Autoliv Inc (ALV) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2013 earnings conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Jan Carlson, CEO.

Please go ahead.

Thank you, Chloe.

Welcome, everyone, to our second quarter earnings presentation.

Here in Stockholm, we have our CFO, Mats Wallin, and our VP Corporate Communications, Thomas Jonsson, and myself, Jan Carlson, President and Chief Executive Officer.

I will start off today's earnings call with a brief review of our second quarter results.

After that, our CFO will provide some commentary around the financial results.

Then I will conclude with an overview of the underlying market conditions and how we see our business evolving throughout the remainder of 2013.

At the end of the presentation, we will remain available to respond to your questions.

And as usual, the slide deck is available through a link on the front page of our corporate website.

Turning the page, we have the Safe Harbor statement, which, as you know, is an integrated part of this presentation, and includes the Q&A that follows.

During the presentation, we will reference some non-US GAAP measures.

The reconciliations to US GAAP are disclosed in our quarterly press release and the 10-Q filed with the SEC.

Moving on to the next page, we had another solid quarter of financial performance, despite a depressed Western Europe and the light vehicle production decline in Japan.

Our sales and operating margin were both better than guided, mainly due to stronger than expected organic sales in Europe, Japan and North America.

Our earnings per share of $1.48 was primarily driven by the organic sales growth, financial net, and taxes.

Our steady operating cash flow continues, where we achieved $192 million for the quarter.

We continue to deliver industry-leading return on investment with a return on capital employed of 23%.

Once again, I would like to extend a sincere thank you to the entire Autoliv team for achieving this result in a very mixed and challenging environment.

Turning the page, our sales in Europe was better than expected at the beginning of the quarter.

This, along with our favorable model mix around premium brands, allowed our organic sales to outpace the European light vehicle production by 3 percentage points.

However, the operational inefficiencies in Europe will continue throughout the year somewhat longer than expected.

In Japan, our organic sales decline of 4% was 3 percentage points better than the light vehicle production decline, since we have a low content per vehicle on certain models, where the year over year decline was higher.

In China, our outperformance of light vehicle production of approximately 6 percentage points was once again driven by high contented models.

For example, we grew by 38% with the local Chinese OEMs.

And lastly, our organic sales growth in Active Safety was more than 70%.

This strong growth was driven primarily by our radar technology with Mercedes and General Motors.

We expect strong growth in Active Safety to continue, as OEMs are increasing as option rates of our radar sensors.

We are pleased with the progress of our defined growth strategy, and the investments we have made are paying off.

Looking now on the next page, we have our production figures for the second quarter.

We continue to see strong US growth, in particular, active safety sensors and frontal airbags, where we see an increasing demand for knee airbags.

Overall, we continue to enhance our overall market position despite the unfavorable geographic mix from the recessionary level light vehicle production in Western Europe, where we have a high market share.

I will now turn it over to our CFO, Mats Wallin, who will provide more color on our financial results for the quarter.

Please go ahead, Mats.

Thank you, Jan.

If you now turn the page, we have our key figures for the second quarter.

Our sales of almost $2.2 billion was the best ever quarterly sales during the strong -- due to the strong growth in Asia in Active Safety.

This strong sales performance drove the profit and EPS improvement versus last year, and our better than expected result versus our guidance.

Moving on to the EBIT development on the next page, the EBIT margin of 9.1%, as illustrated on the chart to the left, organic sales and raw materials were 130 bps and 20 bps respectively, better than the same period last year.

These favorable items were mainly offset by currencies, 40 bps, RD&E net, 20 bps, and the combined footprint effect from our buildup for growth, including vertical integration and operating inefficiencies in Europe.

Our EBIT margin performance versus guidance was 60 bps better, as shown by the chart on the right.

This was driven by our better than expected organic sales growth.

As mentioned for several quarters, the depressed Western Europe markets continues to negatively impact our margins, which we are addressing through our capacity alignment, on the next page.

During the second quarter, the savings from our capacity alignment was $3 million, while the cash outlay was $4 million, and we expensed $3 million.

For the full year 2013, we expect to expense in the range of $25 to $50 million, as previously indicated.

We now estimate the cash outlay to be between $30 million and $40 million for full year 2013.

As we mentioned on the previous earnings call, we expect initial savings to be close to $15 million in full year 2013.

Looking now onto our cash flow, on the next slide.

Our operating cash flow was $192 million for the second quarter.

