Autoliv Inc (ALV) 2010 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Autoliv's financial report for the third quarter 2010 results conference call.

At this time, all participants are in listen-only mode until we conduct the question and answer session and instructions will be given at that time.

(Operator Instructions) Just to remind you this conference call is being recorded.

I would now like to hand over to the chairperson, Mr.

Jan Carlson.

Please begin your meeting and I'll be standing by.

Thank you, Rachel.

First of all, I apologize to all of you that we are a little bit late here.

We had some problems setting up the slide presentation here, but finally I think we're up and running.

I would like to welcome everyone to our earnings presentation for the third quarter.

Here in Stockholm we have our CFO, Mats Wallin, our VP Corporate Communication, Mats Odman, and me, Jan Carlson, President and CEO.

As in the past, we will open with a review of the overall business conditions, along with our quarterly results.

Then we will discuss the near-term outlook and the full year 2010 guidance.

This time we have shortened our formal remarks as many of you will be joining the Ford earnings call in about one hour from now.

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

If we turn the page, we have the safe harbor statement which, as you know, is an integrated part of this presentation.

And, as usual, we reference some of the non-US GAAP measures, and the reconciliations to the US GAAP are disclosed in the quarterly press release and in the 10-Q filing.

Next page.

During the quarter we continued to execute of our strategy to transform our Company for the long term.

We continued to increase market share, due to acquisitions and favorable platform mix.

We now have the best sales balance ever, with close to one third of our sales in each of Europe, Asia and America.

Our flexibility and cost structure improvement should allow our Company to maintain double-digit EBIT margins, assuming current business conditions prevail, and will help to safeguard against potential market volatility.

And lastly, our strong balance sheet and cash generation will allow us to fund further innovation and growth opportunities.

All of this will make our Company even stronger for the future.

Turning the page, we are very proud of our third quarter performance.

We exceeded our sales and margin guidance and posted several records, as you can see from this slide.

This achievement is thanks to the continued dedication and teamwork of the entire Autoliv team.

Thank you to all of you for delivering record results.

Once again, another job well done.

Turning the page, we have our exceptional cash flow performance.

Cash from operations was $198 million, mainly due to our restructuring efforts, capital management and strong sales.

Capital expenditures continued to track well below historical levels and allowed our Company to achieve a free cash flow of $139 million; the best ever for a third quarter.

As stated before, we expect CapEx for full year 2010 to be in the range of $200 million to $250 million, or approximately 3.5% of sales.

Therefore, for full year 2010, we should generate at least $0.5 billion of free cash flow; a new record for our Company.

If we turn the page again, you see the third quarter light vehicle production.

The global light vehicle production improved by 13% year over year, which was 6 percentage points better than what was expected at the start of the quarter.

We outpaced the global light vehicle production and grew organically by 23%.

This is the fourth consecutive quarter when we have outperformed the global light vehicle production.

Our strong presence and growth in China plays a major role here.

I should also mention that the US light vehicle inventory levels remained relatively stable around 2.2 million units or 58 days in September.

Turning to the next page, we have our production figures for the third quarter, including recent acquisitions.

And here we can be very brief.

In all product areas we continue to significantly outperform the light vehicle production, both globally and in the Triad.

So overall, we continue to increase our market share in all products due to our strong growth in rest of the world and NAFTA, along with acquisitions.

Turning the page, we have our associate development.

Since before the crisis we have seen a 20% decline in the Triad light vehicle production, and a 35% increase in rest of the world.

Both swings required a significant structural change of our Company.

We now have 3,400 less people in high-cost countries and 1,800 fewer indirect workers in overheads, improving our cost structure.

We also have 1,900 more temporaries and 3,100 fewer employees, further increasing our flexibility.

Consequently, we have transformed our Company to significantly improve our long-term cost structure and flexibility.

And, at the same time, we have adapted to the market change.

Turning the page, we have the commodity impact on our business.

