Autoliv Inc (ALV) 2004 Q3 法說會逐字稿

Good morning, and good afternoon, ladies and gentlemen. And welcome to the Autoliv third quarter results conference call. At this time all participants are in a listen-only mode. And later, we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require operator assistance during this call, please press star zero on your telephone key pad. Just a reminder, this conference call is being recorded. I would now like to hand over to you one of the speakers for today Mr. Lars Westerberg, please go ahead with your meeting and I will be standing by.

Thank you very much. Good morning to all of you in the United States and good afternoon to all of you Europeans. And we intend to do exactly as usual here, which means that if you go into the corporate Web page of Autoliv.com, you will find directly a slide show on page number one. It is a slide show that we intend to go through together and then open up for question-and-answer session. And I have on my side here, I have Magnus Lindquist, as usual, the CFO, and I also have Mats Odman, the COO, also as usual. So if you would be so kind to look the at the first page here. We can say that's the Safe Harbor Statement that we always show these days. We never go through it but in any case, it is supposed to be part of this presentation. So I hope you study it carefully. Next page shows you the strong sales trend that we have had lately, and as you might have understood already from the press release, is sales for the third quarter was up 14%. We had previously estimated to come out at about 10%. To this, we can say that the foreign exchange added 5, as we expected, but the organic sales growth was 8% rather than 5, so the underlying reason for the increase was really the organic sales increase that was somewhat higher.

And the reason for this is that we have a positive mix in the European community, so to speak, our customers do better than the general market, and the same is actually valid also for North America and the reason in North America is mainly that there is a big discrepancy between the Detroit-based big three and the so-called new domestics that do a lot better. And the moving average trend for the time being, we are running at plus 18% and that again is a combination of currency effect and organic growth. We just compare with what we saw before, you can say that North America came out as we had expected. Where as both Japan and Europe came out better than expected. If we turn the page and look at the vehicle production, as you already know by now, I guess, we have the red line which is basically saying -- or telling us the vehicle production that we had, and the histogram shows our performance and again, you can say that our growth was about 8% organically, which is probably about twice the general underlying market. As you know, we believe that at zero growth in the vehicle production, we believe that our market is growing about 4%. If we look at it from a product point of view, we did particularly well with seatbelts, inflatables and steering wheels. Those were the main growth products for the past quarter.

Turning to the next page, and having a look at the light vehicle production, you can say the planning (indiscernible) was about 9.6 million vehicles, it really turned out to be 9.6 million vehicles, and again, the only slight disappointment would have been Europe, which we have thought should have a little bit of an increase, but turned out to be absolutely flat. But again, was a positive mix for us. So the organic view, the organic sales increase was 10% in Europe, which is quite a bit, if you recall, that we have half of the market, and the market was flat, and we managed to have a 10% organic increase, means that we took basically the market increase. In Japan where we have a much smaller share, we had an organic increase of about 13%. And in North America, we had about 3%, or more or less in line with the market. And again, total light vehicle production as expected in general terms. If we turn the page and look from a volume point of view, how we came out, in the seatbelts, we had a volume increase of about 22%, which is one of the best quarters increases we ever have had. We are presently running at a pace of say around 90 million seatbelts in an annual pace. And we are gaining market share in all regions and basically all markets even around the globe. The IC volume, if we is have a look at the head side air bag, it says 36%, that's all type of head protections.

If we look at inflatable carton alone, it is up 41% year on year in number of cartons. Steering wheel of course also is a market share gain since we're up 25% in volume terms, and as we can see at the bottom of the page, the light vehicle production in North America, Europe and Japan is only .1. So we clearly took market share also in the steering wheels. Turning the page, again, we are coming to the gross margin. We managed to get it up from 18.3 to 19.1. We're at .8% increase, and as we have discussed earlier, we do have an internal target to get it over 20% for the full year, and you can say the last 12 months we're running 19.8, so there is a chance that we might hit 20% for the full year. And 19.1 is one of the better quarters, as you can see. Only beaten by 1999. The major improvements is basically top line growth. And then due to a lot of moving of the value added to lower cost countries, lower rates -- as a percentage of sales, are also down in the third quarter.; C compared to previous.

Turning the page again, we got to the -- we will get to the EBIT or the operating result, where we got from 7.1 to 7.5%. The trend we have seen earlier with a higher expenditure for research and development is still continuing. Even though in this particular quarter, we had a one-time engineering income. That, however, was offset by some extra sales and admin costs, notably in connection with the Sarbanes-Oxley and magnitude of Sarbanes-Oxley, we believe we are going to take a hit this year of about $6 million alone for Sarbanes-Oxley fulfillment which is a doubtful value to the shareholders, I guess, but we have no option, so about 6 million and we took more than 2 million in this particular quarter. Also worth noting is that even though the EBIT is up from 7.1 to 7.5, under the line other income, last year, we had an income of 2.6 million, mainly due to sales of some shares in a Taiwanese company that we felt we have no more strategic interest in. And this year, we have a negative 1.4 million, mainly because of severance costs. So on the line other, you could say because of a one-time effect, we took a hit upon three. So the underlying is somewhat better, actually.

Turning the page to the operating income, or sorry, to the income statement, I guess we as usual look at the change column and again, we can see that the sales is up 14%, and it seems the particular depreciation and so forth was of course not moving at 14% rate, and the gross profit is up 19%. We have the SG&A that we -- as we mentioned, came up a bit. And the RD&E came down a bit, so all in all we ended up having an operating income that was up 21%. And before tax, we were up 24. We did change the tax rate in this previous -- in this last quarter. We believe that we will -- previously we felt that we were going to end up with 31.5 and we believe it is going to be 30 now which means that we have a catch-up effect. Sorry, 31 is where we will end up. So we had a catch-up effect in this particular quarter, so net income rose 30%. And actually our earnings per share is 31%. And the tax rate was 31.5, and I mentioned this quarter, we just booked 29.7 then to catch up. The last 12 months, we are running $3.25 per share in earnings per share. And that is excluding the one-time income that we had in the fourth quarter of last year. And partially as a result of a licensing, come a one-time licensing, comes to 3.25 compensated for one-time effect.

