Autoliv Inc (ALV) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Autoliv financial report for the third quarter 2009 conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. (Operator instructions). And just to remind you all that this conference call is being recorded today.

I would now like to hand over to your chairperson, Jan Carlson. Please begin your meeting, and I will be standing by.

Thank you, Annika. Welcome, everyone, to our presentation for the third quarter Autoliv result. Here in Stockholm, we have our CFO, Mats Wallin, and our VP Corporate Communication, Mats Odman, and me, Jan Carlson, Chief Executive Officer. As in the past, we will open with a review of the overall business conditions, along with our quarterly result. Then we will discuss the near term outlook for our Company.

At the conclusion of this presentation, we will remain available to respond to your questions. And as usual, the slide deck is available to a link on the front page of our corporate website.

Turning the page, we find the Safe Harbor statement, which, as you know, is an integrated part of this presentation. This presentation includes some non-US GAAP measures, and the reconciliations to US GAAP are disclosed in the quarterly press release and in the 10-Q filing.

Moving on to the next slide, we have the quarter three overview. As highlighted at our Capital Markets Day last month, we will continue to focus on staying ahead of the curve. We were in particular pleased with our margin development and free cash flow performance during the quarter. Despite the 12% organic sales decline, we improved our gross margin to 18%, from 16.9% last year. This was mainly due to our Action Program savings and lower material costs.

Excluding restructuring, we managed to achieve an EBIT margin of 5.6%. This was almost the same level as last year. This result was better than the revised guidance of 4% EBIT, mainly due to improved sales, a favorable mix, and currency effects.

And lastly, our free cash flow was much better than last year. Overall, we are extremely satisfied with our rebound. This is, to a high extent, thanks to the tough actions taken over the last 15 months, along with the dedication and commitment of our employees.

If we turn to the next page, we have the cash flow slide. Our free cash flow of $101 million was $70 million better than for the same period last year. This improvement is mainly driven by lower CapEx spending and improvements in working capital. We now estimate our full year CapEx to be in the lower end of the range, $150 million to $200 million. We also expect to maintain a positive trend versus depreciation and amortization.

I should mention that already in October, we have paid down $125 million on our revolving credit facility, and after this, we now have only utilized $75 million of the $1.1 billion credit facility.

Turning the page, we have the latest third quarter light vehicle production figures from CSM and JD Power. The quarter three annualized run rate of roughly 60 million vehicles was up more than five million from the quarter two run rate. This was 11% better than the expectation at the beginning of the quarter.

In the Triad, where we generate more than 80% of our sales, light vehicle production declined by 18%. This was 6% worse than our organic sales decline. In rest of the world, we saw a market increase of 21%. This light vehicle production improvement was mainly driven by a strong performance in China, Korea and India, of 66%, 20% and 18% respectively. Our strong presence in the rest of the world resulted in a 32% organic sales increase for our Company in this region.

On to the next page. We have the quarterly production figures for the third quarter. The volumes in our seatbelt business decreased by 11%. This was more than the decline in global light vehicle production, due to our high dependence on light vehicle production in Europe, which dropped by 12%.

For side systems, we continued to outperform the Triad, which is the dominant market for side airbags. For frontal airbags and electronics, the declines are less than the decline in the Triad. So overall, we believe our market shares have increased slightly during the quarter.

Turning the page, we have our gross margin trend. Lower organic sales had a negative effect of 190 basis points, but this was completely offset by lower material costs. In addition, we were able to improve 160 basis points, primarily in labor savings, which was partially offset by other net of 50 basis points.

As a result, our gross margin actually increased by 110 basis points, despite the 12% decline in organic sales. I might mention that the impact of supply disruptions was limited to approximately $1 million during the quarter.

Moving on to our next page, we have the operating margin. The dashed line on this slide for 2008 and 2009 excludes restructuring charges. The effect of the declining sales on our overhead costs was 150 basis points. This is in addition to the 190 basis points from the previous slide. Actions to reduce RD&E and SG&A costs generated approximately 160 basis points of margin improvement. This improvement was partially offset by lower engineering income of 130 basis points.

Our total margin improvement effect due to our cost saving actions was 3.2%. This includes the savings from the gross margin. We thereby achieved an operating profit of 5.6%, excluding restructuring charges, despite the 12% organic sales decline.

On to the next page. We have summarized the results achieved so far by the Action Program and other actions. In quarter three, we accrued $14 million related to further restructuring activities. The cash payments were $18 million during the quarter, and we now have $59 million accrued on the balance sheet.

The savings generated from the Action Program was approximately $65 million for the quarter, while we expect the annualized savings to be in the range of $200 million to $250 million. This is lower than our estimates last quarter, due to headcount increases for increased sales volume. The margin improvement savings are estimated to be $40 million for the quarter, with an annualized effect of around $130 million.