The second half negative effect of $22 million is in line with our expectations last quarter.

This is primarily caused by the lag effect on supply contracts for steel, zinc and aluminum.

Turning to the next page, we have the fourth quarter light vehicle production according to HIS.

Year over year the global light vehicle production is expected to be flat and increase only 1% sequentially from quarter 3.

The Triad light vehicle production, where we still generate more than 75% of our sales, is expected to be down by 3%.

Most of this decline is in Western Europe, where we still have some hangover effects from the incentive programs in 2009.

Rest of the world, mainly driven by China and India, is expected to continue to increase by 4%.

Turning the page, we have the quarterly production trend since 2007.

IHS expect full year 2010 global light vehicle production to almost reach 70 million vehicles.

This short recovery is approximately 19% from the trough we saw last year.

However, this could turn out to be conservative, as IHS has been every quarter so far this year.

For 2011 the IHS expects global light vehicle production to improve approximately 4% from this year.

Most of the improvement is expected in rest of the world, approximately 8%, while the Triad is expected to increase only 1% next year.

Moving on to the next slide, we have our financial outlook for the fourth quarter and full year 2010.

Organic sales are expected to increase by approximately 12% in quarter four, acquisitions should add approximately 8%, exchange rates approximately 1%, with a negative production day effect of 6%.

Therefore, consolidated sales are expected to increase approximately 15% for the fourth quarter.

And we expect the EBIT margin to be around 12%.

For the full year 2010 consolidated sales are expected to increase by approximately 40%.

Our organic sales growth is expected to be approximately 30%, and the effect of acquisition approximately 9%.

Based on these assumptions we anticipate the full year 2010 EBIT to be around 12%.

Turning to the next page, this concludes the formal presentation of today's call.

We would now like to open up for questions and I leave the word back to you, Rachel.

Thank you.

Thank you.

(Operator Instructions) The first question comes from the line of Himanshu Patel from JPMorgan, New York.

Please go ahead with your question.

Hi, good afternoon, guys.

Hi, good morning, Himanshu.

Could you comment, just given some of the changes we've had in commodity cost, what you're thinking initially for 2011 commodity cost impact?

If we look to the current commodity levels, we believe it's going to have a moderate change.

Not a major change from the levels that we see today.

That will mean that we would have a year-over-year impact in first half as the commodity prices increase during 2010.

And that impact could be up to $20 million for the first half of the year.

But on a full year basis, roughly flat?

On a full year basis, then it would mean roughly $20 million as we see the current commodity levels to prevail the second half would have less of an impact.

So it will be an impact on the first half and not so much on the second half next year.

Okay.

And then I'm wondering if you could comment on just the pace of cost add back into the business.

Are you seeing anything different there than what you would have expected at the start of the year?

This is everything outside of commodity costs, whether it's labor costs or pressure on wages, capacity add-back costs, however you want to define that.

Not substantially.

The transformation that we have made in the Company is there to stay.

The change we have seen has been more on a local basis.

We have been affected a little bit by the strikes in China we saw some months ago, but that is then only in China being reflected.

On the other parts we haven't seen any particular cost additions coming throughout the year.

And lastly, it looks like a decent amount of your revenue outperformance is really being driven by just extremely favorable platform mix inside of North America.

I'm curious if you could comment on the outlook for sure if platform mix trends relative the industry production in 2011 for the Company.

We have looked into the platform mix as much as we have the outlook on the light vehicle production and on sales, and we believe we are going to have a positive platform mix for quarter four and for some quarters into 2011.

We don't have good visibility beyond that, but at least for quarter one and quarter two we believe we will have a continued good platform mix.

Okay, thank you.

The next question comes from the line of Rod Lache from Deutsche Bank in New York.

Please go ahead with your question.

Good morning, everybody.

Just as a follow-up to that, your organic growth is so significantly ahead of production.

This year it looks like 30%; the market production will be at 19%.