Next slide shows you the return on equity where we had an announced it from 9.3 or 11% or 1.7% higher and that is, we're happy to say the 13th consecutive quarter where we had an increase in the return on equity. And again, if we look at the last 12 months, we are presently running at about 13.5%. Turning the slide again, please, we come to the return on capital employed, where we increased 2.2% and we're presently running a little bit north of 16% now, in the last 12 months. And if we would exclude the intangible assets, we are slightly north of 30% on the physical assets that we can manage. So physical assets, a little bit more than 30%. The whole balance sheet included 13.5. Next slide shows you the key figures we have, and I think we've touched upon return on equity, capital employed, and working capital was up a little bit, from quarter two, as you can see, but down from last year, and then previous small changes. All in all, the working capital came out to be 8.7% of sales, and as you may recall, we had a target to stay below 10% of sales. And we had some more in these particular quarters. Also the capital -- total capital employed is pretty flat, as you can see. We were marginally down versus last year and marginally up versus quarter two of this year.

A little bit further down you can find the net debt in the millions of dollars. Compared to last year, it is down more than $200 million, but it is up about $25 million compared to quarter two. And that is mainly because we have, during this particular quarter, bought back shares and paid dividends to the tune of $90 million. And that means that we have given back, so to speak, to the shareholders slightly more than the total cash flow for quarter three. And that's why the net debt went up about 25 million. Having said that, the gearing ratio is unchanged at 22%,and far better than last year when we stood at 29%. Turning the page again, we get to the cash flow, and obviously, the third quarter also exceeds the long-term trend for third quarter cash flow, as we are normally hurting a bit, because as you know, the third quarter is normally fairly weak from a sales point of view. Because of vacations, so the major driver is clearly simply better profit, and that we have the working capital within control, even though as we said before, it was slightly up versus quarter two. And the figures, we can look at the next page, the next slide, and we're going to see here that the last 12 months, we are running cash from operations at a record high 688 million. And after CapEx, we are roughly $400 million positive. Also we can see here that the depreciation is pretty much in line with the CapEx, the depreciation is actually marginally higher, and we thought that the CapEx would be a bit higher than it came out to be in quarter three. But having said that, we still believe that what we mentioned last time, $300 million or marginally above is still the best estimate we can do. But a very strong cash flow the last 12 months and unusually strong quarter three also from a cash flow point of view.

If we turn the page again, please, we get to the shareholder compensation, which we mentioned earlier, the net cash flow, as you saw from the previous slide here was about $68 million, and we spent $19 million for dividends, we bought back shares of 71, so we paid out a little bit more than we got in and it is not worrying at all. So if you sum it up, which we're down to this particular year, this calendar year, we have paid our dividends to the tune of $52 million. And we have bought back shares at $129 million. So back to the shareholders is about $180 million because of an exceptionally strong cash flow. Next time is the CapEx and depreciation, and as we said before, even though quarter three was relatively slow, we still estimate to come in at or a little bit above $300 million. Last year, we had $250 million, and then the increase is, to some extent, currency related, because much of the investments are not made in the dollar zone. And also, the other significant factor would be inflatable carton related on particularly carton but also to some extent the inflaters. Next slide is the recent events that have happened during this particular past quarter, and we continue to restructure, as usual, and as we've said before, we thought we could get up to 35% of our employees in low cost countries. We are now at 38. In the past quarter, we have had to announce a job cap of about 25, 30% of the Swedish assembly plants, and that is seatbelt assembly, that is now totally moving to Estonia and that is a gradual thing that will happen up to the summer of 2006. We have also started up -- or we will -- we have decided to start up a steering wheel plant in the Sheredine district of Shanghai that will be combined with a new airbag plant which we are actually moving into now in the month of October.

Further, we are increasing the seatbelt plant capacity in Romania and what we're trying to do is to take the total increase in the seatbelt production in low cost countries and mainly in Romania, but we also decrease the manning level, in particular in the Hamburg area, a little bit, so the increase in Romania, and a little bit of move also from high cost countries, in this particular case, Germany. So for the consortium, we have issued a separate price release on and then we have also launched in among the island parish auto show, the world's first asymmetric air bag and the only way to do that is that we have a fixed hub steering wheel. And maybe starting to turn the page and try to explain there, as you know, the driver air bags have had to be symmetrical since we don't know in which position the driver air bag will be when it deploys. Well, now, we have together, we seek to and designed a new steering wheel hub that stays in place regardless of how you move the steering wheel and that allows us to make a nonsymmetrical air bag in much the same way as we have always done for passenger air bags. You know, we would never dream about having a driver air bag as a passenger air bag. We want them to be much bigger to have much better, you could say safety content. And now, with this new fixed steering wheel hub, we can do the same with the driver air bag. So this is the first in the world at least as far as we are aware and that was shown in the Paris auto show in September.

Then, if we try to look a little bit into the future, here on the next slide, we can then start out with a light vehicle inventory in the United States. As you can see, the last couple of months, it has been flat in counting the number of sales days. But it is also relatively flat, also if we talk about units, and number of vehicles, and if we -- it still continues on the high side in line with the highest of the past years, and as an effect, we have seen the big three cut back production levels around 4%, we believe, in quarter three. And we believe that the coming quarter, we're going to see maybe as much as a 6% cut back on the big three in quarter four. However, then, those like two markets in the same market, because the new domestics, as they're called, the Japanese, Koreans, Europeans, whereas the big three cut back 4% in quarter three, we believe that we had an increase of 8%. And in the same way with the cut back for big three will be 6%, estimated for quarter four, the new domestics will probably have a production increase of some 3 to 4%. And as we mentioned earlier, this is actually positive for us, because we is have more supply value per car for the new domestics than we have for the classical Detroit cars. Also, if we extend the forecast a little bit to the first half Europe 2005, we have a similar picture with the new domestics going up fairly markedly, and the GM, Ford, Chrysler, at least GM Ford, cutting back production numbers. The next slide will then give you the total market in North America, and as you can see, we expect a pretty weak quarter, because of course, big three dominate the production scene in North America. And 2005, as you can see, we are supposed to have an increase of about 250,000 light vehicles, and having said that, the new domestics will actually increase more than 400, so we are looking for the total of next year, we think, is going to be a slight decrease fprfor big three, but more than compensated by the so-called new domestic.

