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Harman International (HAR)

Q2 2006 Earnings Conference Call

January 25th 2006, 4:30 PM.

Executives:

Dr Sidney Harman, Executive Chairman

Kevin L Brown, CFO

Greg Henry, Treasurer& Principle Officer for Investor Relations

Bernard Girod, CEO

Analysts:

John Rogers, CitiGroup

Godfrey Burkett, SBK Brothers

Peter Barry, Bear Stearns

Lehman Brothers, Jeff Kessler

Ron Tadross, Bank of America Securities

Chris Ceraso, Credit Suisse

Scott Merlis, Thomas Weisel Partners

Operator

Ladies and Gentleman, thank you very much for standing by. We do appreciate your patience today while the conference assembled and good afternoon. Welcome to the Harman International Industries Second Quarter Fiscal 2006 Earnings Release Conference Call. Operator Instructions Certain statements made by the company during this call are forward-looking statements. These statements include the company’s beliefs and expectations as to future events and trends affecting the company’s business and are subject to risks and uncertainties. Persons participating on the call today are advised to review the reports filed by Harman International with the Securities and the Exchange Commission regarding these risks and uncertainties. Well with that being said and here with our opening remarks, it’s always my pleasure to introduce Harman International Industries’ Executive Chairman, Dr. Sidney Harman. Happy New Year, Dr. Harman and please go ahead sir.

Dr Sidney Harman, Executive Chairman

Happy New Year friends. Good afternoon, I am joined today again in Northridge by Bernard Girod, our CEO; Kevin Brown, our CFO; and Greg Henry, our treasurer and Principle Officer for Investor Relations. We will report today on our second quarter results and we will provide perspective on the balance of the year and the years ahead.

Consolidated sales in the second quarter totaled $832.645 million. On those sales, we generated operating profit of $115.860 million, a solid 13.9%. We are in the $1.07 in the quarter. As a consequence, we complete the first half of the year with sales of $1.587293 billion, operating profit of $194.053 million equal to 12.2%, earnings per share of $1.86. Five key elements effect and define our work.

The first is the continued growth of significant new awards to our automotive OEM division. The second is the arch of R&D expense. The third is the scale and quality of our consumer business. The fourth is the character of our professional business and the fifth is the impact of currency and taxes on our earnings.

I will comment briefly, Bernie and Kevin will develop each of them more completely. At automotive OEM, we have received two additional awards of consequence. We have been selected by BMW to develop and supply the next generation BMW infotainment platform. This totally new vehicle platform will be introduced in 2009. The development based on Harman-Becker’s scalable platform has begun; finalization of the contract is underway. We have also received the award from Mercedes Benz for it’s new E-class mid level infotainment system with full Navigation Display and Voice Control along with an all digital Logic 7® high content Harman Kardon branded audio system.

We are now very well positioned at BMW and we see ourselves as the prime provider for Mercedes Benz, with the entire S class, the mid level system for E, the mid level system for C and Harman Kardon branded audio systems throughout the range. When added to our recently received awards from Audi and PSA, these new commitments round out the order books for fiscal ‘08 and fiscal ‘09. We have a very active role in the full range of industry models from entry level to mid level to high end. Bernie will present an updated view of fiscal ‘06 and ‘07.

R&D expense is a major factor in our operations and it has understandably grown over the years. For the second quarter and the year, we expect it to be over 9% of sales, that level of investments in Research and Development will continue in fiscal ’07. It should begin to decline in ’08.

Our consumer business is very healthy and we have many good reasons to expect it to continue to grow at both the top and operating percentage lines. Sales for the quarter reached a $155.008 million. Operating profit of $21.993 million represented a very impressive 14.2% in the quarter. We expect operating profit to be a 10% for the year consumer and to grow half a point next year. We are the leading provider of multimedia products for iPod Docking and Loud Speaker reproduction.

In our new JBL On Time™, winner of the “Best in Show” award at Macworld earlier this month. And our new JBL On Stage™ have had very strong acceptance. Our unique Drive and Play has received numerous awards including “Best in Show” at the July ‘05 Macworld Expo in Boston and it received the “Player Of The Year” award from Playlist magazine. New music enabled phones from Motorola, Nokia and others should expand this market greatly and we are out front in this very promising area. Our new Harman Kardon Media Centers due in September ‘06 and January ’07 will add further fuel to a division which has established a stable position in an otherwise quite uneven consumer electronics world, stable now and continue.

Our professional business remains steady as you go and going. Sales in the second quarter totaled to $130.053 million. Those sales generated operating profit of $14.984 million, a very pleasant 11.5%. IQnet works and it grows the business. Our once troubled AKG unit is strengthening and developing well. In recent weeks, a string of announcements from DreamWorks, Universal, Warner Brothers, Sony Pictures, 20th Century has finally promised the financial support for new Digital Cinema Systems the distributors have been waiting for. There are years of opportunity for the 37,000 theaters in America are upgraded.