We continue to be on track to achieve our operating cash flow target of $0.7 billion for this year.

CapEx of $88 million was slightly more than 4% of sales.

However, we still anticipate capital expenditures to be around 4.5% of sales for full year 2013, to further support our growth initiatives.

We achieved a free cash flow of $104 million in the second quarter.

During the quarter, we paid a dividend of $48 million, which corresponds to a 7% increase year over year.

I will now turn back to our CEO, Jan Carlson, for a general business and market update, our outlook, and closing comments.

Thank you, Mats.

We continue by turning the page, and thereby, I would like to take a few moments to recap our key business targets and some recent examples of our continued investments for growth.

Our sales target is to grow our sales organically at least in line with our market, and grow faster than our market, including acquisitions.

Supporting our growth strategy, we announced during the quarter further capital investments for vertical integration in China and airbags in Thailand to increase needed capacity and remain competitive.

In addition, we announced our new Stereo Vision camera system to address market needs from the new Euro NCAP.

Our long-term US GAAP reported operating margin target is 8% to 9% through the business cycle.

Keep in mind that implied with this long-term range, we will have quarters where we operate above, and even below the range, depending on where we are in the business.

A new objective we have introduced is that we target EPS to grow faster than our organic sales growth, excluding the effects of currency.

And lastly, we have updated our debt limitation policy to have a leverage ratio target of approximately 1 times, and to be within the range of 0.5 to 1.5 times.

We have committed to start adjusting our capital structure this year, and we intend to be within the range of our policy with the end of 2014.

Looking now at our current business climate on the next slide, the EU27 vehicle registration demand continues to remain weak, and near the lowest levels in 20 years.

Looking to the third quarter, the light vehicle production in Westerns Europe is expected to be the lowest level since the trough of the financial crisis in quarter 1, 2009.

This weakness in Europe continues to affect virtually all OEMs with a few exceptions among the luxury brands.

The light vehicle production in Western Europe for full year 2013 is now expected to decline by approximately 3% year over year.

However, sequentially, the light vehicle production is down 12% in second half from the first half this year.

We therefore remain cautious about Europe, as we see no signs of a cyclical rebound or economic recovery, and there could be even risk for further production adjustments.

Turning now to the Americas on the next page, the overall market situation in North America continues, with a steady and stable recovery.

The US SAAR continues to run slightly above 15 million with relatively healthy inventory levels of approximately 60 days.

Although the production growth rate is slowing in North America, the replacement cycle remains positive, and the light vehicle production is expected to increase 5% from 2012.

In South America, the light vehicle production recovery continues, and is expected for full year 2013 to increase by approximately 6% year over year.

In addition, we are benefiting from the new law in Brazil mandating frontal airbags in 2014.

Turning now to Asia, on the next page, in China, the year to date sales of light vehicles are up 12.5% from the record levels in 2012.

Light vehicle production in China is now expected to grow by 7% in the third quarter, and around 10% for full year.

During the fourth quarter, China is still expected to reach an annual production run rate of 20 million vehicles.

In addition, some local Chinese OEMs like Geely, Great Wall and Chery are increasing their safety content per vehicle as they strive to increase the safety rating of their vehicles.

In Japan, light vehicle market appears to have stabilized to the pre-tsunami levels of 2011, and is expected to remain fairly constant throughout the year.

In South Korea, the light vehicle production is expected to be flat year over year, while India is expected to decline 3% in 2013.

In other Asian markets, like Thailand and Indonesia, we continue to see a steady light vehicle production growth, in addition to the increased airbag penetration in Thailand.

So, to conclude, our overall market situation remains a demanding combination of a depressed Western Europe and growth markets.

Looking now to the outlook, on the next page, we have the guidance for the third quarter.

Based on our customer call-offs, we expect an organic sales increase of close to 6% year over year.

This increase is related to our continued strong growth in Active Safety, China, and rest of Asia.

This growth is partially offset by the continued light vehicle production declines in Europe and Japan.

Sequentially, our organic sales are expected to decline roughly 7%, which is related to the normal seasonality of customer summer shutdowns.

In the third quarter, we expect to achieve an EBIT margin of approximately 8.5%.

Year over year, the margin decline is mainly due to currencies, higher costs related to our footprint, and an unusually high engineering income last year in the third quarter that we do not expect this year.

On the next slide, we have our indication for the full year.

Based on our better than expected organic sales growth in the first half of this year, we are zooming in on the upper end of the previously communicated 2% to 4% range.

