Autoliv Inc (ALV) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Autoliv Third Quarter Results Conference Call, hosted by Mr. Lars Westerberg, CEO. My name is Wendy and I will be your coordinator for today's conference. [OPERATOR INSTRUCTIONS] I will now hand you over to your host, Mr. Lars Westerberg, to begin today's conference call. Thank you.

Thank you very much, Wendy, and good morning to all of you in the United States and good afternoon to you in Europe. My name is Lars Westerberg, as Wendy said, and I am sitting in Stockholm as usual with Mats Odman, as usual; Magnus Lindquist, as usual; but now we are reinforced by the newly-appointed Chief Operating Officer, Benoit Marsaud. So a total of we have four here in Stockholm.

We intend to do a slide presentation, and the slide presentation is available on the corporate webpage under the tab Financial or Investors, and you just simply hit the Slide button and you get the presentation.

We also have as a start on that one, we have a Safe Harbor statement which [inaudible] we will not go through, but that makes part of this presentation.

So, if you'd be so kind to flip over please to the page 3, the sales trend.

I think it's no surprise to any of you that we all know that the quarter three was very difficult for the automotive industry in general, and particularly so in North America and Western Europe. In our case, that is partially offset by a very good development in Japan, and particularly Asia-Pacific, which we will get back to.

The light vehicle production in North America, we believe, was down something like 8%, or for Big 3, more like 12%, and in Western Europe, it was down about 5%. I mean, in both of these figures, you could say, are roughly twice as big declines as we saw after quarter two. So an unexpectedly sharp decline in North America and Western Europe.

And on the quarter three, we have also had some other little problems there. There is an increasing problem with some of our sub-suppliers where we have had not only a cost for our ailing sub-suppliers in the States, but also causing a lot of turbulence and extra work and, I would say, also a little bit weaker cash flow than we would have liked to see, even though it came out okay.

The quarter four production rate, we think that in North America there is not too much improvement for this side. We think that maybe the transplants will do a little bit better. In Western Europe, though, we think that there will still be a decline, but not as much as we had in quarter three.

All in all, you could say that we at Autoliv, we still believe that we can have a 2% increase on the organic sales growth in quarter four. And that would mean, given the exchange rate we had in the middle of October, a 6% top line growth. That would, unfortunately, mean that we may not be able to hit the organic sales that we had 2005, but we think the decline would be maybe 1% or so, which we hope we are forgiven, given the turbulence in the market during the fall here.

If you please flip the page to the organic growth. We can say that both the sales and the light vehicle production, both had a decline of 2% during quarter three. In our case, though, it is very unevenly spread. In Japan, we had an 11% growth organic, and in Asia-Pacific, we had a 17% organic growth. But unfortunately, this was not enough to offset the declines we had in North America, which was -5, and Europe -7. But we have to say that particularly Asia-Pacific is remarkably strong, given that, for instance, in Korea, some of our customers had a 30-day strike. That, of course, hurt the growth. And to just take a country like China, the sales increase was plus 148%. I mean, it's not plus 48, it's plus 148. And also, the remainder of Asia-Pacific in general had a very strong growth.

If we go into the vehicles where we had problems, you could say that in Western Europe, [inaudible] Peugeot 307 and 407, we saw a decline some 25 to 35% year on year. The Megane was off 22%, and, as you know, these are, for us, very important vehicles. Volvo's had a pretty big sales drop and production drop.

North America in general [inaudible] large SUV's are hurting, but also some cars like perhaps the Ford 500 saw a decline of more than 50%. So pretty much across the board in North America.

If you flip the page, please - we get to the light vehicle production. And, as we said, the decline in North America and in Western Europe was twice as much as expected. But, as you can see here, a little bit of news maybe is that the so-called transplants or new domestics, they are also flat for quarter three, which has not been the case, normally speaking. They've always been increasing, but they're flat compared to last year.

Eastern Europe, as you can see, grows very, very strongly, with few exceptions, though, it's very little value per car there. It's normally only seatbelts and usually we are [inaudible] safety seatbelt, too. So from a value point of view to Autoliv, today that doesn't mean a lot. At some time future, I'm sure that's going to change, though.

The next slide regarding our own volume. You can see here that the seatbelts are up 6%, whereas the global production is down 2%. So we can even take market share here as we do with steering wheels, where we're up 9%. On the other hand, frontal airbags, we are losing out 8%, which is more than the Triad's production decline. Particularly, that is passenger airbags, and the [inaudible] partially explained by the larger [inaudible] program was the GMC 800 where we had all the passenger airbags, and that has ceased, so that is a big drop we had.

On the new GMC 900, we do not have the frontal airbags. We do have all the side airbags, though, on the truck side, so that would be four bags per car, so that is a trade-off in value terms, but no frontal.

[Inaudible] in volume terms, as you can see, is up 14%. In value terms, that is up 11%.

The next slide, please, is the gross margin, and you can say that there were many one-time items during the fourth quarter. Some positive, some negative. As you can see, we have the second best ever here. But, nevertheless, it is 0.5% drop compared to last year, and that is explained, for instance, by the aluminum [inaudible] price increase where we had to pay at least $6 million more during the past quarter compared to year ago.

Also, as I mentioned before, some sub-suppliers have caused a bunch of problems, and I will say we probably spent 3 or $4 million North America, and mainly here in Europe, there's been a lot of extra work resourcing, moving [inaudible], etc. That also costs money.

For the time being, we here at Autoliv and we have an added problem when it comes to developing gross margin, and that is, we have a number of, for the time being, new plants that are today underutilized. That is particularly applicable for China and, to some extent, in Romania. We have three plants in China. Two of them are filling up fast and will be more or less overbooked within two or three years, whereas the one in Romania and another third one in China will take a longer time to fill up, even though production has started in both of them.

