Autoliv Inc (ALV) 2004 Q2 法說會逐字稿

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Good morning and good afternoon ladies and gentlemen and welcome to today's Autoliv Conference Call. At this time all lines are in listen-only-modes. Later we will conduct a question-and-answer session and instructions will follow at that time. If you anyone should require operator assistance during this conference, please press "*" then "0" on your telephone. And I would now like to handover to today Chairperson Mr. Lars Westerberg. Please go ahead sir, and I will be standing by

Thank you very much and good morning to you in the United States, good afternoon to all Europeans. My name is Lars Westerberg, and I am standing here with Mats Odman, and Magnus Lindquist just as usual and we have a bunch of slides that are available on the corporate homepage under the tab financial information and we intend to go through those slides and then afterwards open up for a question-and-answer session.

So if you'd be so kind to look at the slides then we’ll start with slide number one which is the Safe Harbor Statements which we will not go through but that forms an integral part of this presentation, and we have taken legal advice and that’s the best we can do, we understand, to keep it included.

So if we start with slide number 3, then the sales trend we can say and you can all see here that we have had an exceptionally strong second quarter this year. As you may recall, we believe that the sales would come up about 10%, and we felt that we would have a poor -- currency translation effect of about 5% that proved to be correct. And then we had organic sales that we estimated to 5%. Actually it turned out that our organic increase was 10%, twice the rate we had guessed. On top of that, we had a small little acquisition effect that boils down to a couple of smaller acquisitions Japan, Germany and Taiwan; all-in-all it's only about 1% of sales.

If we then and so all-in-all that was 16% up, and the major surprise was the 10% organic growth. If we have a look at organic growth we think it boils down to a couple of reasons. First off, we believe that we have had from Autoliv's point of view, we have had a very favorable model mix of cars that have been sold and particularly sold in Europe. Then secondly, the regional mix has been very favorable to us because we had guessed that the European car production would be down quite a bit and that proved to be wrong, it was essentially flat. Also the up-tick in the U.S. was unfortunately disappointing but as you know we have of sales in the U.S. nowadays but U.S. in total is only about 27% of sales, and out of these sales more than one-third are to those so-called New Domestic, which means that we are less dependent than we have traditionally been on the big 3. And that has had a good effect on our results also in the United States.

And then thirdly that means strong growth in Asia Pacific which is just following a long trend of nice growth increases so, if you rank them up you could say the strongest growth we have had more or less as usual in Asia Pacific followed by Europe and Japan.

If we turn the page and have a look at the car production, the organic growth we said was 10% versus 5 expected, but the car production has been essentially flat. Our figures indicate a very small decline. When we say this car production here we actually mean North America, Western Europe, and Japan and it is not the global production. The reason is simply that it takes too long to collect data from the rest of the world. It does include as you know countries like Soviet Union or the former Soviet Union, India, Korea, China etc. where the real growth is today, so essentially flat in the triad. Asia Pacific for us was up 22% organically, Europe was up 13%, Japan was up 12%, and North America was up 2%. So, overall a very strong quarter for Autoliv.

If we turn the page and have a look on the car production and the way it turned out this quarter compared to same quarter last year. North America was up about 1% as you can see and that is little bit lower than what we had anticipated. For us the important New Domestic however was up 8.6% as you can see and the big 3 was down about 1%. Also understand that out of the big 3 it was essentially Ford, and that was down about 5%. Western Europe, we had an indication that that would be a fairly sizable decline up to 4%; it turned out to be wrong, it was flat, which was positive and then finally Japan, we had a decrease of 3.4%. So all-in-all, 10.7 million units this year, 10.7 million last year and the plan in March was actually also 10.7, but the regional mix has come more in our favor than anticipated.

We turn the slide again please and look at the volumes that we have shipped out of Autoliv. Seat belts, we have shipped 23.1 million units which is an increase of 19% and if you bear in mind that these are the units that we consolidate. Over and above these we have seat belt production in China, in India, even in France, which is not consolidated. So, I believe we shipped around about 25 million units in quarter two indicating an annual pace of 100 million units which is at least one year earlier than we had planned for to reach 100 million. Pretensioners (ph) were up 14, frontal airbags 2%, chest protection 14, head protection 38. If we -- in the brackets [head protection] take out IC is Inflatable Curtains only. The volumes on the Inflatable Curtains were up 47% in volumes and 44% in value, so a very strong increase. Actually Inflatable Curtains now exceed 10% of Autoliv's total sales. Steering wheels up 10% and what we cannot see here is electronics, but also electronics was up around 15% measured in dollars, so electronics is approaching 10% of sales. So we can say that seat belts had a great quarter, and we are taking market share on seat belts in all regions and corners of the world actually. And then again ICs and electronics are around 10% of the total sales of Autoliv these days.

Turning the page, to the gross margin. The gross margin went up from 19.6 to 20.6% -- one full percent and we are happy to say that we are finally back again over 20% and which used to be the case at the end of the 90s as you may recall. Strongest drivers have been of course the strong sales which means that the depreciation as a percentage of sales has gone down. Another one had been the plant closures that we made last year and have continued this year, it does take away production overheads. And then finally we have actually seen lower component costs also this year, even though we would have liked to see even lower component costs, somewhat hampered by the raw material costs we will get back to that.

Within quarter two, we estimate that we have paid $3 million more on material costs because of the recent price hike on raw materials. And we estimate that during quarter three and quarter four this may rise to $6 million per quarter, so as we said earlier a gradual increase but no explosion. The last 12 months the rolling, the rolling average on the gross margin is today 19.6% so not far away from 20%.

