Autoliv Inc (ALV) 2003 Q4 法說會逐字稿

Welcome to the Autoliv conference call. At this time, all participants are in listen-only mode. (OPERATOR INSTRUCTIONS). I will hand it over to your Chairperson, Mr. Lars Westerberg. Please go ahead, sir, and I will be standing by.

Good morning to all of you in the United States and good afternoon to you in Europe. I'm Lars Westerberg sitting here, as usual with Mats Odman, the Information Officer, as well as a Magnus Lindquist, our Financial officer. And also as usual, we are going to start by reviewing some slides that we hope will give some additional information. The slides are available on the Autoliv homepage, Autoliv.com. And either you go directly by clicking teleconference or as you go into financial info, where you find the same slides. And we will take it in the same order as the slides come on the Home page.

So if we start from the beginning, we can say that the quarter came out much better than we expected here internally at Autoliv, particularly that is valid for the organic growth, that as you might know already, we had an organic growth of about 9 percent, way more than we thought we could achieve, actually. On top of that, we had a fairly substantial increase due to the currency changes as well. So the higher volume resulted in higher margin, and higher margin resulted in higher growth result. And on top of that, as we had informed in an 8-K in December, we had a onetime affect you can say of a new $18 million U.S. We had guided 15 but it ended up being 18. So all in all, it was a very good quarter.

And if we take the next slide and have a look at the next phase, as you can see then in dollar terms, where the sales were up some 25 percent. As you can split up in currency, about 12 percent, acquisitions about 4, and then the organic sales that we mentioned, was 9 percent. If you break down the organic 9 percent, it boils down to North America with only 4 percent and only 4 is partially because we have continued to phase out some inflators, hybrid inflators, that gives us very low margin and also fairly high cost. So excluding those things, the growth was actually better. In Europe, we had an organic growth of 11 percent. And in Japan, we had an organic growth of about 14 percent. China and Korea, as you know, is growing very rapidly for us. And the combination, China plus Korea, was up some 65 percent organically during quarter four. The trend line and moving twelve months that you are looking at on the page here is presently running at about 19 percent at an annual pace. And you can see if you sum up all of 2003, we had an organic growth of some 5 percent. And the production of cars and light vehicle was down two; so we would be at about 7 percent better than the underlying.

If we turn the page and have a look at the organic growth, it was the 9 percent we said. And the production during the fourth quarter was minus 1. There were a couple of reasons, of course. And from our point of view, it was the very favorable model mix that was produced during fourth quarter, and particularly so in Europe. We also had a fairly good country mix in Europe. As you know, there was a large decrease in Italy. And I would say that Italy is fairly low. So from that point of view, also from a market point of view, we had a better market than what meets the eye when you look at the total European picture. You can also calculate it another way and say that all the market increase and occupancy restraints, we took the vast majority during the fourth quarter.

During the page again and looking at the light vehicle production, one can say that North America came in smack on what we believed in October, whereas Europe came in marginally better. From our point of view, actually a little bit better than excluding Italy as we talked about before. But essentially, we can say that production figures came out roughly as planned in October.

Taking the next slide and looking at the units, from our point of view then, we can say that seat belts were up some 30 percent. And that, of course, does include the acquisition of NSK. If we look at the underlying organic growth of seat belts, they were up some 11 percent. But also that is of course very strong compared to the vehicle production. (Indiscernible) in the same fashion -- we booked 18 percent or rather we sold 18 percent more. And the organic underlying growth was about 5 percent. You could say that overall then, steering wheels was of course up a lot here, 12 (ph) percent. And as we said before, only one steering wheel per car. Globally, we believe we have a market share now around 13 percent, which has developed rather recently. Some seven, eight years ago we barely started in steering wheels, and now we have about 13 percent. The only exception to taking market share is front (indiscernible), as you can see with a decrease of 3 percent, which is marginally worse than Indi (ph) core (ph) production.

Turning the page again and having a look at the gross margin, there is a strong increase from 18.2 to 19.7. That's 1.5 percent during the last year. This, of course, is driven mainly by the strong volume development and the strong sales. But on top of that, we have also tacked (ph) the cost side, I know you are already aware of. During quarter three, we took the vast majority of the costs out of the Denver facility, as well as the Indianapolis facility and during the fourth quarter, we have also taken out a lot of costs and (indiscernible) well (ph). All the inflator production is being moved to another plant in Utah. So that has started to help, you can say, during fourth quarter. We also continue to move to the low-labor-cost countries. And as you are going to see later on here, the headcount increase we had last year, excluding acquisitions, was only really in low-labor-cost countries.

