Autoliv Inc (ALV) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to your Autoliv conference call hosted by Mr. Lars Westerberg. My name is Tim. I'll be your coordinator for today's conference call. [OPERATOR INSTRUCTIONS] I'll now turn to your host to begin today's conference call. Thank you.

Thank you very much, Tim, and good morning to everybody in the United States. Good afternoon to you in Europe. I'm really sorry we are 10 minutes late. There were some-- we got bumped from the conference call and had some problems to get back in, actually. So-- but finally we're here again.

I'm sitting here, Lars Westerberg, as usual. And we have the CFO, Magnus Lindquist. We have the Operating Officer, Mr. Benoit Marsaud, and also, as usual, Mats Odman.

We intend to follow the schedule as we usually do, which means that we start with a little bit of a slide presentation, which you can find on the corporate web page directly or under financial information. And once we've gone through the slides, we will open up for a Q&A session and we will do our very best to answer all the questions you may have.

So without going through the Safe Harbor statement, maybe we can turn the page and go directly to the sales trend, as reported. And, as you can see here, the sales trend for the fourth quarter was slightly better than expected. We had a reported sales increase of 9% and organically that was actually up 4% versus expected, too.

You could say that the-- most regions behaved as we expected, with two exceptions you can say. Western European market did worse than expected. We had a decline in Western Europe of some 4%, whereas Eastern Europe came in stronger than expected at plus 15%.

From the Autoliv point of view, though, the mix was improving. As you know, we have had some mix problems. In this particular case, the E-class of Mercedes Benz did real well. So did the large platform from BMW, the [LPL-1] and on top of that, also, the Volkswagen [inaudible] and some others, too, of course.

In Asia, where we had as nice growth as expected, you can say that China ended up on a very strong note. The light vehicle production in China ended up plus 34%, as far as we can understand, compared to previous years.

If we look in our own books, we actually doubled sales in China in 2006 compared to 2005 and, as you're going to understand a bit later here in the presentation, we have made some large investments in China. We expect them to pay back, but in the short term, there will be a little bit of a hit on the profit and loss base, but it's an investment that will pay off. Actually, if you look at sales, this was the second-best quarter four we ever had and it may be somewhat surprising.

Next picture, please, and we can look at the customer distribution as it looks for 2006 -- relatively stable. The dark blue segment here refers to North America. You can say that Ford is the one that is going down for us and that is global Ford. It came from 21% to about 19.5%. And the other, more significant, change is the Asians where, all in all, we have now 27% of sales going to Asian brands. Out of those, the Japanese are dominating with 21.5%, joined by Korea about 4% and China, Malaysia, et cetera, another 2%.

So all in all, Asia is up and Ford Motor Company, the whole group, including Volvo, et cetera, are down a couple of percent -- 1.5%, rather.

The next slide, the sales by customer, gives you more or less the same story about the last two years where, again, the Asians have grown from about 22% to 27%. At the bottom, you can see that the Big 3 in North America are going down, but not as fast as one could expect. But the major reason is here that the inflatable curtain sales is up strongly in the United States. It's up by, actually, 24% in value terms and that is moderating the decline we're looking at for the Big 3.

European market is stable for Autoliv. We have, as you may know, a very strong market share and on top of that, we have the inflatable curtains, which already have the high penetration in Europe. So Europe is likely to remain relatively flat, whereas we're going to grow in Asia, in particular, and also in North America.

The next slide is the organic growth, which is, then, as you may recall, we take away all the currencies and acquisitions and look at the underlying trend. The red line here is illustrating the light vehicle production and, as you can see, it's marginally negative as we can see it in the statistics for quarter four, whereas, as we said before, we were up 4%.

If you start with the regions, in North America we were up 2%, which was very strong compared to a market decline of 8%. It's explained by mix and it's also explained, as I mentioned earlier about the inflatable curtains.

Europe was relatively flat. Production was up 1% and so were we, in organic terms.

Japanese car production was strong. It was up 9% and we were up slightly more, actually. Autoliv's sales in Japan in organic terms up 11%.

Finally we have Asia-Pacific that, more or less as usual, had a boom here. We were up 16% and, as usual, we do not know exactly how the light vehicle production came up in Asia. It takes time, as we mentioned before, to get all the figures in.

If you look at it a little bit, you can say that from a geographic point of view, the growth is obviously in Japan and Asia-Pacific and from a product point of view, inflatable curtains are up a lot. They're up almost 30% in volume terms. Then the third reason I would say is that we had a better customer mix than we have had previously under 2006. You may recall we had a couple of difficult quarters, quarters two and three. We expected it to come back in quarter four, which it actually did, also.

The next slide is the light vehicle production the way we understand it -- we buy from CSM, J.D. Powers and LMC -- and it's not-- it's relatively much as expected, you could say. The only deviation, then, again, is that Western Europe declined a bit more than we had expected and Eastern Europe grew a little bit more than expected. Overall, though, as you can see down in the right corner, minus 0.3% and, as we all know, statistics isn't that relevant, so call it flat if you want.