Currency and taxes have a major impact on our results. Now and going forward, I need not tell you that the direction of currency is extraordinarily difficult to project, but two contrary reviews are now prevalent. Numbers of European economist and their colleagues in Europe predict the Euro rebound to the level of 130. They sight economic progress in Europe, the new and highly regarded government in Germany and the continuation of major US deficits in budget and trade. Many of those we talked to in the United States acknowledge it as weakness but argue that compared to the alternative to the dollar is still the currency of choice.

Clearly, if the Euro strengthens we will be big beneficiaries. I emphasize that even as it has weakened, it was 130 at this time a year ago even as it is weakened we have produced excellent results. We forecast 2006 and 2007 with the Euro at 120, again if it strengthens beyond that we will benefit. It acts a more predictable but they surely impact our results. We show a 34.5% rate for this quarter compared to 32% a year ago. We expect approximately 32% for the year compared to 30.6% last year. We reported second quarter earnings of $0.92 last year and we reported $1.7 this year. Where last year’s results at this year’s tax rate they would show $0.89 on an apples-to-apples basis so a 20% increase year-to-year. More on exchange and taxes from Kevin and Bernie.

Finally, a word on industry dynamics and on alliances. Our infotainment systems are proliferating. Their application to driver assistance programs promises prominent further growth. Prices of infotainment systems are coming down but applications and volumes are rising. Through our unique engineering and software management we expect automotive to maintain 16% operating margins over the next years. New products such as personal navigation devices: the PNDs, are exciting serious interest and we are now serious players. We sold over 40,000 Becker traffic assist PNDs and the aftermarket in Europe in the first two months of its life. Observers of the industry, some observers of the industry ask whether PNDs will cannibalize infotainment systems, of course not. They will introduce growing numbers of users to the value of navigation and they will encourage many to opt for navigation in their car systems where a single HMI will control music, video, climate, telephone and navigation. You know that we have estude the nonsense of alliances de jour.

We have known all along that it was critical to build a complete unrivaled technology base and we have done just that. Now as new developments emerge, we are uniquely positioned to participate as equals with other leading firms in various areas of the industry. Intel has asked us to work together to develop the system architecture to the next generation automobile. The system will be optimized for performance-per-watt, temperature range, for connectivity. Harman will also use the optimized Intel architecture together with QNX® software suite for our next generation of the infotainment systems.

Our alliance with Motorola will soon be expressed in co-developed products, that will come to market to enhance the launch and user experience of new Motorola music enabled phones. A similar alliance is being developed with Nokia and our Apple expressions continue to grow. New distribution has developed, as that products have captured both imaginations and sales. Consider that in addition to Apple, BestBuy, Circuit City, Target, Radio Shack and others, Nokia has begun its own chain of stores. One already opened in the United States and another in Moscow and there are over 80,000 retail outlets operated by the carriers such as T-Mobil and Cingular each of which is a potential reseller of our multimedia products, we have the products and we have the channels of distribution and you now have Kevin Brown.

Kevin Brown, CEO

Thank you, Sydney. Net sales for the second quarter were $832.6 million, an increase of 6% compared to the same quarter of last year exclusive of foreign currency translation sales increased 12%, gross profit margin was 36.7%, an improvement of 1.4 percentage points versus the prior year. Net income for the quarter was $72.5 million, 11% higher than last year. Exclusive of foreign currency translation, net income increased 20%. Earnings per share was $1.07 compared to $0.92 in the prior year. Earnings per share would have been $1.15 excluding the effects of translation.

All three of our operating segments reported higher sales for the second quarter compared to the prior year. Automotive sales were $547.6 million during the quarter, an increase of 2%. Excluding foreign currency however, automotive sales improved 9%. Consumer sales grew 22% to $155 million, Professional sales were 130 million, 5% higher than last year.

During the quarter, the management considered the American Jobs Creation Act of 2004 and approved a plan to repatriate $200 million of cash from the company’s foreign subsidiaries. That decision resulted in only $1.1 million CapEx charge in the second quarter. The second quarter tax rate including this charge was 34.5% compared to 32% last year. We presently expect the full year tax rate to be about 32%. Cash flow from operations was approximately $200 million for the six months ended December 31st. Depreciation and amortization was $64 million for the six months and $32 million for the quarter. Capital expenditures were $45 million for the six months and $24 million for the quarter.

During the second quarter, we repurchased 444,200 shares of our common stock for $43.7 million dollars. We will continue our share repurchase program for the remainder of the year evaluating the by-levels quarter by quarter. The company has expensed employee stock options since fiscal year 2003. We expensed $4 million for stock options during the quarter equivalent to $0 04 per share. Inventory, accounts receivable and accounts payable all improved at December 31st 2005 compared to December 31st 2004.

