Autoliv Inc (ALV) 2004 Q4 法說會逐字稿

Good morning and good afternoon, ladies and gentlemen, and welcome to today's Autoliv full year report 2004 conference call. At this time all lines are placed on a listen-only mode. Later there will be an opportunity to ask questions and instructions will be given at that time. (OPERATOR INSTRUCTIONS). I would also like to remind all participants that this conference is being recorded. I would now like to hand over to today's chairperson, Mr. Lars Westerberg, CEO of Autoliv. Please go ahead.

Thank you very much. Good morning to all of you in the United States and good afternoon to you in Europe. I'm sitting here in Stockholm (indiscernible) with Magnus Lindquist, the CFO, and Mats Odman, the CIO. I would like to remind you from the beginning here that the proceeding will be as usual. We will have a slide presentation, around 20 minutes or so, and then open up for questions and answers. This slide presentation is available on the corporate web page and that is under the title, Financial Information, so under Financial Information. Included in this presentation we also have the Safe Harbor statement. We will not go through it, but that (indiscernible) forms a part of this presentation. So that is sort of part of what we say here without really going through it.

If we start out with slide 3, the sales trend we have recorded lately. As you can see here the trend continues roughly at the same pace during quarter 4, as it is down all the year in 2004. Sales were up 15 percent in the quarter and the trend is 16 for the last 4 quarters. The trend is not much stronger than the forecast. We thought we would be up about 7 percent. Part -- and the biggest explanation is the foreign exchange or you could say the dollar decline. We thought we would have about 2 percent because of the dollar exchange rate, but it is more like 6 percent because the dollar, as you might recall, took a hit actually in the beginning of quarter 4. Over and above that, the organic growth in Autoliv has been stronger than expected, so where we had expected 5 percent it ended up being 8 percent.

All in all, you can say that our sales came up 11 percent more than the underlying car production which is a pace we believe is not really repeatable in the long run. The light vehicle production, as we understand, came down roughly 3 percent and that was in line with expectations, a little bit more than expected in Europe and a better performance in Japan actually (indiscernible). All in all, if we go through the sales performance by region and compare it with the underlying light vehicle production we came out, in Europe 13 percent better than the underlying light vehicle production, 7 percent better in North America and 15 percent better in Japan, also the 3 major regions.

Turning to page 2 and looking at the organic growth, we had as usual a fairly nice outperformance of the light vehicle production. If you look at it from a product point of view it is the same product as usual and that has been the case for a long time. Seat belts continue to take market share in all of the regions of the world. Inflatable products are being installed in more and more cars and we had a very nice increase, as we are going to talk about later, in steering wheels which as you know is not the most profitable product we have. So by reading, you can say, basically the same as before, strong performance in Europe, Japan and Asia-Pacific. We believe also North America was strong but a little bit weaker than the other 3 regions.

Turning to the next page, the light vehicle production. If we take the bottom-line first we can say it ended up with about the same amount as expected or 10.1, 10.2 million vehicles in the Americas, Europe and Japan. Having said that there were some big changes within the regions. For instance, big three in the United States were down 5.5 percent. But offset against a similar increase for the new domestic, or the transplants, they were up about 5.1 percent. So 1 region but 2 trends you could say. Europe, we have here only Western Europe, was down almost 5 percent. That was somewhat worse than we had expected.

Here we will change the source of statistics here because going forward as of 2005 we will include also Eastern Europe because rolling (ph) and Eastern Europe, the trend was much better and the decline was no more than 2, 3 percent in total Europe. So far we had the same source and then to be comparable it is minus 5. In Japan we had a slight increase, you could say. It was better than expected. Turning to the next one and (indiscernible) about the product sales, the higher marketshares. Seat belts we are running now 26 million in the last quarter which means of course that we are running more than 100 million pace for the time being on seat belts. As mentioned that is across the globe, you could say, taking market share.

Inflatable curtains, they are part of the head side airbags and as you can see the head airbags are up about 38 percent. The inflatable curtain is up 45 to 50 percent both in value terms and in volume terms, so assuming a trend for value and volume. Steering wheel is up 22 percent, which of course also is a nice figure, as the profitability as I said before is not the best. To come back to the inflatable curtain, to sum up 2004, the inflatable curtain now is a business of roughly about $700 million. So it is increasingly important for us. At the same time we don't mention electronics too frequently. But electronics passed the half billion dollar mark and ended up with about $530 million in the past year.

If you could please turn the page and have a look at the gross margin. We had an increase of half a percent from 19.2 to 19.7 and we had similar one time charges in both years. So the underlying performance is the same actually. The drivers are, of course, the sales volume in itself but also we had somewhat lower wages and salaries in relation to sales. In the last 12 months for the full year 2004, we ended up 19.9 percent, and as you may recall we had a target of 20 and we fell short by 0.1 percent, but not too bad with 19.9.

