Autoliv Inc (ALV) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to Autoliv third quarter results conference call, hosted by Mr. Lars Westerberg, chief executive officer.

My name is Tim and I'll be your coordinator for today's conference call.(Operator Instructions).

And now over to your host, Mr. Lars Westerberg to begin today's conference call, thank you.

Thank you very much, Tim.

Good morning to all of you in the United States and good afternoon to you Europeans and my name is, as Tim said, Lars Westerberg.

I'm sitting here with the chief financial officer, Magnus Lindquist and the chief informational officer, Mr. Odman, Mats Odman, as usual.

We will start 15, 20 minutes by going through some slides on the past quarter.

They are available on the corporate Web page under the flap financial information.

And you can actually have it directly on the first page, too.

And those are the slides we're going to discuss.

So if we start off, we'll go through the slides.

The safe harbor statement, we will not discuss anything further but as a part of this present presentation we're going to go through.

Slide number one really deals with the sales trend.

This sales came in pretty much as we expected them to but maybe a little bit for different reasons.

As you may recall, after the last conference call, we felt, we believed that the West European light vehicle production would go down some six 6%.

Which it actually did.

But not only that from our point of view, it was a negative mix which we will get back to.

A negative moderate model and that means of course for us, we lose a little bit more than 3% of sales having more than 50% of our sales in Europe and Western Europe.

On the other hand, the United States developed more positively than we had anticipated.

All of the shortfall in Europe was compensated in full in North America, you could say.

So all in all, the top line came in as expected and we think that is pretty good given the circumstances we have in Western Europe for the time being.

If we then flip to the next page, please, the organic growth.

As you can see here, we talked about the negative model mix we had here and I think that many of you know the models we supplied here.

But if you take cars like the Renault Magum, the Mercedes Benz E, the Peugeot 206, the Falkline Polo (ph), all of these were down more than 20% in the past quarter in volume terms.

Some also were up of course.

A number of open models, Peugeot models as well, but all in all, that was of course a strain on our sales performance.

So the negative mix was certainly there.

On top of that, we had a shortfall in Korea, we lost about $15 million worth of sales in quarter three or basically one percent of the total sales.

There were really two factors behind this.

One was that there were both strikes in both Hyundai-Kia which I believe around two weeks, typically, of the working weeks that disappeared from a production point of view.

But on top of that, Hyundia-Kia decided to postpone the start of production of a couple of models.

So all in all, that meant $15 million worth of lost sales compared to our forecast.

On top of that, we had the inflators going down another similar amount but that not a one-time event, that is probably going to continue, whereas we do hope and believe that the Korean shortfall was one-time event.

If we turn the page and have a look at the light vehicle production.

As you can see here, the triad, North American-Europe-Japan was essentially flat or very, very marginally down.

North America came in a little bit better than expected and that was actually the Big Three.

And that probably has to do with the employee discount programs that were active in the early part of quarter three.

And Western Europe did marginally worse than expected.

Eastern Europe as expected.

But if you put it all together into one big number, you can say it's roughly as planned.

The forecasts are more accurate and so.

So if we look on the next page on the production numbers for this quarter in '05 compared to the same quarter last year, as you can see, we did shape 2% more seat belts on a flat production volume in the triumph (ph), so we probably took some market share here.

And on the steering wheels, we increased 5%.

So that means for sure that we took market share here.

And then we believe we probably lost some market share in the frontal air bags since that was down 3% and particularly so that was valid for Europe.

And onto the side air bags, as you know this is a fast-growing business and we don't really know how the market shares develop.

If you take the inflatable cartons (ph), we were up 30% both in value terms and in volume terms globally.

And in North America alone we were up 90% in value and actually no less than 120% in unit terms.

If you look that this picture here, it is pretty much the same as you saw in earlier quarters.

If you continue to turn the page to the gross margin.

We did come in at 20.2% gross margin and did increase a little bit more than a percent compared to last year, which is of course a good trend.

And it's trailing up for the same reasons as has been present the last couple of quarters.

The move to low cost countries certainly helps here.

Not only production overheads as well as target labor of course and also all supplies to the plants are cheaper in low cost countries.

We also get some of the engineering costs that we have taken a bit further down on the P&L but we get some of the it back on the product price.

And of course the closed plants and restructuring programs that we've been running do help too.

And as you also know we have a reclassification of 0.3% from gross margin, you can say down toward any (ph) and that helps.

But against that, of course, in this particular quarter, steel and other raw materials have gone the other way, actually had a negative influence of no less than 1.6%.

But all in all, we increased this and we are happy for that.

The next slide, we'll just show you the EBIT margin, and the margin, as we had guided, should be 7.5%, but with the restructuring cost added back.

And measuring the same way, we come out to 7.9% or just short of 8% EBIT margin which, as you can see, compares pretty well with the same quarter on previous years.

And it's in line or actually somewhat better than the guidance.

Next page, the income statement.

In the middle column we have the percent change column.

Sales was up 1%, as we said.

Gross profit was up 7%, which we just commented on, but as you can see it all appeared on the EBIT lines, the EBIT is the same as it was this quarter last year.

And as you can see it's particularly the overheads.

To start with the sales and administration overheads.

The reason of the sales and administration overhead is really all about expansion in Asia.

We are starting up two plants in China, one for steering wheel, one for electronics and of course there is of course no commercial benefit of it yet but we do have a bunch of people working with it on the spot in Sangpu (ph) outside Shanghai in China and that cost goes to the SG&A.

And in the same fashion we have built our purchasing offices which is one of the reasons we can keep the gross margin in check.

And have some 15, 20 engineers both in Bangkok and in Shanghai if you add them together.

And they're also charged to the overheads which explains basically the whole SG&A increase.

On RD&E, we have two research (inaudible) and one is up (ph) and one of them is the engineering income that we spoke about where we have to take that as cost.

We get the charges back on the products.

At least most of it.

Plus we talked about the reclassification from the production overhead of 0.3 and actually these increase more than explain the increase in RD&E.

The next line item that might stand out a bit is the taxes.