The next slide is about the unit development for Autoliv. Seat belts were up another 8% and we're past 25 million in one quarter. We are running, we believe, including our joint ventures that are not consolidated -- we have those in France. We have it in India and we have it in Malaysia and China. We're running, I think, about 105 million unit pace.

Frontal air bags, as you can see, in relative terms, it's in units, is flat and that corresponds pretty much to the car production, as we said. The head protections, which these days is mainly inflatable curtains, are up 29, as we mentioned before, and steering wheels were up 19. And if you sum up the whole year, we came in with 9.8 million steering wheels. And on the markets we compete and we think that we have-- we are closing in on 20% market share for steering wheels and, needless to say, we are clearly gaining market share, both on steering wheels and seat belts. We have a [inaudible] difficulty just in the side systems for growth areas.

Next slide -- the gross margin development. As you have seen, we had a slight dip in the gross margin and I'd say that much of it comes from the raw material increases where we have, as we have said in the press release, we have really at least three different influences.

Firstly, of course, we ourselves have to book higher material costs to the tune of about $6 million in the past quarter. That is one problem, but the second problem is that our suppliers, the tier-twos, they are squeezed by ourselves and, because we have demanded lower and lower prices, of course, it's the same fashion as our customers demand from us. But they are also facing in their books increasing raw material charges. So many of them are really in problems and it's cost us at least $4 million, could be as much as twice that, really, on the fourth quarter, but $4 million, for a factor.

And on top of that, we had a third problem, then, of course, that presently, for the time being, short-term, it's difficult for us to demand more price decreases from some of our suppliers that are really hanging on the ropes. And, of course, as a part of that one, that influence, also the cash flow and some of these we even had to help with early payments to keep them afloat. I believe it's a short-term problem, but that is what we see for the time being.

If we look internally in the company, how did we do? Well, much in line with what we said before here. The material and freight, if you combine it, we have an increase in relation to sales of 1.0% and that was, to some extent, offset by lower labor costs and we're going to come back to that one. And you know why, of course. It's the lower-- low-cost countries and that helped us, really, with some 0.5% for the fourth quarter. So 1% up on material on freight, 0.5% down on labor cost.

As you also might have seen in the press release we issued here, we think that the gross margin over the year will gradually come back. For the full year, we expect the same gross margin as we had for 2006 will be roughly the same for 2007.

If we then look into the next one, the operating margin, that is down 0.8%, which is fairly much in line with the gross margin. The RD&E is up 0.4%. That is mainly electronic engineering costs that are going up and that is the result of some past orders we had earlier in 2006.

That is, though, compensated by a decrease in the sales and administration costs, which is the same amount 0.4%. So, therefore, you could say the gross margin has filtered through into the operating margin and we booked 8.5%, which was actually in line with the guidance we gave after the third quarter.

Next slide is the income statement for quarter four versus last year's quarter four. As you can see, the gross profit is only up $14 million, but that is partly, or to a large extent, because of the raw material costs that we discussed previously.

You can also see that another problem we have had, not unexpected I would say, is that the RD&E is up $14 million. That, again, is the electronic engineering costs, plus, as we remarked in the fourth quarter for last year, we had an unexpected strong engineering income in the fourth quarter of 2005, so the comparable figure is difficult to beat, you could say.

The net income figure is somewhat difficult to explain. We are up 47% or $33 million. There are two one-time events, at least, here. In 2005 we took a $14 million hit in connection with the Job Creations Act. So that was minus 14 as a one-time last year. This year we have a positive 24 million that is what Magnus called discrete tax items and the net of the whole thing is that the difference is $33 million up this year.

The earnings per share we have also gone up for the same reason, the discrete tax items, and, of course, to some little extent, also helped by buybacks. They represent about $0.03 a share.

The return on capital employed we reported now 16.2%. As you have seen, the EBIT is the same this fourth quarter as it was previous year fourth quarter, but the capital employed is higher and the capital employed is higher mainly because of the working capital. And the working capital, in turn, is higher mainly because we had released those tax reserves which were, then, non-interest-bearing debt you could say and also, to some extent, foreign exchange. So the underlying one, without tax items, would be 16.6% return on capital employed.

The next slide would be the return on equity, on the shareholders' equity, and here we report 17.2%, representing $103 million in net income. Here, if we exclude the discrete tax items, we are coming down to 13.6%, which we tried to illustrate with that red little line here. Last year's return on equity was only 11.8%, but then we were hit with about 1.8%, also from the Job Creations Act. So if you want to make it simple, we could say that both-- the underlying, both years, is about 13.6%. It looks better this year and it looks worse last year, but that's mainly one-time events in both cases.

So 13.6% would be a more-- a more normal figure to look at.

The next slide is the key figures and if we start with the earnings per share, that was up $0.46 and we have explained about the tax items earlier. If we-- if we exclude this year's discrete tax items, the earnings per share was up $0.16 per share.

The working capital grew $24 million. That was a result, again, of the dissolved tax reserves, you could say, and if we exclude that, the working capital is running about 10.2% of sales, a little bit more than we would like it to be. As I'm sure you recall, we like to be below 10%.

And the net debt to capitalization, we're now looking at 29%, which is up 2% from last year's fourth quarter and the reason is simply that we are paying out the dividends of $30 million. We have bought back shares of $66 million during the past quarter, totaling $96 million given back to the shareholders, which is a bit more than the cash flow.

