Autoliv Inc (ALV) 2005 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Q2 2005 Autoliv earnings conference call.

My name is Sean and I'll be your coordinator for today.

At this time, all participants are in a listen-only mode. [OPERATOR INSTRUCTIONS].

I would now like to turn the presentation over to your presenter, Mr. Lars Westerberg.

Please go ahead, sir.

Thank you very much and good morning to you in the United States, good afternoon to you in Europe.

First of all, I would like to apologize.

Seems to be some misunderstanding between ourself and the phone company, Genesis, here, which number they should call.

But nevertheless, we get started now.

Sorry about the delay.

As usual, our presentation, that we're going to present initially here, about 20 minutes or so available is available under the financial info on our corporate website on the internet.

So, financial info, the packet should be already there.

Turning the page to the Safe Harbor statement, it's nothing we go through but it's part of the presentation today.

Next line shows you the sales trends we have had the last quarter here, and as you know by now the sales is up about 5% compared to the same quarter last year.

The regional mix has been kind of negative for us for Autoliv, where western Europe came in 2% below the expectation and as you are going to understand later on, unfortunately, we believe that that trend for western Europe will continue in Q3 and possibly disappear in Q4.

The past quarter has been somewhat unusual too from the point of view we had a very weak April in the United States then a weak Europe in May, and then finally, in June, we had strong amounts across the Company, going to be reflected in our receivables that we have at the end of June.

From a regional point of view, you could say the big growth is in Asia-Pacific where we have an 11% year-on-year organic growth, disregarding then, all sorts of acquisitions, currency exchanges, et cetera.

Turning the page, please, and have a look at sales in Q2, we tried to recap here what happened, compared to the prospects that we gave you for Q2.

As you may recall, we indicated that we thought that we would look at a foreign exchange advantage of about 7% in organic growth, about 3, coming up to 10%.

And that would have given you a sales estimate of 1.735 or $1,735,000,000.

What happened then was that the dollar strengthened considerably during the quarter and, of course, the currency effect that compared to the guidance was a negative $55 million.

On top of that, what we should have told you, which we, I'm sorry to say, we didn't have our eyes on, was that in Q2, we still have a little bit of a seat sub-system plant and that has kind of taken down the sales for the time being, it's a sunset business, we're going to step out of it, but we do it gradually.

The only thing remaining now after Q2 is the seat sub-systems for the Volvo XE-90, and that is a drop of $14 million.

If you take the occupant restraint business itself, we fell short about $12 million compared to our guidance.

Because we reported, as you saw, $1.655 billion.

So, totally, about $12 million less than expected or 0.7% ,and the explanation is quite simply that western Europe came out considerably weaker than expected.

On the next slide, you have another way to put it, basically.

Here we have, as you see, the prospect we thought the currency would give us 7%, actually it came out to be only 3.

The organic growth in restraints, we thought should come up to 3 but came out at 2.

We have here the seat sub systems and the compensation of some seatbelt joint venture in China, they even out.

This is just to simplify it.

Not as dramatic as you may think when you look at the sales estimate of 1750 compared to the actual of 1650.

Really, it was 0.1, 0.7% shortfall.

On the next slide, we have the organic growth versus the vehicle production, and you can say that our sales in Q2 came in in line with the live vehicle production.

The seat sub systems that we mentioned before, plus the external and the low number inflators we have talked about before, the two together, we had a drop of about 2%.

So can you say the core business we're active in, namely airbags, seatbelts, steering wheels and electronics was up 3% year-on-year in sales value.

On the next slide, you have the light vehicle production.

I think you could say that North America came out somewhat better than expected or less bad or whatever you should put it.

The major difference was really the big 3 went down 5.5%.

We had estimated they would go down 7%.

In Europe, we have, as you know, two trends here.

We have western Europe here that came out roughly 2% worse than expected.

At the same time as eastern Europe came out in line with expectations.

But overall in Europe it was somewhat weaker-than-expected.

Japan came out more or less exactly as expected.

As you know, 2% in western Europe, that is about, since we have 50% of our sales in western Europe, that's 1% of our sales and that again, explains the difference in the organic sales increase.

On the next slide, we have the market shares and the unit sales, seatbelts are up as you can see, 5% which, again, indicates that given the market was pretty flat, 0.3% increase, we again took market share in the seatbelts and we dropped some market share in front-end airbags and, again, gained market share in steering wheels with an increase of 17%.

To take the head airbags and split it up, you can say that inflatable curtain, they were up 33% in the volume terms and about 36% in value terms.

And I just anticipating the questions about ICs in the U.S.

They basically doubled in units value -- in unit terms, and in value terms, they went up about 85%.

So gains and seatbelts gains, the steering wheel and somewhat of a drop on the front-end airbags, unfortunately.

Next slide, the gross margin happy to be able to report we did compensate the steel price increases, they came out to be $26.5 million, and they were fully compensated as you can see here.

Essentially for two reasons: First, we believe that the low-cost structure that we're implementing, moving a lot of labor and overheads to the so-called leading cross-countries, has worked out and also, we're getting somewhat reimbursed for engineering costs that are nowadays paid over the [fees pot] than directly up front.

We should also say here, that when we look at 21%, which as you can see it's a very healthy figure, this figure has benefited about 0.3% because of reclassification from the production overheads down to research and development.