Last year on the same EBIT we had $28.7 million worth of taxes.

And this year we had 33.7 for a difference of 5.

As you have seen in the 8-K finding earlier, we have decided to take advantage of the Jobs Creation Act, that is we pay back, I believe about 3.2 billion Swedish crowns -- sorry, 2.5 billion, exactly.

So 2.5 billion crowns and that was a very big tax advantage to do that.

So we believe that we get the payback of about $6 million per year the coming years.

But we had to take a hit then on the tax line of $3 million this particular quarter.

And then of course in the normal fashion we recalculate every quarter what the tax rate seems to come out to and that added another two.

Unfortunately, this is the way we have to book it according to the Sarbanes-Oxley rules because really, what we believe is that it probably would release a provision of $6 million in quarter four.

And had we not had the Sarbanes-Oxley rules we would of course have had a more, shall we say, a smoother development of the tax rate.

So next quarter we will probably see a very low tax rate but nowadays we have to book it when the event occurs and we are not allowed to sort of smooth it out in any way.

So that's why we had a bigger hit in quarter and we won't have an improvement next quarter, unfortunately.

And if you want to make a long story short, you could say that the underlying normal tax rate, we believe is around 33% if nothing extraordinary happened.

The next slide will give you a return on equity.

As you can see, we have had 9.6% return on equity.

Most of the decline has to do with the higher tax this year which we just mentioned.

So if we just for example if we just exclude the Jobs Creation Alone, the one that which will get a station, calls for a station (ph), return on equity would be slightly about 10% and that as we see compares favorably with most of the historical figures.

So mostly it is the tax rate and Jobs Creation alone is 0.5% return on equity in itself.

Please turn the page, return on capitol employed.

As we can see here, the same EBIT as last year but we have higher inventories and higher inventories to some extent is because of shortfall in shipments in Korea where we have an inventory buildup and also we have had a receivable buildup compared to the same quarter last year.

And part of it has to do that in this year sales were exceptionally strong in September.

The four weeks in September of the total 13 weeks accounted for 40% of the whole quarterly sales.

And of course, all of that is shipping and receivables.

So -- well, I guess that's the major explanation.

Also of course we have had these restructuring costs.

And they have been unusually high these past quarter.

The restructuring cost in themselves is another 0.5% on return on capital employed.

So a little bit of operations with higher inventories for Korea, receivables because of the strong sales.

Plus, of course, the restructuring cost that is basically more than the explanation.

Turning to the key figures on the next slide.

The earnings per share is down as we can see here, about $0.06.

And it down $0.06, three of those are really belong directly to the Jobs Creation Act and really another $0.03 is because of the higher normal underlying tax rate.

And against that we have a 3% improvement because of the repurchase of shares.

So that's basically how that wound out.

The net to debt as we can see is also up 77 million but that is because we have given back $159 million to the shareholders in the form of dividends and repurchasing of shares.

And you can also see that that has increased the net debt in relation to capitalization.

So we are now standing at 25% of the capitalization is the net debt compared with 22% at the end of last year.

The head count as you can see, we are 39,700.

It's worth commenting, though, that during the past quarter, we took out 600 positions in high cost countries and we added 700 positions in the low cost countries.

But needless to say, this takes down the cost level in the company considerably and if you extend it to the full year, we have so far during this year, eliminated 1,300 high cost country jobs and we have added 1,200 or roughly the same number but now in the low cost countries which may be one fourth or one fifth of the cost.

The next slide will give you the long-term cash flow.

And just as we had in the last quarter, we have had a negative development in working capital.

As we said before, the cash flow target, the net cash flow target is still $250 million.

But unfortunately in quarter four, it will have to reposition $20 million from pension debt to planned assets.

And that is particularly for the U.S. pension plans.

And nowadays, the SEC demands that this should be part of the cash flow.

So that might be one shortfall.

Otherwise, CapEx we believe now is going to land a bit lower than we thought earlier, more or less in line with the last 12 months of $325 million.

So all in all we shouldn't be too far away from the $250 million that we target normally.

Next slide will indicate the returns given to shareholders.

In the past quarter we have been much more aggressive than earlier on buying back shares and we have bought back basically 3 million shares for a total of $133 million.

And of the present mandate, we have another 3.3 million shares left unused.

And if you take the year to date, we have to the shareholders paid dividends and bought back shares to the tune of $310 million.

And that includes 5.1 million shares.

Next slide is more of an illustration.

Quarter three we paid $44.76 per share and as we mentioned those were 3 million shares during the quarter three.

The next slide is the updated illustration on the raw material costs as they have developed and as you can see the picture is marginally better than the earlier pictures we have shown you.

And for the coming quarter we believe it's going to be $27 million higher than the traditional steel and oil-based product prices.

But compared to last year, it's about $50 million, we'll call it 1% of sales.

If you read the text below here, we believe that the forecast now for the year is $92 million extra cost year on year for steel in particular but also plastic products; 80% has to do with steel, really.

Those $92 million, if you just take them as that will be the result and if you take the 89 million shares we have as a base, you can say that the steel and raw material influence on our earnings per share is somewhere in the order of $0.65 to $0.70 during the full year, $0.65 to $0.70 per share.

Looking forward, what we think that there is probably an upside here, we think that the steel prices will either be flat or down.

Then there's of course, risk that old the bay (ph) and the commodity prices go up.

But the latest development in oil is also positive.

So we don't think there's a downside, there's most likely an upside on the price development or rather the cost for our incoming products.

Next slide should be estimated reduction and basically the news is that there is no news, it is the same slide as before.

Next slide is the purchase (ph) in low cost countries and that is I would say following plan.

As you can also hear earlier, we have geared up with quite a bunch of people in both in Bangkok for general Asia-Pacific but also an office in Shanghai that is concentrating particularly on China.

And that is not only for Asian consumption but worldwide to source more and more in the low cost country, and particularly Asia is beneficial from a cost-point of view.

Next slide, we are as we speak now, we have 42% of all employees in low-cost countries and maybe you initially got the impression that it's slowing down but it's just because 2005 still only has three quarters so there is yet another quarter to add.