The next slide comes back to the cash flow and net income is up, then, partially because of discrete tax items. We have the CapEx, and it's pretty much in line with the depreciation, as you can see, and, by the way, we think that the-- this year's CapEx is probably going to be running somewhere like $325-$350 million.

So then we have, as you can see, a big negative on the working capital, but that is sort of the discrete tax items that pumped up the working capital, but only $100 hasn't gone up to net income, so it's eliminated, you could say, if you look on the cash flow.

Then, of course, we have the factoring that has improved the cash flow with $95 million for the full year and actually $46 million for this quarter and, on the other hand, we have, because depending on where you make the profit, you have to pay taxes in different quarters. So this particular year, we had to pay $25 million worth of taxes in the fourth quarter, rather than in the first quarter.

So that's a lot of one-time things, but for the quarter past, then, we were helped by the factoring, again, of $46 million, but we were hurt by the tax payment of $25 million. All in all, we produced for the year $265 million cash flow after CapEx or $77 million for the past quarter.

Looking at the next one, the cost breakdown, as you can you see here, this was the fourth year in a row where we're running with EBITA at 8.5%. The cost structure is surprisingly unchanged in spite of a lot of influences of price erosion, et cetera, et cetera. The material is running just shy of 50%, year-in and year-out. You could say that the only significant change on the cost side consists of direct labor, that is really going down and we're now looking at 9.6% and that is, as you know, an influence on the low-cost countries, basically saying that we are shrinking the labor costs faster than the sales erosion.

Next slide shows the direct material costs and, as you can see, for the full year we managed to take it down the 3% we had expected to take it down. Having said that, the raw material cost problem really started to appear, for our company, mainly in the second half, in quarter three and quarter four. And we think it might be a somewhat difficult start for 2007 quarter one and two, but there are signs of easing raw material costs in cases, mainly aluminum alloys and zinc and it looks like they have peaked. It remains to be seen, really. The recent trend is, at least, that one. So for the full year we came down to the 3% we had expected.

The next slide shows you the move to low-cost countries where the trend is continuing. In the past year, 2006, the full year, we saved more than $80 million on this exercise. There's a lot of work behind it, but it does pay off. To take the last three years, it's more than a quarter of a billion that we have saved and, as you saw, direct labor is even going down as a percent of sales. At the end of last year, then we had, if you count employees only, we had 49% of them in low-cost countries and 51% of them in high-cost countries.

The next slide shows you mainly where the decreases have been. And at the end of it, all in all, 200 in high-cost countries -- France, U.K., Spain, Canada -- and the increases are, not surprisingly, in China, Romania, Tunisia and they increased about 700, so the net was, then, plus 500 but in cost terms this is probably saving in any case.

Next slide shows you the share buyback. During 2006 we bought back about 4 million shares. Out of those, we bought 1.15 million in quarter four, alone. And at the year end we had 80.1 million shares outstanding and of the present mandate, we have another 6 million to buy back and, as you have seen so far, we have bought 24 million shares since we started in the year 2000 and we have paid a little bit more than $38 a share.

The next slide is the last couple of years, the cash flow compared to the dividends and the share buybacks or, basically, the cash flow versus what we give back to the shareholders. The last two years, as you can see, we have given back more to the shareholders than we have had as cash flow, meaning that we are gearing up the company a bit, which we do cautiously, and we want to achieve a more efficient balance sheet than we presently have.

Trying to look a little bit more forward, then, the next slide into the state of the inventory situation in the United States. As you can see, 2004, 2005, 2006, as well as the 10-year average, are pretty much on the same spot or 67 days worth of inventory at the end of the year.

Since then there have been some announcements, mostly from Chrysler and so forth, that they are trimming the inventories, but as you see, the inventories are neither high nor low at the end of last year, you could say.

And if we look at the coming year, then, or the next one, we can say in North America the-- quarter one is assumed to be relatively bleak or very bleak, with another 5% down, followed by a flat quarter and then some pickup again in the second half. Also, if you look at the volumes, they are very similar for 2006 and 2007 or 15.3, 15.4 million vehicles in North America.

In Europe, on the next slide, you can say we have a similar weak spring, but in an opposite order. We have flat this quarter one and a bleak quarter two to expect here in Europe and a pickup in the second half, and, as you can see, for the full year we are assumed to have 20.7 million vehicles again here next year or, rather, this year. So 2006-2007, similar figures, 20.7 million.

The next slide is a little bit unusual here. We just summed up North and then Europe for your benefit here, and, as you can see, these two, they represent about 79% of our sales and they are down 3% in quarter one, roughly, another 3% in quarter two, roughly, and up 3 in quarter three and up 3.5-4 in quarter four.

So, in other words, it looks like quarter one and two will be somewhat difficult because of raw materials, because of lower vehicle production. That should, then, hopefully, turn around in the second half with more vehicles produced and also, likely, some easing on the raw materials side.

Finally, Japan continues to do pretty well here. We would have a strong first quarter and kind of a flattish outlook for the rest. A similar amount of 10.6, 10.7 million vehicles for both 2006 and 2007.