So, you could say that it's really more like 20.7 if you want to compare it to last year.

But, nevertheless, we did compensate the whole steel price increase we had.

So, in view that that is about 1.6% of sales, we are happy with that development.

The next slide gives you the operating margin or the EBIT margin.

We ended up a little bit in between, you could say, we guided about 8.3%, seemed less in Q1, and last year we had 9% and we ended up like 8 .7%.

Part of the explanation is of course, that these seat sub-systems that we mentioned is a business where we are basically trying to have a zero cash flow and in EBIT, that is pretty much zero again, 3010 is the EBIT.

The lower margin in gas generators we're facing offers the same story.

Even if we lose that sale, it's about 2% and doesn't help a lot when it comes to EBIT.

The EBIT stays just the same.

Last year we did benefit from a long and temporary decrease in the sales and administration costs.

The true underlying is pretty much the same as last year, 8.7.

We should also note here that this figure, 8.7, we have had plant closure costs in the Q2.

But, they were offset by a release of some provisions we had, and those provisions were totally unrelated to plant closures.

They really had to do with the, we had a court in the United States that came out, an appeal that we made was approved by the court, you could say, in the U.S., and therefore, we had to release some resource.

And they just happened to even out.

The difference between the two is less than $1 million.

On the next slide, can you see the income statements where we say the sales was up 5% and as you saw before the gross profit was up 7%, compared to last year.

The the SG&A we had 4. 7% came up to 5.1.

But again, then, we had a benefit last year.

So they are not too different, really, in the underlying trends.

On the RD&E, we had an uptake from 6.3 to 6.7, but that is really composed of two factors.

One is the reclassification from production overhead to RD&E that we mentioned before, and the second is the ongoing trend where the OEMs do no longer pay for the engineering.

We have to take as cost, and then charge it to the products, which then is helping us from the gross profit point of view.

EBIT come out to $144 million, which actually is the highest figure we have ever got in a single quarter.

So, regardless of all of the problems in our industry, it actually was a record-breaking operating income.

Financial costs are up quite a bit.

Mainly because we have at the same time somewhat higher interest rate and also a little bit higher average debt, and I am told the interest rate will only go down sometime during 2006.

Because what we amortized today would only be the variable interest costs and very short-term, and they're very low as I'm sure you're aware.

The next slide will give you the return on equity.

We are holding here in just a little bit north of 13%.

If you take the last 12 months, we're just a little below 13%.

Actually at 12.8%, and 12.8% has forced imposed tax return on equity.

The next slide is the return on capitol employed, sales turning up quite nicely.

Even if Q2 is a 0.5% below last year.

The last 12 months we're running 16.5.

And, again, if we just took the return on the tangible assets, the ones we can really manage, we're close to 40% return on tangible assets in Q2.

Overall, 17.9 or close to 18.

And the next slide then, the key figures.

Earnings per share, $0.95, $0.94 per share.

Same as last year.

Working capital actually did go up 0.5%, but we're still below the 10% we have as a target, and we are presently running 9% of sales and the capital employed is totally unchanged or, even on the million unchanged.

The net debt, as can you see is up $86 million, and that's because we have paid out, among other things, a $93 million we have spent on dividends and buybacks.

That explains the net debt increase.

Head count, we had a very nice development here, the high labor costs counted went down about 200 persons, compensated by an uptake in the low cost or leading cost, 100, and it's even better as you are going to see later on if you take the full first half.

Next slide gives you the longer-term cash flow.

The compared 2004 with the last 12 months, you can see clearly the working capitol went up quite a bit during the Q2, alone here.

We've got $110 million higher working capital, essentially explained by receivables, and that is in itself explained by a relatively weak sales as I said before in April and May, followed by a real strong June that has not become due yet.

So that is your major explanation.

What else here?

The net cash flow target we have of $250 million after Capex is still valid and the Capex as you can see, running rate for the last 12 months is 320.

We're still saying that we think it could probably end up like $350 million, though, but wee not overrunning, at least not the last 12 months.

Next slide, is the return to shareholders and as we said before here, we had another $93 million given back to the shareholders.

We did view the quarter by 1.4 million shares, we paid on average $45.50 roughly.

And for the full first half year, we had buybacks and dividends amounting to $151 million.

The next slide shows you the stock buy-backs that we have of the present authorization.

We have another 6.3 million shares remaining and what we have been buying so far is about 13.7 million shares, that started all at $0.60.

All in all, we have spent $419 million on share buybacks under the present authorization.

Next slide gives you the raw material follow up and then we really came up to exactly where we stood, where we thought we would in Q2, so we had them compared to the start of last year, we had an increase of $30 million but compare Q2 to Q2, it was more like 27 or actually 26.5, and then the general opinion we have for the time being is that prices in general and also our sales prices are heading down, but as I think we said in the last phone conversation, unfortunately that won't help us a whole lot this year because 2005 is pretty much locked in already.

It might have some marginal affect toward the end of the year, but by and large, it's going to be what it is already, and the benefit, if any, will be coming next year only.

Next slide, we had the same slide as last year, again to emphasize that even if we have the sales price increase, we are not seeing overall higher material costs.