And as I mentioned before, during the year, we have eliminated 1,300 jobs in high-cost countries and added a similar amount in low-cost countries.

The next slide will give you an indication of where the jobs have disappeared.

As such, you can see, not very surprising, I guess.

United States, U.K., Australia, Sweden, France, Canada and we go to Mexico, Poland, China, Romania, Turkey and Estonia.

All in all, we're down 100 but with a big mix difference.

Finally, we come to the more looking forward kind of statements.

The slide shows that the light vehicle inventory in the United States, after September, we can say that the inventories in the U.S., they are on the trend line, the 10-year average trend after having dipped considerably during the summer because of the employee discount sellout.

So we are at the 10-year average.

Maybe going forward but maybe the mix will change.

It seems like SUVs and full-scale trucks have a bigger problem to sell and the light vehicles in particularly and the environmentally friendly vehicles do better.

Big Three is presently at 69 days which is as usual higher than average.

We have seen actually more than 100 days at times but 69 is where they are for the time being.

The Asian supplies are 42 days and Europeans are at 49 days but again they are normally lower than Big Three.

Next slide will give you an indication of the light vehicle production in North America.

As you can see, we should have a slide up taking quarter four.

Similar as we have in quarter three with about 2.5%.

If you add up the total year it's going to come in at $15.7 million which is same order of magnitude as last year.

As you can see also the same order of magnitude as the next year is forecasted to be.

During quarter four, the forecast is the Big Three will have a drop of say 1% and the transplant will have an increase of some 11% which normally, in the normal mix would be positive.

Next slide would be the European forecast.

And after having had a difficult quarter as you can see, close to 4% down and worse so for our customers, the Western European production for quarter four would be flattish but with West Europe down again 3% and Eastern Europe some 15%.

And totally up 0.8%.

Finally, Japan following the same trend as we have had all year, up a little bit, ending the year 9.9 million vehicles and the forecast for next year is the same amount or 10.0 million vehicles.

And finally the outlook as we think it will develop, sitting here in Stockholm.

As you know by now, we have 5% fewer working days in quarter four which has been known ever since quarter one.

It's just the way that management takes the day into accounting, basically.

And then the way the countries look now that we give another 4%of translation effect on the effects.

The organic sales to day, are reporting that we think is going to be relatively flat.

We think that the EBIT margin will recover from quarter three and with think that most likely end up on as similar level as we had same quarter of 2004, which I believe was 8.6%.

And with that, Tim, we are ready to try to answer all the questions we can.

(Operator Instructions).

First question comes through from the line of Carl Humquist (ph) from Handersbank (ph) I believe.

Go ahead with your question.

Okay.

Thank you, very much.

Three questions, if I may.

Hopefully pretty easy to answer.

You say that the growth rate in the curtains and the head protection systems in North America is growing fairly well until the quarter.

Can you give us an update on where the overall penetration rate is for the side impact protection systems in North America?

That's the first question.

Then the second one, just a clarification.

When you say that seel prices should be maybe having a positive impact, do you mean that they are actually in your forecast coming down next year?

That's the second question.

And the third question with regards what you call the unprofitable gas generators.

How far are you as far as you can judge in phasing out the old unprofitable gas generators?

Those are the three questions.

Thank you, very much.

We like simple question.

I'm not saying it's so simple though.

The installation rates for side protections, the ones that we know Mats and myself sitting here is more than curtains, they have been at 25%.

They have to be closing in on 27, 28, 29, somewhere there in that order of magnitude given that it has going up so fast.

But as you know it's got to be five years from now it's going to be three times as many.

And it is still growing also in Europe, by the way.

I think the sales in June in Europe were some 15% if I remember correctly.

And side airbags I happen to remember the global figure was 16% up in June at times.

So both of these numbers are relatively high.

The second question regarding the steel prices.

Yes, we believe that the steel prices are down.

We are not so sure that they will continue down, however.

But already now we do see some small positives.

For instance, we see sub system part of the business which really have all the products made of steel have somewhat better steel prices than they used to have.

What we basically meant that, the steel producers, they have limited production now to keep the prices up and I think that in the long run, that usually doesn't last.

So sooner or later, they probably will have another dip down.

But if they don't, there is at least one positive on steel and the negative would be if the old base products compensate or not.

All in all we think the outlook is that it should be an upside here if you add the two together.

And then Magnus has the answer on the inflators.

Yes, the unprofitable gas generators, as you asked about, we expect them to continue to decline next year with another 4 to 5 million on a year on year basis.

And that is another 31% down we can't predict some inflators (ph).

Okay, that makes it very clear.

Thank you.

Thank you.

Our next question comes from the line of Anders Trusk from Iskoldot (ph).

Please go ahead with your question.

I also had three questions, if I may.

First of all, a tax question, just a clarification.

You mentioned Lars, that the underlying tax rate is about 33%.

Is it correct to assume that in Q4, you should have a tax rate of 33% and then I make an adjustment for the $6 million and basically can I do the same for '06, '07, 33% underlying and then deduct maybe $6 million from that.

Second question, about the relocation to Turkeys of the world or the so-called cost effective countries, you're at 42% now, where is the limit or is there a limit really?

I mean, the cost increases etc, you have to be close to your customers, where is the limit that you think at the moment?

Finally, the re-sourcing, sourcing from local countries.

Is this a way the plans you have, is this a way to just to stand still or really a way to actually improve your margins?

What do you say about that?

Okay, thank you.

Well, first the tax rates for quarter four and there is an SEC term that slips my mind but basically what they mean, Anders, is we believe we will release a provision of $6 million for quarter four alone.

And if we do the back of the envelop type of calculation that brings the tax rates down to below 40% for quarter four.

And you can easily calculate a year to date and it will be lower too of course than what we had year to date.

I think chances are relatively good that we have below average tax rates also for all of 2006 since there are a number of tax provisions made after margin of (inaudible) for instance and they are all maturing.

But now we are not allowed to guess, we can only say something when it actually happens.

Your second question is about Turkey.

Where is the limit with the 42%?

