Autoliv Inc (ALV) 2008 Q2 法說會逐字稿

Welcome to the Autoliv Second Quarter Financial Earnings 2008.

My name is Sarah and I will be your coordinator for today's conference.

For the duration of the call you will be on listen-only.

However at the end of the call you will have the opportunity to ask questions.

(OPERATOR INSTRUCTIONS).

I'm now handing you over to Jan Carlson, President and CEO, to begin today's conference.

Thank you, Sarah.

Welcome, all of you, to this presentation of the second quarter results for Autoliv.

Here in Stockholm we have our acting CFO, Mats Wallin.

Our VP Corporate Communication, Mats Odman and me, Jan Carlson, Chief Executive Officer.

We will start with a quick review of the quarter two results, then we will present our outlook for the remainder of the year.

The outlook discussion will include the action program we are launching to counteract the effects on our business due to the shift in global demand, and the continued commodity inflation.

After that we will, as usual, remain available for questions.

You will find the slide presentation through a link on the front page of the Autoliv corporate website on the financial reports.

You will now turn to the next page.

You will find the safe harbor statement.

As you know this is an integrated part of the presentation.

This presentation includes some non-US GAAP measures.

These reconciliations can be found as usual in the quarterly earnings release.

Moving on to the next page, we have a summary for our second quarter results.

We're very satisfied with the quarter except for our sales development that was lower than expected.

This was due to the decline in the production demand and shift in the vehicle mix.

And despite this we were able to reach our EBIT guidance.

We achieved record sales, operating income, and earnings per share for any second quarter.

Sales improved by 10%, operating income by 12%, and earnings per share by 27%.

All figures are of comparable basis.

Lastly, our strong cash flow performance continued as we generated almost $90million after investing activities.

Virtually all of this cash was returned to shareholders in the dividend and share buy-back.

If we now turn to the next page, I would like to make a few comments on the conditions affecting our automotive environment.

Since our teleconference last quarter, the NAFTA light vehicle production has been cut another 700,000 units to 13.4 million vehicles for full year 2008.

While looking ahead to 2009, we anticipate a further drop to less than 13 million vehicles.

Furthermore, since April the market prices for steel and magnesium have increased to record levels, by 38% and 25% respectively.

Somewhat compensating these challenges, we continue to grow faster than the market in Japan and the emerging markets, where we expect a major part of the future light vehicle production growth.

We also continue to increase our market share in seatbelts while maintaining our strong share on side systems.

In addition NHTSA and the EU announced the new safety test requirements for the NCAP, which could increase the safety content of vehicle in the future.

On to the next page, we have the sales bridge versus last year for the second quarter.

Our sales increase of 10% or $180 million was entirely driven by the translation effect to the US dollar.

As highlighted, vehicles and side airbag sales increases essentially offset the declines we experienced in the frontal airbag, sales in electronics and the seatbelt systems business.

Moving on to the next slide, we find our organic sales growth development versus both global light vehicle production and the Triad.

As mentioned earlier, our organic sales declined by 1% for the second quarter.

The major reason for our decline is the sudden drop in the NAFTA light vehicle production which was down 15%.

The reason for the deviation to our guidance is an unfavorable vehicle mix in Western Europe.

Volvo, Renault and [BSA], which combined represents more than 20% of our sales, dropped more than expected.

In addition, key launches mentioned on earlier earnings calls had been delayed, for instance the Ford F series.

In Asia we continue to grow, specifically in China we were up 21%.

And we continue our strong market performance in Japan where we grew more than twice as fast as the market, mainly due to the strong penetration of side systems.

Turning the page, we have the latest light vehicle production figures by region from CSM and JD Power for the second quarter.

Starting from the top, North America there was drop of 15%, 4% more than expected.

The Detroit Three dropped 600,000 units or almost 22% from prior year.

Trucks and SUVs also declined 22%, or 0.5 million units.

In Europe, there was also a shift towards smaller vehicles.

As mentioned earlier, larger platforms at our main customers were down more than expected.

Eastern Europe continued to show a strong growth, over 20%, mainly thanks to the entry level vehicles such as Logan.

In the rest of the world the largest driver is China, where light vehicle production grew more than 14%.

On to the next page we have the Autoliv production figures for the quarter two including the change from prior year.

Strong volume increase continues in our seatbelt business, up 18% including the India acquisition, and in the side airbag, the head airbag, where we were up 13%.

Steering wheel volumes were down only slightly, while frontal airbags were down 4%, mainly due to lost contracts to Ford.

Turning the page we have our gross margin.

Gross margin for quarter two has declined by 40 basis points from prior year.