They're going down by about a percent, but they're not going down as much as they used to do.

They used to go down 3% and we believe we're going to have to settle for 1% during this year.

Next slide again, the slide we had from the capital market base explaining our ambition here to move a lot of the sourcing to the cost comparative countries where we are presently running some 18, 19% of our purchases in the lower cost of the competitive cost countries.

We believe that at the end of next year, we should have that figure up to 30% and the target is to get up to 50% in 2008.

We're not quite sure if we're picking the lower hanging fruit or not, but we're seeing a fairly big difference, like 10, 15% lower prices in eastern Europe and western Europe and particularly Asia, the benefits are even more than those 15%.

Next slide is the follow-up on the employees in the comparative cost countries, or leading cost countries, during the first half, Autoliv employed another 500 persons in the leading cost countries, but we were able to take out 700 employees in the high-cost countries.

It might look like we were slacking off because we have two quarters in 2005, compared to the other ones which, of course, are full-year.

So the trend, if anything is stronger I would say.

Next slide gives you a where do we end up shrinking and increase the head count.

The United States, U.K., Australia, Canada, and Sweden are the 5 largest cutbacks, you could say, and where we end up picking it up is Poland, Romania, China Estonia,and Turkey.

And the net of all of this is 150, but the biggest advantage is of course, that the cutback is 700 persons in the higher cost countries.

For then, come to the next one, showing the savings we have obtained from all of these moves to the lower-cost countries, the cost savings and we have here calculated that in actual fact.

On average, fully-loaded costs in the lower-cost countries like $9,700 per head, where as closing in on $60,000, call it six times as much in the higher-rated cost countries.

The gross savings are $390 million, and then I compare the situation 2004 with the situation in 1999.

Then it's unfortunate that there are some costs in connection with these two.

The freight up, sorry, the freight in goes up from 1.9 to 2.1% of sales and the freight out goes up even more from 0.8 to 1.3% of sales.

Plus, we end up paying more duties here and there, and all in all, that is about $60 million, $62 million more cost, so the net savings we have obtained from all of this moves relating cost country is about $330 million and then, again, if you put it in perspective, that's roughly 2/3 of our EBIT in 2004.

And, therefore as can you see on the next slide, we are continuing to move, and these are the three largest moves we have for the time being involves about a reduction in head count of about 1,200 in higher-related cost countries.

As you can see, we believe that the total cost will amount to some $25 million, but the good news, is that we have already taken 16.5 of those.

Remaining during the remainder of this year plus essentially the first half of next year is about $8.5 million.

And generally speaking, if you want to simplify, can you say the payback on all of these is about one year, roughly.

Well, now looking forward on the core product of the stock situation in the united states in the next slide, I think we're all aware in the U.S.

That there was a big selloff, particularly by General Motors here in the month of June, and we have now 76 days when inventory shrank all the way to 58 days of the inventory.

The cars are presently at 49 days and lightweight trucks at 65 days, and I believe this is the first time in 22 months where the inventory's below the 10-year trend line, which believe is good news, again for the third quarter.

Turn to the next page, we can see the production that CSM believes in North America.

First off, we can say the Q2 came out better than we thought, as we said some minutes ago.

We had anticipated a reduction of 1.6% and ended up about half.

Again, the reason was that the big three made it a little bit better than expected.

Total for the year, the expectation is 315.7.

Not changed the last quarter.

Perhaps we can all see, now having added the expectations for 2006.

The anticipation is a slight pick up of about 300.3 million vehicles.

The next page gives you the similar slides from Europe.

And the European production was to assumed to go up .8% and ended up being 0 and all of that is really an increase, you could say in western Europe, which went from plus 1 to minus 1.

The same pattern here, the forecast for the complete year is 20.1.

But you can see that the third quarter looks pretty crummy here with the reduction of the 3.2%.

Unfortunately, that's predominantly western Europe where we have a lot of sales.

We can also see that in 2006, we should have a pretty nice increase, half a million vehicles and mainly built in eastern Europe, but those are also some cars that will end up in western Europe, some pretty well equipped cars.

Finally, on the next slide, you have Japan.

They have no news.

Q2 came out as expected, the full year is as expected and 2006, no major increase and 0.1.

Therefore, finally, when we are trying to give a forecast for the current third quarter of 2005, we believe that if, if it's true that we have a 6% decline in western Europe that will hurt us with 3% of sales since we have half of our sales in western Europe, and on top of that, if the current exchange rates prevailed, we want to see another drop of 1% because of the foreign exchanges.

Western europe, minus 3; for us, minus 1.

We hope that we compensate for all of that and that will produce a flat sale despite of the falls in western Europe.

The underlying EBIT margin we think should be about the same as we had last year, which is 7.5%.

We're going to have a little bit of restructuring costs as you saw on some previous slides and it's not exactly which one they will come in but estimate it will be something like the 0.3%.

We will end up in that, if that is correct, we'll end up with a 7.2% EBIT margin, for Q3.

That is not exact at all; it's an estimation from our side.

And with that shown, we're ready to take questions and we're going to do our best to answer it.

Thank you, sir. [OPERATOR INSTRUCTIONS].

Your first question comes from the line of Scott Merlis with Thomas Weisel Partners.

Please go ahead.

How are you?

