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Harman International Industries, Inc. (NYSE:HAR)

F3Q 2012 Earnings Call

April 30, 2012 11:00 am ET

Executives

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

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

Robert V. Lardon – Vice President, Investor Relations

Analysts

David Leiker – Robert W. Baird & Co.

Christopher Ceraso – Credit Suisse

Adam Brooks – Sidoti & Co. LLC

Ravi Shanker – Morgan Stanley & Co. LLC

David Leiker – Robert W. Baird & Co.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Harman’s Fiscal 2012 Third Quarter Earnings Conference 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 Monday, April 30, 2012.

It is now my pleasure turning the conference over to Mr. Dinesh Paliwal, Chairman, President and CEO of Harman International. Please go ahead, sir.

Dinesh C. Paliwal

Good morning, ladies and gentlemen, and thank you for joining the Harman third quarter fiscal year 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.

I just returned from a 10 day trip to China and just wanted to share with you quickly, I took my entire Harman executive management team to China, as we met the top customers and key government officials. We opened two new manufacturing and engineering plants in Northern China. We opened an engineering center in Beijing, inaugurated second ever flagship store in Beijing, exhibited full suite of technologies at the Beijing Auto Show, and as a result, we also signed major contracts with domestic automakers representing $500 million.

So in our earnings release published this morning, we shared with you encouraging news and solid financial results marking a tenth consecutive quarter of year-over-year improvement to the top and bottom line.

Before I dive into results of this quarter, I want to talk about something very strategic and huge win for our company. I’m extremely pleased to share with you a big news. With the success we’ve had with leading automakers, and our technology leadership, and the knowledge of our innovation pipeline these automakers have, a leading automaker has selected Harman for a follow-on award. And this more than $2 billion award is the largest ever in the industry, and for sure also for Harman ever.

So I’m obviously very, very excited and esthetic, it’s a slam-dunk validation on our innovation pipeline; and also it just validates our strategy that in-dash infotainment systems will continue to drive the progress forward; and it also tells us that the take rates are going up, which are reflected in our year-to-date growth in infotainment.

Now, let us talk about our quarterly results. In the quarter, our sales increased 16%, and are up 19% year-to-date. Our operating income is up 7% for the quarter; and up 36% year-to-date. All our divisions posted higher sales with infotainment division sales growing by 15%; lifestyle by 20%; and professional by 8%.

The luxury car segment reserve has been highly resilient and has outpaced the overall automotive market; and we continue to gain market share. Our successful expansion into the mid-segment with our scalable platform has captured additional growth opportunities. To expand our market, we have invested smartly in high-growth BRIC countries, setting up five new manufacturing and engineering centers with $500 million of new orders recently in India and China, we are well on track to more than double our BRIC sales in next three years, and achieve our $1.5 billion sales target by 2015.

That’s the pace which never been done in any industry, almost from nothing to $1.5 billion in over a span of six years or so. In BRIC country this quarter, sales increased by 28% led by China with sales growth of 30%. If you look at the year-to-date basis, BRIC country sales are up 30%, led by China at 38%, which is more than four times the GDP.

We continue to expand margins in our largest division, infotainment. Our infotainment sales in the quarter grew by 15%, and our operating margin improved to 7.3%. Higher sales were driven by robust demand in the luxury automotive segment, and continued strong growth in BRIC countries. The rapid adoption of the scalable platform is helping us accelerate our margins and reduce our overall cost. We gained the largest ever multi-year order from Geely, which is also the largest Chinese domestic automaker, who also owns Volvo cars from Sweden.

We also picked up BAIC Motors from China, and we replaced a competitor to supply cross carline infotainment systems to Tata Motors in India, that’s the largest Indian automaker who also owns Jaguar Land Rover.

At the Geneva Motor Show we introduced our latest innovations in connectivity technologies, and we were recently awarded Toyota’s most coveted technology and development award, we’re very proud of that.

As I mentioned earlier, we’re pleased to report that our lifestyle division sales increased 20%. Harman’s portfolio of world class brand continues to distinguish Harman from competition. We extended our business with two longstanding customers BMW and Mercedes Benz, with multi-year cross carline branded audio orders. And there are separate press releases put out.