Turning the page, by the way, you can see it's relatively flat during the last couple of years in North America. And that also goes for Europe as we can see on the next slide, it is maybe even flatter -- 16.-something, all the way from the year 2000 up to and including 2005. And here we had expected that we should have a slightly better outcome in quarter three than we ended up having, and quarter four looks like we should have a somewhat -- a somewhat bigger downturn, 2.5%, we believe that we will still have a positive link, so that would compensate for this decline in car production levels. And other than that, you can say that we had -- we have a picture here where Europe has had a flat production for many, many years, and in spite of that, we as a Company have been able to increase our sales in Europe. Next slide we will show you Japan, and then as we said before, it seems to be relatively easy to forecast in Japan, 2002, '03, '04 and '05 are all estimated to have a production level of 9.5 million vehicles. Quarter four will be relatively weak in Japan as well. I think the reason behind this is simply that the Japanese OEMs had expanded a lot globally, they do have the expansion but they don't have it in Japan. They produce elsewhere, simply. So it is likely that the production levels in Japan will not go very much higher, if anything.

Finally, in trying to answer questions that we haven't got yet, but that we were sure we would get, mainly raw materials here, we haven't made an estimate here, and the past quarter, the one we have -- had the results in front of us, we estimate that we have had steel surcharges of about $5 million absorbed in the quarter that passed. The coming quarter, which is then included in our forecast, we estimate that would amount to about $7 million for a total of 15 this fiscal year. And that in itself has given us a level of the steel prices during this second half of this year, the half we're in then, of about 10% more than normal levels, roughly 10% more than we would normally say would be a normal level for steel prices. We had then tried to estimate what -- what is the exposure we have for 2005? Some of us feel price increases will have to be absorbed by our suppliers. That has already happened and will continue to happen. What we will get, given that the -- we are already 10% higher, and if we assume that the steel prices would go up another 20% from this level, and it would stay at that 20% higher level, for the whole year, then we think that we would see somewhat of a $50 million higher steel component price level. And that is of course something that we will share with our customers. Having said that, we do not know how that will be shared. We can now tell you, it is not going to be 50 million, it is going to be lower, but we don't know how much lower.

And then the old days component, we haven't seen anything worth mentioning this year and therefore we think that next year, if there is anything, it will be less than $10 million. So what we will do is the same as usual, redesign, resource and we will also get some compensation from the customers, difficult to say how much. And then we have a total direct material cost as we see it, it is nevertheless going to be down more than a little from this year's levels. So we're going to have to compensate for productivity and the move to lay low the cost counters as usual. Finally then, the outlook for quarter four, consolidated sales plus 7%, may look conservative to you, but we don't think it is conservative at all, actually, given that we think that the car production, or light vehicle production as you have seen earlier, we think is going to be down 3% or a little bit more, actually. And then as we believe that the currency will only help about two. That means that we are going to look at something that is like minus one. And therefore, to say that we are going to increase 7, that is again an increase of about 8%, which I think actually is fairly bullish. But we have been accused of being conservative. The EBIT margin, last year, if we take out the one-time effect, we had 8.0% as we also showed in the quarterly report last year. We think that it is part of all this raw material and lower production level. We believe that we can probably exceed that a little bit for quarter four this year. And with that, ladies and gentlemen, we are prepared to try to answer your questions.

Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please press number one on your telephone key pad and the hash or pound key to cancel. Once again, if you wish to ask a question, press number one on your telephone now. The first question comes from Paul Sequerveau. Please go ahead and announce your Company name.

Yes, good afternoon. Paul Sequerveau from Chevra. Just coming back to your raw materials slide, you are saying that you're assuming a 20% increase in -- on top of the current levels. Is that indicating the kind of price indications that you get from whomever you are buying your components from that that is actually something that will come and, yeah, I'll stop there.

(AUDIO DIFFICULTIES) The last time -- we are not entering into any sort of long-term contract for the time being. We act week by week and month by month and we believe that the steel prices will level out in the spring. Having said that, we have a delay and yet industry price increases in, and we are afraid it is going to be a delay getting them down again. So this is not a new forecast. This is the exposure that we are seeing for the time being.

Okay. And then just a follow-up on that, when you talk about redesign how quick is it for you actually to redesign. You get contract for a certain platform, can you change the existing say airbag for a particular platform or how does that work? How quickly can you sort of redesign, how quickly can you change to a new type of say airbag in an existing model or is it only new models that can be subject to changes of design?

It is of course a combination of the two. But basically, we can change also existing models and existing component, but only if our customer agrees, and normally what he wants to do then, he wants to have some part of the savings which is fairly understandable, because he usually has some costs, too, in connection with a change. So yeah, I'm afraid it does take time. It is valued of course for all new products but also for existing product, subject to our customer agreeing, and he will agree if there is a reasonably big savings. If it is just a couple of cents, he is not prepared to accept anything.

Okay. Thank you very much.

Thank you.

The next question comes from Scott Merlis, please go ahead and announce your company name.

Scott Merlis from Thomas Weisel Partners. If you go back to what looks like slide six, which is the market share gains which show seatbelts up 22%, the question is, how does all that affect your product mix and affect gross margins? On one hand, seatbelts are growing fast, they seem to be low margin, but then the high margin stuff is growing. Is it -- how does that affect -- how does that product mix and that type of growth affect gross margins?

It is difficult to answer, Scott. I think it is a mixed bag, really. If you take the states, we have a higher profitability on airbags than seatbelts. If you take Europe where we are very big on seatbelts, we have a higher profitability on seatbelts than airbags and then if you take Japan, we're back to the U.S. situation, and if you take Asia-Pacific, I think is fairly similar. What do you think? Fairly similar. So and that actually of course boils down to program by program by the end of the day. But it's not clear that just because seatbelts goes up, the margins goes down. But one that really does have a dilutive effect is steering wheels, where you can say we are always having a lower gross margin than we have on the seatbelts or the airbags.