On the direct materials phase, we have taken down also the direct material costs as a percentage of sales. And the 19.7 is -- if we would exclude NSK, which as you know is dilutive, we would be smack on 20 percent gross margin after the first time in quite a number of years. So a nice development on the gross margin. Turning the page and looking at the operating results, it also turns up, and we ended up, if we exclude the special core (ph) items, those net $18 million, that is nonrecurring, then we had a margin of 8 percent net of the 18 million. That is not up as much as the gross margin, and that is particularly, we have had some increase in DA (ph) research and development spending during the fourth quarter compared to last year. That is something that has been going on for quite some time. And as you know, there are two basic reasons, one is that the level of engineering income is decreasing. In the future, we will be paid not when we do the engineering, but rather, when we ship the engineered parts. And we have taken a conservative approach to the accounting. So we expense the engineering, and should then realize better margins in the future. The second reason is, really, as you also know, there are more models per platform, and that is driving engineering costs. So 8 percent is the margin excluding the special items. If we take the U.S. GAAP reported margin, that would be 9.2 percent.

Turning to the next page for the income statement, we maybe should concentrate on what happened between the two years. You can see that sales was up 25 percent. The gross profit was up 36 percent. EBIT, not as much, but 33 percent. And again, that is because of the ODE. One (ph) country (ph) income before tax were actually up 44 percent, and net income is up some 57 percent. The conclusion, basically, is that the further down we come in the P&L, the larger the increase is really. The ODE was up a lot; we felt it went really from 4.9 to 5.3 percent. Part of the reason is that during 2002, quarter four was exceptionally low because we always get some, should we say, charging up of engineering costs. We did that, of course, also in 2003, but not as much as we had in 2002. The gross margin, we say, that was driven both by sales and by lower-cost. And if we take the earnings per share and if we exclude the onetime item here, we had an increase of 29 cents. If you break that up, it is roughly -- so that 9 cents is because of the currency, about 1 cent is the stock repurchase. The tax rate hits (ph) us (ph) with some 3 cents. And then organically in the operation, we created 16 cents. Those should add up to the 29 cents improvement we had year-over-year.

We turn again and have a look at the key figures for the Company -- and again, we take the part where we do not have the onetime effect in here. We had an increase of 29 cents up to 78 cents. That is of course, a place (ph) of 29, as we said. If we include the onetime nonrecurring items, we have 47 cents -- that would be the reported figure. We are also happy to to report that, as you know, we believe the return on capital employed and return on equity is increasingly important to us. So return on equity went from 9.4 all the way up to 12.9, or an increase of 3.5 percent, actually. Return on capital employed increased 3 percent from 12.3 to 15.3. You may also recall that after quarter three, we did have some problems. We got the working capital to increase too much, and that was mainly driven by us being too fast to pay. So we're happy to say now that Magnus gets some order (ph) in this one, and the payables are up again. So now we are back to 10.0 percent working capital. And actually, if we would exclude the acquisition of NSK, we would be looking at 9.4 percent. And as you know, that is because we have the whole balance sheet included, but not the full year. So that drives it up. Net debt is down about $150 million. We are down to $785 million or 25 percent of the net debt in relation to capitalization. Also, as you can see, headcount went up, so we are now at 37,000 people, total headcount. If we exclude the acquisition of NSK primarily -- we have made a couple of small ones too -- then we have had an increase in the low-labor-cost countries of some 1200 persons. Where as the employment in the high-labor-cost countries actually has gone down 100 persons, which is a development we really try to stabilize.

If we turn the page again, we are having rapid (ph) form (ph) the return on equity and return on capital employed. As you can see, the graphs are moving higher and higher. So no need to go through all of them, I guess. But we can say for the 12th consecutive quarter, we did improve both return on equity and on capital employed. We now have, as we said, a return on equity of some almost 13 percent, which is of course, much better than the interest rate we can get today. Also worth noting is that this graph excludes the special items, so this would be the ongoing business, you could say.

Turning the page again, we come to the cash flow. And in quarter four, we have the solid graph here, before investments we had in the quarter, a positive cash flow, some 237 million. And if we exclude the special items, it's still more than $200 million. Net after investments, we had 174 million. And both of these are record breakers. And if we take out the onetime effect, it would have $141 million. So if you say that we exclude the special items, the cash flow in the fourth quarter was sort of two in normal (ph) quarters, so even a little bit better. You can say we are back to the pace of about a-quarter of one billion after capital expenditures. Part of it is operational; also, we have had the days receivables, we have taken down five days. from 74 to 69. At the same time, the inventory days, we have taken down from 30 to 28 days. So all in all, we had a good cash flow. And the mind main driver, again, was the payables came back to a normal level.

Turning the page and having a look at the longer-term cash flow, you can say that the gross cash flow in the last two years have been roughly half $1 billion for both 2002, as well as 2003, if we exclude the special items. And after CAPEX, we are in the order of magnitude of a quarter of $1 billion per year, or actually a little bit better last year than 2002.

