy supported by four key pillars growing smart infotainment, growing car audio, growing in emerging markets, and getting our cost and capital structure right.

We are pleased to report that our infotainment and audio backlog remains at as record high $14.5 billion, with over 40% of our infotainment backlog in higher margin scalable systems.

We are winning new car audio orders and taking shares from our competitors across the world.

Building on last years momentum in BRIC countries were we grew 68% sales in last years fiscal year I’m pleased to say, we are continuing to strength and grow sales by 91% in BRIC countries in this past quarter.

To meet this rising demand, we have added capacity and expand our distribution channels were necessary, while continuing to drive cost out of our global manufacturing footprint. We have also created scalability and flexibility to deal with any significant fluctuations and demand.

Overall, we continue to promote a continuous cost management culture by launching new internal cost management initiatives following our very successful STEP Change permanent cost-savings program, which we concluded last year with astounding $434 million permanent cost reductions.

I am very excited to share with you that we have launched a marketing campaign in North America to be expanded into other key markets. This is to increase automotive audio take rates, home audio and multimedia sales. We believe that this campaign will also support growth and market share gains across our entire business. We continue to innovate and maintain a rich pipeline of technologically advanced system portfolio and we have hosted several technology days with our major customers in Europe and Asia. Many of you will be joining us next Wednesday, October 26, for our Investor and Analyst Day in Nashville, Tennessee.

At this event, you will have the opportunity to witness Harman Technology demonstration and get further insights into our innovation pipeline. In addition, we will update our mid-term 2013 guidance and also provide guidance for fiscal ’12. For those of you not attending, a press release will be issued on Monday, October 24, 2011 with call in details so that you can hear it online as well as after the call is completed.

During our last earnings call on August 10, I informed you of the $85 million cost impact identified due to the sharp rise in cost of neodymium magnets. With increased sales, the growth impact of neodymium has risen slightly to $90 million while I look forward to updating you on the progress of our cost mitigation efforts at Analyst Day next Wednesday. I’m pleased to say, we have made a lot of progress.

And it is trending in the right direction, because of our focus on operational excellence and our ability to pass on cost increases.

Ladies and gentleman, we are in a new growth phase at Harman. The strong footholds in each of our BRIC countries, further diversifying it and expanding our growth prospects. Our operation realignment will better enable us to focus and make measurable improvement on the profitability of our infotainment business and we are aggressively working on increasing our backlog of scalable system.

As I said, we are excited to have launched a global marketing campaign featuring some of the world’s most prominent music artists. To support further penetration of our five-year plan across our business lines, in particular car audio tape rates, which is a very healthy business.

We continue to invest in innovation and capacity expansion to take advantage of global opportunities as well as these economic headwinds. These initiatives executed by dedicated and committed Harman employees worldwide, about to say, have resulted in eight consecutive quarters of improvement to both our top and bottom line.

I will now ask our Chief Financial Officer, Herbert Parker to provide a closer look at our financial results.

Herbert K. Parker

Thank you, Dinesh, and good morning to everyone. We are very pleased to have begun our new fiscal year with a solid first quarter. We were able to execute well, I guess, our opportunities during the quarter despite the cost pressures that Dinesh had reviewed and achieve very good year-over-year improvement.

Now, I will review a few of our highlights from the first quarter. And as always, note that my financial comments are provided on a non-GAAP basis, excluding restructuring cost.

The reconciliation of our GAAP to non-GAAP results is included in the release. But for your convenience, we took a $2 million charge to restructuring expense this quarter compared to the $3 million credit during the same quarter last year.

Okay, let’s first discuss the revenue line for the first quarter. We grew our quarterly revenues by 26% to $1.51 billion, a new first quarter record for us. If you exclude the impact of foreign currency, which did help during the quarter, we grew at a rate of 19%. Each of our segments contributed to these increases versus the prior year. Though Infotainment was particularly strong and grew 35% versus last year.

While there is certainly a good deal of sustainable growth in these numbers, we also benefited from some pent-up demand following the production disruption, caused by the tsunami earthquake in Japan. This quarter also included a short-term capture of some business from a competitor, who was not able to meet demand during the quarter.

