Autoliv Inc (ALV) 2003 Q2 法說會逐字稿

(Operator instructions)

Good afternoon. We will follow the same procedure as we have done the last couple of quarters which means that if you go into the home page under autoliv.com you can click directly on page 1 and you will receive a package of slides that we will follow initially when we go through the presentation. I think it is going to be around 20 minutes and then we will do our best to answer any questions you may have on the second quarter report.

So if we take it from the beginning, so to speak, we can say that we think that quarter 2 came out much better than we actually expected in Autoliv and the major reason for that is that we took much more market share than we anticipated after the quarter 1 report.

Also, the currency has [hurt] us quite a bit. We thought the currency would give about 10 percent it probably gave 13 percent. The negative of course was the lower than expected light vehicle production, particularly so in Europe. All in all, we had a 2 percent organic growth during the second quarter and that 2 percent, if we clean up the EBITDA for currency it led to an EBITDA increase of about $10m U.S., or say 10 percent higher EBITDA based on a 2 percent organic growth.

If you then turn to slide 1 please, the net sales. As you can see, it's been a strong trend for many quarters now. The increase was 17 percent. However, out of those 17 percent, 13 percent were currency and another 3 percent was NSK Seatbelts that we acquired in the Asian part of it on April 1st, and then as I mentioned, 2 percent organic growth.

You may recall that after the first quarter we said that it probably didn't have any chance to get organic growth, so that was the big positive surprise, you could say. If you look at it geographically it was particularly strong in the Asian markets. The largest of them presently is in Japan, and in Japan if we take away currencies and acquisitions we had an organic growth of some 26 percent year on year which is very strong.

Korea and China also grew very fast, so the rest of the world, which is basically Asia Pacific, grew some 58 percent organically year on year. So very strong growth in Asia in general, and Korea and China in particular.

If we turn the page and look at the organic sales and compare that with the light vehicle production, as you can see the light vehicle production, as we see it, probably decreased some 6 percent during quarter 2, which means that the plus 2 in our sales organically is well above what the underlying market must have been. So the conclusion is we have taken quite a bit of market share during quarter 2.

However, we can say all in all that we do not believe it is realistic to count on such a big increase in market share again in quarter 3. Quarter 3 is actually the most difficult quarter to forecast, partially because of vacations, partially because a lot of changeover with new models and possible ramp up problems with us or the OEMs, and then of course you never know about the new cars if they are sort of a hit or they are not a hit, and that depends on the consumers. So somewhat difficult to forecast. We believe it is too optimistic to believe we are going to outgrow the market with 8 percent again.

Turn the page to the light vehicle production and compare the quarter over quarter. We were down about 9 percent in North America which essentially is what we had estimated. We thought it would be about 10 percent. Western Europe, on the other hand, you may recall we thought it should go down not very much at all in quarter 2, but rather a steep one in quarter 3, but it turns out that the changeover started all that in quarter 2, so we saw a decline of some 4 percent or 5 percent in Europe. But then as a consequence we will not see as significant decline as we thought last time in quarter 2. So you can say a more even development, probably beneficial for all of us, both the OEMs and the top suppliers.

We must have had a very good sales mix for Autoliv, because as you might have read in the report we actually had an increase in sales in Europe of about 2 percent, disregarding currencies.

Turning the page and looking into the unit sales. Seatbelts were up in volume terms 12 percent. If we deduct the NSK acquisition and look at the underlying old Autoliv, so to speak, we had an increase of 3 percent, which still is a lot better than the decline of 6 percent.

Pretensioners, was plus 7, but disregarding NSK it was a flat development. Frontal airbags, minus 5 percent, only marginally better than the underlying market which was minus 6 percent. Chest bags plus 2 percent, head up 30 percent. If you take ICs, inflatable curtains alone, in dollar terms they were actually up 32 percent. Steering wheels, plus 10 percent, compares very nicely to the decline of 6 percent in the underlying market.

So it is safe to say that we had fairly nice market share gains with seatbelts, pretensioners, steering wheels, and we believe also electronics both in Europe and in the United States.

We turn to the next slide and have a look at the gross margin. The trend continues here. We have a gross profit that slowly but steadily is picking up again and we ended up a full percentage higher than last year at 19.4 percent versus 18.4 percent. That full percent could actually have been 1.3 percent if we exclude NSK again which had a dilutive effect. So it would have been very close to 20 percent gross margin here in quarter 2.