I cannot tell honestly.

But there is certainly plenty more to do in both North America and Europe and I think there is a lot more to do in Japan, so I think we're going to be busy taking down the cost quite some time and if you tie that in with your quarter three and the re-sourcing of low-cost countries.

I think what we need to do since that you have seen we are for a number of quarters, we have a lower sales growth but still we want to defend the EBIT and particularly earnings per share.

And I think we're going to be successful doing so.

But that is because we presently take down the cost faster than the sales price deteriorates.

So from that point of view, combine your low labor cost employees and the re-sourcing to low cost countries, we think it could be enhancing margin compared to the prices we gave to our end users.

And I think the proof in the pudding really is that this year we have seen the steel and raw material price increase of about 1.5% of sales, but we're coming in with an EBIT that is in very close to last year in any case.

And I can assure you the pressure from customers is just as bad as ever.

So I am sure we made the normal price concessions, and yes, we defend the EBIT margins by raw material prices.

Very good.

Thank you.

Thank you.

Our next question comes through from the line of Thomas Bessen.

Please go ahead with your question.

Good afternoon.

I had two questions about your growth prospects.

Could you please elaborate on which key mold or platform are going to eventually drive your organic growth higher in the coming 12 months?

And my other question would be related to your new products, if it may start becoming a new driver for gross into 2006 and 2007.

Basically, what do you expect in the next one to two years in terms of organic growth, do you think it can recover from five level or do you think basically you have gone into a more mature phase of your growth, where we should expect that, grow more or less in line with car production?

Basically, we try to publish for all of you the launches we have quarter by quarter because honestly, we cannot keep it in on top of our head.

It's just too many models and many models on the same platform.

So I think the best answer is if you have an idea about what programs or models you think will be successful, the best is to look in our quarterly reports.

And Mats has given you an usually a long list of -- introductions.

And new products and slower growth.

We will have some slower growth to come in a couple of quarters, but if you look in our backlogs that will also come back.

I wouldn't say to a very strong growth but stronger than it is for the time being.

I think this has to do with the fluctuations in the backlog, how some customers are doing and how we are doing.

Clearly it's not going to go as fast as it did when the airbags were new but I don't think this is a mature business either yet.

Even though we will have a temporary slowdown.

Okay, that's where I was coming.

When do you expect, basically, your growth to pick up again?

That's what I was asking what kind of big program will eventually start driving your growth again?

It's really not based on any programs, we're just simply looking in the backlog.

Okay.

Basically all programs are all globally (ph).

Okay.

And when you look at your backlog, should it expect sometime in 2006 and 2007 or?

I can't be that specific because firstly I'm not sure that I will give you the right answer and secondly as you heard in Korea just a couple of minutes ago, all of a sudden the delay is production and all of a sudden they like the peak increase.

So they extended the end of production so they were on another year.

So many things happen all the time and that's basically also why we never publish the order intake because everything changes all the time.

Sorry to say.

That's fine.

Thank you, very much.

Thank you.

Our next question comes from the line of Scott Merlis from Thomas Weisel Partners.

Please go ahead with your question.

Good afternoon, everybody.

Just to follow up on the previous question.

Is it safe to say that your future backlog is higher than the 2005 backlog?

Without being specific about years or whatever?

We're not going to be specific about years, but it's safe to say that we are going to turn up again, yes.

It's going to take a couple of quarters, Scott.

Got you.

That was expected.

The cash flow numbers, you seem to say that your capital spending will end up a little bit lower than expected for year, does that fall into next year, 2006?

Or is 2006 just going to be a little bit higher anyway just for the cash flow model?

I don't think it is so Scott that we have delayed any investments, I think it's just that we hopefully have been evolving some or that we have negotiated a little bit better, simply.

It's not that we postpone anything.

Okay.

That answers my question.

And therefore, the cash flow guidance before pension will be close to your original guidance of a quarter of a billion, 250 million.

That's our target.

And gross margin continues to be remarkable given that you have the $92 million hit from raw material.

Gross margin of 22%.

But - and you're saying there is a negative mix impact hit in that gross margin and I'm wondering, are we missing -- how do you -- without much unit growth, with negative mix impact, with the $92 million cost penalty, how are you keeping your gross margin up there?

Is it really just pure cost reductions or are there some kind of mix improvements from selling more side curtains?

A mix improvement, a variable profit improvement from Asia growing so fast?

I know it's a complicated formula, but can you give me a little more granularity on what's driving the gross margin?

Well I think you basically touched upon it yourself, Scott.

It's basically all of it.

We do believe if you put a number, if you say that we have taken out 1,300 high-cost jobs and replaced with 1,200 low-cost jobs, a fair amount of those are in production overheads.

As soon as we open a plant we need the whole production overheads.

And It's easy to calculate, that is a pretty big cost savings and we think that will continue.

But on top of that, you are right, of course, it is a mix in products, it's a mix in customers.

But nevertheless as you know also 0.3% of it is artificial because it moves down to RD&E.

But then again, it is a nice improvement.

We agree, we've taken down the cost and we take down the sales price and we think that it might even continue at least for some time yet.

So, if you look at the gross -- the way the gross margin usually works.

If you were to get just 2% unit growth, would that tend to go into existing capacity and therefore would it absorb overhead?

Would you get the normal operating leverage from even just 2% more through put?

I mean, does it go into existing capacity?

Your utilization rates go up?

How much unit growth do you really need to usually get a meaningful help on the gross margin?

I think it is such a small increase as 2% I think we could squeeze it into existing product volumes.

On some parts of our product like some textile components and so on, we have decided not to do a lot more capacity.

We're going to have what we have.

We're going to run it at full speed at all times and buy all the volumes that come over and above our capacity.

But outside those I would say that we can probably push through another 2% without increasing overheads very much at all.

And that should have the normal effect on gross margin?

Yes, it should.

Last question, could you give us your latest thinking about the buy back, where it's been, where it is, where it's going?

You are going to see that on Monday morning, Scott and you will not be surprised.

Okay, I'll stay tuned.

Thank you.

Thank you, very much.