So a little bit of added overhead because of some new plants that we have sort of invested in for the future.

If you turn to the operating margin, please. And we are down 0.3% and the reason is, of course, mainly that we are down 0.5% on the gross margin. That is, to some extent, offset by lower restructuring costs [inaudible] the last year where we had a -6 and this year, we have a marginal plus income.

Having said that, we are still pretty proud that we could come in with the operating margin as guided in spite of the fairly strong headwinds. You may recall we said we would not see the 7.5% we had a year ago, but we believed we could pass 7%. So we ended up with 7.2%. And that was again the problems we had with mainly North America and Western Europe.

Turning the page please to the income statement, and as we usually do, we go through the deviation column. Total sales are up 1% and that is, of course, correct, even though organically, it's -2. It's a dollar exchange rate effect, you could say.

If we go down to the operating income, we are -2%. Income before tax is -3%. And when we come finally to the net income, we are up 106%.

[Inaudible] needless to say, I am sure that many of you have seen the release sent out that showed that during the quarter, the net income went up because we had a -- we released a tax position that had been in place ever since 1997, and we have been trying to flag for it the last couples of quarters, and that came now in quarter three. If we take away that one-time tax effect, we had an underlying net income of some $56 million. And the underlying earnings per share was $0.68, versus last year's $0.66. So we were up $0.02, you can say, excluding the one-time tax release. And the earnings per share increase, by the way, is put together from three components. We had a -$0.02 because of a lower net income. We had a +$0.01 because of foreign exchange, and a +$0.03 because of share repurchases, compared to last year.

Also looking at the P&L, I would say the most -- the figure that stands out is a RD&E cost, the engineering costs. They are up mainly because of a lot of engineering activity within the electronics. Also, to some extent, because of the strong order intake. And that's probably the most outstanding point.

The next slide, please, will try to explain this one-time tax position has an influence on a number of lines in the profit & loss and the balance sheet, and we are just trying to take you through. The reported column is, of course, the U.S. GAAP declaration -- U.S. GAAP report. And as you can see, the net income is $122 million, whereas if we adjust for the $66 million tax release, the underlying is more like $56 million, as I mentioned earlier.

In the same fashion, the earnings per share according to GAAP is $1.58, whereas the underlying is about $0.68, or $0.02 better than last year.

Return on equity, in the same fashion, goes down from 20.6 to 9.6%. We'll get back to that one. And working capital was $668, down to $602. And working capital in relation to sales, which we say stands at 11% [inaudible] 10% and that is because the tax accrual was booked as the -- the tax position was booked as an accrual about a year ago was a short-term accrual, because we knew that this would happen, even though we were not allowed to say very much because of the new accounting rules.

And when we talked about earnings per share, as you can see in the footnote, this is based on 82.1 million shares, whereas at the end of quarter three, we had 81.2 million shares. But 82.1 was the average for the quarter, and I understand that that's the way we should calculate it.

Next slide, please, is trying to explain the [inaudible] share of the interest expense. Last year, we had $10.0 million in interest expense. That would have gone up with about $6.7 million because we had a higher net debt, partially because the repurchased shares, but also, the floating rates are higher, so we would have added $6.7 million. That has been counteracted by the Jobs Creation Act, which, as you know, we took advantage of in quarter four last year. So we took away most of that increase, so the net went only from 10 to $10.5 million of interest cost net.

The next line, we tried to make a statement [inaudible] between the net income Quarter 3 last year and Quarter 3 this year. So last year, we had $59 million. FX added 1. The financial net would have added 3. The tax position added 67, actually composed of 66 with the release of the tax position. And $1 million in an underlying lower tax rate.

And then, on the other hand, the net income was lower, so we take away $3 million. The minority share was $3 million. And then the buyback took away another 2 that you could say is offsetting the financial net positive. And that's how we ended up with $122 million, according to U.S. GAAP.

The next slide, please, is return on equity, and the official return on equity is 20.6%. In this slide, all we have [inaudible] regard to that figure, and we can say that the net income was down $3 million, but the equity was also down in the same proportion. And therefore, the underlying return on equity is the same figure as last year, 49.6%.

The next slide will show you the return on capital employed and again, EBIT was down 2 million, but unfortunately, the capital employed was up $110 million compared to last year, and there are two major reasons for that. One is, again, this tax position that added $66 million. Plus, we had increased the inventory about $25 million. And between the two, that is 90 [inaudible] 110. Those $25 million of inventory increase is really in France, where we had increased the inventory of initiators, and that is because we are taking in initiator production that was earlier produced by an outside company and, to be able to do so, we had built up a little bit of a safety stock in France. There's also safety stock in North America and that is more because we are going to move production from a high-cost country to a low-cost country, which, of course, is Mexico then. So you could say that those are not mishaps. Those are sort of planned increases.

The next slide is the key figures. And the red, or the colored, column is for the U.S. GAAP figures, but they include a [inaudible] number of tax position releases. The earnings per share, which we show at $1.48 is rather $0.68. And return on equity, where it shows 20.6, as we mentioned, is more like 9.6. The -- on the other hand, the working capital is not 11%. It's more [inaudible] 10%.

And then finally, we have net debt that has gone up $54 million. This $54 million, you can break down to dividends paid to the shareholders of about $29 million. And also, we have repurchased shares for $52 million. Against that, you can deduct the net cash flow 24 for a total of 67, which is fairly close to the 54 we had as an increase in the net debt position.