That is the primary drivers for the increase. The gross profit is lower material costs, simply. That has a very big effect for us. We have had a probably if you saw that, as you may have seen we have had to charge more to the engineering. Less engineering income, but rather have charged the engineering costs we have on the component prices, so that also drives the gross profit a little bit.

And then actually we believe that the evolution of sales prices is probably slowing down a little bit again, and particularly so for seatbelts, which we believe now that the erosion in seatbelt prices probably aren't below 1 percent for the time being.

So slower erosion of the seatbelt prices, a little bit more charged on engineering costs to the sales price plus lower component costs have lead to this increase. But basically, the underlying is actually 1.3 percent disregarding NSK.

Operating margin on the next slide. It is marginally better than last year, because as we see later on, the research and development took a big jump up, unfortunately, but we are at 8.2 percent of sales. After the first quarter we thought we would be close to 8 percent but then what happened was, of course, that we took much more market share and we got bigger volumes and that drove the operating margin to instead of being a little bit below 8 percent we ended up a little bit above 8 percent.

Then as we said, RD&E was a negative. If we look on that one, we can look at the income statement on the next slide. If we start in the middle of the slide and look at the change, percent change column. As you can see here the sales grew 17 percent, as we said before. Gross profit was up 23 percent. The EBITDA, or operating income was up 19 percent. Then, as we had a couple of one-time effects below the EBITDA line and before income, before tax we got 31 percent increase and 36 percent finally on the net income. So a nice development. The 18.4 percent to 19.4 percent in gross profit we commented on earlier. You can also see the RD&E here which grew from 5.1 percent to 5.9 percent. I would say that there are two major reasons. The largest one is, no doubt, that we have had a very strong order intake the last couple of quarters. The negative side of that is that we have to do a lot of engineering, which we are going to see turning into sales then within a couple of years. And then also, as I mentioned, less engineering income. We have to charge the engineering cost on the piece pricing which we don't like, but which unfortunately is a trend here in the market.

Income before taxes went from 7 to 7.9 and finally the earnings per share, we are also benefiting from having bought back some shares. We grew from 53 cents to 75 cents.

If we then turn the page and look at the key figures. EPS again was up, as you can see, some 21 cents. Out of that 21 cents, 5 cents was because of currency and the remaining was the real increase, you could say. The last 12 months the EPS have now been $2.19.

The return on equity took a jump here from quarter 1 to quarter 2 from 10 percent to 13.4 percent which we believe is a fairly good number. As you know, the return after tax. The year return on capital employed went from 12.4 to 15.4 which is an increase of some 3 percent. The working capital went up a bit, but then we had to recall that now it includes NSK and NSK is actually about [$13m] of the $30m of this increase. The remainder is by and large currency, simply.

So if we take the working capital in percentage of sales, as you can see first quarter we are about 8.8 percent, disregarding NSK we would have been a 9.1 percent and that would be a currency effect. Then NSK drew it up to 9.6. The reason is we had the full working capital in the balance sheet but we only had one quarter of sales from NSK acquisition.

The net debt went up a little bit, $23m, but the net debt to capital actually went down from quarter 1 to quarter 2 from 30 percent to 29 percent. The head count is up, and most of that is explained by the NSK acquisition. Other than that, it is low cost countries, predominantly.

If we continue to the next slide and look at the profitability, we have, as we can see, substantial gains both in return on capital employed and on the return on equity. We now have ten consecutive quarters of improved returns year on year. These improved returns, they are occurring at the same time as the weighted average cost of capital is actually going down because of the lower interest rates, so we have had ten quarters of fairly nice improvements there.

Turning the page to the cash flow, here we have seven quarters where the gross cash flow which exceeds $100m. If we disregard the effect of the acquisitions in Japan we have an underlying cash flow after capital expenditures of some $60m which seems to be a fairly typical figure the last couple of quarters.

On the next slide we can see the same thing, but in numbers, and in the right column we can see the last 12 months. As you can see, we are going up fairly nicely in the net income. The depreciation, which is of course non-cash too, goes up. Then we have a change in the working capital. The working capital again is partially because of NSK and partially because of currencies.

The capex came to $240m which is more than we had in 2002, but it is still below the depreciation. So from that point of view, it is under control. The capex presently rounds at about $250m for the 12 months moving average, or moving trend, you could say.