As noted, Harman’s expansion into emerging markets continued with the largest ever branded audio award, in China and India with BAIC, Geely, Great Wall and Tata Motors. These multi-year awards further strengthen the order backlog for branded audio system, which now stands at $3.2 billion; and carries in mid-teens operating margin.

The company unveiled new marketing campaign Hear the truth, featuring Beatles’ Sir Paul McCartney. This complements Harman Kardon, the Beautiful Sound campaign featuring Jennifer Lopez. These campaigns are increasing overall brand awareness and helping drive car audio take rates, and home audio and multimedia sales.

The transition of our professional division from a historically product-focused business to a total solution provider is progressing well. And we are taking share in high growth emerging market. Professional division sales grew by 8%year-over-year; in the environment, where our peer group grew 3%.

We launched a brand new system called IDX, audio visual paging and pedestrian flow system for the airports and hospitals. We have already won projects for hospitals in the United States and at Curacao International Airport.

We are aggressively marketing this new system to multiple airports globally, but particularly in high growth areas like China and India. And we remain the supplier of choice of the world’s biggest sports and entertainment events like Grammy Awards, Oscars, Academy Awards and Super Bowl halftime performance.

Ladies and gentlemen, our relentless focus on innovation and execution has earned us 10 straight quarters of profitable growth. We’re growing in all regions and taking market share. In particular, we’re growing way ahead of the competition in emerging markets. And our hard work to optimize our global foot print and cost base is delivering profitable growth.

We now have the financial flexibility to pursue any number of strategic capital allocation options. So ladies and gentlemen, when you look at the competitive landscape, Harman is the most attractive investment opportunity in our peer group, and we continue to validate that with quarterly results.

Now let me recap key points. We continue to build shareholder value in rapidly rising EBITDA at a CAGR of 280% over ten quarters, half of our 14 billion order backlog now carries double digit profit margin. We are outpacing peer group growth with year-to-date sales up 19%, BRIC sales up 30%, China sales up 38%. We have a global footprint with a world class cost structure. We have invested in sustainable innovation with over 4000 patents are growing. We have a strong balance sheet with liquidity of $1.3 billion, and we are strongly positioned for profitable growth in the future.

So I just say, before I hand it over to my colleague Herbert Parker, well to my investors and analysts; we as a management team have done our job, and we are excited about coming years for what we have in store; and I hope you also see us a stable company which has done a massive turnaround now be positioned for great growth, we’re doing all the right things, and I hope you also hold your position in our company, and show us that you’re also staying long with us.

With that, I’ll ask our Chief Financial Officer, Mr. Parker to provide you a closer look at our financial results.

Herbert K. Parker

Thank you, Dinesh, and good morning to everyone. First, let me walk through a few of our financial highlights from the quarter. As you know, please note that my comments are provided on a non-GAAP basis, which exclude restructuring costs. The reconciliation of our GAAP to non-GAAP results is included in the press release, but for your convenience we took an $8 million restructuring charge this quarter.

Okay, beginning with the revenue line for the third quarter, we grew our quarterly sales by 16% to $1.96 billion. All three of our segments posted solid growth increases versus the prior year with the infotainment and lifestyle division both growing at double digit rates. Our gross margin during the quarter was 26.8%, down 40 basis points primarily as a result of near premium cost increases.

Now, moving on to the SG&A expenses, excluding the one-time gain of $60 million from the sale of intellectual property last year, our SG&A was reduced by 80 basis points to 20.6%.

Moving on down to the net income for the quarter, we reported $53 million or $0.74 per share compared to net income of $43 million or $0.60 per share in the prior year.

I will note that, our effective tax quality rate was 12.5%, and our year-to-date rate is 22.1%. Now, this excludes the $124 million tax benefit recorded during the quarter related to deferred tax asset allowance release. And in spite of the investments in growth related initiatives, which you heard Dinesh, speak about, our cash and cash equivalents balance was basically unchanged. Also our total liquidity remains at $1.3 billion, our operating cash flow for the quarter remained positive at $12 million despite the increases in net operating working capital.

