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Harman International Industries Inc. (NYSE:HAR)

 F1Q08 Earnings Call

October 25, 20074:30 pm ET

Executives

Sidney Harman - Executive Chairman

Dinesh Paliwal - Chief Executive Officer, Vice Chairmanand President

Kevin Brown - Chief Financial Officer and Executive VicePresident

Robert Ryan – Vice President and Treasurer

Analysts

Scot Ciccarelli - RBCCapital Markets

Chris Ceraso - Credit Suisse

Peter Barry - Bear Stearns

Peter Friedland - Soleil Securities

David Niederman - Pacific Crest Securities

Jairam Nathan - Banc of AmericaSecurities

Jeff Kessler - Lehman Brothers

David Leiker – Robert W. Baird

Operator

Good afternoon. Welcome to Harman International IndustriesFirst Quarter Fiscal 2008 Earnings Release. (Operator Instructions).

Ladies and gentlemen, if I may have your full attention: pleasebe aware that certainstatements made by thecompany during this call areforward-looking statements. These statements include thecompany's beliefs and expectations as to future events and trends affecting thecompany's business and aresubject to risks and uncertainties.

Persons participating on thecall today are advisedto review the reportsfiled by Harman International with theSecurities and ExchangeCommission regarding these risks and uncertainties.

Sowith that being said, let's getright to this first quarter agenda. Here with our opening remarks, it's alwaysmy pleasure and privilege to introduce Harman International Industries’Executive Chairman,Dr. Sidney Harman.

Sidney Harman

Thank you, Brent, and good afternoon. I amSidney Harman. Joining metoday in Washington, D.C. areDinesh Paliwal, our Chief Executive Officer, Kevin Brown, our Chief FinancialOfficer; and Rob Ryan, our Principal Investor Relations Officer.

Inour conference call of September 27th, I said that we disagreed strongly with thedecision by KKR and Goldman Sachs not to proceed with thepreviously announced merger. And I said that we would bevigorous in pressingour position--that we have been, and I amgenuinely pleased with theresults.

As you undoubtedly know, on Monday of this week, October 22,we announced theresolution of thedisagreement. That resolution provides thecompany with $400 million atan interest rateof 1.25%. The noteswill be convertible at$104 a share, and thesponsors have agreed neither to sell nor hedge their position for atleast one year. Further, and atour request, Brian Carroll, amember of KKR and themember who led thediligence effort, will benominated to join our Board.

I repeat, we proposed this step because we expect Brian tobring a meticulouslydeveloped diligence and knowledge of our business. And we expect that hewill learn those critical management nuances that distinguish and build agreat company.

Today our employees, our customers, and our largestinvestors are enthusedand reinvigorated by theagreement. We and our Board have no doubt from Harman's point of view, this is anadmirable settlement. And we arenow back at work,enthusiastically undistracted.

And I add, that inthe process we havelearned a rather greatdeal about our company, learning we will put to effective use. Although I wouldnever have chosen such anindoctrination for our new CEO, Dinesh Paliwal hasdemonstrated his stunning capacity for analysis and appropriate action and hiscontagious enthusiasm for hard work.

We have chosen atrue leader and I amdelighted to call him partner. Inrecognition of Dinesh's role, I ampleased to forgo thetitle of Executive Chairmanand to work with him and our Board as its full-time Chairmanof the Board. Itwill become effective atour annual shareholders meeting on December 17th.

Now, after that quite modest introduction, I encourageDinesh to speak for himself.

Dinesh Paliwal

Thank you, Dr. Harman. Thank you very much. Before I commenton our performance during thequarter, let me alsotell you, ladies and gentlemen, that I truly share Dr. Harman's enthusiasm for thefact the recentinvestment agreement with KKR will have on our company.

Thereal impact is far more significant than avoiding thetime and cost ofpotential litigation. This agreement facilitates thereturn of wealth to our investor base through share repurchase, and we willbenefit from KKR's expertise as askilled financial partner.

I'm very pleased with theearly reaction from keycustomers, investors, and our employees. Anumber of direct calls I have received from our large customers worldwide andthey were very, very positive. They were very happy to seethat we have put this behind sothat we can move onwith bigger and better and serious things they want us to focus on.

With this foundation inplace, we can truly turn our full attention to strengthening our business, asDr. Harman said. We will implement strategic initiatives for controlling costs,managing risks better, simplifying our global footprint, and expanding ouractivities in themid-range markets. Each of these offers tremendous opportunity, and we willpursue them aggressively.

First quarter sales of $947 million were arecord, I remind alltime high record, and reflect continued top-line strength with double-digitgrowth for each of our three businesses.

Automotive sales for thequarter, up 14%, were supported by several factors, including higher sales ofportable navigation devices, we call PND, theramp-up of Chrysler Infotainment systems, and sales increased to luxuryautomakers, including Audi and BMW.

Consumer net sales were up sharply, 28% from thesame period last year, as we continue to expand our product offering andleverage themerchandising power of leading retailers such as Best Buy inAmerica andMedia Mart in Europe.

Our professional sales continue to grow, up 11% for thequarter, as we serve theleading names insports and entertainment, particularly inlarge speaker areas and mixing equipment for touring artists and facilities.

In afew moments, our Chief Financial Officer, Kevin Brown, will review ourprofitability in threedivisions. But I must sayI take a great deal ofpleasure in sharing atleast at theoutset, that theguidance we gave you afew weeks ago, we have come out better than that. And Kevin will share with youthe details.