Working capital on the next slide. Again, it is moving up to 9.6 but really disregarding NSK it is 9.1. If you dig into it we can find that the receivables actually went down from 81 days of receivables to 77 days of receivables. The inventory is calculated in the same fashion and was flat at 29 days of inventory. So from that point of view it is under control as well.

The next slide will show you the capital expenditure and depreciation. It is really no news, we can just say that the capital expenditure is in line with the depreciation. Again, the last 12 months trend is hovering in the order of $250m.

The major capital expenditures in quarter 2 on the next slide, by capacity, that is for future shipments of course, $17m. We have had had to build new inflator lines with new types of inflators both in the States and in Europe. It's cost us about $11m, same in investments. Seatbelt capacity, $8m and electronics capacity of about $7m.

During the quarter we have now moved the last part of the production that was not in Canada or in France, but rather in Portugal, that has now moved to Canada and to France. We no longer have any activities in Portugal, and that went very smoothly. So all in all, then that was about the same order of magnitude as depreciation.

If we come to the recent developments at Autoliv on the next slide, the United States Senate Committee demands new regulations on ejection mitigation and that of course has to do with the large number of fatal accidents in the United States because of rollovers. That would strongly, if this comes out to be a new proposed rule-making, that would strongly influence the sales of inflatable curtains as well as side airbags as well as rollover system sensors. We believe that that would be a good thing for the United States. We believe about 10,000 Americans die every year in rollover accidents, and we are sure that thousands could be saved.

Secondly, we did acquire the NSK seatbelt operation in Thailand and Japan, which you know already. Then we also acquired a relatively small outfit in steering wheels, steering industries. This is primarily supply Mazda which is also based in, as you may know, Hiroshima. Both of them are meant to further improve the coverage we have in Japan and we believe then again that we have somewhere in the order of magnitude of 25 percent of the Japanese market in value terms.

Also, we got a new authorization from the board of directors to buy back more shares, more stock if needed. I think we have bought back so far about $8.2m out of the first allotment of $10m. We have bought them, by the way, at an average of $21.66. As you might have noticed, we take it fairly carefully. We are very determined to make it a good business for the shareholders. We are not buying back just to buy back.

We have also appointed two new board members, Mr. Sune Carlsson, a Swedish representative. He has for the last couple of years been the chief executive of SKF, the largest roller bearing company. Before that he was EVP of ABB. Then we have an American representative, George Lorch. He was the chief executive of Armstrong Industries, a U.S.-based company and he is also a member of the board of Pfizer, which I believe is one of the very large, probably the largest, drug company.

What has also happened is that [Torkarico] Japan has bought out GRW. We had to get a joint venture in a Canadian seatbelt operation known as QSS. So TRW sold it's 60 percent to [Torkarico].

Then finally, the Insurance Institute for Highway Safety has got the first two sales from this new type of side impact testing program. They came out in June. That is probably what has happened in the surrounding world around us.

We then turn to the thing with the inventories and the forecast for sales in Europe and the United States. The first graph here shows you the inventories calculated as days of sales. As you can see, the blue line on top, we are still above the ten year average trend line, so it is approaching normal levels but it is still somewhat high in the United States, and particularly so for Big Three.

The next slide will show you therefore the light vehicle production forecast from North America which is then compiled by CSM and a little bit more defined by input from Big Three themselves. Basically it is unchanged from the previous forecast. We still believe it is going to be approximately 15.9m vehicles in North America, a very small change. The forecast for quarter 3 is minus 4, and then you can say in quarter 4 we will be back to normal which will be the same level as we had for 2001 and 2002. Roughly the same level in 2003. We should be back to normal, and generally speaking there might be reason to have some of this in quarter 4, for a little bit of a turning around of the market.

In Europe on the next slide, the same story more or less. We have the same forecast as we had last time for the full year of 16.2m light vehicles, but now we have already taken part of the decline that happened in quarter 2. Therefore, the decline in quarter 3 is not any more some 9 percent or so, but only about 5.7. So that leads a dramatic decline in quarter 3. Then quarter 4 should actually be a relatively good quarter which should be better than 2001 and 2002. That is compiled by DRI and it is the latest input we have had from them. So by and large, a little bit difficult to judge quarter 3 and a firm quarter 4 is what we see in the course here.