We turn to the next page and look at the EBIT margin. We did have a onetime effect in 2003 and maybe we should cover that once and for all. We had some income from a license in Japan actually, plus we had a couple of provisions. The net effect was a onetime income of $18 million. If we take out that underlying onetime effect, the margin last year was 8 percent. This year we had 8.6 percent. So you could say that we had an improvement in the underlying or comparable EBIT margin of 0.6 percent. That was in spite of having seen fairly high raw material increases, higher than what we expected.

We actually, you'll recall, we thought we would see an increase of around $7 million but it turned out to be more like $12 million for quarter 4 and will be back to what it is going forward. The drivers for the EBIT margin is of course the gross profit mainly. Then we had some onetime gains in the research, development and engineering. We had again a license income to the tune of $5 million, which is a onetime effect. On the other hand, we had a $5 million cost for the Sarbanes-Oxley, so it sort of evens out you could say.

Also in the column "others" we had a fairly big cost here also, excluding the 18 of onetime and that mainly has to do with severance costs for personnel decreases in Sweden, as well as in the United States. We in the background being that we are moving production to lower labor cost countries. The last 12 months or rather the full year 2004 came out at 8.4 percent and the comparable figure in the previous year was 7.7 percent. So you could say up 0.7 percent for the full year and up 0.6 percent for the last quarter.

Turning the page and having a look at the simplified income statements, as usual starting in the middle column with the changes. Sales, as we said before, was up 15 percent; gross profit was up 18 percent. And then come down to the EBIT level, we are up only 7 percent. However if we exclude the onetime income last year of 18 million, the EBIT is actually up 24 percent on the comparable level and the same goes for the earnings before tax, actually up at 25 percent. That is a little bit of a disturbance on the onetime effect for last year.

In a similar fashion we had another little disturbance, if you look at the tax rate. We ended up having 32 percent tax both years but the odd thing is that in 2003 we took a cash-up effect in 2003. The last quarter the tax rate was 27 percent. Now in 2004 we have the opposite cash-up effect, going from 31 to actually a 32 percent tax rate. So that means we had a 35 percent tax rate and that means that it is not really comparable.

Again we had on the gross profit where we are hit with these 12 million of raw material costs in the SG&A, we were hit by the 5 million in SOX, Sarbanes-Oxley costs. On the other hand, we benefited from 5 million in the license income. That I would say is the largest single fully in the case of SOX, single onetime event. Turning to the next one and having to look at the return on equity. If we measure again in the comparable underlying way, the fourth-quarter we had a return on equity of 13.7 percent which should be compared with 12.9, the same quarter for the previous year. An improvement also here.

In the last 12 months we are now running at 13.7 versus 2003 we were at 11.5. We believe that the weighted average cost of capital for Autoliv is around 8 percent. Turning to the next page, return on capital employed. Again, this showing the comparable or the underlying trend goes up for about 15.3, all the way up to 18.5 which is 3.2 percentage points. The last 12 months or the full year we were at 16.4 compared to 13.3 in 2003. You could say that the improvement is fairly steep when you talk about return on capital employed.

Again if we took out all of the intangible assets out of the capital employed and only measured return on physical capital, we would have a healthy 41 percent return on the physical capital employed. The next page then, in the key figures we have mentioned the first one, return on equity, return on capital employed. The working capital, we got down all the way to 484 million which I think you’ll see is a nice decrease compared to quarter 3, but even more about more so when compared to the same quarter the previous year when we were about 528.

It is worth noting that is for the sales that is 15 percent higher and that is why in relation to sales, we were all the way down to 7.9 percent, well below the target of 10 percent; questionable if it is sustainable or not. But in any case, we're happy to see it down all the way down to 7.9 percent. We had a relatively high capital expenditure during quarter 4 and that is where you can see that the total capital employed is up a bit. That is because of all the capital expenditures. Net debt is down $114 million in quarter 4 and for the total year is down $185 million, and that is without (indiscernbiel) that is down to 18 percent which is relatively conservative.

Headcount, we had a slight decrease in quarter 4. Most of the decrease, or all of the decrease and maybe a little more actually came in North America where we decreased 400 persons. Having said that, we did have an increase for the total year 2003, but out of that increase only 5 percent of the, should we say, full-time employees are in high labor cost countries. The other 95 percent are either in low labor cost countries or otherwise only temporary.

Turning the page again, please, we come to the cash flow where we had a very nice cash flow. It continues to exceed our long-term trend and as you may recall we believe that we can have in the full year a gross cash level of about half of one billion and net of a quarter of one billion. Here we had one quarter alone with $137 million cash flow. You should turn the page and have a look at the long-term cash flow. You'll see all of 2004 we ended up with $680 million gross cash flow and 367 net cash flow. It was better than the long-term trend. And you can also note that the CapEx now for the first time in a long time, CapEx did exceed the depreciation with some $50 million.