Thank you.

Our next question comes through from the line of Lee Cooperman from Omega Advisers.

Please, go ahead with your question.

Make that plural, questions.

Thank you, very much.

First let me congratulate you guys.

Running an industrial enterprise with inflation, to have relatively flat volume and maintain your margins, you have to be congratulated for doing a very high quality job, and I appreciate that as a shareholder.

I have five questions.

The first one is kind of just housekeeping, if you look at slide 13, what should I be assuming this year and next year for D&A and cap ex?

The 325 cap ex this year, is that the same next year?

And D&A. last 12 months is 315, should I assume that for the year and next year?

Or can you give us more specific numbers?

I think if I were you I would say 325, 350 for cap ex next year.

325 to 350.

We thought it would be 350 this year and we have taken it down to more like 325 for the time being.

A lot of lot of it has to do with the move to low-cost countries, though.

And then D.N.A. would move up modestly as well?

Yes.

So let's say, what, 325?

That is probably correct.

Second, in a past speech, one of you, either Lars or Magnus gave, you talked about 600 to 900 of additional gearing opportunity.

How would you update that number and change it if it all?

Is that still 6 to 900 or would you lower it a little bit or what?

Just roughly?

Very much depends on what target you have but --

The target you had when you said you had 600 to 900.

That was in relation to keeping a triple B plus rating but now we have an A minus rating which means if we stick to that rating of course the head (ph) it is left.

But I would say that we can easily gear up another 5, 6, maybe 700 million U.S. dollars and justify the triple-B plus rating.

We are happy with a triple B plus.

We didn't really ask for the A minus.

Good, good.

This question is an important question to me and I would like to emphasize that you are on open microphone, no rule FD (ph) issues here because the world is on the call, this information is available to everyone.

So I would like you to spend some time discussing the logic behind the repurchase program.

Is it simply a way of returning money to shareholders and in no way expresses your view of the valuation of company and how the market is valuing us?

Or is it part motivated by the view the market is mis-valuing us?

Okay?

And the second part of that question, but let me give you the first part, first.

Okay, what we do really is as I believe you know already, we usually wait one or two days, we see where the market settles down and we have an investment banker together with the board and the investment banker gives the board the advise, they value company in all the ways that you know and I know investment bankers do, is the discounted cash flow is the P and the similar Q ratios and comparing with comparables and they come up with a net conclusion on what is the fair value of share and then the board hopefully draw a logical conclusion and we make up our mind.

So I assume if we are going to be logical that you would not buy the stock back in at prices in excess of what you think the business was worth, is that a fair statement?

That is a fair statement.

So the fact we paid $50 to $51 in the first quarter and now the stock is trading $40, that should make you and me more excited about buying back.

Assuming that the world is not materially different today than it was in the first quarter.

Is that a fair observation on my part?

That is a fair observation.

Okay.

Perfect.

Am I correct that you have 3.3 million shares left on your existing authorization?

Yes.

Yes.

Assuming the world doesn't change, would you hope to complete that authorization this year and what do you think the mood of the board will be when the authorization is complete?

Do you think you will reload?

We don't know that.

We have to see what the board says then.

You're going to see what we do on Monday morning as usual.

We're going to follow the same routine as we always do, Lee.

The only suggestion I'd make, I started out the ca;; with the compliment and you guys deserve it, you're a first class company, your disclosure is exemplary, I think you either ought to get off the Swedish stock exchange or basically convince them that the rules regarding repurchase are archaic.

Companies in America buy stock right up to the day they report earnings and they're in next day, I have been involved with a company that announced publicly they were going to sell themselves, they hired J.P.

Morgan to sell them and continued to buy stock during the whole marketing process of the company.

To pull out literally a month before earnings come out, I think is archaic in this world.

Academicians tell you stock prices adjust to new information virtually instantaneously.

And I think you have an established program.

You give disclosures that very few companies give.

You post it on your Web site daily.

It seems to me that we should be more anxious to capitalize on market weakness than we are by following these excessively conservative rules.

But I won't ask you to respond.

I just say that as a statement.

The last question, I'm interested in the next quarter or even next year.

In looking at the company say on a five-year horizon, would it be reasonable to think in terms since you're a world company, worldwide auto production growing a couple percent per annum, that increased safety content adding maybe 5% to the top line.

Right now I realize you get can't get price but over time maybe 1or 2% in price so that over time on a five-year basis that top line can grow 8% or is that too optimistic in your opinion?

Not the next quarter and not even necessarily next year but just a trend?

As we trend we believe the core production goes up, if I remember correctly, roughly 2.5% with everything Asia and so forth and so on.

There is a big potential you know in all the development markets.

But on the other hand some of them and notably Western Europe do already have that very well equipped cars.

So I think 5% is too much per car.

But 2.5 in volume of cars and maybe the values, maybe half of the five.

I couldn't guess on five years, I have never done that exercise.

But all China, India, Malaysia, Thailand they have basically no, less than $100 per car.

Same goes for Russia and the whole former Soviet Union.

Talking about 1.3 million cars there.

Thank you for responding to my question.

Again, I want to congratulate you.

You do a first class job not only of managing the business but in providing information to investors.

Thank you, very much, Lee.

Thank you.

Next question comes through from the line of Uran Metchukmee (ph) from ABM Amro.

Please go ahead with your question.

First of all, coming back to the margin being supported by 0.3 percentage points from reclassifications of the production costs and R&D.

Does that mean that these R&D costs were amortized?

And if that's the case, should we expect any more of that going forward.

And second question, if you could just comment from your point of view how you see the bankruptcy of Delphi's North American operations, is there any exposure that you are at all concerned about, any sort of exposure from any disruption by UAW members either occurring at Delphi or GM or any other operation in North America that could affect you in a harmful way?

Or do you see any opportunities from the Delphi bankruptcy in the U.S. in terms of perhaps some assets owned by them being of interest to Autoliv?

Okay, if we start with the first one, basically this is only in way of the following the financial manual we have that some companies were charging cost to production overheads that rightfully belong to RD&E -- I don't know if you want to expand on that Magnus.