Is there any way to just [parsh] that out into the amount that came from platform mix versus the trajectory of increasing content?

In other words, if we look out to next year and production is up 4%, and the Triad's up 1%, is there any way to think about what that would imply for your organic growth?

Well the prime reason for the outperformance is the good platform mix, and also growth and market share gains in emerging markets.

So these are the two dominant factors for it.

As we alluded to, this big outperformance cannot go on, of course, forever.

So we will have to see, when we come after the quarter four, how that is going to play out.

But as we said, for the foreseeable future we will have a positive platform mix, and then we will come back later on with the growth for '11 after quarter four.

Isn't some percentage of this attributable to increasing content?

I don't know if you're counting that as positive platform mix, but just increased airbag penetration, or seatbelt pretensioners, and that kind of thing.

Yes, you are right in that we are well positioned.

In the established markets we are well positioned on the platforms, having an increased penetration rate, on the side systems, for instance.

And we are also benefiting from the [2-14] being still in progress in the US, reaching the 100% in some years from now.

So that is, of course, contributing to the growth.

We have said that content could up to 1% on the long-term horizon.

That, over the cycle, could be seen as a measurable [added for content].

Okay, and --

(Inaudible - multiple speakers) here we could perhaps clarify is the regulation for new side impacts.

That will mandate side systems in the US.

And also just as a follow-up, is there anything -- you commented already on commodities being fairly benign.

Is there anything you see on the horizon that would amount to some dilution to the margins that you've been experiencing?

In other words, is there any reason to expect that 2011 margins wouldn't be higher than the margins that you're seeing in 2010, just given the operating leverage and your expectation of positive platform and production growth?

Well, let us to come back to the margins for '11 after quarter four.

What we have said so far is that we will continue to deliver double-digit margin if the current conditions will prevail, and if you have no major deviations in the environment from today's situation.

But you can't point to anything in terms of your costs or investments that would cause some increased dilution to margins that you see in the intermediate term?

Not at the time being, we cannot see that.

We have said that already in the last earnings call that we will continue investing in China for further capacity and we would also monitor the relation indirect to direct people based on the market growth and the expansion in the market.

But not really any significant I can point to today, [not some] I would highlight, no.

Thank you.

The next question comes from Peter Testa from One Investments.

Please go ahead with your question.

Just a couple of things following on from the themes already mentioned.

Firstly, just trying to understand the growth of penetration in emerging markets as a driver of the outperformance of LVP, if you could help us understand that a bit better?

I understand your other comments, but just specifically in that region.

And then the second question was just on the operating costs.

Your SG&A costs have been held very flat, in light of very strong sales growth.

For example, are you confident that that's something which can be maybe not sustained at exactly that level, but at conceptionally that level?

If you start with the growth in emerging markets, we have been early out in China; we have been having a good platform mix.

We are having a good situation, both if you take China as an example with the domestic OEMs as well as with the foreign OEMs.

We are the market leader in both segments, and we are growing the market shares.

We have the right platform mix where we have a good penetration on well selling platforms, like the Volkswagen Golf, in Nissan and Hyundai inside China.

We have also a good position on the domestic part like platforms of the Geely Emgrand EC7.

So we have a good sales mix.

We have a good presence in China.

We have a high vertical integration; 10 plants up and running including component factories from inflators, steering wheels, electronics, and also webbing and cushion manufacturing as well as module assembly inside China.

As a third factor we have invested in technology; we have a brand new tech center in Shanghai.

So I think that is contributing to the outperformance in China in particular, which is the main driver of the emerging markets.

If you take the second part of your question, the SG&A part, for the long haul, you should approximately look to 4.5% in relation to sales.

Okay, but just on the other, I understand your points on the models and the investment that you've made in China.

Just I guess I'm trying to understand, we normally think of model mix as differing between size of cars and content per car because of mix of types of cars.