Therefore, our indication for an organic sales growth is around 4% for full year 2013.

Our full year 2013 EBIT margin indication of approximately 9% remains unchanged as operating inefficiencies in Europe and currencies are expected to offset the benefit from the higher organic sales growth.

Turning the page, we have summarized our sales and margin outlook from the two previous slides.

All figures related to our outlook assume that mid-July exchange rates prevail, and excludes costs related to the ongoing antitrust investigation and capacity alignment.

In the third quarter, consolidated sales are expected to increase 5%, while the indication for full year 2013 is for sales to increase around 3%, unchanged from April.

We expect the tax rate, excluding discrete items, of approximately 27%, capital expenditures of approximately 4.5% of sales, and an operating cash flow of approximately $700 million.

Excluding antitrust, all to remain unchanged from previous outlook.

So to recap, we delivered another solid quarter of financial performance in a very mixed environment, and remain focused on executing on our strategies.

So if we turn the page, we conclude the formal comments of today's earnings call, and we would now like to open it up for questions.

And with that, I leave the word back to you, Chloe.

Thank you.

Thank you.

The question and answer session will be conducted electronically.

(Operator instructions) We'll pause for just a moment to allow everyone to signal for questions.

We now take our next question from Ravi Shanker of Morgan Stanley.

Thanks.

Good morning, or good afternoon to you.

I have a question on the Active Safety.

This 70% improvement was pretty stunning.

Was that something you had expected, or was it a surprise?

And do you see any move forward from future business as a result of this?

We said that this is a better than expected quarter.

We have been having organic sales last year of over 40%.

We are expecting the organic sales to continue.

But this quarter that went by was somewhat better than expected.

The main reason for the good result here is the rollout of the radar products on the GM vehicles in the US, and also, the continued rollout of the collision prevention assist to Mercedes, also primarily in the US.

So going forward, we'll be looking at a reversion back to the 30%, 40% range?

We haven't given any guidance, actually, for the organic sales.

But we should continue to see a strong growth, continued forward.

Very good.

Thank you.

Thank you.

We'll take our next question from Brian Johnson of Barclays.

Yes.

(technical difficulty) what you might have seen in pricing, and if there are any changes, because you've got some great growth in China where the content is outpacing the market.

But in the more developed markets, even with all this great Active Safety growth, the outperformance, on a revenue basis, is more nominal.

Can you kind of just -- we know the basic math that you always talk us through, but anything different vis a vis this quarter in terms of the offset from pricing versus some of the content, and the content growth you've been seeing?

No, there is no real difference in this quarter compared to other quarters.

Over many years, we have been running between [2% and 4%].

We are running within that range as of today.

As usual, when you introduce new products, new products tend to have a higher price decrease in the earlier phase of introduction, and I think that is the same now as it has been in the past, so really, not any change.

And by new products, would that imply -- does that mean that there's some pressures that could develop in China, or is the -- when we see 600 basis points outperformance there, it's really the content growth is even greater and already reflecting some of those kickbacks?

When you look to the content growth in China, and you see that it's a result of a long-term investment in production footprint, in development capacity, and a focus to be close to not only the foreign OEM, but the Chinese OEMs.

We have worked consistently towards also the Chinese OEMs, and we are happy here to see that high contented vehicles and Chinese OEMs in general are growing fast.

Chinese OEMs overall, with us, had to face growth of close to 40% on -- compared to a production increase of 7%.

So I think that is the situation.

Great.

And just a final question.

Americas, the organic growth lagged the vehicle production growth by about 200 basis points.

Europe was ahead.

I understand the premium story in Europe.

But anything in driving that negative to the market in Americas?

No, I don't think there is anything in particular.

There was some models there running out, etc., but I don't think it was anything in specific around that.

Okay, thank you.

Thank you.

We'll take a question from Rod Lache of Deutsche Bank.

Hi, everybody.

A couple things.

One, I hate to ask you to do this, but would you mind repeating the comments you made on slide 7, about the year over year impact of margins from these individual parts, the organic sales, raw material, RD&E, and footprint?

We can do that, if you want.

We talked about the margin compared where we illustrated -- we talked about the slide to the right there, to start with, and you may take it, Mats.

Yes, I --

Versus the prior year.

Versus the prior year, yes.

And we estimate that the impact of the high organic sales, but also the positive raw material effects, they are 130 bps and 20 bps respectively.

So they are improving the margin.

But then they are mainly offset by negative effects from currencies, 40 bps.