The main reason is the commodity inflation and increased energy and fuel surcharges, which had a combined negative effect of 125 basis points.

We have been able to somewhat offset these negative effects with improvements in overheads, labor and material cost reductions.

These improvements were roughly 100 basis points combined.

On to the next slide, we have the operating margin.

The operating margin of 7.8% for quarter two was in line with our guidance of at least 7.7%.

The unfavorable gross margin effect mentioned earlier of 40 basis points was more than offset by continued improvements in our RD&E activities.

These cost reductions and higher engineering incomes generated 70 basis points.

So overall, despite the light vehicle production environment in NAFTA and in Western Europe, we are satisfied that we were able to slightly improve operating margin, especially considering the negative effect of commodity fuel and energy inflation on our business.

On the next slide, we have the EBIT bridge for the quarter versus prior year, where we have separated the currency effect.

The increase in EBIT was mainly due to improvements in our RD&E of $12 million and their cost reduction improvements of $13 million, as well as an overall positive currency.

This was partially offset by commodity inflation increases of $22 million.

The commodity effect was worse than expected in our guidance by $12 million, mainly due to fuel surcharges and energy related costs, such as increased utilities for running our plants.

So overall the EBIT increase was primarily driven by improved operating cost performance.

On to the next slide again, we find our cash flow.

The $87 million of free cash flow was in line with our internal expectations.

We continue to focus on working capital management, and maintaining capital expenditures below depreciation and amortization.

These initiatives allowed free cash flow to essentially be in line with quarter two net income.

And despite the current tough economic environment, we remain committed to working capital less than 10% of sales, and capital expenditures less than 5% of sales.

Turning the page, we have our return to shareholders.

And for the last 12 months we have returned over $500 million in dividends and buybacks.

This represents a 13% return of the average market cap.

We increased the third quarter dividend by 5% to $0.41 per share.

We also continued to buy back shares albeit at a lower level.

Given the current economic climate we continue to keep a close eye on our debt levels, while maintaining an efficient balance sheet and strong investment rating.

To conclude the quarter two portion of our presentation, we have managed to withstand the headwind from the market fairly well, and deliver record sales, operating income, and earnings per share along with a strong cash flow.

We even managed to slightly improve operating margin there by meeting our margin guidance.

We will now move on to our outlook for the remainder of the year.

And turning the page, we have the light vehicle production change for North American and Western Europe.

We focus on these markets since we derived nearly 75% of our sales from these two markets.

Looking at the NAFTA region represented by the solid red line with circles, we see the CSM forecast in July.

The decline from this April forecast is mainly due to further erosion of the truck and SUV market.

It represents a 5% deterioration for the full year where the light vehicle production is now expected to decline by 11.6%, as shown in the legend.

In Western Europe however, the overall differences are smaller.

From April to July there are significant changes by customer and for key Autoliv platforms.

For instance, Renault Laguna is down 35%, Volvo is down approximately 10% across most platforms, and [BSA] is down 6% overall.

At the same time we see more small cars like the Nissan Navara, the Nissan Note and Micra which were up more than 10%, and also the Daimler A and B class which were up 4%.

For China, which our most important market in the rest of the world, the rate of growth is also declining in the second half of the year.

The CSM forecast shows the decline of light vehicle production growth from 23% to 10% in quarter three, and from 14% to 7% in quarter four, when comparing the April light vehicle production to July.

On to the next slide, we see how our organic growth outlook has changed over the last 90 days.

This is illustrated on this chart from the drop from the black line to the red line, black triangle line to the red circle line, which now represents our latest 2008 quarterly organic growth estimate.

As mentioned earlier, the quarter two shortfall of 3% was driven by NAFTA declines, and the unfavorable platform mix in Europe.

For quarter three, we now expect organic sales to decline close to 3% versus a 3% increase expected in April.

Almost half of the decline is related to lower than expected volumes in Europe related to key platforms, as mentioned on the previous slide.

The remaining difference is due to slower growth in China and Korea than expected in April, and the Ford F series launch delay.

Due to overall market conditions, we now expect for quarter four an organic sales growth of approximately 2%, versus 5% in April.

This assumes that there will be no further launch delay.

We expected 5% sequential improvement from quarter three, minus 3% in quarter three, to plus 2% in quarter four.

It's expected due to a long list of program launches.

The programs expected to have the most impact are the VW Golf and the Renault Megane launches that we have talked about before.

The gradual ramp up for some of the smaller passenger car vehicles that Autoliv is overrepresented on, such as the GM Epsilon and Lambda platforms.

On to the next slide, as stated in our last earnings call, the commodity environment continues to deteriorate, and we now see a further negative effect on our business.