We're fine, thank you, how are you?

Fantastic.

Your gross margin was pretty impressive, given the hike in steel cost, but I'm trying to understand, and you did a good job of laying out your plant closings and cost reductions on slide 23 and 24.

Just trying to understand the timing of some of the actions, the cost savings in 23 and 24.

Does a lot of the cost savings fall into '06 essentially or is there anything in fourth quarter?

How gradual is it?

I, it's very gradual as can you see on the, I don't know what slide number it is.

But where have we shrunk the most in the high labor cost countries, and clearly number one is the United States.

And they are not influenced at all by these 3M projects we're running.

U.K. we have a little already, Australia a minor bit and France not at all for the time being.

In France, we're still negotiating with the unions and Scotland, we don't know exactly where the costs will end up.

We're trying to give you guidance.

The bulk of the majority remains to have, actually.

So there could be an '06 effect?

Clearly.

Yes.

Clearly it will be an '06 affect.

Okay, and it's meaningful.

Moving to the top-line, when you look at your organic growth, are you able to comment at all on the general pace of '06 launches that you see in your existing backlog and that new business for '06 versus '05?

I have the launches in '06, and there are lots of them, but many of these launches are platforms that we already have so they're not incremental, you could say.

I would say that thee incremental may want to buy?

Kia and Honda and stuff like that.

Many of the European platforms like to take the small [personal] PSA 207 and so on.

Yes, that's a nice $180 million a year kind of platform, but you know, we already have the present one.

Yes.

Right.

Regarding some answers.

In terms of, do you see content growth in western Europe when you look at your '06 backlog?

I think the western Europe we're seeing, we probably are as big as we're going to get in Europe, actually.

We have about half of the market and I don't think our customer want us to be bigger.

If there is more value per car I couldn't offhand tell you.

The western European one is where we will be fighting to keep it steady in all of our terms.

Okay.

And on the CSM forecast for western Europe production.

That was issued, was that issued in July?

No -- well, yes.

This is brand new, I would say.

It's a J.D.

Power LMC.

Forecast actually --

Brand new, actually.

Must have been a couple of days old only.

To be honest with you, Scott.

We have a problem because we're reporting a little bit too early.

Our lady Veronica has to call around to sort of drag out the statistics from the various suppliers like JD Powers, LMC, and so on --

Got you.

Usually we get figures not yet published.

Right.

Because sales were very -- up 4.5% in June.

So I was trying to figure out if that was incorporated to the new forecast.

You mean North America?

Europe Europe had a strong sales force in June.

It might be in their forecast.

I'll have to look into that.

I can't say that I know for sure.

You'll have to ask Veronica.

She's just sitting here looking like a dead fish.

We'll take the next question.

Thank you.

Thank you.

Okay.

Sir, your next question comes from -- to you from the line of Lee Cooperman, Omega Advisors.

Thank you, let me figure out how to get this off of speaker.

One second.

Can you hear me now?

I can hear you now.

A few housekeeping questions and then two more substantive questions.

On the housekeeping questions, as I read the release on page 7, was there not, in fact, $5.5 million pretax of non-recurring costs absorbed in the quarter?

You broke out in the footnote on page 7.

So should I look at that as 5.5 million of non-recurring items?

Is that -- let me just shoot out the question.

Okay.

Okay.

Not recurring.

We normally put severance charges under income and expenses, but if you will see them as non-recurring or not, I would say the shut downs and plant closures.

It's unfortunately a part of our normal business.

It's one-time, but regular on the other hand.

Got you.

The total cost of shut down is about $7 million.

Got you.

Including what you see broken up.

There will be some other one-time recurring the next quarter.

Okay.

Theoretically, there was 5.5 million of incremental cost.

Second, what would be your best guess, again, these are housekeeping, and the more substantive questions are second.

The Capex and D&A for '05 and '06 if you had to make estimates for the full year.

If we had to make estimates, would say we think it might end up a little bit south for the 350 million of this year that we anticipated earlier and I think 350 is a good estimate for next year.

A lot of those into remaining in China for the time being.

Right, and your D&A I guess would increase from where it's running, I guess what, 325, 330, something like that?

Yeah, it will be a Main -- slightly.

Right.

The 350.

The 350 will be slightly above this year's D&A.

Correct.

Exclusive of working capital changes, most of your net income will be free cash flow.

Yeah.

That's correct.

That's correct.

Okay, what was the Euro-dollar exchange rate in the quarter that was used to arrive at these earnings?

1.25.

1.25.

Okay.

What is the actual presently outstanding shares.

Not the average for the quarter, but the presently outstanding shares?

It's 90 million.

90 million.

Okay.

Now for the more substantive questions, reading your material, it looks like we have not lost market share.

I wonder if you can shed light on this.

I notice on a year-to-date basis, TRW stock is up 24%, our stock through yesterday is down 2%, for the year.

It's a little bit more than that; it dropped this morning and they're selling at 3 PE points higher than us on this year's estimate and 1 PE point higher than us on next year's estimate, and we seem to be an inherently more profitable company.

You have any explanation, any view of that?

Not really.

Possibly that they believe in the, the investors believe that there's more upside, because TRW have a couple divisions that are not doing well, as you know from an EBIT margin point of view.