Itgoes without saying, however, that improving this element of our performance inthe Consumer businessremains a highpriority in terms ofprofitability margins. Inthe Consumer sector,our strategic relationship with companies such as Apple, Nokia, and Motorolaoften provide first-to-market opportunities for us. And that is avaluable reward for engaging them inour up-front R&D.

We areamong the top sellersthrough e-commerce sites, such as Amazon and eBay. And we aresupporting leading retailers through modular merchandising concepts, such as theHarman Entertainment Lounge. We actually kicked off this great concept ofHarman Entertainment Lounge inIFA, Berlin, and there was atremendous feedback from thousands or hundreds of customers who visited us.

We recently metwith more than 1,000 top sales people from Best Buy locations across theU.S. ata multi-day event thatbrings Best Buy's top achievers face-to-face with their keyvendors and new products. We were told and we believe that Harman stole theshow. The positivefeedback continued after theshow, and we're very, very pleased with theprospect that hasestablished for us going forward.

Our professional systems continue to bethe choice of bothworld-class entertainers and facilities. Inthe first quarter, wedelivered Harman systems for such prestigious venues as Gucci inJapan, theAlamo Dome in Texas,and Atlantis Hotel in Dubai.

For the2008 Summer Olympics inBeijing, we areinstalling systems for nearly every major venue, including theNational Stadium, National Aquatic Center, Olympic Sports Center Gymnasium,Shanghai soccer stadium and Hong Kongequestrian venues.

I'm personally excited by theenergy these world-class customers bring to Harman's business. We will continueto serve them with focus and enthusiasm, leveraging both Harman's traditionalmarket strengths and arenewed corporate spirit. We areenergized, committed, and moving to reach our full potential atpretty rapid pace.

Ladies and gentlemen, thank you for your attention. And nowI will hand over to our Chief Financial Officer, Kevin Brown, for acloser look at firstquarter results. And then we will open up for Q&A.

Kevin Brown

Thank you, Dinesh. I will provide certain information on anon-GAAP basis to give you abetter understanding of our results, exclusive of merger-related costs. Thesecosts, primarily advisory legal fees, were $4.7 million during thequarter. Areconciliation of first quarter GAAP to non-GAAP results was included inour press release, which is available on our website.

Net sales for thefirst quarter were $947 million, anincrease of 15% compared to thesame quarter last year. Gross profit margin was 27.9%, compared to 34.8% lastyear. Operating income was $41.4 million, compared to $86.9 million inthe prior year period.Excluding merger-related costs, operating income was $46.1 million.

Net income for thequarter was $36.5 million, and earnings perdiluted share were $0.55. Excluding merger-related costs, net income was $41.2million and earnings pershare were $0.62, compared to last year's record $0.85.

Foreign currency translation affected our first quarterresults as the Eurostrengthened about 8% compared to thesame quarter last year. TheEuro averaged $1.37 inthe quarter comparedto $1.27 last year. As aresult, foreign currency translation improved sales by approximately $42million and contributed $0.07 to earnings pershare in thequarter.

Gross profit margin was 27.9% during thefirst quarter, adecrease of 6.9 percentage points compared to thesame period last year. During our September 27th conference call, we discussed Automotive'schanging product mixand its effect on gross margins. We expected gross profit to decline as weentered the mid-infotainmentsegment and ramped up our PND business. However, theplanned decline was burdened by higher than expected material costs and thelaunch of new infotainment programs and new manufacturing facilities.

Theramp up at ourfacility in Missouriwas slower than we had expected because over thecourse of the quarter,our automotive customers slowed its 2008 model introductions to clear out unsold2007 model inventory. We expect this to beresolved in thesecond quarter. We believe our material costs will improve going forward andour new manufacturing facilities will gain efficiencies as they approach fullproduction.

Operating expenses were $223 million for thequarter, an increaseof $23 million from fiscal '07. Operating expenses inthe quarter include the$4.7 million of merger-related costs mentioned previously. We expectsignificant additional costs related to theresolution of themerger in thesecond quarter.

Absolute operating expenses increased inboth R&D and other SG&A. Automotive gross R&D is $13 million highercompared to the prioryear, reflecting theresources added in thethird and fourth quarter of fiscal 2007.

Theadditional R&D or engineering bulge we discussed indetail in our Januaryand April earnings calls, is necessary to support our many new business awards,invest in new areas oftechnology such as Driver Assist, and to ensure thedelivery of the recordnumber of new programs launching inthe next severalyears.

Thefirst quarter tax ratewas 9.3% compared to 34.5% during thesame period last year. Thelower tax ratereflects a credit fromthe settlement of aprior period tax audit inGermany.

As Dinesh said, first quarter sales increased ineach of our three operating segments compared to theprior year. Automotive sales increased $81 million or 14% during thequarter. Automotive gross profit, down ninepoints from the prioryear, was affected by product mix, material costs, and new programs. Automotiveoperating income of 6.7% of sales was impacted by thegross profit decline.

Consumer sales increased $26 million or 28%, driven by newproduct introductions and strong international sales. Consumer gross profit was1.7 points below thesame quarter last year, as competition inthe multimedia space hasdepressed margins. Consumer reported anoperating loss in thetraditionally weak first quarter of negative 2.6% of sales; however, that was a2.2 point improvement compared to theprior year.

Professional sales increased $14 million or 11%, due to newproduct introductions atJBL Proand Soundcraft Studer. Professional gross profit exceeded theprior year in bothdollar terms and as apercent of sales. Professional operating profit improved 1 point to 14% ofsales.