Then to the sales outlook. We believe that for the full year 2007, it looks like the organic sales will be somewhere, 3%-4%, but, as again we said, as you can see further down on the slide here, a little bit slow start in quarter one for reasons we just mentioned here that North America and Europe will have a relatively weak start of this year.

So organic we expect just a percent or so in the first quarter and the FX should give another 3, so consolidated sales, we believe, given today's exchange rates, we would report something like 4%. That's, at least, the base case.

Earnings outlook -- the organic sales increase we talked about for the full year. We are having a bunch of startup costs and most of those are in China. We, for all practical purposes, bought a whole block, something like a year and a half ago in a placed called Fengpu and we have started up a steering wheel plant, an inflator plant and an electronics plant and they have a lot of load. But we had to take, for instance, in the steering wheel plant, steps one, two and three at the same time because of the backlog that we had created. But that also means that we have three plants that are fully erect and fully ready but really no load for the time being. So that will be a burden during 2007, but that is, of course, something we did consciously.

Mando acquisition will mean that we have-- this is goodwill created on the backlog, you could say, a value on the backlog where we will have to write off $12 million during this year and next year only about $6 million. This is, maybe, a bit difficult to explain, because the EBIT has been fully consolidated all the time, since we had 65% of the company. However, we have, on minorities, taken out 35%, because that was the minority holding.

So what is happening here is that the EBIT will actually go down because of the acquisition for $12 million, but the earnings per share will go up because we take away the minority part. I'm not sure you understood that, but you're welcome to ask.

Then we have the direct material costs and, as we see here, we take 8, we think, in quarter one, and another 12 for the remainder of the year. If you sum those up, as you can see here, this is a lot of cost, like $57 million or so, which is not far away from 1%. So you can say the expected EBIT margin, if you look at it positively, will be more like a little bit shy of 9% than the 8% we will report.

Quarter one, same thing. Startup costs about a quarter of the Chinese costs. The remainder will be evenly spread, so we have one-fourth of it in quarter one for a total of $9. We have the direct material costs, all in all, that is $17 million, which is about 1%.

So if we were forgiven this, which I suspect we're not going to be, but if we were we would be running 8.5% EBIT, roughly, but we will report, we believe, 7.5% or a little bit more.

That, Tim, was the end of the presentation and we look forward to questions and we will hope to produce answers.

[OPERATOR INSTRUCTIONS] Ladies and gentlemen, we apologize to you for the delay in going to questions. It appears the host line has dropped. Please hold the line and we will attempt to reconnect them as soon as possible.

So I hope we're back in the call here. We are ready to take any questions you may have and we're going to try to answer them.

Thank you very much. The first question we have comes through from the line of Himanshu Patel of JPMorgan in New York. Mr. Patel, please go ahead.

Hi. Good afternoon, guys.

Good afternoon.

Two questions. First, can you give us a sense for the quarterly cadence of organic revenue growth in 2007? I know you mentioned production is weak in the first half, but how do you think about kind of the fourth quarter? Because it looks like fourth quarter of '06 you had a pretty good quarter. I'm not really sure whether there's a comp issue there that would make Q4 '07 particularly tougher.

No, quarter four in '06 came out a little stronger than expected -- I'm not sure I understood your question fully -- came out a little bit better than expected. That was probably because some of those models came out a little bit stronger than expected and if you take the Mercedes Benz E, for instance, we had pre-pretensioners in there and they have quite another value than the old pretensioners. So you have some reasons.

We had expected quarter one of 2007 to be somewhat better than it looks for the time being, but it has been some tweaking of the volumes in North America and there has been some, also, here in Europe, which is not so strong. Otherwise, I think quarter four for 2007 is assumed to 3.5% up. That is, in my mind, nothing extraordinary about that one.

Okay and I guess another question for you, Lars, there's a decent amount of electronics assets available on both sides of the Atlantic right now for potential acquisitions. Is there anything on that front that has keened your interests recently?

You are right that there is a lot of assets available and it's also clear that some of it is of interest to us and some dialogue is ongoing, you could say.

Okay and maybe one last one, if Magnus is there. Working capital has been a reasonable drain in the last year and, I think, the year before that, as well. Is there any opportunity on that in 2007?

I think that the opportunity will try to keep it stable in relation to sales. I think the drain, or most of the drain, for 2006 was really related to the tax reserves. That represents about $95 million out of the $157 million, as you see, accounted for as the working capital drain, as you call it.

So I think we should be able to have-- further control working capital during this year.

As a percentage of sales?

As a percentage of sales.

Maybe it wasn't explained properly by me, but just to underline Magnus' point, it looks like we went down $157 and, of course, we did. But $95 of those are just tax provisions that disappeared and they moved up to net income, rather.

So you could say that the working capital grew about $60-$65 million, only.

Great. And one last question. Lars, the cost to direct suppliers, I think you guys mentioned $4 million to $8 million this quarter. That's, I think-- I think it was about $4 million or so in the third quarter, as well. How do you kind of see the trajectory of that in the next couple of quarters? Are we at a peak right now or does that get any worse from here?