That should give you some upside, if you're optimistic, of course.

Got you.

Now to the more significant question.

If you look at your page 17 in your handout, you show the average price paid for the shares repurchased and you can see a clear trend.

You pay 20.92 in '03, 41.88 in '04, and so far in '05, 46.92.

That's correct.

In your signature, you said you're comfortable operating with a net debt significantly below EBITDA.

I calculate you're .8 and declining.

Your interest coverage, you have a desire to operate significantly above 2.75, 18 times an improvement, and you say on your website or a recent presentation, I forget which or both, you have as much as $900 million of additional gearing available to you.

I'm curious, if you think you're going to grow the business over the next three or four years, and that we're going to become a more bigger, more profitable company, which is why we come to work every day, why would you not use this balance sheet leverage today in a more significant way to buy back stock rather than wait and do it over time and pay higher prices?

I would like you to think like owners and be opportunists.

We have the lowest interest rates, or near the lowest interest rates in our lifetime.

You have a large dividend stock.

Your after-tax costs of your dividend versus the after-tax cost of borrowing would leave a more aggressive stock repurchase program, not any different from the cash flow standpoint, and I would implore you and your board to sit down and think about this in more detail that I think a much more aggressive attitude towards repurchase is in order unless you think the outlook for your business is not as favorable as one would assume.

I have been assuming personally that worldwide auto production grows a couple percent a year that you pick up 5 or 6% from content.

You know, you got a little bit in pricing and that maybe we're 10% growers, 11 times earnings with an underleveraged balance sheet and wondering whether you guys have a different view and whether the board should focus on this in a more significant way, and I appreciate you listening.

Yeah, and let me comment shortly that we're discussing these topics all the time.

As you can see on slide 16 and 17 as referred to.

We have speeding up to the payouts to both dividends and share buybacks.

When it comes to both dividends in 2003 and buybacks you can say stronger, when we stopped in, start it again in 2002 where we increased every year, the numbers we have bought back.

So we're considering and trying to, in the best way.

Your next question comes from the line of Himanshu Patel with J.P. Morgan.

Hi, good afternoon.

I had a question about your business backlog over the next few years.

If you look at the, some of the launches that you announced in the second quarter in the press release there is a decent amount of Big Three business coming onstream right now.

I'm wondering is that reflective of your backlog in '06, and '07, i.e. is the mix of domestic Big Three versus transplant penetration rate moving more towards the Big Three over the next two years?

It's not moving more than the Big Three, actually.

I would say the opposite.

For North America, it's more on the transplants in the pipeline and we're running as good as 50/50 in the United States today, between transplants and Big Three.

In the seatbelts, it's predominantly Big Three and always has been.

Okay.

And what about you mentioned earlier you're losing share, you're losing share in the frontal airbag business.

Correct.

Is that to TRW?

I don't know who it is to, really.

But it really, it ties together with the way that the customers buy.

Predominantly, they split it up intosystems, like frontal systems and side systems, and seatbelts and we have been very, very strong with side systems which, we think is to the advantage of the company that normally there are four airbags on the side.

Two thorax and two head-side airbags, with only two frontals.

If you're concentrating on the sides, you will inevitably can lose frontals and vice versa, I would say.

Last question on margins, excluding the cost of the plant closing in the third quarter, you're guiding to roughly flat margins in Q3 and looking at what you did in Q2 and Q1 and then on an underlying basis, you're flat or above a year ago.

I wondered why would you guide to flat margins in the second half when the steel comparisons are probably easier, North American production comps are easier by then.

Well, you know, we have a negative to start with from the point of view, the western Europe where we make a lot of money, it's going to go down, we believe, about 6% in volume, corresponding to 3% in sales.

That has to be compensated on other parts of the world and some might be profitable, some less profitable, of course.

That's four counts for a big decline in western Europe in Q3.

That concentrated on any OEMs where you have high exposure or is that across the board?

It's across the board.

Okay, thank you.

And then if I can take the opportunity to answer Scott Merlis' question regarding the strong sales in June, are they reflected in the forecast for western European production and I think you mentioned the 34.5%, Scott.

They should be is the answer back.

Our statistics have come after that funeral was published.

Your next question comes from the line of Thomas Besson with Merrill Lynch.

Yes, it's Thomas.

I have a couple of question.

Could you please update us on your new products, your move toward more safety, please, and mention if you have any plans besides the increase of cash spent to buy back shares or income your dividend and make an acquisition on that side.

On the acquisition, on active safety, we are continuing as you're aware, the system.

We'ree also concentrating fairly much on precrash sensing and precrash systems.

We're not working with ESPs and we're certainly interested to make that one.

But one can also make joint venture corporations.

I hope that was not the question you asked?

Yeah, that's the question.

And your next question comes from the line of Christian Breitsprecher with Deutche Bank.

Good afternoon, it's Christian Breitsprecher with Deutsche Bank.

I have a question regarding the working capital.

You highlighted it, the strong business in June led to an increase in receivables and working capital requirements.

When we look at your consolidated balance sheet, receivables didn't really go up versus the end of March, and inventories were down versus the end of March.

It's really the other efforts, which increased significantly, so first question, could you explain more what is behind it and what is behind the increase in other current assets and secondly related to that use, do you still feel comfortable with the target to generate about $250 million of free cash flow in the current year?