AtSeptember 30th, our cash balance was $77 million and total debt was $183million. During thequarter we made tax payments of $73 million, primarily inGermany, andpaid $18 million to retire our remaining senior debt. Capital expendituresduring the quarterwere $27 million. And depreciation and amortization was $34 million.

Accounts receivable atSeptember 30th were $580 million. Inventory was $475 million. And accountspayable were $326 million. As we reviewed inthe September call,sales growth remains strong but several factors will affect full-year operatingperformance.

Full-year sales for fiscal '08 areforecast to be $4.1billion, an increaseof 16% compared to $3.5 billion infiscal '07. We expect each ofour three operating segments to produce higher sales than theprior year.

Full-year gross profit margin is expected to be31% of sales, approximately 3percentage points lower than fiscal '07. Lower gross profit margin isforecasted inAutomotive, primarily due to product mix, new model and plant launch costs andincreases in materialcosts. Operating expenses before transaction costs areforecast to be $870million for fiscal '08.

Within operating expenses, we expect R&D costs toimprove each quarter but remain higher indollar terms than our FY '07 record. As apercent of sales, we expect R&D costs to belower than fiscal '07. Total operating expenses including R&D areforecast to increase about $55 million from fiscal '07. On apercent of sales basis, operating expenses should decrease from fiscal '07.

Finally, we expect fiscal year '08 earnings pershare before transaction, legal, and restructuring costs, to meet or exceed the$4.14 reported for fiscal '07.

As announced on Monday, we will implement anaccelerated stock repurchase program. Anaccelerated stock repurchase program allows us to immediately retire over 4million shares or about 6% of theoutstanding shares of thecompany. We expect that accelerated share repurchase will improve fiscal '08earnings per share byabout 4%.

We will now take your questions.

Question-and-Answer Session

Operator

Representing RBCCapital Markets, our first question comes from theline of Scot Ciccarelli.

Scot Ciccarelli - RBCCapital Markets

Wanted to ask about thegross margin on theauto side. Obviously itwas down about 9points, according to Kevin's commentary. Can you give us anidea of what is anongoing pressure on themargin, because we're moving into mid- and entry level programs? And what iswhat you have termed sort of one-time-ish that we should getpast?

Dinesh Paliwal

Yes, Scot, let meshare my view on that. As we have said, inthe longrun, we may have pressure on thecontribution margin. But we have also said before, and I said it, and I repeatagain, we are aspiringand feel pretty confident to hold on to good profitable operating margins wehave maintained. And we're not there yet.

What hashappened in lastquarter or actually ashort period here, we had couple of brand-new plants started up, one inU.S. and one in China;we had also PND portable navigation device business taking off on avery good level; from 2006 to 2007 to 2008, we're seeing phenomenal growth andhere we have a lotmore material price increase, which hasimpacted on ashort-term basis.

Also, material substitution inour OEMs, which allows us once ayear, typically, to take itto our customers for costreduction or design changes,which will take costs out; typically allows us once ayear, but we are invigorously trying and actually succeeding to dothat twice a year. Sowe missed that infirst quarter and we actually ended up taking material price variance inthe wrong direction,which should not happen going forward.

And similar things could besaid for some of theramp-ups, which we had said that theplant start-up in theUnited States had aslower ramp-up due to our customers' request as they had some unsold oldinventory and they wanted us to slow down, sowe ended up taking some cost--overhead fixed costas well as some variable cost--which otherwise wouldn't have hit thebottom line.

So, those aresome of the one-offsthat put a lot ofpressure on our bottom line, which we don't believe should continue, goingforward.

Scot Ciccarelli - RBCCapital Markets

I guess what I'm trying to getto, Dinesh , is, as a9 point decline, was two-thirds of itkind of one-time-ish, thefactory costs, et cetera, and one-third was just kind of thestructural pressure? I guess I'm just trying to size that?

Dinesh Paliwal

Sure.

Kevin Brown

Sure, Scot. And I think you've captured itaccurately.

Scot Ciccarelli - RBCCapital Markets

Two-thirds to one-third?

Kevin Brown

Two-thirds to one-third; themajority were theone-time impacts.

Dinesh Paliwal

Yes, about that, yes.

Kevin Brown

And as I noted for thefull company, we were down 7 points ingross profit in thequarter, but we expect that to only be3 points for the full-year.We anticipated some of that gross profit decline inthe full-year inour planning, based on our product mix change.But some of is theeffect of the one-timefactors Dinesh discussed.

Scot Ciccarelli - RBCCapital Markets

Very helpful. And just aquestion about thebalance sheet, receivables, inventory up pretty markedly. Is that just afunction of the newprograms? Or is there something else that might beimpacting account that? Thanks alot.

Dinesh Paliwal

Yes, sure. I think none of us like to seeinventory build up but there aretimes in theyear, that particularly now, where we had some inventory build up on purpose.We had a number of newproduct launches coming up prior to Christmas inour Consumer business that actually put some inventory.

And also Chrysler ramp-up, which was not planned by us, andwe had a customerslowdown and that hasalso forced some inventory with us, and that added alittle pressure on. And then receivables and payables, that's another thing andI think we're working on that. SoI think we can balance that out between receivables and payables.

Sothat's pretty much on our radar screen. Every month, Scot, we review that. Infact, next week is our fourth monthly review, half aday with each division President and their CFO and management team. And workingcapital, particularly these three items, one-by-one, with clear action plan isbeing pursued.

Operator

Next inqueue, we go to theline of Chris Ceraso of Credit Suisse.

Chris Ceraso - Credit Suisse

Acouple of things. First, Dinesh, maybe, can you outline for us inany more detail therestructuring plans that you areputting in place, interms of specific actions, thetiming of those actions, and what you expect interms of cost savings?