Finally, on the last slide we have somewhat of an outlook for quarter 3. We believe then that the sales will go up some 10 percent or so and that is of course saying that we would have a slight organic decline somewhere in the order of 2 percent or 3 percent. That should be compared with the forecast at the core production in North America and Europe should have a decline of some 5 percent. So we would do slightly better than the market, but not as good as we need in quarter 2, but still better than the market.

We also believe that we should be able to, in spite of the smaller decline in organic sales, we believe we should be able to match the margin we had last year in quarter 3, which was a little bit more than 7 percent. So the same order of magnitude, we believe, for quarter 3 of this year.

With that, ladies and gentlemen, we will take questions and we will do our best to answer them for you. So over to questions, please.

Thank you. (Operator instructions) Our first question is from Thomas Bissell. Please go ahead, announcing your company name.

Hi, it's Thomas Bissell from Smith Barney. Let me first congratulate you for these figures which are really impressive. I have three questions for you. The first quarter will be, is it possible that you elaborate a bit more on your gross margin improvements, which in my view is clearly the most impressive achievement I see in your figures. Can you tell us if it is sustainable, if you think you can go back to figures we had in the 20 percent or 21 percent going forward? I mean on 04, 05. Is it something you think is reachable?

The second question will be on the trend for R&D. You have effectively stressed the fact that it is more difficult to charge engineering costs directly. Should we expect to ride the indicators more between 5 percent and 6 percent going forward, rather than 5 percent previously, or do you think you can do something for that?

The final question will be on the tax rates. It seems the tax rate has gone down. Should we expect a tax rate more in the magnitude of 33 percent for the full year in going forward than around 34 percent or 35 percent in previous years?

Thank you very much. If we take the first one with the gross profit improvement, the largest component that we have analyzed here is really the component cost that we have been able to take down as a percentage of sales. We believe that that is sustainable, so that should be there to stay.

The second component which I believe today is not so strong, but we believe will be strong as we are going to charge engineering on the piece part. So that will probably, if anything, probably will increase rather than decrease.

Then finally, the price erosion which we believe is the third component, the prices have, at least for us, eroded slower than historically. So we hope that that third component is going to be sustainable. But you know, this is a fight everyday simply. So by and large we would say that it should be sustainable, the gross profit improvement. Having said that, of course, if the volumes go down, the production overhead there is always a fixed element that should be there, so we cannot stand too big of a volume decrease. The trend will lower component costs and price erosion and engineering and the piece part, that is probably going to be there for good.

Secondly, the RD&E trend, I think you are unfortunately right. We are probably going to have to say that it is going to be somewhere like 5.5 percent to 6 percent. The reason we bring it up now is not that it is such a big element today, but we are seeing in the new contracts we take that it is the same everywhere. We have to charge the engineering costs to the piece price rather than, as we have done before, we have sort of received it directly from engineering.

So it is somewhat difficult to measure because the engineering income we had really consists of at least three different parts. We have the crash income, and that will remain. Then we have the royalty income from patents that we have given to various competitors, and that will remain. Then if the engineering for orders and that is going to be, unfortunately, going down a little bit. I think it is probably a good idea to assume it is going to be a little bit north of 5.5 percent.

Thirdly, tax rate I leave over to Magnus, he is the tax guru.

We expect the tax rate to stay up at a level of 32.5 percent. The reason for that is, as we say in a report, it is the result of a reduced [inaudible] without any accounted tax benefit. So we are sort of, say turning around, countries like Mexico, Japan and Canada.

Thank you very much.

Thank you. Our next question is from Keith Hayes. Please go ahead, announcing your company name.

Good afternoon, Lars, it's Keith Hayes from Goldman Sachs. Two quick questions. Firstly, you talked a lot about the Senate Committee and the potential increase in the inflatable curtain demand in the U.S.A. Would that require a lot of additional investment and capacity expansion, or do you think you've got that capacity in place given your view of where the market might go?

Secondly, you gave us an interesting figure about the average share buy-back price of just over $21. Would you continue to buy back your stock at the current share price?

Okay, Keith. We believe that if the curtains go up very much in volume we're going to have to make some investments, but you know, on the inflator side, we have plants that are for sure sufficient for this, so this will be just direct production machinery which is not all that much, actually. If we talk about the curtain itself, I think that we would probably expand, or we will expand the Canadian plant up to the full capacity of, if I take it off the top of my head I think it is 63 louvers. Other than that we will probably buy from the outside. We of course have the option to invest, but I think we are open to buying from outside the same type of curtains as we produce in the Canadian plant. So some investment, but not all that much.

