Autoliv Inc (ALV) 2006 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to your Autoliv second quarter results conference call. (OPERATOR INSTRUCTIONS).

I will now hand you over to your host for today's call, Chief Executive Officer, Mr. Lars Westerberg.

Good morning to you in the United States.

Good afternoon to you Europeans.

I am Lars Westerberg.

I'm sitting here as usual with Magnus Lindquist, the CFO, and Mats Odman, the Information Officer.

And just like we usually do, we have a presentation package available on the Autoliv corporate website under the title, Financial Information.

And we intend to start to go through that one and slide by slide, and then as John said open up for questions afterwards.

The Safe Harbor statement on page number two we will not go through it, but that is a part of our presentation.

And the next slide please shows the sale trend.

And generally speaking, if you take it from a global point of view, we think the sales came in a little bit better than we had expected globally.

You could say that most of the light vehicle production that was also little bit better than expected.

But most of that increase came in Japan, and as you know, we have the lowest marketshare in Japan.

We had a little bit south of 20%.

The sales decline was 3%.

As you might have seen out of that FX, foreign exchange is 1%.

And then we had a couple of products that we talked about just about every quarter that we're phasing out.

Those are some high-cost inflators in the United States, plus some seat belt systems in Sweden.

And they contribute with another roughly 1%.

Of the base business, the occupant restraints, they were down organically somewhere around 1%.

Having said that, we have not taken into account that in this particular quarter we have the Easter holiday in the second quarter compared to last year when it was in the first quarter.

To compensate for that one, it was probably somewhat of an organic increase actually in the restraint side.

The biggest explanation for our slightly better than expected performance is not so much the sales in Japan, but rather the model mix, particularly in Europe, turned out to be a little bit better than we had feared.

There were some models that had a relatively positive surprise like the Opel Corsa or the Renault [Logan], the Toyota Corolla, etc.

All of those surprised on the positive side, you could say.

But generally speaking the guidance were fairly correct.

The problem we had as expected was Western Europe, as we had thought.

In connection with this we would like to emphasize actually that we would like to confirm, or reconfirm, the picture for the full 2006, where we believe that the organic sales decreases we have had during quarter one and quarter two will be totally compensated by quarter four because, as you're going to see later in the presentation, we believe that quarter three will be flattish, if you talk about organic sales.

The decline in quarter one plus quarter two should be compensated by strong sales in quarter four.

If you turn to slide 3 and we come to the organic growth.

We can say that the organic sales actually grew in each region outside Europe.

And the reason it did not in Europe was of course the various steep decline in production volumes we saw like minus 7% in Western Europe, which was too much to compensate from our point of view.

If you take some of the regions where we drove particularly much, in Japan we had an organic growth something like 11, which then actually outperformed Japanese production that was stronger with plus 5.

Rest of the world, which from our point of view essentially is about China and Korea, where we had an organic increase of 13%.

And as we have spoken about before, we don't really get the statistics from China and Korea.

It takes a long time, but we believe that that must mean that we're taking marketshare also there.

If we turn the page please and look at the light vehicle production, you can say what strikes you I guess in Japan -- I'm sorry, in the North American market there was no big change compared with the previous year.

But Europe is like two different worlds almost.

Whereas you can see here we had the West European decline of 7%, which by the way was marginally better than expected.

But you can also see Eastern Europe up about 13%.

And this is going to continue throughout this year really with very strong double-digit increases in Eastern Europe.

And then next year probably it will come down to something like 7% up in Eastern Europe.

Strong increase in Eastern Europe, and then an unusually strong decline in Western Europe that will also moderate going forward.

Japan as you can see was up, and it was up more than expected.

We had a 5.7 increase in the Japanese production.

And here you can say that some of our large platforms did have problems, which we knew then, like the Volvo large platform, some of the Peugeot 307, 407 etc.

And actually some of the lower models too, even though the decline was not as bad as expected for the Magnus.

Strong in Eastern Europe, strong in Japan, weak in Western Europe, and no big changes in North America for the past quarter.

If we turn the slide and look at the production volumes that we achieved, we're still running 100 million pace in the seatbelts.

We had a decline of 1% only, in spite of having such a high marketshare in Europe.

This decline actually happened more -- most of it was in North America, because in North America we have a relatively strong exposure on seatbelts when it comes to the Big Three, whereas on-air bags, as we talked about before, more than half of all the year bags in North America nowadays to transplants rather than the Big Three.

The chest airbags they are up everywhere in volume terms outside Europe.

Frontal airbags are down in the States, and that is particular in the sport utility vehicles where we have a high amount of passenger airbags.

The inflatable (indiscernible) they are, as you know, part of the head airbag.

They are up in volume, terms and in value terms about 11%.

And then finally steering wheels, we're up as you can see 6%.

So we clearly take marketshare here.

And we are particularly successful for the time being with the transplants in North America on the steering wheels side.

Turning the page please.

We come to the gross margin.

And we are very pleased with this development on the gross margin.

As you can see it landed on 21.4%.

And that is the strongest figure we have had since the airbag boom somewhere at the end of the '90s where we seem to have had a higher figure.

And if you analyze it which Magnus has done, there are of course as usual a number of factors that is coming into effect, but the one that stands out is the lower percentage of direct labor as a percentage of sales.

And that is probably just a confirmation on the multiyear program we have had to move our own value-added from high-cost countries to low-cost countries is paying off.

This is structurally going to be lower, and that you're going to see later we continue with these trends.