Dinesh Paliwal

Yes, I'll certainly respond to that. It's agreat question, Chris. Restructuring was something we already talked, evenprior to my arrival here. And we started and we did some restructuring infourth quarter, fairly small. And typically, our experience is you will seethe full payback inthe following 12 to 18months for therestructuring you do.

Now I come back to specifics. We gave you guidance of about $25million to $30 million inrestructuring in next sixmonths. And that was based on anumber of things, which we would like to achieve, assuming our Board ofDirectors approve theplan management is putting together right now.

And these arein thearea of consolidation of manufacturing or assembly sites, both inEurope and inNorth America. Secondly, we would also like toconsolidate our supply base, which would have almost--well, I shouldn't sayalmost--but it had afaster payback because sourcing can really impact your bottom line rapidly.

And right now, we don't necessarily take full leverage ofgroup purchasing done atthe group level. Sothose are theareas. These restructuring programs will bedecided, approved by theboard and hopefully, we can start triggering them insecond quarter.

And therefore, thepayback we will not seein fiscal '08. We willexpect those paybacks to start to come and then stay with us from '09 onwards.

Chris Ceraso - Credit Suisse

And that's on abase of $25 million to $30 million that you'll start to pick up in'09?

Dinesh Paliwal

That is correct.

Chris Ceraso - Credit Suisse

Okay. Kevin, what was themagnitude of the taxsettlement? And what should we think about on afull-year view for '08, as thenormal tax rate foryou?

Kevin Brown

Themagnitude of the taxsettlement was about $8 million, $0.12 or $0.13 pershare. For the full-year,we expect the tax rateto be 27%, 28%,running a little lowerthan what our full-year ratewas last year, but Germanyalso lowered their corporate tax rates inthe past sixmonths or so. So 27%,28% is what you had to think about on afull-year basis.

Chris Ceraso - Credit Suisse

Okay. And then, thelast question, I think on thelast call you mentioned that there were 7 new programs launching this year. Canyou just give us aquick rundown on thespecific models, thetiming? And then maybe any ones where you're sort of theco-supplier and who theother co-supplier is?

Dinesh Paliwal

Yes, sure. First of all, let mestress that these arehistoric times for thecompany fiscal 2008 and fiscal 2009, which areexciting in some senseand I think they are. Because we traditionally have had start of production, aswe say SOP, or thenew program launch, one or two ayear. And now, we arefortunate to have significantly large portion of business, which was available inthe market, came tous. And that triggered anumber of these SOPs. So2008, we will have 7 of these, they arewith Chrysler, Hyundai, SsangYong inKorea, Audi,Porsche, BMW, and PSA.

What is most appealing to me, personally, is that theseprograms, some of them aremixed segment strategy program, like PSA, which is very good because that's thearea where we have tremendous future potential for growth and once we start totake full benefit of scalability of our platform and also amortize theabsolute research and development dollars.

Even if we will have lower contribution margin on mixedsegment business, our bottom line would benefit from thescale and scalability and thesize of this business and also R&D, because we will not require thesame level of R&D for themixed segment.

For ’09, we will have, again, pretty strong historic year interms of number of new platform or new product launches we will have inOEM business. And these aregoing to be BMW L6, PSA[], Hyundai will have another one, Porsche, Mercedes E-Class mid-segment, andMercedes S-Class facelift.

Soagain, '08 and '09 arehistorically very busy, costintensive. That's why theR&D cost hasbeen there and also pretty taxing on allmanagement and employees worldwide, but exciting for future potential.

Operator

Next inqueue, we go to theline of Peter Barry with Bear Stearns.

Peter Barry - Bear Stearns

Kevin, can I take you back to your R&D comments, please?You mentioned thegross increase was $13 million inthe quarter, is thatright?

Kevin Brown

InAutomotive, yes, Peter.

Peter Barry - Bear Stearns

Okay. Could I ask you just to drill down alittle bit more, as itrelates to R&D. Is itmore a QNX or is ita broader Auto unitphenomenon?

Dinesh Paliwal

Itis a broaderautomotive phenomenon. We areinvesting on R&D across theboard on these new launches. They arein navigation area,they are inspeech area, multimedia, and of course, thesoftware platform. But it's not just QNX.

Peter Barry - Bear Stearns

But is QNX alarge portion of that number, Dinesh?

Dinesh Paliwal

I would not saythat. No. I think, it's equally, perhaps inproportion, QNX would not beone of the major ones.

Sidney Harman

Tell me, Peter, why you ask thequestion. You may beseeking information different from theclear direct answer you got to thequestion as you asked it.

Peter Barry - Bear Stearns

It hasto do with thesoftware initiative, Sidney. And isit growing more andmore; is its momentum growing more and more and is itbecoming more and more important apart of your outlay effort?

Sidney Harman

Itis growing. It becomesmore and more important, and without question, itis a significant keyto the future of this company.But the real growth inR&D has beendriven by the needs tosatisfy this enormous set of new undertakings that Dinesh hasreviewed with you.

Peter Barry - Bear Stearns

And could I ask, inthat regard, Sidney, is itsort of the front-end?Or is it back-end?Middleware? I'm looking for alittle more color that inregard, that's all.

Sidney Harman

I want to give what you you're asking for. What is itthat you're asking about, is itfront-end or middle-end?

Peter Barry - Bear Stearns

Spiking R&D budget.

Sidney Harman

I'll let Dinesh respond to that.