RD&E net, 20 bps, and the remaining bar is related to the combined footprint effect from our buildup for growth, including vertical integration and operating inefficiencies in Europe.

Okay.

What you see there is on the footprint side, a combination there of the buildup for growth that we have been talking about for a long time, and also talked a lot about last quarter, and the vertical integration, and the combination of operating inefficiencies.

In the R&D net part of it, you reported R&D&E as a percentage of revenue at 5.9%, versus 6.1% last year.

So is the reason it's a negative, does that have something to do with reimbursements?

I don't think there is -- it's not related to engineering income.

This is more related to that we invest more in RD&E.

So it's more from the cost side point of view.

Okay.

If you look to the RD&E overall this year, it will be up $45 million compared to last year.

Right.

I was just looking at is as a percentage of sales for the margin effect, but I guess I can revisit that.

For the third quarter guidance, the 6% revenue growth, 8.5% margin, so you're effectively guiding the earnings of $175 million versus last year's $197 million.

You have over $100 million of revenue growth, which I would think adds maybe $20 million to EBIT.

Can you just kind of give us some color on the offsets that you see there that would result in an earnings decline?

The biggest offset is actually in the RD&E net, and we estimate that that offset impact is [1.4] on the margin.

And approximately half of that, a little bit more than half, is related to engineering income.

And as you maybe remember, last year's third quarter, we had an unusually high engineering income.

And this year, it's sort of becoming more normal.

So that's why it's sort of, more than half of the [1.4] is related to that.

And then we also estimate that we see a more negative currency effect year over year, around 30 basis points.

And then the -- basically, the remaining item is, again, the same explanation as we had for the second quarter.

It relates to change in our production footprint and operating efficiencies.

How -- for the full year, how large is the footprint inefficiency, and how should we be thinking about that as we look out to 2014?

For 2013, we estimate that the impact for that is around 80 basis points for the full year.

For 2014, we have to come back in January next year.

But does it -- just to --

If you look to that 80 basis points, you can say half of that is related to buildup, and related to -- the other half is related to inefficiencies.

Okay.

But directionally, could you provide any color on whether next year is a kind of similar year, more significant or less, in terms of these inefficiencies?

When you talk about inefficiencies, you recall we said in February that we would have hoped to see this going away by July timeframe.

And now, we are seeing this taking longer time than we have expected.

We will work very focused to make this go away throughout the year.

But we have to come back next earnings call and even in January to see if there would be anything remaining.

But I can assure you, we are staying focused to make this go away fast.

Okay, great.

Thank you.

We now take our next question from David Leiker of Baird.

Good morning.

Good afternoon -- good morning.

Good afternoon as well.

Active Safety, you break out the unit volume there.

What portion of your revenue is Active Safety?

What's the run rate on that right now?

You know, the run rate of the revenue, we haven't given any guidance on the run rate.

We made $220 million roughly last year, and we haven't given any outlook on the run rate -- on the full year run rate, as of right now.

Okay, we can work through that.

And then, I want to come back to this footprint inefficiency item.

What's the source of the inefficiencies?

Are those launch costs related?

You know, we are operating here with very un-utilized plants, in some cases.

We are operating in an environment in Europe where light vehicle production, this quarter, actually, quarter 3, is going to reach the worst level since 2009.

But the overall run rate of light vehicles was 46 million units.

So we are working on depressed levels, and when you deal with this, you have a capacity alignment, to align capacity with the production levels, and you have also to change the footprint.

And some of these discussions that we have and activities that we have are taking longer time than what we have thought originally.

And this could be all sorts of things, involved with changing the production footprint.

So it's a capacity utilization issue, not a manufacturing issue.

It's a capacity utilization issue.

It is -- that is predominantly the case, yes.

And then, so can we just dial down one more level there?

How many plants are you looking at realigning, relocating, closing, and how many are you opening, and where are you in that process?

We haven't talked about how many plans, and we have not been specific in plants, because we have discussions with different parties in this capacity alignment process.

And we don't want to go and forego those discussions and talk about how much and how many, and how many people involved, or -- etc., around that.

The change here from previous quarter is that it's taking longer time, and I think it's important to state that.

It is not bigger issues, it is not different issues, it is not other issues.

It is things that take longer time than expected, and therefore, will continue into second half from the first half.

Okay.

So then -- [the last slide in here].

So if we look on slide 7, that footprint item is the utilization impact of what you're -- the problems that you're addressing.