Looking at this graph here and maybe turning the page to the depreciation and CAPEX, we believe that the CAPEX will go up a little bit this year, 2004. It's primarily driven in investments in looms (ph) to weave (ph), inflatable curtains (ph), and also investments in inflator production, particularly for side systems where we are very successful for the time being. If we look at the slide, capital expenditures and depreciation, you can say that quarter four, we had a lower CAPEX and depreciation. But again, we believe this is probably going to balance, roughly, in 2004, and probably on a level around $300 million U.S. So an increase from 2003 to 2004.

Next slide, then, we are trying to visualize the fact that during this year, the value, supply volume for Autoliv to Japanese vehicles in North America will exceed our supply value to the U.S. Big Three, which is really what we have been working on ever since the year 2000, because as you know, we believe that Big Three will continue to lose market share in the U.S. So for us it is very essential to get into the Japanese suppliers. As you can see, they are going to have a fairly nice trend in the coming couple of years. It's also worth noting that for the Big Three, this excludes the new commitments -- the voluntary commitment announced in December. And we believe that the new voluntary commitment is not going to produce an material extra savings in 2004. And if it comes in 2005, we believe it's going to be in the latter part of 2005 when the 2006 model year is introduced. It's our impression that maybe some analysts are somewhat more optimistic than we are on this topic. We think it's going to come relatively late. But of course, they are going to live up to their commitments in 2006, actually, (indiscernible) 2007.

Turning the page and having a look at the global picture, it just shows that the side systems, both types, the chest system as well as the head protections are continuing to go up, almost on a linear pace here, going forward. So the penetration now then is going to be something on the order of magnitude of 20 to 25 percent for head systems during this year and continuing up next year. But the chest protection continues up, and will increase going up even faster in 2005. We believe the pick-up again will be in 2006 mainly, for the U.S. market.

We will then have a look at the recent events on the next slide. We have decided to be in the new airbag facility in Shanghai in spite of not having filled up the present one. But the backlog is very strong. During the fourth quarter, Ford Motor Company granted our present site, a quality (ph) of old (ph) in Shanghai, which we like very much, of course. Autoliv France, go to Japanese award, so-called TPM award, also first category for world-class manufacturing. And that is in Gonan (ph) (indiscernible) Paris. As you also know, we have got a onetime consideration of about $35 million for a license (indiscernible) from OEA to another company in our business. We had the -- we are going to appeal the verdict for 27 million that happened during the quarter -- also in the fourth quarter, that we also had an 8-K on. And then we talked about the sales (ph) commitment for side impact protection system. That for us is very substantial. It's probably going to be one and a half to two years before we see a new (indiscernible) save (ph) coming out of it. Then we try to look a little bit on what we believe about the production volumes coming forward, and we can say that the last two quarters, the U.S. vehicle inventory measured as days of sales have gone down, and a little bit more in December than in November. And we are roughly at the ten-year average. Having said that, it's on the right way. It's going down, it's below the ten-year average. But it is still a fairly high level if you talk about number of vehicles. So we hope the trend will continue. The vehicle inventories are not low yet.

If you turn the page and have a look at what CFM forecasts for production in North America -- they believe the production here in 2004, we're going to see a slight uptick in quarter one, a similar one in quarter two, a flat quarter three and a flat quarter four. So all in all, this would give us about 200,000 vehicles more in 2004 than we got in 2003. These changes are also small. So we have preferred to look at it as a flat volume, and particularly, in view of the inventories that are still relatively high, measured (ph) as number of vehicles.

If we turn the page and look in Europe, it's a similar trend really, flattish first quarter, a little bit of a flip in the second quarter and a flat third quarter and a kick-up in the fourth quarter. But all in all, 16.1 or 16.2. So flat development also in Europe. The next slide, we will show you Japan and you have the same story again, really, where we are going to have -- we believe these figures are slightly better first half than second half. But for the total here, it's on the same level again. If you want to a simplify it, you could say that quarter one will be relatively flat, as will the total year be for 2004, if our estimates are correct. So finally, what we believe, on the last slide, the outlook for quarter four, we believe that the sales increase will be somewhere like 15 percent. And that will be from our point of view, a marginal organic increase. We do not dare to believe it would be as good as it was in the fourth quarter, but will (ph) be (ph) coming back into the third quarter. And because we believe we have taken out some costs from the system structure as well as material, we believe that we can slightly exceed the margin from last year of 7.2 percent. On top of this, I think it's fair to say we potentially have a lower tax rate in this year than we had last year. So that should be slightly higher on the special area as well then.

With that, we will be happy to take any questions, and we are going to do our best to answer them. So over to you, Maria.

(OPERATOR INSTRUCTIONS). Nicholas Hurst.