Dinesh Paliwal

These programs, they arenot just a couple ofmonths or so induration, they go on more than one year. I would saythe SOPs, which wehave planned for ‘08 we arepretty much at thepeak and slightly declining, inabsolute as well as percent of sales.

For the6 SOPs we'll have in'09, they are alreadybeing ramped up but they arenot, in terms ofmagnitude of absolute dollars, as large as fiscal '08 SOPs are. So, to answer abit more specific, I would sayfor '08 we are alreadyfrom the peak down,and for '09, we arejust about getting up there atthe peak level.

Peter Barry - Bear Stearns

One more costquestion, if I may. You referred to materials costseveral times during your comments, Dinesh. Could you give us alittle more detail on that score?

Dinesh Paliwal

Sure. Material costs, I mentioned intwo areas. One is, as our PND business starts to grow--which is good news--PND hasa lot more material costin build up materialthan you would have, because we buy alot. There is a lot ofhardware in itand some software embedded, but we buy it.

Sothat becomes a greaterportion of our material costoverall. So that's whywe will see and if youare not fastenough to move with themarket sometimes, there might besome lag from your replacement of thecost and passing onto themarketplace.

Second item I mentioned is to dowith traditional OEM business, where you supply infotainment system and there area lot of components.As other industry does, we dothe same. We areconstantly aspiring to find innovative engineering design changesto bring the costdown and simultaneously finding better, high quality, lower-costcomponent, which we can replace.

Traditionally, carindustry allows us once ayear an opportunitywhere we have fully tested and proven that thesubstitutions areperfectly fine and then they allow us to doit, and if you missed that window of once ayear, then you start with expensive components, which you areusing. So that's whatactually happened infirst quarter, to some extent.

And third element, inall fairness, oursupply chain people arevigorously trying every year to negotiate better prices, better negotiations.And first quarter, when you set thetargets, not necessarily you're able to getthe full benefit,which you start to seein second and thirdquarter.

Sidney Harman

And, Peter, I want to add to that both because of thespecifics of thequestions and thegeneral implications. You've been around us along time. Thehard truth is that we have taken on avery substantial set of challenges and thecircumstances of thelast year, no one had planned itto be this way, but thehard reality is those circumstances have made itmuch more difficult to getthe balance that youneed to deal with that assembly of challenges.

I amamazed at how easy deepbreathing is coming to allof us right now and what apleasure it is to beback focused entirely on thebusiness. There's work to bedone in theareas that Dinesh hasreviewed. We can do itnow and having gotten through that necessary balance encompassing thissignificant series of new undertakings, I think you're going to find us adarn sight stronger company than we had been.

Peter Barry - Bear Stearns

Sidney, I'd liketo close with two questions for you. One, I was wondering if you, maybe perhapsDinesh as well, might give us anupdate on Helmuch Shinagle and how he's doing atAutomotive OEM?

Sidney Harman

I ampleased to yield to Dinesh on this one, for acouple of reasons. First, because he's our CEO and second, I amgoing to enjoy hearing what I know he's going to say.

Peter Barry - Bear Stearns

And one more question for you, when he's finished, Sidney.

Sidney Harman

Okay.

Dinesh Paliwal

Okay. Well, that's agood question, because being new to thecompany; my personal priority hasbeen to build a veryclose relationship with thetop management team. Helmuch Shinagle is one of theclosest and top partners, very large business heruns, and very important business for our company.

And hewas brought in thecompany with thebackground he hasthat's second to none. And last week I had thepleasure of traveling with him to major keycustomers of ours in Germany,and also visiting together anumber of keylocations of Harman International.

I got to know him abit more. And also, hewas able to share his vision with meand also share his plans how theR&D would bescaled in terms ofmixed segment strategy and how we will use thescalability and what our plans arefor long-term consolidation inwestern versus emerging markets.

I will conclude, I'm extremely pleased with him on my team.I would not trade him for anyone right now.

Sidney Harman

Your question to me, Peter.

Peter Barry - Bear Stearns

Yes, first astatement, Sidney. I wanted to wishyou all thebest of good luck inyour new role as non-Executive Chairman.And if you would share with us what themeaning and significance of that changein title might be?

Sidney Harman

Oh, fair enough. I intend to reduce my workweek by atleast 50%. I'm only going to work 23 hours aday. Listen, you know mewell. You know that work is mother's milk to me. I would have offered you amore qualified answer if I were not enthusiastic as I can be, not only aboutDinesh's talent, but about theeasy way in which wework together.

I forgo theExecutive part of thetitle, principally as atribute to him. And you must seeit inmy readiness, my eagerness, my pleasure indeferring to him as you ask questions. But thehard reality is that heencourages me to beat itand you know I love being atit.

Peter Barry - Bear Stearns

Good luck, Sidney.

Sidney Harman

Thank you very much, Peter.

Peter Barry - Bear Stearns

Thank you, sir.

Operator

Next inqueue, we go to theline of PeterFriedland with Soleil Securities.

Peter Friedland - Soleil Securities

Hi. Afew questions, first on thePND side of things, if you could talk about unit volumes for thequarter and what you're expecting for theyear?

Dinesh Paliwal

Sure. As I said earlier that PND is anexciting business, where we understand this business and we aredriving it prettyrapidly. And we areactually pleased with thegrowth and thetrajectory we areseeing.

In'06, we had 150,000 units sold. And in'07, we sold 425,000 units. And I'm quite happy to share with you, just infirst quarter of fiscal '08, we have sold 250,000 units and we expect asignificant growth to continue throughout '08.