The head count -- that takes us into the next slide, which is trying to illustrate the move we have to low-cost countries, and this was strongest move we have had in any single quarter, and we increased the manual laborers in the low-cost countries with some 1,600 persons. And, at the same time, we've decreased 400 positions in the high-cost countries, for a net of 1,200 persons. On top of that, you can see also that nowadays, we have 90% of the high-cost employees as temporaries, and that is, good for us going forward. It's more flexible, it's much faster and, generally speaking, if we need to shrink, it's also lower cost for us.

If you take these figures for employees, we now have 49% of the employees in low-cost countries, so we're closing in on 53 still. Head count, which is the employees plus the temporaries, then we're at 46% in the low-cost countries. And then, [inaudible] as I mentioned, a very strong move during Quarter Three.

The next slide shows you where did it really take place, and one thing stands out [inaudible] of course, and that is a very strong increase in Mexico. It really composed of two things. Mainly, we have a number of launches happening in North America for the time being. And then secondly, we have also some [inaudible] North America and down to Mexico. And how much do we save on this one? Well, we have gone through this one. The first nine months of 2006, compared with the first nine months of 2005, we believe that we saved about $87 million by moving to low-cost countries. And if you compare it with the end of 1999 or January 1, 2000, it's probably in the order of $550 million. So it's a very important strategy for us to be able to defend our profit and loss.

Next slide will show you the long-term cash flow, the so-called LTM, and we always concentrate on the LTM because, as you know, some quarters have strong cash flows and some quarters have not-so-strong, and Quarter Three is one of those with not-so-strong. First of all, it's important here to emphasize that the tax position is eliminated now automatically. It does blow up the net income, but it does go out again under the working capital. So you've got [inaudible] cash from operation or cash [inaudible]. And you could say that these last twelve months, it does benefit from -- to the tune of $39 million from the factoring we started in Quarter Two. But it suffers, you could say, from $30 million that we had in voluntary payment into the pension fund in Quarter Four of last year. So, therefore, you could say that we are around $550 million in cash flow from operations, and we are very close, or even actually a little bit above, because [inaudible] we want to produce a [inaudible] cash flow for the shareholders.

Quarter Three in isolation looks pretty bad with a [inaudible], but then it is saw that during Quarter Three, we [inaudible] decrease of the factoring of about $20 million. So from 42 to 43, that was negative. But if you take the year-to-date figure for cash flow, we do exceed last year's cash flow, even if we exclude the factoring. So cash flow remains strong.

Next slide is the buy-backs that we performed, the buy-backs that we did in the market. Year to date, we have bought back 2.8 million shares, and that means we have a remaining mandate from the board of 7.2 million. And, as I mentioned earlier, outstanding at the very end of September was 81.2 million shares. And the average for the quarter was 82.1. And you can see 22.8 million so far bought back.

Next slide, we have some technology [inaudible] for a change. The left one here is the safety vents and the safety bags. That is a low-risk deployment bag, and the reason for showing this one, we at Autoliv are nominated to -- we are in the finals for a PACE Award, that is a [inaudible] automotive [inaudible] award you get for the best innovation with automotive in the U.S. And we are one of the finalists. I think there are, all in all, seven finalists. But there are more than 100 entrants.

And I'm happy to say that we have launched the three low-risk deployment bags now. All of them received five stars at the -- in the [inaudible] evaluation, and we have, all in all, 29 orders for the time being, an increase in [inaudible].

The slides to the rear. That is the world's first frontal airbag intended for rear seats. And the reason for bringing up that one, you can see that the man is sitting here with his footrest up, and the risk if you don't, in the first slide on top. The risk is that he submarines below the seatbelt seatbelt in case of a crash. But we have then -- sorry, [audile] lower one. And with our kind of bag, this could stop the [inaudible] from sliding and he would not submarine. And Autoliv received an engineering award from Lexus during Quarter Three for these inventions.

The next slide is the simple cost down activity that we're performing for one of the major OEM's. The cost savings, depending on how much the [inaudible], is between $20 and $40 per vehicle. $20 is the just combined [inaudible]. Up to $40, though, if it's a more equipped car with rollovers and sensors that we can combine both for the ESP or ESC system as well as our rollover system. I'd like to emphasize that this does not mean that we as Autoliv are moving into the ESC system. This is a cost down activity for the OEM's.

We so then tried to look a little bit forward. What can happen to the car production and it takes a look at the next slide, the light vehicle inventory. You can see the September figure, that's 67 days. It's above 2005 and 2004 and it's unfortunately above about the 10-year trend. And in that light we should see the forecast for Quarter Four in North America where we expect to see another pretty tough [inaudible] in production values.

And that comes in the next slide, then, which is the light vehicle production in North America. Quarter Three, as we mentioned, had a decline of some 8% and, as you see here, we believe it's going to be a similar figure for Quarter Four. Maybe a little bit better. And the improvements would be then, as you see, that the new domestic will come back and start to grow again in Quarter Four. [inaudible] flat in Quarter Three.

And for 2007, you can see the forecast for this year, 15.4 million, should go up a little bit up to 15.7 million during next year. And that increase would happen in the second half of the year.

Next slide is the same thing for Europe. Quarter Four in Europe looks a little bit stronger, and it's relatively flat. And that also goes for Western Europe. We mentioned that it was down 5%. The drop in Quarter Four is now limited to 2% only. So not good, but less bad, you could say. And next year, we should see a relatively -- all in all, a relatively flat production in 2007 compared to total 2006.

Finally, Japan. On the next slide, as you can see, relatively flat 2006, similar number as 2007, or 10.6 million vehicles, which is a fairly strong figure and a big chunk of those [inaudible] are exported out from Japan.