Moving on to the gross margin; our first quarter was 27.5%, up 80 basis point from last year’s 26.7%. All of the gross margin improvement came from our Infotainment business, where we increased gross margin by more than 500 basis points. This was a result of a range of productivity improvement, which has lowered our count rate.

The impact of these initiatives was also amplified as a result of high level of sales growth in the quarter increasing the leverage effect. As Dinesh talked about earlier, gross margin in our other two segments; Professional and Lifestyle came under significant pressure from high cost of neodymium magnets. This has a net impact of $8 million or 270 basis points for the Lifestyle Division and $1 million or 70 basis points for the Professional Division.

We will continue to work to minimize the impact of this on our profitability, and as Dinesh noted, we will update you on our neodymium actions and financial projections during the Analyst Investor Day next Wednesday.

Let's move onto the SG&A area, where we can inform you that our consolidated SG&A for the quarter was very good. We added $32 million in cost to achieve the $240 million of sales growth. The STEP Change program has really helped instill ongoing cost discipline in organization and become much more efficient; organization has become much more efficient I should say. And combined with the strong revenue growth, our [push play] efficiency enabled us to reduce our expenses by 170 basis points to 20.3%. As a result of the gross margin increase and the SG&A expense rate decrease, our operating margin improved quite nicely, growing to 7.3% from the 4.8% of last year.

Now moving onto the net income for the quarter; we reported $49 million or $0.69 per share compared to net income of $25 million or $0.35 per share in the prior year's quarter. And I'll note that effective tax quality rate was 23.6%. Our cash and cash equivalent balance decreased by $231 million in the quarter, while still bringing our total liquidity to $1.2 billion at the end of the quarter. The major items impacted the cash during the quarter was increased net operating capital of $182 million, which we needed to support higher sales, the acquisition of the MWM, which was about $70 million, and of course we have foreign currency translation reduction of $56 million.

I would like to point out as a percent of annualized sales (inaudible) our net operating capital was reduced by 170 basis point compared to the first quarter of the prior year. Now just to remind you, we do have a disciplined process for deploying our capital and we will continue to evaluate alternatives. What is – it is an organic growth investment and acquisition or a share buyback.

We remain most interested in investing in organic growth opportunities, such as building our footprint in the BRIC countries, where our long-term returns are the most promising. We believe as we saw with the Selenium acquisition in Brazil and MWM in United States that strategic acquisitions can accelerate and complement this strategy.

In addition, we do remain committed to provide in those sustainable dividend stream to our shareholders and our Board of Directors continues to evaluate share buyback opportunities along other strategic options.

As I noted when I begin, this was a strong start to the new fiscal year for Harman and our eighth consecutive quarter of year-over-year improvement at both the top and bottom line. We maintain a strong balance sheet with excellent liquidity and as a result, remain in position to take advantage of a poor range of strategic options.

Now, just briefly, I’d like to note that in addition to our quality results, we provided a full year’s work of quarterly financial data for our new segments as part of our press release. This should help you to better understand the business as we are now running it.

With that said, operator, we are now ready to take your questions.

Operator

(Operator Instructions) And our first question is from the line of Himanshu Patel with JPMorgan. Please go ahead.

Himanshu Patel – JPMorgan

Hi, good morning guys.

Dinesh C. Paliwal

Good morning, Himanshu.

Himanshu Patel – JPMorgan

A couple of questions, the temporary substitution business that you guys talked about in the press release on the Infotainment side. Can you put some dimensions around how much that may have benefited Infotainment revenue and margins this quarter?

Dinesh C. Paliwal

Himanshu, it was not big amount, but I would probably rank it below 5% in terms of revenue however it created a pretty nice leverage almost 100 basis points at the bottom line.

Himanshu Patel – JPMorgan

100 basis points on – for the whole company or for...

Dinesh C. Paliwal

For the Infotainment business. Because the speaker voice in Infotainment business.

Himanshu Patel – JPMorgan

And Dinesh is that stuff really just a one quarter issue or could you see some spillover in the current quarter as well on that?

Dinesh C. Paliwal

It may, we don't know how long will it go as we – we’re preparing for the call, we’ve still had some activities going on, on that account?