So it's the next slide -- the next slide, called Capacity Alignment, is the costs of actually making those relocations in terms of physical changes and headcount reductions, and things like that.

Is that the right way to look at that?

It's a blend.

It's -- this footprint part, it's a blend of both costs for buildup for growth, to phase the vertical integration we have connected to the growth, but it's also including operational inefficiencies.

And then the capacity alignment one on slide 8 are actually the charges for executing those changes, right?

Yes, exactly.

Those are the charges, and you can see also the savings we are expecting now for the full year here are close to $15 million.

That's wonderful.

Thank you very much.

Basically 50% of this is related to buildup, and 50% of this is related to the issues, to the (multiple speakers) --

Okay, thank you for the clarity.

Our next question comes from Stefan Pieter of Goldman Sachs.

Yes, hello, and good afternoon.

Two questions, from my side.

The first one, if you could just help us understand a little bit what's going on in Europe.

So it seems like the second quarter production came in significantly better than expected at the beginning of the quarter, but also, we were up year over year, let's say, 100,000 cars or so.

And now it seems like the outlook for the third quarter is that will be down year over year, so the summer production will be lower.

And at the same time, it seems that the industry is sort of destocking again by 100,000 vehicles.

So why did car manufacturers overproduce in the second quarter, if car sales were not really improving?

And let's say, can you give us a little bit of color which manufacturers or which area in the manufacturing space, the volume, the premium, that's been driving this?

And my second question is just, trying to understand a little bit the reconciliation of your guidance.

I think I'm very, very clear on the volume outlook for both -- sorry, the revenue outlook for both Q3 and Q4 implied.

Where I'm struggling a little bit is on the margin.

If I just plug in the 8.5% you're guiding to for the third quarter, it implies a significant step up in profitability, let's say, 9.5%, or maybe even a bit more for the fourth quarter.

Should I read a little bit of conservatism into the third quarter, or do you expect a significant improvement in the fourth quarter?

And while I was talking, sort of the usual question I like to ask, in terms of further acquisition opportunities, is there anything more meaningful, or is the pipeline still relatively difficult, given how well Active Safety is going?

Thank you.

Thank you very much.

That was three questions, it was around mix, it was around acquisitions, and then some comments around the guidance in the middle.

So if I start off with the mix in Europe, you could say we had a good situation in Europe, where premium brands, in particular, then, BMW, Mercedes and others, had a relatively better quarter, and we had a better mix than we expected earlier in the year.

So, whether that will continue into quarter 3 or not is very difficult for us.

Why this turned out in fact to be a better production situation for them, whether there was sort of better planning, or underestimated plan or not, I'm not sure really I'm the right guy to answer on here.

We had a good, strong growth with those car manufacturers that gave us a good effect.

And of course, also, as we said, Mercedes and Daimler, Mercedes there is the taker also of active safety for us, so that also a second order effect coming [into us], or affecting the North American growth.

We expect the mix throughout the year to be -- continue to be good.

So we also expect as -- also into quarter 3, when we look to the customer call-offs, we expect a lot of growth to come from -- continue to come from Active Safety, and we also continue -- expect a continued growth from European premium brands here in quarter 3.

I would also like to add that we also see that same thing as of now for the Chinese OEMs, and also, in other areas.

If I turn the question to you, Mats, for the second part, I can come back for the acquisition part.

Sure.

And trying to sort of make the journey, then, from where we are today, and having the second quarter now behind us, is that in Q3, compared to the second quarter, we have 7 percentage points lower sales in the third quarter, compared with second quarter.

And the reason for that is basically the vacation period, the summer shutdowns we are seeing.

Which is sort of more, obviously, seasonality-related nature.

But then, when you go from the third quarter to the fourth quarter, then the fourth quarter is sort of without that vacation period.

But in addition to that, the fourth quarter is also the quarter when we normally see high engineering income.

So the engineering income is sort of from -- also from what we have seen in the past, it's very high in the fourth quarter.

And that is also one of the reasons we also see the analysts making better margins in the fourth quarter compared to the third quarter.

I hope that can help you to understand the walk.

Yes, that's very clear.

And then when it comes to acquisitions, we have essentially nothing new to report on this one.

We are having talks, ongoing, as we have had for a long time, but to what extent this is going to lead somewhere, etc., we have nothing new to say as of right now.

So, nothing new to report on acquisitions.

Okay, thank you very much.

Thank you.

Our next question comes from Brett Hoselton of KeyBanc.