This increase was primarily due to higher receivables associated with our double-digit revenue growth. As a percentage of sales, our net operating capital was basically flat at 16.6%. We expect a significant portion of the accounts receivables to reconvert into cash during the fourth quarter.

Now, for those of you who are new to our company, our capital allocation strategy remains unchanged. We will continue to evaluate alternatives whether it’s an organic growth investment and acquisition or share buyback. We remain most interested in investing in organic growth opportunities such as building our footprint in the BRIC countries, while long-term returns are the most promising. And as demonstrated by Selenium acquisition in Brazil and MWM in the United States, we believe strategic acquisitions can accelerate and complement our capital allocation strategy.

And finally, we remain committed to providing a sustainable dividend stream to our shareholders; and as you recall our Board of Directors has pre-authorized a share buyback program.

Now let me close by highlighting the fact that this makes our tenth 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 we’re well positioned to take advantage of a full range of strategic options. And with that said operator, we’re now ready to take questions.

Dinesh C. Paliwal

Sylvana, are you there?

Operator

I am.

Dinesh C. Paliwal

Yeah. You may want to announce how to sort of ask the question. Please, go ahead.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of David Leiker with Robert W. Baird & Company. Please proceed with your question.

David Leiker – Robert W. Baird & Co.

Good morning, everyone.

Dinesh C. Paliwal

Hi, David and good morning to you.

David Leiker – Robert W. Baird & Co.

Just two quick numbers questions here, and then a broader question. One with the tax rate and the change in valuation allowance, what do you expect that to be going forward here?

Herbert K. Parker

What we expect, David, is pretty close to the 23% to 24% for the full year that we had guided you at. We could possibly come in around year-to-date rate, which is 22%, but for fiscal year ’13 and going forward, we’re still striving to go for 28%, which was still below than our structural rate.

David Leiker – Robert W. Baird & Co.

Okay, and then beyond the restructuring costs, there are sometimes some other moving pieces in the R&D, royalties, things like that; anything of note there in the quarter?

Herbert K. Parker

No, we were normal. I think, just the information, the R&D was about $59 million this quarter for infotainment, it was $53 million for the same quarter of last year. So it’s nothing unusual.

David Leiker – Robert W. Baird & Co.

Okay, and then lastly, if you look at the $2 billion piece of business here, you had nice contract award there. Can you give us some color in terms of the net – you had sales of follow-on contract, how much of that is extension of existing business on next generation vehicles, how much might be incremental revenues, and any color you could provide there?

Dinesh C. Paliwal

Sure, this is pretty much a follow-on. So it’s a placement business, the good thing is, this business has been awarded to us which will not start shipping as a fully ramped up program until beginning of calendar year ‘15. So that’s one color, second color I’ll give you, this is based on current run rate or take rate. And the customer and us, we both feel the current technology we’re going to deploy, the take rates will significantly go with this. So this business is likely to grow, and that might be incremental to what we have. So it’s a pretty much follow-on replacement business from like-to-like basis.

David Leiker – Robert W. Baird & Co.

And then it doesn’t seem like you’re updating your backlog here with these awards, and business launches…

Dinesh C. Paliwal

No, we have not, because backlog is on a quarterly basis. Frankly speaking, this award was confirmed to us on Friday afternoon. So we have not revised our backlog numbers, so you can add back for future perspective, which will put our backlog if I say, tentatively 14 plus till it’s a 16 billion highest level.

David Leiker – Robert W. Baird & Co.

Okay, thank you very much. I’ll come back.

Dinesh C. Paliwal

Thank you, David.

Operator

Our next question comes from the line of Chris Ceraso with Credit Suisse. Please proceed with your question

Christopher Ceraso – Credit Suisse

Thank you, good morning.

Dinesh C. Paliwal

Hi, Chris, good morning.

Christopher Ceraso – Credit Suisse

So just a follow-up on the contract award, I just wanted to double-check. Are there any additional trend lines that you picked up on this award? Has there been a consolidation maybe where Harman picked up additional responsibility relative to any of the junior suppliers that may also be on these programs?