Turning the slide again and coming to the EBIT, the operating margin, we're up .7% and we could say that the problem we had is the continued fairly high engineering costs we have had and also this particular quarter we had booked some severance costs particularly so in France and in Netherlands. In Netherlands, it had to with -- we did shutdown a plant in Netherlands; in France it had to do with [inaudible] – we have taken on manning levels in our steering wheel plant in Coursier (ph)[inaudible].

The overheads in general however, production overheads, sales overheads, administration overheads are down as a percentage of sales and that is in spite of having to accept higher costs for external audit fees. We have bought more $1 million for compliance of the Sarbanes-Oxley Act and we expect to book at least the same amount unfortunately in quarter three.

We will then turn the slide and have a look at the income statement. Starting as usual in the middle column and look at the column that changed. Sales is up 11% for airbags and 25% for seatbelts; in total we say we are up 16%. Gross profit is up 22. Operating income is up as we said been up 25% and then finally income before tax up 23%. At the very-very bottom line earnings per share increased year-over-year with 22%.

The SG&A as a percentage of sales in the two right hand columns 5% decrease to 4.7%. However if you look at it in dollar terms it was up about $6 million. Out of those $6 million however, only $2 million are underlying costs and the other four are foreign exchange translation and the Sarbanes-Oxley cost that we mentioned earlier. The 0.3% we saved there however was spent on the RD&E which continues to go up about 20 million and if we make the same breakdown here, foreign exchange translation explains about 4 million. The lower income that we have booked the last couple of quarters amounts 8.5 million and the salaries about 6 million corresponding to 3% increase in the headcount in the engineering community.

Continuing down the P&L income to the other income and you compare quarter two last year with quarter three this year, we have had actually as we said earlier we have severance costs in Netherlands and we also have had severance costs in France and as you can see that it is a swing between the two years of $4 million. So, all in all, we produced an EBIT of 142 million this quarter compared to 114 last year.

On the other financial items also we have a negative variation compared to last year. Last year's plus 3.5 ended up been minus 1.4. Last year we had a couple of one time gains, you can say in connection with an acquisition in Japan, which we did sell off some shares which produced a financial income of 3.5 million.

Finally, on the earnings per share the 12 month rolling we’re now looking at $3.25. But also we would like to emphasize that this does include a one time gain that we had in the fourth quarter of about 14 cents. So, the real underlying operation has produced about $3.10 rolling you could say over the last 12 months, so three dollars and about 10 cents.

Turning the page again, we come to the return on equity. We have now reached 14.6%, fairly respectable and it continued up as you can see one [inaudible] full percentage points and what we measure here is then net income after-tax in relation to the equity. We have also gone through plus (ph) or minus here what is the way to the average cost of capital and as we can see most analysts believe (ph) it will be more than 8% but in any case less 9%. So there is plenty headroom between our return on equity and the weighted average cost of capital.

Turning the page again and coming to the return on capital employed, we increase actually 2.8% year-over-year. Explanation here is of course the -- fairly much improved EBIT in relation to a -- you could say that the working capital that is well under control and as a percentage of sales has gone down and we will be back to that.

So also sometimes Mag and I get the question why do you have such a low return on capital employed in spite of the good EBIT? That is because as you may know we have a lot of intangible assets and if we deducted the intangible asset we actually do produce a return of 41.2% return on the physical assets. But on the total capital employed is 18.4%.

Turning the page again please and looking at the key figures I think we have touched upon the earnings per share, the return on equity, return on capital employed. The working capital we ended up having 8.5% of sales in working capital after quarter two. However, there has been a couple of positive temporary effect and Magnus claims it is around $30 million that had a positive influence in quarter two. But nevertheless even including these or excluding these, the working capital is down both as a percentage of sales and in actual dollars. So we are well below the 10% target we have.

The net debt is down about $66 million and then if you also saw us that we have paid dividends $19 million. We have bought back shares to the tune of about $41 million and still the net debt is down another $66 million. So the net debt to capitalization is down to 22% compared to 29% one year ago.

Turning the page again please, and then looking at the cash flow. We had a fantastic quarter when it comes to cash flow. We had a gross cash flow of 206 million and we can say that there is of course a chance we are seeing an increase in speed of reg book (ph) CapEx and there is a chance we will exceed the CapEx for the full year. We estimate it at (ph) $300 million. Out of those 206 million about 30 million of those are temporary as we said before. The CapEx is exceeding last year, we spent about 85 million versus last year 58, but even after that we produced net cash flow of $123 million which is more or less half a year’s normal net cash flow.

Turning the page again, we are looking at a more longer term cash flow, we had a gross cash flow and a net cash flow that was the best ever. The main drivers are or have been (inaudible) -- net income of 41 million, the change in working capital of 46 million and again the negative is the CapEx which is up 39 million. So all in all, the last 12 months we have seen a net cash flow after capital expenditure of $343 million.

Turning the page again and having a look at the CapEx and depreciation. If you look on the blue bar here it is relatively high and we’d just like to say here that there chance that we can exceed the earlier forecast of $300 million CapEx. Actually if we look at the last 12 months we are running $286 million but we are seeing increased CapEx and particularly for the Curtain basis both in Canada as well as in England as well actually module producing capacity. So there is a chance we will have $50 to 300 million.

Turning the page again and coming back to the material cost -- the raw material cost, and we said earlier that we believe we had an estimated $3 million negative raw material cost throughout quarter two. We have estimated that we will have that 3 million will be 6 million in quarter three and again 6 million in quarter four. So, all in all for the full year we will see about $15 million we believe sitting here today and of the $15 million [inaudible] we have taken three so far.

So the new targets we hope that we can take the costs down. We believe it can be around 2%, we had hoped we could get down about 2.5% and the major influence that I'm sure you are aware about is the steel[inaudible] cost, but also to some extent, the textile cost based on nylon and again oil based you can say.