We now expect this effect to be around $60 million for the year versus the $32 million expected in April.

As illustrated on the table, the increases are mostly related to steel and magnesium.

Of this $60 million incremental cost, approximately $45 million is expected to come in the second half of the year.

Moving onto the next slide.

We have prepared a table showing our headwind development during 2008.

In January we expected to generate an improvement of $45 million or 50 basis points over the 2007 EBIT margin of 7.9%, excluding the legal costs.

Hence the guidance of 8% to 8.5%.

This was based on an expected organic sales growth of 2%.

In April we did see some deterioration in the expected results for full year 2008, albeit still a 20 basis points improvement after taking action to further reduce costs.

Therefore we held on to our 8% to 8.5% guidance, but at the low end of the range.

In our current situation, raw materials, fuel surcharges and energy costs combined are expected to hit us by almost $50 million more than in April.

We can expect a sales decline of 1% rather than an increase of 2%.

Our margin could erode as much as 70 basis points versus 2007, despite further increasing cost reduction.

However, this is before any compensation for commodity increases and any additional restructuring costs.

Turning the page, we have our action program.

Considering the rapid deterioration in our environment we will now launch an action program.

The aim is to preserve the long-term operating margin range of 8% to 9%.

As mentioned in our press release earlier today, we have three primary areas of focus.

The first is to adjust and align our capacity to the global last week of production developments and trends.

The planned actions include downsizing of our temporary and permanent workforce, which will likely include further plant closures.

It will include reducing the number of tech centers, yet remain aligned to support our customers.

And we will also reduce production overhead and SG&A.

The prime -- the second primary area of focus is to further accelerate the local country sourcing, supply consolidation and other sourcing initiatives.

We also plan to reduce our product variation and streamline our product portfolio around the globe.

And the third primary area is to ramp up investments for new products with focus on smaller vehicles.

This may include products that avoid collisions or at least mitigate the severity of the crash, and this could require some 200 to 300 people, either reallocated or new hires, but overall we expect a net RD&E decrease.

Moving onto the next slide, we have estimated cost and savings of the program.

The action program, including severance and restructuring, is estimated to cost up to $75 million, and it is estimated to generate a $120 million in annual savings once it's fully implemented.

The program is expected to start generating savings already in quarter four this year, and gradually increase during 2009.

The full effect is expected in 2010.

The actions could affect up to 3,000 people.

As many of temporaries, we expect to get a favorable effect rather quickly.

Turning the page, we have our financial outlook for the remainder of the year.

This guidance should be compared to our operating margin of 8.2% achieved in 2007, excluding restructuring costs and the legal provisions.

For the full year 2008 we now expect sales to increase by around 8%, including an organic decline of almost 1%.

The India acquisition is expected to add almost 1% whilst the currency is expected to add 8%.

Our full year 2007-2008 EBIT margin guidance has been lowered to 7% to 7.5%, excluding further severance and other restructuring costs.

The low end of this range would imply an earnings per share of approximately $4.50 which is approximately 11% better than 2007 on comparable basis.

This assumes a 29% tax rate, and excludes any additional share buyback in the second half.

For the third quarter 2008, consolidated sales are expected to increase by 7%, including a 3% decline in organic growth and a 1% increase related to acquisitions.

Our quarter three EBIT margin is expected to be approximately 5%, mainly due to the increasing commodity, fuel and energy costs and the organic sales decline of 3%.

This now concludes the presentation of today's call, and we would very much like to open up for questions.

We will do our absolute best to answer them.

I leave the word back to you, sir.

Thank you.

(OPERATOR INSTRUCTIONS).

The first question comes from the line of Danielle Riley, please go ahead.

Danielle Riley, your line is live; would you like to ask a question?

The next question comes from the line of Eric Michaelis, go ahead please.

Eric Michaelis, would you like to ask a question?

Actually, I didn't press the button, so I don't have any questions for the time being.

I'm sorry.

Okay, thank you.

The next question comes from the line of Adam Jonas.

Go ahead, please.

Hi, thanks, Adam Jonas from Morgan Stanley.

Can you hear me?

Yes, we can hear you.

Hi, Adam.

Hi, good afternoon.

Good afternoon to you.

A couple of questions.

First one should be pretty easy to answer.

What percentage of your sales -- and granted, I understand this is a moving number, a rapidly moving number perhaps.

But what's your best estimate percentage of the Group revenues from Chrysler, right now?

It's around 3% of consolidated sales.

Okay, next question is distressed suppliers; you've alluded to this at many times.

Can you just give us an update on which types of suppliers are distressed, whether the severity of that distress has increased or -- just to give us a bit more color on how bad that is getting?