During the quarter, we added 2,800 people to manage the light vehicle production increases. As we alluded to last quarter, we have found further cost improvement opportunities. This will result in approximately $100 million in restructuring costs for 2009, lower than the $75 million anticipated in the beginning of the year.

We turn the page again, we have our associate development by various headcount categories since we initiated the Action Program, as well as for the third quarter, broken out.

As mentioned in the Capital Markets Day last month, our labor force is now increasing. This is to adjust to the light vehicle production recovery, so the increases are mostly temporary direct labor within local countries. Temporaries are now increasing as volumes recover, but are still reduced by 1,100 since July last year. A similar trend can be noticed for overall headcounts in local countries, and direct labor, as you can see from the slide. However, indirect labor is still continuing to decline. This will further reduce our breakeven point.

Currently, close to 15% of our workforce are temporaries. We will also continue to adapt our manufacturing footprint to the light vehicle production trends in each region.

On to the next page. We have the commodity impact on our business. The commodity indices remain well below 2008. However, they have increased enough since that quarter, and are nearing levels last seen in early 2006.

For the third quarter, we had a net positive effect of $29 million. This was slightly better than expected at the beginning of the quarter, as virtually all of this is due to the higher volume, higher sales volume. Considering the most recent volume effects, we now anticipate a commodity price benefit of $59 million for full year 2009.

On to the next page. We can see that our net debt to cap ratio has declined to 27%, and for the quarter, we reduced our net debt by $39 million, thanks to our strong free cash flow performance. As you know, we do not have any financial covenants on our debt. We have an internal debt policy where we track the leverage and the interest coverage ratio. And as illustrated on this slide, we do not currently meet our internal debt policy on a trailing 12-month basis, but we do for the quarter.

Based on our guidance and strong free cash flow generation, we expect to be in compliance with the leverage ratio, but not with the interest coverage ratio policy, by the end of the year.

On to the next slide. We have our important platforms and models in China, which is supporting our strong outperformance versus the market. The majority of these vehicles are produced by non-Chinese OEM. And all of these vehicles that you see here, except the Suzuki Alto, have more than $250 in safety content per vehicle.

On to the next page. We are looking specifically at the fourth quarter. We have the latest global light vehicle production figures. The forecast of 15.6 million vehicles is 11% above 2008 level. This is the first time in five quarters that there is a possible year-over-year improvement.

This represents the sequential improvement for quarter three of approximately 500,000 vehicles. In NAFTA and Western Europe combined, an anticipated improvement is expected to be 4%. China and India are expected to continue to outperform all the markets, and are now forecasted to show a production increase of 68% and 38% respectively. And lastly, the annualized quarter four run rate of 62 million is line with the latest forecast of 62 million vehicles for full year 2010.

Turning to the page, next page, we have the latest full year global light vehicle production figures. And as illustrated here, we see full year 2009 is expected to decline 15% from 2008. Our two largest markets, NAFTA and Western Europe combined, the decline is 25% versus prior year.

On to the next page. We have the financial outlook for fourth quarter and full year 2009. In quarter four, organic sales are expected to increase by more than 10%, while consolidated sales are expected to increase 25%, given currency exchange rates. Excluding restructuring charges, we expect the fourth quarter EBIT margin to be at least 7%.

For the full year 2009, we anticipate our consolidated sales to decline approximately 25%. Based on current exchange rates, we expect the negative currency effect to be around 4%, while we expect to outperform the light vehicle production in NAFTA and in Western Europe combined, with 5%.

Based on these assumptions and customer call-offs, we should generate an operating margin of more than 2% for full year 2009, and that is excluding restructuring charges.

To summarize, thanks to our actions and improving light vehicle production, we are back to an operating profit, including restructuring costs, and we continue to generate a positive free cash flow even in these difficult economic times.

The next page is concluding the formal presentation of today's call. But before we start the Q&A, I would like to turn to the entire Autoliv team, and to acknowledge and to sincerely thank you for your support and your commitment to improve our Company, especially during these tough times. Thank you all for an excellent job.

Now we would like to open it up for questions, and I'll leave the word back to you, Annika. Thank you.

Thank you, Jan. (Operator instructions) We will take a short silence while questions are being registered.

Our first question comes from the line of Adam Jonas. Please go ahead with your question, announcing your company name.

Hi, it's Adam Jonas from Morgan Stanley. Good evening.

Hi, and good morning to you.

Thanks. I just have a couple questions. First, we're already seeing from Daimler, which reported headline numbers yesterday, that working capital was a positive contributor to them. Volkswagen has been indicating that working capital has been positive. Knowing how the payables versus receivables math works on -- for the Latin producers, we can expect also positive working cap for them.

So we have this pattern of your customers kind of taking money back from suppliers, but yet, you reported a positive working capital performance in the third quarter. At what point do we start to see the impact of suppliers starting to fund OEs again on the working capital side? For example, for the fourth quarter, represent a bit of an outflow on the working cap as the -- you know, different from what we saw in the third quarter. That's my first question.