Last slide is then the outlook we have for Quarter Four this year. We think, as we said, with the foreign exchange rate that we had in the middle of October, which, by the way, the most important is the 1 euro we have calculated to $1.27. With a stable exchange rate, we should see the top line grow about 6%. Of that, then 2% will be organic. We believe that we will have a similar underlying operating margin as we had last year, where we had a -- as you saw in the second quarter report last year, we had a $30 million one-time engineering income which we believe will not repeat these year, but you never know. But we believe it will not.

And that was about the end of the presentation. So Wendy, we will try to do our best to answer all your questions.

Thank you very much. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Avanish Aquila of UBS. Please go ahead with your question.

Good afternoon. This is Avanish Aquila from UBS here. Just a question on the reference to China, the crash test ratings in China. You mentioned it in the release. I just wanted to get your thoughts on exactly what kinds of tests do you think they might introduce in China. Would this be just frontal crash testing or would they go as far as doing side impact tests? And then secondly, what do you think is the timeframe for this to happen? Is this something that you expect to happen in the near future?

Okay. And we -- Mr. Mats Odman will try to answer that one.

Yes. This is then a similar thing as the rear-end crash tests that we have in Europe. So you will get a number of stars, depending how well your vehicle performs in the crash test. And the exact criterias for each of the crash tests -- the frontal and the side bags, I'm not aware of, but I can come back to you about the details.

Okay. Great. And on the timing --

As far as I have understood, it will be introduced from the start of the next year.

Right.

I can just fill in here that, from a marketing and sales point of view, there's practically no side systems sold at the time being. We had crash test statistics on it. You can get statistics on frontal airbags, but there's nothing like side airbags. That is a market yet to come, you could say. With very few exceptions, side airbags are not sold in China.

All right. Great. Thanks very much.

Thank you. Our next question comes from the line of Thomas Bessen of Merrill Lynch. Please go ahead with your question.

Hi. It's Tom Bessen. I'm really sorry. We've got an emergency evacuation in my building, so I will pass and leave it to someone else. Apologies.

Thank you. The next question comes from the line of Patrick Lindquist of HQ Bank. Please go ahead with your question.

No emergencies here. Anyway, I had a quickie on inflatable curtains.

Could you speak up a little, Patrick?

Sure. Like that? Yes. On inflatable curtain, normally you've been seeing that [inaudible] has been exceeding volume whereas it's kind of turning the other way around now. Are you seeing -- does that show increased price pressure, or it is just a mix thing?

It's just a mix thing, Patrick. It depends basically on the size of the car, you know, and it's -- I'm afraid it has no bearing on margin even.

No. Okay. And just finally on Korea. I mean, there was a strike in the first quarter. Do you have -- or are you expecting any sort of catch-up activities from -- in the fourth quarter, or are you just expecting them to sort of resume at the normal pace in your forecast?

And that's a good question, because normally, we have seen exactly what you say, that they had a strike in connection with the wage negotiation, and there is a strike and then they work like maniacs for a couple of months and catch it all up in fourth quarter. My personal -- and I'd be happy to -- my personal understanding is that they -- that might not happen this year, because I think the won has gotten to be a bit stronger against the dollar, and I think you and I have maybe some [inaudible] problem in the United States. It came back, but I don't think we will see the same strong fourth quarter as we normally see. And by the way, Patrick, when we make a guidance for Quarter Three, we cannot anticipate a strike, even though that is kind of normal. So year on year, we don't suffer so much, but it does, of course -- the forecast is hard to and it was almost 30 days this year, the strike. And there was a second small little strike for temporary workers afterwards.

I was going to hang you for not being able to forecast strikes. Thanks anyway.

Thank you. Our next question comes from the line of Alex [Toms] of Morgan Stanley. Please go ahead with your question.

Hi. It's Alex Toms from Morgan Stanley.

Hello?

Hi. It's Alex Toms at Morgan Stanley. I have just a few questions. First of all, raw materials. What do you expect the raw material impact to be in 2007? And secondly, I know you've bought back a lot of shares. Why have you not cancelled those shares? And the third thing, what's the overall impact of the distressed suppliers on your margin [inaudible]? Thank you.

Okay. There were some great ones. I think what we are seeing in raw materials, I think we're seeing that we have a similar hit in Quarter Four as we had in Quarter Three. We believe that -- 2007, we don't know yet. We have not made yearly [inaudible]. Chances are, maybe that after all [inaudible] prices do moderate a little bit, and aluminum, as you know, that peak, as far as I can remember, in May and June this year, has gone down a little bit. We hope it continues down. Zinc, I think, has not come down. We are no [inaudible]. But we believe probably similar levels as last year, hopefully with some trend down. What was the next question? The cancellation of shares, thank you.

And we were advised by our investment banker not to do so, because in case we would like to make an acquisition or something larger, if you want to get a new money or new [inaudible], say a new [inaudible] that takes a long time because you had to write a booklet and you have to get it out, and it takes typically one or two quarters. And then the opportunity might be gone. So that's why we still keep them and don't cancel them.

That was two questions. Did you have a third one?

Yes. On the distressed suppliers. What impact does that have on your margin and what should be expected going forward?

And I think the best estimate we have that it did hurt North America by about 3 or $4 million during Quarter Three. I think that most of that is sorted out as we speak. But I'm afraid that there will be new people coming in here. I think it's very difficult to predict what's going to happen. I think we'll both see the same thing that some of them are sort of having huge problems. In Europe, and I don't know, Benoit, we have a number of [inaudible] suppliers that are in trouble, too. Somebody sort of leaves the business of automotive [inaudible] supplies. They don't think it is particularly interested. And some of them, I think you have to buy raw material on their behalf because their creditworthiness has disappeared.

Exactly. Specifically, [inaudible] activity and aluminum and [inaudible].

Sorry. Would you consider buying any of them to guarantee supply?