But I'm trying to also understand the extent to which, for example on locally produced cars by local companies, whether you're seeing any particular -- can you define any particular trend of adoption rates in these sorts of things that may help us understand something other than just mix of vehicle?

Well if you take the overall mix in China, it's a very fragmented situation in China.

You have low entry cars like the mini vans, you have a couple of million units produced in China that is called mini vans.

There are larger vehicles with 79 seaters, basically without any content.

They have more or less a lap belt in the car and no other safety equipment.

These are dominating in the rural areas where you have the farmer going into the cities.

Everything from that end up to the higher end of imported or foreign OEMs that are manufactured in China with full content cars.

But also if you take the domestic players, you have players like Geely for instance with the Emgrand that I referred to.

That is a car that has around $300 of content, which is as high as what you see in Europe and in North America.

If you take the take rate, the adoption rate on the airbags in the frontal systems in general in China, we believe it's around 85% on the frontal.

If you take the side system in average in China it is about 10% in China.

But then, as I said, it varies very much from the higher specified vehicles to the lower specified vehicles where you have a value of maybe $50.

Yes, okay.

That's helpful, thank you.

The next question comes from Brett Hoselton from KeyBanc Capital Markets.

Please go ahead with your question.

Good morning, or good afternoon.

Good morning, Brett.

Contribution margins were a little bit worse than I thought, going from the second quarter to third quarter.

And then the guidance from third quarter to fourth quarter implies slightly lower contribution margins than I would have expected, which implies that you are seeing some cost add-back.

And I could be mistaken there, but my question is, going forward as you think about your contribution margins, how are you thinking about your contribution margins over the short term and the long term?

What kind of numbers would you look at?

And then is there going to be a period of maybe increasing cost add-backs -- and this is kind of like Himanshu's question -- over the next quarter or two, and then that tails off going forward?

Yes if you start to explain then the road map from Q3 to Q4, we should remember that in Q3 we had vacation accruals being released in the third quarter for the vacation period, mainly in the western world.

That is not the case in Q4, so you will have sort of a swing-back of around $12 million having an impact on the contribution of the sales numbers you have in front of you.

And longer term thoughts?

In the longer term I think -- as we have seen so far during this year we have principally had a full contribution.

We are talking about the range between 25% and 35%, and we have been in the high end.

Going further ahead I think we have to come back about that when we talk about that in Q4 earnings release.

But as I mentioned earlier, Brett, there are no significant cost drivers that we see that it should add back costs.

Nor have we changed the pricing pressure.

We have said the range of pricing has been between 2% and 4%, and we remain within that range.

We have said now for a couple of quarters that we are in the upper part of that range, and we still remain in that upper part of the range, but not outside.

And then secondly, Jan, as you look at your mix of business, clearly your exposure to the rest of the world has increased fairly significantly here; that is from a content per vehicle standpoint.

My perception is that's a faster growing part of the world.

So as that portion of your business grows, and your exposure there increases, it would seem that your new business revenue growth rate has the potential to accelerate versus where we've been over the past five years.

And again I'm just focusing strictly on the new business, ignoring production or FX or anything on those lines.

Is that a possibility?

Maybe I didn't get your question fully.

Well, what I'm thinking is, content per vehicle in China is growing faster than it is in the US.

And since your exposure to China is becoming very meaningful, it would seem that your new business revenue growth rate might actually start to accelerate, going forward, versus where we've been over the past five years or so because you're getting larger and larger exposure, greater and greater exposure, to these faster growing markets.

It's actually becoming a very meaningful part of your revenue base.

So is it possible that you could see your net new business revenue growth rate accelerate beyond any changes in production, or apart from any changes in FX?

Not in the short term, if you think about quarter four or in the short term.

Maybe if you think about it in the longer term then you may be right, but not in the short haul.

Okay, thank you very much gentlemen.

Thanks a lot, Brett.

The next question comes from Thomas Besson from Bank of America Merrill Lynch in Paris.

