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Executives

Dinesh C. Paliwal – Chairman, President and CEO

Herbert K. Parker – EVP and CFO

Analysts

Christopher Ceraso – Credit Suisse

Ryan Brinkman - JPMorgan

Ravi Shanker – Morgan Stanley & Co. LLC

Adam Brooks – Sidoti & Co. LLC

David Leiker – Robert W. Baird & Co.

Doug Thomas – JET Investment Research

Harman International Industries, Inc. (HAR) F4Q12 Earnings Call August 10, 2012 11:00 AM ET

Operator

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Harman fiscal 2012 fourth quarter earnings call. (Operator Instructions)

I would now like the turn the conference over to Dinesh C. Paliwal, Chairman, President and CEO. Please proceed.

Dinesh Paliwal

Good morning ladies and gentlemen, and thank you for joining the Harman fourth quarter and full-year 2012 investor and analyst call. I’m joined in Stamford, Connecticut today by our Chief Financial Officer Herbert Parker and our Vice President of Investor Relations Robert Lardon.

We had an outstanding year, and I’m pleased to report solid progress with sales up 16% and operating income up 47% for the fiscal year, with a nice increase of 41% in earnings per share for the year.

I’m extremely proud to report that we continue to innovate and invest in technology. We added some 600 new patents and patents filings this past year, and our invention portfolio has grown to 4,400, almost doubled in the last five years. Our strong pipeline of new products in our [inaudible 2:27] branch and expansion of our channels globally position us for healthy secular growth.

We are on the forefront of developing connected car technologies, with a focus on active driver safety. As you know, we successfully collaborate and integrate technologies from Google, Apple, Microsoft and other partners. Actually as a very good example, just a couple days ago, Chrysler put out a press release, and let me talk about it. Harman just launched a latest infotainment system to Chrysler, it is called Uconnect. This will for the first time connect to a cellular network in the United States without an on-board smartphone. Just think of how many percent of Americans carry smartphone in the car, not too many. This is first in the industry that it is phone [inaudible]. The new technology will debut in the 2013 model Ram 1500 pickup truck and 2013 SRT Viper. This Harman technology will allow consumers to use voice command with a touch button on the steering wheel, to do Bing-powered internet searches, read and write text messages and enter navigation destinations without multiple prompts. Vehicles equipped with this Harman technology will also be able to serve as a mobile hotspot. Chrysler’s infotainment chief, actually, Mario Zenios, called it “one-stop shop and connectivity, online apps and smartphone integration.”

So moving along, car companies have done very extensive research on consumer needs and technology solutions available. Embedded infotainment ranks very high on each automaker’s priority list, principally due to safety requirements and the need for full integration with the car’s sensors and other subsystems in the car. Research validates that embedded infotainment system penetration will continue to grow rapidly, and it will be complemented by smartphones. I remind everybody that only 20% of the cars currently have embedded infotainment systems, and this is likely to go up to 50% within the next five years. In addition, basic telematics and basic connectivity will also grow in the car via smartphone integration. And it’s likely to go from less than 5% today to some 30% in five years. So, these trends really put Harman right in the sweet spot of a big growth opportunity, given our leadership in automotive embedded infotainment system, design and smartphone integration capability.

I also want to remind you that Harman has led the smartphone integration and we will provide the service to car companies just like what we did with Chrysler this past week, just like what we are doing with BMW this fall. With or without an embedded system in the car, our record car intake for embedded infotainment system and the recent awards from leading automakers confirm our strategy and business model.

On that note, we are pleased to have scored several key events during fiscal year 2012. We extended our relationship with BMW through a 2 billion+ order that we shared with you on the last call. And earlier in the year, we booked a 400 million [inaudible] award for Porsche-Volkswagen group.

To meet the growing demand for entry-level embedded infotainment systems, Harman launched a new scalable infotainment platform targeting entry and mixed segment vehicles. It didn’t take much. We had immediate success with this launch and we penetrated Asian automotive companies and one scalable next generation system orders from Tata Motors of India, China’s BRIC, [inaudible] and several others.

Today we are pleased to share with you a new [inaudible] major breakthrough award. We have received a significant new order from the world’s largest automaker, General Motors. This $900 million order will provide General Motors with a new, advanced, scalable infotainment technology. [inaudible] success in Europe, Asia and now North America with Chrysler, General Motors, thoroughly enforce our leadership in these technology areas. It is important to emphasize that our sales by final destination are very diversified, as shown on slide eight of your deck.

The EU5 represents only 30% of the company’s sales; 74% of that 30% is in robust German market. Therefore, our exposure to European uncertainty is hardly any. We have got nothing to do with Greece and several other slumping economies, so long Germany continues to do well.