No, we really try to avoid that. We don't want to integrate backwards. And we'd rather try to help them out.

Okay. Thank you.

Thank you. Our next question comes from the line of Tom Haney of Dresdner Bank. Please go ahead with your question.

Hi. Good afternoon. This is Tom Haney. I have a question regarding your outlook statements. I understand about the R&D, but basically you're saying your 8.5% operating margin is unchanged if you exclude the R&D of last year, but you're getting a 2% organic growth rate. I was just wondering where your operating leverage is going in the fourth quarter?

Yes. That's true. You could say that maybe -- I think we said initially was in the forecast. I think it's unusually difficult to predict for the time being. There have been so many news lately, all of them negative, so maybe we're [inaudible] for the time being. There's too many bad news lately. We sure hope that it's in the operating leverage, but we are maybe a bit cautious.

But that's just being cautious, and that there's not anything in like --

What we hope is being realistic.

Okay. I have a question regarding going on to the production outlook, in Europe particularly. We've had basically a big question mark how things are going to look in the first half of next year, especially when you look at the German BAT hike. How do you -- how's your feeling of what's going on, in particular in German production?

Well, what do you mean? How it's going on --

Well, yes. Well, we're having a feeling that there's a pull-forward effect due to the BAT hike of 300 basis points in Germany. And that's pulling forward some demand. I was wondering if you had any view of what that's going to mean to the first quarter of next year?

I can't say that we really know that. I did see the same, as you mention here, that Germany was really the only market with some [inaudible] in Quarter Three. But I can't say that we have an opinion on it. We think that many of the notions that we made earlier during the year -- you know, there's been a number of them, the Peugeot 207, the Volvo S8, [inaudible]. The quarterly launch, and even the second quarter after launch, volumes aren't really meaningful, and we believe that it will start to become meaningful now in Quarter Four. And hopefully that [inaudible] whatever we can have as a problem in the market of Germany.

And if I could move on to France, how is that looking for you guys?

We have an expert here and he's from France. What about France?

In France, we have seen the weak [inaudible] the end of 2006, and all information we have, it was -- let's see, the first part of 2007 will not be higher than the end of 2006. We can see maybe some [inaudible] at the end of 2007, but for the other big customer, which is Renault, [inaudible] Nissan, we are not expecting [inaudible] before, let's say, early 2008.

Okay, and what about -- I mean, what is the 2007 mean for your guys? Is that a disappointment? Is that what you're trying to say?

No, we're not trying to say anything. We're just trying to say how we estimate [inaudible]. You know, we don't have any staff doing this. We buy these surveys from J.D. Power, CSM, etc., etc. We put them together and then we compare it with our own backlogs. So when really give you forecast, that is more based on our backlog plus input from the OEM in question. Unfortunately, as we said, these [inaudible] -- the real production rates have been a lot lower than the forecast because the inventories have been too high and, particularly in the U.S., they are trying to take out inventory.

Okay. And I have one last question. When you see the strong growth coming from Japan and the rest of the world, particularly China, how does that equate to profitability versus your European and North American business? Does that dilute what we're seeing here, this strong growth in the rest of the world and Japan?

In Japan, margins are lower than they are in Europe and North America, and as we've said many times, we think it will stay that way. You know that the cost of capital in Japan is very low. When you talk about Asia-Pacific in general, it's higher than it is in Europe and North America. And then, as you heard earlier, we have putting more value added into China, and that would probably make it even more competitive, I would say, because imports into China, you have to pay customs duties, and that's why we have taken this long-term investments of producing electronics, steering wheels, inflators, gas generators, all of it within China, so we can avoid the whole customs duty. And either we get higher margins or else we can defend the margins compared to competitors. [Inaudible] medium, long-term kind of investment.

That China production. Is that -- how much of that for China itself and how much is exported?

I'd say that most of it is for China itself. There are some that do exports, too. We have -- the largest one that comes to mind is the Honda plant in [inaudible] where most of it is exported, but -- and not too small part is actually for Chinese OEM's too. That is definitely today's [inaudible] in China.

Okay. Thank you very much.

Thank you. Our next question comes from the line of John Hernando of [inaudible] Bank. Please go ahead with your question.

Thank you. John Hernando of [inaudible]. Just have two questions actually. The first one relates to the line other income net, which is normally, if you go back at least a few years, a negative number. It was positive at 1.3 in the quarter. I mean, you highlight that you didn't have restructure cost this quarter compared with previous year. But could you elaborate why this number, which is normally negative, turned positive in the quarter, and should we expect this to be positive going forward from here? The second question is -- we touched upon this previously about going into '07, given the weak ending we have of this half of the year. The markets are expected to improve next year, but could you elaborate, given the current outlook on the production side, what kind of organic growth rate, given your pipeline, that we should expect for the full year 2007, please? Thank you.

Answering your first question [inaudible]. You're right, John, that normally we have expenses here because normally we put our [inaudible] when we move production and shut down plants. This particular quarter, we actually had a release of a particular restructuring charge that was recorded in 2001. So therefore, it was positive, but it was just the one-time impact. So going forward, I guess you that will continue to see restructuring activities and, therefore, negative costs on this line.

How large was this release?

It was about -- a little bit more than 1 million then.

Okay. Thank you.

And then when you talk about the 2007. We have found it difficult enough to give guidance one quarter at a time. The basic scenario is still the same. We think we're going to have a reasonable growth in 2007. And that, again, is built on our backlog, the order intake we have had for some time, and then with the volumes estimated and when they should come into production. So 2007 should be a reasonable growth for -- that's no change to that forecast.

But mix should be better then because, I mean, we see some of your large customers such as Renault having a better product program, I guess, in '07 compared with this year. And [inaudible] Volvo shifting the V70, so from a mix point of view, it looks better, I guess.