It does not really have an impact on operating margins.

It is just the reclass between gross margin and RD&E.

And we don't amortize RD&E and we take it all as cost at all times so there is no asset call that we depreciate.

This is purely that Magnus got discipline in the group, they have done some interpretation of financial manual in parts of the group that we didn't agree with.

Second one regarding Delphi, I think that you have probably explained much -- did we say that in the report or not?

Our exposure to the Delphi bankruptcy is less than $0.5 million and we have taken all that as cost during quarter three.

So financially is all done.

I believe your question is probably more directed toward could that hurt us in any way?

And I would think the way it could hurt I guess if there is a huge strike in UAW that stops GM, Ford and other companies to ship cars, then it would hurt.

Other than that, I don't think it could hurt us.

It would be indirect from them, that's basically what I'm saying.

If the bankruptcy in one way or the other would make GM, Ford and others stop producing.

Opportunity, yes, of course to some extent we have overlapping businesses.

Whether that's going to be something that Delphi wants to talk to us about is of course up to Delphi.

I think they're very busy sorting out which businesses they want to be in and which they do not want to be in.

But some of our businesses do overlap.

Okay.

Thank you.

Thank you.

Our next question comes through from the line of Himanshu Patel from J.P. Morgan.

Please go ahead with your question.

Good afternoon, guys.

Good afternoon.

In China, is there an inflexion point in your content per vehicle when you look at your backlog through the next three years?

Or is it fairly linear growth?

I think you said before it's sort of in the low $100 per car range rate right now.

I think the cost of cars will go up actually.

We don't see an inflexion point yet where there would be less content in the cars.

More a mix of various brands.

As you know we have had for the time being we do not have the optimum mix in China because from traditional points of view, we started out the first joint venture in 1989 with Volkswagen.

We still have a bunch of business with Volkswagen but unfortunately Volskwagen is losing some share.

So from that point of view we have -- from an Autoliv perspective, we have mix problems but that will correct itself.

I do not see an inflexion point if you mean a digressive mode of increasing the cost --

-- I actually meant a positive inflexion point.

I mean, is there an acceleration in the rate of increase --

Yes, various, I thought that was a given sort of and you looked at the next inflexion point.

Sorry about that.

Right, right.

Okay, coming back to North America, the side curtain air bag wins, they've mainly been concentrated so far with the transplants for the whole industry.

The Merck American car makers are obviously looking at that as a reason to become more competitive.

To what extent does your customer mix start shifting to become more Big Three when -- if and when they start installing more side curtain air bags?

And I'm thinking come the '07, '08 timeframe, is it likely that most of the incremental volume on side curtain air bags is actually coming from, let's say, G.M. and Ford rather than the Japanese?

Yes, you're probably right, that the big chunk of the increase will come from the Big Three since you correctly assume that the transplants are new domestic as they're called they are better equipped for the time being.

So there will be another increase from Big Three, clearly.

Does that concern you at all on long-term margins?

Because, Lars, I know historically, you have referenced Big Three business as being less profitable than the Japanese business.

So I'm just wondering, is that inherently just because it is Big Three or is it because the products maybe that the Big Three buy from you right now are largely commoditized products like frontal air bags.

And if they're buying side curtain airbags then maybe the margin is not going to be so different?

We think that it's going to be, the margins we're going to get on the curtains from Big Three we assume are going to be similar as the ones we get from all other customers.

The problem we have had with Big Three I would say is that for the time being, our supply value per Big Three car is much less than it is on a transplant car.

That's may be why we have had a somewhat negative stance on the Big Three.

Okay.

All right, thank you.

Thank you.

Our next question comes through from the line of Fred Labier (ph) from Societe Generale.

Please go ahead with your question.

Hello.

A short question first just on SG&A costs were higher because of two new factories in China.

And my first question is do we have additional cost to expect in Q4 and then maybe more generally, are you satisfied with your current industry footprint and can we imagine there wouldn't be no net increase in the number of upfronts in the years to come now?

Well, I think, conferring with Magnus here, we believe that the SG&A cost increase will be there in quarter four.

And as you know, we need those plants to come up and being operational before we can back at the existing plants.

And then there is of course positive because what we cut out is costlier than the ones we just commissioned.

But that will take a couple of quarters.

So the answer is unfortunately SG&A costs will be there in quarter four.

our second question regarding footprint.

We cover all parts of world from that point of view we are happy with the footprint.

But we are not happy with the footprint from the cost point of view.

So you're going to see more plants being opened in low-cost countries and shut down in the high-cost countries.

We all of us here hope and believe that the one we are shutting down in the U.K. is the most costly because conditions vary from country to country and it's also from that point of view that you hear us all the time make a difference between M.P.s (ph) and head counts.

Many countries where it is expensive to contract, we have, what you call them, you have temporary employees to a large extent.

So they are fast and they don't cost too much to take out.

So the footprint is covering the customers, that's the good news.

But it's too costly, that's the bad news.

So we will win back (ph) most automotive sub-supplies move more footprint over to low-cost countries.

So the conclusion is that the number of factories could remain flat from now on?

Could remain flat because we open one and shut one.

Could even go down, who knows.

Okay.

Just to follow-up on maybe this Delphi issue, did you use to get some components from Delphi?

I was thinking that you were maybe purchasing some (inaudible - thick foreign accent) from Delphi?

Could it represent a risk or maybe an opportunity to (inaudible - thick foreign accent) to get more integration?

No, we do not buy any and to my understanding and Magnus agrees, we cannot come up with anything that we'll buy from Delphi of any significance and certainly not weight systems or pub (ph) systems that we do not buy.

It is the contrary sold, we supply some of these what we always refer to as low margin uncompetitive inflators.

A big chunk of those actually go through Delphi.

Okay.

Thank you.

Delphi is a customer, not a supplier is the conclusion.

Okay, thanks.

Thank you.

Next question comes from the line of Patrick Lindquist (ph) from H&Q Research.

Please go ahead with your question.

Hi good afternoon.

I have a question on the if you look at the growth that you are aiming for the fourth quarter.