But you're saying it is not clear that high growth in seatbelts hurt gross margins? You would think it would be? No?

You would think so. We don't.

Uh-huh. Why is that? I mean that's always been a -- isn't that always been a below average margin type of product? A more commodity-oriented product?

No, I don't think so. Because you know, we think we sell seatbelts because we have something to sell, so to speak. We have pretensions, pre-pretensions, load limiters, adapted load limiters, we have all sorts of -- belt is not a belt it's so many adds on. Much to figure out the cost down and longer term we have had on seatbelts, and the answer is nil because we keep adding value to it and adding functions.

Uh-huh. So the --

By the way, when I say seatbelts, I include pretensioners of course.

Now I understand. Now I understand. But if we look out to '05, is there any -- and you look at this product mix, to what extent can this -- do you think this is a neutral positive or negative factor in terms of affecting gross margin? Or -- and helping to offset steel costs?

Basically, what we have is a business plan for 2005 based on regions, but we don't split it up the other way. So we have it by region. You could say -- I cannot answer your question simply. And with regards to steel prices, we take it, as I mentioned, week by week, month by month, and the discussion of raw materials was just in anticipation of a lot of questions on raw materials. Because we have seen all of the other companies have been swamped with questions about raw materials.

No, we appreciate the transparency and the disclosure. That's very helpful. And in terms of offsetting steel costs, how hard is it to accelerate planned cost reductions into the second half? Was the Sweden closure planned for that time? Was it accelerated? How hard is it to accelerate into the second half relocation and stuff like that?

I would say that by and large, we move as fast as we can regardless of the environment. It is a matter of how much we can do, simply. And I'm sure you read the press releases, we have a lot of activity going in on Romania, for instance. We have a lot of activity in China. You know, our investments in China have by and large so far been for the Chinese markets. But we are clearly seeing that now we are changing so the Chinese production will also be for Australia and Japan and we move as fast as we can. It is not primarily driven by any steel prices, you could say. It is driven by a long-term move to get down permanently the cost level in the group.

I understand. And the last question is, cash flow, it seemed to be surprisingly strong for you in the third quarter. Does it -- one, does some of that reverse, like working capital in the fourth quarter, or do you expect strong cash flow also in the fourth quarter? And does this help you maintain your rate of repurchase? Rate of stock repurchase?

We don't have any one time positive impact in the third quarter when it comes to the working capital. So we have no reason to believe that we are not being able to have the working capital under control in the fourth quarter. So based upon that scenario, I think it is quite realistic that we will maintain our repurchase program.

Thank you very much.

Thank you, Scott.

The next question comes from (INAUDIBLE).

Congratulations to everybody. In a difficult environment.

Thank you.

I have, as you might suspect, a couple of questions on the raw material, but first one question on the third quarter results. I wasn't how shall I say it, clear whether or not you would say sort of a clean result, if it were in the special costs in the quarter. I didn't hear you correctly, I think.

There are no particular costs, and maybe I confused you by comparing with last year, where we had a one-time gain. Now, just trying to get your attention that we had a one-time gain last year. I don't recall that it took the other -- the line other above the EBIT line to positive 2.6, where we usually have a negative. We typically try to record all of our severance costs there so we can follow them up easily and if you just take the line other, it is a difference of 4 million, which is really .3% EBIT.

So but in this particular quarter, this year, it is certainly strange --

There is always strange to us, but nothing particular, I would say. Nothing of any size.

Very good. Now, if you detail from the example that you give here, a proper cancellation, based on our own assumptions on these prices, first of all the surcharges that you talked about -- that you show for '04, those are gross figures but including, you know, the absorption from your suppliers? Is that correct?

That is correct.

All right. And then of the '05 figure, when you're talking about in terms of the assumption, is that -- if you assume that that is part of the increase, on sort of all your steel components -- the components but the content of the components.

Yes, that is done in the same way as 2004. That is the net exposure we would see if we had a 20% increase in the raw materials fee. And that is before we share the pain with our customers.

Yeah. But it is not sort of a just one region or the context is up for renewal or whatever. It is all of it?

No, it is very different I tell you from, region to region, the way we have got the reports here, and I would say it is worse in the United States than for instance Europe. Because of the dollar being down as well, you know.

And on the direct material that you mentioned, you still expect it to be down marginally, could you -- I think maybe you had sort of a 2% down this year, is that correct?

That is correct. About 2% this year. And what I tried to say or what we tried to say was basically it is not going to explode to a big positive number. It is still going to be a negative enough but not very big . Iif we are right of course.

Between minus 1.5 and minus a .5 then?

Less than zero.

Yup. All right. And then the assumption on the oil-based components, excuse me, the price that you had mentioned there, what if it would be -- if you were a buyer on the oil price, you think it is going to be 45 average, what would that be?

No huge numbers, I mean as you can see, we have not seen anything this year. We do not expect anything quarter four so saying less than 10 really means that there probably are going to be some but it is not going to be very easy to detect. That will probably be fibers or technical glass or something, it is not exactly the same you buy one year from the other, it is probably going to be difficult to trace even.

But you purchase components with a polymer value are always sort of related value of the -- somewhere between 100 and $200 million a year, is that also correct?

I think it is more like 250 million and maybe even 300 million but we are way high up in the food chain here. You know, the further away you are from oil, the more dilutive it becomes before we see it. If you buy a steel component, it is clearly steel and you have more difficulty defending yourself.

Yes. Thank you very much. Very good information. Thanks.

Thanks..

The next question comes from Nicholas Hearst. Please go ahead and announce the company name.

Yes, good afternoon. Nicholas Hearst, Morgan Stanley. A couple of questions on the inflatable carton to change subjects a bit. You obviously still had a very good growth rate in the third quarter. 36%. Could you share with us what kind of expectations you have for the units for this year and next? And also, I noted in your release that you had a significant increase in capacity for this product. Could you help us quantify the percentage increase of capacity you have had? And potential timing of more expansion next year or the year after?