Yes. From a mix point of view, you're right. And most of Volvo's programs [inaudible]. Renault, we have some. [Inaudible] '07 will kick in. We have a bunch also in North America, even though I don't recall if that's in '07 or maybe more in '08 that they kick in. We also believe that Asia-Pacific -- it's now 10% of sales, and the way it keeps growing is going to be more and more important. So Japan and Asia-Pacific is today 20% and the States is 25%, so they're catching up, you could say.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Ronald Tadross of Banc of America. Please go ahead with your question.

Hello. This is actually Joe [Speck]. I'm Ron's associate. Two quick questions. One, on the second quarter call, you said the factoring receivables could, all in, could be 100 to 150. Is that still accurate?

Yes. As I mentioned, yes, we have the potential to increase the factoring, but it's also related to what is the cost of doing that compared to our refunding rates, and for the moment, it is still very positive for us doing it in certain particular cases, particularly in France and in Japan. The problem we had in the third quarter was that the quarter-end was on a Saturday, which means that, according to the payment terms, you got paid for the factoring Monday, October 2, which meant that we actually got in the money, but a couple days late. So there would have a positive impact in the fourth quarter instead of a positive impact in the third quarter.

That was just a technicality [inaudible] there ended up being a Saturday in between there.

So what will be the actual number for the third quarter?

39 million compared to 59 in the second quarter.

And then, likewise, you previously have said that you expected the third quarter to be the peak of RD&E expense, so -- and I know you spoke to this a little earlier in the call, but the fourth quarter number should trend down from the third quarter, where it was like 6.7?

We have said that, in comparison to sales, that the third quarter normally has a fairly high percentage. But we also said that we expect the full year to be around 6.7, 6.8%, and we still believe that.

Okay. And the same for 2007?

We have not given --

We don't know that. We haven't put everything together, but could be that, could be a bit lower maybe.

Okay. Thank you.

We have a big electronics push for the time being and that should start to moderate at least.

Thank you. Our next question comes from the line of Gregoire Rougnon of Exane. Mr. Rougnon, please go ahead with your question.

Yes. Good afternoon. Three questions, please. The first one is going back on China. Do you have an idea of where the penetration of frontal airbags is currently and where it could be in two to three years' time?

Well, we think that the penetration today is relatively low. I can't give you a figure. I say that it's, for the time being, very low [inaudible] nothing but it's growing fast. I don't know that there are any predictions available on where it would be in the year 2009 or so. At least I've not seen any.

Okay. Compared maybe to other markets you've had experience with --

No. It's far behind, if you compare it with other regions, of course.

But in terms of the ramp-up, you saw the [inaudible] market.

Well, it's -- the ramp-up, we are sure, all of us, is going to be strong because, as you know, there are modern cars produced in China and they're built to have a combination of seatbelts airbags. So we think it's going to come very much stronger than when it penetrated Europe, for instance.

Okay. And a question concerning maybe the euro-yen rate, because it seems that some Japanese [inaudible] choose to put more production in Japan then decide to export that to the U.S. Is this something that could affect you in terms of maybe your market share North American [transference] compared to the Japanese [inaudible]?

That would not be good, you are right, because we have a much better standing in North America than we do in Japan. We compete better with Japanese sub-suppliers in the States than we do in Japan when they are on their home turf. So that would be negative.

Okay. And in terms of the RD&E, you mentioned a 0.9 positive effect that it had in the Q4 '05. Do you think we've got to take this 0.9 points fully for the fourth quarter '06 or you could -- well, it could be closer to mixed effect, I would say.

Generally speaking, and as we published in the fourth quarter report last year, we actually wrote in black and white, so to speak, not to confuse anyone, that we had an unplanned engineering income of $30 million, and this year, we don't intend to plan on anything like that. Having said that, normally there is, of course, the end of the year a lot of engineering costs being paid, between the OEM's and our [inaudible]. But it's virtually impossible to predict how it's going to be done. And I think a lot of it has to do with the situation within each particular OEM, if they want to clean it up before year-end or not. So the $30 million one-time, we do not think will repeat. Whether we do get a normal lower engineering income, yes, normally. But we're not so sure about this year when many OEM's had problems with their own profitability.

That is the kind of worst case maybe --

Oh, I don't know what is worst case anymore.

[Inaudible] Thank you very much.

Thank you. Our next question comes from the line of Thomas Bessen of Merrill Lynch. Please go ahead with your question.

Hi. It's Thomas Bessen with Merrill Lynch. [Inaudible question] Can you come back to what you managed to do with [inaudible] and why [inaudible]

Well, thank you. We can hear you. I hope -- it's good to hear you're still alive even though the emergency evacuation. For the fourth quarter of this year, I would say that it's not out of reach that we at least match last fourth quarter's gross margin, or maybe even surpass it. The problem we're having is rather that the engineering line will be much higher than last year, and as we tried to explain, partially because of the $30 million. So I don't think we should automatically draw the conclusion of [inaudible] gross margin. That might be a positive surprise. Who knows?

Okay. Thanks a lot, Lars.

Thank you. Our next question is a further question from the line to Tom Haney of Dresdner Bank. Please go ahead with your question.

Hi. Sorry to do this to you guys, but I have a question regarding pricing. We had a comment from the VW that they were asking prices of up to 8%. I was wondering if you've heard or seen anything on your side regarding such drastic pricing?

We have noticed that they are pretty tough on pricing. That is correct. And having said that, of course, they are not alone. And how this really ends, I couldn't tell for the time being. But it sort of seems to be jumping around between the various OEM's. They all have a new program, whether the call it Going Forward or Shift or NRP or Revival Plans, I don't know. All of them seem to have a program, including Volkswagen. And it certainly is a pressure on us. But we cannot give 8%. That's also equally clear.