If we would then exclude car production which could be debated where it goes, it seems as if you are basically saying it's going to be the worst since 2001, and I'm just trying to understand, since production wise the regional mix should be better in fourth quarter than in third, you're still guiding for organic growth to be worse, so I'm just trying to see is the reason for a slower Q4 very much related to the models that you're actually producing, a model mix issue and also when you see that potentially reverse?

Is that related to the normal Q3 launch cycle or is there any reason to believe that it will happen sooner or later?

Well, you cannot look at the average numbers that we have on the slides here and in our report.

You have to, as you also said, Patrick, look at individual models that we supply.

And in Western Europe as Lars said, we have several models that have not been performing so well.

We have declines of more than 20%.

And since nothing is changing, they're not any launching any new - it will be as before, this trend is likely to continue into the fourth quarter.

Right, but you wouldn't have a clue on where we're heading in 2006 on that model mix issue?

But you can also understand that some of your other analysts told us a little bit earlier today if you compare fourth quarter of this year with fourth quarter of last year, fourth quarter of last year was exceptionally high with it nearly 11% better than car production and basically we say we're going to have that same rate.

But that's of course a very difficult quarter to compare with if you put it that way.

Fair enough.

A question on the SUV.

I mean, assuming that SUVs are out of fashion in the U.S. given the gas prices, I mean, obviously Big Three are -- have a lot of those which would be good because you sell more Japanese cars where you have a high install value.

But on the other hand you have the value of an IC in an SUV is higher than in a car.

How does it turn out in total when as I say SUV sales are falling?

Or the share of SUVs are falling?

Is that still a positive for you?

I think if you take the SUVs and the trucks, we are overexposed when it comes to electronics and I believe we are underexposed when it comes to conventional restraints.

And then you have to say on the top line then yes, clearly from that is from ABCD kind of pillar has higher a price than a smaller car but not necessarily a higher profit.

It can coincide of course but the top line we hold clearly but I'm not the sure that the EBIT line with hurt.

It can.

But it's more driven from model to model, really.

Okay.

Final question, on the co-op that you announced in Italy a few weeks ago, does that in any way make it more difficult for you to if you would be able to acquire electronic sales assets from Delphi?

No, not at all really.

It's really completely different business.

This is what (inaudible) Telematics and particularly Europe and the U.S. too, to some extent.

Okay, thanks.

Thank you, very much.

Thank you.

Next question comes through from the line of Gregoir Rinion (ph) from Exane (ph).

Please go ahead with your question.

Good afternoon.

A few questions.

First, if you could give a little bit of detail on your backlog.

Not only in terms of products so what type of product makes you consider that there will be some rebound?

Is this the curtain air bags or --?

Not really any kind of product or any specific model.

Basically we just aggregate what we have in the backlog.

As simple as that.

We do not measure the backlog by its sort of potential or backlog but could of course do that but what we are seeing is just the backlog in general.

Okay.

Second question, if you -- you had given guidance for Q3 in terms of restructuring costs.

Is there anything to say for the fourth quarter?

Yes.

We expect it to be around $4 million.

Okay.

And third question, you've had quite a big number of restructuring actions since the start of year, do you expect more restructuring benefits next year compared to this year?

Yes, we do and on top of that, we think there will be additional restructuring actions.

But as we said before, we hope and believe that the new ones will be less costly than, particularly, the English one we did this year.

But there will be more benefits next year.

Okay.

And the last question may be on working capital, so you had some deterioration.

We saw that part of it was linked to Korea.

What do you expect in the next quarter or quarters?

Do you expect an improvement?

We target that another way.

Okay, and is there any - is it going to upset the level of latest quarter of the -- latest two quarters?

Our target is clearly to improve the working capital, to improve it compared to this quarter where it's 9.0% and we want to take it down, clearly.

And we have a plan how to do it and let's just hope that the plan works.

Okay.

And maybe just a last question if I may.

So we saw you had a deal with Ford where you are benefiting from the consolidation of the suppliers, do you see this trend maybe coming to other car makers?

We have had this sort of cooperation with many car manufacturers before particularly with Europe as I believe you are aware.

We are just happy to see that the Ford Corporation as we believe it will develop, that will be to the benefit of both.

I'm sure we're going to deliver better systems at a better price to Ford and in the long run that's going to benefit the end consumer.

I hope that others will follow suit.

But we sitting here around the table, we don't know.

We just think it will be good.

Okay.

Thank you very much.

Thank you.

Our next question comes in from Patrick Chibom (ph) from Chevre.

Please go ahead with your question.

Good afternoon.

I had actually canceled the question.

But there is one little follow up just on the U.S. side impact market.

You said that the penetration rates had reached up to possibly 28, 29%.

Are there any big differences between the U.S. brands and new domestics and also, following on this, we have this voluntary commitment from the car producers, I guess it was somewhere in December '03 when they decided on that.

But there is also legislation you're talking about.

Do you see this legislation as a good compliment to the -- to the voluntary commitment or is it something that competes with it and possibly delays the penetration to reach 100%?

I'll answer the easy part and then hand it over to Mats.

He's an expert on all these dates.

It is clearly a difference between the new domestics and the local Big Three.

The new domestic are much better equipped on side systems.

There is no doubt about it and what we see are the Big Three is trying to catch up.

And now Mats will fill you in on all the dates about the voluntary restraint agreement and the new proposed rulemaking.

But you don't have any numbers on the Big Three and new domestics in terms of penetration?

Or should I guess that myself?

The latter I hope.

Well as you saw in our report there have been some new developments in the legal field.

And there was a new act, the Safety Act that was signed into law here in August.

And that introduces some new directives.

And the most important one is from our perspective is the fact that car makers will be obliged to announce the crash rate and how many stars the vehicle have when they sell the cars.

There are also other things, for instance, rollover prevention and there are studies about election (ph) protection of the occupants of the vehicles from rollovers and so forth that could have some impact on us.

But as to the side impact legislation, that is also discussed in these documents and the latest news is that there will be a final rule presented in March to Congress.

In March?