Okay, regarding the working capital the balance sheet is made to end the foreign exchange rates, which means that if the U.S.

Dollar strengthens our receivables in foreign currencies goes down in value.

So, when we talk about the cash flow and change working capital, it's the average rate, the best reflection of the development, and in other current assets with a strong increase from the end of March to the end of June, we include financial derivatives r related to the Euro bond loan that will increase in May next year, going from the other known current assets in March and then have been released to other current assets, which is not -- [audio problems]

We talk about the value of the derivative of $105 million.

That explained the whole difference between the end of March and end of June.

And that's not included in the working capital.

Okay.

And coming back to feeling safe and generating the $250 million free cash flow, yes, we believe we have an opportunity to further improve the working capital in the third quarter.

So -- .

Still in our target.

Yeah.

Okay.

Thank you.

Your next question comes from the line of Adam Jones with Morgan Stanley.

Thanks.

Good evening, gentlemen.

I have a couple of questions.

The first is the difference between your growth in North America versus the growth -- growth of the overall North American production environment.

In the first quarter, you outpaced by 5% the market.

In the second quarter with production down less than 1%, you were flat, so you only outperformed the overall market by basically 1%.

Does that explain by the shedding of the seating sub-systems or is there something else that we're looking at there?

That's my first question.

Okay.

Should we take that one first.

The North American, the external inflated we're talking about is roughly 1% in sales.

All in North America, and that is the lower margin inflators.

Once upon a time, they were manufactured by the OEA company in Denver.

That's something that is not part of the airbags, these external inflators and limited to North America only.

The seat sub-systems, they're really in Europe only.

And, therefore, you could say what you're looking at is an organic increase as we stated in the report of 1%.

Actually, it's more like 3%.

We had seat sub-systems where we're minus 1 and the external inflator was another minus 1 and the base as we said, airbags, seatbelts, steering wheel and electronics are free.

Okay, second question is on the supplier reimbursement, can you quantify the magnitude of how much that helped in this specific quarter?

You want me to repeat the question?

It's as good as impossible to make, actually.

Okay.

Fine.

We can conclude it's part of the explanation where we can keep the gross profit up to a similar or even slightly better level than last year.

I think in the past, though, in terms of quarter-to-quarter, the order of magnitude, though, was if I remember correctly, single digit, million or low single-digit million dollar amounts.

Is that a fair assumption?

I could not answer you, really.

Yeah.

I don't know.

That's okay.

Let's go to my final question, then, the timing and the magnitude of what is left in the shedding of the seat sub-systems business.

I didn't catch you on the, in your opening presentation if you quantified that and how much longer that would take why we have these.

I know you're saying it doesn't contribute to the operating line but to try to predict the organic growth, just to predict that.

Right.

Okay.

Well, what remains today and after the quarter, too, here, is more or less an operation in the order of $75 million.

It's predominantly seat structures for Volvo XE-90, and it's going to run as long as the XE-90 in its present shape is running, and I would say 2008 or 9.

The closure of the plant is already in the balance sheet and you inflate them when you lay off people.

It doesn't really cost you anything as long you give them notice.

Okay.

So it's not a near-term thing.

This is going to run to '08, '09.

Yeah.

If we're look into the rest of the year.

We won't have further shuttings, is that fair?

No, we're going to have essentially, run with the volume now and if you have an estimate, did you see how many are sold, Volvo XE-90s that are sold.

It's directly proportional.

We have in the meantime, we have consolidated the whole operation into one, which I believe we did last year.

We shut down the other plant, sold off the plant.

I don't believe there are anymore one-time costs to take.

Okay.

Thanks very much.

You're welcome.

And your next question comes from the line of Austin Earl with Newman Ragazzi & Company.

Yes, hi, good afternoon.

I have two questions, perhaps if I could take them one by one.

The first is regarding the engineering reimbursement and the R&D reimbursement.

I'm getting confused with you saying you did get a reimbursement and the other with an OEM delaying reimbursement.

I was confused.

I wondered if you could help me on that.

Absolutely.

If you go back a few years in time, normally when we engineered, take whatever airbag is passing you, for instance, the customer, the OEM paid for the engineering and also for the tooling and we delivered to him and he owned the tool and the design.

Today, he normally doesn't pay for engineering but still pays for the tooling and then he claims he will pay us for the engineering over the piece pot, meaning next day, the animation should have been $25, maybe we'll get $27.50 or something, so he will pay back the engineering over the lifetime of the product.

It -- he's safe, though.

Wheeling and dealing.

We end up giving away the engineering costs we should have been getting back.

Nevertheless, it helps a bit and helps to offset the cost, even though I think the lower-cost structure is needing the largest explanation.

So, what I'm confused by is what did you mean by reimbursement that came through just in the quarter.

If you're saying it's coming through on higher prices, how do you sort of measure that on a quarterly basis?

Maybe reimbursement is a bad word then.

Really what it is, we get to charge more than we would have normally have done because we have to pay the engineering from out of our own pocket and therefore, we get the charge more on the product and theoretically, once we have shipped the whole product, we have all of our costs paid.

Okay, and on the R&D, is that very -- similar?

On the R&D, we paid ourselves.