Himanshu Patel – JPMorgan

Okay. And then two more questions, the Lifestyle division saw some pretty respectable growth as well, I think there's about 15% ex-foreign exchange. I know there is double-digit order production growth, but I think the way you defined that segment now, I think almost half of 40% or so of that is the consumer audio business. So can you just give some color beyond what’s happening on the growth rate of that unit? Was it driven by the by the branded audio side or more by the consumer side?

Dinesh C. Paliwal

Well, first of all, let’s just make it clear that eight million in the quarter came from MWM sales, which is not so big number, but I still wanted to just clarify. Second, we had started seeing some good pick up from our Japanese auto audio business, which has been, you know first it was the quality issues and then came tsunami. We are still not at pre-quality issues level, but we are definitely almost at pre-tsunami level. So that has been a very nice pick up in car audio side.

Himanshu Patel – JPMorgan

Okay and then last question I appreciate the comments on the balance sheet. Can you just give us a little bit of texture around the acquisition pipeline? How activities are the efforts right now? If you could estimate how many deals are you guys looking at, is it a few or is it over a dozen? And when you think about the gestation period of when these things come through this, should we think about some acquisitions potentially happening this year or is this stuff that you could take few more years to realize?

Dinesh C. Paliwal

Himanshu, thank you speaking. This is really not top of our priority. We do think if we can find the high quality acquisitions small-to-medium size and if it is relatively large and also relative for us, if it is a compiling we’ll definitely take a look at it. But number focus and I said very sincerely is on execution and I hope you all in analyst, some of the best friends who deal with our business, you recognize that it is being a constant continuous work of some 12,000 people who are producers, the result we have it didn’t happen overnight, so I don’t want that culture to be compromised at all. So that’s why have step up a separate team who reports to me directly to look at such pipeline globally. And you know we will look at it, I don’t know whether I can give any timeframe, because we were to do any acquisition, it would be done. We're very comfortable, from the multiples point of view, from the governance point of view, from the management we bring in, we'll not feel any pressure to do any deal ever.

So that's where we are. Do we see something happening next six months? Maybe, but not a whole lot of deals we are looking at. At any given time probably we will be looking at five, six deals. We are very selective and we hope that maybe we can close one or two next 12 months.

Himanshu Patel – JPMorgan

Okay, thank you.

Dinesh C. Paliwal

Sure.

Operator

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

Christopher Ceraso – Credit Suisse

Thanks, good morning.

Dinesh C. Paliwal

Hello, Chris.

Herbert K. Parker

Good morning.

Christopher Ceraso – Credit Suisse

Thanks. Just wanted to clarify the comment about the temporary business that you're doing for a competitor. You said it was less than 5% of the revenues or was it less than 5% of the growth in revenues?

Dinesh C. Paliwal

Less than 5% of the revenue of Infotainment in this quarter.

Christopher Ceraso – Credit Suisse

Perfect, okay. And the 100 basis points, is that a 100 basis points of margin?

Dinesh C. Paliwal

That is correct.

Christopher Ceraso – Credit Suisse

Okay, thank you.

Dinesh C. Paliwal

Sure.

Christopher Ceraso – Credit Suisse

Can you just help us revisit, and I'm sure you're going to go through this in more detail next week, but I'm wondering about the cadence and the ramp up of your new scalable Infotainment business in fiscal '12, '13 and '14. Can you give us a ballpark of how much of that comes on in '12 and '13 and '14?

Dinesh C. Paliwal

Chris, I know you're going to be trying to be with us, but this is where I really hope, if you allow us, we have done a pretty good job in terms of defining year-by-year, bucket-by-bucket margin analysis and backlog analysis. So we plan to go through that detail on Wednesday. That's okay with you?

Christopher Ceraso – Credit Suisse

Okay, understood.

Dinesh C. Paliwal

Thank you.

Christopher Ceraso – Credit Suisse

Have you had any issues with disruptions in chipset, supply or other electronic components because of the flooding in Thailand?

Dinesh C. Paliwal

We saw the news. As we all saw and immediately talked to our head of sourcing and we believe at this point, we don’t have any concern because we have not just the sole source of situation. I think we should be fine.

Christopher Ceraso – Credit Suisse

Okay, good. And then the last question, it looks like even setting aside the Neodymium issues that you’ve had a bit of margin compression in the pro business, can you talk about what else is going on there that’s putting pressure on the margin and is it expected to continue or do you see it bouncing back to call it 15% adjusted for Neo?