So the cash flow is driven, as you can see, from the improvements in the net income plus the improvement in working capital mainly. This is a new record, a new record to beat at some point in the future. Turning the page we can have a look at the total shareholder compensation and during quarter 4 we did buy back some shares. It was limited due to the run-up in the share value. The dividend will increase; that has been communicated earlier. So in quarter 1 the dividend goes up about 25 percent and for the full year 2004, we return a dividend to the shareholders, $70 million to be compared to $51 million in the previous year 2003.

We have a look on the stock buybacks on the next page. The total share buyback in 2004, we did buy back 3.4 million shares at an average price of roughly $41.9 or $144 million during the year. And if you combine that 144 with a dividend of 70 million, you could say that we gave back to the shareholders, one way or the other, $214 million which then is roughly 60 percent of the net cash flow. Turning the page again and coming into the CapEx and the depreciation. As we said before the CapEx came in at about $313 million compared to 246 the previous year. We believe that the CapEx will remain on a relatively high level for 2005, some 300, $350 million in that bracket. This is of course driven by volume. It is also driven by increases in particular in safety belt costs, but also to some extent in foreign exchange. Those are the three major reasons.

Then turning the page and having a look at what we could believe about the coming couple of quarters when it comes to light vehicle production, starting out with the inventories of light vehicles in the United States. December was a strong sales month in the U.S., therefore you could say that the days of inventory is now down too or even slightly below the ten-year average. Part of it though is technical because of the strong December sales. So if you count the number of vehicles we are actually up a little bit compared to the end of 2003, which if you turn the page will result in -- as you may recall we had a bleak quarter 4 in core production in the United States. We believe that the production in quarter 1 will not be too strong either. So we may not get another decline here of say 5 percent. But again we are going to see that the big three does do fairly much poorer.

It is estimated to be down no less than 9 percent from the big three, and as you know we buy these figures from CSM. On the other hand the new domestics are supposed to be up some 5, 6 percent. Sounds fairly dramatic to us but if you put the two together that would result in a decline in North America of some 5 percent. You could say that the trend from our point of view continues relatively weak production figures in North America, but a good mix (indiscernible).

Turning over to Europe, and again this is probably the last time I hope when we look at Western Europe alone. We think it's going to be a not so strong first-quarter in Europe either with a decline of 1.5, 2 percent. If we roll in all of Europe, however, it looks like the decline will be slightly less than 1 percent. So not so dramatic and as you can see also, here the forecast for the total 2005 is now down from 16.3 to 16.1 million vehicles. So somewhat pessimistic here. December sales, however, were strong; U.S as well, and particularly in Germany where car sales were up more than 20 percent.

Turning the page, please, and having a look at Japan. This strong trend from quarter 4 is again expected to continue into the first-quarter of this year with a 3 percent increase compared to the first-quarter of 2004. Here you can also see that the full year is supposed now to be about 9.8 million. So it's somewhat stronger full year forecast also for Japan. All in all, we would say that we think it is going to be another year with relatively flat car production over the full year. But we think the the year and quarter 1, we saw (indiscernible) with some 2 percent down of light vehicle production but improving gradually throughout the year.

Next page. We are trying to give you some kind of guidance on the raw material price increases. We believe we are looking at them and we could say immediately here that this is not all the (indiscernible) we have done. We have done our very best to try to help you out, to give some kind of life on why we think we are going to look at when it comes to raw materials costs. To start out, to try to understand it, (indiscernible) quarter 2 we took a hit of about $3 million. In quarter 3, you should add the two first; it's 3 plus 2, some $5 million. Then when you come to quarter 4 the hit was more like $12 million for that quarter alone, and in other words last year we took a hit of some $20 million.

We have then simplified this figure, this graph, and believe that in quarter 1 we may see as high as a $30 million increase compared to quarter 1 in 2004 when we had nothing, as you can see here. So around 30 million. What we are also trying to see that the blue portion of it, that is increases that we know will come, mainly because some of the yearly contracts have run out and new contracts have been signed. The purple portion is which we think is the likely outcome of all of the negotiations we have had for the time being. Some of them will be retroactive starting as of January 1st. And as you can see our guesstimate is that we might have $30 million per quarter for the total year then and we now see the pie chart starting on January 1.

So the good news, it's probably as bad as it's going to be, but then the bad news, it may not the full year; that's basically what we say. I guess you could also note here that we have started to get reimbursement from some of our OEMs. It is not so easy to get, I have to say. It is like pulling teeth, but at least two large OEMs have started to compensate somewhat for the raw material increases we are seeing, and of course we hope to improve on that one. But 2 so far. If we turn the page, again please, we can have the pie chart here where we tried to illustrate what is happening then to what we see as raw material costs here.