And then my final question is on the surcharges on the energy.

That seemed to be the real delta that jumped out and got you this quarter.

I suspect you are certainly not alone there.

Do you expect -- can you give us an idea of whether -- even though you're paying surcharges, are you still in a position where you're below market in terms of energy costs?

Meaning, even if energy spot prices remain where they are in spot terms, would you -- is it reasonable to expect further surcharges from your energy suppliers?

Thanks.

We start with the supplier situation.

The type of suppliers is stamping part suppliers.

It's generally, different kind of tier one suppliers, tier two suppliers to us, component suppliers, where we can see a higher level of raw material content.

They -- it has deteriorated since our last earnings call.

We estimate the full year effect now to be $14 million instead of $12 million as we expected a quarter ago, and all of this additional $2 million is falling into the second half of the year.

The reason is obvious, deteriorating volumes seen, primarily in North America, and the increased commodity prices is pushing the tier two from both ends.

The situation deteriorating, as I said, is primarily or mostly, I would say, in North America, but even in Europe we have a couple or more issues than we have had in the past.

So that's about the supplier situation.

Can I interject?

Sure.

Are -- you've quantified the potential for the operating profit, the EBIT impact.

But what about on the working capital, do you find that you're having to pay some of these suppliers earlier than you used to, or to work on terms that may require a higher level of working capital outlay than you would in the normal environment?

Yes, it could happen, and we could see that we have to change the payment terms in some cases, but it depends from case to case, actually, but in some cases that has happened and we could even expect that to foresee from -- foresee that to happen also down the road.

Having said all that, we will still be within the guidance of working capital of less than 10% of sales.

You also see that in the level of inventories, you are actually seeing an increase in the inventories which has to do with the higher raw material prices, but also to some extent with distressed suppliers where we are actually gaining -- taking in more components that we should have needed in the normal case.

Understood.

Coming back then to the energy level, I'm not sure I have any detailed information to you to claim that we are on a market spot or not.

We have the feeling that we are [solidly] in the middle of the range when it comes to the market environment.

No worse, no better from an energy standpoint.

Of course, a lot of it comes from the increased oil prices and goes directly into the energy level, and that's what causing it.

Can you give -- what is the typical nature of an energy contract of electricity or gas or other sources?

What's the typical length of existing contracts?

I'm very sorry, Adam, but I don't know what the typical length of it is, actually.

But I would suspect we have no difference in that the other environment declines in the market, actually.

Okay, thanks very much.

Next question comes from the line of Himanshu Patel, from JP Morgan.

Go ahead please.

Hi.

What planning assumptions for industry volumes for 2009 are you working with in light of the new restructuring plan?

We are looking into -- we are basing it on the [CSM] forecast actually.

Primarily, you are almost only on the [CSM] (inaudible) forecast.

For Western Europe and for North America?

Yes.

And just -- can you give us a little bit of sensitivity there.

If those forecasts prove to be, let's say, 5% too optimistic.

Is the current restructuring plan sufficient to cover that or would you need to do more?

Depending on what type of platform mix we would have.

If we would have a shift in vehicle mix that could be unfavorable or not, but we assume that the current restructuring program should incorporate a certain level of sensitivity through the existing plans.

Okay, and then you mentioned mix degradation in Europe as customers buy smaller cars.

Can you give a little bit of a sense of the content per vehicle difference, let's say between a C segment car in Europe on average and an A or B segment in terms of safety CPV?

Well, it varies in general between, as you know very much, between the different cars.

If you take the smaller cars like the Peugeot 2007 for instance, you have a fairly high content on the vehicle.

Now it happens to be that the Peugeot 2007 is actually down 14% for the quarter that has -- that is to come here.

And therefore, we see that the level varies between OEM and OEM.

I don't have any general differences between the A and B segment at hand for the moment.

I'll come back to you with that.

I am just curious why you guys highlighted that now, because I think we've seen downshifting in European mix for a while now from D segment to C, and more recently from C to B.

Have you seen something particularly accelerate in the last quarter?

Well it has been in the last quarter, it has been, as I said, particularly heating up in some key platforms.

I mentioned, like you and I mentioned here now the 207, we have the 407 that is also down here.

It has been also, you have the Renault Megane here that is on the phase out, where we basically have everything in the existing Megane car.

And it's down 22% for the quarter.

And that is a phase out effect that is unfavorable to us right now.

Okay, and then the $120 million anticipated savings from the restructuring plan.

Any way to give us a rough estimate how much of that would flow through in '09?

I have to be back on that for you.

We are aiming to get this started as soon as we possibly can.

We are aiming to strive to take as much as cost as we can up front, hopefully -- the [lion] part of it, hopefully already this year, to get the best effect, and this rapid effect, out of it as soon as possible.