We think it's a similar amount, as you correctly point out here, quarter three and quarter four, but we wish we know how it would be going forward here. But let's say it's still ongoing and I think the poor guys are squeezed a little bit from us, a little bit from raw materials. So if the raw material scenario hold water that it will go down, I think it will ease up.

We can't say, though, that we are at the peak. We can just say quarter three similar to quarter four. It is impossible to predict. We're really trying to do that to give you some guidance, but it's impossible to predict.

Okay. Thank you.

Sorry about that.

Thank you.

Okay. Thank you for that question. The next question we have comes through from the line of [Daniel Riley] of SEB and please go ahead, Mr. Riley. Mr. Riley, your line is open. Please go ahead with your question. Mr. Riley, are you there? It appears we have no question from the line of Mr. Riley.

The next question we have comes through from the line of Mr. Rod Lache of Deutsche Bank.

Hi. This is Chris Struve for Rod. Good afternoon, everybody.

Good afternoon.

Good afternoon.

I guess my question is a little bit longer term in focus. If you look at the last couple years we've seen organic growth kind of be below the trend of years before. We've seen earnings, other than share count, kind of flatline. I guess the question is, is the second half of '07 the turning point on that or is '08 going to be better or are we looking at kind of a business that may grow at more normalized rates?

Well, we think it's going to exceed 3% this year, organically and maybe with some upside. The figures we're looking at now say that '08 will be even stronger and we can say that '09 isn't fully booked yet, but so far '09 looks quite fine. '10 is just-- do you say '010? Year '10 is, in any case, too far out, we can say.

So '07 we're up; '08 we're up even more. '09 looks fine for the time being. '10 -- impossible to say. We have more and more Asians, as you heard, and they have shorter and shorter time from order 'til the SOP.

And if we look at, for example, operating margins, in the kind of '01 to '04 timeframe we saw massive operating margin expansion, obviously driven by cost cutting and other activities. What kind of margin expansion do you expect, going forward. Are we looking kind of in that 8.5% range for the foreseeable future.

We have said many times here that in this industry, if we can keep the EBIT margin over-- slightly between 8% and 9%, we think that's probably as good as it gets. We might see it 9 at points and we might go down below 8, at some point, too. But 8 to 9 is what we have said before and we stick to that, actually.

Thank you. That's all my questions.

Thank you.

Okay. Thank you. The next question we have comes from the line of Patrick Lindquist of HQ Bank in Stockholm. Mr. Lindquist, please go ahead.

Yes, hello. Mine is on the working capital side. I had a question. I mean, isn't this-- I mean, you say it's a challenge to keep stable. I would rather put it, I mean, is it fair to expect that it could even creep up further since you're sort of stuck between a rock and a hard place here. I mean, the customers have their problems -- they don't want to pay you -- and the suppliers, they have their problems -- you have to pay them.

I think it's temporary. The only thing that is a challenge is that the payment terms, when we expand in Asia and in Japan as we present here, the payment terms there are longer when it comes to customers than if you compare to North America and also Northern Europe. So that is a little bit of a challenge, but we try to compensate that by moving, also, suppliers to these kind of regions, which means that we try to get the same payment terms. But it's temporarily pretty difficult, yes.

Okay. Okay. And then a question on sort of the China startup, if you will, that's going to cost you a bit of money in this year. Could you just give me a feel for why should I view that-- Obviously, it's a change, probably, from the '06 cost level, but, I mean, you expect to grow in the future and, obviously, these kinds of costs will probably return. What is extraordinary in this $25, if you will?

No, we don't regard any of these costs as extraordinary. We're going to book them as normal costs. We're just trying to tell you that if you start up three plants in, essentially, a whole block in China, it's costly in the beginning. But as soon as we are ready and we ship the first little bolt out of that, that's when we start to depreciate them. And before we have done that, we have built up overheads, the whole infrastructure and all of that. So it's costing some money.

But if you see that against the backdrop of 34% higher light vehicle production in China, we are doubling the sales in China, we don't have much of an option, unless we should start to say that we are so shortsighted that will sacrifice some phase here because we want to look better short-term.

Okay, thanks. Final one on the-- if I read through the report on pricing I can find the intense price pressure wording in more places than usual, I would say. Is that to indicate that you're seeing an accelerating trend in terms of pricing going down?

Have you ever read a report from us that doesn't talk about intense price pressure?

Well, I'm just saying is there any change in the trend?

Well, no, it's as bad as ever or as good as ever, whatever way you look at it.

Okay, thanks.

Thank you. Thank you for that question. The next question we have comes through from the line of Frederic Labia of Soc Gen in London. Please go ahead, sir.

Hi, good afternoon. A couple of questions, please. You posted a really good performance in the U.S., especially if we consider the production curbs. Could you just avail on the market situation there? I mean, who are you gaining market share against and do you consider there are opportunities in that region? That would be my first.

Then, the factoring, you factor for $95 million of receivables. What's your strategy? Do you want to go further in that direction? What was the factoring, is that without or with recourse? Just a few details on that.

And we're getting the [inaudible] of Mando full consideration. I'd just like to know what is the part of minorities that is still Autoliv-Mando, which was in the '06 accounts?