Dinesh C. Paliwal

A little bit of both, to be honest with you, as I said but I’m not in the liberty to give those details because customer would not allow. We intend to put out a press release hopefully bit more details as soon as we’re allowed to, but this has been our lead customer very, very advanced technology customer. So yeah, we’re picking up some in trim line and also some on the expense of partners but yeah, that’s all I’m allowed to say, Chris.

Christopher Ceraso – Credit Suisse

So if I looked at over the life of the programs, is it safe to say that the $2 billion looking ahead is maybe a little bit bigger than the comparable period that you already where supplying. So in other words there is a bit of a step up in your revenue base with this customer?

Dinesh C. Paliwal

Absolutely correct, because I’ll give you an example, with the same customer the original award which we got two, two and half years ago that was just over $1 billion and that's already turning into much bigger award because the take rates are going up, as more and more people worldwide are opting for embedded infotainment system. So, this award of $2 billion today, likely to grow bigger than that.

Christopher Ceraso – Credit Suisse

Okay. Next question, the margin in Lifestyle business was a little bit weaker than we thought and I understand that seasonally the March quarter is not the best quarter for the consumer products within that division. But even on a year-over-year basis, if I take seasonality out of it, it looks like margins were a little bit light even after taking into account the Neodymium pass through that you mentioned. Is there anything underneath that or are there any events or investments or what caused the year-over-year decline above and beyond the neo issue?

Dinesh C. Paliwal

Let’s talk about gross margin and we can also talk about operating margin. Herbert, do you want to handle that?

Herbert K. Parker

Yes, you are absolutely right Chris, in the gross margin level, you heard Dinesh mention several investments we’re doing in countries and factories. So we are about 200 basis points related to the investments in Dandong, let’s call it cost increases, Mexico and our channels. So we’ve been doing a lot there to building up our channels. So that’s where most of it is coming from. And there was a smaller point, a little smaller mix change of about 50 to 80 basis points.

Dinesh C. Paliwal

And also third piece is neodymium. Neodymium is about 230 basis point and half of 230 is coming from just the facto which adds up to the top line at zero margin and about half of the neo impact is a true cost impact. Chris, since you do so detail analysis let me tell you the way it’s working. Neodymium, we are very happy to report that, we had index in place, which means we’re able to pass on all the cost increases to our customers, but the way that works, it could have worked positively for us, but it does work that we charge the customer at the time of shipping, the spot of the neo and the neo prices have been coming down. So if we bought something at higher price, we are giving actually at a slightly lower price. So it’s a quarter impact maybe another quarter, because you are going to be done with neo by end of this fiscal year.

So that’s probably another $5 million or so to absorb in the fourth quarter. So that explains as Herbert said, 230 in neo, and about 200 basis point in expanding channels, factory ramp up, training of personal, adding dozens of sales folks and little bit of a mixed issue. That’s it, there is nothing unusual. And we’ve also said in our press release, we expect our coming quarters to have favorable margin development.

Christopher Ceraso – Credit Suisse

Okay, that’s helpful. And then just to check the China and Mexico the 200 basis points. We should assume that continues, right. Because you just to want to hop onto new business in China and you are pushing hard to grow in these markets, so there should be some ongoing investment level. Is that a reasonable level?

Dinesh C. Paliwal

No what I meant to say, this is a duplication we’ve bunch of people from U.K., Europe and America helping us ramp up. So we’ve lot of SG&A cost right now, also lot of training going on, lot of simulation programs going on. And also retraining and training some of the new channels. So I call it almost a one off because the rest, we should be back onto the normal SG&A cost level. So this is a ramp up of Queretaro in Mexico and Dandong in China.

Christopher Ceraso – Credit Suisse

Okay, that’s helpful. And then just last one, Herbert the – I know David asked about taxes, but what about specifically in the fourth quarter, as opposed to the full year average. What are you expecting in the Q4 fiscal 2012 tax rate to be?

Dinesh C. Paliwal

Yes, the way we do it Chris is the tax rate is always based on a full years, so full year is 22.1%. We expect it around the 22% level, but it could be 23% or 24% in that range.

Christopher Ceraso – Credit Suisse

Okay, and then just to clarify. You said for fiscal ’13 and beyond you expect it to be at 28% maybe a little bit lower, is that right?