Itmight be agood opportunity for meto add, this business is very exciting and attractive, both from thedefensive and offensive point of view. One, offensive, more PND business growsmore awareness and theknowledge of infotainment develops inconsumers out there. And more they seeit themore they want to had in-dash, fully-integrated, fully-functional infotainmentsystem in their next carthey buy.

At thesame time, we know this business because we've been doing infotainment for longtime before our competitors started to dip their toes in. And large OEMs haveexpectation from us but we drive this business aggressively, sothat millions of cars out there who donot have fully integrated infotainment system, they become our targets. Sothat same OEMs, when they're selling their new car, would beable to sell our infotainment system, which is fully integrated. Soit's an excitingbusiness.

Peter Friedland - Soleil Securities

And as far as that 250,000 number, it's apretty big jump overwhat you did in thefourth quarter. So wasthat ramp in theU.S.? Or whatwas the bigdriver there?

Kevin Brown

Itwas a number ofthings. First of all, we ramped inGermany. And inGermany, we arein theposition of closing out some of our first generation technology as we replacewith it higherfunctionality new technology, sowe had some closeout sales inthose numbers.

But inaddition, in ourConsumer business, where we've had aneffort underway for about sixmonths now, we're now starting to seesome traction there as we lead into theholiday season. And we had some consequential volume inthe Consumer segmentas well for PNDs this quarter.

Sidney Harman

And I think it’s fair to sayis that we have every reason to continue to expect, by far, thedominant part of that business is going to bethe European markets.And we are verypleased with the levelof product that we're bringing to it. That, more than anything, explains why welook stronger in thefirst quarter.

Dinesh Paliwal

I think, it's fair to saythat this PND business, as you would expect, with our very strong foothold inEuropean auto industry, that's where we had thelarger portion of our PND sales, while we're growing very rapidly inNorth America and other places as well.

Peter Friedland - Soleil Securities

Well, then, maybe this is agood segue, but if you could give more color on what was thekey driver of growth inthe Consumer segment?

Dinesh Paliwal

Well, Consumer business, first of all, it's different interms of cycles. Cycles areshorter here and if you can besuccessful in riding thewave and tagging along with thenew product introductions of theproducts like iPhone and iPod inthe past, then youhave a great time and agreat year. And this is what I think we have seen infirst quarter and we expect to seefor rest of the year.

Our growth inConsumer business was very, very good. We're very happy to seethat. And we have anumber of new product introductions planned for Consumer business. Double-digitnew product introductions coming up for Christmas season, and again,double-digit new product launches, we’ll seein calendar year 2008.And the whole game isto hit them on time, on budget, ahead of every other competitor, and that'swhat I think we intend to do. And sofar, we are on track.

Sidney Harman

And I want to add, Peter, that what may not beobvious in theraw numbers, but is very important and compelling to me, is our continuedgrowth in Europe.More than anything, that is where you seeour Consumer business taking on more and more muscle. Itclearly is influenced by new products.

But itis more influenced by thefact that we're penetrating those markets very, very effectively, andgenerating relationships with keyaccounts that produce volume. Europe is avery, very big pieceof our Consumer story.

Dinesh Paliwal

And I think Consumer business growth helps our OEM businessgrowth in many ways, interms of the brandbuilding and massive awareness itcreates in thehands of consumers.

Operator

David Niederman with Pacific Crest Securities hasour next question.

David Niederman - Pacific Crest Securities

Thanks, good afternoon, just acouple of questions. First, hoping you can comment on theDAs development. You talked alot about the SOPs,but just curious as to where we arewith the DAs?

Dinesh Paliwal

Well, this is anexciting area and this wasfurther validated during my trip last week with these bigOEMs I personally visited. Our Driver Assist development activities areongoing. And this is one area where we think tremendous future opportunities arethere for us to grow, and also to differentiate from average competitor infuture. And we areworking pretty closely with anOEM on a developmentprogram, but as you may already know, David, this is not to deliver innext couple of years.

This is afiscal 2012-and-beyond program, but this is where we areputting our R&D now, up-front, capturing early ideas, concepts, and testingthose with the OEMswe're working with. And we donot actually break out R&D expense by program, or by customer, but this isone area where we're not holding back.

David Niederman - Pacific Crest Securities

Great. And hoping you could just provide alittle color or information as to, there's alot of headline noise around Chrysler and also soft sales from Hyundai, atleast in theU.S., and just […]

Sidney Harman

I’m sorry, we're having alittle trouble hearing your question. You wanted alittle background on Chrysler andwhat else?

David Niederman - Pacific Crest Securities

Just confidence inability to meet sales projections for Chrysler as they're going through theirturmoil, at least herein theU.S.?

Sidney Harman

Let mespeak to Chrysler ingeneral terms. There is anew, as you well know, ownership and management atChrysler. That brings with itsome problems, and itbrings with it someopportunities. Our experience with this group is that they aresurprisingly knowledgeable and eager to embrace new technology.

I need not remind you, thetradition in Chrysler,certainly as I was growing up, was that this was theengineering company. It's ajoy to find ourselves encountering guys there, who want to understand thetechnology and want to embrace it.

Obviously, theturmoil you talk about goes on inany situation such as theirs. We think they're dealing with itwell, and we are veryoptimistic about where things aregoing between them and us. Their sales aredisappointing to them, but that's hardly surprising.

You and we will have to take our measure of them over thenext couple of years. I expect itto be pretty doingpositive.

Operator

Thank you very much.

Sidney Harman

Gentlemen, we're beginning to run out of time. I just wantto make theobservation that I'm holding acouple of the goodgray beards for thelast questions. I mean you no disservice when I saythat, Mr. Nathan.