Hello, gentlemen.

Hello, Brett.

How are you?

Doing well.

Wanted to talk a little bit about margins, and just some clarification.

Looking at the year over year walk from the third quarter of 2012 to the third quarter of 2013, it looks like you're kind of looking for an approximate decline in margins of about 160 basis points, if I did my math correctly.

I thought that you had attributed about 140 basis points to RD&E net, and about 30 basis points to FX, which would be 170 basis points, and then you've got these operating inefficiencies.

So somewhere -- I think I've got my math wrong, or I misunderstood something.

So I was kind of wondering if you could kind of walk that through again for me.

First of all, you have growth, compared to last year.

So there's there's variance in organic sales increase of close to 6% for the third quarter, and that is a piece you need to have in your roll forward.

And that is, of course, adding onto the result.

Did you -- and I apologize, did you quantify the changes in the production footprint and operating inefficiencies impact on the third quarter specifically?

I know you gave the (inaudible) the full year of 80 basis points, I believe it was --

Yes.

-- third quarter impact?

It's a bit around 130 basis points.

Okay.

And then, as we think about next year, it sounds like the operating inefficiencies will hopefully be resolved, possibly as you move into the first half of next year.

So you have some easier comparisons there, potentially.

It looks like you should get some restructuring savings next year, production potentially a bit of a tailwind next year, and then you've got price-downs and inflation and that sort of thing, which will be the usual headwinds.

But net/net, it appears as though kind of the pluses outweigh the minuses in terms of your margins into 2014.

Are there any other significant positives or negatives that might impact your margins into 2014?

I think you have mentioned a lot of positives.

There might be also negatives.

You never know.

We -- it's too early for us right now to talk about 2014.

We'll have to look into light vehicle production and how it will play out.

Western Europe is on very low level, and could it be worse, what is the growth looking like in other regions, and how is that playing out?

So, too early to say at this stage.

Okay.

And then finally, we've seen some indications that the EU is moving on some of their investigations here in some other areas, and I'm wondering if there is any update as far as you see.

I mean, is there any read-through that you see into your investigations, in terms of whether timing or magnitude or anything along those lines?

I don't think we should draw any conclusions out of the recent information from other parts of other investigations into our case.

At least, we are not doing that.

And besides that, I have no other comments to the EU investigation.

Okay, excellent.

Thank you very much, gentlemen.

Thank you, Brett.

Our next question comes from Thomas Besson of Kepler Cheuvreaux.

Please go ahead.

Thank you.

Three quick questions, please.

I'd like to come back to Europe, first.

I'm concerned that you effectively use your call-offs for your comments about Q3 outlook in Europe, and not IHS or [LMC]'s forecast.

Second, I'd like you to comment about LATAM, where you suggest 20% plus increase in production, and where we start seeing negative signals in terms of end demand, so what's your outlook for LATAM getting into Q3, Q4?

And lastly, you had an extremely low net financial charge in the quarter.

Is it something which was a one-off, what was up, and what should we expect for normal quarters ahead, please?

Could you repeat your second question there, so we get that right?

Absolutely.

So, second question was about LATAM, South America, where you report that production was 22% up in Q2, 13% better than what you forecasted.

I mean, in Brazil, we've seen demand stop or crashing in June, and the attitude doesn't seem to be necessarily positive, so I was very surprised to see this spike in production in LATAM in Q2, and I wanted to have your outlook for the region.

Okay.

Thank you.

Okay, very good.

We can start with your first question there, and the call-offs is the basis for the Q3 guidance, so that's right.

We have, for the full year indication, used for the outer quarter IHS numbers as a basis.

So that's the case.

When you talk about LATAM, you -- if you read IHS numbers as the guidance, you see that IHS number has basically zero development in quarter 3 for South America.

So it was 22% in second quarter, and then it was basically zero.

And if you then look into quarter 4, they even talk about a negative, actually, in the quarter 4 development, light vehicle production development.

I don't think we have too much of a different view on South America than -- on light vehicle production than what IHS had.

You should recall that it's also a matter of mix.

Our sales down there, it's very much a matter of mix.

In addition here, light vehicle production is one thing, but also, the airbag penetration is another thing.

So market growth and sales growth might be different significantly, due to this.

Next part was the financial part, and I leave that to Mats.

It's basically two items.

First of all, we see around $1 million lower interest expenses.