Herbert K. Parker

28% is a pretty good solid number.

Christopher Ceraso – Credit Suisse

Okay, thank you.

Dinesh C. Paliwal

Thank you, Chris.

Operator

Our next comes from the line of Adam Brooks with Sidoti & Company. Please proceed with your question.

Adam Brooks – Sidoti & Co. LLC

Yes. Good morning. Just a quick one to start, and then if you will a follow-on.

Dinesh C. Paliwal

Good morning, Adam.

Adam Brooks – Sidoti & Co. LLC

Good morning. Just a quick one to start and then a few other follow-ups. Just may be an update on your expectations for scalable revenue for fiscal '12 and then for fiscal '13 as well

Dinesh C. Paliwal

Yeah, we’ve said in the past of course that we expected like $150 million, $160 million in this fiscal year from Toyota and what you have. And we should have about $500 million, $600 million in fiscal ’13, maybe slightly higher. So it’s going in that direction as we’re ramping up, Toyota, Chrysler, they’re all on this program and they are really showing pretty robust demand.

Adam Brooks – Sidoti & Co. LLC

And can you may be talk about any car stations you had with some domestic OEMs, looking out ahead may be over the next product life cycle taking on from Harman Infotainment?

Dinesh C. Paliwal

Domestic means, U.S. based right?

Adam Brooks – Sidoti & Co. LLC

Yes.

Dinesh C. Paliwal

Absolutely, in fact there are lot of discussion going on. We already worked with one, so other two there is a lot of discussion going on, but that’s so irony, I am in discussion and discussion and discussion. So we hope some day that discussion turn into something real. But I am very positively exposed in this discussion, and hopefully it will yield to something Adam.

Adam Brooks – Sidoti & Co. LLC

And can you give us a sense what utilization rates are right now in China?

Dinesh C. Paliwal

Utilization rate in China for the brand new factory is lower as we’re just ramping up. But our factor in Suzhou, it’s running pretty good. It’s running two full shifts. We can add third shift if necessary, but right now it’s running very well. It’s in the range of like 80%, 84% level.

Adam Brooks – Sidoti & Co. LLC

Okay, and real quickly on the corporate expense line, is that $28 million is that roughly what we should expect as a quarterly run rate going forward?

Dinesh C. Paliwal

I think so. It’s a pretty good number because some of the cutting edge innovation we drive more like in our Palo Alto lab and other areas would continue our marketing which is driven from the sales line, as sales in Beijing would continue to keep that. In fact we said that, on a year-over-year, Adam we may actually add 50 basis points or so because this is really helping us increase the audio take rates and whole multimedia. So the number you have is just pretty good number.

Adam Brooks – Sidoti & Co. LLC

All right. Thank you.

Dinesh C. Paliwal

Very well. Thank you Adam.

Operator

Our next question comes from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.

Ravi Shanker – Morgan Stanley & Co. LLC

Thanks. Good morning, everyone.

Dinesh C. Paliwal

Hi, Ravi. Good morning. How are you?

Ravi Shanker – Morgan Stanley & Co. LLC

Hey, Dinesh, I am well. A couple of questions on the numbers. Herbert, can you just help us with the seasonality of the infotainment margin as well. I think last year, your margins were kind of a little bit all over the place in the fourth quarters and this year you did see nearly as much of a sequential decline as you thought last year. Can you help us with what 4Q looks like and also if that’s like then your new normal seasonality?

Herbert K. Parker

Hello, Ravi. Giving information, we’ve said historically. We don’t give the quarterly guidance, but what we have said to all of our analysts that you are going to expect in third quarter for the APRs to come in, so normally there was a lower depressed margin that we will have. You can expect our first quarter is when we normally have our savings from supplier. Now the reason our margins were higher this past first quarter is because we have unusually high revenues. We normally do not have revenue that high in our first quarter. So it was a good development. Another thing you should know about, in the fourth quarter some times a lot of our OEMs will shutdown the last week or so. So that’s the color I can give you on what happen with our seasonality.