And then the second is, you mentioned pretty clearly that you don't expect you'd meet both your requirements on leverage by the end of the year -- you'll meet one of them. So, is that a pretty straightforward way of saying not -- to the market, please don't expect you to renew your buyback or dividend activities until we get into 2010? I just wanted to lay that out there for you to address. Thanks.

Thank you, Adam. I can take the second part of it. As we said, one of them, the leverage ratio, we are expecting to meet, and you know, dividend and buyback, in particular, dividend, is a question for the Board. And until we are compliant with both our internal policies, I'm not going to address the Board with the question.

We expect to be compliant with both of them sometime during first half of 2010, and then it's time to bring it to the Board. That's as far as I can say on the second part of the question.

For the first part of the question, I leave to Mats.

Regarding the working capital in the Q3, I would say it's two items bringing these [to you]. First of all, we have managed our payables and accruals that are well in relation to increased receivables, but you also see in the cash flow statement and the currency effect, so that you have an EBIT more positive effect in the cash flow. If you look into the balance sheet, you will see that very small increase in working capital due to the high effects.

And as we move into 4Q, any reasons -- any arguments for why the working cap should be negative in the fourth quarter for you?

Not really. I mean, we don't -- I can't see that the fourth quarter should be more negative. Of course, it depends on how the [spaces] is developing and how it developed in each month of the quarter. But that, we have to come back to.

Understood. Just wanted to see if you had any visibility there. That's fine. Thanks very much.

Thank you, Adam.

Our next question comes from the line of Matthew Mission. Please go ahead with your question, announcing your company name.

Mr. Matthew Mission, your line is open. Please go ahead with your question.

This question seems to have been withdrawn. Our next question comes from the line of Anders Trapp. Please go ahead with your question, announcing your company name.

Yes, Anders Trapp. Company name, SEB Enskilda. I have two -- no, actually, three questions, if I may. Firstly, I wonder if you could elaborate a little bit more about the development in the rest of the world, especially your -- that you say, yes, you believe you're gaining market shares in the rest of the world. Could you talk a little bit more about that? It would be very interesting, I think, considering that's where the future is, I guess.

Second also, if you could clarify or quantify something about what kind of incremental cost savings we can expect for next year, compared to where we are standing right now, or what you will [log] for this year, if any?

And finally, if you could talk a little bit more about the risk for a setback in the US when it comes to official car production forecasts that you are using. A lot of these are talking about that unless things pick up soon, these [class] will be revised downwards, and what impact that could have on your margin guidance for the fourth quarter.

Well, actually, if I start with -- the market share is, of course, one of the most important market share -- markets that we have in the emerging market is China. And we are expecting to grow from last year about 26% overall in China, to over 30%, 34% in 2012 in China. So we are expecting to grow our market share significantly in China.

The important part, or an interesting part is to look onto the foreign OEM side, and also to the domestic OEM side in China, and we are expect actually to be beyond 30% in both of these segments in China in 2012, growing from approximately 20% share through last year on the domestic part to above 30% or 31% in 2012, and growing the foreign side in China from 29% up to 36%.

We believe we are the market leader already today, but we will hold this position and strengthen this position inside China. If you look into the Indian market, we believe we are roughly at the 50% market share inside India also. So we are holding in one of the two most important or interesting growing markets in Asia, holding a significant portion of that share. I don't know if that answers to the question.

But as we also reported on the market, Capital Market Day, our sales in China today is $400 million, actually. We expect that to grow to $700 million in 2012. If you then look into the additional production we have in China, mainly used outside China, you can already today add another $100 million.

So the production level in China today is already $500 million, or approaching $500 million. And if you anticipate that that outside production share would grow, we are not far away from $1 billion in China, sales in 2012, if you also include the part that is bought outside China, but produced in China.

I leave the rest to Mats. It's easy for me to say Mats here, because I have two Mats in front of me. So -- but I leave it to Mats about the cost side, and see if you can elaborate from there.

Yes. You talk about the Action Plan and the current run rate on the Action Plan. We estimate that on an annualized level, that we have a marginal improvement of around $130 million now currently.

But if you look into our Action Plan now, we have reserves, provisions in our balance sheet of around $59 million to be executed. In addition, we expect to accrue another $40 million in Q4.

So that means that we estimate that Action Program we continued, will continue in Q4. By the end of the year, we will have reserves by approximately $75 million to be cash paid out in 2010 over approximately three quarters.

So you could say that we will see continuously cost savings and marginal improvement throughout gradually 2010, and the full impact of the Action Plan for the full year impact so to speak will be first in 2011.

But it's difficult to say exactly when the savings will come in, how they will kick in. It's very much a timing issue. It depends on negotiations with unions and so on, so that is difficult to say.