Again the purple part of it is value added upstream in our supply chain and that, as you can see, is a big part of the material cost (indiscernible) but it is going down. And it used to be 71 percent. It now went down to 67 for two reasons. First, the material content is going up, and as you see it's primarily still going from 35 to 38 here. Petroleum-based flat electronics actually going down. Then others will be about 12. But there is also another reason and that is as we move out and buy and more material in low-cost countries, for obvious reasons than the value added, which is a lot of labor, will go down as a percentage of the total purchasing costs for two reasons.

One it's the raw material costs, and the second one is that we move to places where we have less labor cost, you could say. On the next slide we tried to bring it together for you and you have seen this graph before many of you. We used to go down about 3 percent per year or so and as you can see last year we did not manage to go down 3 percent; we only came down about 2 percent and that is 2 percent of the cost then -- of the materials of 1 percent of sales. As you can see when everything is said and done also for 2005, and in spite of this uptick in raw material costs, we still think that the material costs will go down but it is going to be slightly south of one full percent of total purchase materials or half a percent of sales you could say.

To that you should of course add the normal productivity gains we have, the quantity discount we are working to get and also what we try to get from the customers. You can also say that we have another target when it comes to purchasing. As we summed up 2004, we had about 15 percent of our purchasing in low labor cost countries and the target is at the end of this year, that figure will be 20 percent. That is also another factor to roll into it.

In conclusion, the raw material costs are disturbing and they will not permit us to take down the material costs as much as we normally would, but we are still heading down at least a little bit. Summing all of this up to some kind of forecast, we should say for the 2005 first-quarter, we believe that the sales could drop somewhere in the region of 12 percent. We think about 3 percent of that could be foreign exchange. The reporting days, we are going to have about 5 more reporting days in the first-quarter out of which two are holidays in the Christian part of the world. So that is 3 more working days and then again, not the whole world is Christian. As you know, we have about 20 percent in Asia.

So if you deduct those, that is about 4 percent or so organic growth which we believe compares favorably with the light vehicle production which we think is going to be down 2 percent. That would mean that we out-do the light vehicle production some 6 percent if we succeed with this for the first-quarter. Also the EBIT margin, we feel of course that it's somewhat difficult with all of these raw material costs, if it doesn’t rise too much and we are (indiscernible) it is not more than 25 million. We think we could reach the same level as last year which was about 8 percent EBIT margin. It would be about the same then for the first-quarter of 2005.

That sums up the presentation, so we will prepare to try to answer all of the questions there may be.

(OPERATOR INSTRUCTIONS). (indiscernible)

(indiscernible) from (indiscernible). Just one question on the U.S. side impact market. We know that we're going to reach up to say 100 percent penetration in like '09, '08 or so, and you are, or the market is, now somwwhere at roughly 10 percent. Can you just confirm that you are -- or we are at 10 percent and given your order book and what you see, when do you see this kind of market starting to accelerate and sort of the penetration increasing?

We believe that the penetration, if we talk about curtains mainly, I believe more like 15 percent in the U.S., and Mats is nodding too, so that's probably what we're seeing for the time being. Your second question, do we see it coming or not, and we are seeing it coming. If you take United States only, the volume of truck has increased 61 percent year-on-year, which is fairly hefty. Actually it did cause us some problems because it's difficult to respond to such a surge in demand. So we had a lot of premium freights and similar problems during quarter 4. We see incoming projects. We cannot, of course, have exact timing. But 61 percent year-on-year is a lot.

It is a lot, yes. Okay, thank you.

(indiscernible)

(indiscernible) in Stockholm. I had a question on the outlook that you have. You're saying that you're going to grow sales by 12 percent which gets you to roughly 1665. And if I just apply a straight 8 percent that is an EBIT of 133. Then again you're saying that the calendar effect will add some 5 -- out of that 5 percent is a calendar effect? Is that correct? The question is, if you wouldn't have that kind of calendar effect, according to my calculations you would have a margin somewhere in the 7 cent area. Is that the underlying trend that you want to bring to us?

I leave this one to Magnus, and I would just like to say this is not an exact science because Easter is Easter in a lot of countries, but not all countries. Then on the other hand it's not 5 percent in some plants either because some plants are running 7 days a week, 3 shifts you know, and some others only run 5 days, 2 shifts. Over to you Magnus, I will be happy to let you explain this one.

We would not have any margin impact due to these extra days because normally we accrue for the costs that also are incurred during those extra days. So it will be the same margins. It will not have any impact due to the extra days.

Okay. On raw materials you are saying that the gross effect is 12 in Q4 and you're expecting the gross to be 30 in the third quarter. And as I understand, the net effect was minus 10 in the fourth-quarter and you are looking at minus 25 in the first which gives you roughly the same level of compensation, i.e., 17, 18 percent. Is that the assumption that you have for surcharge compensation, if you will, for first quarter, is that because you think it's going to be at roughly that level for the whole year? Or is it because you think it's just going to gradually come up to a level more than say 20 percent?