So where do you guys see your pricing this year in general?

We think it's going to be the same story as usual when all the dust is settling down [inaudible] 2, 2.5% on erosion. Then, of course, it is thought that a new generation will take down the cost, too. So even though the price might go down, the margin stays the same.

Okay. Thank you for that.

Thank you. Our next question comes through from the line of Bernard Horn of Polaris Asset Management. Please go ahead with your question.

Yes. Good afternoon. I was just wondering if you could discuss a little bit the geographic profitability that you're experiencing. I'm interested in knowing if there are certain regions where you're seeing sort of better margins and pricing and other regions where you're having to give greater concessions.

Well, generally speaking, we never discuss these things. I think we have, in general terms, stated on many occasions that we have lower margins in Japan than we do have elsewhere. But then, on the other hand, what do you pay for cash now in Japan? Is it 0.5% or something? So of course, the cost of capital is so cheap in Japan, so it wouldn't be reasonable to demand 10% margin if you [inaudible] 0.5. Normally, North America and Europe are similar, I would say, and Asia-Pacific has a chance of being slightly better.

So you're essentially earning, with the exception of Japan, it would seem, and that's a cost of capital, you're earning essentially the same margins from all the various OEM's and there's not one that is a better customer for you in a profitability sense. Is that a fair statement?

I would say there is, of course, one that is best. But I would say that it's not such a huge difference between them. It has a little bit to do also with how we reallocate RD&E expense. As you know, some of our -- we never balance anything on the balance sheet, as you know. We take it all as cost. That means that some of our customers has to carry that cost on the customer income statement, and that is -- in spite of that we usually [inaudible] those customers because we like to develop products together with customers. So from an accounting point of view, it looks different, but really in actual [inaudible], it's not so different.

I see. And then the -- I just wanted to also follow up on the statement that you have in your release that talks about the pricing pressure that had been addressed by the phase-out of unprofitable and low-margin products. Can you be more specific about which products and programs you have phased out and where, geographically, those were phased out. And where did that business go? Are these -- can a new competition coming up on the low-end margin products, or --

No. Basically, what we talk about is two product areas. And the one that is easiest to explain is that once upon a time, this company made seat structure frames, you could say, to make seats, and once upon a time, we had most of Volvo's business, for instance, and a little chunk of Jaguar's and, I believe, probably 5, 6, 7 years ago, we decided that there was no future in this for us. We had, I think, at the most, $150 million or something like that in sales, and there is no chance to compete with people like [inaudible], Johnson, [inaudible], etc. So we decided we'd like to leave the business. At the same time, we had to continue to produce until these products end naturally. You cannot just cease to produce or you would put your customer in trouble really. So for practical purposes, we will be out of this business when the Volvo XC90 disappears. That is the last model of these seat frames that we'll continue with. I'd say today it's what, Magnus, $57 million or something? Not a lot. And it's not producing any EBIT. It's just diluted.

The second product line is we acquired a company called OEA, a Denver-based company. In other words, we talk about the United States. It happened in 2001 or something like that. And then we inherited a product line of high-[inaudible] inflators for drivers and they were complicated designs, they were expensive to produce, the prices were not very attractive either so, pretty early in the process of merging the companies, we decided the same thing. We had to sort of let this phase out as time goes by in a natural way. And how much do we have of that today? It's not much, in any case. Maybe $25 million less [inaudible] That will disappear when last models of our customers run out, too. So this was for technical and cost reasons we took out the inflators

Okay. Thanks very much. That's great.

Thank you. Our next question comes from the line of Himanshu Patel of JP Morgan. Please go ahead with your question.

Hi. Good afternoon. For 2007, you've got a sizable amount of launches coming. I was wondering, is there any way to quantify the sort of full-year increase in launch engineering costs that you may incur in '07 versus '06?

I don't know if there is one. We don't know of any one, in any case. We cannot. And it's -- normally it's not so bad. It's really if we have a problem. Then it can cause enormous amounts of [inaudible] because we have to fly them around in chartered planes and so forth. A normal launch isn't all that expensive.

Okay. So, I mean, you think --

We do not quantify it, Himanshu. We don't know how to quantify it because we would more or less have to try to figure out where will we have a screw-up and where we will not, and we don't know that beforehand.

Okay. Second question. On the move to low-cost countries. I think in your backlog, the -- correct if I'm wrong -- the airbag mix is increasing. Does that -- because that business is a bit more capital-intensive and labor-intensive, does that sort of reduce or stop the rate at which you're moving workers out of high-cost countries into low-cost countries?

I would say normally not. Benoit has been the mastermind between these moves. But I think the way we operate is typically we calculate number of labor minutes and we translate it into how big of a savings would it be to move this particular product. So the textile [inaudible] basically moving most of them, with the exception of [inaudible].

Most of them -- because the textile business is a very labor-intensive business. And in that case, competition cost is low compared to the saving we can do.

And then if you talk about the rest of it, the gas generators, we have set up our first low-cost plant in Romania where some lines are moving from [inaudible] France. Plus we have set up the first line in China as well. And then you could say we have the labor-intensive [inaudible] if you'd like, in both those countries. And then they will probably shift and we are sending it into [inaudible] closer to the customers.

[Inaudible] because we are saving the labor in the low-cost countries, but on top of that, that gives us the possibility to [inaudible].

So we can buy -- as you know, we have -- you know we mentioned we have three steps we talked about before. Number one is we move out our own labor cost. Number two -- and we really [inaudible] pay off anymore. Number two, we need to buy more in the low-cost countries. We think we're at 23, 25%. A bit more than two years from now, we should be at 50. And then number three, eventually engineering will have to move. We have a little bit more than 300 engineers to low-cost countries today, but that has no financial impact. So this step one [inaudible] at some point in time. But having said that, you saw that Quarter Three was recordbreaking. So we are not at that point at all.