Right. Do you have anything to say about the raw material costs for next year, given where you are, where the levels are right now, booked prices?

If you talk about the raw materials, we had an improvement this quarter of $29 million. We expect another $25 million in Q4. And for 2010, we expect an improvement of around $10 million.

If you look also at the setback, the third part of your question, Anders, and we -- there is probably some level of setback after the incentive program. However, if you look onto the North American market, if you look into the figures from CSM and JD Power, you can see, following the numbers, that we are going from an 8.5 million production level, or 8.6 million production level this year, up to about 10.5 million cars produced next year. So there is a -- over 20%, 22% increase between 2009 and 2010 in volume.

What we can also see, which I think [Daimler], we also commented about, is that there is, at least now, a rebound effect on premium cars for the sort of -- closer than -- the quarter closer to now, quarter four and also make a bit into 2010. We see premium cars rebounding a bit here, as an effect of the, relatively speaking, as an effect of the incentive program.

So I think there is a rebound, and there is a setback effect, but how big, that is really hard for us to estimate. I don't have a good figure to quantify a target. All right?

Thank you.

Thanks, Anders.

Our next question comes from the line of Hampus Engellau. Please go ahead with your question, announcing your company name.

Thank you very much. This is Hampus Engellau from Handelsbanken, Stockholm, Sweden. I have two questions, if I may. My first question is related to the FX revaluation effect on [EBIT] in third quarter, if you can quantify how much impact it had on the margin.

And my second question is related to the Action Program. It took only $40 million this quarter, and my question is just, do you still expect to take the rest of the $100 million for fourth quarter? Thank you very much.

Thank you, Hampus. I'll just start with the second part of the question.

We expect to take a charge on the P&L for the upcoming quarter of about $40 million. We expect to take the rest of the cost during the quarter that is -- that we are into right now. We expect to have a cash outlay of about $25 million for fourth quarter, so that is in relation to the Action Program.

That's the plan for it, and we hope that it's going to play out like that.

I leave the FX revaluation to Mats.

Yes, the FX revaluation aspect for -- compared to the guidance, it's around $3 million.

All right.

Okay? Was that okay?

Would you like to proceed to the next question?

(inaudible). Sure.

Yes. Then our next question comes from the line of Kenneth Toll Johansson. Please go ahead with your question, announcing your company name.

Oh, sorry, that question has been withdrawn. Then our next question comes from the line of Joe Amaturo. Please go ahead with your question, announcing your company name.

Hi. Joe Amaturo, Buckingham Research. How are you doing, Jan?

We are doing great here in Stockholm. How about you, Joe?

I'm doing pretty well. A couple questions. What are your near term to intermediate term expectations for A&B car production in Europe? And if you could, what percentage of your European sales are tied to those two vehicle segments?

Let us come back to that a little bit later in the call. I don't have the A&B car but we will dig it up for you, Joe, and come back to you a little bit later during the call.

Okay. Next question. As it relates to the commodity prices, if I understood -- if I heard correctly, you're expecting a $10 million improvement as it relates to raw materials in 2010. Could you just give us a sense when you renegotiate these contracts, and how frequently you're renegotiating your raw material contracts?

Normally, it's non-ferrous metals, like aluminum, zinc, magnesium, etc. Normally, they are renegotiated on a quarterly basis. Steel price varies from time to time, and it has been, in the past, to a large extent, annual negotiations. But during the time when prices were up, and changing dramatically, we cut these down to close, as short periods as possible.

We have sort of tended to increase these [orders]. We are on a longer period right now. But it's still varies also between regions, between Asia, between China, and between Europe.

Okay. And I guess the last question. What -- we have a strengthening euro situation right now. Could you just remind us of what the EBIT impact is for an improvement in the euro? I know you've cited this in the past.

If you talk about that the US dollar is weakening by 1% compared to the euro, we expect a sales increase, given the 2009 current sales level, you could talk about just $25 million on sales, on 1% weakening of the US dollar compared to the euro.

Then the marginal impact on that is, of course, depending on which quarter you are talking about, but if you talk about the run rate we have in the past, or what you see today. But let's leave it up to you how to calculate that cost.

I guess what we're seeing today, I guess is the best --

If you see what -- if you look on what you see today, you could basically take the margin you see, actually, and in the press release, it pretty much corresponds to the effect that you should multiply on that $25 million.

Okay. All right, thank you. Good job.

We will come back with the A&B question later on, Joe.

Okay, thank you. Take care.

Take care.

Our next question comes from the line of Thomas Besson. Please go ahead with your question, announcing your company name.

[Good morning], Thomas Besson, Bank of America-Merrill Lynch. Two quick questions, please. Firstly, you have the lowest ever CapEx run rate and the biggest capital appreciation difference as well. Can you tell us how long you can spend so little, and how fast depreciation will fall? So mainly an idea of where CapEx and depreciation are going to be in 2010. That's the first question.