Our strong sales base in BRIC markets has also reduced our dependence on mature Western economies. Our global marketing campaign featuring celebrity ambassadors such as Paul McCartney, Maroon 5, Jennifer Lopez, Liu Huan, A.R. Rahman and Tim McGraw, is delivering increased brand awareness and improved automotive take rates in all our key markets globally.

Our emerging market growth during fiscal year 2012 has been outstanding. Amidst the infotainment and branded audio wins noted earlier, we have continued the expansion of our resources in high growth markets. In China, we opened Harman’s largest new manufacturing facility in Dandong, established a brand new engineering center in a city called [inaudible] and inaugurated our second Chinese flagship store in Beijing. We continue to add resources at our multiple development facilities in India, China, United States and Germany.

We are strengthening our presence in Russia and our operations in Brazil as we pursue opportunities like 2014 Sochi Winter Olympics, 2014 FIFA World Cup and 2016 Rio Olympics, to just build on what we did successfully at London Olympics with our professional audio systems. In addition, we recognize the need to remain vigilant against uncertain global economic conditions. Fortunately, the luxury market, car market in particular, continues to show resilience and new automotive customers like GM will strengthen Harman’s access to the world’s top three [inaudible] markets.

We will continue to pursue growth in both established and emerging markets, positioning Harman as a diverse global player. Our strategic efforts over the last five years have now transformed Harman to a secular and balanced growth company. Our aggressive innovation focus will remain a critical element of this growth. As a prime example, Harman’s scalable system approach has reduced our development costs and dramatically shortened our time to market. Earlier this week, we announced we will acquire Interchain Solutions, a Bangalor, India-based infotainment and telematics company, with expertise in Google and Droid-based open system solutions. Together with our technology portfolio and talented engineers, we are well-equipped to compete on the [inaudible]. We have built a globally competitive new Harman by taking out 450 million in prominent costs, while redirecting our capital investment by realigning our sourcing for cost and currency and by rebalancing our workforce to best-cost countries, with 50% of our workforce now located in fast-growing, emerging markets.

Ladies and gentlemen, I have told you earlier that Harman’s strategy is to build an organization that can compete profitably in any economic cycle, and we are well-positioned now. We have worked hard to build a strong balance sheet that facilitates all of these pursuits, and in the last quarter we took advantage of market opportunity to repurchase our stock and announced the doubling of our dividend from $.30 to $.60. I am very proud of Harman’s management team, and thousands of employees worldwide who have embraced this culture of continuous improvement and performance culture. And we are committed to furthering this trend.

Before I ask my colleague Herbert Parker to take you through our key financial data, let me share a few highlights of fiscal year 2012. We outpaced the market, with sales up 16%, BRIC markets grossed 31%, lagged by China at 42%, which obviously gave us a 41% increase in earnings per share. We posted our 11th consecutive quarter of improvement in both top and bottom line, with our EBITDA growing at a compound aggregate growth rate of 245% during this period. We have continued to book major, multi-year awards with leading automakers in Europe and Asia, while landing a new significant order from GM. We booked a record high $5.2 billion in automotive orders during fiscal 2012, and our automotive backlog now stands at a record high 16.1 billion, and now comes the real good news. This backlog of $16 billion now carried double-digit profit margin. This is the sure thing, which investors like to hear, that what the stream of revenue will look like in coming years. None of us could say that four years ago, five years ago, two years ago, but we worked on replenishing the bad business with good business, while running off the platforms which was generating low-margin business. That took a lot of discipline, a lot of courage, but we have built that culture now. We have more than doubled our patent portfolio in the last five years, and our new product pipeline has never been so rich and relevant. Our balance sheet is healthy, positioning Harman to readily meet its obligations and to search out strategic opportunity for growth.

With that, ladies and gentlemen, it’s been another exciting year at Harman. Our team is energized to carry this performance into fiscal year ’13, and we look forward to the continued support of our customers, employees and shareholders, who are cementing Harman’s position as the go-to global technology leader in audio infotainment.

Thank you for your attention, and I will now ask Chief Financial Officer Herbert Parker to provide some additional color on our fourth quarter and full-year results.

Herbert Parker

Thank you, Dinesh, and good morning to everyone. We’ve closed yet another very solid year of operational and financial improvements, and I’d like to review just a few of our highlights. As always, most of our financial comments are provided on a non-GAAP basis, which basically excludes restructuring costs and other nonrecurring items. The reconciliation of our GAAP to non-GAAP results is included in the release, but for your convenience, we took a $9.4 million charge in restructuring [inaudible] this fiscal year.