Well, hi, Nick. Well, first off, the figures you mentioned I think is totally for head airbags and that includes also (INAUDIBLE) rised head and you know, components like that, and basically that is a dying product, I believe. I think we're going to see airbags on the one hand and cartons on the other. At least that is the trend we're looking at for the time being.

Okay.

But if you take it in volume terms, the ICs were up 41%. In value terms they were up 43%. But that does not mean that we can charge more. It is the mix, you know. We have talked about it before that the cars in North America and the trucks tend to be larger and the larger current is higher cost resulting in higher price, simply. So don't misunderstand it. But 43 value, 41 volume. Have you divvied up what we're looking at for the coming couple of years, Mag.

No.

So can you discuss the capacity increase while I find that then?

Yeah. We are expanding our capacity, but in percentage terms, I can't give you any particular figure there. What we are saying is that in the past, our CapEx has been slightly below the depreciation and amortization, and we expect it to, this year to be slightly above. So that is really some kind of indication. But when it comes to the order intake for Ford, for example, the new coming -- the new legislation in the U.S., we have not seen any new orders which means that we don't build up any new capacity until we get the orders.

So that's potentially a swing factor for growth in that business in 2005?

I would say it's -- maybe not 2005. It would come probably later, because if -- if we have to have an impact in terms of 2005, I would guess that then we should have got the orders already. And we also need to then to further increase the capacity. So I would say that it will then have a swing fact when it comes to the CapEx in 2005, and probably the same 2006 and 2007 and onwards.

Thank you.

And then coming back to your first question then, it looks to me, and my figures are not completely updated, it is done in quarter 2, it looks like about a 35% volume increase during 2005 and about 30 in 2006. However, do as Magnus said we have not seen the optic in the states in those figures. I think it is conservative for '06.

Right. And what sort of total unit base should we look for in 2004 then for this product?

Well, Magnus can say that. He is a short-term guy. Don't show me. You read it there.

Yeah but I have to look it up because I don't remember the number.

And we talk ICs only then.

It is okay. I mean what you're suggesting is that the percentage growth is not changing. It is around 30, 35%, if I look out to '06?

It is going to be north of 30%, it is going to be more like 35 next year and then as I mentioned 40 in '06 but with a strong upside. What did you say, Mag? He didn't say very much.

8.4 million after 9 months.

I would say it is going to be north of 12 at least. I have it at 12.7 in my figures but that's not completely updated, as I mentioned.

Great. Thank you. And just on the guidance secondly, you have progressed in operating margin between 40 and 90 basis points, so far, this year, but this has been decelerating in terms of progression. And your wording for the fourth quarter, you say you will exceed slightly the 8% from last year. But how do you square that with your objective of getting to a 20% gross margin for the full-year '04? Because that would probably suggest that you will be at the upper end of that recent band? Should we read that it is difficult to achieve the 20%? Or should we read that indeed we could have some upside from what you've achieved in the third quarter at least which was 40 basis points improvement?

Well, we think that the gross margin is -- it is even though it might be cocky to say that because we have to get much more than 20% then in the fourth quarter. But we think we have a fairly good chance at achieving that. But then as you know, Nick, we have all the year had a fairly high percentage in RD&E and that is not going to disappear in the fourth quarter. Over and above that we also have this Sarbanes-Oxley thing that is probably going to have the highest figure for the year, I would say in quarter 4. So it is below the gross profit line but above the EBIT line, if you put it that way.

All right. Thank you for that.

Thank you.

The next question comes from John Hernandez. Please go ahead and announce your company name.

John Anders from Alpha Berg here. And I'm so sorry to get back on the raw materials but as far as I remember, you said before that you had contracts covering this year that you were getting into negotiations by the end of the year, but now I get the impression that you have basically bought that and more or less spot prices, could you elaborate something on that?

I think it is a mixture of everything. You're right, we have -- I think we said often times that we had a mixture of contracts. Some of them soft spot. Some of them longer term. A few of them though, more than one year. So what we're trying to do is extend it a couple of weeks here and a month there, because again, we believe that we're not going to see this big increase, you know. There is a lot reaping in the steel industry and if you read what they say, it seems like they have a similar, from their point of view, fear and from our point, hope, I guess and that is that they will level off and maybe even start to go down, and in that environment we try to avoid long-term contracts. If we need something, it will be more short-term.

But if you look at the latest price increases that hot-roll coil almost doubled, how much of that would you say is already in your prices? Because to say that you have a certain lag in your components, have you seen that effect already or is that something that you're betting on will decline going forward?

It is just too complicated, the nature of it. We cannot answer it. There are too many plans with too many purchasers that do it. I think we have to tell that you we have all sorts of percentages here in our business plan for next year. I would say the lowest price on steel are probably running like -- they are probably around 20% total, I wish we had seen 10 already, you know, and some of them, as I mentioned, in the U.S. have some problems and they're all the way up to 45. So you cannot just grab a figure and say hold those figures up. It depends what you pay with. Do you pay with strong euros or weak dollars or do you pay with average yen or Korean waons or what.

But what do you think is different for you when you're talking about being able to transfer the increased costs to your customers, because many as your competitors have been express worries that they will not be able at all to transfer that to the customers.

I don't know who those are. Because most people I've seen, they say the opposite, they are going transmit it all and we say we cannot do that. We know we don't have to take all of it but we know we're going to have to take part of it and we are clearly not in a position to tell you how much. 50 will be sort of be the exposure and it's going to be less, but how much, so we cannot say. I don't know.

No, I understand.

I think some of them have said actually they are going to have no exposure and that, I can't believe. That means that the supplier takes their half and the customer the rest. It sounds too good to be true, at least in our Company.

Fair enough. If we look into 2005, and model launches -- I mean you have very strong market share gains in 2003 and 4 and got a lot of larger contracts. How does it look into 2005, and given new models coming in that will help your organic growth. Could you elaborate how you think market share is going to move next year?

We can’t do that John because we've got so many questions now on whether or not we supply that side airbag on that model so Mags has some kind of a write-up that covers two pages, what is happening in 2005 now, Mag?