The second, please, an update on your quest for potential acquisitions, whether it's something that we should expect to happen sometime in the next six months, or whether it's still a long-term quest.

We thought the way the CapEx divided up into the D&A for next year, Mats will come back to. But for the CapEx, you know, we have said with that in the presentation here, $150 million to $200 million, in the lower end of that range. For next year, we are having a range of $400 million to $450 million, and also there, we are staying in the lower end of the range.

We have been, for some years, as you know, around 5% in investment, but that has been during the buildup phase of China, and (inaudible) primarily. So you should look towards slightly above 4% for 2010.

When it comes to acquisitions, as you know, and this is sort of an area we have been looking for for quite some time, and we are very -- still looking with high interest and with high intensity. In all assets that is out there, that we are looking into and we are being interested in, as you know, Delphi, for instance, has announced they are going to exit the active safety by year-end, and that is, of course, an interesting [course] for us to look into.

The area of active safety is still very interesting. There are some niche companies that is out there that could be of real interest for us, but nothing I can comment on here and now. It's very much up to when there is a seller that is ready to sell, or something that fits our strategy. We are not going to go away from being the safety company we are, primarily, and having either passive safety and consolidating that market, or active safety and that technology. But it's very hard to tell you whether it's going to come closer, or sooner or later, Tom, unfortunately.

Back to the D&A part -- Mats, you want to comment on that?

It's difficult for me to comment on that. I have to come back about that. I don't have that number with me currently.

Okay.

Okay. Thank you very much.

Thank you, Tom.

(Operator instructions). Our next question comes from the line of [Johann] (inaudible). Please go ahead with your question, announcing your company name.

Johann (inaudible) from Nordea Markets. Two questions, please. First of all, when you talk on a continuous basis to your customers, do you get any impressions or comments from them about what they expect in terms of any potential hangover spilling into next year from the expiry of the scrapping incentive programs? Do you sense that there is an anticipation of that happening, or do they believe the recovery could go on uninterrupted for volumes?

And the second question is just, when it comes to your model mix that you see that's developing into 2010, do you, given what you see right now, expect to have a volume development which is materially different, either in a positive or negative way, compared with the overall car volumes out there in the market?

We don't see a very big difference, compared to what we have today. We are having -- we have had, for Q1 2009, and also late 2008, very important launches. We are expecting these launches to continue to give us a favorable vehicle mix. We are seeing, also, the mix in the market sort of changing back towards a higher level of larger cars, actually.

And if you talk to the OEMs, to come back to the first part of your question, it of course varies to whom you are talking to. You get sort of one answer if you talk to the North America OEMs, or you get one type of answer when you talk to the premium car segment OEMs, like Daimler and BMW.

But overall, what you can say is, we believe that there is going to be a bounce back in a higher level of larger cars, at least for some time now. We believe we are going to continue to benefit from the launches that we have had through 2008 and 2009, giving us a good vehicle mix (inaudible). For instance, you can say that these at the Renault Megane, which is a very important platform for us, is coming back and doing better and better.

So that is -- that is what I can comment on, on the question.

We've got a question also about here the A&B segment. And for us, last year, those vehicles, the A&B segments, were 17% of our global sales. And those segments accounted for 19% of global vehicle production.

This -- so, we were two percentage points below the global average in that -- last year, in those segments. This year, we have increased to 90%, but the global market has increased to 24%. This is (inaudible) different.

Then in next year, it's expected to [freeze] again. We will increase to 20%, and the global markets will have 23% in the A&B segment, (inaudible) again.

So it will basically be back to where it was last year.

I don't know, Joe, if you are still on the line, but that was to your question about the A&B segment.

Our next question comes from the line of Peter Testa. Please go ahead with your question, announcing your company name.

Yes, thank you. It's Peter Testa from One Investment. I have two questions, please. One is just, when looking at raw material issues looking forward, should you face a rising raw material price environment, can you please give us some sort of help in understanding as to the environment you think you are in for pricing to manage that, and how else you could manage it?

And the second question is, you give the long-term margin, slide eight in the presentation, which basically shows a fairly consistent margin pattern of, for many years, when the environment was less dramatic than what we've just seen. And I was wondering if you think, as a longer term question going forward, would you think that in longer term, that you can push your (technical difficulty) this level, given the changes you've made to the Company during recent times? Or would the commercial and policy and strategy of the Company -- at that point, you can approach that point, be one that more favors growth over margin? Thank you.

We'll start (technical difficulty) the raw material piece of it. If the raw materials will tend to go up again, we will, of course, again fight the battle with our customers to try to get as much money back as we possibly can. We have, during the time now, been trying to include as much raw material clauses as possible into our contracts in the meantime here, to have been preparing for what could be sort of a bounce back of higher raw material prices.

So that is, again here, the situation that we had some years ago. Maybe we are somewhat better prepared, but we are fighting a constant battle to our customers about this, and to have this into the contract.