Operator

Thank you very much, Dr. Indeed, itis Jairam Nathan of Banc of America Securities.

Jairam Nathan - Banc of AmericaSecurities

Hi, thanks. Can you explain for therecord, what is your coststructure look like on thegrowth side? We want to try to understand that better, just to getthe idea of what theeconomies of scale could be?

Dinesh Paliwal

Nathan, if I understand, please help me. You're talking on abroad base coststructure, how it allwould amortize as we grow?

Jairam Nathan - Banc of AmericaSecurities

On theinfotainment systems. What does thecost structure looklike? And how much is materials, how much is labor  - that kind of information?

Dinesh Paliwal

Nathan, first of all, we don't necessarily break out likethat, at that level.But, I could give you abroad brush answer, which hopefully, will suffice. We have been prettygenerous, and knowingly so, that we have invested inR&D due to 7 in2008 and 6 in2009, SOPs - so 13,versus perhaps 2 or 3 inthat period, traditionally.

Sothat has put quite abit of burden on R&D budget, as we have talked about. But that's somethingwe invested for thefuture because R&D and revenue cycles arevery different. You invest R&D ineither one, and by thetime you see revenue,it's probably year three or year four, sometimes. So, you will seea percent of salesbased on our overall cost, on R&D thebig chunk of overallSG&A. That should slide down as we go forward.

Number two, I like to make, which is important to mepersonally, before even I came to Harman, we have to push scalability ofplatform, common architecture of software and we need to bring theculture of inventing every time new for thenew SOP. We can't afford to dothat and we arepushing that culture. That's great for us, and even great for our customers.

Even BMW and Audi and Mercedes, they want to seethat we have more and more common architecture supporting their multiple newSOPs so that lifecyclecost for them islower. But that helps us overall coststructure to bring down, inabsolute as well as inpercent of sales. But, these arethe long-termstrategic direction I’m sharing with you; we're not there yet in100%.

Jairam Nathan - Banc of AmericaSecurities

Okay. Secondly on working capital, itwas big use infiscal '07, as you were ramping up thePNDs. How should we think about this for fiscal '08? Would you continue to seesome use, just because you'll beramping up in North America?

Kevin Brown

Yes, I think inworking capital inthis particular quarter, we're inthe cyclically highquarter for working capital as we build into our Christmas selling season. Andas our sales aregrowing, inparticular, we're ramping up theChrysler business, which is driving up some of our inventory and receivablelevels.

I think once, we getthrough the early partof the year, we shouldbegin to leverage our working capital better than we've done inthe past 12 months. Wedon't expect a repeatof, for example, theinventory levels that we had inPND in thepast year. And we've worked those down pretty successfully. You'll beable to see theresults of that, I think, inthe bottom line, oncewe get past theChristmas quarter.

Operator

Representing Lehman Brothers, Jeff Kessler.

Jeff Kessler - Lehman Brothers

Thequestion that I have to ask, Sidney and Dinesh, thegrowth in Consumer wasquite high. Normally, Consumer isgoing to benegative, at leastfrom an operatingincome perspective in thefirst quarter, for seasonal reasons and for ramp-up reasons as well.

Your forward bookings inConsumer, are theystrong enough to sustain thetype of growth that you saw inthe first quarter?Because it does becomematerial in thesecond and third quarters of your year, particularly thesecond quarter, when we're dealing with Consumer. And obviously, itmakes a difference ifyou can sustain that type of growth rateinto the secondquarter.

Sidney Harman

Well, Jeff, I would like to tell that you our bookingsconfirm it. But, I remind you that theConsumer business for us, for everybody, simply doesn't work that way. Therevirtually is no forward-booking. You work itday-by-day, account-by-account. You read themarketplace, you seehow well your products aredoing, and you generate thebusiness as aconsequence of it.

Soforward-booking isn't going to beyour answer. The onlyanswer you're going to getfrom us is how confident arewe in thefirst quarter is reflective of how theyear is developing. We're pretty damn confident.

Dinesh Paliwal

Inthis business is not thebusiness where you build backlog. You actually getthe order and you shipit very fast. That'swhy I said this business is probably one of themost challenging insome aspects and wonderful, because you actually cash infast. You have a newproducts; you have themoney coming in, too through fast.

Sidney Harman

That's right. If you're building backlog, there's somethingwrong with you.

Dinesh Paliwal

Exactly.

Jeff Kessler - Lehman Brothers

Okay. Final question. You kept those brands inConsumer to get thebrands into theautomotive area. What is thepayback right now? What is thetechnology you're taking from Automotive and using inConsumer that is palpable, that is tangible right now that you're going to beusing to market with over thecourse of this and next year?

Sidney Harman

It's agood question, Jeff. Thereality is that we aregrowing in confidenceand we will say this inour annual report, that we aregetting very close to what everybody hasthought to be theGolden Grail of instant, seamless connectivity. We don't and we're never goingto have a Consumerbusiness large enough to support theengineering base required for that.

But thetransfer of that know-how from OEM and now I'm pleased to point out to you thatthe large expendituresin R&D that somehave condemned areprobably the biggestassurance you or any observer may have about our future. That work willtransfer and effectively inproducts we otherwise could not manage.

As for thevalue of the brands,oh my goodness, it isbeing confirmed over and over and over again. I've just been reading half adozen articles on this, including inlast week's 'New York Times,' how brand hasgotten to be theelixir of thebusiness, and one of thethings that thearticle made reference to was that marvelous summer TVadvertising program by Lexus.