Also, for the past quarter I think it is fair to say that this really reflects the operation of the Company.

There are no significant onetime items, neither positive nor negative, so 21.4 in reflecting the operations in quarter two.

Turning the page again, we come to the operating margin, or the EBIT.

As you can see here we landed 8.8%.

It is a similar level as last year when we had 8.7%.

And a little bit unusual, we are lower than quarter one in quarter two.

But that has to do with the fact that in quarter one, as we discussed in the last follow up, we did have a capital gain, particularly from some English plants that we sold.

So the underlying EBIT margin in quarter one was 8.6, and now we are running 8.8.

For the full half-year as reported we stand at 8.9%, and not too far away from 9% EBIT margin so far.

That was the EBIT, and turning the page again please, we come to the profit and loss statement.

And we usually start with the columns, increase and decrease, and look at the variance.

And again we can see the sales that was down 3% year-on-year -- actually 2% organic, but as we said before, only 1% really on the basic business, occupant restrains.

Also we had the Easter holidays, we mentioned.

If you look at the overhead, sales and administration, we're down.

So they are flat as a percentage of sales.

Research, development and engineering is flattish in the dollar and cent point of view, but therefore it has gone up as a percentage of sales.

It will remain relatively high for the remainder of the year, particularly in Q3.

And then it has to do especially much with with electronics where we have had I would say a pretty steep increase in order intake, and that is costing us engineering costs also going forward.

You can also see that the interest costs are coming down from 11.8 million 8.8 million.

And that is maybe a little bit remarkable if you take into consideration that the net debt on average is up 30%.

But this is a result of the utilization of the Jobs Creation Act that we did in the fall of 2005.

And as you recall, we took some onetime cost and it is rewarding to see that it really paid off.

On the minority line, you can also see we're backing out more profit from the minorities, and that is particularly the Asian companies.

They'll do well, and it is still so that some of them we have minority interest in them.

That is notably I would say in Korea -- some Chinese operations.

Also, we have the item, other costs, which is about 6 million negative -- other financial -- other costs above the EBIT line.

This is usually the restructuring costs, and in this particular case it is,you could say reserved for severance, particularly in the textile part of the Company.

It refers to England, Australia and Canada.

And needless to say, it hasn't -- most of it to do with we moved to lower-cost countries.

On the next slide we have somewhat of a bridge on the net income for comparative purposes.

So you start with the same quarter in 2005.

The FX helped us with 1 million.

And then you have what we call financial net came up 4.

And that is because the Jobs Creation Act we just discussed.

Lower volume took away 2 million.

Minorities and joint ventures, mainly in Asia, took away another 3.

And then we're 3 million, that is so to speak the cost of the buybacks.

Those are costs we have had because we took on extra debt to buy back shares.

If you add those back, we're actually more or less on the same level as last year from a net income point of view.

On the other hand the earnings per share, as you will see later, is up $0.06 per share, $0.05 of those is because of the share buyback program.

Turning the page again please, we come to the return on equity.

And I guess these in conclusion is more or less that the trend continues here.

The year on year improvement for this particular quarter is from 13.4 to 14.2%.

I would also like to emphasize here that quarter three and quarter four last year, they look worse than they really are because this is where we booked the onetime items we had for the Jobs Creation Act, so the development is not as volatile as you might think when we just look at the graph here.

Coming to the next slide please, where you have the return on capital employed.

We're more or less smack at the trendline.

We're having 17.7% return on capital employed.

And it is not so amazing that it is similar to last year, because as you can see all that in the P&L, the EBIT is more or less the same and the capital employed is also more or less the same.

Therefore the return on capital employed is pretty much the same.

As we usually state also, if we exclude all the stock assets and only look at the physical assets, the return during quarter two was 38% on the physical assets.

Turning the page please do the key figures.

Starting with the first one, the earnings per share were up $0.06.

As we mentioned, $0.05 of those is the result of the buyback of shares that we have done between the years.

We talked about return on capital employed and equity.

We come to the operating working capital as a percentage of sales, we are below the target 10%, but we are up from 9% a year ago at 9.4.

Net debt is up to $18 million.

But then of course we also have to remember that in quarter two we made buyback for about $47 million.

We paid off dividends to the shareholders at around $27 million.

All in all, it is in the order of $75 million given back to shareholders.

The loss line, you can see headcount.

From the previous quarter we are up about 800.

That is composed of an increase in the low-cost countries of 1,000 persons, but a decrease in the high-cost countries with about 200 persons.

The net is 800 persons, but with a hopefully better distribution between high and low-cost countries.

The next slide is supposedly illustrating a little bit what has happened in the last six quarters here in these move out of value-added.

The high-cost countries headcount had gone from about 25,000 to less than 23,000.

You can say if you annualize it, we have managed so far to decrease some 1,400, 1,500 persons per year -- a decrease 1,400, 1,500 per year from the high-cost countries.

And the increase in the lower-cost countries has been roughly 2,500 per year during these quarters, the last six quarters.

Also, what IT might be worth noting is that in the high-cost countries the percentage of temps is increasing, and that is not a coincidence.

We are trying to have as many temporaries as possible because that gives us flexibility.

We can move out at lower cost if and why we would like to move to lower-cost countries.

You can see it is a lot higher percentage of temps in the high-cost countries than in the low cost countries.

Next slide please.

It is in figures the cash flow.

As you can see, it has been really strong here.