Nicholas Hurst at Morgan Stanley. Three questions -- the first is your trend and SG&A was rather unfavorable in 2003. You talked more about the R&D going up but not as much about the SG&A, which was basically, on an absolute basis, bailed out by your growth that you registered. What are the reasons for that? And what trends should we look for in 2004? My second question is the restructuring benefits North America, on the cash flow side, what kind of working capital savings from your organization should we expect? And finally, your plans for China, you're doubling capacity. Do you have export potential there given that airbags are skyrocketing in terms of of exports from China to North America?

You're right that the trend for the SG&A, particularly measured in dollar terms, have done up. And we got bailed (ph) out (ph) by the volume, you could say. If you dive into it which Magnus has done here, it's essentially three things have gone up. The one that stands out is professional services. And when you dig into professional services, it's a lot of legal costs that we have had in 2003 that may or may not repeat in 2004. But as you have understood, some of these onetime incomes and some other things have had a kind of legal background too. So that has cost us quite some money. Then the trend has been similar but not nearly as strong for IT as well as insurance costs. The insurance has been in the last two or three years, really.

Your second question is regarding working capital and the restructuring benefits in the U.S. We don't see any kind of tangible benefit from a working capital point of view. What we have done, as you know, the German site is closed, and the production has moved over to Utah. But it will be tied up pretty much the same working capital. Capital. The Indianapolis plant has moved mainly to Mexico, so that would be a little bit more, but it's very marginal. So I don't think we can talk too much about that one. And (indiscernible) to another plant in Utah again, it's roughly the same working capital. So we don't have -- we don't see any large improvements or deteriorations in the working capital.

Your final question about China, Nick, we believe that the -- there is not a whole lot of potential for export from China today. If you take material costs in China, they're still too much imported parts. I know that many of the car producers, when they have the same material in China as they have for instance in Western Europe, they see a cost increase in China of some 30 or 40 percent. The trick is of course to localize all the material and not ship in from the outside world. But before that is done, we don't really have the potential to ship out of China. The cost is too high. I believe that that is valid also for the OEMs, for the time being.

Yes, but how do you explain then that the shipments of airbag components have gone up so much from China to North America? Are others doing different things than you do, in terms of the supply chain? Or why is it so strong, in terms of the number of airbags simply getting to North America, from Asia and particularly, China?

I don't believe that that is right, actually. I believe we have that we have the first airbag campaign. We have not shipped any airbags to China. To my knowledge, I think the Acarpa (ph) has as well, and that's it. I can't believe that Acarpa is importing material to China, assemble it and ship it to U.S. As you may know, Nick, from a labor cost point of view, and that's mainly what you gain in China; we talk about 2 or 3 percent of savings for an airbag module. So that would not pay for the freight, even.

Rob Langley.

Calling from Koznos (ph). Just two brief questions. First of all, I understand that Q4 is the first quarter in which you had created sales from the new Golf (ph), which sounds like quite an important vehicle. I was just wondering if you could quantify the amount of sales you got from the new Golf in the fourth quarter; is it correct it's about $50 million U.S.? Secondly, on the gross margin -- very impressive gross margin in the fourth quarter. I just want an update on where we are in the direct material cost reduction program, in terms of quantifying the number of suppliers you are now down to in Europe from the original number given in May of 2003? And whether you are ahead of program?

We are going to answer the questions in the opposite order. So Magnus will start with the gross margin while I try to figure out the Golf for you.

When it comes to gross margin, and this is a supply conservation production program, I can say we are actually according to plan. And as you know, it's a many year program. So we have the ambition, then to reduce the number of suppliers from today's roughly 2000 down to 500. And it would take another at least three years to do that. So it's a long-term program., with small incremental improvements. But when it comes to the gross margin, we believe that we will have a continuous improvement in that, also due to what Lars said earlier, that we're getting paid for our engineering more and more via piece-price (ph) amortization, when we start delivering products, rather than as engineering income when we make the engineering.

I will take the first question, and this is going to be rough numbers, I'm afraid. I would say on the PQ34, which is the predecessor to the present Golf, we estimate that we ship about $30 (ph) million per quarter, if we just take the total figure and smack it up on four quarters. The new peak PQ35 is going to be on the order of magnitude of $40 (ph) million a quarter. I hope that answers your question.

You had the whole 40 million in this quarter, is that correct?

In the third quarter, it was very marginal shipments for the PQ45. And they had a relatively slow ramp up for (indiscernible) that I am not familiar with. During the fourth quarter, I would think it's probably around $40 million, without knowing exactly.

Andy Strapp (ph).

Enskella (ph) Securities. I have a couple of questions if I may. First of all, apart from the programs with your suppliers, do you have any other material cost initiatives? And by that, I mean of cost relief (ph) costs in '04, '05 that we should be aware of? Secondly, also considering the strong margins we have seen recently in your order intake and also when it comes to new regulations and new weapons of commitment, etc., what do you see as your expected organic growth rate on top of the core production in the next say, five years compared to what we have seen in the past, say, five years? Is it is going up or down or sort of the same?