The other thing that is important is, I guess, we showed a number of examples on the Capital Market Day, where we have taken out expensive raw materials by redesigning the product, replacing heavy and bulky metal housings with fabric housings, redesigning the curtains, etc. And in doing so, we will continue to do, actually for the aim of reducing weight, reducing, sort of the -- also, the expense of raw materials.

So there you say, that's the way we continuously address the raw material impact. And obviously --

Excuse me for interrupting -- excuse me. The question is more, thinking about the environment in which you find yourself, in terms of being able to manage that, and that issue, should it arise. Are you essentially saying that you see the issues are well known, well traveled issues, and you manage them in the way you described, for example, the Capital Market Day, or do you think the industry partnership environment is more difficult, or more -- something more accommodating?

Well, I'm not sure that I understand your questions correct. I think, going back to where it was some years ago before this [build] peak and the raw material peak, I would say we are in a somewhat better position with our customers, maybe because we have been addressing this very hard. But we have not been successful throughout the customer base to build in raw material clauses in our customer contract. We simply haven't seen that, and that has not been possible in the negotiation.

So there will still be cases where we would probably face the fact that raw material prices will go up. We would not be compensated by the customer if that would happen.

So, some more clear strategy against our customers, but in many cases, it's still the same situation. I think that -- answer to the first part of the question.

The second part of the question was to -- long-term margin. Yes, long-term margin, you know, we are -- have been working very diligently through our Action Program to improve the margin situation, and if you look longer term, and we will see that the margin improving part to sustain, to a large extent, into the Group. And Mats can comment more about that later on. We are having today $130 million of margin improvement out of the $200 million and $250 million in total savings.

Longer term margin indication, and our guidance, has been, throughout the cycle, we will be between 8% and 9%. And we hold onto that target.

I don't know, Mats, if you want to comment more on the sustainability?

Yes. I mean, very much sustaining, we also continue with the Action Plan. And as I said before, we have reserves of $59 million to be used further on, and we will have more accruals made in the fourth quarter. So this continues.

Yes, my thinking was more whether the margin profile going forward would be a bit higher on the basis that you've been addressing indirect costs, you've accelerated your low cost country mix. But you know, that's one hand, but on the other hand, in the past, you've also been running a very successful strategy of building share and growing in new markets, and reinvesting an element of what you've been able to achieve in efficiency, and considering the growth plan of the Company. I'm just thinking in terms of that latter point, whether that balance should be expected to return, or whether some of the real structural changes made gives you a higher plane going forward.

I think we have, and the entire Autoliv team, has been extremely successful in performing onto the Action Plan, and we have been very successful in achieving a margin improving part of the savings from the Action Plan. As Mats alluded to here, we will have another $75 million in cash to -- that is already sort of expensed, but in cash, to be taken during 2009. And of course, that will also contribute, as the focus is on the indirect. That will contribute to margin improving, and to sustain the level, and possibly also further improve the margin effect on the saving.

But to (inaudible) and commit to higher than 8% to 9%, when we know we are dealing with the world's best purchasing department on the other side of the table, is a tough one. And so, even if it's looking good, 8% to 9% is what we have said, and we stick to that.

That's very helpful. Thank you very much for the answers.

Thank you.

Our next question comes from the line of Patrik Lindqvist. Please go ahead with your question, announcing your company name.

Sure. It's from HQ Bank in Stockholm. I had a question, a bit of a follow-up on the raw materials side, maybe looking at it from the other way around. I mean, you've been having a significant tailwind for raw materials now for a few quarters, and my question is, that you're saying that you've been moving into the making the raw material cost (inaudible). Is there any risk that that selection -- I mean, that you will be having -- that some contracts that are coming out now will be on slightly worse pricing conditions, at a time when you will have been faced -- like an increase in raw materials, if you see what I'm trying to get at?

Well, I think if you combine the raw material sources and the pricing conditions into one question, we can also divide it up. And we have seen during the third quarter which effect that can have, that the order intake -- we don't talk so much about order intake, but the number of projects coming out of our customers has increased quite a bit, and we have captured a good portion on the projects, we believe. And this level of projects is a sign that is a more, higher activity from the car manufacturing side, to go into new product development and new car models.

That is, in itself, is increasing the competition, again, the interest from all of us to gain this business is of course increasing the tendency to give higher price reduction, directly or indirectly.

So that is good, later on, put the pressure on the pricing side. So far as I said, and I answered before, we have had 2% to 4%. But as I said, this is an indicator.

It can, of course, again here on the raw materials side, when you are seeing it bouncing back, the willingness of sort of negotiating this as a part of the contract, it of course -- it's of course that, from the (inaudible) side. And if it won't affect the pricing, it can, of course affect the pricing at the end of the day. The guy who is getting the order has the most or the best total cost, or that we have, including raw material compensation and these price and development costs and [fueling] costs and whatever it is.