But in addition to that, we were also -- had quite big currency effects on our cash and loans, cash and loans which we have in other currencies than dollars, and -- so those are unrealized currency gains on those items.

And they were around $4 million.

Well, thank you very much.

Thank you, Tom.

Our next question comes from Hampus Engellau of Handelsbanken.

Please go ahead.

Thank you very much.

First, coming back to the capacity alignment program you're running, given the wide range you've guided for, also the costs we've seen year to date, from what you see now, is the risk that this will continue into next year?

That's my first question.

My second question is more a general question around China.

We hear that they're widening their car purchasing restrictions into eight new cities in China.

And I was wondering how this -- is that affecting production, given that we could have moved sales between quarters, etc.?

Thank you very much.

Capacity alignment into 2014, too early to comment about 2014.

You cannot exclude this to be the case.

But we will come back to that at a later stage.

It's all depending on how Europe is developing, as we all understand.

And [during], for the 8 cities here, there has been numbers out there that this could have an effect of 400,000 vehicles in production, these 8 cities.

We believe that this will have lesser of an effect of the high content vehicles, because of the ability for people buying more expensive cars to pay the necessary price.

So for the high content vehicles, it might be less of an effect.

We should have in mind that 400,000 vehicle effect here on a run rate of 20 million vehicles produced per year, so we put it all also in the perspective.

All right, thank you.

Thank you, Hampus.

Our next question comes from Agnieska Vilela of Carnegie (inaudible).

Yes, I would like to just clarify what you said about your outlook for Q3 and Q4.

Is it correct that you said that Q3 is based on the call-offs, and then I think you said that the full year is based on the IHS.

But I assume that you meant Q4?

Yes, that's right.

That's the back -- I said the back end.

Maybe that was not correct, and is clear.

Thank you very much for this clarification.

Q3 is call-offs, and outer quarter is basically IHS.

Okay, thank you.

And then, once again, about your guidance for the second half of the year.

When I compare it, the guidance that you provided today with the one from April, I can see that now, you guide for somewhat lower EBIT margin of 9.4%, versus the implied margin of 9.1% in April, despite the fact that you expect a higher organic growth.

And I assume that you knew already about the lower engineering income coming in in the second half of the year.

So is the main difference here the prolonged inefficiencies in production and so forth?

If you think sequentially, I don't think engineering income is sort of the explanation here.

Engineering income is an explanation when you do the comparison for Q3 year over year, because we were unusually so high last year.

But if you sort of go from the previous indication for the full year to the current one, then you see -- and higher sales.

But the leverage on that higher sales is offset by more costs related to inefficiencies, but also negative currency effects.

Okay, thank you.

And my final question, about your capital structure.

You're saying that you will start to optimize it already this year.

Do you have any decisions taken already?

We will come back to that at a later stage.

No new information since the Capital Market Day, as of today.

Thank you.

Thank you.

We'll now take our next question, from Richard Hilgert of Morningstar.

Please go ahead.

Thanks.

Good morning.

I mean, good afternoon.

Good morning to you.

Most of my questions have been asked already, but I would like to hear a little bit more about what you see going on in China.

We hear so much about how growth is slowing down in China, and that there is the potential that we have an economic bubble over there that could burst, even worse than what we saw in 2009 here in the United States.

Wonder if you could talk a little bit about -- you know, you've got a certain amount of growth that's occurring over there because of additional penetration of more safety equipment.

What's the difference between what your growth experiencing there is, because of the unit volume in China, versus the amount of growth that you're experiencing over there because of penetration into additional vehicles and because of penetration of more technology into the vehicles?

There is a blend of it.

It's hard to explain that here right now.

The clear difference with it, we are expecting to continue into the second half in quarter 3 in China.

Light vehicle production here for the year, approximately 10%.

We could expect to continue to outperform.

Depending on the economic play-out, you can always also see the effect the people would buy cheaper cars instead of more expensive cars, and how the profile would look like.

So I think it is a difficult case to explain.

We are continuing positive on China overall.

There might be ups and downs and bumps, but we expect to continue to outperform light vehicle production.

Okay, very good.

Thank you.

Thank you.

We'll take our next question from Ryan Brinkman of JPMorgan.

Please go ahead.

Hi.

Thanks for taking my call.

I'm just curious on the full year margin guidance, from a very high level perspective.

Your outlook has been at 9% for a couple quarters now, despite tracking 80 bps better than guidance in 1Q, and 60 bps better in 2Q.