Okay, starting with the topline. We increased our annual revenues by 16% to $4.4 billion, and if you exclude the impact of foreign currency, we grew at a rate of 17%. We are pleased to have produced strong, double-digit growth in both infotainment and lifestyle divisions, combined with the delivery of double-digit EBITDA percentages in all three operational divisions. I’d also like to point out that since fiscal 2009, our total automotive backlog has grown from 10.9 billion to 16.1 billion to-date, and this is an all-time record for Harman.

As shown in slide six of our slide deck released today, this backlog growth is not only related to our existing business, but we have also grown our backlog of new business and new customers from 2.7 billion to 4.5 billion in the same time period.

Okay, speaking of our gross margin, it expanded by 90 basis points during the year, despite the headwinds we faced in the lifestyle and professional divisions from the neodymian commodity cost increases. The increase in margin percentage was driven by economies of scale on our fixed costs, coupled with our continued benefits from our ongoing global footprint initiative, and our relentless focus on cost efficiency. We also continued to improve in our control over costs. Our full-year SG&A expense declined by 60 basis points to 20.1% of sales, compared to the prior fiscal year, even though we were simultaneously increasing our investments in global brand awareness. These improvements translate into 150 basis points increase in operating income, representing an other annual increase of nearly $100 million.

Net income for the year was $211 million, and our earnings per share were $2.93, compared to $2.08 per share in fiscal year 2011, this is a 41% increase. Our effective tax rate on a non-GAAP basis was 21.9%.

Now, regarding the status of our balance sheet items, we reduced our year-end net operating capital as a percentage of annualized sales by 120 basis points to 11.6%. This was primarily driven by DSO and DPO improvements, which was also a key contributor to our ability to generate $260 million of cash from operating activities. As such, our immediate access to available cash, or total liquidity, now stands at 1.4 billion as of the end of this fiscal year, and this gives us sufficient capital to cover our future operating, financing and investing requirements.

Now for the benefit of any new investors, let me state our capital allocation philosophy. We follow the same type of disciplined approach for deploying our capital to the highest and best use as we do with the allocation of operational resources required to drive improvements into our P&L. Each alternative, whether it be an organic growth investment, acquisition or buyback, is indexed against each other and against the value that a stock buyback program provides as a key hurdle. Having said that, it is our belief and experience that long-term sustainable shareholder value is best created through investing in organic growth opportunities such as building our footprint in the BRIC countries, combined with accretive acquisitions that either add complementary technical capabilities or provide distribution access to emerging markets. We’ve also determined that the delivery of a growing sustainable dividend stream is an appropriate method to returning value to our shareholders.

All right, let me now just address a few guidance-related topics. As you know, we did issue guidance today. Since October, 2011, as you know, most global automakers’ production forecasts have come down. However, Harman’s market share gains, favorable customer mix, are helping to offset these headwinds. We have updated our fiscal (2013) guidance for the foreign currency changes only, and we also have updated for the share count, so I’d like to emphasize and point out again that on a constant currency basis for local currencies, we are maintaining our previous guidance provided in October, 2011.

Finally, I’d like to also note that we have now assumed a tax rate in the range of 26 to 28% for fiscal year 2013. In conclusion, financially we’ve become increasingly strong. Our profitability continues to improve. We have a strong balance sheet to achieve our growth plans. Most importantly, we’ve brought a great deal of cost discipline into the company and that is now part of our culture.

Operator, we are now ready to take your questions.

Question-and-Answer Session

Operator

(Operator instructions).

And our first question is from the line of Chris Ceraso – Credit Suisse. Please proceed.

Christopher Ceraso – Credit Suisse

Thanks, good morning, can you hear me okay?

Dinesh C. Paliwal

Very well Chris, thank you.

Christopher Ceraso – Credit Suisse

Okay great. So, I have a couple of questions on the backlog, and then one about the guidance.

On the backlog, I appreciate the info on how much is new business versus how much is replacement. Can you give us any additional collar on the timing of when the 4 to 4.5 billion of (inaudible) comes on stream and how much should be see in 2013, ’14, ’15. Maybe just over the next two or three years to help for modeling purposes?

Herbert K. Parker

Hello Chris, this is Herbert. We can’t give you that Chris because eventually we’ll be giving you the five year guidance. And you know, we’ve only given fiscal year ’13. So that would just be simply asking for the guidance, and that we’re not all prepared to give you. What we did, and it was part of the discussion with people like yourself, we just thought we’d go ahead and visibly show that we are improving it. So, you can make some better assumptions of what is increasing.

Christopher Ceraso – Credit Suisse

Okay. Is it fair to assume though that the heavier new business is in ’14, ’15, ’16, and it kind of ramps up to that level?