Okay. And then, finally, a question on China. Obviously, I'm sure sales in China will continue to increase quite significantly for the whole Group, and then, historically, at least, the installed value for the car in China has been very much lower. But the models that you showed in today's presentation all have quite impressive value per car numbers.

So the question is, given those kinds of scenarios, how much should we expect the installed value of the car to be impacted by this significant increase in China? Or is it that you would also get a quite significant declaration of the value installed in the Chinese sales? [What percent]?

That's a very good question. If you look to -- and we have looked up this question earlier today, and I promised [Olaf] to rehearse a bit here, actually, because I got it also from him. The problem is, if you look onto the average content in China, is that it looks rather flat. It is, today, roughly around $200 per car in average in China.

If you look onto Chinese volumes, it is a large increase of smaller cars with lower content per vehicle, which is diluting the average value. So even if the market is growing, and even if cars are getting more safety content, the average content on the fleet is diluted by the lower level cars.

So from a market point of view, and for us, therefore, the market share point of view, we are looking more towards our development of all our supply value, Autoliv's supply value. And we are seeing this increasing between 2009 and 2012 with approximately 25%. And that is, then, a combination of higher content, and of course, market share gain.

Okay, thank you.

Our next question comes from the line of H. Patel. Please go ahead with your question, announcing your company name.

Hi, it's Himanshu Patel, JPMorgan.

Hello, Himanshu.

Hi. I just had a question on contribution margin. If you just look sequentially, excluding restructuring charges, I think it was 35% in the second quarter. It looks like in Q3, it was about 41%. And then it looks like your guidance for Q4 is implying 18%.

Two questions, and I'm just looking at variance in EBIT divided by variance in revenue, and the EBIT number looks good, restructuring charges. Number one, what explains the modest uptick in contribution margins Q2 to Q3? Was that just related to mix shift? And more importantly, what explains the big decline in implied contribution margin for the fourth quarter? Is that reflective of some sort of fixed costs coming back into the business, or is it also explained by mix changes?

First of all, if you talk about what is [Q2, 3] impact, we should at least know that the raw material impact is slightly positive, not maybe sequential, but at least year-over-year. And we also have some positive currency effects, which we talked about before.

Coming back in Q3, Q4 look, I really have to come back about that. I don't think my actual numbers here, really -- someone else there over the table (multiple speakers) --

I don't either. I was surprised. You're saying it is -- you come to 18% contribution. I don't know how you came to that number, Himanshu, but --

Well, I mean, you're guiding to roughly $1.5 billion of revenue for the fourth quarter, and 7% operating margin on that would be about $104 million of EBIT. And in Q3, you had $1.3 billion of revenue, and about $74 million of EBIT, excluding restructuring charges. So it implies an EBIT growth of $30 million on roughly, on my math, about $165 million of sequential revenue growth, so that's about 18%.

Does that mean that you're principally calculating on the EBIT margin? Let's do it like this. We have to come back about that question. I don't have a proper answer on that one.

Okay, no worries. And then, just a last question. Could we get a little bit more color on just the state of the tier two supply base in Europe? We had heard from some other suppliers earlier that there was a lot more distress in Europe now than North America. Any color on what the state of that is?

There is a distress in Europe, I agree to that one. However, we are seeing a declining in total for the Group, a declining number of suppliers on our watchlist. We are -- we mentioned 78 in the previous earnings call. We are down to 50. But you are right, there is increased distress, but there is still a distress also in North America from our point of view, what we see.

But the general climate has somewhat improved. It also comes out of, we have been good in managing this, only using up $1 million for the quarter.

Okay, thank you.

Our next question comes from the line of Matthew Mission. Please go ahead with your question, announcing your company name.

Good afternoon. This is actually Brett Hoselton from KeyBanc Capital Markets.

Hello, Brett.

How are you today?

Oh, we are not too bad, thank you, and you?

I'm doing pretty good.

Good.

Pricing. I wanted to ask you, as you think about this quoting activity, what has changed, if anything, in terms of pricing? And I'm thinking about four categories here. One, just the upfront price for a product. Two, the price downs that you're expected to give going forward. Three, value added, value engineering changes, and where the savings accrue to versus -- you know, yourselves versus your customers. And fourth and finally, commodity cost escalators.

Have you seen any meaningful change in any of those four categories, and would it be beneficial or detrimental to Autoliv, in your opinion?

Well, I think there is a participation from many of our customers in all the [BAVE] discussions, and of course, during the time when volumes have been down, we have been using this to discuss with our customers the opportunities for any type of BAVE activity, to just improve the situation for them, as well as for us, and also for our tier two suppliers.

And many times, it has not been possible to negotiate changes in the product, just because it is a lot of extra work for many of the parties involved, and it has probably not been in all parties' interest.