March of 2006.

That's the latest date I have seen in --

That is on side impact -- not only the head production, also the whole side of the car.

Yes, but always most important to protect the head.

Naturally so.

Okay.

Thank you.

Thank you.

The last question we currently have in queue comes through from the line of Adam Jones from Morgan Stanley.

Please go ahead with your question.

Bringing up the tail end here, I think.

Good afternoon, guys.

Good afternoon.

Two questions.

The first is on the steering wheel business.

You said you gained share.

And if my understanding is correct, you have been losing share in North America steering wheels recently and that could have had -- represented an impediment to your frontal air bag or your driver air bag delivery as these things get packaged into a steering wheel.

Can you inform us during the quarter, did you correct these recent share losses in North America or was it a share gain elsewhere?

And within that context, assuming - let's get Delphi's intentions out of the case but they do have a steering wheel business with decent share.

Is that something that could potentially be interesting to you as a bolt on in North America?

Now, my second group of questions relates to attrition, but maybe if we could take the first one first, thanks.

Okay, on the steering wheels, I don't think we have lost share but we are trying to go through the figures and Mats is coming up here.

What I do know that in quarter three here we gained a lot of Japanese shares.

And while he's trying to discover it, I think we have had some problems with profitability with Europe in this year and that has been corrected throughout the year, you can say.

So now as we make money in Europe on the steering wheels, using those modest numbers, I have to say but it's much better than losing.

So what did you find in the literature, Mats?

The numbers are very small.

But more than 35% increase in unit terms.

During the quarter?

In the quarter.

In the U.S.

In the U.S.

I think you heard it, Adam.

I take -- that has mean that you are taking market share in a grand way.

That's one of the few you know where we know if we take market share or not.

Because so far there is one unit per car.

Is that as a result of Delphi being in a weakening position or is it just new business through the transplants?

I'm sure it's only new business, I'm not sure if it is to the transplant.

But if Delphi were having any problems, we would see them in a couple of years.

And we do understand your point on Delphi steering wheel business.

It is a huge number of steering wheels but it's probably too big for anybody to just take on.

So we'll see how it develops.

I think Delphi has to figure out what they want to do and what they do not want to do going forward.

Understood.

My last question is just on the attrition.

The numbers that you provided of 1,300 workers leaving the high cost worker base, year to date.

Just given the size of the restructuring that you've indicated that would be coming in the fourth quarter.

I think it's reasonable to assume another 600 leaving in the fourth quarter or that order of magnitude.

So it looks like looking about 7 or 8% net attrition or net reduction including early retirements or buyouts of the high cost base.

How much of that -- what is the gross number?

How many just come up naturally each year either in percentage terms or numbers of employee terms of high cost base each year?

And secondly, can you help us with -- can you provide any information on the wage differential or any rule of thumb for every thousand head count reduction shift from the high cost to the competitive cost countries?

Is there any rule of thumb in terms of millions of dollars of savings?

Or if you're not able to answer it that specifically, maybe more abstractly, are the savings that you have achieved this year interest shifting from high cost to low cost, just the labor alone, is that in the order of magnitude that's been able to offset the $92 million headwind on the raw material side that you so explicitly gave us?

Okay, we have sort of had a conference here while you were talking to us, we don't were talking to us, we don't have the forecast really for how many we will take out in quarter four.

The only the thing we can tell you is that will continue and particularly so if the spring of next year, the Australian downsizing will continue at a pretty fast speed.

Think you could say that the U.K. is more to a large extent done now.

I think we have 40 lines if I take it off the top of my head and we have moved all but four.

So most of that is down.

The Australian is not at all - well it's started but there is a lot more to do.

Your question regarding retirement, we have very few people that are very old in this company.

The whole industry as you know, Adam, is pretty new and we have expanded a lot during the '90s and the 2000s.

So I would say it's negligible.

And if it is not, we are at least of the opinion that it is sitting around the table.

When it comes to the cost advantage, we normally say that in lower cost country depending what it is of course, typically 20, 25% of the cost in the high cost country.

Then if you take that times the 1300 we eliminate, you find that that does not compensate for the 92 million in raw materials.

But together with eliminating total plans and plans overheads and totally taken out costs, then it does compensate.

But the labor costs alone does though the do it.

It helps but it's not the only explanation.

Understood.

Thank you, very much.

Thank you.

Thank you.

I believe we have just one final question coming through from the line of Richard Haydon from Omega Advisers.

Please go ahead with your question.

Good morning.

Let me echo what Lee had said earlier - it's a terrific quarter all things considered.

Going back to the last question, if you take an average compensation for the people that you're displacing relative to the new hires, what would be the average differential?

Okay.

We're going to take one last guess and here it comes out of Magnus.

The average costs in the high cost - I'm just guest guessing but it's around $40,000.

That's our best estimate for costs including pension time and costs and all the rest of them.

Yes, and when you go to a low cost country, that 40 converts to what?

Less than 10, probably.

So just as a rule of thumb for the 1,300, if you just - if you were to save 20,000 as opposed to 30, that's roughly $26 million in savings from that movement alone this year?

Probably more, because when we prepared some slides (ph) once upon a time here, this was in June, I happen to remember that the average full cost for a low labor cost buy was $9,750, all things considered.

Okay.

And just one last housekeeping.

And perhaps it was covered earlier.

This 4.6 million swing in the other income account in the third quarter, what were the components of that?

It was really -- 5 million was basically construction costs.

Okay.

Okay.

Terrific.

Thanks for your help this morning.

Good call.

Thank you very much and it's afternoon, by the way.

Depending where you are.

Yes.

You're right.

Thank you again.

Thank you.

Okay.

Thank you.

We have no further questions today so I'll hand back to your speakers to wrap up today's conference call.

Well, thank you very much all of your for your many interesting questions and this was the quarter three conference call.

We hope to be able to talk to you again.

The same here (ph) so we'll come back on February 9th, 2006.

Same time. 3:30 in the afternoon.

Thank you very much, all of you.

Have a good day.

Thank you for joining today's conference call.

You may now replace your handsets.