Original Source: FD (FAIR DISCLOSURE) WIRE
. Sidney Harman, Harmon International Industries, Executive Chairman
. Dinesh Paliwal, Harmon International Industries, CEO . Kevin Brown, Harmon International Industries, CFO . Peter Barry, Bear Stearns, Analyst . David Leiker, Robert W. Baird, Analyst . Chris Ceraso, Credit Suisse, Analyst . Jeff Kessler, Lehman Brothers, Analyst . Scot Ciccarelli, RBC Capital Markets, Analyst . Jairam Nathan, Banc of America Securities, Analyst
HAR reported that it expects FY08 non-GAAP sales to be $4.1b, and non-GAAP EPS before transaction, legal, and restructuring costs to meet or exceed $4.14. Expects 1Q08 non-GAAP sales to be $950m, and non-GAAP diluted EPS before transaction, legal, and restructuring costs to be $0.50.
A. Key Data From Call 1. FY08 expected non-GAAP sales = $4.1b. 2. 1Q08 expected non-GAAP sales = $950m. 3. FY08 expected non-GAAP EPS before transaction, legal, and restructuring cost to meet or exceed $4.14. 4. 1Q08 expected non-GAAP diluted EPS before transaction, legal, and restructuring costs = $0.50.
S1. Opening Remarks (S.H.) 1. Significant Events: 1. KKR and Goldman Sachs not to proceed with Co.'s previously announced merger. 1. HAR disagrees strongly with this decision. 2. Bernard Girod retired. 1. Dinesh Paliwal began as CEO on 07/01/2007.
3. In the automotive business, Co. has typically processed one or two major new programs each FY. 1. This year, Co. is launching seven new programs. 4. Co. encountered increases in material costs, which placed pressure on margins. 1. During that period, Co. has built, staffed, and opened a new manufacturing facility in the US, and is ramping up a new plant in China. 1. Start-up of these facilities has represented a consequential challenge. 5. Analyst consensus EPS for 1Q08 was approx. $1.00. 1. Co. now believes this will be approx. $0.50. 6. Professional business is strong and growing. 7. HAR has $14b backlog.
S2. Business History & Strategy (D.P.) 1. Highlights: 1. Co. made a number of wise, strategic acquisitions, and proceeded to grow them. 1. Over the past six years, Co. has doubled the size. 2. HAR will simplify its manufacturing and engineering footprint.
1. Management had intended last year to do a restructuring, and
had spoke about $10-15m one-time charge in 4Q07. 2. Management was so occupied with the merger transaction that the plan was not implemented. 1. While Co. completes the detail of this restructuring,
expects a one-time of $25-30m over the next six months. 3. Plan will require tough decisions on: 1. Jobs. 2. Real estate. 3. Global footprint optimization. 3. Along with footprint simplification, Co. will act to reconcile a diverse mix of internal processes spanning such functions such as finance and accounting, human resources services, legal, and more. 1. Has reached a size where significant synergies in these areas are achievable.
4. Co. has identified several other areas where it can sharpen
its performance, which include: 1. Cost control. 2. Improved approach to managing risk. 3. Further expansion of product offerings to mid-range markets. 5. Will become more disciplined in shopping smart. 1. This means shopping around the world, combining the purchasing power of multiple HAR units into a world-class supply chain that matches its world-class products. 6. Risk management is another opportunity, whether Co. is launching a new product line, taking on a major project, or refining its global footprint.
7. HAR's global footprint will become a sharp focus in controlling cost and putting resources close to new and existing customers.
8. Co. will seize opportunities to new consumer and automotive
products that improve volume leverage and through professional
products that further expand its dominant position in this
area, especially the developing world. 9. 1Q08 guidance vs. 1Q07: 1. YoverY difference is primarily due to lower gross profit,
R&D, and SG&A expense, which are higher on a dollar basis. 2. R&D and SG&A are lower on percent of sales basis. 1. They were not as much lower as Co. had forecasted. 10. In April 2007, offered guidance for 2008. 11. For full-year 2008, gross profit is expected to be lower than anticipated in April 2007. 12. On 09/24/07, Co. reflected the change in modified guidance. 1. Change is due to: 1. Higher material prices. 2. More than expected ramp-up costs for the two new manufacturing plants in China and US.
S3. Guidance Review (K.B.) 1. 1Q08 Guidance: 1. This is on a non-GAAP basis before transaction related costs. 2. Sales to be $950m, up 15% vs. 1Q07. 3. Gross profit to be approx. 28% of sales, down about seven points from 1Q07. 4. OpEx to be $227m, up $27m. 5. Operating income to be $40m, down from $87m in 1Q07.
6. Diluted EPS before transaction, legal, and restructuring costs
to be $0.50 or $0.35 below $0.85 in 1Q07. 7. Sales are projected to increase in each of Co.'s three operating segments vs. 1Q07.
1. Expects motor sales to increase approx. [15%] during the qtr., primarily due to: 1. Ramp-up of an infotainment system program. 2. Higher PND sales in Europe. 8. Consumer sales are expected to increase about 25% supported by new product introduction.
9. Expects professional sales to increase 10%, as new products
are introduced to the market incorporating Co.'s HiQnet
protocol. 10. Gross profit is expected to decline about seven percentage points from 34.8% in 1Q07 to 27.9% in 1Q08. 1. Variance is primarily driven by the automotive segment. 2. Expects gross profit to decline as Co. enters the mid-infotainment segment and the ramp up of PND business. 1. Planned decline was exacerbated by higher than expected material costs and the launch of new infotainment programs and new manufacturing facilities. 2. Ramp up at the facility in Missouri was slower than expected, because over the course of the qtr., Co.'s automotive customer slowed its 2008 model introductions to clear up …