Herbert K. Parker

That’s correct. Matter of fact, I think you’ll see a big heavy stream of business coming off in ’15. You know, even if you go back to the BMW or NTG, - I’m sorry, the Mercedes and the BMW as well, and then you couple with these, so yes, I think ’14 and ’15 you’ll see a big boost.

Christopher Ceraso – Credit Suisse

Okay, that’s very helpful. And then, I thought that last quarter when you announced that the win with BMW, that that had taken the backlog up to $16 billion. Am I getting that wrong? Or was the GM already in the number, but it wasn’t revealed that it was in the number, or has something that you already won rolled off?

Herbert K. Parker

No, Chris. And also you should look at the fact that the (inaudible) had about $800 million related to the reduction in the backlog, if you’re trying to reconcile. I’m not sure which way you’re going.

Christopher Ceraso – Credit Suisse

That makes sense, thank you. Okay, and then any collar on the GM win itself, the timing of the launch, what countries it’s in, any specific models? I think you did mention that it’s a scalable program. But any other collar on the details of the win with GM?

Dinesh C. Paliwal

Chris, we are not allowed to reveal a lot more. This is well under development. We have a very good staff. This would be advanced infotainment, which will bring in full integration, safety connectivity. This will be state of the art system, and we’re not allowed to mention what models we go and what competitor it’s replacing. We have been told not to, but I guess you guys have your own tremendous intelligence, so you will learn quickly yourself. But we are very pleased that the first time Harman has been asked to come in, and we’re very excited. I’m personally very excited, I’ll oversee that program myself to the last success, as I did Chrysler program myself because GM/Chrysler both, they set the benchmark here. Chrysler had just launched beautifully, no bugs nothing, great technology. And GM will be sometimes 2014, and is what they’re targeting.

Christopher Ceraso – Credit Suisse

Okay. And then on the guidance, what filled rates are you assuming for North America and Europe in your fiscal 2013 that underpins your revenue guidance?

Dinesh C. Paliwal

I’ll give you a couple data points, as we have previously said we use all the data points. The Saab you are looking at 430, North America at $13.5 million. Europe $17.5 million, and China at $15. At the same time if you see the car production, assumptons worldwide for ’13 is at 4.5% all globally including everything. But when you look at (Harman Williams Luxury) and (Harman Williams All). Harman Williams already work with Chrysler, Fiat, Tata, Geely, all of that, they will grow 2%. So, that’s the data we have in front of us. In addition what supersedes everything is customer intelligence, customer production release, which we get six to nine months in advance. So, that helps us fine-tune how our, you know purchasing decisions should be.

Christopher Ceraso – Credit Suisse

Okay, and just one last item on the guidance that pertain to (inaudible). I think you said, was it 26 to 28 Herbert?

Herbert K. Parker

Yes, that’s correct.

Christopher Ceraso – Credit Suisse

Why is that, what’s the difference between that range that you’re expecting for fiscal ’13, and the relatively low 21% that you printed in the fourth quarter. Why are taxes going to go up so much, or transversally, you know, why were they so much lower in the Q4?

Herbert K. Parker

Yes, okay Chris. The structure tax rate is 30%, but as we are able to utilize a lot of discrete items from reductions in properties like Germany and other countries like that, it reduces the tax rate. Another factor Chris, is that we’re starting to make more profits in North America now, and as you know that has a higher tax rate then we do in most other jurisdictions, that’s the main driver.

Christopher Ceraso – Credit Suisse

Thanks, that’s very helpful.

Operator

Our next question is from the line of Ryan Brinkman from JP Morgan. Please proceed.

Ryan Brinkman - JP Morgan

Hi, good morning, congratulations on the quarter, and thanks for taking my call.

Dinesh C. Paliwal

Hi, Ryan, thank you.

Ryan Brinkman - JP Morgan

Could you just provide a little bit more collar, maybe on the trend of Lifestyle? It looks like the change in revenues, ex-currency inflected higher to up 39% year-over-year this quarter versus 22% year-over-year last quarter. What accounts for that increase? Is it mostly on the automotive/audio side, or is there anything to report on the consumer side of things?