We didn't understand your question (indiscernible). For fourth-quarter, this will (indiscernible) of about $12 million. The first quarter may be somewhat sketchy. We believe there will be an order of magnitude of 30, and that of course the difference is 18 if that is what you mean.

Those figures that you mentioned, they're gross figures, not including any surcharge compensation.

That is correct.

I understood from months earlier that you had received roughly 2 million in the fourth-quarter of compensation roughly. That is 17 percent out of the (indiscernible).

17 percent on 12. You calculate a lot. Well we could say the 12 minus 2 is 10.

Exactly. I am just trying to figure or put it another way. Do you think that the level of compensation that you will be able to get going forward will be higher than it was in the fourth quarter?

I guess what you're aiming at then (indiscernible) could we see a similar chunk of the 30 being compensated as we saw in quarter 4? I truly don't know. We are working on it with all various customers actually and I don't know if we’re going to succeed with any one or with all of them. It is clearly a fight, you understand.

I have a question if I may. You said that you had strong growth on IC's in North America, 61 percent, and maybe capacity is the problem. Are you seeing that, realizing any of the price increases even? You're saying that prices are stable, overall, but are you seeing even being able to hike prices?

I wish I could say that. The question someone has asked before in our business here. We can say that it's -- we have had some cost actually. From our point of view you could say that the effective price has almost been lower or the margin has been lower. Having said that, we are enlarging the plant in Canada and we'll do the same in the UK. Sitting here today we believe it is going to be much less premium freight in the first-quarter. You could say price realization has a chance to be better.

Thank you very much.

(indiscernible)

(indiscernible) Securities. Patrick (ph) actually nixed a few of my questions. But the real material issue is I think very interesting. I just wonder on the guidance you gave on the quarter 1 margin of up to 8 percent or similar to last year, what have you included in terms of OEM compensation in the writing of that guidance?

You can say, following on this, we believe the gross is 30 as Patrick here concluded and you do too. We have read, well we have put in for the text here that if it hits net more than 25 then we are in trouble. A combination of volume discounts and the compensation from customers at 5 (ph), in other words.

Okay. (indiscernible). It could be better then, if you’re very successful in your negotiations, I mean.

We told you with the negotiation, it is 5.

On the OEMs you mentioned that 2 have been kind enough to grant you some compensation. Are those in North America or Europe or is it both?

We don't want to comment on that unfortunately.

Alright, I understand that. Again on raw materials, I don’t really fully understand if you expected the impact to be, the gross impact and then also the net impact to be similar or evenly spread over the quarters or not?

We expected (indiscernible) to be the same over the quarters. Having said that, the full impact is here. We estimate it to be flat over the year. (indiscernible) so, that even if the steel would start to go down we think it still would remain relatively flat. We have a time lag also when it hits, but we believe also when it is. So we think it's going to be -- the answer is yes, we believe it's going to be flat and it wouldn't help a whole lot if steel started to fall.

I understand. Finally, profitability of (indiscernible) has been maybe not so good for some time. I just wonder what do you do about it?

You could say it has not been so good. It is still not so good, but it's the best it's ever been.

So you're happy with that?

No, not happy about, but happy with the direction.

Do you think it will ever come close to your group average?

I don't really know. For the time being we are (indiscernible) primarily because we are very interested to sell driver air bags. More and more of our customers want to buy steering wheel and driver air bags and we want to take those orders when the combination is found. So therefore sometimes we can accept that the margin is somewhat distorted on the steering wheel if we got a good bargain on the driver air bag. That is a kind of chicken and egg situation.

Thank you.

Scott Merlis.

Scott Merlis, Thomas Weisel Partners. Given your cash flow situation, have the priorities for reinvestment, relative priorities, changed at all in 2005? In other words, what are the priorities of repurchase dividend increase versus acquisition as a priority? And I am assuming debt reduction is not a priority, so priorities for reinvestment of what was a very extraordinary cash flow.

Scott, if we had an acquisition that we felt was sound and good with a good return, that would be priority one, no doubt. Between dividends and stock repurchase we don't really have a priority. I think you're going to see us, if we do something here, we are probably going to do a combination of the two. But clearly if we find a good operation that fits the Company we would do that one as priority one. As you know in our core business we are approaching a size where it’s getting more and more difficult basically everywhere.

Would it be accurate to say that your propensity to repurchase stock in 2005 could be similar to 2004?

I would say yes, at least.

At least. Okay. Turning from the very strong cash flow to your organic growth, could you just explain the organic growth in the fourth-quarter? More specifically why it was so strong when your major market, Western Europe, was down 4.5 percent? Of course Eastern Europe could have offset some of that but you can only sell so many air bags in Romania.