Please go ahead with your question.

Thank you very much.

It's Thomas Besson, Bank of America Merrill Lynch.

I have just two questions, please.

Can you comment, Jan, on the trend for tax and CapEx in '11?

We've seen both actually being significantly lower than we thought at the beginning of the year.

Should we count on something closer to 25% tax rates?

And do you think you can maintain CapEx at 3% of sales or should we expect something more, at 4% or 4.5%?

And second, given the impressive cash generation you've had over the last 12 months, and anticipate for the coming quarters, could you just elaborate on the various uses of cash you see, going forward?

And what is the ranking in terms of your preferences for cash use?

You could be cash positive in just maybe five or six quarters if you don't do anything.

Well if you take the CapEx range to start with, for this year we said approximately 3.5%, and for next year we have said approximately 4% of sales.

So this year in the range of $200 million to $250 million, which would point to about 3.5% of sales.

Sorry, just to interrupt you here, because for the time being it's going to be challenging to get there.

You've spent $142 million, so you're going to be at the very low end of that range, or rather 3% of sales, unless you significantly accelerate in Q4, which is why I'm asking that question.

Yes you're absolutely right, Tom.

We are at the lower part of this range, $142 million right now and we are increasing.

And that's why we are also going towards the 4% of sales ramping up in 2011.

So we see a slight higher CapEx range, and part of that is investments that we have talked about of plant expansions in China, for instance, and also new plants in India.

So we are having expansions in capacity in the emerging markets that is partly driving the increased CapEx range here.

Okay.

And on tax and cash use please.

Yes, on the tax, we expect to have a tax rate now for 2010 which is going to be close to 30%.

You have seen now that the tax rate for Q3 was a little bit above 29%.

We believe, though, that the tax holidays we have in emerging markets, they will fade out over a medium-term perspective.

And in a medium-term perspective we will come back to a tax level in the low of 30% in that perspective.

Second part of your question, use of cash.

Our prime use of cash is to grow the Company.

We aim to use the strong balance sheet and to use the cash that we have to grow through acquisitions, and also through investment in technology.

So that is our prime use of cash.

You know, Tom, we have been a shareholder-friendly Company, and if we would exhaust all these opportunities then we would not be successful, we will, of course, take a discussion in the Board how to return the money to shareholders.

But that is a discussion for the Board, and the first direction right now is to use the cash for growth.

Great, thank you very much, and well done again.

Thanks, Tom.

The next question comes from Anders Trapp from SEB Enskilda in Stockholm.

Please announce your question now.

Hi, Anders Trapp here.

I just wanted a couple of small things.

First, again on the growth in China, or the expansion of what kind of safety products they put in their cars.

If you look at the typical domestics like the Geelys or the BYDs or Great Wall, which of the more advanced products is it really that they going for if there is any kind of trend you can say?

Is it pretensioners, pre-pretensioners, side bags, what is it really that they are going for?

If you take the more advanced products, it's pretensioning seatbelt systems and it's side systems.

Very rarely, if any, you see pre-pretensioning yet in China.

And do you have any kind of catch-all number of the value per car?

I know it's a very, very diverse market, but if you --

$200 on average approximately, $205 on average.

$205, okay, very good.

Also if I may ask you just a detail maybe but -- I think you write in the report that there's 800 people from high cost countries that left the Group during this quarter, and you also write that you have a $15 million cash payment for severance payments or restructuring.

Is that relating to these 800 people that left the Company during the quarter?

Partly of it.

Difficult to answer how many of them it is, but of course the $15 million is down in the high cost country environment, and part of those funds are related to that.

Just also, those 800 people that left during the quarter, have they been actively working in the Company up until now, contributing to producing, basically?

Yes.

Some were included in the acquisition which we made, and because of the synergies we reduced the headcount.

You could say that they have been working until they left, most of them.

Okay, I understand.

And finally also on the acquisitions, you say that you want to grow.