The last 12 months we have produced $579 million worth of cash flow.

And the net is about 304.

And as you will recall, we have already spoken about the target of 250.

However, we have sold some receivables here to the tune of about 58 million.

That would drag it down to something like to 250 million than if we had not sold the factoring -- not reduced the factoring.

But I would still be on target.

We think we have done this factoring for very good reasons.

As Magnus can fill you in, the marginal cost for Autoliv's borrowings is about 5.5%.

And the receivables we have sold have been in France and in Japan.

In Japan the interest rate is about 1.9%, well below the 5.5.

And in France is about 3.5%.

Both of them, I would say, we have sound treasury management and nothing else really.

I also want to say that the net CapEx of 275 for the last 12 months looks a little bit better than it really is because, as you may recall, we have sold off some empty plants.

We have sold an English plant.

We have sold a plant in Denver.

We have sold another plant in California.

All in all I would say it is about $30 million.

So the last 12 months it is running roughly at the same level of CapEx as 2004 and 2005 if we disregard this onetime effect.

Maybe a bit complicated.

If you turn the slide please, we come to the stock buyback.

I think the illustration is fairly self-explanatory.

During the first half we bought back about 1.9 million shares.

A fairly evenly distributed between quarter one and quarter two.

At the end of quarter two here we had an outstanding number of 82.1 million shares.

And our mandate for repurchasing stands at 8.1 million shares for the time being.

That is the mandate we have as management.

Coming into -- looking -- trying to look a little bit in the future on the next slide, and we have the U.S. light vehicle inventories, and they are clearly not looking too healthy.

You can say we have a 72 days inventories for the time being, with Big Three up almost 5% year-on-year.

And the worst part of it is the truck inventory, which I understand is sitting at around 92 days for the time being.

Considerably worse than the cars.

And out of the big OEMs, Chrysler is the one that has the highest inventory level for the time being.

Then if we turn the page and look into the production figures.

And again these are compiled in this case from CSM for North America.

We're looking at the forecast of roughly minus 4% for the coming quarter in North America.

And by the way, this does include the latest Ford announcement of CapEx and production.

If you take -- and then it would be a slightly less bad fourth quarter, if you like.

The forecast for 2007, as you can see at the bottom right here, is that we should have some pick up in 2007.

If that happens that would be a nice improvement compared to the last four or five years.

All in all, a little bit of a difficult quarter three, and quarter four that is a little bit down as well.

Europe on the other hand, seems like it is coming back.

We should have a very slight pick up, but at least positive in quarter three in Europe.

And as you can see quarter five comes in relatively strong with a 5% increase, and that happens to coincide when we think we're coming back relatively strong too.

All in all, and if you compare the yearly figures and second half looks better than the first half, and quarter four looks strong.

And other hand, you can say that the forecast for 2007 is the same level as 2006.

Finally, Japan, has had a nice development throughout the year.

That is forecast to continue all the way through and with a marginal increase also in 2007.

Some of the launches during the 2006 timeframe, we have the BMW X. 5 produced in the United States.

We have the [Volvo S80].

And both of these, by the way, are already launched.

We have the Ford S-MAX, the [Mini Cooper] that will launch a little bit later in the fall.

The 207 [Pashur], that has already launched.

And the Ford Galaxy the same.

All of these we hope will continue to contribute to a better sales for Autoliv in the coming quarters.

Finally, then the outlook for quarter three.

We think that the organic sales, as already mentioned, will be relatively flat.

If the foreign exchange rates stand as they do more or less for the time being, we think that will result in a consolidated sales increase of 2%, driven then by the foreign exchange.

The EBITDA margin we think will exceed 7%.

But as we also said in the text we sent out, it seems to be difficult to reach last year's 7.5%.

We have some extra high cost, particularly research and engineering, and a little bit of the raw material costs.

Again, the full year we think it will reach the same level as 2005, which means that Q4 will compensate for shortfalls in Q1 and Q2.

And I think is the final word, we believe that we in Autoliv are now out of the quarters with declining organic sales.

And we look forward to having increase in organic sales for a number of quarters to come.

With that, John, we're already with the presentation, and we look forward to the questions.

(OPERATOR INSTRUCTIONS). [Avanish Aquila] from UBS.

Just a couple of questions.

First one, on the higher RD&E you mentioned some electronics contracts that related to that additional spend.

Is it safe to assume that is night vision contracts, or are there other products there?

Would you be able to give us some more detail on what exactly the product is that you are co-developing and what that expenses being directed to?

And the second question, just on the factored receivables, you have given some disclosure on factoring of receivables in the release.

Are we to assume this is receivables with OEMs?

These are receivables you have from customers.

And do you have any liability relating to these once they are sold?

Just a third part of that, is there a total amount you can give us for receivables outstanding that you have sold?

That is all.

Thanks.

Thank you very much.

I would say that the RD&E on the electronics it has been running a bit high for the last couple of quarters, and we think it is more or less peaking in quarter three.

It does not specifically have to do with night vision.

It is rather so that the electronic business will increase relatively much in a year or two.

And as you know, unfortunately we have to spend the engineering before we get the sales.

So the answer is, no, it is not particularly with night vision, it rather has to do with new orders.

The question number two about factoring of receivables I hand over to Magnus.

To indicate this correctly, we have sold off receivables related to investment-grade companies and customers, which means that they have been sold without any recourse, so they should be without any risk to Autoliv.

And that is why we haven't taken them off from our balance sheet and also taken them into the cash flow.