And I understand the typical seasonality, but I think the outlook, when 2013 guidance was first introduced, was for some improvement throughout the year as your restructuring efforts take hold.

So I'm just wondering if you're seeing some headwinds now that you did not originally anticipate at the start of the year that could pressure back half results, or if maybe you're just being cautious, given there's still choppy end markets.

Thanks.

Yes.

That's coming back to sort of the leverage on the higher sales we are now indicating for the full year, and that leverage is offset by more costs related to operating inefficiencies, and also, negative currency effects.

Okay.

I think it's also important to say that we are increasing growth.

We have also a good order intake.

So I think that the Company is growing fast, and of course, as we comment here, it's growing faster than expected.

And so, it is a challenge to manage this environment between a very depressed situation in Europe that doesn't see and show a lot of signs for recovery, and even stronger growth here in other areas.

Okay, thanks.

And then, you know, I think in the past that you've produced some really pretty interesting analysis in some of your marketing presentations regarding the inventory situation in Europe.

And I'm curious what you think of the trend this year, particularly in Q2, given the slower sales, but the stronger production.

Do you think this is entirely explainable by changes in imports and exports, or what might we be seeing in inventory build again in 2Q, and does that somehow factor into your guidance?

Maybe it is so that the production level is coming closer to it.

It's still, we believe, a high inventory level, but maybe it is so that the production levels are coming closer to the demand here in Europe.

That could be one indication we could see.

Okay, and then just last question.

It seems like your first half R&D expenses, or ER&D expenses, are tracking only roughly $7 million higher year over year versus the full year guidance for, I think, $40 million to $45 million.

So, did you always presume this cadence, or does it instead maybe signal that you're on track to spend a little bit less than what was originally thought?

If that is true, is that driven by any sort of conscious decision to pare back spending, or just due to efficiencies, cost savings, or something else?

Thanks a lot, and congrats on the quarter.

Oh, thank you very much.

And the best indication we have for R&D is to stay below 6% of net, between 5.5% and 6%.

We have said that R&D today is expected to be $45 million, more than last year.

That is the best information I can give you today.

Of course, when you see the strong growth in Active Safety and expect this -- a strong growth to continue, then of course, that is also affecting R&D.

Thank you.

Our next question comes from David Leiker of Baird.

Please go ahead.

Hey.

I had just one follow up question here.

Sure.

On -- I hate to go back to this, I apologize.

But on the capacity alignment, if I look at slide 8, and I look at the same slide from Q1, a couple things.

One, you've lowered the amount of cash outlay that you expect by a pretty good amount, and you've maintained the savings that you expect for the whole -- just for the whole calendar year, despite the comment that you're seeing some delays in executing some of these actions.

Can you just reconcile all of that for me, please?

I'm not sure really what you wanted to -- you want us to reconcile.

But we are expecting the costs to be within the same range.

When we come closer now to the cash outlay, you see that from what we expected to be the cash outlay in April, that is somewhat lower.

But the execution on the accruals that we have made is unchanged.

There are other things along these lines that is taking longer time than we have expected.

So -- and that is actually, you know, no difference on that one.

So the cash outlay, is that because you're finding the cost of executing these changes is -- the cash cost of executing is lower, or is it because it's not -- some of that is being pushed out?

It's -- the implementation is somewhat pushed out.

So that's why it's a little bit less cash out than we thought in April.

But there is, in fact, no changes to the structure of the program as we --

No, I understand that.

But it's -- but to me, like it would seem like the execution of the headcount reductions and plant changes are tied to the cash outlays.

So if those outlays are pushed out, you still have $15 million of savings.

It would seem to me that that $15 million of savings would be pushed out as well.

We expect the same savings as we did in April.

So there is no change to that.

And the overall program, as you recall when we start talking about this, was to have the majority cash out in 2013 and 2014.

Right.

And we talked about a 2 to 3 year payback after cash is paid out.

And that you now see the variance here between what we estimated in April, and there is some delays in some parts of the implementation, as Mats correctly said.

But overall, we believe that the restructuring program is on track.

Okay, great.

Thank you very much.

Take care.

Thanks, Dave.

We have no further questions at this time.

(Operator instructions) We currently have no further questions.

Okay, with that, I would like to thank everyone for your attention and continued interest in Autoliv, and I look forward very much speaking with you again during the third quarter earnings call on Thursday, October 24th, 2013.

And until then, I hope you all have a safe and relaxing summer holiday, at some point.

Thank you very much, all of you, and goodbye for now.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.