Ravi Shanker – Morgan Stanley & Co. LLC

Got it. And also on the new win, just – to the extent can you give us some more detail here, Dinesh you said that the previous business started out at $1 billion and then increased over time, can you give us the number that it’s exiting at before you move into this new $2 billion win?

Dinesh C. Paliwal

Yeah, Ravi, it’s hard to say because this new business, which is in production, going into production starting July, August, by the way, it has not started shipping yet. This is coming out soon. So indications from the forecast, from that customer are that, this will go at least 10% to 15% higher than the original award was; and that is, it’s going to be lifetime about three years.

After that runs off, the award which we just around $2 billion, that would kick in. And again, there are expectations that in next two to three years, the take rates would definitely be significantly higher than we have today, and also we are driving lot of professional services in our business to create recurring revenue, because we believe that more-and-more to increase the penetration of embedded, which is what OEMs absolutely count on, we have to bring the initial cost of ownership down, and start to build a business case more and more towards professional recurring revenues on services.

So I think, this $2 billion, by the way to begin with, this is more than $2 billion, we didn’t give a specific number, and it’s going to grow.

Ravi Shanker – Morgan Stanley

Very good. And just finally a bigger picture questions, you won some good new business with the Indian and Chinese OEMs, can you talk about how your conversations are going in both those regions, and also in Brazil, are you like aggressively looking to increase penetration and grow in these markets, or is this more of, you’re waiting for the business to come to you and are focusing more on the mid and high end markets?

Dinesh C. Paliwal

I think we are going to them aggressively, and we should because we are together with our global OEMs first of all, and they are growing very rapidly, like BMW is up 30% plus in BRIC market, so we are obviously going to ride with them. But to domestic automakers, I think it validates the Tata, BAIC, Geely, they have turned to us with the largest award ever. Then also had two implications: one, we have figured out how to win the jobs in these domestic automakers, compete against the competitor. We did not compete in the past and we still make money, that’s the key. So award we win, they have to be good profitable award otherwise we are not in. So we are aggressively pursuing both in India and China. Brazil not so much, because Brazil doesn’t really have a whole lot of new domestic OEMs, we work with existing guys for VW and Fiat and Chrysler; Ford is another one, which is reasonably represented, we don’t do much business with Ford. So all in all, very aggressively marketing our capabilities. And by the way, emerging market, BRIC countries, will have higher penetration rate to begin with. So they will have a higher scale than even other OECD countries had ever seen. So it makes it particularly more important that we are aggressively pursuing.

Ravi Shanker – Morgan Stanley

Great, thank you.

Dinesh C. Paliwal

Very well. Thanks, Ravi.

Operator

(Operator Instructions) And our next question is a follow-up question from the line of David Leiker with Robert W. Baird & Company. Please proceed with your question.

David Leiker – Robert W. Baird & Co.

Hello, again.

Dinesh C. Paliwal

Hi, David.

David Leiker – Robert W. Baird & Co.

Dinesh, I just want to make sure I’m clear on clarification on what I know. When you talk about your revenue from China and from the BRIC nation, how are you treating the revenue with the Chinese OEs with that on European branded companies particularly on Geely and Tata here?

Dinesh C. Paliwal

Well, those are not even – those are not into revenue of course, so they are orders right now. But sorry, I don’t follow you, how are we treating separately, you mean domestic versus global OEMs?

David Leiker – Robert W. Baird & Co.

No, you have this target, I mean, you’re talking about the success you are having in BRIC regions and things like that. Are you considering, these are really European branded automakers?

Dinesh C Paliwal

It’s total David, it’s combined because we are getting [rights] from that global OEMs whether, they are Hyundai, Toyota, or European automakers, for Asia, for BRIC markets, that’s actually turning into revenue, and of course now recently we have also started penetrating with infotainment and audio with the domestic automakers.

David Leiker – Robert W. Baird & Co.

Okay.

Dinesh C Paliwal

So in our SAP systems we track revenue by country, by region, we have good audited numbers. What goes into these emerging markets goes to Germany, U.S. or what have you and so that’s how we will continue to do.

David Leiker – Robert W. Baird & Co.