Of course, you have the financial muscle, you have the confidence, and you are also wanting to expand in active safety.

Are there plenty of acquisition targets around on active safety at the moment?

Well there is not an easy task to get the right assets available.

There are definitely assets that we have on the radar screen, but the situation hasn't changed dramatically of the targets being available.

I've said before it takes [two for a time], and that still is the case.

We are a buyer, but there aren't too many sellers, but the occasion may come at some point.

The market changes and we still believe that we would be successful within some time.

I guess the question that we ask ourselves is if you're going to overspend on flowers and chocolates to get someone to dance with.

No, I don't think so.

We paid over the last two years about $150 million for $400 million in sales, so if we continue on that path we are not buying too many flowers.

Okay, thanks.

The next question comes from [Austin Earl] at [Aldergate] in London.

Please announce your question.

Hi, I have three questions, if I can?

If I state them one by one.

The first was just so I can clarify, when you said that the pricing, that the range is normally minus 2% to minus 4% and that you're at the upper end.

Does the upper end refer to the minus 4%?

The minus 4%, correct.

Okay.

Second question, again just a clarification.

In the cash flow bit in the text of the statement you refer to minus $29 million from less factoring.

So I assume that that is recorded within the change in working capital and, therefore, if I ignore that $29 million, in fact, you would have had an inflow from working capital?

Yes, it is, of course, factored in, in the working capital.

It has increased the working capital with $29 million, compared to the second quarter, because we have selectively chosen to end some of the factoring programs.

So if you would understand, the underlying working capital performance, then the 6.7% you have now in the report would more be in the range of 6.4%, 6.3%.

Got you.

Okay, thanks.

And the third question.

I'm sure, if you intended to change your medium-term targets, you would have announced it already, but I just wanted to understand whether it's compatible that you're saying -- I don't quite understand, you're saying you expect margins to remain in double digits.

And yet, you're through the cycle margin target is 8% to 9%.

Can you maybe just square the circle there?

Well as I said, I'm not sure I can give you more color on that one.

The 8% to 9% that we have referred to in the past has been over the business cycle, and there is difficulty to know where the business cycle really starts and ends, and how you should cap that.

And sometimes, it's easier to refer to what you can see for the foreseeable future.

And that's why we have stated that, for a number of quarters to come, as long as these conditions prevail, no significant change on the wages, no significant changes on the raw materials, no worse pricing pressure outside the range, and the life vehicle production that is corresponding to the IHS forecast, we would be able to do at least a double-digit margin.

So I think that is what we have said lately, in addition to the 8% to 9%.

Okay, got you.

That's great.

Thank you very much for your help.

The next question comes from David Leiker from Robert Baird.

Please go ahead with your question.

Hi, good morning.

It's [Keith Schuker] on the line for David.

Hi, good morning.

Just one quick question.

You talked about where you see SG&A going long term as a percent of sales.

Can you do a similar exercise for the research and development expense?

Approximately 5.5% for the year.

We have said, long term, it should be south of 6%, and we hold onto that.

For this year, we will be approximately 5.5%.

Okay.

And then, could you just talk about active safety penetration, how your growth is going in that business, just a status update on the active safety side?

That's all I had.

Thanks.

The status update on the active safety; we are, for the time being, active in radar areas; we are having development programs ongoing in the vision area; and we are active in the night vision area.

If you take that part of the market, we believe that is approximately $400 million market size, growing to $1.5 billion by 2015.

If you take our market share in that piece of the active sales market, we estimate our share to be approximately 20% of that market share.

We believe that we will be able to grow.

We are among the leaders in the radar area, and we are the leader in the night vision area.

And, as we said before, we are looking for further acquisition targets to grow in this area.

If you expand the active safety beyond the sensing business and look into the chassis systems, we have demonstrated, in one of our Capital Market Days, our own stability control.

That is still in a development phase, and we are working on that.

We have no orders on that system yet.