But you know how it is, you cannot take it until you have the detailed plans worked out and you have to have it fairly detailed by the plant and by site, so we don't have.

But what I can comment today, is in 2010 we will see the full year effect.

It will gradually kick in during 2009.

Okay, and then I wonder if you could go back to the energy fuel surcharge question.

What is that exactly?

Is that just the fuel surcharges related to transporting your components from your plants to your OEM customers' plants?

Is that not --?

In the freight charge is primarily almost only the fuel related to transportation, when it's (inaudible) energy, the utilities keeping our factories running, that is also -- it is an indirect effect over the course of the oil price.

But it sounds like most of this $25 million -- is it the fuel surcharges or primarily --?

It's almost half-half, basically, utilities and freight.

A little bit more on the freight costs but almost half-half.

Do your extended supply chains exacerbate the problem, having a lot of production in low cost countries?

Does that complicate this a little bit more than it would have otherwise?

I wouldn't say it's complicating.

As I've said before, and said in the past, we need to get our supply base closer to every manufacturer to minimize this effect out of it, and so far we have not reached the (inaudible) level years, so we're working on it.

Great, thank you.

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

Go ahead, please.

Hi, it's Thomas Besson from Merrill Lynch -- hello.

I wanted to ask you about cash returns and acquisitions.

Given the outlook you paint for H2, is it safe to assume that you may eventually reduce the pace of your buyback?

We will see that on Thursday, actually, when we come back with the buyback program.

Okay.

Given the move we've seen, obviously it is just very recently, but on the Continental, could you comment on your real interest, would you still be interested if any attractive assets, [worth going to have a look at] to make selective acquisitions and to eventually go above the levels, decided not to go through if the right asset was to come on the market?

Well, I think, we -- of course -- there are a couple of things, we are always interested in the right buy.

But the right buy also differs from time to time.

I think in times where we are like this, we want to take on a lot of debt, actually, to make huge acquisitions.

We don't want to take on board a lot of extra risk which could be involved in making very big acquisitions.

We don't want to do that.

If we have the right acquisition in front of us, that would fit either a passive safe addition in the emerging markets, or an active safety technology in globally, anywhere in the world, we would be very interested in looking upon it.

In particular, if it's something that would enable us to avoid accidents and make a step into the active safety arena further than we are today.

Okay, fair enough.

Can you comment on the -- what you're working on in terms of the possible '09 commodities impact, and Himanshu asked you the question about the environment in terms of production and how it would -- what the sensitivity was.

Can you comment as well on commodities and could you say anything about the relationship with other makers?

You mention pricing pressure still as a negative and one of the reasons for your change in guidance.

But obviously it's going to get worse in '09, so could you put a figure around that or -- and comment on where you are in your negotiations please?

Well, if we look on the pricing pressure with the customers, I don't think there has been any change in the pricing pressure.

It is as bad or as good as it always been.

What we are looking now is that we are in intensive negotiations with our customers on all fronts, actually, to recoup commodity and price increase from our customers.

In the environment where you see other suppliers being distressed, being close to bankruptcy or similar, a company like Autoliv that is doing fairly well, relatively speaking, we of course have an uphill battle to fight for the commodity compensation that is out there with the customer.

And I can assure you, we are doing a lot right now at every customer.

If you look on the commodity impact, if I understood you right, Tom, you were seeking for our opinion of the commodity price increase for '09.

We have not seen the full effect of the current pricing level yet.

If you look on the current pricing level for commodities, it could be around $100 million for full year '09.

We are now talking about $60 million.

There could be an additional $40 million, approximately, if the current prices would prevail.

It's an indication for you to help you with the modeling, but a lot can change, as you know.

We don't know how the market outlook is there, and if the commodity prices would even fall back, actually.

So we don't know, but it's a decent indication.

Okay.

So, to finish, can I ask about the timing of the restructuring charge, the cash out, and make sure that I understand correctly?

Your 5% guidance looks very low if it's pre-restructuring, even if in a context where your organic growth is (inaudible).

Can you just clarify these points; timing of restructuring, timing of cash out, and whether the 5% is effectively pre or post any restructuring charge you may take in Q3, please?

If you look on the quarter three isolated, quarter three is seasonally a lower quarter.

If you have a seasonal effect compared to other quarters, you can say that you have between 50 basis points and 100 basis points as a seasonal effect to start with.

Then you can say that the raw material effect that we are seeing after freight and utility cost has a negative impact of close to $30 million, or about 180 basis points.

If we then look into the organic decline that we see here of 3%, then you are not that far away from the 5% guidance, so you are very close to the guidance.