Dinesh C. Paliwal

It’s both Ryan. We had an excellent growth in car/audio, almost 28%. But then you need to do some put and take. At 3% of the growth in Lifestyle came from neodymium surcharge with we billed, and that came as, you know, margin. So that’s the thing. So 28% and you can adjust for 3% neodymium. We had a healthy gain of also double digit in Home and Multimedia, and for those of you who have been following Harman a long time, our consumer business, how we call it Home and Multimedia under Lifestyle, traditionally has struggled and not made money, but now we are mix-single digit operating profits. So, we’ve made a turnaround, and we are double digits (inaudible). So all in all very good year for Lifestyle. And it also underscores why we made this change when we put consumer and car/audio together, we are able to see the branding and marketing dollars really helping us connect consumers those who are buying home office (inaudible), and the car/audio brands. And we are seeing the (inaudible) going up, and I expect this division to continue to do margin expectation and topline expectation in ’13,’14’and ’15.

Ryan Brinkman - JP Morgan

Great, thanks that’s really helpful to get that breakdown and collar. Just on infotainment, it looks like your FY13 infotainment guidance does not seem to imply margin expansion relative to what you were able to achieve in FY12, maybe on not flowing through the, what was a real strong quarter this quarter. I’m just wondering, you know, what is the driver of that assumption though given that you should continue to transition clients, you know from the lower margin customized to the higher margin scalable systems over the course of the year?

Dinesh C. Paliwal

Couple of things. First of all we should explain to you that we confirm the range of our guidance. And if you look at our range of guidance for 2012, for Infotainment it was 160 to 175 operating profit, and we landed at 182. So, we did beat it nicely.

So, having said that, rather than tweaking the guidance for one division here and there, we just left it. We wanted to come out, we’re not changing our guidance, we’re leaving it as it is. Actually midpoint of the guidance, you know, tells you where we’ll be, and we are going to definitely have an improvement. So, we already landed at 7.6% this year, the guidance it starts with 7 and goes to 8.2 if you the quick math, (inaudible) operating income. So, clearly we have a possibility to come out in the top half of the guidance, and hopefully even beat. But a lot of things are still uncertain.

And the last item Ryan, which is important, also Chris implied and other colleagues, that some of the programs are rolling off in ’13, and our high margin programs would be early in the ramp-up phase.

Operator

Our next question is from the line Ravi Shanker from Morgan Stanley. Please proceed.

Ravi Shanker – Morgan Stanley & Co. LLC

Thanks, good morning everyone.

Dinesh C. Paliwal

Hi, Ravi, good morning.

Ravi Shanker – Morgan Stanley & Co. LLC

The national, Herbert, can you give us a little more color on what you’re expecting for the outlook for German OEM production for the second half, why that’s still looking pretty stable or any signs of movement there?

Dinesh C. Paliwal

We’re not seeing there will be any change from our first half of the calendar year, which was our second half of fiscal ’12. We’re not seeing anything, which is what’s supporting. There might be from customer to customer some changes, but all in all, it looks reasonable. Unchanged since October actually.

Ravi Shanker – Morgan Stanley & Co. LLC

Okay, so pretty stable. And Herbert, a couple of housekeeping questions for you. Your corporate expense seemed to spike up a little bit in the quarter. I think it was the first quarter you have done over 30 in the last couple years at least. Anything in particular going on there? That’s a one-time issue in nature?

Herbert K. Parker

No, Ravi, it’s actually in line with our annual guidance that we’ve said. We’ve talked about increasing the marketing costs about 50 basis points per year. So we’re up a little bit above that, but we had more investments in technology, ecommerce, and IT platform. So it was higher for the quarter, but for the year, we’re pretty much in line where we expected to be.

Ravi Shanker – Morgan Stanley & Co. LLC

So 2013 still stays in the $800 million level?

Herbert K. Parker

Slightly above, not 50 basis points of marketing brand awareness.

Ravi Shanker – Morgan Stanley & Co. LLC

Thanks for this chart on slide eight, which shows your geographic distribution. Can you break that rest of the world slice a little bit more? And tell us what are the big pieces out there?

Dinish C. Paliwal

The rest of the world obviously includes Japan, and it also includes the rest of Europe because in year five, we only put in five big countries for us. So the rest of Europe including Eastern Europe would fall in that. And Africa where we don’t do a whole lot, so Japan, the rest of Europe, and of course Australia, and South Asia, not much business in that part. Again Ravi, it’s all about our focus as management is expanding and our country obligations are expanding, you will see more focus to go in those areas.

Ravi Shanker – Morgan Stanley & Co. LLC

Got it, and so can you give me the number for that 18% how much is Japan and how much is the rest of Europe?

Dinish C. Paliwal

I won't have today, but I certainly can follow up with you. We have that data, but I don’t have it hand right now.

Ravi Shanker – Morgan Stanley & Co. LLC

Perfect, that’s totally fine. And one last big picture question for you, Dinish, what’s the benefit of bringing interchange in house? I mean is this something that you’re going to be looking to do going forward? Or was there something specific here that you wanted to get in terms of skills or patterns or something?