So the actions we have taken on the next slide we are consolidating and restructuring of the supply base. I believe you are aware that we have around 2,000 suppliers. Our target is to the take the number to 400. This is a gradual thing though so what we do is we only give those suppliers that we want to retain new business and during the spring it also went below 200, at least the major ones that one can follow. So we are on the way, but it is going to take time, because the old contracts have to fizzle out. We are also increasing efforts to source our purchases in low labor cost countries. We presently source about 13% of the material purchases in low labor cost countries but they are very unevenly spread and that we are doing the best job in Asia Pacific, not so good job in Europe and Japan. These are [inaudible] good suppliers and long term benefits from redesign that is -- you can say also normally ongoing projects that we continue to run as fast as we can.

Next slide, the recent events -- the proposed new regulatory upgrade of the U.S. side-airbag standards have happened during quarter two and we have closed another two plants the seat subsystem plant in Sweden and also an assembly plant in Landgraaf in the Netherlands. We have decided to expand the webbing capacity, the webbing for the seat belts and that will happen in Romania, and that’s about $25 million corresponding to 14% of what we buy in Europe, and that is going to take about $7.5 million of investments. We have as already mentioned bought back about $41 million worth of shares and also a dividend of $19. That means that so far we have bought 9.6 million shares at an average price of $24.6 a share and there is another $10.4 million shares that we can re-purchase.

Coming to the inventories situation on the next slide; the June situation in the U.S. inventory is not particularly promising, as you can see we are more than 70,000 vehicles partially it’s a technical effect because the sales in the U.S. was pretty weak in June and therefore the number of sales price is fairly high, but nevertheless it's not a good picture and it needs to go down relatively fast. It's on the higher side of all these years as you can see.

If you turn the page then and have a look at that forecast from CSM -- CSM has downgraded the light vehicle production forecast for North America and now anticipate a slight decline in production levels for quarter three and then actually somewhat higher decline in quarter four, so all-in-all for 2004 they are now looking at 15.9 million units, and last time we spoke it was actually 16.0, so it is not particularly dramatic. As you can also see the first indications for 2005 is that we will have an increase in the U.S. light vehicle production of some 300,000 units compared to this year.

Turning the page to Europe; the second quarter was better than expected. The full year sales was about 16.4 million as anticipated., but the June sales in Europe are still strong and the quarter three has been upgraded but quarter four downgraded and the pattern is pretty much the same as in the States. We have a similar forecast for the full year and a slight increase anticipated for next year. So between North America and Europe, we should be looking about say 0.5 million units more in production units for next year. In Japan finally, you can say we had a decline in quarter two. We will have an up-tick in quarter three and at the then down again in quarter four, but all-in-all 2004 would result in the same as last time we spoke 8.4 million units, and that is also the forecast for 2005, which will put it into 8.4 million for three consecutive years.

Turning the slide again please to the shareholder compensation on that is just -- illustrating what we said earlier; we paid dividends of 90 million, we bought back shares of 41 million. You can say in various ways we have given back $60 million then to the shareholders. And we have board authorization to buy another 10.4 million shares. Finally the final slide then the outlook for quarter 3. Given that the exchange rate stays where it was the other day, which was given is -- about 5% increased because of the foreign exchange translation. We believe that the inorganic growth of about 5%, is what we estimate for the time being. And we for the time being we are not seeing any large volume platform launching in quarter 3 this year, and as you may recall last year we had to Golf launching and then we had the Spring here, we had Opel Astra, Ford, C-max etc, but at time being we do not see any large volume platform where we are involved to any large extent. The EBIT margin we believe if we adjust the same be a little bit higher than last year and last year it happens to be 7.1%. So, with that Arnica (phonetic) we would leave it back to you, and we would be happy to answer all the question we can.

Thank you sir, ladies and gentlemen if anyone has a question at this time please press the number '1' on your telephone keypad. To cancel your question you press the '#' or the pound key. Once again it’s number '1' to register questions or '#' or pound key to cancel. And our first question comes from Anders Trapp (phonetic), please go head with your question and announce your company name. Anders Trapp of Enskilda Securities.

Hi it’s Anders Trapp from Enskilda(phonetic) Securities. Congratulation for a great results again.

Thank you very much, I'm happy that somebody likes it.

Yeah, I don’t understand what is happening in the share price right now -- I have just a couple of question; really first of all if you could dwell a little bit more on your North American development sales growth of 2% I think it was -- and you mentioned some I mean when I read what you are saying it looks like most of the products are all growing nicely and then we know that you’ve been gaining market share generally and especially with the transplants so how come the growth is only 2%, you are talking about the increased price pressure and some contracts also being lost or being replaced and I don't understand if they are lost or replaced, on the thought for frontal (ph) airbags.

Okay, while basically I'm just -- I think what you are talking about is the airbags only in the United States, right? Because the seat belts are doing fine, and if we then have a look at the airbags, really what we are -- it is a continuation of what we have said for a couple of quarters really. We have as a consequence of the OEA acquisitions a couple of years ago. We inherited a number of hybrids, driver hybrid contracts before actually to Delphi for further you could say shipment into some other big 3 OEMs here and those have been fairly high cost products where we didn’t make any money at all basically, so we will have purposely sort of let them fade out, and that is so-called airbag products, that is one of them, one big explanation. And the second one is that these days we don’t have those automatic price ladders done where we had to go down 3% per year or something like that. So this is what you call pay to play rather[inaudible] and when we accept a new order, we have to give something and therefore that happens to hit quarter two this year. Given the new accounting rules we can no longer that – we need to spread it out, you have to take it when it comes and that was a fairly big amount in quarter two.