Okay, and this noise cancellation technology that you’re talking about. Can you give us some sense of what kind of revenue you generate on that on a vehicle level, I don’t know the scale, is it $50 or $100, $500 is there some scale you can expect the scale you can get us.

Dinesh C Paliwal

No, there is. It of course depends on the scope. By the way we are starting to see some wonderful success. We are already in Prius, we just got an award with Volvo and we are also going into Nissan which has not been our account, but we are going in. And of course German automakers talking to us and so are Hyundai and others. So give you a ballpark it’s a per car technology license, it is about $60 to $80 per car, so it’s pretty good, it’s a very high margin business.

More importantly this differentiates us from others, because others can not do it, as easily. And then we are supplying to Volvo now, EFS, this is an electronic engine noise cancellation, which is interesting. And when I was in China last week, the Chairman of Geely, Mr. Li Shufu, tells you how these emerging market CEOs are hungry for the latest technology. He asked us that, he won’t like to see that technology in his premier sedan in China, in Geely, so we’re quite excited.

David Leiker – Robert W. Baird & Co.

Okay. And then one last item here. As we look at the moving target, as I’m sure you are aware of the technology on what’s going in vehicles these days. And it seems like we’re really three different paths we’re on today, one is in embedded system like what you do with BMW today; there is one that’s integrating technology for multiple people, something that you see at a Ford SYNC or at the Toyota In-Tune, and then what we saw at the Consumer Electronics Show, is a lot of technology shown on how the smartphone gets manipulated through the vehicle by voice activation. Your thoughts on where that’s going, where your technology can play into each those three paths as consumers want more of this capability inside the vehicle?

Dinesh C. Paliwal

I think we obviously have very good understanding, because we are very closely integrated in the think tank of automakers. The way it’s going, David, it’s not either are, there will be a common play, there will be personal smart devices in the car with limited capability, no matter what we say, because they still cannot do more than two functions at a time, while we do seven or eight or nine functions simultaneously.

Second, automakers absolutely would not like to ship ever a car which costs 30,000, 40,000, 50,000 or 100,000 without a guaranteed performance, which is in the car. So irrespective of what operating what it is, so we’re working closely on both fronts. One, continue to provide automakers what they want, and this was a validation from this leading automaker to put $2 billion order for future. They’ve seen how we will bring latest connectivity in the car, at the same time, they will be working closely with all operating system based phone devices, whether it’s Nokia or Samsung or Motorola or Blackberry or iPhone, we integrate them. So it’s a – what you get, with phone you get some capability and with fully integrated, you get total capability, and both will be there and both will continue to grow. The good thing is, the penetration rate is only 20% or some percent, and car companies tell us that by ’15, they expect 50%, 60% penetration. So there it’s a lot of growth in this sector coming up.

David Leiker – Robert W. Baird & Co.

Okay. Great, thank you very much.

Herbert K. Parker

Very welcome, David.

Operator

Mr. Paliwal there are no further questions at this time. I’ll turn the call back to you. Please continue with your presentation and closing remarks.

Dinesh C. Paliwal

Yeah, Sylvana, we can now give another minute to our listeners, if there is anybody who has either follow-up question or a new question. So I’ll give one more minute.

Operator

(Operator Instructions)

Dinesh C. Paliwal

All right, let me make my concluding comments. First of all, ladies and gentlemen thank you for your questions. We do appreciate the time you’ve taken today to learn more about Harman, and our achievements. Let me tell you that, Harman is a clearly a secular growth story. We’re gaining some market share because of innovation, and very rich patent pipeline. We are gaining from attach rate, our penetration rate going up, we’re gaining from our pro audio, professional audio because a lot of infrastructure were going go, that’s why we are able to grow 8%, 9%, which sector is growing only 3%, 4%.

And on top that, we had a growth engine ramping up quite like nicely in BRIC markets where we have figured out how to get four times GDP which lot of other companies struggle. So therefore, I just want to leave our investors with big comfort, management team of this company is working hard, we have transformed the company, we had a good cost base in place, global footprint and great backlog with very good margins, and therefore we feel very comfortable, and we feel excited about coming years.

With that, I say, thank you very much, and have a terrific afternoon.

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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