Okay. I'll take the first one and Magnus take the two following ones. The U.S. market situation is somewhat beneficial for us because, as you know, there is a lot of side systems being installed for the time being. There is a voluntary restraint agreement in North America and, on top of that, there is a new proposed rule making, as well. And that benefits us, because we have a higher market share on side systems than we do in, for instance, frontal.

Secondly, we also have a good customer mix in North America, because we are strong with the transplants, be it Japanese or Europeans, than we are with Detroit. So, therefore, the Big 3 they were down 12%, but we don't hurt that much because we have so much with the-- with the-- particularly Asians.

So it's a matter of being on the right product range -- you could say the sides -- and the right customers in North America. So no doubt are we taking a lot of market share.

When it comes to factoring, Magnus?

Yes, when it comes to the factoring, when we account for this factoring, it is really without recourse, otherwise we would have to keep the receivables in the balance sheet. Our target is, really, to do the factoring when we can do it at a lower cost than our marginal borrowing rate and for the moment it's about 5%. And, of course, the higher volume of the factoring we get, the higher the marginal cost for factoring becomes.

So I think that the present level of close to $100 million is a fairly reasonable level that we will try to keep in the future, given today's pricing and today's interest rates.

And then finally, Mando?

Yes and then Mando. When it comes to minority, as Lars said in his presentation, we have, then, consolidated 100% of Mando and then in the minority interest in the income statement for 2006, we have deducted, net, $11 million U.S. dollars as the earnings share for the, at that time, minority shareholder of the 35%.

So we have the sort of contradiction that we take a hit of $12 million this year on the EBIT, but we gain $0.03 on the earnings per share. Not always easy to explain. And, Magnus' answer is that last year we had $11 million as the minority share.

Okay. So $11 million was the figure for last year?

Right.

Right.

Okay, thanks.

Okay, thank you. The next question we have comes through from the line of Anders Trapp of SEB in Stockholm. Mr. Trapp, please go ahead.

Hello. I have two questions, if I may.

Could you speak up, please, Anders? Because we can barely hear you.

Yes, all right. Is this better?

Not much. But a little bit.

Is this better?

Ah, much better.

All right. Some difficult technology here. When it comes to the growth rate in rest of world, outside Japan, U.S. and Europe -- I guess I'm talking basically Korea and China, I guess, I just wanted to-- I mean, that is, I guess, part of the growth case going forward for Autoliv. I wonder what you can say-- how big of a share of your sales do you have outside Japan, U.S., Europe today? What do you expect it to grow with? I mean, we know it's growing a lot, but, I mean, how long will you see it growing and, then, by what percentage?

Okay. We tried to show you-- I think it's about 12% we have. And you're correct. It's mainly about China and Korea and then we actually have a shrinking sales in Australia, but that is for cost reasons. So a bunch of volume goes from Australia to Korea and to China, but that is, of course, included in the same cluster.

So Mats is looking frantically in his papers, but we seem to believe it is 12% and now he's proving to me that it is 12% in rest of the world, Anders.

Compared to 10 in 2004.

Yes.

And, as you know, there is a lot of upside in China, no doubt. The equipment base, even through driver air bags and seat belts are there, it's a lot to do, still.

What is-- I mean, sort of-- I have no idea. What's the penetration rate for, let's say, driver air bag or passenger air bag in the total car production in China today? It's like 1% or is it 10%? I don't know.

It's much higher. Driver air bags are a majority of cars. Passenger air bag is probably an option in most cars, but not all cars. They don't exist in some.

But if you take the air bag market -- I don't have it in front of me -- but it's very much fragmented and there is at least three local Chinese air bag suppliers, too, and we don't know exactly how much they supply and to whom. Still, [inaudible]

But you would expect this share, to take Korea and China together, India, I guess -- I mean, double digits growth for many-- for many years ahead? Is that what you-- on the air bag markets? Or, I'm sorry, yes the safety market?

Yes, that's right, Anders, and I mean, India has barely started with air bags. And they still produce, I believe, 1.2 million cars, roughly, without any air bags. And, as you know, five air bags per car, that's 60 million air bags-- 6 million air bags, sorry.

All right. Finally, just a short one on the startup costs that you referred to in China. When will they-- these factories stop being dilutive to the margin, do you think?

Yes, probably somewhere in 2008, here, is Benoit thinks, and I think he's pretty right. Having said all of this, I'm pretty sure we're going to make money in China this year, too, but it's not going to be much, because of all these startup costs.

All right. Thank you.

But it's an investment.

Okay. Thank you very much. [OPERATOR INSTRUCTIONS] Okay, the first question we have coming through is from the line of Ronald Tadross of Banc of America in New York. Mr. Tadross, please go ahead.

Hello. This is actually [Joe Speck] for Ron. A question on the $20 million raw material. First of all, is that a gross or a net number?

This is the price increase we estimate for the bought-in material components, you could say. Having said that, that's the best guidance we can give you, even though it's not very-- it's not very accurate, I have to say. It's built on a number of assumptions, but we thought we had to give you some kind of guidance, what we think for the time being. So this is what we expect to pay more than we would normally have paid.