Okay. So that’s what you are referring to when you say that the contract on frontal airbags are being -- have expired. They have been sort of replaced with new contracts at lower prices basically?

No, not really basically, it's into production what you read there.

Okay. Alright. Could you say something about how you're thinking when it comes or reasoning when it comes to you pricing the 10.4 million share buyback authorization that you have?

Yes, we would do as we usually do on this, we will let the market price settle here and then we -- just going to make up our mind and I guess continue to do what we've done earlier. So as we've said so many times, given the strong cash flow and given that we don’t need it presently we are going to give it back one way or the other.

I'm sure that the investors are happy to hear that. And finally, also if you could say something more about your guidance for the third quarter, I mean basically when I read the guidance it sounds like same kind of guidance that you have given for a long time when it comes to the current the new quarter with the sales growth of 5-10% and then a margin that is slightly above last years and every time you are beaten especially the margin quite a lot your sort of -- your own margin guidance quite a lot. Are there any specific reasons you won't do that this time again?

Well, I believe so because if you take the strong sales we had in quarter two, it does result in a higher margin than expected too, you know, so stronger top-line does give a better EBIT line as well. The major I would say difference is that we are -- as I mentioned here not seeing any real high volumes platforms launching in quarter three so we think it is not going to be more how should I say a more stable continuation compared year-on-year because if you remember last year the goals actually did launch and some other products also launched in quarter three. We don't see the same thing this year. Just the same we believe we can increase the organic growth some 5% or so and again remembering that if we think that the production will be flat for quarter three and quarter four that is still better than the market.

Yes, but when you have a lot of Q3 launches, and also a little bit of a drag on the margin because of start-up costs etc.

That can be the case, Anders, and that is of course all -- but there is all sorts of risks involved but of course if you do launch high volume products that gives you the opportunity to have the sales volume and a higher EBIT margin, but this year that will not happen I am afraid. Actually also quarter three is somewhat difficult to forecast because given that some producers have had fairly inventories chances are that they have extended shut downs for the summer and we don't really know that. Quarter three is slowest, you know, and that is somewhat difficult to predict.

Alright.

One thing is for sure, it’s going to be the slowest in the year.

Yeah, okay. Thank you.

Thank you.

Thank you. Our next question comes from Graham Phillips. Please go ahead with your question and announce your company name.

Hello, I'm Graham Phillips from UBS, can you hear me?

We can hear you loud and clear.

Great. Thank you. Couple of questions, firstly, could you tell us a little bit about the Focus -- the Focus-2 and Corolla II, would you say, you had more content on these vehicles, and I know they will have more safety content, but actually in relation to the old Focus-I and Corolla I -- and there -- yeah.

And I'm sorry, we have to say that we have given up on keeping the track on what we have in old platforms and new platforms -- there are just too many. Sorry Graham, but why don't you give us a ring afterwards and we will find out in the mean time for you.

Okay, no problem.

They are just too many, you know, we have the sidebags in the old ones or the new ones and so forth, too many details, sorry to say.

No problem. And just on your guidance then for extra cost of raw materials. If I look at that, that's a negative headwind of about 0.4 percentage points on your margin, but really after the second quarter, you have had a benefit of close to one percentage point at the gross level there so I mean in effect you are expecting margins excluding the raw materials to actually deteriorate, but is that coming back to other issues that you are mentioning, or again just is it being a little bit conservative?

While really it is -- what we say -- if you compare with quarter two, the extra increase that we would have is only $3 million for quarter three and quarter four, you could say. It’s nothing very dramatic, I didn’t quite follow your math I have to admit but, nevertheless, we did have 3 million extra in quarter two and we think it is going to be 6, in quarter three and quarter four. As you understand, that's what we can’t just[inaudible] calculate and we don't know, if that will actually happen or not.

Sure. It's right I mean I was just saying -- looking at that $6 million as sort of a guesstimate of what that would be of your third quarter turnover, to seeing if you can -- you know if anything against that you can improve above that.

Make it less than $6 million you mean or what?

Well no, I mean other effects. I mean, obviously the higher volumes, your higher organic growth must be giving you big -- better capacity utilizations of your plants and so on --

Right, it could.

Okay. And just on the CapEx so what would be the figure you would guide us to for this year and next year in terms of total capital expenditure now that you have sort of said it’s going to be above your previous guidance?

Yeah. And we don't say that for sure but it looks that way we have to admit. We said that the last 12 months we are running 286 [shipping] here but we can see all three of us here when we getting the request for new CapEx that they are on a higher level. We are having to expand the curtain buildings both in Canada and in England and we have more looms. We have to build up more (inaudible) module producing plants too. We don’t know for sure but maybe you should you add 40 million, 50 million or something like that as a rough estimate.

To 280 more

To the 300 and I don't know whether 280 or not but 300 plus 50 is 350 roughly.

So about 350 for this year and next year?

For this year at least.

Okay. And what about into next year?

Don’t know yet. We have to see because that’s why we are a little bit worried too because you know how they are shifting. We approve a CapEx here but we don't know exactly when the goods is actually shipped and when the building is ready and when it is put on the balance sheet.

Okay.

And then actually given our accounts [inaudible] we have to take it into service before we start to depreciate.

Okay. That’s great. Thanks very much.

Thank you.

Thank you. Our next question comes from Thomas Besson. Please go ahead with your question and announce your company name.

Yeah hi it is Thomas Besson at Citigroup. I have a few questions as well. First on your side airbags market share, could you make us an update on where you are in the U.S, Europe and Asian markets for side airbags and how it places the competition versus you, I mean who else is in effect [inaudible] competing in this market?

Okay. I will give that over to Mats, it's his favorite topic.