Inventory was $321.3 million and inventory turns was 6.3 compared to 5.9 turns last year. Accounts receivable were $418 6 million and accounts receivable days of sales outstanding were 48.7 compared to 50.6 last year. Accounts payable were $218 2 million and days of payables outstanding were 39 versus 32 a year ago.

Our cash and cash equivalent balance was $394 5 million at December 31st, an increase of $124.3 million compared to last year. Total debt was $402.6 million, net of cash and investments that was 8.1 million. I will now turn to Bernie Girod.

Bernard Girod, CEO

Thank you very much Kevin. We are very pleased with the results for the second quarter. They are in line with our expectations and ahead of street estimates. I want to reinforce points that Sydney and Kevin have made, when you examine our performance for the second quarter and the balance of the year you need to take into account three factors which have a dramatic impact on our results.

First currency. In the second quarter Euro was up 1.19, last year it was 1.3, that’s an impact of 8% on sales and operating earnings. For the balance of the year, we are using a Euro rate of 1.2, last year it was 1.285, a reduction of 6.6%. The impact of currency is therefore substantial. In the second quarter, our sales grew at an actual rate of 12%, at constant currency rates. Likewise operating earnings in the second quarter grew at a rate of 26% at constant currency rates. The same will be true for the balance of the year. The Euro rate of 1.2 reported sales growth will be reduced by 5 percentage points and operating earnings growth will be reduced by approximately 7 percentage points versus the prior year.

The second factor is the tax rate, the tax rate was 34.5% in the second quarter. Last year it was 32%, an increase of 2.5 percentage points as explained by Kevin. For the second half of the year, we are forecasting a tax rate of 33%, up 5.6 percentage points from last year’s rate of 27.4%. Last year we enjoyed substantial one-time tax credits in the second half.

Third is R&D expense. In fiscal 2006 and 2007, we will be spending substantial additional R&D dollars to develop the systems for the approximate $1.5 billion of annual business we had won in the last year or so. Sales for these programs will begin in the latter part of fiscal ’07 and be in full swing in fiscal ’08. In the meantime, we will be spending more than our usual share in R&D. In the second quarter we spent $75 million on R&D, up $19 million from the prior year. In the second half of fiscal ’06, we will be spending approximately $157 million on R&D, $45 million more than the previous year. R&D expense in the second half and the year will be about 9.2% of sales versus 7.3% in the prior year. We expect that percentage to continue in fiscal ’07 and to begin dropping in 2008 when the sales for the new contracts begin to show.

From an operating viewpoint, the business is firing on all cylinders. The consumer group reported record results, the sales growth of 22% in the second quarter and operating profit growth of 70%. Second quarter operating profit percentage for the consumer group was a staggering 14.2%. The new multimedia products for the Home and the Car are very successful with sales of nearly $40 million in the quarter.

The OEM group continued to execute at a very high level winning new contracts from BMW and Mercedes Benz, while achieving its objective of 16% operating profits for the quarter. Sales were up approximately 9% when adjusted for currencies. Gross profits were up was for the quarter but as indicated during the last conference call, earnings were down because of R&D spending.

We expect automotive earnings to be up for the second half in the fiscal year. The professional group had a great quarter. Sales were up 8%, currency adjusted operating earnings were 11.5% of sales compared with 7.9% last year. We are particularly pleased with the progress of the European operations.

Looking forward to the balance of the year and to next year. Our earnings expectations have not changed. For the current fiscal year, we reiterate our EPS guidance of $3.85 per share. It suggests earnings of approximately $2 a share in the second half, 5% above the prior year. But please note that in the second half the currency impact on earnings per share is $0.11 and the tax impact is $0.15 for a total of $0.26. Therefore when adjusted for non-operating factors, i.e. currency and tax rate, EPS is up 21% for the second half and up 26% for the full fiscal year, well inline with our long-term objectives.

For fiscal ’07, we expect a modest increase in first quarter EPS, because of the low tax rate in the September ’05 quarter, but the balance of the year should be strong consistent with our prior expectations and statements, we expect a full year earnings increase of 15% to 20% and we will now take your questions

Questions-and-Answer Session

Operator

Well thank you very much Dr. Harman and our host panel today for your time and that presentation. And Ladies and Gentlemen as you just heard at this point we turn towards your questions and comments and we invite you to queue up for the panel today. Operator Instructions And representing Robert W. Baird & Co, our first question goes to the line of David Leiker, please go ahead.

Q - David Leiker

Must have woke up on the right side of the bed this morning. Good afternoon. I have a couple of leverage questions and then a bigger picture question, Kevin, where do you think a full year capital spending number comes in, you are running well below last year’s run rate?

A - Kevin Brown

Yes, we are running well below last year’s run rate. But we believe it will run above last year’s run rate in the second half. We would expect full year capital spending to come in very close to last year’s rate, well about $170 million.