And finally, if you could talk a little bit more about Page 14 in your presentation material. About the development of your business with the transplant in the U.S. I don't really understand if you're talking about the total value or if it is the value per car that that page is showing, please?

If we start with reducing supply, you're right. That is a program we have running actually. The second program that has sort of started up here, late during last year, is the global part (ph) chasing system, which is I would say coming into service now. And that means that if I am going to buy an article (ph) sitting in Stockholm, I can immediately get to know what to my colleagues worldwide pay for the same article from their suppliers, and who is the supplier. So we can have then, just (indiscernible) at the bottom, we are going to know what is the lowest price worldwide that we pay. We think that is going to help us. Thirdly, we have also started out and we have had our first auction. I believe that was right before Christmas, on plastic components, that gave us a very good result. And we are going to have the second one within a couple of weeks here. And that is about diecasted parts. And if the first auction is any kind of indication of what we're going to achieve, it looks fairly promising. Your second question -- that was about order intake with respect to sales commitments and so forth.

Yes, and the organic growth rate going five years down the line compared to what we see in the last five years also -- if it's going up or down based on what you have seen in terms of new rules and regulations and sales commitments and (indiscernible) predictions (indiscernible), etc.?

We believe that, historically, I think we have always talked about 5 percent, as the sort of normal value added annual increase. I would say probably for the time being, we speak to that one. We have not run the numbers really. But as you know, more and more cars get better equipped too. So that potential maybe is going one way. And all these sales (ph) commitments and roll over commitments is going the other way. So if I propose something, I will just stay with the numbers we have you sold for.

Number three, your question on transplants, that was intended to mean our supply value per (ph) car. Essentially, what we say then, in other words, is from an Autoliv point of view, today, we are better off or at least the second half of the year after the launches this year. We are better off if the American consumer chooses a Japanese car rather than a Big Three car. But of course, we still have more sales to Big Three than we had to the Japanese transplant, because from a production point of view, I believe that close to 70 percent of the production in the U.S. is still Big Three, even though it's trailing down.

Is this any particular brand? Is it home (ph) now, is it broad-based? The big increase you expect for '04 versus '03?

It is fairly broad-based, but home-based is one of the strongest.

Scott Merles (ph).

Obviously, organic growth was a very substantial surprise. Which one of two or three product lines surprised you the most and why?

I would say that generally speaking, we are probably mainly surprised about Europe. We had, at best, a flat market in Europe and the organic growth was 11 percent. Secondly, from a product line point of view, as you may recall, we had some problems last year with falling sales in seat belts. And a couple of these conversations, quarterly conversations, we said we are going to come back on the seat belts. But then all of a sudden, it became like a catch-up thing here with 31 percent up in quarter four. Maybe we should have understood it would be the strong. But that was actually stronger than expected as well. From a model point of view, I am not able to answer you. And I believe my colleagues aren't able either. But Europe (ph) in general, seat belts in the United States, I would say.

To follow up on your Denver comment, you said something to the effect that because you discontinued the hybrid inflator, which I think is probably the old OEA inflator, did that add to -- when you adjust for that, does that add to the organic growth rate? I wasn't quite sure how that relates to the total Company growth rate if at all?

Maybe I was not very clear. You're right, it was the old driver (ph) hybrid, really. There is only one customer in the whole world that uses a driver hybrid, and that is GM truck. We feel like the driver hybrid is a fairly complicated (indiscernible), which means it's fairly high cost and very little margin. So we have decided not to have a new generation (indiscernible) by itself, you could say. The Denver operation, we closed entirely, which means we have taken -- moved all the driver hybrid as well as the passenger hybrid as well as the side hybrid, and for the vast majority, they are now produced in Brigham City, in Utah. Our point was that all of these driver hybrids that were sold through other OEMs, directly through OEMs or other system houses, they were booked as external sales. So while we no longer booked as sales because we don't sell anymore, that of course is negative you could say, from the point of view that that is a negative organic growth, if there is such a thing, as a negative gross.

To what extent was it material -- would your organic growth have been materially somewhat above 9, percent accounting for that?

Do know how much we deal -- let's see. I will try to come back with how much the external inflator sales in the U.S. went down. Do you know how much? Then say directly. Don't show me the figure.

It was down over $20 million.

Year-over-year?

Yes, in the fourth quarter.

Okay, you've got that, Scott? $20 million (inaudible) quarter for 2003 compared to the previous year. You can notch (ph) yourself if it's material or not.

Now, since there wasn't any unusual sales boost, it seems like there wasn't any unusual sales boost in the quarter. So is it conceivable that there will be certain quarters in '04 and even '05 where there could be 7 to 9 percent organic growth? Is something like that still on the radar screen? We recognize your conservatism in the 5 percent. But in certain quarters, can you still show 7 to 9 percent, given that there wasn't anything really unusually boosting sales in this quarter?