To get any real precise numbers it’s a bit difficult of course but we estimate there are fighting by market share in the United States is at least 40% and in Europe more like 50%. I don’t have the number for Japan and Asia in -- top of my head.

It's high in Japan but it's probably around 35’ish or somewhere in that order or magnitude. Then of course I would say it's hardly existing any real market in for instance China or so forth.

Okay.

But overall I think not too much below 50% worldwide, maybe 45%. Because Europe is still the vast volume you know.

Okay. So who are the effective competitors [inaudible] is it just you, Takata and Visteon (ph) or?

Yeah I would say [Daicel] TRW and Takata are the three major ones. Without any -- they are clearly the three big one. And some others we are also like [inaudible] and so on but they are well smaller.

Okay. Could you make us an update on the development of new contracts for your future products. You have been discussing about night vision and pedestrian protection. I think the regulation for pedestrian protection at least comes into effect relatively soon now. Do you have some visibility about these possible cost relay or is still it too early?

I think on the pedestrian protection, the way we see it developing is really that the OEMs sold the demands is the step one of our stage here in Europe and Japan by passive methods. They do with a hood or the bonnet, or they do with the design of the car for the most part. We see the market for pedestrian protection really taking off only if step two of the regulations really come into effect and I believe that is in 2009-2010. That’s probably when we are going to see the market develop if it will. So for the time being they design bonnets and hood in another way to be able to absorb energy and give clearance to the engine blocks. So not a lot to expect there I am afraid.

Okay. In night vision you have something new to show us or?

We can always show you something new. We have new prototypes more or less every second month now but nothing new that we can come out with publicly.

Okay that’s fine. And last question I think we have discussed that well you have discussed that previously in[inaudible] another question what the use of your cash because at the current rates it will be difficult for you to continue to buy shares and increase your dividend, you still don’t plan to make any acquisition?

Well, if we find something interesting to buy we would of course buy it but the alternative is to give it back to the shareholder. Really the alternative is to buy our own shares and that’s what we’ve been doing, we have been buying about 40,000-50,000 shares a day you could say on those days when we are permitted to buy and then you know they have just -- what do you call this math.

Sorry.

Closed periods when we are not allowed to buy. So that [leaves]limits it a little bit and then it is kind of complicated too because we try to follow the combined regulations from New York and Stockholm which limits out for the first hour, half hour and limits the last half hour and it limits the amount in relation to total turnover and so forth. So it's not so easy to do.

Okay. So eventually you could -- an extraordinary dividend if you don't any acquisition and effectively once you finish buying back your shares?

We could yes, but I believe that feeling in the Board for extraordinary dividends is not particularly positive to be honest with you.

Okay.

To buyback shares and increase dividends is much more likely.

Okay. Thank you very much.

Thank you.

Thank you. Our next question comes from Bautick Krevner (phonetic). Please go ahead with your question and announce your company name.

Yes, good afternoon [Bautick Krevner] from Shevaran (phonetic). Just a couple of questions, one clarification you write that your gross margin improved despite high raw material prices and you mentioned the reason is that you have good growth, cost cutting and currencies. Now, is it absolutely impossible -- don't you get anything -- any price increases through the end customer here or do you have to absorb 100% of the cost of raw materials?

We would very much like to say yes, but that’s not really true. We are not giving very much to our end-users. We think the best we could hope for would really be that we have to give a somewhat smaller discount than the normal one. That’s the best we can achieve, I think. To believe that we could really raise prices is only wishful thinking.

Okay.

And the 3 million you know just to put it in proportion…

Yeah.

Since (inaudible) we have in the 3 million on raw materials we had like 7 or 8 entries in the [inaudible] second quarter, a one time effect you know, going back and forth and generally speaking they came out to be net that was slightly negative for us which means that we would have a higher EBIT had we not had all these one timers. So the 3 million of raw material is nothing mind boggling you could say.

No. Then another question just looking at US data you were giving this light vehicle inventory number of more than 70 days and still some slight down revisions on the forecast production for Q3, Q4 and then also I believe for next year. Do you feel that the forecast are actually sort of sufficient to cope with what we see happening with demand and also with the inventory situation. Will that sort of -- is this, these costs enough to reduce inventories given where we see sales go etc.? I know that you rely on CSM, but I mean clearly you must have a view on what they produce the type of forecast.

The three of us I think we conclude that we believe that the big 3 are better to judge their own inventories than we are. At least what we are seeing is that the year ago total inventory in the States is 3.9 and this year is 4.15 and so it is not a huge increase but it is disturbing to some extent, I agree with you but we are not in a position to tell you if this is enough or not. Having said that, we have seen that the first couple of weeks in July to say something good in the States, I am not sure if that is enough or not.

Let us see. Thank you.

Let us see.

Thank you, our next question comes from Scott Merlis. Please go ahead with your question and announce your company name.

Hi Scott Merlis from Thomas Weisel Partners. Great cash flow, great quarter.

Thank you.

The -- I just wanted to review the one-off items or semi-unusual items in the quarter. First of all there was a, -- I guess it was 4 million in severance due to the restructuring in Holland and France.

About 3 million, correct.

3 million.

Yes.

And then what there an unusual gain in Japan or did I hear that wrong. You sold some equity in Japan or something?

It was seen in the second quarter last year.

Oh! That was -- I am sorry so that was last year, right.

That was last year, that trued up the comparison between the two years only.

Right. So, so far we have 3 million at least unusual severance costs in the quarter and what about the reserve for the recall?

Yeah, that's also in there.

Yeah it's in there.

In what quantity?

Well, we don't -- we don't want to go over that one, because we have customers too and we don't want to tell them how much we have reserved.