Dinesh C. Paliwal

I don’t expect it to continue in this quarter we had is the timing, we as you know are investing in our sales distribution as well as capacity, and I'm very happy that this division is doing it. Because this is where the biggest growth potential comes in emerging markets that is building up a lot of audio infrastructure as an example, the biggest Disney theme park is going to be in Shanghai, and we haven’t lost a single theme park in (inaudible) so imagine, who is preferred. So we have a lot going on and we have to put in investment, infrastructure so that was it. Underlying fundamentals of this business are strong as ever been and is very happy, so I think and from the revenue point of view, we had a couple of delays in booking some of the projects, which we should see in coming quarter.

Christopher Ceraso – Credit Suisse

Okay. So maybe that fix itself pretty quickly, but it would sound like you’re on a multi-quarter growth phase, so there should be some ongoing drag for the growth outlay, is it that fair?

Dinesh C. Paliwal

Well, I think on an average basis we should be continuing and improving this business over last year. I don’t see any reason why this business will not continue to perform as well as it has performed last year or even better.

Christopher Ceraso – Credit Suisse

Okay, fair enough. Thank you.

Dinesh C. Paliwal

Very well, Chris

Operator

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

David Leiker – Robert W. Baird

Hi. Good morning.

Dinesh C. Paliwal

Hi. Good morning, David.

David Leiker – Robert W. Baird

My apologies. It’s Friday morning in my mind.

Dinesh C. Paliwal

I’m happy at Friday morning.

David Leiker – Robert W. Baird

Business from a competitor 35% of revenue, $30 million, you say that the 100 basis points of margin or 100%.

Herbert K. Parker

Hello, David. It’s Herbert here. 100 basis points of margin.

David Leiker – Robert W. Baird

Okay. Thank you very much. Just to make sure. On the balance sheet and the cash flow, there is not a cash flow statement in the release, but as we did through the balance sheet, I don’t think there is about $200 million of cash that was used and I know you work through $180 million in working capital, Herbert.

Herbert K. Parker

Yep.

David Leiker – Robert W. Baird

It looks like a big chunk of that is in other current assets in accrued liabilities. The assets lined up 40 million, the liability numbers down $40 million. Is there any detail or any discussion color you can give us that’s behind that swing?

Herbert K. Parker

You just walked due to pool of P&L, I mean pool of balance sheet cash flow statement, but we’ve mentioned the net working capital midst in the ForEx of $56 million. We’ve mentioned the MWM of $70 million and then you got CapEx, dividends. I could go through if you want to go off-line the whole cash flow statement.

David Leiker – Robert W. Baird

Again, I guess I’m trying to zero in on net working capital number because if we look at receivables, inventory and payables, those seem to be all pretty much in line with the revenue number, thus the other components of the current estimate, current liabilities. In that we can talk about (inaudible) but I just if you had any thoughts right now in terms of the working capital item beyond those trade items?

Dinesh C. Paliwal

Well, I think you can talk to Herbert later, but just to be clear for the wider audience there is nothing of that sort. It’s all receivable big chunk. We had a great sales and we’re going to start to pick lot of cash. We have to do a lot of hard work, but I expect a very strong cash quarter as we are in this quarter now in second quarter. So I think network, net operating working capital will take itself, take care of itself as we go. Right now, if the hump generally happens because of the European holidays what have you. So I don’t see anything more to it David.

David Leiker – Robert W. Baird

Okay, but I’ll follow up on that and as we look at the Infotainment segment, we look at that the numbers are quarterly and appreciate the disclosure on the quarterly segment numbers for last year that is usual. Your revenue there look like they are down about $9 million but the EBIT sequentially is up about $30 million, as it shift at any color you could provide in terms of the – that significant profit improvement actually.

Herbert K. Parker

Sure, let me first I’ll remind you back in fourth quarter we specifically called our $12 million that were one-timers remember $8 million lack of our supply management savings and we talked about 3.7, I’ll call it 4 for the software glitch which we fixed now. So right away you’ve got $8 million is different. The second, yes we’ve told second we’ve told you in the past that we normally start our supply management savings on July 1, where the APR comes on January 1, so you’ve got a pickup there.