It's conceivable, but we don't dare to bank on it. We took a tremendous amount of market share, and you cannot do that every quarter.

That gets to my last question, is, are you taking market share because you can integrate the whole system? And is a lot of that coming in Asia? You used to give an Asian backlog number of around 700 million. Have you updated that Asian number at all?

No. I think the growth we see is basically -- if you take it from a geographical point of view, it's very much about Asia. If you take it from a product point of view, we seem to be very strong on side systems. And that is, of course, primarily caukers (ph), but also side airbags.

I'm sorry, just one more question. To what extent are the royalty fees and the patents recurring?

The one we had here is not recurring. This was a onetime agreement we had with a colleague in our business, which has been lingering on and going on, and caused some so-called professional fees. And now we finally agreed and it is a once and for all payment.

Right. But I was thinking about your products and given the whole range of fees, is there a material recurring stream of patents -- of royalties -- given the whole range of products?

We do have a positive stream of royalties. But I would not say it's material. We get it ongoing, you could say. And of course, all this is that, some patents expire and some of the agreements are not used anymore. But on the other hand, there are new ones coming all the time. So it is a stream, yes, but it's not so huge.

Thomas Vesance (ph).

Citigroup. I have a couple of questions, starting with the consequences of the U.S. OEMs decision to self-commit (ph) for side airbags. Could you give us your estimated breakdown between curtain (ph) and side airbags protection for Teraxa (ph) into (indiscernible) Danish (ph), if you have any? Could tell us if in your view, the decision is going to put more pressure on pricing decline on these systems? And finally, on these systems specifically, do you think these new belts (ph) will be marginally enhancing or just topline enhancing? That's the first question.

Okay, thank you. It's a side system they are going to do. If it's going to be curtains or side airbags or both, I am not able to tell you, because as we've said a little bit earlier, we have not seen it yet in the order books. We just know there is a lot of discussion going on, because as I am sure you are aware, the capacity for for curtains is limited for instance. So it will take sometime to get it in. Do you, Mats, have any comments to it, if it's curtains or side airbags or both?

I think it's more both, actually.

I was under that impression too, but I cannot say that I know. Regarding your second question, will this be pressure on price? I'm sure it will, because if you sort of rule from 10 percent installation rate in the U.S. to 50, that means you're going to ship five times as many. And they are, as you know, very efficient purchasers, so they are going to squeeze price. But nevertheless, I believe it is margin-enhancing, because it's sort of part of the picture then. We have already done all the engineering. The take rate is low. But if you go from 10 percent 50 percent, and we have done all the engineering trials and tests, that should be margin enhancing just the same, even though the price per unit will most likely go down.

Two other questions if I may. We have seen your R&D expense as a percentage of sales and going up this year to 5.8 percent if I'm right. Should with consider that this is a peak or should we consider that it is going to sit down there? Or can it even go to 6 percent going forward?

I'm sure it will pass 6 percent during 2004.

It will go up?

Yes, correct.

Two very quick questions. You mentioned that (indiscernible) your CAPEX has to go up in '04. When do you think you may have to build more capacity for side airbags to field the requests which are going to come from the U.S. OEMs?

The CAPEX will go up during 2004, and mainly driving by the side airbags and the curtains, actually. In itself, that would be fairly sizable investment to produce both the bags themselves, but also the inflators. So it is driven by the side systems. As you may recall, we talked about 230 to $260 million for this year and we stayed within the bracket around 250, I believe. We think it might be even 50 million more for 2004. But as you also see, fortunately, we have a cash flow that tends, it is not a big problem.

Clearly. One final question, if I may. Are you prepared to try to commit to a new target in terms of gross margin or EBIT margin? Or do you think you just prefer to say that it's going up?

We prefer to do our best.

Arnold Judee (ph).

From Exhan (ph). Two questions, the first one relates to raw material prices, and specifically, steel. Given the recent price (ph) in some of those derivatives, what could be the impact that you foresee going forward in 2004? And specifically, maybe on the light of this auction system that you put in place? The second question relates again to your forecast for Q1 and Augany Croth (ph). It suggests you outpaced Golf (ph) (technical difficulty) significantly in '04, specifically in Europe. With the help of the Golf, as you mentioned it, I see actually little reason why you should not go on like this on the back of this ramp-up curve for the Golf, specifically in Europe, and the good acceptance for side airbags. Why are you then so cautious when it comes to your sales growth forecast in Q1, on the light of what you have done so far?