Secondly, regarding buying back of shares, what we are going to do Keith is we are going to see where the share price lands after some days here, and then we are going to look at what the analysts believe the correct value on the share is. Thirdly, we are going to take some outside advice too and then sort of discuss it between ourselves and make up our mind.

Thank you.

Thank you. Our next question is from Hinta Boardmann. Please go ahead.

Hi Lars, this is Hinta Boardmann, NWQ Investment Management. I just had two questions, one referring to the last one on margins. I think a couple of years ago that you were saying that you could return your margins back to a 10 percent EBITDA. You came very close. And, gross margins of over 21 percent, the same levels as when you were spun off from Electrolux, especially with these new products that have been coming on-stream, I think it was 2003-2004 you were quoting.

Given obviously the currency changes and the pricing and so forth, do you think the ability to get that 20 percent to 21 percent gross margins are still achievable, or do you think they are pretty much at these levels and are going to be sustained for now?

The second question was regarding your buy back plan. Obviously there's been a lot of discussion about the changes in tax laws for dividends and so forth. Autoliv has been very good about buying back shares. Do you think there is going to more of a trend to shift towards more cash dividends?

Well thank you. Firstly, if we start with the margin and basically I think we can concentrate on the gross margin. You may recall that the Visteon acquisition which was made April 1st of last year was very diluted, and still we think that was absolutely needed for us to be able to supply systems in North America, and not only components. As I have said, it's been a success because we've also been able to take down the component cost for the European electronics company, but it is no doubt a dilution.

This year we have the same thing with the seatbelts in Japan, but I think that has also been necessary for us to be a complete supplier in Japan. As you have seen, we have tremendous growth in Japan. I would say a 5 percent market share in Japan is impressive for any company that is not Japanese. So we have got it back.

But if we hadn't done those two I am sure we would be somewhere for sure north of 20 percent gross profit. As you saw here, we had 19.4 now. Just take out NSK and we are 19.7. Take out Visteon and I am sure we would be 20 percent plus. So consequently it is very realistic to get there.

Having said that, we have sort of shifted a little bit the focus and not only going for margins. We want to give the shareholder a return on equity and a return on capital employed, because it seems to us that is the way that the market really puts a value on our type of company. We had taken some outside advice from an investment bank and it was very clear cut. There is a very strong correlation between a return on equity and share price, and also return on capital and share price.

So what the answer is, we believe it is very possible to go north of 20 percent gross margin. We would almost be there if we hadn't had done these last two acquisitions. Just the same, they are very profitable.

Second, when we talk about the tax and the dividends, we are going to discuss that in quarter 4. For sure, buying back shares does not rule out that we increase the dividend, because we think that we presently generate more cash than we need in the company. So the question is only how to give it back in a good way to the shareholders.

Going back to the margins, so with NSK you have some carry forward contracts from the previous owners, and obviously NSK and those expire within the next year or two. So presumably with your cost-cutting strategies and the expiration of those contracts, presumably we should be able to see your margins continuing.

You are going to see it gradually coming up, but then again I think we have said to you many times in this quarter, it is not realistic to get 10 percent EBITDA in Japan. I think it is not doable. This June I think it has been a success because not only is it back in profit but also helped Autoliv Electronics Europe to increase the profits, because some of the most expensive components proved to be the same for the two entities. So then when we doubled to volume we could get a bargain on the component price, so it is hard to isolate.

Thank you, Lars.

Thank you. Our next question is from Adam Jonas. Please go ahead.

Thanks. Good afternoon. It is Adam Jonas from Morgan Stanley. I just had a question about your capex to D&A. You mentioned that recently in the past five years you've been spending less than you've been depreciating. That gap is narrowing a little bit, but can you give us a little bit of guidance on how much longer this can last, or maybe when you would expect that your capex needs for either capacity expansion or the capex related to the development would surpass the level that you are depreciating, because clearly you can't do that forever.

For the future we don't see that the capex will exceed the depreciation. It should be at that level or a little bit below.

What's going on here is also somewhat of a shift here, because firstly we move on to low-cost countries which means less automated equipment which means less capital expenditure. That's one thing. Secondly, even in the high-cost countries we are buying less automated lines. There are sort of more persons in it. The reason we do that is that this gives us more flexibility for the output. It seems now that the ramp up is faster then all of a sudden it starts to slide down faster also. So therefore if we introduce a line with a fixed output that is going to run half of its lifetime under capacity. So what we do now is we have a lot of people there and then when the volumes go down we seem to reallocate and take out one person after the other until the line is simply stopped. So we gain flexibility and we spend less on capex. So it is correct.