Research is something we do on our own accounts.

Development, research is -- is on our own account.

Development is with the customer.

We come up with an idea and we get the customer interested and develop together.

What I spoke about was the bulk of the cost which, is the engineering.

Okay.

The second question I have was just regarding the slide you that present on the benefits of moving to competitive cost countries.

I think it's a useful guide to get the absolute euro as well, the absolute dollar savings.

I wondered on a return on capital basis when you take into account the costs of closing an account in western Europe and building a new one in eastern europe, wherever it might be.

How, is there any way of sort of comparing on the return on capital rather than on absolute millions of dollars?

I think the difficult, the only thing we can see both of us is a return on capital employed is still trending up nicely.

Okay, but I mean you didn't think in the slide that you presented at least maybe putting an interest cost to do with the extra capital expenditure?

No, this is strictly the -- the costs we took here was did rent costs, salaries and all types of practices related with salaries and so forth.

I was all afraid out, all dues is paid, but then we have also assumed that the material costs, if the same in a high-labor cost country and a low-labor cost country.

We're trying to explain all the moves we have made have given us net $330 million.

You are right we have had to spend some, of course, on plants.

I would say much of the machinery, though, we have spent less than in high-related cost country.

As the labor cost goes down, you know, it's less interesting to pay for a lot of the equipment.

But maybe I can ask a slightly different question on the same theme.

The plants you're closing in western Europe, are these plants that are going to be closed anyway?

Are they relatively young plants or old plants being closed?

It's a mixture of everything Some of them we own, some of them we don't own even.

So see, we ended up leasing.

I would think we have too many new plans, the negative.

We have cheaper, less expensive production equipment, that's a positive.

I can't tell you the balance offhand.

Okay, that's great.

Thank you very much for your help.

Thank you.

And your next question comes from the line of [Patrick Lindquist with H&Q.]

I have two questions remaining.

One is just to get a firmer grip.

We have seen a lot of growth excluding car production now.

Do you see any reason why this trend should change looking beyond third quarter?

You indicated --

Did you say your question regarding the sales trend, Patrick?

Yeah.

Yeah.

I mean sales growth.

If you look at the sales, the growth excluding car production, I think, coming down and then the second quarter and you look at it coming down as well.

The question is if you look into your order book and look ahead, is there any reason to believe that this trend of growth -- you have been talking about, should change beyond the third quarter?

In Europe, we think, as we have said many times, we believe that we can't really grow a lot more.

Wee probably about half of the market here, and we don't think our customers will allow us to get any bigger, actually.

I think we're as big as we're going to get in Europe.

If the European car production goes up, we'll go with it.

When it goes down, we'll also go with it.,because we're as big as we're going to get.

In Asia-Pacific, though, we're going to grow, of course, we'll continue to grow and will continue to as long as one can see out, at least '08, '09, we should grow nicely.

The United States, we have a chance to grow as well and we are doing well with the transplant.

Japan, we probably left them out.

As you know, Toyota is like 45% of Japan Domestic and Japan, they have their own production of basically own products.

Seatbelts and gas generators.

So, we are approaching a limiting force in Japan, I think, without knowing.

Okay, ex-Europe, there is no big contract coming on the screen, say fourth quarter,, looking ahead?

You go -- but I mean it's more like a general Asian growth and what have you.

I would say so.

There is no big huge contract coming to -- that would change the total picture.

No.

Okay, final thing, if you could just give us a feel for, on the side-curtain side in Europe, what has happened there in terms of pricing and the material of the product, because I mean that is getting more of a widespread product.

Is it happening anything particular on pricing and competition in the market?

The magic piece of paper going to give you an answer. [laughter]

But this is not the forecast.

This is a history here, and in -- Europe we had a increase of 22% when it comes to the IC.

The units.

Yes, also more or less in sales values.

Roughly than, Patrick, advance 20, 22%.

We change the prices here and talk -- talk more about prices.

It's more dependent whether it's a big curtain or a small curtain that we ship,so it's a mix affects rather than the price.

I think that is actually, there is a price decline here, because it's new product and then you always have a higher price decline.

I hope you got that, Patrick.

It's about 20, 22% both in unit and value in Europe and must try to explain here that the size of the car has a lot to do with the price.

Per unit.

And that is increasing at the accelerating pace?

Well, I mean, it's going up in Europe clearly but not going up as fast as it is in the U.S., but having sai, that of course, as you know, the U.S.

Is starting from the volume that is less than half of the Europeans.

Sure.

It's small numbers and you can say we double the volume in the U.S.

But they're still way behind the European.

I'm just trying to get a sense for the actual price aside, you have the mix in the U.S. -- .

In the U.S., we have the volume doubled and the value went up 85%.

Sure.

Thanks.

In total, about 3 million.

And your next question comes from the line of Richard Haydon, Omega Advisors.

Good morning, one short-term item.

The tax rate expectation for the remainder of this year, and then could you spend a moment in trying to help us better understand what your thinking is for incremental profit margins in '06, relative to steel prices coming down and labor costs coming down, and then if you could give us a few moments on new products.

Yes, the tax rate in the quarter was 33 1/2 and we expect it to be somewhere in that order of magnitude for the year.

It could be slightly down given positive outcome on certain tax dollars.