We will still have a lot of launches but I don't think that these cars with ill have the same production volumes as for instance the Meganno, the Golf, so there is nothing that stands out like that. In the coming fourth quarter, the most important launch will be the Mitsubishi Colt where we have basically everything in that. Just to mention one example. But, you know, we have now, for the last two, three years, been automated -- every major vehicle. And we cannot continue to be so much about the trend line when it comes to launches. So it will be a more normal situation going forward, as we mentioned already last quarter.

But how do you think that will affect -- I mean you had a relatively strong or very strong I would say organic growth rate the last, you know, eight quarters of the back of these launches between, you know, 5 and 9.5% and given what you expect in terms of model launches next year, is an organic growth rate between 4 and 5% more realistic, given the underlying car production market?

We have not given any forecast for next year. And I mean we have to sit down and make a calculation, but we have always said that the long-term trend for this market of ours, it is almost 5% in terms of growth.

That's what were you saying. I usually say 4%. But it's somewhere in that region, John. And I guess what Mags is saying, we don't have any mass volume cars. There are more variants on the team. And if we look at the Feriza, there's the BMW, Wagon there is the Jeep Commander, there's a Dodge Neon, there are a lot of things here, but then again we don't know how successful each model will be and it is a wide span.

Sure. One last short question. How large share of your total U.S. exposure is to the light truck segment?

We have not updated that, but I think we're pretty much line 55/45. Wouldn't you say?

That's the last time I saw it.

So the answer would then be 55 trucks and 45 cars. And it really did change during when we acquired the Vista Electronics, because they had for instance, the air truck and so on and we're much more exposed to the trucks than we were on the restraint side.

Okay. Thank you very much.

Thank you.

The next question comes from Patrick Lindsey. Please go ahead and announce your company name.

Good afternoon. Most of my questions have been answered but I have one additional on the gross margin, you say you're reasonably confident they will be able to reach 20% plus in the fourth quarter. What sort of -- what's the driver behind that? Because that means that you're again accelerating on a year-over-year comparison. Is there any particular reason why you think it is going to look nicer in the fourth quarter?

I think it is basically not a whole lot of changes, actually, Patrick. I think it is going to be the same drivers as we had for the third quarter, and as we recorded, we said that the -- it is going to be probably lower wages and sources for the fourth quarter, as a percentage of sales. And because that's, we have seen, and that is of course a net effect from moving out to low cost countries, and then I would think that we are probably going to have a better top line, as we said, than last year, even if you -- some believe that 7% is conservative, and again, we do not think it is. We think it is pretty brave. It is at least 7% up. And even in volume terms, it is up quite a bit.

I fully agree with you on the aggressiveness of the 8% in the fourth quarter. I mean --

Thank you very much.

I haven't heard that figure any time from you. Anyway, could you --

Thank you.

Could you just give me a sense for -- where -- is that coming only from sort of the -- what you believe to be the model and manufacturing mix in production? Or is there product mix in there, between different airbags? I mean is there anything in particular which makes you as positive as you are in your guidance?

You mean the 7%?

Yeah, well, the 8, actually, because if you have plus 2 on currency and minus 3 on car, that's -- you've got 8.

I understand what you mean. It is basically, you know, we have of course, internally, some kind of forecasting system, and Magnus and I always complain and moan and groan over the quality of the forecasting but it does suggest that it could lead somewhere in this ballpark, actually, so it is a mixture of positive mix, and that we have probably be in there taking more -- not probably, we are taking more market share all the time, and we expect to continue to do so in the fourth quarter.

But I shouldn't read in that you're expecting to be -- to have a better pricing due to the -- that you're getting actually customers to accept more -- higher prices?

No, and if we do get that Patrick, I think it is going to be in the form of a steel surcharge where they accept, I would say not readily at all but probably accept to pay something in fees surcharges, an then I'm sure they're going to follow the steel prices very carefully and when the steel surcharge to go down again, the steel surcharge would disappear.

Fair enough. Finally, on RD&E, did you say the number on sort of the extraordinary invoice RD&E that you got in the third quarter?

No, and it is not too significant, either. It is kind of trades off with the Sarbanes-Oxley for the most part. So you could see total overheads came on pretty okay. You could say. But with a little bit too much on SG&A and a little bit too little on RD&E, simply.

Is that something that actually should have been normally in the fourth but came in the third? I mean --

No, not at all.

Okay. Thanks.

Thank you.

The next question comes from Graham Phillips. Please go ahead and announce the company name.

Good afternoon. It is Graham Phillips from UBS. Could I just ask about a new product area that we're hearing a little bit about, the lower leg and knee bag area. What the potential size of this market is, what sort of the different products are, and what the sort of settling fees you are to be -- to the customers about why they should have this product, you know, how it is for safety and reduces injury and so on?

On the knee airbags are coming and just particularly, you know, if you are on the borderline to getting a five star, and with the help of a knee airbag, you do get a five star which would mean that capacity was not five star, normally, and I have my familiar outdated volume sheet that I have here. Maybe not -- my sheet, we got to have about a million of those knee airbag shipped next year.

I'm sorry, I missed that.

About one million knee airbags shipped next year which is what I have on my sheet grammar. Again it's from quarter two so something might have happened.

So far this year we have old about 600,000.

600 that would mean about 800 so my million is probably fairly okay. So that's the answer then About a million for next year.

And how's the average of pricing, the margin compare on this product to the group, to your averages?

I would think that average, I would think the price varies a lot, whether we supply the cover or not, because then the cover is part of the instrument panel. So some countries supply the inflater, the bag only and sometimes the cover, and then the price varies consequently. I would say, correct me if I'm wrong, 25, $30 is that about right?

Even a bit more.

Even a little bit more and that must mean that the mix is so far fairly much U.S..

That's true.

And who are the major competitors and do you have any advantage like you developed in the inflatable curtain in terms of patrons or what have you?

No I would say the only advantage we have here is that we are probably more of a systems supplier than our competitors. But from a product point of view, they could do the same. But you know, some -- you know, sometimes when we have customers, they want to achieve a five-star rating, and then any air bag might be one solution where you can have other solutions, too. And we've been an assistant supplier then we say that it cost say $25 to get it and then the OEM will find out if they can do something else, like changing the physical design of the instrument panel cheaper than the $25. I would say that the only advantage is that we probably supply more systems than the competitors.