Just one more question if I may. You gave the list of the product launches during the second quarter that you have Autoliv content on. Can you maybe add a little bit more colour about which ones are progressing well, which ones you think might have a bit more room to catch up in the second half? Thanks.

I have to say that I am not really competent to go through all of these. I mean some of them you can discuss if they have any input. Lamborghini I don't think it is very interesting.

It has an airbag on that?

We have the seatbelts and pretensioners. I'm sorry, I have to decline, actually. The point I think I try to make here is that in quarter 3 it is always difficult because that is when we have a lot of new models and there are ramping up problems not only with us, but our OEMs typically have a lot more problems and that may delay shipment without our knowing it.

Maybe I could just narrow it down. The BMW product is one you gave us quite a bit of content on. How is that progressing?

As far as I know, it is progressing fine.

Thanks very much.

Thank you.

(Operator instructions) Our next question comes from Graham Phillips.

Good afternoon gentlemen, it is Graham Phillips from UBS. Three questions if I could. You talk about the improvement in the gross margin. How much is this due to the reducing number of suppliers, this is actually a falling raw material cost as such.

Secondly on Japan, with the Japanese OEMs, can you give us examples of where you have won some business with either or both the Japanese transplants in the U.S. and also Japanese manufacturers domestically?

Thirdly, just looking at the improvement in the organic growth or the growth figures you show for the side airbag on the head, can you sort of contrast the European and U.S. growth rates there? Sort of the plus 30-odd percent for the second quarter I was thinking of.

Okay, thank you. Let's see what we can do here. Generally speaking, if we talk about the gross margin, what we are looking at is it is simply the component cost. I am sure the few number of suppliers are going to eat into it, but the big one that happened during this quarter was component cost, simply. That all seems to have to do with the [seal] prices in the U.S. that did not come up the way we thought it would come up. So product cost is the answer on that one.

The second one, the Japanese that we have also for the U.S. as well as Japan, we have for instance Toyota Corolla, it is in Japan, in North America. We have another Toyota which is Europe and Japan. We have a number of them really. I am just looking at these quarters. If I look at the full year there are even more of them. And then the Mitsubishi that is called Mitsubishi in Japan but it is called Chrysler in the United States. We have another one called Reno in Europe and it is called Nissan in Japan, and so on.

It's a fairly sizeable number. We actually get more business out of Japan from Japanese suppliers. Some of them like Honda, they build twice as many cars outside of Japan as they do inside of Japan.

Just particularly, I think if we go back six or nine months ago, we were talking about moving more exposure into the light truck segment in the U.S. both through the Big Three and possibly through the Japanese. Do you think you are going to be on some products coming in over the next six to 12 months in the U.S. either Japanese light truck segments or U.S. light truck segments which will start to benefit? Can you give some examples?

I think we are fairly balanced today. I think we have a similar share in our business as the market is in North America. So we have sort of the same share of our business goes into trucks as the truck market is of the U.S. market.

Do you know how that would contrast between the Japanese and the Americans, let's say is it 50/50 or 51/49 in that last set of data?

I really don't know. Do you know, Mats?

That's one of the transplants.

I can't answer you. Mats feeling is that we are still underrepresented among the Japanese transplants.

Okay, there is nothing coming - are there things coming up over the next six to 12 months, are there new products launched that you have been allocated to be on that would improve?

I think it would improve but really, honestly, I cannot give you a solid answer on that one.

Also, just on the issue of the organic growth or the growth figures that you show on the side airbag.

As you know, we have on the side airbags we have a growth rate in Europe of about - as we see it it is about 24 percent, that is quarter on quarter, quarter 2 and quarter 2. In North America it is similar, we actually have 20 percent quarter 2 increase this year over last year. In Japan, the increase year on year is 111 percent. That boils down to the 30 percent you saw on one of the slides. So 24 in Europe, 20 in North America and 111 in Japan.

Great. Thanks very much for that.

Thank you.

Our next question is from Patrick Lindquist.