And third when you add the big business we’ve picked up from a competitor higher margin that contributed to that margin as well. And finally we continue with our own going of cost saving activities, so that’s the main reason for the improvement from the sequential quarters.

David Leiker – Robert W. Baird

Yes, (Inaudible)

Herbert K. Parker

Yes, I’ll remind you sorry.

David Leiker – Robert W. Baird

Go ahead.

Herbert K. Parker

I will say, and I will remind you that we normally say for those various reasons like the different cost savings versus the costs we gave up for APR, we normally don’t compare sequentially but this is so high in this case we’ll address it, normally is not very relevant but it will in this case and those are the main reasons.

David Leiker – Robert W. Baird

I appreciate that. Thank you. So the competitor of business, if you’re saying it’s a 100 basis and $30 million of revenue, it’s not a very big number that…

Dinesh C. Paliwal

Well, it’s not but we just wanted to be very granular.

Herbert K. Parker

We are very clear David, we said it was less than 5%, I mean 5% or less was the number we gave.

David Leiker – Robert W. Baird

Okay, great. And then one last slide and then I’ll circle back. If you look at the pro business on the revenue line, you know, that’s we’ve been running 15%, 20% revenue gain this quarter up 3%. I know there is some difference there in terms of the segments. If we look at the end market that number looks a little bit weaker than what you historically would have done.

Dinesh C. Paliwal

David, couple clarifications, the last year's number included the full gain of Selenium revenue so if you peel that off we had a very healthy 9% growth in the basic Professional Division business prior to acquiring Selenium, which is great, if we can drive 8% to 9% growth. So having said that, this quarter, as I said, couple of projects from the timing point of view, we couldn’t book the revenue and that will probably come into the second quarter and it should. So I don’t see anything, I think this business is in a pretty good shape, of course, not a hard work but I think we’re positioned well.

David Leiker – Robert W. Baird

Okay, great. Thank you.

Dinesh C. Paliwal

Yeah, you’re welcome.

Operator

(Operator Instructions) Our next question is from the line of Adam Brooks with Sidoti and Company. Please go ahead.

Adam Brooks – Sidoti & Company

Good morning guys.

Dinesh C. Paliwal

Hi, Adam, good morning.

Adam Brooks – Sidoti & Company

Can you talk a little bit about the footprint expansion, you’ve called out the one facility in Mexico that’s up in running and maybe you can talk a little bit about that; and two, in China as well, anything else is on the horizon and I guess what inning do you think we’re in as far as the BRIC footprint expansion?

Dinesh C. Paliwal

Okay, it’s a great question because this is more a strategic. So Mexico facility came online in Carretero, Mexico great industrial belt with a lot of blue-chip [American] manufacturing is happening. So very pleased with this, and this up and running. And this does have, you heard me say in my prepared comments that we have flexible and scalable manufacturing, and this is exactly that example. We can crank it up to add almost 100% more capacity without incurring any significant capital, because we have got to flexible workforce, flexible cell mechanisms to move things around.

Then it comes to China, we have two brand new facilities. They well have actually started pilot production, but full production should start by end of this month or beginning November. One facility is dedicated to our infotainment and audio business, predominantly audio. So BMW, Audi, I mean, Mercedes and Toyota, Hyundai, all of that production for Asia part would have start to come from that factory soon. That's going to be a very good leverage for us from the cost point of view.

Then second factory is dedicated to our professional business. The pro business is growing so much in Asia; it doesn't make sense to shift products around from either our facilities here in the United States or from Mexico.

So between these three factories and existing plants in Hungary, which is a very large production hub for us and Germany and United States, we have tremendous capacity, which we can turn up if we want to without incurring any significant CapEx. I mean, a pretty good position we feel that we have built flexible production increase in our footprint. And also from the cost base point of view, our 60% of our workforce for blue collar manufacturing is in best-cost countries, 40% in high-cost.

And as growth continues in the direction we are driving, I think you will see lot more manufacturing leverage to come, because we will load more capacity in these BCC plants of Hungary, China, Mexico, Brazil and other places.