Okay, so you had unusual costs of -- and meaningfully in excess of 3 million and was there any unusual gains that we talked about or didn't talk about?

While basically, Scott, -- we have as we said earlier, I don't know how many interests in all but we've had this all-in-all it sums up to a small negative number.

Right, well, I'm just -- so in a way the 3 million in severance, does that disappear in the third quarter, or will there be other severance?

There will be other severance, if we fire other guys.

But, by and large that should be a lower number in the third quarter?

I don't promise that at all. You know we have the ambition, as I'm sure you are aware, to take out these in high labor cost countries and move them to lower labor cost countries and we do that regardless of the quarterly results.

Okay and also just to understand that the operating leverage, it seems like when your sales surprise your -- margins surprise in a disproportionate way, can you talk about a variable contribution margin it looks like, you know, it looks like it could be 25% or above, in other words, it looks like the stronger sales really drove the margins and the question -- you know, it seems like if sales were up 12% in the third quarter that also would significantly help margins, but you know looking at your capacity utilization especially in Europe do you still have significant operating leverage is the question?

I guess you could say Scott that -- if the top-line grows so does the EBIT in percent and the reason is very simple, if you look at the gross margin as you could see here we are around 20% we've said the last --

Right.

12 months we are 19.6%, but then at the gross margin level we have shot some fixed costs like for instance depreciation of production tools, production lines, and production buildings and so forth. And they don't change just because we have been pumping more volume into it and that’s why you have the leverage, and that works fine if you have an increased volume, but it unfortunately works the other way if the volume goes down.

Right, but if you ever talked about your contribution margin a variable contribution margin of -- is it 25% or greater or for every dollar increase in sales what --?

We are talking a lot about this but never externally.

Okay

Sorry about that Scott.

And looking longer term, Honda has announced in the States that they are going to quickly be 100% -- in a full page in the Journal they've said 100% side head curtains by 2006, and I am hearing from GM and Ford that and Chrysler that they want to beat the '07 requirement in the voluntary agreement, and you know every thing I hear says that you could get between 45% and 50% side head curtain penetration in the U.S. industry by '06 not -- instead of '07. And the question is, is it going to be a shortage of looms, are you accelerating capital spending so there won't be a shortage of looms, and also hasn't history shown that when there is a shortage as it was the case with driver’s side that for a while you get unusually high margins?

First, you are right -- I think you could say already today there is a shortage of looms and capacity for one piece woven curtains [inaudible] both in Europe as well as in the United States. That's why we have discussed earlier we make more KPCs than we really plan to do. Having said that however the fixed orders or deferred orders from big 3 are not there, yet; they are talking a lot about it and they want to discuss pricing and so forth, but as we see it now but that may change of course. It seems to us that they are going to wait till they have to do it in the United States. It might be different for the so-called New Domestics they might decide to do it earlier. But I am not so sure that we'll get exceptional margins, that would be great, but that would be a windfall that will disappear relatively fast, I am afraid.

Right. But history showed that it lasted for at least a year or two when you had driver side, alright?

You are right. On the driver’s side you are right actually. That was mandated by law and that did drive our prices, no doubt. And margins were great for a couple of years. And on the IC sale we need to see why it really -- we haven't really seen the firm orders on it yet, we have a lot of discussions I could say on it.

So if you get an increase in '06 orders sent to you December of this year, would you have enough time to build the looms, how long does it take to build the loom?

A loom we buy it's about 5 or 6 months delivery time, but we need a building to put the loom in.

Right so if the '06 orders surge December '04 you should have enough time to capacitize?

Yeah, we should.

Okay, great quarter thank you very much.

Thank you very much, Scott.

Thank you. Our next question comes from Nicholas Hirth. Please go ahead with your question and announce your company name.

Yes, good afternoon. Nicholas Hirth of Morgan Stanley. Just of a couple of cost related questions. You mentioned that they’re going to be lot less launches; major platforms in the third quarter. How much did these live launches such as the Golf in the aggregate cost last year, so what kind of delta could we have this year? And tied into that why are you using the word slightly in terms of your EBIT margin progression when in your first quarter and your second quarter you achieved you know almost 100 basis points certainly in Q1, why the caution about the third quarter now that at least for the beginning we’ve had the big 3 maintain their production schedules? That’s the first question, second really quickly is how much do you expect to save from the redesign of products and the other efforts with suppliers and these ongoing programs you mentioned?

The first one -- the launches I cannot put a number on it really Nick, the -- our point was rather that you know, now we have all of these cars launched the Mégane, the Golf, and all of these are already on -- they are launched therefore speeding the production you could say and therefore to be able to meaningfully beef up the volume again, we would need to have another high volume platform launching, and we don’t have that for time being, we don’t see that coming up. Actually now the Mégane is the biggest platform we have and I believe Golf is probably number two by now, PSA if you know is somewhere too. The second question regarding redesign I didn't quite get, can you repeat that, please.

Yeah, you've mentioned the savings from redesign of products and standardization. How much really can you do there, given that we have an evolutionary process, but you know there is not much change in the curtain or in some of the other products these days, at least it looks like that from the outside?

Yes, so what we can do there is basically, we can read – we can print and change out and inflate it to your new generation, lower cost inflated. You can change the way you assemble the inflatable curtains. The curtains even though you may say they look the same and the function is the same, they are vastly different. Some of them are extremely complicated and actually have a sales price of say $130, $140. Some of them are really, should we say, value, well value-engineered and they have like a $30 price a piece. And essentially both of them are inflatable curtains but they are vastly different in size, in complexity and also use different inflators. So our challenge is to help the customer to make the design simpler with fewer brackets and fewer mounting straps[inaudible] and cheaper inflators simply. That’s basically what we can do. On the seat belts I would say that there is probably less of re-engineering.