We would be interested to merge into that, if we would have an opportunity to do so.

We have been able to launch the world's first combination, some years ago, between active and passive safety, by integrating the sensor cluster for stability control in our airbag controllers.

So we are also participating in the chassis system and in the chassis architecture.

And that is a part of the development, and the development effort we have in active safety arena.

Okay, thank you.

Thank you.

The next question comes from Niclas Hoglund from Swedbank.

Please go ahead with your question.

Yes, good afternoon.

Most of my questions have been answered, but just a clarification on operational leverage.

Could you maybe elaborate a little bit on the different regions in the potential -- or rather the difficulties in mainly China, with the high capacity utilization and investments that you are undertaking?

Shouldn't we expect slightly lower operational leverage, going forward?

That's my first question.

Thank you.

Of course, we have to understand that the production levels in China, they are very, very high for the moment.

We have a booming market and, by that, we also, of course, have a good impact on the margins.

Of course, coming back to more investments and expansion in China, we do that because we have more volumes to be done in China.

So somewhere along the road, it might be so that we will have some more expense, because we have a higher capacity.

But how much to say, it's very difficult.

Should we expect compensation from a little bit of the higher value-added products also added to the Chinese markets, with a little bit higher gross margin?

Or should we expect a little bit of a softer development here, in the light of the build-up?

Well if you look on the Chinese markets, as such, the simple way to see it is that you have a global price, but you have a much better cost structure in China.

You have lower costs for the raw material, and you have, basically, lower costs for -- not for the raw material, but for the material, as such.

And you have lower added value.

So that is the simple equation, when you operate in a market like China.

Pricing all very much global.

When you look into more advanced products, as we alluded to earlier on the call, it will take time before you have a significant portion of advanced systems, like pre-pretensioners or night vision cameras, or similar products like that.

The migration here from where we are today, we'll go into further installation of airbag systems, like side systems; more advanced people systems, like pretensioners in the front, and pretensioners in the back.

And then, installation of the mini vans that I talked about, by having, first of all, three-point belts, and then starting off with [complete] systems, and then migrating upwards.

That's the penetration we believe of the market in China.

So that's building the contribution margin of that product.

But cost structure lower to global price in China.

Sounds nice.

And then, just a question on the balance sheet.

What kind of capacity do you need?

Looking at the past financial crisis behind us, of course, a strong balance sheet is clearly what was needed, and also, in order to continue to grow and take market share.

But going forward here, we are expecting the market to continue on a good pace, and then probably to recover further in 2012, with the Triad.

So really, what kind of strengths are you looking at?

Well if you look on the balance sheet, as such, for the time being you could say that, from a normal perspective, we have a too strong capital structure, too strong balance sheet.

We don't believe we have a too strong balance sheet, for the time being, as we are in a situation we are looking for acquisition targets.

We think that, right now, we have the right balance sheet for taking advantage of opportunities that is out there, and that will hopefully then come our way, as we think.

Looking ahead, we will have to see how the market development is.

In the past, we have been looking for a certain net debt to capitalization, a certain leverage ratio.

Based on the last couple of years, the market and the opinion may be that the balance sheet should be slightly more conservative to what you saw a couple of years ago.

But it remains to be seen; we will have to take this step wise.

Right now, we are focusing on growing the Company and using the cash for this.

Okay.

Thank you very much.

The next question comes from the line of [John Buckland] from MainFirst in London.

Please announce your question now.

Yes, just two quick questions.

When you answered a question referring to the margins, you basically said the environment is not changing and, therefore, the double-digit margins will remain in place, as far as you can see.

But in your assessment of future business plans, surely you do look at the risks of things changing.

And I wondered if you could just talk about what you see the main risks are, if you're basically saying the environment's going to remain good for the next year or so.

And maybe you can talk about what's happening on the acquisition front; the cost of acquisition, and are there risks there?