The first one, raw material and steel prices, I would say none of us is an expert on it. But generally speaking, it has less influence than we have thought all the time. The rule of the thumb that we presently use, as you know, we do not buy raw material as such. We buy components or parts. And the rule of thumb is that after the parts that we buy, about 25 percent of what we pay is the cost of the raw material itself. And 75 percent is in other words, value added for our suppliers. So even if the raw material would go up, that is negative, of course. But it's not as dramatic as one would think. And of course the opposite is (ph) also (ph) that if the raw material goes down, we don't get so much benefit as one would think. The auctions and the experience, I will be happy to come back here (indiscernible) when we have done a couple of them. So far, we have only done one. And that was very successful. But having said that, there is a lot of preparation work that has to be done before you can have an auction. So it's a fairly big effort and when you do it, you need to have a good result, which we actually did. The second question, I understood that -- maybe that's more of a question -- I think you're trying to say we are too conservative with our volume forecast for quarter one. And we can just say we hope you are right. But we don't have to bank on anything else, really. As you know, we had 2 percent organic growth in quarter three and then we had 9 percent. Hopefully that can be more than 2 percent, but we prefer to be somewhat cautious for quarter one.

The thing is that, do you agree on the book business that you have already done, in Europe specifically, which has been the outperforming region so far? That's actually -- there's no reason for that to stop specifically on the back of this Golf ramp-up.

The Golf is an important platform no . Doubt but of course that might also be also that they had a backlog for quarter four that was maybe bigger than expected. I really don't know the details. But by the end of the day, we are depending on what models the consumers finally buy. And we do not know, of course. As you know, there was a very low shipment of Golf in quarter three. So there might be they had sort of a hump to get over in quarter four.

(OPERATOR INSTRUCTIONS). Graham Phillips.

UBS here. Just a couple of questions here -- first of all on net debt, I was just trying to reconcile the 785 that you give with the balance sheet items; I come up with 902. Normally, going back historically, you can't normally reconcile that with the balance sheet. The second thing is on the cash flow -- is there any acquisition costs coming out as the remaining part of NSK during the first quarter, I think, or this year? Within the cash flow, with good cash generation, what is your view on the dividend increases or additional share buybacks? And just finally, on the Japanese, I think your Japanese customer exposure is around 10 percent. Give us a split of what that is in terms of North America and within Japan itself?

All right. Thank you, very much. The first one, I will be happy to hand over to Magnus regarding the net debt.

As you remember from the Q3 report, we made a change in the reporting. We were grossing up the gross debt, because we had nested (ph) debt-related derivatives into our long-term debt. So we were putting them as a growth on the balance sheet under 'Other Long-term Assets.' That's why you cannot reconcile it in this report. So that's correct.

The second I will answer on cash flow here -- we had no more cash to pay out for NSK. That's done once and for all. And we are also happy to tell you while we're on the subject here that they do much better now. And actually coming up here during the fall, it is no where near where it should be, but it's not as bad as it used to be. Dividends and so forth, the dividend for the first quarter was decided already in the Board meeting in October. The dividend for quarter two, we will be deciding at the Board meeting in Chicago, which I believe is February the 10th. And of course, they are going to discuss the subject, and most likely also regarding repurchase of stocks.

Your third question about the Japanese and the Japanese OEMs, they are much more than 10 percent. We believe in 2004 here, we are going to be just around $1 billion in sales to them. And that is, of course, a split between Japan, North America, Europe and the rest of the world, or actually North America. I'm just looking at the graph here, it looks like it's about half or so. From our point of view, it's closing in on 20 percent exposure to the Japanese OEMs. And that still means, as you know, that we are under-represented, because the Japanese OEMs by themselves make up nearly one-third of the world's car production. And we are just approaching 20 percent. I think coming up fairly fast. If you go back a couple of years, it was very small.

Max Warberton (ph), Goldman Sachs.

Another question about the Japanese, please. You talked before about the fact that the Japanese margins -- overall the margins on business with Japanese customers are a little bit lower. Is that still very much the case? And is that a challenge that will offset some of the very good work with cost reductions as we go into 2004, as (ph) you are going to see big organic growth from the transplants and the states, and also with Japanese customers in Japan? Is that still the margin for a while?

I think we have concluded here around the table that it mainly refers to sales to Japanese customers in Japan. We have sort of -- we are on the Japanese price levels. And as you may know, the Japanese margins are lower than the European or North American margins. On the other hand in Europe and North America, the price issued to the Japanese are similar to the prices issued to everyone else, which means that they are also similar margins. So when we talked about it before, we probably thought mainly about sales to the Japanese in Japan.

Hans Westerberg (ph).

From Swett (ph) Bank. A couple of questions on products, potentially development and contracts. Knee airbags, electronic contracts, weight sensoring, position sensoring -- could you elaborate on that a little bit please, Lars?