Q - David Leiker

Okay, great. And then bigger picture, with the BMW business, this is really the first meaningful piece of business that you have that you are renewing that you originally had. And then part of the investment piece, as the part of that business model is, on those next generations you pick up more content and features and functionality. Can you talk a little bit about what this new business that you are going to learn from business – from BMW, call that fits within that table of matrix?

A - Kevin Brown

Oh yes, I am not great comfortable, David, but the suggestion is it’s the only one, we for example have also announced the new awards from Mercedes, so if -

Q - David Leiker

Right.

A - Kevin Brown

So if someone wants to examine this in terms of, is there a trend developing, I think that’s reasonable. We are not free to tell you a great deal about this BMW award. I feel comfortable telling you that, it is an altogether new platform, which, it is our expectation. We will serve BMW’s needs across the full range of its line. That’s a very encouraging development from our point of view. This represents, as we see it, a very significant new approach by an automotive maker who has demonstrated in recent years a stunning capacity for imagination coupled with aggressiveness and effectiveness. And so I think, the award that we announced today is beyond the fact that it is very good business, also very significant. Since you cast your question in terms of the big picture, I think it’s appropriate to me to just note that almost no day passes when we don’t read another press release about some stunning new developments from some giant in the field. This is about to revolutionalize the business, it has been going on now for the last 5 years. I think the significance of this award on which we focus is that, right there you can look at the prism of this industry. That award was almost predictably going to go the company best equipped over the long run. I think we should be properly on it that we were the choice.

Q - David Leiker

Wonderful, that is all that I need, thank you very much.

A - Kevin Brown

Thanks David

Operator

And thank you Mr. Leiker. Next in queue, we go the line of Scott Merlis representing Thomas Weisel Partners, please go ahead.

Q - Scott Merlis

Good Afternoon, gentlemen.

A - Kevin L Brown

Hi Scott, how are you?

Q - Scott Merlis

Just doing alright. Continuing with the BMW award and perhaps some other awards, the “scalable platform” is the term we use, but it hasn’t always been this scalable, is it becoming more scalable, if you define scalable as getting more economies of scale are common to architectures and software but between customers are among or across the model line of within a given customer. Is it becoming more scalable with the new generations?

A - Sidney Harman

Oh I think it’s fair to say that it has become more scalable over the last several years. Others might claim some role in that but I remind you, we were out that very early and when we were out there very early we were saying this is the key to the feature and in that scalable architecture you are going to find the answer to whether a company can deal with these systems on every level of the car platform including the entry level. That’s the opportunity in its general outline and I think it’s fair to say we have been the pioneer and the leader there. Bernie, do you want to add to that?

A - Bernard Girod

I would only add that, with the acquisition of QNX we have substantially enhanced our ability to provide a common scalable platform. And we are seeing the new evidence of that, I think you are well familiar with the QNX operating system.

Q - Scott Merlis

Okay, moving from big picture to numbers, could you just review the automotive operating income number again?

A - Bernard Girod

Sure Merlis. The sales for the quarter 547.6, gross profit of 206.9, operating income of $88 million, 16.1% of sales.

Q - Scott Merlis

$88 million?

A - Bernard Girod

Right.

Q - Scott Merlis

And, let’s see, and with the currency that would have been, without a constant currency?

A - Bernard Girod

The numbers are the same at the constant currency, of course, it’s the number for last year which changes. Last year, we had – we were obviously higher than last year in sales, in the gross profit, in gross profit percentage. The key difference is operating expenses versus last year.

Q - Scott Merlis

It's the R&D.

A - Bernard Girod

That’s the R&D, that’s all R&D. Now last year we had some unusual one-time factors as well, we had 19.1% of sales in the second quarter of last year so it was an unusual quarter. We finished the year with 16.2% of sales in automotive. Truly up, clearly the second quarter of last year was unusual, on top of that there is currency and so on so forth. So we are right on target with our number and you know that we telegraphed this very event for, we have been telegraphing that for a long time.

Q - Scott Merlis

Right, no just from one telegraph but the way to think of automotive operating income, you opt in the second half is the comparisons were easier and the R&D comparisons gets a little bit easier I guess. But as there other things going on such as the S-class being even move of a startup, are there some throughput in volume?

A - Bernard Girod

Scott, let me just comment this way. First of all, the S-class is a stunning success, stunning success as a vehicle and a stunning success for us as the platform. It’s been a flawless launch, it’s a wonderful product that has no bug, works very well, nicely profitable for us. And thus in the second half, we are going to see an improvement in automotive operating profit for nearly a point versus the prior year. And you are right, the operating expense comparison gets a bit easier, it ought to be about the same as last year. So overall we are expecting the second half to be well within the 16% operating profit range that we’ve been expecting and well above last year.

Q - Merlis Scott

Okay and once if you just review the R&D in the second half. Just so we can close the loop here? To make sure that I get the numbers written down right.

A - Bernard Girod

Right. R & D for the year is $300 million and we spent $144 million in the first half so I’ll let you do the math, it is complicated for me. Thanks Scott.