You are right, but actually we believe you are right, and that Eastern Europe, that changed the picture a little bit. The car production goes up in Poland, in Hungary, Romania, and a little bit everywhere. So that's why we're going to change our sources of statistics. Basically we had a great mix of vehicles here in Europe. In North America it was rather sold at our customers, notably transplants. Japanese and Koreans did very well. We have tried -- we are somewhat surprised too. We all see the underlying production with 11 percent. I think mathematically that is more or less the market.

Yes, because the organic growth would have been 10 percent I think if Western Europe was flat. So I guess that is assuming -- I'm assuming it is content growth and market share gains, might be equal factors?

Yes, could be, could very well be.

Last question deals with the gross margin. When you strip out currency which helps your gross margin and when you strip out this unusual commodity spike which may or may not be one time, but it almost looks like your gross profit was well over 20 percent in the fourth-quarter. In other words what is driving the gross margin improvement in the underlying operations. It could only be -- I guess it's mix versus volume versus cost-cutting. Is there an unusual amount of cost-cutting that is starting to come through, or is there an above-average mix improvement because you are selling more side curtains, or does electronics help your mix, or does higher value added seat belts help? I'm trying to get a relative sense of drivers of the underlying gross profitability improvement.

It is a combination of the factors you mentioned. It is of course the increase in sales volume but also the move from high labor cost countries to low labor cost countries which means that the percentage, when it comes to labor cost per sales unit or sales dollars, it is decreasing. And also of course, a product mix issue.

Thank you. Great quarter.

(indiscernible)

(indiscernible). First on raw materials, haven't really understood what was the reason for this type of exposure you were talking about, the 60 million in October and now it's more likely to be 90? Are there any contractual negotiations that went worse than you than you were expecting?

The reason, it's quite simple, that in the fourth-quarter we saw a spike in the raw material prices. That means that we have to adjust our forecast also or our view on 2005. The 60 million that we had as an exposure after the third quarter now it is more, as said on the bottom here of the slides, it's 90 something.

Okay. But the spike was stronger than the 20 percent you were including in the 60 million.

As you saw the prices have gone up more in the fourth-quarter than we foresaw after the third quarter. That affects also our view on 2005. If you look at it, quarter 4 we thought we were taking 8.7, but ended up taking 12. Then as Mats said, we rolled that one into forecast for 2005. And again all of that is not a fact. The part and parcel of this chart here is what we believe we are going to have to give really in these negotiations. Unfortunately most of the conclusions we are going to make will be retroactive as of January 1st.

I assume you have had some contractual negotiations in the fourth-quarter. Are there any major renegotiations coming ahead?

Yes, some of them are ongoing, and particularly on the steel and plastics issues. I think on the electronics we are more or less concluding and that has, as you have seen, a healthy progress on the electronic components. Also I would like to point to the fact here, the page behind actually, it said all of this actually – in steel, the raw material content goes down. It doesn't go down as much but it will go down even at those relatively, hopefully, pessimistic forecasts we have now, on a hit of $30 million a quarter during 2005.

The reason is clear you know, because what we buy, roughly 70 percent is value added at the suppliers and that value added is still subject to the same negotiations and the same productivity discussions as there used to be. The only thing that is added is the raw material cost of it.

In terms of RD&E, what do you see your efforts going in 2005? Do you think you'll have to step up or you will have reached a good level in terms of (indiscernible)?

We still believe we are going to end up somewhere in the ballpark of 6.5 percent on sales for RD&E. And you may recall yet that the fourth-quarter usually turns out to be better and it did so also this year, partially because the normal things and progress we run for our customers, they want to conclude it and we want to conclude it. Sort of cleaning their books. On top of that we got this $5 million onetime income that we mentioned before.

Okay. One question on products. Could you make just a little overview of how active safety products went in '04? How much were your sales and how is it developing and an outlook for '05?

I think you can say that the sales of active safety from our point of view is negligible in 2004. It will be somewhat bigger in 2005 but not mind-boggling because we'll introduce the 9th edition. I believe -- when did we introduce the (indiscernible)? Is that '05 or '06?

I have to check that.

In either case, I could say for the first half of '05 that will be very, very small numbers. But it will gradually start to come in as of September of this year. So during 2004 we only had costs really and no income.

Okay. And maybe for longer-term, maybe '07, you will have an idea of how much it could contribute to your sales?

We have an idea but it has so much to do with the take rates from our customers because many of them won't be sold as options. We don't know how they will be priced, we don't know the take rate. So we are not communicating that. I am so sorry.

Maybe just a last question quickly. We have seen in the fourth-quarter that your operating margin was up, but the gross margin was almost flat if we excluded some costs, exceptional costs of Q4 '03. Does that mean if you expect flat operating margin in Q1 that the gross margin could be down?