Adam Brooks – Sidoti & Company

So, if were to lookout, let's say 3 to 5 years, I know two years ago, you broke down infotainment segment as far as percentage of revenue from different regions about 50% Europe, 35% Americas, remaining rest of world, maybe a glimpse 3 to 5 years out given the certain cost structure where that

Dinesh C. Paliwal

Yeah.

Adam Brooks – Sidoti & Company

May be revenue you never (inaudible)?

Dinesh C. Paliwal

Yeah, absolutely. It's a great one for – we always talked five years planning out. So right now we're looking at how would it look like in 2016. My aspiration is that company should be doubled the size by then, but of course, we have to do a lot of work to get there. To double the size, by then, I would expect our manufacturing to be 80% of our workforce to be in best cost countries and 20% in high cost. And I think we are very well underway on that path with the direction we have. And I think the current footprint will allow us to expand by adding more production sales, so we have a lot of [illustrated] in each of these plant, which means the biggest chunk of expense is already done now, all you do is to add production line and add few more ships. Right now, we're running two ships less than Mexico and to begin with in China, we’ll run one or two ships, you can always add ships. So, we will have by 2016, 80% workforce in BCC and not significant capital required for these in the current manner right now.

Adam Brooks – Sidoti & Company

All right, great. Thank you.

Dinesh C. Paliwal

You're welcome.

Operator

We have a follow-up question from the line of David Leiker with Robert Baird. Please go ahead.

David Leiker – Robert W. Baird

Yes, just two number of questions here. Herbert on the SG&A lines, can you just split out what portion is SG&A versus R&D for us in the quarter?

Herbert K. Parker

Yes, just a moment. On the R&D part – R&D was $59 million

David Leiker – Robert W. Baird

Okay.

Herbert K. Parker

Versus $54 million last year, so more or less the same, so 49 in the nominal rate, but if you restated it’s more or less same, it’s pretty much flat.

David Leiker – Robert W. Baird

Okay. And then just to clarify on whether there is anything unusual in terms of accruals and R&D capitalization?

Herbert K. Parker

No.

David Leiker – Robert W. Baird

Or anything like that in the quarter?

Herbert K. Parker

No, we are nominal in this quarter.

David Leiker – Robert W. Baird

Perfect. Thank you very much.

Herbert K. Parker

David, just now we realized the numbers given in infotainment or were you asking for Infotainment owner or you wanted the company?

David Leiker – Robert W. Baird

Well, both of them actually.

Herbert K. Parker

Okay, I’ll give you Infotainment, the company was 86 million this quarter and 76 million last year.

David Leiker – Robert W. Baird

Okay, great. Thank you very much.

Herbert K. Parker

Maybe while you’re on line I want to clarify one thing, because I am not sure we made it clear about the 100 basis points you’re asking, you said as very low. If you split that number that’s a 20% incremental margin improvement. Because one of your basis point is 6 million and on our 30 that you said, but we just say it’s less than 30%. Even if that is 20%. So I am not sure.

David Leiker – Robert W. Baird

Thank you for the clarification. I was putting it on just the incremental from the new incremental business. Thank you.

Herbert K. Parker

Okay. All right.

Operator

We have a follow-up from the line of Chris Ceraso with Credit Suisse. Please go ahead.

Christopher Ceraso – Credit Suisse

Thank you. Two items just I want to clarify on the substitute business, is this like years ago when companies would launch, and your competitor wasn’t ready and you would get the step in, is it a scenario where you’ll step down the vehicle and your competitors step down the vehicle but they have an issue, so you are able to slot in pretty easily, or if that’s not the case, can you explain how you’re picking up the substitute business?

Dinesh C. Paliwal

Chris, it was to do with Japanese Tsunami components scarcity, and this supplier was not able to round up their supply base as efficiently as we have, and I also dare to tell you, I received accolades from German OEMs telling us, how Harman handle the supply situation over the last 12 months way ahead of anybody whether they were Japanese suppliers or European or American. So it was related to that, so that’s why we don’t says its forever, I mean we’ve picked up a good quarter less than 5% as you heard me, and it might continue for few more weeks so whatever we don’t know, may be for a quarter, but we don’t know that.

Christopher Ceraso – Credit Suisse

Right, but is it on a vehicle that you already supplied, so in other words…

Dinesh C. Paliwal

No, no, not..

Christopher Ceraso – Credit Suisse

Is it easy to start you in?