Q - Merlis Scott

Thank you.

Operator

And thank you very much Mr. Merlis, next we go to the line of Chris Ceraso representing Credit Suisse, please go ahead.

Q – Christopher Ceraso

Thanks, good afternoon everyone. Can I ask about the E-Class, are you wining incremental content here? It sounds like you just doing a middle of a program based on the press releases, who’s doing the high level program, is this net larger or net smaller than your current business on the E?

A - Bernard Girod

The E-class is for the mid system. Let me first tell you what we mean by mid system. This is a mid system with full map and full navigation and pretty fully featured. So whereas its going to pass, the mid was a turn-by-turn or fairly simple system. This one is pretty elaborate and pretty fully featured and we think the installation rates will be quite high on the E-class. All that being said we don’t have the entire vehicle that we have now so for that particular vehicle volume will be the dollars of sales will be down versus what we currently enjoy. That’s something we’ve known for a long, something we’ve been expecting and it is well within the range of the forecast of sales on earnings that is in our five-year plan.

A – Sidney Harman

I’ll simply add to that, there had been considerable speculation about how all of that business was going to go and there were those who rather anticipated that Harman would not be a significant player. For two reasons we think the awards of the mid-level system both for C and E when coupled with the S priceless in the preeminent world. Experience in the past has suggested that we time and again pick up level of business that we had not originally forecast. That possibility exists in a system of the feature level that Bernie has just suggested. I would simply emphasis the view that we are quite comfortable with our position at Mercedes and we sit across the range of those cars.

Q – Christopher Ceraso

Can you share with us what’s different about the high level system and why they decided to go with the different suppliers, are they just running out the business?

A – Sidney Harman

First of all I think you can say these two things. It is should be no surprise to anyone but the automakers, numbers of automakers feel they are better positioned as they have more than one supplier. I remember making the comment five and six years ago. We had no anticipation, no thought, no conceit that we could somehow get it all. So that is part of what is going on here. To avoid anybody whispering, they may give us the sour grapes, we just tell you, but our experience in this role tells us if you had to choose between the mid and the high, likely you’ll do better with the mid. There isn’t that much difference in functionality and performance, this will hardly surprise you between the two systems. And there are - they are options. I think we are going to do quite well.

Q – Christopher Ceraso

Have you picked up incremental audio here?

A – Sidney Harman

Well I think it depends on your definition of incremental but I’m comfortable announcing to you that we will have a Harman Kardon branded system across the entire range, mid and high everywhere.

Q – Christopher Ceraso

And that’s more than what you currently have.

A – Sidney Harman

Oh yes.

Q – Christopher Ceraso

Okay, and then I guess lastly, the 50 basis point expected growth in operating profit for the consumer business it sounds slower than what you had been expecting in the past. Is that just because the margin got higher sooner than you thought or are you seeing a slowdown in the profit growth there?

A - Bernard Girod

Actually I think we’re probably being a little conservative. But that’s a pretty good number for now. Keep in mind that the topline is growing at a very high rate from next year we’re looking at better than 25% topline growth, so with an improvement in operating profit percentage of 50 basis points, it gets you some pretty nice numbers.

A – Sidney Harman

That was a pretty snappy margin on the consumer side and I think probably pretty good idea for us to project cautiously.

Q – Christopher Ceraso

Great thanks a lot.

Operator

And thank you very much Mr. Ceraso, next we go to the line of Ron Tadross representing Banc of America Securities, please go ahead.

Q – Ron Tadross

Okay good afternoon guys. Just two questions. First, as I just looked at your auto business excluding currency year-to-date your sales growth has been about 7% and I am just wondering if you can give us an idea of the range of revenue growth in that business for the second half but then excluding currency and then the other question is, the bigger picture, can you just give us a timeline to where you see opportunities in Japan for your infotainment business and maybe Toyota specifically?

A – Sidney Harman

Let me answer the first part of the question, first 7.3% excluding currency for automotive for the first half and the 8.9% for the second quarter. The second half will be a little more vigorous. We expect 12-14% improvement in sales, again currency adjusted year-over-year. So for the full year apples-to-apples we should be over 10% sales growth. Opportunities in Japan...

A- Kevin Brown

I will speak to that, your question is, can we give you a timeline? And the answer is we cannot. It is moving more slowly, you asked particularly about Toyota it is moving more slowly at Toyota than we would have wished. It’s moving more slowly at Toyota for us and for everybody else on earth. This outfit is doing the work, its closer every year to making its original determinations about the platform, my expectation is that we will see the first expression of the decision there related to Toyota’s operations in Europe. I maybe wrong but what evidence I’ve seen and read suggest that. But it is very difficult to project, it’s certainly not within the next year or so.

Q – Ron Tadross

Yeah I appreciate that, I know it is once they get going, they go quick but it takes time. Is there any significance just lastly, I mean I heard that Toyota assembling an internal telematics group, I’m wondering if you are aware of that and if so, is there any significance for that for your effort?