No. The gross margin was actually up about half a percent. And you are right. If you read the footnotes on the slide, you can be led to believe that it was the same. But Magnus could probably explain in detail, but really we took at least as many hits on the gross margin this year as we did last year. The real underlying improvement is half a percent and that ended up being 0.6 percent on the EBIT line. If we talk about forecast for Q1 we really only give guidance for sales and for EBIT. We don't do it for the nines (ph) in between.

Okay, thank you very much.

Adam Jonas.

It's Adam Jonas from Morgan Stanley. Just one question on your cash flow. Two things in the quarter that you gentlemen referred to that might have been a little unusual. The working capital source, despite the very strong organic growth, I think you mentioned Lars that maybe that's not sustainable and that is understandable. Then the other thing was that you are now at a point where it looks like your CapEx is once again above the D&A. Are these two trends -- would you expect CapEx to remain above D&A for '05, I mean as fourth quarter and '04 trend to continue or maybe even widen? In terms of working capital, a little bit more detail on what you think, what your opportunities are to squeeze even more out of whether you think the growth that you need and that you're going to feel organically means that that is unlikely?

When it comes to CapEx in relation D&A, I would say that the trend that you saw in the fourth-quarter will continue in 2005. It will be slightly above. When it comes to the development of working capital, we have it targeted to be below 10 percent and I think we should be pleased if we can continue to be below 10 percent. We also see in the negotiations with the buyers that they are also putting in some kind of demands when it comes to shortening of payment term rather, to get some price increases which means that of course that will have a negative impact on working capital. But it could have a positive impact on the margin.

That is a very interesting point. Are you finding that maybe as some of your tier 2 and tier 3 suppliers are coming maybe under even more brutal raw material pressure than you are, that you're having to support them a bit by paying a little earlier than you otherwise would?

I'm not sure what you mean by supporting. It's through pure negotiation. But it cannot be more derivative than our situation.

That is your experience, is that they're not in worse shape than you are?

Well I think – usually, if you go down to tier 2 they make more money than tier 1.

We were just hearing, at least anecdotally, especially from some suppliers in the states that the indirect impact of rising raw material costs, meaning paying higher prices to the tier 2 and tier 3 level is more harmful than your direct impact.

I think we could say the 3 of us really don't know, to be honest with you. It's probably brutal for them too.

Thank you very much.

(OPERATOR INSTRUCTIONS). Marcus Remus (ph).

(indiscernible) from Deutsche Bank. Two questions; one follow-up on the CapEx issue. Can you give us an exact number for what you are planning in terms of CapEx for the current year for 2005 and maybe 2006? Secondly, on the issue regarding the negotiations with the OEMs in terms of how much they are willing to pick up with regard to the raw material prices, when do you think you will have better visibility on that issue? Is it going to be another two months that you really know how much you can pass on or is that an issue that will carry through the whole year?

On the first one, CapEx, we think it's going to be somewhere around 300, 350 for this year. As Magnus said, the chances are it will exceed depreciation for some time. On the second one, the negotiations, it is -- you know the outcome (indiscernible) and I do too. It is not so easy to convince them to raise the price. So I would say that is all the question. Usually what it ends up being is that we have a discount that is lower than it would have been had it not been for the raw material costs. You could say the give-backs would be lower is most likely a result. Then the deals can be extremely complicated. Some of them only work with surcharge, some of them want to have the normal productivity and then give back some, some want to pay back cash and have the normal price go kicking around in parallel. I don't know that there is a path in (indiscernible). And actually I don't even know that we are going to succeed with all of them.

It is clear that you're not going to get price increases. I'm just wondering, what is the timeframe? Do you know maybe by the end of March how much you can compensate? Or what is the time when you really have better visibility on this whole issue?

I think it is coming up one by one and we are working with it everywhere and we are not the only one as you know. Basically the whole tier 1 industry has similar dialogues ongoing and some of them are in much worse shape than we are, with negative EBIT margins, and I guess they are better off negotiating. Nobody feels so sorry for us and that is a problem we have.

Okay, thank you.

Austin Earl (ph).

It's Austin Earl from Numa Rigazze (ph). I just had a clarification question. I apologize; I missed part of the call. But it's just going back to this issue of raw materials. I thought that you said that the impact would be 30 million a quarter, but then you say it will be 90 million for the full year. So what have I missed there?

(indiscernible). I mean if you have an increase of 25 million and you have 4 quarters, that is roughly 90, 100 million.

Okay, so 25 to 30 a quarter (multiple speakers).

It is not an incremental (indiscernible) increase. So that will be too bad.

Thank you for asking. Now I understand too.

Thank you very much.

Frederick Labia (ph).