And the overall savings versus prior generations typically would be in what kind of range?

That is based into what we have been doing. We have been doing this all the time, you know there is nothing extraordinary. These efforts have been going on all the time and obviously if anything it’s probably more difficult to get them through now it seems like many of the OEM’s lack engineering capacity to absorb new proposals.

Okay. On the first question you didn’t really speak to the point of you know, why so much more caution about the third quarter in terms of margin progression versus the first two?

No, we don’t think we are too cautious. Third quarter is always very, very difficult to predict, that we said actually and on top of that we do not foresee the big expansion on the top line and we think it’s a fair estimate of what we can do in the third quarter. We do not have any known quarter built in to it.

Right.

Okay.

One more then if nobody wants to take the mic. Just -- you seem to have a big increase in headcount from last year about 7.5%. You also mentioned that some of this is engineering hiring. How is that linked to the CapEx plans that you have and secondly what type of medium term projects -- I mean we talked about this pedestrian thing but it didn't seem to me that that was the core. What other projects would there be related to this added engineering resource?

Right. While you are right, Nick. It is a fairly big increase in headcount and we did have an -- somewhat of a back of the envelope calculation to figure that here. And we are year-on-year up about 7.4% in number of heads. But then again you have to remember that most of these heads are now low labor cost heads. And the ones that are in the high labor cost countries are either engineers and I would say that those are up 3%. Or else they are involved in the curtain manufacturing predominantly in England and Canada. So other than that we would normally only recruit in low labor cost countries. And I think we said that 60% of the margin quoted to you were in low labor cost countries. The remaining 14 in other words are involved in either engineering or else in the curtain production.

Great.

But you are right. It’s a fairly big increase. It surprised us too. [inaudible]

And the long term projects. Is this more ongoing engineering for visible projects or is it more medium term.

I would say it is probably more mediums term. Adoption of known technologies I would say.

Right. Thank you.

Thank you.

Thank you. Ladies and gentlemen, just to remind you all, it's the number "1" to register question or the "# "key to cancel. And our next question comes from Claus Amazon (phonetic). Please go ahead with your question and announce your company name.

[inaudible]. I had two questions. First coming back to this U.S. issue on the organic growth that you showed, you mentioned in the statement, a strong pricing pressure, and I was wondering if there is something going on there, if there are other changes etcetera, etcetera. And secondly if you could, you know, quantify the loss of sales due to the contracts[context] that you are running off on the [inaudible] to generate some of the frontal airbags?

On the first one, the strong size increase and so forth, as you said I guess [Mats] has explained in great detail[inaudible] kind of dealings that one has to do nowadays with more and more customers and again to recap, earlier, we had to commit to a certain price zone per unit but that is no longer the case. But then again when they come out with new requests for potential if you want a quote you have to get the price down on the existing production and that is what we have called strong pricing pressure. But then of course, if you take all of that in one quarter, that then is sort of the cost; the second one on the external inflators.

If we calculate on the North American airbag sales, then it is about 4.3% minus on the North American airbag sales, that's relates to the lower sales of inflators in sales value.

How much did you say?

4.3%.

Okay.

4.3%.

If you calculate this price down in the U.S. can you give us a figure for that as well?

Yeah, but we don't want to do that again for competitive reasons, you know.

Okay. Another question on raw materials. The 6 million that you have said you are [softening] Q3 and Q4 is that a full effect from -- if you would calculate what the raw material price that you have now, would you expect another cost increase to come through on Q3 and Q4?

That would be the full one but calculated from now that would only extra three. Six is compared to what we thought it would be and then we have three already this quarter, there will be an additional three in to quarter three and nothing additional in quarter four.

Right.

And that’s our best estimate, you can hear yourself but it is difficult to figure out. We try to make it out of the guidance only.

Okay. Thanks.

Okay.

Thank you. Our next question comes from Christian Breitsprecher. Please go ahead with your question and announce your company name.

Good afternoon. It is Christian Breitsprecher of Deutsche Bank. Also relating to the raw materials, looking as you have the structure that you have in terms of the purchasing agreement, if the raw material prices stay where they are at the moment, do we have significant raw material prices kicking in also next year or is it more or less digested then with the fourth quarter may be the first quarter of next year?

We would have raw material price increases of course kicking in. If they stay on this high level as they are today then, I think we calculated for the full year that would be about 35 million. But then again they are running 25, then if we take 6 million per quarter. So that would be 1 million a month or something in that order of magnitude but I have to say this is somewhat theoretical but you understand me with what we are saying. We have got nothing quarter one, we got 3 quarter two, we got 6 quarter three, 6 quarter four and we would have like 9 each quarter next year.

Nine each quarter?

Compared to what the situation was just in quarter one this year.

Okay. Right, but then obviously the base already moves up then with the --

Exactly the base has already moved up a little bit.

Okay. But your-- the [player] structure is not in a way that your contracts are set up in a way that these raw material price increases actually filter through over two or three years but its really hitting you kind of now?

It is hitting us gradually. We would like have our balance sheet anything from very short contracts to longer term contracts but I would say 2004 I think is pretty much a done deal[inaudible], 2005 it is relatively open.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from Carl Haulbtiz (phonetic). Please go ahead with your question and announce your company name.

[inaudible] thank you. Three, hopefully very short questions. First of all a clarification regarding the CapEx -- the increased guidance for CapEx. Was it right to assume that its not been driven by what could see an accelerating order intake regarding inflatable curtains in the U.S. was that what you said?

What we understand is that there will be a big demand for inflatable curtains. But we also see that we will not be able to stand up to it with the present capacity. So we are building up now because we know it’s going to come, but we haven't seen it yet.