Can you give an idea of roughly how much you have sold -- how much of these receivables are outstanding?

The percentage of these customers is -- we have sold US$58 million for the quarter.

And in total?

In total.

And there is very likely more to come, and particularly if you realize that it costs us only 1.9% in Japan.

It is clearly a great business case to do it rather than to pay 5.5.

Right.

But this is the first time you have done it then?

It is not been done in previous quarters?

We should have done it before, of course.

Anders Trapp of SEB Enskilda in Stockholm.

I have a difficult one.

Actually, we are thinking alike.

Of course the questions I have, have more or less been asked already.

But I have one question and that is actually, you didn't really answer the question on electronics.

You said what it wasn't, but can you say what it is?

I tried to say in the question was it night vision, and the answer is no.

And then I tried to say, it is all the other things we produce in the electronics.

Those are satellites, telematics, safety, seals.

It is the normal run of the business.

It just so happens that we got a bunch of contracts.

That is good stuff.

Also, I wonder about this restructuring cost, or whatever you want to call it.

What would you say is a normal level for a quarter?

I guess it was like $5 million this quarter.

What is a normal level or a range?

Hard to say.

It doesn't come in even lumps unfortunately.

And always when we have to shut down a complete plant, it is usually a bit more.

But probably this is relatively normal.

What it has to do is it a little bit in Australia.

It is a welding plant.

And that welding plant by the way is moving to Shanghai.

It is a little bit from the textile workers in (indiscernible) in UK.

And they become [post] and they're going to be somewhere in (indiscernible).

I've forgotten what (indiscernible) is in Polish.

And then we have some Canadian.

That is what it is for this time, but it more or less decreased.

The only plants that were really closed is the Australian one.

And I think that is more or less reserved.

All of it, yes.

That is already taken.

It is somewhat delayed unfortunately.

It will happen on the next year.

Just one more question about the serving of the receivables for factoring.

I just wondered when you sell those receivables do you get full value, or do you have to give something away for the (technical difficulty)?

What we give away that is the discount -- the interest cost.

You get paid today -- the bank is getting paid when the receivables are used.

Then you know, in Japan it is a no-brainer, for instance, because the risk of not getting paid for companies like Toyota is not so hard.

For some others there will be a bigger risk component and that will be different.

That is why Magnus emphasized it is investment-grade company.

Patrik Sjoblom of Cheuvreux.

Just a little bit of a follow-up on the R&D.

It is it so that you are expensing all these R&D costs immediately when they occur?

There's no element here of capitalizing it, so what we're going to seeing in Q3 is not sort of a new level, but just the peak.

That is a first question.

Then the second question on these [four] costs -- on European vehicle production, do you have that kind of split up on what is going to be the growth rate in Q3 and Q4 in West and East Europe?

Very good.

Thank you very much.

We will start with the first question which is the easiest one.

We expense everything we can expense, so there is no hangover.

We would never activate anything.

And that by the way, includes night vision too.

All of that is expense.

If we come to the production -- can I borrow yours, Magnum?

I cannot give you -- it is particularly for this year.

It is somewhat strange here.

If I can read a couple of quarters here on the East European growth.

Quarter one 17%.

Quarter two 13%.

Quarter 3 18%.

Quarter four 16%, for a total average of the year of 15%.

Coming into 2007, and not taking every quarter, the average for next year will be 7%.

So it is particularly this year the production rate for Eastern Europe is growing very much.

And at the same time as Western Europe, this year is supposed to be -1.3 and next year -1.8.

I don't know if that was too many figures for you, but it gives you an indication I hope.

We never get too many figures.

Thank you.

Michael Anderson of [EVLI].

It is Michael Anderson from [EV] Bank in Stockholm.

Two questions please.

The first one is you're talking about a pretty good second half of this year, especially Q4.

Is there any -- what do you see as the main reason that that won't happen?

If we exclude markets of your business and your customers here, should we be looking at the success of the models you have been presenting here?

The second part is your very good growth in Japan, could you talk a little bit more about that?

And should we expect that to continue as you're growing approximately twice the market their?

Thank you.

We start with the first question regarding quarter four. (indiscernible) we can see any particular risk.

It would be something like we had a major problem at the launch or if our customers had a major launch issue.

But as you know, we're so relatively big and so spread on so many customers so one of them wouldn't necessarily kill it all.

We have -- in essence we don't see a whole loan of risk.

And that is why we maybe are a little bit cocky when we say, we reconfirm the forecast.

We are really taking the volume forecast that we get from our customers, and the closer we get, the more accurate it becomes.

It is like a cold or something you know, the closer we get, the more firm they get.

We tend to believe it should be fairly safe quarter four.

It doesn't -- to us it does not look like a gamble.

Secondly, the increase in Japan.

There are many components of this.

There are some banks that have moved from the UK to Japan.

On the other hand, some seatbelts are being moved from Japan to Korea and so.

It is hard to say exactly the market share.

But if you stay a little bit longer-term in Japan, it is clearly so that the Japanese OEMs are starting to store inflatable curtains also for the local market now.

And we have received orders too from at least one of the most dominant Japanese suppliers, when they make it standout in Japan.

We have an indication that that will happen from all the major Japanese suppliers.

As you may now, from -- sorry, customers of course -- the Japanese customers.

Suppliers of course.

That would mean that we have an unusually high market share on inflatable curtains in Japan.

That would certainly drive our market share.