Dinish C. Paliwal

Not so much patterns, but it is to do with open source solutions. We got out of Q&X operating systems more than a couple years now. We want to be operating system agnostic. So we continue to use Q&X as our fundamental operating system, which we still believe most robust from a safety point of view. But we are not developing a broad based entertainment Lenox and Droid, Microsoft, everything, so we will have – and systems will not be unique to one operating system. The colonel could be one thing and Ask be something else. It’s going to be a high bred system, which is what actually is needed and Europe is sort of calling for and talking to more BMW and Audis who lead the space with us.

They seem to be very comfortable with the strategy we have, so this will company we acquire. This will give us additional horsepower to expedite our engineering development work. In addition, we’re also adding some 100 software engineering resources and Google and Droid based competence here in life and invest in our Chicago area. Lots of people from Google have actually have left to join Harman.

Ravi Shanker – Morgan Stanley & Co. LLC

Understood and just speaking of Q&X, REM is obviously having a few difficulties right now. Can you remind us again how things stand between you and your ability to use Q&X expecially if REM kind of licenses someone else or partners with someone else?

Dinish C. Paliwal

That’s a great question for all of our listeners. When we sold Q&X to REM, we took care of our shareholders interest for next 20 years. We have access to the source code of Q&X no matter what change of hands happen. Even if the company goes so south that no one can save it, we still will have access to it. And frankly speaking, we have as much confidence in Q&X as REM today. And we have a relationship, so there’s no issue of access to source and access to development for next 18, 20 years.

Ravi Shanker – Morgan Stanley & Co. LLC

If things get really bad there, would you consider bringing it back in-house?

Dinish C. Paliwal

I don’t know about that. We’ll see. We’ll see who goes them first. We’ll see.

Ravi Shanker – Morgan Stanley & Co. LLC

Understood, thanks so much guys.

Dinish C. Paliwal

Thank you, Ravi.

Operator

Our next question is from the line of Adam Brooks from Sidoti Company LLC. Please proceed.

Adam Brooks – Sidoti & Co. LLC

Good morning guys. I just wanted some help on Pro a little bit. Gross margin looked a little big light in the quarter. Maybe you could talk about what hit there and kind of you think happens over the next few quarters.

Herbert K. Parker

Yes, this is Herbert. Yes, Pro basically had a higher cost of [inaudible] in that quarter than they had previously. And obviously compared to zero of last year. Also the profession division, we ramp it up as we said in China and Mexico regarding the capacity. So we expect that to go away and we look for good improvements next year.

Adam Brooks – Sidoti & Co. LLC

And if we go to Info for a second, can you give us a sense of the matchup between SG&A and revenue from a Euro point of view?

Herbert K. Parker

It’s pretty much going to be similar to what we have as far as their cost, their revenue of 70% more or less like that the SG&A would be in Europe versus the U.S.

Adam Brooks – Sidoti & Co. LLC

Okay, so staying on that point then, SG&A came up a little bit in the quarter and obviously a high percentage of sales. Maybe is that due to expected launches over the next year? Was there anything in there why SG&A jumped a little bit even though FX went against you?

Herbert K. Parker

I think it’s probably because of last year when we had the sale of monetization of intellectual property. That was $16 million. That reduced the SG&A. So it’s more of what happened last year as opposed to what’s going on this year.

Adam Brooks – Sidoti & Co. LLC

Okay, maybe a sense of what our CapEx looks like for fiscal ’13.

Herbert K. Parker

Still 2% to 2.5% of revenues. We expect CapEx to stay at that level.

Adam Brooks – Sidoti & Co. LLC

Okay, and just in Europe just in case things get much worse very quickly, what’s your temporary workforce over there as a percentage of the overall workforce?

Dinish C. Paliwal

Typically, Adam what we have done now and this is a transformation over the last three years, we used to have almost 100% permanent workforce and now we’ve gone almost 80/20 model. So we have 80% permanent workforce. And to deal with increase in demand like in 2012, we are able to bring in temporary workforce, which is due to reviews if the demand goes down. It’s of course much easier to work with in Hungary, which is our largest manufacturing in the world, much easier to deal with than Mexico and China and other places. So that’s I made a big point in my earlier comments that we are actually very well positioned now to deal with economic ups and downs when it comes to our manufacturing cost. We can adjust it rather quickly than in the past.

Adam Brooks – Sidoti & Co. LLC

Great, thank you.

Dinish C. Paliwal

You’re welcome.

Operator

(Operator Instructions). Our next question is from the line of David Leiker from Rober W. Baird & Co. Please proceed.