They almost forgot to mention that thesystem they were selling theMark Levinson sound system, promoted by thelikes of Elvis Costello and Diana Krall arecontained in anautomobile. They almost forgot to mention theautomobile.

Brand is crucial. We domore business, I saythis, perhaps to theawkwardness, theembarrassment of some of our guys; we domore business with Lexus on Mark Levinson than we doeverywhere else in therest of the world.Brand is king.

Jeff Kessler - Lehman Brothers

Sidney; instant,seamless connectivity, that's anice phrase for Consumer. What does itmean?

Sidney Harman

Itmeans, my boy, that wherever you want your music, it's immediately athand. You move from theoffice to the carand you bring it withyou, you move from thecar on ahike, you bring itwith you. You take aholiday with your wife or your girlfriend, whichever you choose and you bring itinstantly and seamlessly with you. That's what itmeans. Everybody's been looking for it. Everybody's closer today than theywere. We suspect we're closer than most.

Operator

Representing Robert W. Baird, David Leiker.

David Leiker – Robert W. Baird

First acomment on theguidance. I just want to clarify this, Kevin. Your guidance, you gave us GAAPguidance of $4.14 or better, correct?

Kevin Brown

That was excluding restructuring and transaction costs. So,on an operating basis.

David Leiker - Robert W. Baird

Areyou putting any sharerepurchase in there?

Kevin Brown

No.

David Leiker - Robert W. Baird

Okay. And then two other questions here. Chrysler, as afollow-up to what you talked about before, Dr. Harman--but wondering if wecould get some moredetail on it--that there area number of vehicles atChrysler they're looking atdiscontinuing. And whether that puts that $500 million of business atrisk at all? Is that$475 or $450, or do wenot know yet? If you can address that?

Sidney Harman

We really don't know yet. And, of course, we hear thesame stuff you do. I suppose itis less a matter ofhow many vehicles and how effectively those vehicles contain thekind of systems that we're interested in.

David Leiker - Robert W. Baird

Right.

Sidney Harman

We'd settle for fewer vehicles and higher penetration rates.

David Leiker - Robert W. Baird

I would understand that. And then thelast item here is and alittle contradictory here, given that you have afair book of business that you're launching here today; but what doyou think the timingmight be on thenext wave of new business opportunities for you, that you'd bein aposition to talk about something?

Sidney Harman

It's difficult to answer precisely for thereason that you suggested, we've got such aheavy book. But new stuff is inthe works. And I wouldthink that though we'd seelittle exciting new reports, really exciting new awards inthe course of thisyear. I think next year you're going to seesome serious work let out. And we expect to play our part inthat.

David Leiker - Robert W. Baird

Okay. Itwouldn't be fair toassume that some of your engineering efforts to getnew business have been redirected to launching business, that that pacecontinues in terms ofgoing after new pieces of business?

Dinesh Paliwal

Absolutely. Look again, this is acontinuous relationship with customer-base OEMs. They have worked with us for somany years. They want to continue that relationship. And they also have theirbreathers to take breathing room when they're launching new business afew years. It's acycle in autoindustry, and it's worked very well sofar. So we willdefinitely take our fair share, as we have inthe past, as thenew business opportunities arelaunched.

Operator

Dr. Harman, back to you for any closing remarks.

Sidney Harman

Well, first let meto take a smallpersonal privilege. I want to comment on our first quarter. There's been, Ibelieve, an unseemlyamount of noise about itbeing a poor firstquarter, adisappointing first quarter. I didn't hear itin this conference,but I've read it. And I just respectfully disagree.

Inour September 27th conference call, we noted that we had never providedguidance on the firstquarter. The Streethad almost a year ago.And the Street spokeabout $1 plus. Our record is clear on this, we would typically have cautionedrestraint when estimates arerunning beyond what we thought to bereality.

You've often heard meurge analysts to restrain your enthusiasm. We failed to doit when thoseambitious estimates were made about thefirst quarter, because we were headed to being aprivate company status, and virtually everyone had dropped coverage on thecompany.

Now, consider just amonth ago, we did forecast thefirst quarter at$0.50. Today, we reported earnings, excluding transaction costs of $0.62.That's a pleasant$0.12, or 24% higher than our own forecast. Inthat same 27 of September call, we forecast actual operating earnings of $40million, and today we've reported them at$46 million, again, without thetransaction costs.

This year's first quarter is going to represent about 12% to13% of our estimated full-year earnings. With theexception of the lasttwo uniquely and I think, especially strong first quarters, that's absolutelyconsistent with our lengthy history.

My view is that we're off to apretty darn good start with this first quarter. Not as strong as last year's,but consistent with history, consistent with our expectations.

And finally, I'll tell you allthat we're--all of us--veryhappy to be back innormal mode. There's no way we can estimate or tell you how much thedistractions of thepast year have costus. But we arebreathing clean, fresh air, and we arehappy to be back atserious work. I thank you all.

Operator

And thepassion certainly comes through. Very nicely said as always, Dr. Harman.

And ladies and gentlemen, your host is making today's callavailable for digitized replays for one week and also by theweb replay for seven days. Thedigitized replay is available starting at8:00 pm Eastern Time, October 25th.Please dial 800-475-6701, and atthe voice prompt, entertoday's conference IDof 891-629. Alternatively, you may go to www.harman.com to listen to theweb replay. You will need to enter theaccess code, once again, of 891-629.

And that does conclude our press release for this quarter.Thank you very much for your participation.

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Source: Harman International Industries F1Q08 (Qtr End 9/30/07) Earnings Call Transcript

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