But that is probably medium-term.

It is great when it happens, because engineering is already done, as you understand, it is just a matter of producing more of the same normally.

Thomas Bessen of Merrill Lynch.

I had a couple of questions.

I wanted to start with a regional question that I hope you will accept to answer.

You know that (indiscernible) is thinking about making a tie up between his two companies and General Motors.

Clearly these two groups are two important customers for you.

I would like you to say just a few words about your view on this kind of finance, and obviously the target which is probably to reduce further costs.

Just a few words on the equation between volumes and costs.

I have a few more questions afterwards.

I don't think we're in a position to comment on the particular margin, in all of these.

But you're right, (indiscernible) and GM are all of them three good customers.

If it would be possible for them to standardize their product then we of course -- that is a win-win for all of us.

Like I think you read about the seatbelt contract we got, even though prices were competitive, of course, costs were really competitive, because we had big volumes from our own side too.

But that you know is the fairly -- how should I say -- it sounds very easy, but it is not so easy to do.

Of course in the medium-term that might be done or the long-term.

I think that is the best possibility they would have.

Other than that, I don't think we're in a position to comment on the discussion.

Can I ask you a quick question on the increasing content of safety (indiscernible) per vehicle in low-cost country that you mentioned somewhere in your interim report.

Do you have any dollar data that you could give us for instance for the Chinese market in the first half '06 or the first half '05?

This market is growing at a very fast rate.

Not on top of my head in any case.

Yes, I'm just pulling out (indiscernible) China update, but it is like 65.

Can you find something while the conference goes on.

I'm sorry I don't not have it on top of my head.

I'm sure we have it somewhere in the documentation though.

It is increasing, and I think you could say now generally speaking in China most of the cars in China that are launching now, they offer frontal bags.

Normally as an option but sometimes as standard.

The airbags are coming pretty fast into China.

Just one more question more.

With the quality of your reported earnings, because I'm a bit surprised by your factoring, but I am a bit surprised as well with free cash flow you're reported, including both the disposals and the (indiscernible).

Although I think it is the first time I see report numbers which I need to address for an element that other companies would [retrieve] themselves.

I was wondering if you could give us a clear number for your CapEx for the full year, net of the various things you will include in the number.

And what kind of free cash flow, with or without the factoring of receivables, we should expect for the year?

I'm not quite sure I quite understand your problem or your comment.

When you come to the CapEx we try to help you out here by saying that you have to remember that we've got onetime income here.

We think that the CapEx is 325 to 350, as we have said before.

But then also we try to make everybody remember that we have sold some assets to the tune about 30, so maybe that ends up with 30 million less simply.

That was simply that one.

The factoring, I don't think it has anything to do with quality.

We're just trying to save money for the Company of course.

And I think we told you that out of the cash flow 58 million stems from factoring.

I'm not sure I understood your question on this point actually.

Different accounting standards make the factoring, it is usually added back to the debt, but here it is not going to be the case.

So I was just wondering if you have already a clear view of what you're going to factor in the second half of the year so that we have a view on what kind of free cash flow you were going to report under U.S. GAAP?

First commenting on the U.S.

GAAP, we are following U.S.

GAAP surely.

When you are selling the receivables without recourse, and then of course you should account as we do.

Yes, I understand perfectly well, but we are asking in the question how much are you -- do you have a view already on how much you're going to sell in the second half so that we -- because your free cash flow for the year, we thought that free cash flow will be significantly higher due to these factors, and eventually as well due to the disposal of the plants you have just mentioned.

I would say it depends on case-by-case.

And I am responsible for the accounts and you are not.

But I will guess that, as Lars indicated, we will have $0.03 or more Japanese receivables.

Another maybe 20, US$30 million in the second half.

That is a guess.

[Tom Haney] of Dresdner.

Lars, I have a question for you regarding your recent comment about the low labor cost target of 55%.

I don't recall that you gave a time period.

Could you give us a time period for that target?

I think you could probably say that there is not an explicit target set like that.

The only target we had, and it was publicly given, at the turn of this half year, which is June 30 of 2006, we thought that we can reach 45% of the employees -- not headcount, but employees in the low-cost countries.

That proved to be relatively accurate.

I think we ended up with 47% of the employees.

Then I think it is difficult for us, because as I'm sure you realize, you take the low hanging fruit first, and the ones where you see that the biggest benefits are.

But there are still a lot more to do.

I think it is not unlikely that we do reach 55%.

But I can't say that we have a plan on exactly when and how to reach it.

But there is more to come for sure.

I would say that it does include Japan in the coming years a lot more than it has had so far.

Would it be safe to say something like two years, or you just don't want to give any figure at all?

The latter, I'm afraid.

I just don't want to given any figure at all.

Sorry.

I understand.

I would like to go to the GM order, the 500 million GM order.

Have you done any calculations on the -- because of the size of this order, the profitability of it that you're going to get out, or can you not say that?

I think you can say that given that there is such a big volume and so standardized, it is going to be as smooth as any other order actually, even though the price is very competitive.

If you cannot be any -- I understand you suspect of course that it is such a high volume, so we have a very, very low margin.

That is very so that we think we can take down the cost to such an extent and it ends up being like a normal order for us.

As you might have seen in the press release also, all of them will be produced in lower-cost countries, and that helps of course.

This won't be just produced out of China, this will be produced globally in other regions?

I was under the impression it would be produced mostly out of China.