Thank you. And just one other new product their in the seatbelt area, you mentioned that -- some of the retractors and so on, but there is also some other product areas I think it was in like the three plus two belts, point belts and things like that, it is in more growth area, new products in seatbelts which is helping here?

So far, I would say that it is mainly studies on that end, what we have got in orders now, and coming in, those are pre-pretensioner (ph), I think we mentioned those before in these follows-up and the first rather significant orders are starting to come in, actually, I believe this quarter -- the past quarter.

Okay. Right.

So it takes time, from idea to sketch to an order, it is usually a couple of years.

Okay. Thanks very much.

Thank you.

I could add here, as to the quantities that we are going to get, to put it into perspective, these 600,000 knee airbags, the previous year it was 100,000 so it is up by half a million, so the increase is quite significant.

Would you like to make percentages?

No, I wouldn't. [Laughter ]

Okay.

The next question comes from Frederic Levia. Please go ahead. Sorry? Please go ahead and announce your company name.

Yeah, Frederic Levia from SG securities. Just a question. You had a strong guidance again this quarter. But my question is just to an update maybe on price origin by product, and you know, just to break it down and see what is price erosion for maybe seat bags and frontal airbags and above all the curtains of course.

Yes, we have to answer the same way we always do I'm afraid that there is nothing new. It is a strongly competitive scene as it ever was, maybe stronger even, but it is maybe still about 2% and more on the air bags and slightly less on the seatbelts, and I don't think anything particular has happened in the last quarter.

Okay. So no accelerations?

No, no acceleration, I would say. Not from the same thing this quarter, in any case.

Just regarding your restructuring do you plan to ever -- to expense costs relating to these actions in Sweden for maybe Q4 or maybe 2005?

No, you see, in Sweden, contrary to what many believe, it is very, very cheap here to lay off people. It is really theoretically doesn't cost you anything but you have to do it in a planned fashion so that people who have worked a long time with the Company, they have a longer notice time, you could say. But by the end of the day, it doesn't cost you anything. The real cost is in actual practice, is that you have to pay stay bonus for some key people that you want to stay. So we will not have any one-time big costs, and basically, we don't plan to do that for any closer anywhere, we have taken costs all the time as it comes, and normally, you can see on the line "other income" above the EBIT line, what we have paid at that particular quarter in severance costs. So for this quarter, it was $1.4 million. Do you know which countries, Magnus?

Yes it was Netherlands, and a little bit in the U.S..

U.S., Netherlands.

And a little bit in France, too.

So France, Netherlands, and U.S. That was this past quarter. So I don't think you wish to have any -- though we may get one-time big restructuring cost, but for the Swedish enterprise at all.

Okay maybe one last question on cost cutting. You plan to reduce the number of your suppliers just wondering whether it should be quite a slow start and then an acceleration, could you just give us an update on this, please?

We think it is going to more of a linear progression because the idea is we have lots, of them as you know about, 2,000 suppliers and as I think you know, we try to scale it down to 500, but the way to do it is that we are not giving new orders to suppliers that we do not want to have in the long time, in the long haul. So what we have done now, since about a year and a half, we have given new orders to I think wasn't it like 240, was it 300 -- 240 for North America and Europe this year.

Okay.

That means that they get new orders. And the ones that used to produce for us, they will fade out gradually, as the programs they produce for fade out. Do you understand that? Maybe it was too complicated expressed. No.

No, it is perfect. Thank you.

Thank you.

The next question comes from Klaus Umbersham. Please go ahead and announce the company name.

Clause Umbersham, ABG. I had a question on the organic growth. When you're back on -- you have had I think over a long period of time now, a difference between the multiple action on your sales around 6%. When you look at the order books, look into 2005; is there any reason to moderate that?

Well.

Never mind what the ultimate production would be, which looks to be on the downside anyway.

It looks to be on the downside but actually that is primarily fourth quarter. We think the total next year will be flattish as we said, maybe with a weak spring, and we don't give any forecasts basically. We try to give some guidance only quarter by quarter. And I think we have to stick to that one. But as you say, we have for a lost quarters, we have been doing better than the underlying productions.

Take as an example the market share gains in seatbelts which tends to be a very broad-based issue and not only in North America, Europe, and Asia, as well. Is that something that you expect to continue? If you look a couple of quarters ahead? And the other things like -- it seems like you're taking market share away from Brigadier for example in the U.S. and Brigadier now has more players.

We have been saying that the order is about a billion dollars, I would think is probably correct. We think that the seatbelts have been very successful. I don't think it is realistic to do as we do now, increase 22% in one quarter. That is exceptional, of course, on a flat market. So it is probably too strong for the time being but also long term, we intend to increase more than the market does.

Okay. A question on the raw materials, just a final question, I hope. You say in the impact is -- the cost of the 2005 would be down marginally and I guess that is assuming no volume change. So as a unit, what are your costs?

Yes, we -- it was what we call material in relation to saves.

Yeah.

As a percentage, in other words.

But then in the conclusion, you also talk about sales volume increases as one compensating factor.

Right.

Which suggests if you sort of read in between the lines that some of your pretty numbers will disappear into, raw material cost, nevertheless. Is that the way we should read it? Or is that a wrong way to read that?

I think it basically means that -- yeah, you might have some right in there that, we consolidate the base, but then of course, we hope that we can continue to increase the volumes as we have done the last couple of years. Actually for a lot of years. And then normally, we can then get some kind of better pricing than we would get had we not had the volume increase. But given the turmoil in the steel market today, obviously it is a temporary thing. You know, I am much older than you are, so we have seen nickel surcharges, we have seen all these surcharges, I didn't think I would ever have a steel surcharge, but now it might be steel surcharge that would disappear. So even if it was so that some of the effects from the issue, we say the strength or the much fewer suppliers would be taken out, it would be a temporary effect, I think. Longer term we would get it back again.

Unfortunately, I'm you're not that older.

I'm sorry.

You're not that much older, I'm afraid.

You know how it is to have it over the year, there have been from time to time various type of surcharges and right now, it is steel.