So I think that has been working fine. And on the pricing side, it's not, just as I said, there hasn't been any major changes to the pricing. It's actually between 2% and 4%. But during activities lately here with a higher activity from the OEM, the competition is, further again increasing, and the (inaudible), when there is more business that is out there, you are combined, as always, in big system pricing situation with also the ability to gain new orders. And here, we have been able to come out favorably, we think.

A number of -- maybe not your peers, but a number of the other auto parts suppliers have talked about seeing some improvements in some of these areas, becoming a little bit more favorable for the suppliers. And what I hear you saying, Jan, is that in your space, you're thinking there's some positives and some negatives, but all in all, it sounds like it's fairly similar -- or at least, as you look forward, you don't see any material beneficial change in the favor of Autoliv? Is that a fair assessment?

No, I -- yes, I think that is a fair judgment. It is -- has been some (inaudible), but in -- all in all, I don't think there has been major changes. No.

Okay. Switching gears, looking at this 7% plus in the fourth quarter, that's a pretty impressive number, in my mind. Are there any unusual numbers, or any unusual items in that fourth quarter? Normally, as I look back, the seasonal progression is, the fourth quarter margins are roughly the same as the third quarter margins. Is there anything you see materially changing from the third quarter to the fourth quarter that is driving that 7% that might be unusual?

Not sequentially like that. It isn't that -- anything you can take year over year, and there has been -- we have some positives up on the raw materials. We are expecting a $30 million savings year-over-year. We are also expecting a, to a less extent, engineering income, as we had less engineering income in third quarter, we are also seeing that in the fourth quarter.

So, that is year-over-year, any change. But sequentially not a lot.

Okay. And then, as you think about the primary drivers and the improvement sequentially in your margins from the third to the fourth quarter, I'm thinking about production possibly being up, a little bit more restructuring. Are those the two primary drivers? Is there a third that I might be overlooking?

No, I think sequentially, you should look upon the continuous performance of the Action Program as we mentioned, and also, the increased growth, the increased volume. These had -- these are the major factors, and a continued vehicle mix that is laying -- gaining in favor, favorable to us. And as I said, also, there -- the fact that we may already here see larger vehicles playing up a bit. In the third quarter, we had, to a large extent, substantial here, A&B segment in all small cars. And so the mix is also playing a -- to favor as well.

Okay. And going back to the question about your margins, from 2003 to 2007, on average, I calculate that your operating margins ran around 8.3%, and kind of ranged between that 8% and 9% that you were talking about. I think a number of us in the investment community were thinking, given all of the cost reductions that you've made, you could start to push those margins up from that 8.3% to maybe a higher number.

And you mentioned that through a cycle, you'd like to kind of be in that 8% to 9% range, but I'm not sure if you meant to imply that at the peak of the cycle, you'd be above the 9%, and in the trough of the cycle, you'd be below 8%.

So my question, I guess, is, you're at 8.3% on average between 2003 and 2007. Coming out the back end of this, do you think you're probably going to be around that 8.3%, or do you think that you could potentially be higher than an 8.3%? It seems logical that you would be higher.

I think you should not exclude that you could be higher than 8.3%, and in particular, during some period of time during a cycle, you could probably expect us to even be about 9%, and you should probably expect us to be. And you -- at times, isolated quarters also being below 8%.

It's all depending on, you have the seasonality effect. The third quarter is normally a weak quarter. You have raw material prices, you have whatever it can play into effects, and then throughout the cycle affects the operating results.

But as we alluded to before, we are going to have $75 million to sort of execute -- but being expensed in 2009, but being executed throughout 2010. So, mainly focused on the margin improving side, so the margin improving actions will continue throughout 2009. And that should give us sort of a sustainable level of $130 million, or even an improved level of the $130 million. But let us come back and talk about that a little bit later, when we are executing 2010 [after Christmas].

Okay, very helpful. Jan, Mats, thank you very much, and your team -- very good job, guys. Very good job.

They are doing a great job.

Our next question comes from the line of Carl Holmquist. Please go ahead with your question, announcing your company name.

Thank you. Carl Holmquist, Danske Bank. I'll try to be brief. Your $10 million guidance for the lower raw material costs next year, how do you arrive at that? Could you just give some feeling for assumed volumes and price there?

We are assuming the existing volume, so there is the same volumes that we have today, and the effect, then, is on the pricing side. So there is no volume effect to this $10 million. That's only a price difference between the first part of this year and the first part of next year.

Very helpful. Thank you.

Thank you.

And we have no further questions registered at this time. I will hand the conference back to you.

Very good. I would then like to thank everyone for your attention, and I look forward to the next earnings call, which is going to take place in January 29, 2010. And in the meantime, until then, I wish everybody a safe and relaxing fall, and a nice holiday season. Thank you very much, all of you.

Ladies and gentlemen, thank you for your participation. This concludes today's conference, and you may now disconnect your lines. Thank you.