No, it will be also in our Romania, Poland and Mexico, if I recall (multiple speakers).

And all of them are lower-cost.

I'm sure you realize that the engineering costs just disappears when you talk about volumes like this.

Sorry to dig here, but you're talking normal profitable.

Is that normal -- we know the -- we have seen the European profitability.

Is it something we could expect in that region from this order?

Yes, I think it is probably not out of the question.

It could easily end up there, yes.

You combine the engineering costs it is diluted so much it disappears.

It is all produced in low-cost countries.

And it is -- could end up being a typical European order.

Thank you for that.

One thing that you haven't mentioned -- or maybe I came in a little late and you said it earlier -- is anything regarding material costs?

I know in the Q1 you said you didn't have anything.

I was just wondering what your outlook is for the second half, and if maybe you could say how things are looking for the 2007?

The material costs is a problem also for us, as you correctly question here.

For the year Quarter three is the one where we are looking at for the time being.

What is hurting us for the time being is really the aluminum zinc alloys that we use, particularly in seatbelts.

And I would say particularly in spindles in seatbelts, maybe in other products do.

We think we going to have to charge a little bit more than 5 million, 5, $6 million extra for the (indiscernible) in quarter three for these zinc aluminum alloys.

And unfortunately there isn't a lot you can do.

If you bought aluminum -- pure aluminum, you could hedge yourself on (indiscernible) but these alloys you cannot.

The only thing you can try to do is try to get some support from supplier, and hope you get some support from your customer, which I think unfortunately is unlikely.

We try to -- I think we are going to end up eating about 5, $6 million in quarter three.

Thank you for that.

And then one last question regarding some of the businesses that you are basically running down, seat subsystems and airbag inflators.

How long are we going to continue to see these businesses?

Good question.

The seat subsystems I think we talked about 2009.

And for practical purposes it is going to shrink at the same rate as the Volvo XD 90 shrinks.

Because most of what we produce, not all, but most of what we produced are structures for all the seats in the XD 90.

And as you know, that is a (indiscernible) with a relatively of complex seat mechanism that we have designed.

A very good product, but with a lousy price, I'm afraid.

On the inflator side, I don't really know.

Do you know Magnus?

It can't be too far away from the (indiscernible).

We acquired a company called [OEA] I think back in 2001.

And by doing so we take over a bunch of orders.

And this is five years into the program.

I would think maybe two years or something?

But it is getting less and less of course.

[[John Hernando] of [Cupton] in Scotland. ] of [Cupton] in Scotland.

I just have three questions.

First, I would like to start with pricing in the quarter.

I know you don't disclose your pricing for products.

But if I do sort of volume adjustments and FX adjustments, it feels like the pricing effect is somewhat less negative in this quarter.

Does that relate more to mix of you phasing out products, or were there any particular items in this quarter that affected the pricing less negative than in previous quarters?

I think it is the same as usual basically.

If you see some improvement then it is a mix issue, but there is no light in the tunnel here.

We are squeezed as ever.

Just more of a mix effect.

More of a mix effect.

Just so I understand it correctly when you discussed the raw material issues, you had some onetime extra costs that you see in the third quarter, so is not a change in raw materials contracts for you.

So we should expect that to effect the second half as a whole.

For example, steel is another material, but you refer to zinc and aluminum only.

Is that correct?

The steel we think the steel is still within check.

As we have said in some earlier conferences, we don't think this deal will produce any extra costs this year.

We still believe the same thing actually.

What we talk is the zinc aluminum, and that will be there for quarter four.

And I don't know when and if zinc or aluminum goes down.

I think we have aluminum at around $2,500, and it was about $3,000 for awhile.

I think it is no particular peak or so for zinc and aluminum.

I think it is where it is, and steel stays put for the time being.

The last question relates to basically your statement that, okay, this third quarter might hopefully be the last quarter of declining organic growth rate for Autoliv, or maybe you will start to grow again.

Do you know what we have in the Call production forecast for 2007?

I think Autoliv weighted is around 1% growth rate in production next year.

You seem a little bit more upbeat on the organic growth.

Could you share with us your thoughts on why you should come back to growth rate levels again?

Has it been increased penetration rates for, for example, side impact protection in the U.S., or are there new contracts that will kick in during 2007 that you could share with us?

Or could you please elaborate a little bit on your thoughts for '07?

We certainly believe that our sales organically will grow more than 1%.

I think it is a combination from taking market share, mix questions.

You know we are very strong on curtains and so forth.

So in the plants that we have now, the rolling quarterly plans that Magnus produces, we see ourselves growing above 1%.

That's clear.

We don't want to go into how much, but it is difficult enough to try to guide a quarter at a time.

What we try to do with a full year guidance here we gave after quarter one was to explain to all of you there will be a couple of soft quarters, but it will come back in quarter four.

And that is basically what we believe.

And as we continue into 2007, and certainly it should be more than 1%.

But when you talk about market share gains, is that for the safety market as a whole or product areas outside the inflatable curtain then?

Basically, we're going to grow faster than the car production.

Then you can discuss is that because the market is going very fast, or is it that we take market share.

And I think it is a little bit of both actually.

Most of the market growth will be in Asia actually.

[Fred Laraby] with Société Générale.

I have a few questions actually.

First thing on organic growth again.

You grew for a 0% organic growth or something comparable to last year over 2006, meaning that in Q4, just to catch-up, it would be an organic growth of plus 4 to plus 5%.