David Leiker – Robert W. Baird & Co.

Good morning, everyone.

Dinesh Paliwal

Hello, David. Good morning.

David Leiker – Robert W. Baird & Co.

Good morning. The – a follow-up question first on this Slide 7, the backlog slide. Again, you know, I want to make sure that the incremental detail here, this is great. I look at the Infotainment awarded business, you know, it looks even adjusting for currency in that number, you know, when you add 4 billion and take 800 out for currency, there’s still about another $2 billion. Are you adjusting that number for business that’s already launched? Is that what the balance of that is?

Herbert Parket

No, I'm not sure I follow you, David because what we’ve got is we’ve had 11.7 billion last year and we had – what was it, 4 billion, which too out revenues of 2.4, you know, you have to reduce the revenues from it. And [inaudible] of about 600,000 – I mean, 600 million. And then a small adjustment of 300 coming back to the 13 billion. So maybe it’s – you didn’t take the revenue maybe?

David Leiker – Robert W. Baird & Co.

That answers my question. Thank you. I just wanted to make sure I understood the methodology.

And then, Dinesh, as we look at 2013 in your guidance here and you know, I understand the other’s a range there, but if you take the midpoint of the range and we look at where the earnings performance comes from, you know, you’ve done a great job on the Infotainment side, but incrementally here the lifestyle and professional are going to be the primary earnings drivers in 2013. We haven’t really talked about what’s going on in those businesses. Can you take a little bit of time of, you know, that the revenue drivers and the margin drivers are, those two pieces since you are looking at 2013?

Dinesh Paliwal

David, first of all, I was really smiling and happy. You’re my hero because you’re asking me now professional and lifestyle questions. In the past, all the calls, we spend 99% of the time on entertainment, which I’m glad that because we have turned the corner. You guys seem to be pleased with the way we’re doing.

So let’s come back to lifestyle and professional. You are absolutely spot on that lifestyle and pro had been [inaudible]. And that is gone away. We will not talk about [inaudible] even if the price is still high and we have dissolved that and we took care of that business.

Second, professional launched 140 brand new products earlier in the year, especially in the main [inaudible] area of storage sound and [inaudible] sound in the loud speaker area and that business is just taken off. So I expect really to be beating our last year’s sales topline growth rate definitely in Pro. I expect that. And Lifestyle has done a very good job dealing with all this new [inaudible] issue and ramping up correctional facility Mexico and [inaudible]. Both of these divisions, that’s totally behind us so that should be falling off the bottom line for the margin expansion.

At the same time, I’m getting ready in two weeks’ time to go to Berlin, we’ll have the world’s largest home multimedia show where we’ll launch the 25 brand new products. That’s the highest I’ve ever seen. No more than five products every year and this is 25 products. So I think we expect quite a good topline at the same time you know we’re very disciplined when it comes to pricing and pricing premium. So we’re holding on quite well, so I expect both of these division to grow topline with the new products, to grow topline from the new markets and Pro and Lifestyle both will also benefit from North America, all the slow pickup, but nice pickup. Both of them are seeing very good inquiry for the [inaudible].

David Leiker – Robert W. Baird & Co.

Okay, great. And then how much – do you know off hand how much [inaudible] headwinds you have that – to catch up yet in the first part of 2013 because I don’t think you got that all straightened away until quite a way through the year.

Dinesh Paliwal

2012, we said last time that we will be done with this, that was a personal goal I made and the team made. And we are done with it in terms of never mentioning that, even if it is a bit of a headwind, we will find ways to accomplish it. Mostly we have passed it on to our customers in their pricing and that’s, if [inaudible] goes down to where it used to be one ago, then our customers will get a break, if not, it’s there. At the same time, we also have pretty advanced development in material sciences to find substitute to replace Neil with better acoustics capabilities and we are doing that in design changes. So I think that in those, they’re quite under control.

And in terms of capacity, margin expansion for [inaudible], that would [inaudible] bottom line. And then it comes to capacity in Mexico and China, there we’re going to be ramping up already, but all the products for China factory will be running at 80% production capacity. That would help us fast expanding the Asian market in China, India, Vietnam, Indonesia, they are very booming and so I expect topline to be much stronger than 2012.

And in Lifestyle, to come close to what they did last year, I’d be happy. Last year was an amazing topline, which may or may not be sustainable. We’ll see, but profit extension is the key.

David Leiker – Robert W. Baird & Co.

Okay, great. And then Herbert, when we look at that corporate line, just to follow up on the earlier call, you know, over the last couple of years it was 60 million, 80 million, 106 million. It looks like for the tax in the 26 and the 28% range, did that number end up being more, you know, it seems like it needs to be lower in 2013 than what it was on ’12. Is that right?