Yes, we could. On the volumes on knee airbags it has yet to be any large volume. I am looking here on my little sort of piece of paper. We think we are going to ship -- last year, we shipped about 0.1 million knee airbags. And I am happy to tell you, we are going to ship seven times as many this year, 0.7 million. The next year, too, is going to be 0.8. And then '06, it's going to be around one million. So yes, it is increasing, but it is not any big deal from a topline point of view. at least not yet. As I'm sure you know, we have this -- what do we call it? The pen (indiscernible) restraint (inaudible) -- sorry?

Anti-sliding bag.

Okay, he calls it anti-sliding bag. And that is sort of feeling your way a little bit on the market for knee airbags. It has to do, which one is better? Depends on whether you are belted or not belted. And as you know, in the U.S. you're not belted; in Japan and Europe, you are belted. The other parts of it, the weight system and so on, no influence at all. And basically, that market, as we said many times before, sort of conquered by Delphi and I believe still is conquered by Delphi. We are not a participant, at least not yet. What else would you like to hear?

That you are getting lots of contracts, of course. No, seriously, electronics, how about getting into Chrysler? You are actually expanding your market share with Ford. But getting into new customers, could you give us some information there, please?

I think for electronics, that's kind of a success story, really. A couple of years ago when (indiscernible) my sales story was a little bit like $180 million. And I would say that we are going to come in like $500 million or so. And not only that one, the bottom line has gone from a fairly big negative to a fairly big positive. So that is a success story. We have been able to come into a number of large new customers, but I am afraid not yet to DaimlerChrysler. I would say that basically, most of the others, but not all of the others either. We believe that we have about 18 percent of the world market for the time being, which gives us and a couple of others roughly the same size. So we are as big as the biggest. But we cannot say that we are the biggest yet. But we are working on it.

Keith Haze (ph).

Goldman Sachs. Just listening to the call, everything seems to be going extremely well, very positive. Yet when you talk about Q1, you were talking about sort of 5 percent organic growth, I think I heard you say. You were talking about margin that's essentially flat, year-on-year, slightly up, with that level of organic growth. What is making you so cautious?

Basically, Keith, we believe it's going to be -- we don't dare to believe that we can have another quarter of the same kind of market share increase as we had in fourth quarter of last year. So somewhat conservative on the sales -- we hope we are somewhat conservative on the sales. On the margin, we believe we are going to do better than last year, and that mainly has to do with cost, because if we don't believe we are going to have a large volume increase, that means that if we should have a better margin, we have to do it ourselves. We believe we will.

Was I right in hearing that you thought Q1 for you would see a 5 percent organic growth?

No, not really. We think possibly less than so. But we don't know. It's kind of hard to get a grip of it. January is basically soft, as you know, with too many holidays, basically. I think there would be an organic growth, but not very much, a couple of percent. And that means that basically, we believe that if the margin will go up and we want it to go up, we have to do it ourselves from a cost point of view. Volume, we don't dare to think will help us in quarter one.

Andy Strapp.

Regarding the organic growth rate levels, 10 percent above the core (ph) production in Q4. You have been talking about the brand mix has been helping you a lot. Do you have any kind of indication that you can share with us about how much of that growth came from the brand mix, please. That would also help us understand what to believe for Q1 and so forth.

I'm sorry I cannot help you. I really would like to, but I cannot, because we don't follow up (indiscernible) per brand (ph), at least not as frequently so we can see a trend on a quarter amount (ph) on it. I cannot help you, I am afraid.

Okay. But it is clearly a significant part of the growth rate?

It's more than brand, you know; it's actually down to models, if it should be any easier. Because as know, in all brands, some models we have, some models we don't have.

I meant model mix.

And that makes it very difficult because there are just too many models.

(Indiscernible). Order intake -- there has not been any talk about order intake in this conference call. And I just wonder if it's continued to be as strong as you have said do many times over the last few years?

It's not been as strong in the fall as it was in the spring. It's been okay but it has not been great. The spring was great.

And just one final housekeeping question about the -- that we should expect a lower tax rate, at least for '04, if I understood you correctly. Is it much below the 32 percent we have been used to seeing, or is it just a tad below?

We don't know yet on this. It's very much depending on, we have a number of tax audits (ph) ongoing (ph), and it's very much depending on the results from these audits. But I can say, we will be maybe a couple of percent assuming (ph). But that's just a guess.

You know, these calls, Andy, there are reviews coming in sort of at a frequent pace. And if it goes the way we think it does go, we say there is a potential to go down 2 or 3 percent.

All right. Let's hope for that, then.

We do.

(OPERATOR INSTRUCTIONS). Mr. Westerberg, it appears there are no further questions. I will hand it over to you for any closing comments.

Very good, then. Thank you, very much, all of you for all the interesting comments and questions. We will be happy to come back with a similar conference on April 22. We will do it at the same time and in the same fashion. So in the meantime, I hope you are going to have a nice first quarter, too. Thank you, very much from Stockholm.

Ladies and gentlemen, this concludes today's conference. You may now disconnect your lines. Thank you.