Could you share with us your production assumption for the Q4, or is that just your relative performance you're really confident about let's say doing 4 to 5% more than the prediction?

I think your math is correct.

If we had an organic degree of 2%, and then another 2% in quarter two, and we need to catch it up in one quarter.

And given that the spring is somewhat more -- somewhat stronger than the fall in volume trends, you're right, 4 or 5% up.

That we should do.

Just maybe to complete on this one, I think that last year you had some kind of calendar effect that was negative.

And that is offering you maybe a lower basis of comparison.

Is that included in your forecasts in organic growth or is that something you put aside?

If you compare 2006 and 2005, we had the same calendar for the fourth quarter.

Now turning to margin, please.

It seemed that again in Q4 last year the R&D and January expenses were rather low.

It was 5.2% of sales.

Could you just guide us to a figure for Q4, as it seems that the Q3 figure would be a kind of peak, maybe 6, 7%?

Just could you just give us a little help on this?

What we said in the fourth quarter last year that we have extraordinary high engineering income.

What we have done before is that we have said that we believe that the ordinary expenses in relation to safety would be around 6.7, 6.8% for the full year.

That I think you have down there.

And that is the input to calculate what it should be in the fourth quarter.

It is somewhat unpredictable you know to know what the customerss will actually pay or not pay during the fourth quarter.

It has a lot to do with their own performance, which we have no clue about.

That is clear.

Maybe just two short questions on products.

In the report there is something written on the strong competition in frontal airbags.

Could you just elaborate a little more on this.

Where does that come from?

Is that from China or competitors in that country?

And my last question would be on the curtain airbags showing a really good trend.

It is plus 11% I guess in Q2.

Do you see an acceleration of that figure or something that should stabilize at first end?

The strong competition we talked about in frontal airbags in the fact that we have not maintained some of the contracts.

It is a reflection of the fact that some vehicle manufacturers split their vehicles into frontal airbags and side airbags and seatbelts.

Since they don't want to give us everything, and they think we have a stronger position and they have fewer alternatives, so to speak, in side systems, they tend to take us down in the console systems.

It is as simple as that.

Magnus Lindquist.

And then to come back to your questions on the inflatable curtains, the big market for the inflatable curtains is Europe today.

More than half of the cars here in Europe have inflatable curtains.

In the States that is more like every third vehicle or so.

If the car production in Western Europe comes back, you're going to see the numbers go up fairly nicely on the inflatable curtains.

On top of that, there will be increased penetration, both in North America and Japan.

First in North America, I think we can almost bet on.

And Japan I think is driven by the Japanese OEMs themselves, not by any law or so.

[Anders Brazilius] of Swedbank.

I have just two quick ones.

Regarding the restructuring charge that you took in the second quarter (indiscernible).

If you go and give us a guidance for the third quarter there would be no special restructuring charges in that quarter, is that correct?

That's correct.

It would be less than 1 million or around 1 million.

What you could see so far at least?

And then if I come back to the tax ratio, which perhaps less interesting to predict, but anyway it has been quite jumpy over the two last quarters.

And now you say it should be 32%, which you said also in the Q2 prediction.

What is your forecast?

Do you think now it will be around 32 or is there still a risk that it would be higher?

You're right, we have also firmed up the tax will be (indiscernible) between the quarters Q2, the change in requirements to accounting on taxes according to U.S. GAAP.

The forecast is of course 32%.

But we said that we have a number of tax audits that are -- could be closed during the year, which then could have an impact, or even a significant impact, during 2006.

What Magnus means, a positive impact.

In essence what it means, we are forced to show this jumpy development of the tax rate, even though we can calculate what it should be for the full year, but we cannot do that for reasons that are clear.

Then what Magnus is hinting at at there are nowadays it has to be so for practical purposes.

If we make a provision, the whole time before -- how should I say it -- there is a certain timeliness in which the IRS would have to come back if it is in the States, the Swedish authorities it is in Sweden, etc.

Before that happens we cannot dissolve them.

It can jump, but it can jump both ways.

That is Magnus' comment.

Okay.

You keep a lot of lawyers employed I think.

Yes, we do, and internal bureaucrats too.

Tax experts.

Adam Jonas of Morgan Stanley.

Most of my questions have been answered.

I just wanted one further one on the factoring issue.

If you could elaborate on what the capacity is to push this further.

I think you are pretty clear that you have dipped into it -- it seems you're doing a test right now whereby you're exploring the opportunities with the higher credit customers that you have in Japan and in France.

But if you were to isolate -- if you were to allocate the high-quality business where you could get a couple hundred basis points of pick up on the borrowing costs on pushing the factoring, how big would that pool be?

Are we talking about another hundred million or are we talking about hundreds of millions of receivables that you could do this on, therefore to give us a better idea to predict what positive impact this could have on your borrowing costs?

I will (indiscernible) on that.

Given the pricing, much less than 100 million.

I would guess that maybe it trends to 30, as I said before in Q3.

And it could be another -- I don't know, but less than 100 million extra.

I guess Adam's question is how much could it be all in all (multiple speakers) more than 100.

All in all, as I said, that could be 100 to 150 or thereabouts.

But this depends on the pricing.

We're not in a position where we need the cash price here, but we do want to take down the cost for the loan, and the financing cost simply.

It is as simple as that.

If we can do that at well below 5.5% without any recourse, we will do it.

If it comes up to the vicinity of 5.5, or they start to have recourse, we won't do it.