If you look on the margin development in ongoing, there is, of course, wage increases; there are price decreases; then there are material fluctuations.

We have been able, so far, to compensate the increases in the normal environment with our productivity, that has been about 5% normally year over year.

We have been able to offset the prices by decreasing the price on direct materials to be able to keep direct material on slightly above 50% level.

So there are, of course, variations.

When I referred to the double-digit margin target, I'm saying any variation of what is outside the normal variation.

We, of course, believe there is, and we always realize there is going to be changes and ups and downs here.

So that, we understand.

If you -- what was the next part of your --?

Yes, acquisitions.

As I said, we have been interested, and we have had discussions on acquisitions.

And so far, we haven't come to a situation where you could say that this is an acquisition that is not worth paying for, in terms of that the price has come to a level that we have not continued a discussion.

That is not the case.

I think more the assets we are looking on today is embedded in structures where they either are having different strategies for their assets, or they see this asset as a strategic part of an ongoing business.

But as you know, and as we were saying on the Delphi acquisition, it was a strategy change that suddenly made this opportunity available for us.

And we were there as a buyer, we had the power, and we can go ahead and execute.

We still believe there is going to be also opportunities on a similar way on the active safety area.

So it's not questions of [our price].

Thank you.

Thank you.

The next question comes from [Edoardo Spina] from Morgan Stanley in London.

Please announce your question.

Hello, good morning.

This is Edoardo Spina from Morgan Stanley.

I had just one quick question on the production for next year, 2011, actually, the first quarter.

Looking at your order book, what sort of feedback can you give us on European production for the first quarter?

Well if you look on -- you mean the first quarter '11?

Yes.

Well the best numbers we have on the production level is what you can get from IHS.

And if you look on the first quarter for Europe, it seems that Europe is down 0.7%, so approximately 1% down in '11, compared to last year.

If you look to Western Europe, it seems that Western Europe should be down 4%.

And that is figures according to IHS.

Which is not far from what you see from, let's say, your order book and talking to your customers, right?

Well we don't have that visibility really, when it comes to quarter one.

We have normally between six and eight weeks, depending on where you are; you can say between four and eight weeks, really.

So we don't have any real there visibility in what you read here.

Okay, thank you.

Thank you.

The next question comes from Hampus Engellau from Handelsbanken in Stockholm.

Please go ahead with your question.

Thank you very much.

I have one question, and I guess it boils down to market share gains.

If you exclude the acquisition of Delphi, in which product areas, and also geographical areas, are you currently gaining most market share?

Well I think we are gaining, of course, the same level of market share in the electronic control units, as that was not dependent on the Delphi acquisition.

And obviously, we can look that figure up for you, and maybe we can take that before we finish the call and I have the exact numbers for you.

Sure thing.

Thank you.

(Operator Instructions) There will be a short silence while participants register for questions.

The next question comes from Anders Trapp from SEB Enskilda in Stockholm.

Please announce your question.

Yes, a follow-up on China, or another question on Chinese development, or your development in China, rather.

I know that you had a tremendous year last year when it came to taking orders.

I think you had a very high share of the orders that were up for grabs.

How has that been doing this year?

I guess you haven't been able to repeat the performance of last year, but have you still been gaining share on order intake, compared to what you are delivering at the moment?

We are still gaining share, not in the same places, because you can't do that everywhere.

But we're (inaudible)

Excellent, thanks.

We appear to have no further questions at this time.

I hand the conference back to you.

Okay, very good.

Hampus, we have to come back to you after the call with the numbers here.

We have the numbers for you on the market share gains, without acquisitions.

So by that, I would like to thank everyone for your attention, interesting questions.

And we look forward to our fourth quarter earnings call, which will be on February 1, 2011.

Until then, I wish you all the best, and a good holiday season, when it comes.

Thank you very much.

Ladies and gentlemen, thank you for your participation today.

This concludes today's conference, and you may now disconnect your lines.

Thank you and goodbye.