But, presumably, you'll be able to offset some of that through cost reduction-- other cost reductions?

Yes, of course. We will-- of course.

Okay.

Because, as you know, we don't buy raw material, as such. We buy fabricated products. The raw material companies [inaudible] but then, of course, the value added by the supplier is subject to the normal negotiations.

And then, I guess, just looking outwards, considering you have relatively healthy margins, do you expect to be able to reprice contracts in the future to sort of recover some of that-- some of the hit you've incurred over the past year or two?

Very difficult for us, because, as you say, our margins are relatively okay and we ran 8.5% here in quarter four. I don't think any of our customers feel particularly sorry for us. If would be different if we were about to go broke, because then we would create so many problems for them. So I think that's wishful thinking. I don't think we will succeed with that, but as we've said many times before, on the other hand, if the prices for raw material goes down, we have nothing to give back, because we never got anything.

Right. Okay. Thank you.

You're welcome.

Okay. Thank you. The next question we have comes through from the line of Mr. John Hernander of Kaupthing in Stockholm. Mr. Hernander, please go ahead.

Thank you. John Hernander here from Kaupthing. I just had a very brief question. There are discussions regarding a sort of mandatory issuance of whiplash safety and I just wonder if on your current product portfolio and supplier value, could you elaborate a little bit on what kind of, potentially, you would see in supplier value if this kind of legislation starts coming true?

Yes, we leave that on to Mr. Odman. He's the whiplash expert.

Yes, we have this crash-rating program here in Europe called EuroNCAP and they have now decided to introduce a sixth star. You can five stars in these tests and they're going to add one for whiplash.

And, yes, we have the best system on the market, which has been proven over again and over again in tests, independent tests. And that is supplied, for instance, to Volvo and Jaguar, for instance.

Jaguar.

But does that also include the seat structure or--?

No, this is part of the seat structure. It's the recliner where we have this feature.

Okay. But how much sort of does that cost in terms of supply value? I mean, because you elaborate if this sort of--?

Oh, we don't want to negotiate with you, John. We do that with our customers, but basically it's an uphill battle because we only supply the recliner, as Mats says, and many of the guys who supply the complete structure they have some-- some, shall we say, not as elaborate solution, but yet something that can be called whiplash and back to you, Mats, there have been a number of laboratory tests by independent laboratories. Ours fared the best, but it happens to be slightly more expensive and, therefore, the seat producer prefers to supply his own rather than buying from us.

So we almost have to get a pull from the end user, almost have to specify it should be ours if we should be able to supply.

And then-- so you're basically talking about the car buyers?

We're talking about the OEMs, convincing the OEM that ours is the only one that will do for him.

Yes. Okay. Okay, so you don't see that's a major potential for your-- or a significant potential for you. It's more like add-on business or--?

It's more like add-on business, correct. And, as you know, our presence in seats is diminishing. We want out of the business and I think we're down to $15 million or something now.

Yes. Okay, thank you very much.

You're welcome.

Okay, thank you. The next question we have comes through from the line of Mr. Tom Aney of Dresdner in Frankfurt. Please go ahead.

Good afternoon. I have three questions. The first one I want to start off is the first question that was asked today on electronics acquisitions. To be more specific, we see that Siemens VDO is, potentially, up for sale. Are you interested in Siemens VDO?

Well, that would rather be the other question, because I think they are $10 billion and we are $5.

I know. Just making sure that you weren't-- if you were looking at it or not.

No. Well, we are not. I mean, we are-- we are way too small, to put it, frankly.

Okay, you're not going to do any big, big acquisition there. Okay. Secondly, I have a question regarding European production in the first quarter. Because I'm kind of dumbfounded what's going on. Because of the VAT situation in Germany, I was expecting production to come off. We've seen the German Auto Association said production was up 16% in January and you're saying, actually, European production is going to be flat, despite what-- the lower sales we're seeing all around.

I was just wondering why is that European production seeming to be so stable in that kind of circumstance?

Well, let me pass it by Mr. Marsaud.

Yes, I think this impact in Germany is not taking too much because it's a lot of exportation from Germany. And if it is flat, then down, in West Europe, it's because of the French market, which is still weak, which is balancing, a little bit, the German exports.

So-- so it's the German export that you're seeing?

Yes.

Some of our best customers in Germany are BMW, as we mentioned, and the big platform 567, the Mercedes Benz E and, as Benoit is correctly pointing out, the chunk-- the biggest chunk are exported. Of course, we have a chunk of Audi, as well.

So--

The problem we have, as you say, it's actually the French market, particularly.

So in Germany, it's more the premium brands that are seeing the increased production or is it also the Opel [inaudible] of the world?

I can't say that I exactly know, but we are a bit surprised, too. We had all these-- the sales in Germany was the strong-- the only one that grew really much towards the end of last year. So one would expect a backlash there, but, as you also know, we buy this research from CSM, J.D. Powers, LMC, et cetera. They know pretty well and I think it's-- if you call in a bit later, we can look through the statistics together and we can answer for you which models are supposed to do what. But we don't know it on top of our heads, sitting here.

Okay. Thank you for that.

You're welcome.