At the same time, we're also now investigating the effects of the new jobs creation act in the U.S., which could also lead to that we would have one-time extra tax charges this year, but that's not decided yet.

So the forecast now is 33.5 or slightly, slightly lower.

That was your question about the tax rate.

With regarding incremental profit margins, we generally don't make forecasts for 2006, but clearly if the steel prices would go down dramatically that would help us to the same extent they have been hurting us this year, and actually we're pleased by having a decent volume after all.

We have 1.5% with extra steel charges this year.

Now yeah, you're right that.

Is an opportunity to grab next year if the steel prices really start to go down.

We don't believe they will go down where they used to be.

They're probably going to end up somewhere in the middle.

Finally, your third question, new products.

There is lots of them even though I would say nothing that is so revolutionary or mindboggling.

We have low-risk deployment airbags, we have steering wheels, we have thermal steering wheels, we have pre-tensioners coming up, we have [pocket] pre-tensioners coming up, and we have the night vision is being launched as you might know right now, together with BMW, and it's actually described in the home page for BMW since last week, really.

So there is a lot of product coming in the pipeline, and we're yet to see how well they're going to do.

Can I just go back to the second question, incremental margins, again.

I'm not asking for specifics.

But some sort of sense, with labor costs coming down in addition to what you did mention to steel, which has penalized earnings by maybe $0.80 a share this year, there is probably a lot of room on the upside, isn't there?

On the labor cost steel goods come down clearly and that should stay down.

A new structure being worked out all the time.

The steel prices will take a hit of, say, $100 million this year in round figures.

We don't think we'll get all those 100 back.

Maybe 50 or something.

The problem we have in our industry, the customers want their fair share of it.

But then, on the other hand, it's a mixture of all of these.

How much can we hang on to and how much can we pocket.

And the trick, of course, is to pocket more than we give it away.

Absolutely.

Thank you.

You're welcome.

Operator: The next question comes from the line of Shane McKenna with Goldman Sachs.

Good afternoon, gentlemen.

Just a couple of questions, if I may.

When you laid out your raw material impact for 2005 at the end of last year, you had hoped for some pass-through with the OEM, as I think you said you would use it as a bargaining chip.

Given that, we hit exactly what you were forecasting, 27 million in both quarters.

Can you give us detail on whether you expect to pass any further raw material impact through to the OEMs in the second half or are you still sticking to your targets?

I think it's come up, basically as we thought.

It's difficult to measure, most of it.

We can measure the steel cost increase we have, and that's roughly where we thought it would be.

We're using it as a bargaining chip.

There are a couple of OEMs that compensate us the cash in dollars and in euros.

For most of them, it's the bargaining chip.

The proof in the pudding is really the EBIT margin, why we can hang on to a little bit higher prices than we could have done otherwise, we do get a little bit of financial compensation and plus our suppliers have helped us a about little bit, too.

All in all, we hope we can land the year between 8 and 9% in EBITDA, and roughly, we're running 8.5, having said that, we have a difficult third quarter as always this year.

Nothing remarkable, but the third quarter for obvious reasons is always slower.

So far, we're pretty much where we thought we would be.

Okay, another quick couple of questions.

First of all, you saw a benefit of release of certain provisions as you have detailed, which offset the restructuring charge in the second quarter.

Do you expect any further special release of provisions in H2, and the other question is related to your guidance.

You talk about 1% impact with currency.

Given your average rate was close to 1.25 in Q2, what sort of currency rate were you anticipating on the 1% negative hit on Q3?

Okay, I can take the first one.

The provision we released given these things with Sarbanes-Oxley, et cetera, is not up to us to decide about the provision.

But what happened here is we appealed a judgment in the United States and the court gave us right.

And, therefore, we should release this provision and it just happened to pretty much coincide with the hits we took of plant closures, and you can never foresee what happens in cases like these.

The simple answer is no.

We're not aware of any provisions that we can release for the second half.

They may or may not come.

We don't know for the time being.

Thank you.

When it comes to foreign exchange numbers,

We have assumed the foreign exchange rates in the beginning of July, about 1.20.

Okay.

So the answer was slightly above 120.

Hello?

Gentlemen, your final question comes from the line of Scott Merlis with Thomas Weisel Partners.

Just a quick follow-up.

Given the cash flow this quarter and given the outlook, how do you now feel about your cash flow forecast?

It's for the full-year of 2005.

Scott, we still believe we can produce that quarter of a billion after Capex for the full-year, even though I can agree with you it's lower than one could have hoped.

Yes.

So the cash flow of quarter billion?

Yes.

Okay.

Thank you very much.

Appreciate your help.

You're welcome.

I would like to turn it over for any closing remarks at this time.

Well, thank you very much all of you and, again, I am sorry we started about six, seven minutes late here because of our misunderstanding.

There is one thing in the press that must needs to apologize for.

It's on the dividends here.

We have the wrong date for the X date.

It says that that should be August 6, but we have -- happened to turn the number upside down.

It should be 9.

August 9.

The real x date is August 9 and we apologize for, that too.

Other than that, thank you very much for all your question and your interest.

From Stockholm, we wish you a very nice summer and talk to you again in October.

Ladies and gentlemen, this concludes today's presentation, you may now disconnect.

Have a great day.