So that is how we are coming to the 5% guidance for the third quarter.

Okay.

Can you comment on the timing of the restructuring and the cash out for the restructuring --?

Yes, sure, I can comment on that.

We are trying to do, as I said, we want to get started as fast as we can with the restructuring, and therefore we are right in the middle of working hard right now with the planning mode of the restructuring program, and if we can, we will try to take as much as we can on a cost base already this year, but that requires, as you know, detailed planning, plan (inaudible) [and side-by-side].

From a cash flow point of view, it will be a delay, maybe up to six months delay, from a cash out point of view, but from a bookkeeping point of view, we're trying to get as much as we can already this year.

Yes, thank you very much.

That's all for me.

The next question we have comes from the line of [Patrick Nolan] from Deutsche Bank.

Go ahead, please.

Hi, hello.

Hi, Patrick.

I just have one -- two follow-up questions.

On the commodities, what type of recovery is factored in to the $60 million headwind that you have for the full year?

As we said in the presentation, almost no compensation is factored in here.

(inaudible).

And in the restructuring plan, you talked about developing products for smaller vehicles.

I guess I'm kind of confused, because isn't a lot of what you produce pretty much interchangeable between a larger vehicle and a bigger vehicle?

So what type of new products would we be talking about, here?

Well, we believe that the vehicles are, in general, getting smaller.

There will be even a higher focus on the performance for smaller cars, which will be a focus on cost level.

I think it's everybody that are close to us, we are, as you know, we are having feedbacks on the nanovehicles.

Everybody that has been trying to get into the nanovehicles.

If you take a high specified product and try to [decontent] it you will be unsuccessful, so when the world is going towards smaller vehicles, you have to have a specially-designed roadmap for the smaller cars, and that is what we are intensifying our efforts in right now.

We have products we are producing for smaller vehicles already today, but we will see that will have a larger portion of our sales in the future.

And I know this next question might be difficult to quantify, but of the $120 million, a large portion of that is acceleration.

Is there any way to give us an idea of just how much of this is incremental beyond the plans you already had in place?

It's very hard to comment, you are absolutely right, actually.

There are, of course, some parts of it already included, as you have seen on one of the slides at the end of the presentations.

We have cost reduction programs, and we have already -- took that into account already at the previous earnings call, and we had it already in the plan.

But the [lion] part is now new here.

Thank you very much.

The next question comes from the line of Patrik Lindqvist from HQ Bank.

Go ahead, please.

Thank you.

Patrick with HQ Bank in Stockholm.

A question on the distressed suppliers, as you mentioned that cost is going up slightly in the second half against the first half, whereas, if you look at the raw material guidance that you have for yourselves, there's a significant increase, almost a doubling on the impact, if you compare first to second half.

Since you're saying that suppliers are basically very much raw material impacted, that's sort of a disconnect for me, and I just would like to understand how you reason when you say that your suppliers that you've been working hard on for many years will do better?

That's my first question.

Yes, of course, there is a point that we have been working with the suppliers, and we are working with the suppliers still already, but this is our best estimation that we are having today.

And it is increasing the stress level on the suppliers, we're working hard with them to have them take the [lion] part of (inaudible) increase on their side.

(inaudible) but there's no specific reason that's why you're saying that the increase will be less, the impact will be less from that side than it will be from your direct raw material exposure.

No, it is not, actually, and in some cases, there is also -- so that, how it works in practice is in some cases we also buy the raw material and we provide them to the distressed suppliers, so maybe it is also so here in the figures that we are buying raw materials, and taking that burden, and then providing this to the distressed suppliers.

In that case, the supplier is too distressed, so probably cannot even buy, or does not have the cash available to buy the raw material.

And therefore, you partly see that factored into the raw material part.

Okay.

And another question on the benefits of the restructuring that you're talking about.

You said that you were aiming to get some impact already in the fourth quarter this year, so I assume that's a part of what you're including in the guidance, and could you say something about the magnitude that you're expecting, since that's basically -- that's very near out in the future?

Thanks.

I cannot comment on it, really, actually.

We are right in the middle of the planning for it.

But as I've alluded to here, then, fourth quarter part of it will be primarily related to the take-out of temporary workforce.

That is something that you can do relatively fast, actually, and that is what you should expect, actually, in the fourth quarter.

Sure, and it is included in what you're expecting for the full year, the 7% to 7.5%?

Okay.

Final question, on China.

It seems as if a start-up cost, if you will, is continuing, which is, in a way, understandable.

You say that volumes will be lower, but the question is, in a way, you can say that it seems as if you have built up too much capacity now in China, and by when do you think that you'll be able to fill those new plants and thus run at least a break-even situation there?