I know. Let's assume that this is the picture that we emerge in 2005, that these assumptions would be the correct ones. Would you expect to be able to hold to the margin that you have today?

We don't make forecasts like that. I mean, we are going to do our best of course to hold and possibly try to increase, also, but of course, it's as you realize too, given that the core production is on the way down for a couple of quarters, and given that the raw materials go up, it is getting more and more difficult, as we have said, the last couple of releases, I believe, and what we're saying today is basically we think we can do it, another quarter again then, and actually exceed a little bit.

Yeah.

When we speak to each other in general, we are going to tell you what we think for quarter one.

All right. Thank you.

Thank you.

The next question comes from Greg Openio. Please go ahead and announce your company name.

Yes, hello. This is Greg Openio from Examine Genepetta. Just sorry to come back on your slide on raw materials, but this is just to be sure. How far out are the lines for the '04 and '05 comparable, my question is, the line for 2004, is it originated from compensations from customer and resourcing? Or is it also before the -- these effects?

Okay. The 2004 line that we have meant it to be is net of what the suppliers have kept. But we have not been able to get any compensation from our customers yet.

Okay.

And that is the same as we have done for 2005, for the very simple reason that we don't know how these discussions will end up. So 2005 is also net of what the suppliers is supposed to do. But also not taking into account what we will charge out to our customers. And again, we think it is going to be split a little bit between suppliers, ourselves, and customers. And the 50 does not include anything between ourselves and our customers.

Okay. So the 50 in '05, includes the share that your suppliers will keep?

Yes.

Okay. Thank you. And could you just remind us of the level you could expect if there is no price increase in steel next year? Is it still around 35%, if I remember right? 35 million, sorry. Compared to the 50.

I'm not sure I understand the question. But if you take what we are looking at today then, assuming that the 20% do not happen, as you see there, in the second half, we are running about 12 million higher than would be normal, which would mean that on a full-year, we would see 25 million more than normal before having shared the pain with our customers. I'm not sure I answered the right question.

Yeah, I think this is my question. Well, maybe or maybe 25 to 28, if we take the fourth quarter.

That's probably correct.

Okay.

I have to warn you though, it is not that a fact. We estimate 5 and we estimate 7 so it is give or take a million number of figures.

Uh-huh. Okay. And just the last question, you're generating a strong free cash flow. Do you have any other possible intention to use the free cash flow apart from the share buybacks?

Yeah, another possible term is to further increase the dividends that we have done in the past but that is very much up to the board to decide.

Okay. And in terms of further acquisitions, --

Yes, if something suitable comes up, we would be happy to do that. But given the size we have in most of our markets, it has to be not too big of a competitor or something that compliments us, and as I think we have mentioned before, we believe it will have some kind of technology put into it, too, expanding the field we're in. But minus is right. It is probably a combination of dividend and share buyback and the other thing is we do find a suitable company to acquire.

Okay. Thank you very much.

Thank you.

The next question comes from Peter Testa. Please go ahead and announce your company name.

It is Peter Testa from One Investments. Sorry, I'm going to have make sure I understand your raw material question again. Just at this point on excluding effects of redesign and resourcing compensation of customers, it is clear, but the point on the next point, on total direct material costs of 2005, am I clear that you are assuming that as a percentage of sales, therefore there is a price assumption in there?

Yeah, you know, when we make our P&L, we have sales and then we have gross profit and so forth. And what we are saying is that what we then would -- what Magnus moves is direct materially a percent, and we think that that will -- the material costs as we see material costs will go down a little bit. Not as much as normal because of the steel prices primarily.

Okay.

But we would see them go down. And we should not mix that up with the raw material, though, because when we say material, only a part of it is raw material, and if you want to make it simple, you could say that half of our sales, we book as materials. That's 50% of sales is materials. But the raw material part of it is 15% of sales. Only a small portion of what we book as materials.

Yes, I guess my question was, what price assumption have you assumed in that statement that is a proportion of sales, material costs, to be down a bit, what price --

We have basically used the assumptions we're saying here, that we think that the -- we have somewhat of a worst case scenario, actually.

So you're assuming the same minus 2 pricing more or less that have you had this year?

Yes. We do.

On the other side, you've assumed no volume leverage because you haven't assumed any change in volume. Is that --

I think the bigger effect will be to share the pain with our customers.

Okay. Right. So that would be like you you say worse case. And then within this productivity improvements tend to come over the year, material prices are tending to move in a more volatile standpoint, would you suspect that this would be somewhat worse in the first half and better in the second half as a result of that?

Yeah, that is probably a realistic scenario.

Okay. That's fine. Thank you very much.

Thank you.

We have a follow-up question from Scott Merlis. Please go ahead.

Yeah, just briefly, what happens to Sarbanes-Oxley next year? The 6 million this year?

The next year, I am not into next year yet, but just trying to work it out this year. As you know, this year is the first year we have to certify according to section 404 when it comes to internal controls. And it is very heavy job for the whole organization and as Lars said earlier, it will cost us in the order of magnitude $6 million US only in external costs. So it's not including our internal costs. So next year I can't tell you but hopefully we will take down the costs from today's level because then we have learned and we have perfected all of the procedures that we have supposed to have in place due to the Sarbanes-Oxley.

Yeah, I've heard from some companies that there is a big up front cost and some of, that a lot of that actually goes away in year two.

That's what we hope, Scott. Because really Magnus has not use so much consultants as most people normally, do which has to some extent made our board nervous, but the reason for not doing so is not only that it costs money, but secondly the loaning affects disappears as the consultants walk through the door again, so our ambition will be that it's a lot lower next year but then we don't know about you guys in the states, you might come up with something new again.

Yeah. That's right. Yeah, you got to watch those consultants. Thank you very much, once again, congratulations. Good quarter.

Thank you.

Gentlemen, we appear to have no further questions. So we will hand the conference back to you for any closing comments.

We just like the three of us here, would just like to say thank you very much then and wish you a Merry Christmas because next time we speak is probably at the end of January.

January 27.

January 27. So have a good time in between. And that's all from Stockholm.

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