A- Kevin Brown

We’re aware of this of course, in fact if you’d ask me about that six months ago, I would have said we were aware but their people are working with them daily. It’s a good move by Toyota because in the past one of the things that they found difficult is that so many of their efforts were split into various smaller groups, there was radio group and a navigation group and so on so forth. They really putting all of that together, putting some focus on that, bringing the right resources together so we think that it’s a good move.

Q – Ron Tadross

Thank you.

Operator

And thank you very much sir. Next representing Lehman Brothers we go to the line of Jeff Kessler, please go ahead.

Q – Jeff Kessler

Thank you. Shifting over to consumer as you folks were presenting your unification but the item came up on the news that Harman are actually JBL’s collaboration with Motorola. You have talked about music phones for a little bit, you talked about numbers. Could go into a little bit about exactly what part of Harman will be utilized in these music phones and what the consumer - ultimate consumer and user is going to face when these things come out in 2007 and 2008?

A- Kevin Brown

Hi Jeff, these things are out now. There is a growing proliferation of music phones. Sony, LG, Horizon, just that everybody, one might argue that somewhat earlier than we had anticipated that’s a kind of complex formulation. The reality is that what’s appearing now, including if you’ll let first expression which was presented as a combined effort by Motorola and Apple, what’s appearing now is now shall I put it the awkward stage. The iPod remains the benchmark even if it is itself not a cell phone. But if you going to measure the music-enabled cell phone, you got to measures its facility, its speed, its utility against by benchmark and as of today there is a substantial way to go. Downloading, navigating storing the music this is pretty awkward if anyone has played with it. Hardly a surprise, pretty good that it is out there it is relatively early as it is. I expect to see exponential progress by numbers of these guys. The primary expression that will not be exclusive, the primary expression for us is going to be a cell phone equivalent of the now multiple product multimedia line, that includes on JBL, On Tour, On Stage, On Time and the more fully developed On Stage II and the like. We will be, I expect the leaders in developing similar products for application to cell phone. As for the numbers we’ll probably along with you and everybody have a better sense of this when strategy analytics new study is out in a few weeks but just staying with the number that’s they kind of introduced most are pretty well embraced in the course of the last year, this expectation will be up to a billion music-enabled phones in ’09, that still seems like a reasonable prospect. Consider Jeff with all things accounted, iPod is probably sold somewhere between $35 million and $40 million that is a stunning, stunning performance.

Q – Jeff Kessler

Are we talking about JBL transfusers and AKG microphones in the phone, can JBL pull in AKG into this?

A- Kevin Brown

No, no. Let me repeat, emphasize what I’ve said. I am not talking about the product that we provide for the maker of the phone to be incorporated in the phone. We may see a role there for us because of our expectedness in the software arena, but that is not what I am talking about, it is not what I spoke off. I said that you would see from us a line of products that would be the cell phone equivalent of the line of products that has been so successful for adapting the present iPods. Thus the current JBL On Tour, On Stage, the new JBL On Time. Those are devices as you know which dock the iPod, charge the iPod and reproduce aloud at very good performance quality level to music, which you are otherwise obliged to listen to through earphones. That’s what exists today. We expect to be producing a similar line of products, which will easily accommodate the new music-enabled cell phones. As I have made that clear, let me stick to the rest of your question, which had to do with numbers. Market scale. I’d said that to date there have been to 35 to 40 million iPods sold, pretty much that since the start. We have sold somewhere between 1.5 million and 2 million of our iPod enabler systems. That’s a pretty nice percentage of the total number of iPods 5%. Hey Jeff what’s 5% a billion cell phones? I’ll do the arithmetic for you, it’s 50 million. By no means am I suggesting you we are going to sell 50 million of our multimedia devices, these equivalent of On Tour, On Stage, On Time. Well we’ll get a pretty good piece of those. We continue very bullish about that consumer opportunity.

Q – Jeff Kessler

Can you go just briefly into, I know it’s a small item but the minority interest item that appeared this quarter which is actually more like a minority credit, what was that?

A – Sidney Harman

Yes. As we announce last quarter the company made an investment and formed a joined venture with a Korean navigation and software company called Navis, we fully consolidate the results of that joint venture in our financial results and this minority interest credit that you see this quarter is the result of us giving back to the minority partner in share of what were loses in the quarter. For your models I would expect that will continue for the next several quarters probably at about that same level, its very small.

Q – Jeff Kessler

One final question over the last quarter or two, you’ve become much more transparent in giving out and we’ll say dividing up your consumer and multimedia business, are you comfortable, obviously you are comfortable doing this, are your client’s comfortable seeing this?

A – Bernard Girod

In what way are you referring to, Jeff?