Well, I think that we are still seeing a significant growth in China.

We are looking on, even if you look on the latest forecast, 14% this quarter, quarter three, here, and 7% in quarter four, even if the growth has come down a bit.

It may be sort of a one-year delay, up to a one-year delay, compared to our previous indications.

We don't think we have too much capacity in China on the longer run, not by any means, but we may have -- we are too early, maybe, in the capacity, seeing what we see right now, and that's what is reflected in the start-up costs.

But we believe in the long run it's not too much capacity.

Sure.

Thank you very much.

The next question comes from the line of Joe Amaturo from [Buckland] Research.

Go ahead, please.

Good afternoon.

A couple of questions.

First, your third quarter EBIT margin guidance of 5% suggests to me that you're going to see quite a rebound in that EBIT margin come the fourth quarter.

Is that a fair way of looking at that?

Yes, you can say it's going to be better in quarter four than in quarter three, yes, definitely.

Well, do you think the fourth quarter average is above the full year guidance?

If you do the math, back in (inaudible) and use it to do the reverse engineering, as I'm an engineer, here, then you come to above the full year guidance.

Right, okay.

And then, secondly, with respect to the share repurchase, will you be moderating share repurchases and return of capital to shareholders for the restructuring action spending that you're planning?

As I said earlier on the question, you will see later on in the week how we will handle it.

Okay.

And then with respect to working capital, there was quite a noticeable difference in working capital with it being unfavorable this quarter versus quite a favorable last quarter on the cash flow statement.

Could you just tell us what really drove that and what the expectation is for any potential reversal come the second half?

You're referring to that we have a negative impact in the [cash] flow now in Q2, and that's mainly due to that we have little bit higher inventory levels now in Q2.

Okay, so that should reverse out in the third quarter?

We don't know yet, but we could say that the high inventory level is mainly referring to the higher raw material prices and, of course, (inaudible) distressed suppliers (inaudible) show up later on, and we don't know yet if that is going to go back or not.

Okay.

All right, that's all I have.

Thank you.

Thank you.

The next question comes from the line of Eric Michaelis from Societe Generale.

Go ahead, please.

Hello?

Eric Michaelis, your line is live.

Do you wish to ask a question?

No, I don't, actually.

I didn't press the button.

I'm sorry about that.

Oh, no worries.

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

Go ahead, please.

Hi, thanks.

I just would like to clarify two quick points, please.

The $120 million restructuring charge, where are you going to take that?

Is it going to be in other income and expense, it is going to be in the gross margin?

And could we, should we, expect on top of that some possible asset write-offs, please?

Well, I think it is, first of all, it is $75 million cost, I think you said $120 million, maybe I misunderstood you.

Yes, sorry, $120 million is the payback, yes?

(inaudible) it's $120 million annual savings, $75 million expense.

Sorry for that.

And regarding the classification of it, if you talk about severance payments, it normally shown under other income and expense.

Okay.

But then, the $75 million, does it include possible write-off, or would possible write-off come on top?

It could, it could, but -- No, it is included.

It is included.

The $75 million includes the severance package and potential write-offs.

So that is all included.

Okay.

Perfect.

Thank you very much.

Thank you.

We have no further questions at the moment.

(OPERATOR INSTRUCTIONS).

We have a question from the line of [David Leiker] from Robert Baird.

Go ahead, please.

Good afternoon.

Hi, good morning, David.

I just want to confirm something, because I think I heard a couple of different things on this guidance.

Your slide in the slide deck on slide 20, I think it said that excludes the restructuring program.

Is that correct?

That's right.

Okay.

On both the positive and -- the cost and the benefit?

Right.

Okay.

If we look at Eastern Europe, which is where the incremental growth is coming in Europe, how do you participate in that?

In the Eastern Europe, we are participating in it, of course, but as you know, there are a significant lower content per vehicle in the Eastern Europe than we have in the Western Europe, and therefore, every car by car shows up in the light vehicle production.

You have the 20%, over 20% growth, but from a safety value point of view, it is not the same.

But we are participating in it.

And is that magnitude of difference comparable to what you would see in China and other emerging markets?

Approximately, yes.

Okay.

And are there standards in place to take that safety content higher as there is in other places, or is that not in place yet?

Well, you have in China, for instance, you have the China NCAP that is driving safety content in China higher, and they are starting it up, and they are focusing quite a bit on safety concepts in China for various reasons.

As we have mentioned, you have the export vehicles that offer a different content in China than the Chinese OEMs, and the domestically built cars in China, and then, of course, as we said, the deregulation and such is driving it.

Okay.