That is the last question that we have. (OPERATOR INSTRUCTIONS). [Gregory Rudinall] of Exane.

Three questions please.

First, on the rebound that you expecting in Q4 in terms of growth, could you -- you stated a number of models, but on your Q1 (indiscernible) in Q4, I think at the interval.

Are there other platforms that you will be exposed to and that will start in Q4?

I think maybe (indiscernible).

Are you particularly exposed to this one or two others?

Really, to be honest with you, and if they launch in Q4 they usually don't give us much volume in Q4.

I think the volume that we believe will come up here in the fall is rather vehicles that launched during the spring, because they tend to have a slow start while we and particularly the OEMs figure out how to produce them.

I think the Q4 sales will be much more of a result of the launches we had here in the spring.

And that is why we try to explain on that little picture that BMW X5 and all that -- maybe the (indiscernible) etc.

I believe out of those only the Mini Cooper is the one that is launching during the fall here.

That will probably be good volume line when it is up to speed, you could say.

But it will not (indiscernible) help very much in Q4.

You have to give it like half a year for the volume to develop.

A question on RD&E, so given the high-level you'll have in H2 do you think we can have a decline for next year, given that it is probably going to have a total -- the sales line on that and maybe a little lower cost?

We're certainly trying to limit the cost, and we hope we can come back and take it down as a percentage of sales.

I cannot promise anything today.

It is only July '06 as you know.

It depends very much on the order intake we have.

If we are not -- can't get a lot of orders than we would not for sure know do to do the engineering.

Just to take something on the factoring on the level of net debt you're reporting, is this adjusted for the factoring?

That's correct.

The factoring is paid.

So it is reduced -- the net debt.

That is why you can see that the net debt looks like it is up 24%, if you take the level in (indiscernible) June, but the average for the quarter was higher, because the factoring came in gradually during the quarter.

So the average was up 30%.

Maybe a last question, if I may.

On price per share, you already had one, but I wanted to come back on this.

One (indiscernible) mentioned that the price per share got considerably accelerated in H1.

Are you seeing moves like this maybe in Europe?

No, I think we have the same pain basically.

I would say relatively constant pain.

It is not better than usual, but it is not worse either I think.

[Ralph Waller] of HVB.

I'm afraid the first one is a longer question.

The thing is that I have the feeling that you're pretty much ahead of the schedule when it comes to bringing the high-cost operations to low-cost countries.

I would assume that a (indiscernible) and faster pace helps you especially in the GM order you received.

So the question would be, could you, A., tell us how far you are ahead currently of competition when it comes to cost?

And B., do you see that this will help you also in further negotiations with the OEMs, and that you could expect more strategy on contracts to come through in the course of the next couple years?

The last question is a short one.

Could you just tell us if you would continue your share buyback program after the second quarter results announcement?

The first one -- I think it was the first one, I actually (indiscernible).

But I understand there were three, so you have to fill us in the third one.

If we are ahead on competition or moving out to low-cost countries, I think in Europe we are, but in North America we're not.

Most of our competitors in North America they have moved to Mexico a long time ago.

I think we are laggards in North America.

In Europe we might be a little bit ahead.

Japan is a mixed bag.

I would say that for the time being we're probably on par with the rest, but we have a plan there actually.

The share buyback, I understand that question and have -- sorry to have to give you the same answer as usual.

We're going to think through today and tomorrow and then we are going to act on Friday, and you can see on Monday what the result was.

Because as you know, we publish it every day what happened the day before on our website.

On Monday you can see what happened on Friday, if anything.

There was another question too that I'm afraid I missed.

The consequences of being more faster in terms of bringing the operations to low-cost countries, if that would result in further contracts we have seen -- as we have seen with General Motors?

It would be either be more contracts or better margins or a combination of the two.

I think what you are seeing with General Motors is not only really the low-cost portion.

I think it is as much the fact that we are global.

Wherever this platform will be big, we're available there in the vicinity.

Whether they build it in Korea, we are in Korea, even though most of the seatbelts might be produced in Shanghai.

Who knows.

And the same goes for Korea and everywhere else.

I think the global reach we have now has proven to be a very big asset.

Thank you very much, and congratulations to a very good performance compared to your peers.

David Leiker of Robert W. Baird.

This is [Keith Sheeker].

Depreciation and amortization for the full year, have you guys set an estimate for that?

I guess we have said that the CapEx I think we mentioned.

And generally speaking that has been pretty much on the same level as CapEx and depreciation.

I can't say that I have any particular forecast for that.

Do you, Magnus?

No.

If we look historically it is going more or less hand in hand.

You can see that on slide number 15, I believe.

It is not a big difference in any case.

Then as we're looking out into 2007 here, and we get some of these programs that are launching in the fourth quarter here ramping up, if we're going to be doing 4 to 5% organic growth here in the fourth quarter, can we see that number go any higher in 2007?

I don't really know.

We're going to guide you as soon as we know ourselves.

As soon as we believe we know.

The only thing we have mentioned so far is that the quarter four uptick, it is not going to fizzle out.

It is something that is going to continue into 2007.

We have been trying to guide you that the two quarters again that have been lousy had been a temporary effect.

There are no further questions in queue, so I will now hand you back to your host to wrap up today's call.

Thank you very much all of you for all the interesting questions.

We are going to go on vacation and go fishing all of us.

And we will talk to next time on October the 26th.

Thank you very much for calling in and for your questions.

Have a nice summer.

Bye-bye.