Thanks, this is Patrick with NJQ in Stockholm. I have a question on the gross margin. You say that you are moving some from RD&E up to sort of gross margin. How large an impact was that in the second quarter, just to get a sense, or how much money you are moving higher up the P&L?

Secondly, on the market share improvement that you actually achieved, having said that you basically wouldn't beat the market by half a percent or a percent in the beginning of the quarter, you end up with 8 percent better than market. The question is, is that mainly in Europe where the difference came from, or what other drivers of this very different outcome than you expected?

We'll start with the second one and the engineering income, I think what you are seeing is it is fairly [marginal, even though it has started actually, due to some engineering costs.] The reason we bring it up is because we are going to see more of it, unfortunately. That is what we see in the new contracts. But today it is very marginal, it is going to come so we are going to talk more about it in the coming couple of years.

Talk about market shares, the increase is of course Asia. The Japanese car sales, they went down 2 percent and we went up 26 percent. So there you see a huge market share increase. This is organically. As you know, roll in NSK and we double sales. Organically it was like 26 compared to minus 2.

In China we have double sales and I would say that the light vehicle production is probably up 50 percent or somewhere in that order of magnitude. Korea is a similar picture as China is. As you know, China is mainly for Chinese consumption, Korea is mainly for exports so there are two different markets. We take market share in a big way in that part of the world.

My question is really more, obviously I presume you went after price that you sold quite nicely in Japan and into China, things like that, but it is a big difference from what you implicitly said in the beginning of the quarter to what you actually came out. The question is, is that from those regions or is it from other regions where you were surprised?

You could say that generally speaking, you could say of course we do not know what cars that people will buy. If you take Europe for instance, where we have such a big market share, it's half of the market, we should theoretically move as the market does. So the car production is down 5 percent in Europe, we should go down somewhere like 5 percent, but as you saw here, we increased 2 percent.

So the only reason is that people buy cars with a lot of safety content where we happen to be a supplier. So if the market all of a sudden changes and they start to buy Fiats, then we are going to take a hit.

Thanks.

Thank you, we have a question from Grant Finnley, please go ahead.

Just a follow up question. In the P&L for the charge "other" in the net financial line, there was a plus 2.5? Plus 3.5. What was that?

Of the 3.5, 2.5 was the gain of NSI contracts and the share of the Japanese company. That is a very complicated little bit, I hope we don't have to explain it. This is the wrong time. Thank you.

Okay, thanks.

Our next question comes from [inaudible]

One question. Given your market share which has risen quite considerably, can you estimate a percentage of your current market share is globally in seatbelts and airbags and do you think that your OEMs will be relaxed with this market share, or do you think they may eventually push some of your competitors to rebalance a bit their positions?

We will leave that one over to Mats.

We don't do any calculation of this per quarter. We try to do it on an annual basis, that is difficult enough. But I mean, it goes without saying that we have increased our market share so we estimate it to be at least one-third of the global market. There are two elements, of course. We are better positioned in the growth areas of the market that decides airbags; secondly, we have the aggregate effect that Lars discussed before. We are taking market share in Asia. But I have to come back with the exact numbers in the beginning of next year.

It's probably the best thing to do. I think we said before, we believe the seatbelts will be around 25 percent, to around one-third. Europe we say seatbelts are around close to 60 percent, I would say, given the latest development and airbags a little bit shy of 50 percent. If we talk seatbelts in Japan I would say we are around 20 percent. Airbags in Japan we are probably around 20 percent as well. [Senecor] was 19 percent the last time we measured. In China it is more difficult to say. We think we were typically one-third. In Australia we are very big.

The question was, is it going to be a concern for the OEMs or are they fine with you having your rising market share nearly everywhere?

I think you probably have a point, that the OEMs would probably like to have more competitors and maybe they think we are too big. But having said that, the way that they are squeezed, you know, they don't want to pay more for the products just to see the other suppliers. I think they are in a bind here. Maybe some of the things they want to bid, but they continue to buy from us, so so far, so good.

Okay, thanks a lot.

Thank you.

Thank you. There appear to be no further questions at this time, so I'd like to hand it back to you for any closing comments.

Thank you very much then. So my second line is, thank you very much for participating here in the middle of July. Stockholm here is a little bit like 30 centigrade, it is hot. So thank you for sitting in there and asking all these questions. We will be talking to you in October when we have the third quarter results. In the meantime, have a nice summer. Good bye.

Thank you. That concludes today's conference call. You may now disconnect your lines. Thank you.