And I have one last question regarding Asia. I was wondering if you could quantify the amount of sales that you're doing in China, alone, and in Korea, alone.

Well, yes, the-- we don't want to be too specific here, but roughly you could say it's a quarter of a billion each.

Okay. And, I mean, the margins of those businesses, they're not-- as you're experiencing this rapid growth there, they're not diluting your group margins?

We were probably saying too much when we talked about the sales. We do not go into the individual margins. Let me just say, in general terms, we have good margins.

But you can't just say if they dilute your group margins or--?

No, they don't. Not at all. I mean, that's why we point out, that the Chinese thing we do this particular year will end up that China will be dilutive, but a normal year, China is not at all dilutive and certainly not Korea.

Korea we have had the opportunity to grow, you could say, in steps. I think it's step four we have now, Magnus. We started out with a relatively small plant. We grew it in step two. Then we grew it in step three. So it never became a big cost.

The problem in China when you explode like you increase 100%, then you have to take a step in your facilities and then you end up with a year like the coming year where you're hurting on the EBIT line a little bit, which will then-- Benoit said, probably come back in 2008.

Okay.

But it's just growing too fast, you could say.

Yes, thanks for that. And if I could just have one last follow-up question. You're saying you expect a 7.5% EBIT margin in Q1, but 8% for the full year. Is that because the raw materials is more of a first half hit and are you expecting a progression-- an EBIT margin progression or improvements throughout the year?

We hope and believe that the [inaudible] material is worse the first quarter and will gradually calm down as the year goes by, particularly if you make year-on-year comparisons, which we do.

And do you see the second half profitability being stronger than the first half?

Yes, we do.

Okay.

And as you saw, that corresponds, also, not only to the raw material but also to the vehicle production.

Right. Okay, Thank you very much.

You're welcome.

Thank you. The next question we have comes through from the line of Thomas Besson of Merrill Lynch in London. Mr. Besson, please go ahead with your question.

Good afternoon. Apologies if I ask a question which has already been commented before, because I was in the Renault presentation.

I would just like to ask to understand two things, please. One is linked with the gross margin development. Basically, you managed something which I still fail to understand in the previous quarters when your organic growth was negative, which was to improve your gross margin, and now you're more or less telling us that gross margin is going to be stable and it has declined, actually, in the last two quarters where organic growth was becoming more positive.

So I know you have problems with some suppliers, but it goes exactly at the opposite of logic, of my understanding of this business. I'd like you to elaborate on that and that's the first question.

The second, Lars, is a bit more peculiar, I would say. I would like to know if Autoliv has a rule in terms of succession or age of retirement or if you've really thought about-- maybe you have discussed that before, and I apologize if you have. I'd like to know if you plan to retire at 60 or if you have any obligation to do so or if you have the possibility to stay beyond that?

Thank you very much. That's my two questions.

Okay. Thank you very much, Thomas. The first question, we did touch upon, but it's relatively complicated, the gross margin. We had-- externally we had a lot of problems because of the raw material question, particularly towards the second half of last year. Directly, we took a hit of $6 million. That's easy to explain, easy to calculate.

The problem is that some of our suppliers, because we squeeze them in the same fashion as we are squeezed, so some of our suppliers -- and I will say not in Japan or in Asia or in Northern Europe -- but Continental Europe and North America, we have had and continue to have some suppliers that are very stretched, that we need to help in various forms. And that cost us at least $4 million and maybe even up to twice that number in quarter four.

And on top of that, as a third problem, we cannot negotiate down the material cost if our supplier is already hanging on the ropes, as you say with a boxer. So, therefore, we do have a gross margin problem that is really coming from the same root cause, the raw material cost.

That's the external problem. Internally, then, in the company, we said that we have-- when Magnus analyzed, we have direct material costs, including freight, is up 1%, partially as a result of this raw material question. On the other hand, we did decrease the labor cost with 0.5%, so we had 0.5% hit there.

And the last one is easy to understand for both of us. That's really, of course, the low labor costs where we continue to take out high-cost people and take on low-cost guys.

I hope that answers your question. So the raw material is really the root cause. Other than that, we could have had an excellent quarter. We came out with 8.5%. Hadn't we had all of these things, that would have been a lot more fun, actually, but that's sometimes the case.

The second one, regarding succession, that you can-- at the American company we had a proxy statement and there you can see on each and every one of us on this phone call, basically, where we are, retirement age and so forth. And the bottom line is that they can kick me out and Magnus and Mats and Benoit at the age of 60.

Okay. Thank you very much. That was very clear.

Okay, thank you. The next question we have comes through from the line of [Lucy Bell] of [Bench], in London. Ms. Bell, please go ahead.

Oh, hello. Thank you. Actually, my colleague just asked the questions. Thank you. 'Bye-bye.

Thank you.

Okay, thank you. In that case, there are no further questions in queue, so I will hand you back to your host to wrap up today's call.

Well, thank you very much all of you. We're sorry about this little bit of problems we had with the telephone line. I hope it didn't disturb you too much.

So we here in Stockholm thank you so much and we will talk to you again or maybe meet before, but at least talk to you on April 26th. So have a good time in between. So thank you very much for attending.