Okay. And then one housekeeping question of Magnus. Do you have a sense on how the tax rate in '07 will look?

Yes. We think that the tax rate will be 32%, or it could be slightly lower, but our best estimate is 32%.

Thank you.

And if we had a tax position, we would not be allowed to tell you.

Thank you. Our next question comes from Fred Laraby of Societe Generale. Please go ahead with your question.

Yes. Good afternoon. Fred Laraby from SoGen. Just a quick question on the [inaudible]. You said that you expect it to improve over the next quarters, but what I don't get is what [inaudible]. So could you just be more specific on what kind of [inaudible], what kind of countries, maybe?

No, I think it's nothing magic in this one and I wouldn't say it's particularly European. I mean, even though, for '07 I think Europe will flatten out. Europe has probably had its worst year in 2006 here. And we would see it flattening out already in Quarter Four actually. we think. At least not as big of a decline as we have had. In the U.S., it continues for the time being down, and then that's a sad fact. But of course, there are 207's coming up, [inaudible] kicking in and the Volvo is gearing up. It's all, I understand, according to plan. Volvo has a lot of new launches. They had the C30, the S80 coming onstream and so forth. So all in all, we think it is improving in Europe. We don't see the same trend, unfortunately, in the States short-term. And then Benoit remarks that the Logan is up and that is, of course, correct. And we have seatbelts for the Logan.

Okay.

[inaudible]

Okay. Thank you.

We have no questions currently in the queue, so just a quick reminder, ladies and gentlemen. [OPERATOR INSTRUCTIONS] I now have a question from the line of Scott Merlis of Thomas Weisel Partners. Please go ahead with your question.

Thank you very much. You might have said this indirectly, but the -- you couldn't quantify start-up costs, but when you look at the cadence in the launch curves of a lot of these new products, they begin in the third quarter. Fourth quarter, they tend to be halfway up to production, and by first quarter -- or three-quarters to full production, and maybe a lot of them by first quarter, it seems, will be closer to full production. Just a general average. It varies greatly, but -- Is it possible to say that any start-up costs that you have on most of the new product, whatever that is, would be over by the first quarter? You get a little in the fourth quarter and more in the first -- and less in the first quarter?

Yes. Generally speaking, we think you're right, actually. There is, of course, a center of gravity around the third quarter, even though nowadays, they launch a little bit anytime, it seems like. Also we agree with the volume development you described. The launch quarter usually doesn't do much for us. It takes a couple of quarters to come up to speed.

Right.

Some customers do it faster and some do it slower, and some of them plan to be faster and then eventually, some of them just end up being faster, sort of losing control. But I would say it's a center of gravity on launches Q3 and that would be gone by Q1.

Okay. And I'm sorry, can you just review the sales or production declines for those Peugeot 307, the Renault Megane and the other one, the other Peugeot, I think?

Yes. The 307 and the 407, they were down. One of them -- let's see, I have it here. We have the 407 here down some 24% and the 307 down some -- almost 40%. And that's why I call it 25, 35%.

And the gain is down around 20, isn't it?

Yes. 22 I think I have it at. The Megane, -22, yes.

Okay. So the question on those two lines -- if you look at the 307 production lines, the various productions line and the various Megane production lines, what can you do to respond to the underutilization? In other words, can you change machinery around? Can you change the lines around? Head count reduction?

There are different parts of it. The inflators, they are usually not unique for the car models. So there, you sort of even out. But if you take the modules, when you produce the modules, they are unique and what Benoit can do is simply move around the labor. We have, as you know, less automated lines than we had some 7, 8 years ago and more than we have -- we operate with various operating levels. So if volume goes down, we take out 1 or 2 operators and the ones that are still left, they are working full-speed, you could say.

That's exactly -- [inaudible] and then we had used a number of [inaudible] and this is why in the presentation they made [inaudible]. You see [inaudible] in France. [Inaudible]

So the [inaudible] lines, of course, we cannot do much about. That's unique if it talks about modules. But the manning levels, we can do something and we are doing something to. With the inflators, it's usually not such a big problem because the inflators usually are in a lot of different cars.

Right. And in some cases, some lines are [inaudible] more profitable [inaudible].

So would you say most of the remedial and corrective responses to the lower Peugeot and Renault production are either -- would you say they're already implemented or will mostly be implemented by the end of the fourth quarter? How would you characterize the remedial response?

Well, what Benoit does, if the volume goes down in the line, he immediately calculates [inaudible] and moves around the operators so that's done instantly.

So, okay. You've adapted to those lower production numbers the best you can.

Yes, exactly. [inaudible] suppliers in order to not affect the working capital.

You know the [inaudible] system [inaudible] production principle.

You bet.

Even though we use a copycat called the [inaudible] production system.

Right. APS.

APS. Good.

So -- and I think the -- but what give you a lot of confidence for Q4 and into '07 is not just a lot of fresh models, but there's a lot of thing improving mix as well. Is that --

Well, that's true. And of course, looking at the backbone. That's the backbone of the whole thing.

You have backbone. Right. Good. Well, thank you, and I wish you a good day.

Thank you. There are currently no further questions in the queue so I will not hand you back to your host to wrap up today's conference call.

[inaudible] and thank you very much for all the interesting questions, and we look forward to hearing you again on February 8 in the year 2007. So thank you, all of you, and have a good day to you, too. Bye-bye.

Ladies and gentlemen, the conference has now finished. You may now replace your handsets. Thank you.