Hebert Parker

Which number are you expecting to be lower, the corporate expense or the tax rate?

David Leiker – Robert W. Baird & Co.

The corporate number.

Herbert Parker

No, no, we’re not expecting it to be lower because we’re investing heavily in our global brands and we’re seeing good payback, so we would continue to do that. It would only – it would definitely not be lower. We may stay at that rate if we find a different savings, different strategy, but it would not be lower.

David Leiker – Robert W. Baird & Co.

Okay, great. I’ll come back if there’s time. Thank you.

Dinesh Paliwal

David, just on corporate, I totally agree with what Herbert said. But you’re not talking big difference from ’12 to ’13. We may add 10 to $20 million in bond building, but that almost stays back in our take rate in car audio systems.

David Leiker – Robert W. Baird & Co.

Okay. Great, thank you.

Dinesh Paliwal

Sure.

Operator

Our next question is from the line of Doug Thomas from JET Investment research. Please proceed.

Doug Thomas – JET Investment Research

Good morning, guys. Congratulations on getting through a very – no fault of your own, a very noisy quarter.

Dinesh Paliwal

Thank you.

Doug Thomas – JET Investment Research

Dinesh, I was wondering, I think sometimes people mistake what’s going on in the industries and actually, you know, don’t think about – maybe they have the opposite argument they need to take, but on the General Motors thing, you’ve said before, you thought you could win them over but you know, and that would be, you know, I don’t want to put words in your mouth, but clearly you said it would have to be economically beneficial for you guys. And I’m wondering in light of that, given what’s going on, particularly in Europe and Asia, I know there’s a lot of concerns out there on the growth of the, you know, on the auto market, particularly on the low end. You know, what’s the sales process look like at this point in time? In other words, I would imagine that as competitive as things have gotten in certain sectors, and as much pressure as there are in people like a Fiat and Ford in Europe and so forth that what you guys have to offer them would be much more valuable going forward from a competitive point of view and from a cost point of view than when things are booming, for example, and they can sell whatever they make. Am I – is that a, you know, is that – are you seeing that reflected from your conversations with customers?

Dinesh Paliwal

Doug, you tried not to put words in my mouth, but you sure did. I mean, you said all the right things what I would have said. First of all, the culture in this company is all about pricing and premium pricing. So GM business is a win-win. GM gets technology, the latest cutting edge and we get what we deserve for what we’re paying. And then you mentioned the impact in Europe, the economy, what happens to Fiat, Chrysler and some of the European automakers, you know, that’s why we do track OEMs in three different categories.

One, we say all OEMs do globally, they are going to grow about 4 or 4.5%. Then we look at [inaudible] OEMs, including Chrysler, Fiat, Hyundai, Tata, German automakers, they’re going to go about 2%. Then we look at [inaudible] OEMs, pure luxury, Porsche, Audi, BMW, Tata. They’re going to grow 0.3%. So if you put it all together and do the weighted average, find out, we’re going to be growing three times the growth of the car companies, which means we’ll be taking market share and why can I say with such confidence? Because we have production releases out in our hands already for the next six months and we’re quite pleased.

And on top of that ,if I may, we’re seeing clearly all of these global players, they may see some slowdown in their mature markets, but they continue to see growth in India, China, Brazil, Russia. In India, they’re starting from almost near zero, they’re growing 40, 50% a year. And China would grow also from 15 to 20% a year. So this is very healthy for us. And since we are on the market, we’re on the ground, we have R&D, engineering, manufacturing, So I just want to make a quite point for the benefit of all listeners, that we’ve arrived where a good company should be. Let me serve your customers close to where they are. So we’re serving Chinese customers whether they are German automakers in China or Asian customers, we’re serving them from China.

We’re serving German automakers from Germany, American automakers from Mexico and the United States. So logistic costs and also proximity saves us money and improves the quality And you get [inaudible] from that from automakers. The days are gone when Japanese pushed their technology and everything was coming from Japan. It’s still does, by the way, for some of our competitors, but we’re actually not going to allow you to be on top of the technology.

One more thing I’ll point is we opened the last couple years with wonderful R&D lab in Palo Alto. That’s expensive, but it’s very necessary to keep in touch with technology, which is happening in connected space. We’re opening up another open source R&D in Ann Arbor and Chicago area to really be on the leading side and [inaudible] open-source systems.

Operator

(Operator Instructions). There are no further question in from the phone lines.

Dinesh Paliwal

I think if there are no further questions, I think I would like to have a wrap up here. So with that said, ladies and gentlemen, I really thank you for your interest during our call today.

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