Q – Jeff Kessler

The margins in your automotive business specifically and dividing up all divisions which is great for us analysts maybe not -

A – Bernard Girod

Let me answer you quite simply. I suppose if we designed the world all by ourselves and there were no rules and no SEC and no good practice to follow, we might make it more interesting for you by being the place open but the requirement that we display our business engagement in those sectors is a requirement. If it’s a requirement we follow it and we lay it all out and. Am I uncomfortable with our customers knowing it? Of course not. The reason I am not uncomfortable is that I have the most profound respect for our customers. They don’t need us telling this stuff. They can almost nail to the penny what things cost their suppliers at every level, so you know, we conduct our business we know that our customers at every level are looking for value and price we keep providing it. Our job is to keep providing better prices for them and still maintain serious margins for us, we are doing a pretty good job of that.

Q – Jeff Kessler

Ok thank you very much.

Operator

And thank you very much, Mr. Kessler, next in queue we go to the line of Peter Barry representing Bear Stearns, please go ahead.

Q - Peter Barry

Thank you good afternoon gentlemen. Bernie, you were kind enough to give us gross profits for the OEM segment, would you be so kind as to do it for pro and consumers as well, please?

A – Bernard Girod

All right. Gross profit second quarter consumer, the numbers $52.3 million, 33.7% of sales, operating income was $22 million, 14.2% of sales, up 69%. And on a pro side we’ll give you sales of $130, gross profit of 47.9 or 36.8% of sales. Operating income of $15 million, 11.5% of sales, up 53% versus prior year. Now these are the numbers of current currency rates obviously.

Q- Peter Barry

Bernie, while I have you, you spoke glowingly about the S-class launch. I think it is generally understood that it wasn’t exactly a terrific environment for luxury vehicles in Europe in the December quarter, one was that true? And two did the sell in, if you will that take away the S-class fly in the face of that and will you give us an update on the North American launch?

A – Bernard Girod

Okay I will answer your six questions if I remember them but I’m an old man, I’ll probably forget half of them.

A – Sidney Harman

Peter has made you that.

Q- Peter Barry

An old man too asking old man’s questions.

A – Bernard Girod

Mercedes volume are well - our volume with Mercedes was up very nicely, nearly 20% in the quarter currency adjusted. The S-class is doing just terrific, production volumes are in excess of our expectations as our installation rates, which are obviously very high. But this softening that we referred to is, has been felt, there is a or just to be amusing there is a shell game going on in Germany among the E-class, the BMW 5 and the Audi A6. And so in anyone quarter one is up the other is down and currently the E-class and the C-class in particular are down at Mercedes Benz, not our installation rates, not our pricing but the physical production of those vehicles is well down versus prior year and versus our expectations. On the other hand the S-class obviously is way up and doing very well as the new M-class volume that we have is doing terrific, the R-class so on so forth. And the Audi A6 by the way since you speak about luxury vehicles the Audi A6 continues its great success.

A – Sidney Harman

Peter, the one thing I quickly add to that is that the S-class was a very important development for Mercedes and you know why? Every indicator, every bit of evidence that we have seen, every bit of evidence that we have seen suggested that is one hell of a vehicle and that with it they have probably reasserted their positioned in terms of quality and we’re quite proud of the role we played in that.

Q- Peter Barry

So are there any implications for North America given your comments?

A – Bernard Girod

Oh I think it’s going to be a successful car, Kevin made the point, you made the point so much of this is not as much a function of how good a car it is. It is much more function of how good an audience we’ve got. How good a market this is going to be. It will do well in this market. It is much more difficult for us to tell you what kind of market its going to be.

A - Sidney Harman

And keep in mind also that the S-class is a rolling launch over some period of time, there are new engines that are being offered every three to six months they are the larger, smaller engines, diesel engines and different versions of the vehicles so we expect that there will be some nice growth in the S-class for quite sometime.

Q- Peter Barry

Sydney, could you give us some update on the latest JV and what role that might play and whatever progress you make in the Asian market?

A - Sidney Harman

Yeah. They been extraordinarily impressive to us in the time that those people had and the time that the JV as can put together. I think it’s in one respect the key our success if we have the success in China. That outfit is going to irreplaceable in that respect. We got a lot of work to do there but we’ve got the tools and that was the whole point of the joint venture.

Q- Peter Barry

One final one from me, bulk of music-enabled devices and what you can bring to that? When might we see a meaningful enough ramp in revenues given the size of the numbers that we are looking at over the next several years?

A – Kevin Brown

I hesitate to answer the question I’ll give you I think some help by explaining my hesitation. We have been speaking about 2009 as the breakout year and I’m perfectly comfortable with that. There is 2007 and 2008 intervening, it would be very sweet if we saw some serious activity there. Two things need to get done and we are not the guys who are going to do it before that breakout can really occur. The first is the resolution of the behavior of the cell phone for music as I was reviewing it earlier, you will remember that discussion. I hope you’ll remember that discussion.

Q- Peter Barry

I do.