Dinesh C. Paliwal

No, it is not, it was excluding what we do, this was a supplier who could not do, and we had a similar product which they could, because they couldn’t shift cost without this infotainment, so that’s why we’ve picked it up.

Christopher Ceraso – Credit Suisse

Okay.

Dinesh C. Paliwal

There is an incremental beyond our models work we’re doing.

Christopher Ceraso – Credit Suisse

Okay.

Dinesh C. Paliwal

Yeah.

Christopher Ceraso – Credit Suisse

And then can you give us any numbers around the cost of this big marketing push that you’re putting on with the famous people?

Dinesh C. Paliwal

Yeah, yeah, it’s a fairly small number, I think we have said it before, we are a company of pretty conservative because I might beg on to the engineer, so you know I’d like to do a little bit of marketing, but do it from the engineering mind, so which is always very conservative. So we expect probably 50 basis point of our sales to spent in this on an incremental basis from what we did last year, which is about $20 million this year for more than last year, so that’s a pretty small number compared to what other people do, but I think we have a good way to do it, because we leverage every single dollar better because we work with co-market with automakers for audio sales, so that’s why I think, we can stay with that number for your guidance point of view, I mean that’s about, the same incremental 50 basis point annually, you can count on.

Christopher Ceraso – Credit Suisse

And how long do you think this will go on, or does this you can stay at this level?

Dinesh Paliwal

I think it should go on

Christopher Ceraso – Credit Suisse

Yeah

Dinesh Paliwal

Because just like, and running costs, so running costs will be part of SG&A costs as we go forward, but what we think, is going to help us take our takeaways up and that would pay off, so such programs if executed properly and you know our execution style, these paybacks are well below 12 months.

Christopher Ceraso – Credit Suisse

Okay great. Thanks again.

Dinesh Paliwal

Very welcome.

Operator

And we do not have any other questions at the moment.

Dinesh Paliwal

So we're going to allow our listeners another a minute or two, as they are digesting lot of information, lot of good information. So we allow them to have couple more minutes and then we will go to the conclusion.

Operator

(Operator Instructions). Our next question….

Dinesh Paliwal

Okay

Operator

Go ahead.

Dinesh Paliwal

Go ahead please, yeah you can go ahead.

Operator

Okay, the next question is from the line of Michael Razewski, with Douglas Lane. Please go ahead.

Michael Razewski – Douglas Lane

Hi Dinesh good quarter. I was just wondering what the upgrade is for the Toyota Touch & Go, compared to the Entune system? What is some of the new features that you have and what keeps you excited about that?

Dinesh Paliwal

Yeah Entune is for North America and Touch & Go is named for the similar product offering in Europe. So what it does predominately, it is a next-generation. What we are taking it that means you can upload and download some of the feature applications in the system without bringing it to dealer or in a massive upgrade of the hard disk, which used to be the case.

So that's a very positive for the next consumers those who come and buy these cars, they can take away and then without worrying about that their infotainment system would be antiquated in two years or one-year time.

So they will have online apps related to infotainment, related to connectivity, related to multimedia and whole host of other point of interest and a smart information like Aha Mobile. Aha Radio allows content aggregation from the social media and bring it. So all of those features its an engine we have put in and of course, now as consumers get more mature with this technology they will be downloading more and we will monetize.

Michael Razewski – Douglas Lane

Great, thank you.

Dinesh C. Paliwal

You're welcome.

Operator

(Operator Instructions) There is no other question so far, sir.

Dinesh C. Paliwal

Very well, I'm pretty sure that many of our investors and actually I know all the analysts who cover our company have already confirmed right after issuing the press release. So I'm very happy with the excitement and enthusiasm you have shown to join us on Wednesday, thank you. Those of you who have already signed up the (inaudible) sold out as I’ve seen this morning right after the press release.

So with that, ladies and gentlemen I sincerely thank you for your time and your clarifying questions. We do appreciate the time you’ve taken today to learn more about Harman and our continuing achievements.

We believe that we have the right execution culture. We believe we have the best management team in the industry and our people are focused. So I look forward to seeing many of you at our Investor Analyst Day in Nashville next week and share more data with you. Have a terrific afternoon and good investing in Harman. Thank you.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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