(indiscernible). Just one quick question. You gave guidance on Q1 '05. So my question is that given this environment in terms of raw materials in terms of production you got quite precise forecast for those elements. Is it realistic to forecast an incremental margin for the full year?

We really don't give full year estimates on the margin and we can just say that we have, as you know, we have the target to stay between 8 and 9 percent EBIT margin, which we have succeeded to do the last couple of years. Of course we are shooting for the same thing this year. Clearly the raw materials will make the material go down slower than we would have liked them to do. We lose one point you could say, but we lost one point also last year. Then we increased margin with 0.6. Now we lose another point and I guess it remains to the seen now where it's all going to end up. But sorry to say, we don't give full year forecast. It is difficult enough with quarterly forecast.

Thanks. The target specifically remains unchanged?

The target remains unchanged.

Does that answer your question, sir?

Yes.

(OPERATOR INSTRUCTIONS). Graham Phillips.

Just a couple questions if I could. First, just on the working capital. There was this positive inflow in the fourth quarter of 57-odd million. I can see that you traditionally (technical difficulty) in the final quarters (technical difficulty).

You were cutting out. I don't know if it's a mobile or something. We heard the first part, the working capital.

Yes. (technical difficulty)

Now we can hear you again.

I mean basically I just wanted to ask about the working capital. Why there was (technical difficulty) in the fourth-quarter and if there was any one-off (technical difficulty) particular customer payment period (technical difficulty) that it would be, expected to be, a reversal in early '05?

No. We agree with you. There is somewhat of a seasonal effect that we usually see in quarter 4 (indiscernible). But no, there is no onetime effect with any one known customer, not that we are aware of and we should be aware. It is just normal business you could say. Then tt is another season after quarter one again of course.

Okay. Second question is, when should we expect to see the net finance cost starting to come down? You have obviously been paying down your debt, 50 or (technical difficulty) a quarter. Will we start to see an impact from that at all from your net interest income line?

Sorry to say that it will take some time because what we are repaying is our short-term debt with short-term interest rates. So what we then still have left is fixed-rates, so it will take another year or so before we can see the interest rates go down for Autoliv if we not decide to repurchase some of the debt in advance.

Right. And then looking at this issue of the higher R&D costs and also the payment terms that you referred to on an earlier question, perhaps moving forward, for a couple of years now we've been seeing the higher R&D costs. Now we've got the issue of payment terms. The promise of course was that the higher R&D costs would come back through higher piece prices eventually, so a couple of years in on that, and now we've got pressure from raw material. When, and I'm sure you're tracking this as well, when people have asked for you to pay for some of their R&D, when would we expect to see it coming better in pricing in your top line? The fear of course always is that you never actually get it. There's something that comes up and you just have to pay for the R&D and you don't get the return?

We are actually seeing some of it because you know we measure those internally (indiscernible) contribution. And in spite of all this material source contribution, it is same or slightly up. So we do see some of it. I won't be able to tell you exactly how much because some of it gets lost in negotiations for new orders but it is there. Not all of it, but some of it.

Is there a particular period which should move through the curve and get a fuller period of benefit or does it just dribble and we actually will have the hit in R&D, but we never (technical difficulty) benefit on pricing?

I think you might remember when we said we're going to have to look at the EBIT line because that is really where it should all come out because we're going to have higher R&D. A chunk of it, we will get back on the gross profit. But when we come down to the EBIT line it should all be compensated. And EBIT is up, as you have seen.

Okay. Just one final question. Where are we on Safe-by-Wire? Again, sort of speaking to one or two of the other companies that are in the consortium area, I get the feel that it is not a free available product for perhaps you to use to help with your active-passive safety work. Is this something that is critical to your strategy going forward, Safe-by-Wire, or do you have alternatives or what is the latest reading on that?

I understood the agreement that we should have a standard and that should be then able for everybody to use. So if you have a sensor in the vehicle for one application you can use that information for other applications as well. It will really be up to the vehicle manufacturer to decide how he wants to use that and when he buys the sensor he will have to discuss that with the sensor supplier.

But is it critical -- I mean do you have alternative plans in your strategy that doesn't solely depend on that? I guess you do in terms of radar and so on.

Sure, but you have a sensor there and one sensor supplier says that he restricts the OEM to use the information from that sensor to his own application, under the supplier's application only. I think the license is that the OEM, the vehicle manufacturer, will use another sensor supplier in that case. You brought this up with me once before and I have not looked into the details, but that is my interpretation and I will be able to give you a fuller answer next time we talk when I have had the chance to check the facts with the experts. But that is my interpretation for the time being.

Okay, thanks very much.

There appears to be no further questions at this time. I will hand the conference back to you, gentlemen.

(indiscernible). Thank you very much for the attention and the questions and (indiscernible) we will talk to you again on April 21st, when we have the first quarter. Thank you very much and have a good evening.

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