A – Kevin Brown

So I won’t repeat that. The other is what I’ll loosely call “infrastructure” and that’s still kind a confused. You got the carriers, you got the phone makers, you got the music providers, who gets paid for what and how. Where the things going to get sold, there are lots of stores out, there is lots of interests out there, but here are two coordinates that need resolution. If we had a magic wand that could make that resolution come to pass right now we do it, because we’d be ready to get on that wagon quick. All we can do is hope to see that comes to pass, I am sure it will whether we have to wait to 2009, whether it will happen in a year or earlier, its too early to tell, ask me again three months from now, will you?

Q- Peter Barry

ASPs will be roughly the same as on the iPod device?

A – Kevin Brown

Yeah sure.

Q- Peter Barry

That is it for me, thank you very all of you.

Operator

And thank you very much Mr. Barry. Our next participant in queue is Godfrey Burkett with SBK Brothers, please go ahead.

Q- Godfrey Burkett

Bernie, our ratio of a year in CU and call you in terms of any editions?

A – Bernard Girod

You poker player?

A – Kevin Brown

Then you to get on with it pal because we are -

Q - Godfrey Burkett

You speak from experience I know, depreciation and amortization this year please?

A – Kevin Brown

Depreciation and amortization has been running about 32 million a quarter, we expect it to run right about that pace, about 130 million on the year.

Q - Godfrey Burkett

Okay very good. Now when you use these estimates that you get being the 385 and then the 16% to 20% increase next year Bernie, I’m assuming that the QNX which was going to loose about $0.16 or $0.17 annually or $0.04 a quarter but that’s right on target?

A – Bernard Girod

Yes, it’s continuing.

Q - Godfrey Burkett

Okay, so all right good, so I mean there are no disappointments?

A – Bernard Girod

No not at all quite the contrary.

Q - Godfrey Burkett

And then you remember last time I asked you about your replacement for Frank Meredith, can you bring this out today on where you stand on that program?

A – Sidney Harman

Oh you’ve been listening to him today, Kevin Brown is our CFO. We think he is doing a superb job.

Q - Godfrey Burkett

Terrific okay thank you very much guys.

Operator

And thank you very much Mr. Burkett. Our final question today comes from the line of John Rogers with CitiGroup, please go ahead.

Q – John Rogers

Yes, thank you, most of my questions have been answered, I just I wanted to clarify I think you had said earlier that the home entertainment business was 40 million in the quarter and I was wondering what that comparable number was last year?

A – Bernard Girod

The comparable number was 22 million, its actually 42 million in the current order, last year it was 22 million.

A – Sidney Harman

It is pretty snappy growth, isn’t it John?

Q – John Rogers

That is pretty snappy growth. I just have one more question and I guess that as I look at R&D with the backlog and I understand this arc that you are speaking out but is the R&D going to support the backlog through 2008 and 2009 or is that going to develop products for growth beyond the backlog that we can see right now?

A – Bernard Girod

The bulk of that is to develop the products that the award that we received which launched in late 2007 and then to 2008, 2009 you know the Audi award, PSA Chrysler primarily and now BMW so we typically there’s a three-year development time before you see the first 1st, a dollar of sales, that’s just expenses that you have to have ahead of time.

Q – John Rogers

All right thank you.

Operator

And thank you Mr. Rodgers. With that Dr. Harman, I will turn the call back to you for any closing remarks.

Dr Sidney Harman, Executive Chairman, CEO

I’ll make it brief, Brent, and I thank you for help. Just from my point of view is and has always a good exchange. I can’t resist noting for those of you who have been with us now a lengthy time but we just reported on what must be our 21st consecutive solid, solid quarter. I hope we didn’t sound inappropriately aggressive today but I tell you we are feeling pretty good about the health and the shape of this company and the role we are playing in all three parts of the world. If we can produce the kind of results we did in this quarter and we are very confident about what we are going to produce at year-end in the face of so many uncertainties, in the face of very unhelpful currency and the tax circumstances as they are, then I think we have good reason to feel that in essence this is a strong well position company, I can’t resist noting that our balance sheet speaks volumes about that, so not unnecessarily aggressive, not unwisely confident, but feeling pretty solid, we have got a very good company we are going to do very well and we thank you for your help.

Operator

And we thank you doctor as well, simply inspiring and very nicely said as always doctor. And ladies and gentleman your host is making today’s conference available for digitized replays for one week and also for replay on the company website for 30 days. Now the phone digitized replay is available starting at 8:00 pm Eastern Standard Time till February 23rd – dial 800-475-6701 and at the voice prompt enter today’s conference ID of 815075. Alternatively you may go www.harman.com to listen to the replay on the company website and you’ll need to enter the access code of 815075. That does conclude the press release for this quarter. We would like to thank you very much for your participation as well as using AT&T Executive teleconference service. You may now disconnect.

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Source: Harman F2Q06 (Qtr Ending Dec 31, 2005) Earnings Conference Call Transcript (HAR)
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