And then, where -- have you seen anything with the (inaudible) standards in North America and in Europe, where you're seeing content go up when you look out two or three or four years on new vehicle programs?

Do you see that happening?

You mean in the new side regulation, or --?

The collapsing -- all the different standards into one (inaudible) safety measure.

No, we don't have -- we have not seen that really yet.

It's so new, so we haven't seen that yet.

It remains also to be seen how the different OEMs take on board this.

The classification is going to be different.

You're distributing the stars in a different order, we're all aware of.

And that has not been seen, any effect of it, yet.

Okay.

And then the last thing, here, is if we look at these commodity costs, going to $60 million now, and I think you said that on a run rate that's closer to $100 million, is that correct?

On the -- yes.

On a calendarized, on a full year basis, if the current prices would be on a full year basis, you are on a run rate of approximately $100 million.

Refers to just commodity or commodity and fuel and energy?

Just commodity.

Okay.

And what do you have -- what kind of recoveries are you able to get off of that, that's implied in that number as you look forward?

In the numbers that we have presented here, we have virtually no recoveries included, but as I've alluded to before, we are driving this pretty hard here, and I will not be able to fully tell you that in our next earnings call either, because I'm sure the negotiations will continue.

I'm not even sure I will be ready, be able to tell you fully in the fourth quarter earnings calls, because they will try to postpone all this kind of negotiations.

But we are running it very hard, and I have no exact figures to give you at this time, Dave.

Okay.

And then the last question, when you look at the action plan, here, cost of $75 million, savings of $120 million.

When do you think, timing-wise, the savings offset the costs incrementally by quarter?

Would we see that early in '09, or is it later than that?

I will have to come back to that, Dave.

We don't have that -- we haven't made that exact calculation yet.

Okay.

Thank you.

Thank you.

The next question comes from the line of Anders Trapp from SEB.

Please go ahead.

Yes, hi, I have one question.

I apologize if it's already been answered; I joined a little bit late.

I just -- on the R&D spending that you have, you mentioned that you're going to do some changes there, including for instance net reductions.

What are you aiming for in terms of percent of sales and R&D?

You've been around 6%-ish for a while.

And also, my second question connected, it's basically, how much of efforts will be redirected to what is a nanocar product, and how fast can you have new products out for these really small cars?

We are looking to approaching 6% from the low side.

That is our target for the R&D level.

We remain on that level.

So, approaching 6% from the 5.5%.

We are looking towards 200 to 300 people additionally in product development, but that means that as we said a net reduction, we are going to reduce more in the application engineering.

Looking into the product, the timing from a point of view, to have something to start to sell, we would hopefully have something during 2009.

To have it in production will take several years later.

Yes.

All right, thank you.

Our next question comes from the line of [Eric Petterson] from [APG].

Go ahead, please.

Yes, hi.

Just one question for you.

How big is your exposure towards SUVs and light trucks as a percentage of Group sales?

That part is roughly is 5% of consolidated sales in North America.

It's a round number.

Okay, thank you.

Thank you.

The next question comes from the line of David Leiker from Robert Baird, go ahead please.

Just one other quick one here on commodities.

What are you guys assuming for steel prices?

For the full year?

Well, for the full year, and as we go into next year?

We are -- for this year we are assuming $40 million for the full year, in price increase compared to last year.

So that's [$60 million, $40 million] of steel?

Yes.

And where are you --?

And then you have -- you can have this plate here to make it easy for you.

We are again expecting a decrease of the zinc level, that is basically offsetting the other materials like oil-based materials.

And then you have a magnesium price increase of roughly, in the ballpark, of $15 million, and then you have aluminum that is up closer to $5 million -- slightly above $5 million.

But the [lion] part of -- absolute [lion] part of it is steel.

Where are you on your contracts for steel?

Are you locked in now through the end of the year or are those contracts rolling off?

Varies from region to region, believe it or not, with a tendency to have a shorter term in the Asian regions than in the European regions.

So how much of your steel price is closer to the market price?

I can't comment on that, really, actually today.

But, as we said, the run rate for the year now is approximately $100 million and we are experiencing $60 million for this year, so that gives a decent indication of it.

Okay, thank you.

Thank you, David.

We currently have no more questions, so just a final reminder.

(OPERATOR INSTRUCTIONS).

There are no further questions coming through so I'll hand you over to Jan Carlson to wrap up today's conference

Okay, thank you very much all of you for participating in today's call.

Thank you very much for interesting questions.

We will be back to you, next time, here on October 21 for the third quarter earning's call, and until then I wish you all a very good summer.

Thank you very much.

Thank you.

Thank you for attending today's conference.

You may now replace your handsets.