Okay, great thanks. Secondly, you mentioned that you have seen somewhat too large inventories for some of the OEM's that you supply to. Could you give a little bit more detail in which OEM's and in which markets?

Yeah. We basically talk about United States. And the ones -- the ones where the highest inventory seems to be Ford and General Motors for the time being. It is around about 87-90 days each.

Okay. So from your perspective approximately how much of your overall sales would that contribute if you look at GM and Ford?

You can say that the big 3 in the sales are about 17, 16 more -- 15-16-17% of sales somewhere in that order of magnitude. And I don’t know who is the biggest of them.

Okay.

But you have the order of magnitude, I hope.

Yeah, definitely.

Okay.

The final question then you mentioned that you currently have 13% of your sourcing of components in low cost countries. I cannot recall if you have had announced the target regarding this figure in the future.

The targeting is 100%, but it going to take time.

Approximately how long time do you estimate?

Well Carl, I’m going to be retired I think.

Okay.

I really I can not answer you, -- but what we are saying that we want to move it out as fast as possible and you know if we can manage out to low labor cost countries -- and then we have our own manufacturing also low labor cost countries. We have a double whammy. The cost for the product is lower and the logistic cost is also lower and it will then be so fortunate also our customers would move out their manufacturing, we would all gain a lot.

Okay, so basically the limit is your potential to move your own production out of high, high cost country.

Yes, and get it the accepted also by our customers, -- because as we mentioned earlier the webbing plant in Romania. We already have the seat belt plant in Romania which is under expansion, so if we then do the webbing also in Romania we save a lot on logistics and transportation costs too you know, because today it’s produced in Netherlands.

Okay, wonderful, thank you.

Thank you.

Thank you, our next question comes from Rolfe Bauler (phonetic), please go ahead with your question and announce your company name.

Hi, it is [Rolfe Bauler] from HEB Munich(phonetic). Good afternoon.

Good afternoon.

First question would be about the seasonality of your sales and earnings by half year, when I look at the last two years, we had a strong first half, and a better second half of each fiscal year and if I understood you right you do not assume for this fiscal year due to the missing new launches in the second half that this will repeat or did I understand you wrongly?

No, we say that the second half of the year will also, -- we are going to continue to increase compared to last year's second half, but not at the same rate as we did during quarter two. Given everything else looks the same, we think it's going to be year-on-year about 10%, half of that being as foreign exchange and half of that being organic under lying growth.

Okay.

So we will be stronger than last year's second half.

Okay. Thank you. And the other question would be could you just give me may be I have missed it, but you could you give me a flavor of the total amount you spent on raw materials, just to get a flavor what the $50 million means to your total amount of raw material expenses during the year?

Let's see, -- let's figure the math out, we feel that -- we know that out of sales 60% is what we buy in products and out of those I think 30% percent is raw material what we talk about is 30% or 50% so that is 15% of sales.

Perfect.

Would be raw material based.

And mostly steel and textiles as --?

Two big ones are steel related and oil related mainly textiles and webbing.

Okay, thank you very much.

Thank you.

Our next comes from Richard Hayden (phonetic) Please go ahead with your question and announce your company name.

Omega Advisors, just a quick question. Wow many shares are currently outstanding?

[95] million shares.

How many?

95 million.

It's not less than that?

It's the average number the exact numbers outstanding at the year and this is 93.8 million.

So $98.3 per June?

Yeah, every June.

So, you know he has the -- what matters is the average during the quarter or during the half quarter (ph) past. So, 93.8 is the answer.

Thank you.

Welcome.

Thank you. Ladies and gentlemen, just to remind you if there is anyone else who has a question or comment at this time, please press the number "1" now. And we have a question from Frederic Levi (phonetic). Please go ahead with your question and announce your company name.

Yeah I know. Frederic Levi (phonetic) from SG Securities. I have two questions, one is through really simple it seems there is no launch platform [inaudible]volume launch in Q3, there is the raw material price issue and the recent demand related to inventory [overrun]. Do you think that may be there is more risk than usually on your ability to reach or beat your guidance?

That is what we boiled [inaudible] into when say that we think we are going to beat last year’s margins a bit actually and last year was 7.1% and we also say that sales will probably increase around about 10% given the present situation[inaudible]. But all of that is taken into account, you could say. Raw material and exposure, volume exposure, etc. [inaudible].

Okay.

And we tend to really get the same of course.

Okay. So you don't feel that –there is maybe be more risk this quarter.

Not particularly I think we can conclude.

Okay. Maybe another question on China. Maybe could you give us an update on the situation over there? There was maybe some economic cool off and some slow down in the pace of growth -- in the auto market over there.

You are right. And what we have heard is probably same as you have heard. We saw something like a 40% volume increase during the first 5 months or so this year. And it’s cooling off as you say pretty fast now [inaudible] and we believe that second half of this year will not be whole lot stronger than the second half of last year. So it is cooling off in China. There is no doubt. Having said that it's not material, you know, we talk about a 120 million out of say 6 billion. So it's not a material thing. It's -- may be not official cooling off, because as you know they may remit the credit for the consumers. But that's what they do and it does cool off, no doubt.

Okay. You didn’t feel any impact --

It did of course have an impact, but it is not huge, you know, because total sales for one year only 120 million.

Okay. Thank you.

Thank you.

Thank you. And there appear to be no further questions at this time, so I'll hand the conference back to you gentlemen.

Thank you very much all of you for a large number of questions I have this evening. We appreciate it very much. So, we wish you all come back on October 21 this year, when we have the third quarter results and we will see what it all looks like then. So in the meantime, please have a nice enjoyable vacation. Thank you, [Christopher].

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