Autoliv Inc (ALV) 2013 Q3 法說會逐字稿

Good day, and welcome to the Q3 2013 Autoliv earnings release conference call.

This conference is being recorded.

At this time, I would like to hand the conference to Mr. Jan Carlson.

Please go ahead.

Thank you, Marian.

Welcome, everyone, to our third quarter earnings presentation.

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

As probably you have noted, I nevertheless wanted to make you aware that we had, at the release time at noon Central European Time, a discrepancy between the English version and the Swedish version sent out.

A correction to the English version were sent out at 1.00 pm Central European Time.

We had the corrections also identified in the last page of the release.

I will start off today's earnings call with a brief review of our third 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 also reference some non-US GAAP measures, and the reconciliations to US GAAP are disclosed in our quarterly press release and the 10-Q filed with SEC.

Moving on to the next page, we had another solid quarter of financial performance, primarily driven by our record sales for a third quarter.

Our sales and operating margin were both better than guided, mainly due to stronger than expected organic sales growth in all regions, including continued strong premium brand mix in Europe.

Our earnings per share of $1.31 was driven by a lower interest, net, and a lower effective tax rate.

Our exception good operating cash flow of $206 million was the highest ever for a third quarter, due to good working capital performance, and we continued to deliver strong returns on investments with a 21% return on capital employed.

During the quarter, our Board renewed the Company's mandate to repurchase up to 3.2 million shares.

The follows our commitment at the Capital Markets Day back in May to start moving towards a more efficient capital structure before the year end this year.

And lastly, I would like to acknowledge the entire Autoliv family for a job well done in achieving these solid results, as we navigate through some very challenging times for our Company.

Turning the page, however, due to our previously communication operational inefficiencies, and now even stronger growth, we are experiencing related margin challenges.

Our results in Europe are currently stressed, due to operating inefficiencies relating to underutilized capacity, capacity alignment actions, and also strong growth in steering wheels, which puts further stress on the capacity alignment.

In Brazil, we have a challenging situation due to supply chain issues.

And we are also currently challenged by currencies -- in particular, the Japanese yen and several growth markets where we have -- where we presently do not have a complete natural hedge.

Active safety, for the time being, continues to dilute our Company average margins, due to high RD&E investments for growth.

Our organic sales growth of almost 60% is evidence that these investments are paying off.

We foresee these margin challenges continue into 2014.

However, despite these challenges, we are on track to deliver approximately 9% EBIT margin, excluding costs related to the antitrust investigations and capacity alignment for the full year 2013.

On the next page, we have organic sales growth of an 8.2%, was about 2.5 times better than the global light vehicle production.

In the Americas, we outperformed the light vehicle production by close to 4 percentage points.

This was mainly due to active safety radar with Mercedes, and the increased adoption of frontal airbags in Brazil, where our organic sales grew by 49%.

In Europe, a favorable model mix around premium brands, and a 30% increase in steering wheel volumes, enabled our organic sales to outpace the light vehicle production by more than 2 percentage points.

Our 7% organic sales increase in Japan, which was 5 percentage points above the light vehicle production, was mostly attributable to strong export demand for models we supply high content per vehicle.

In China, our strong organic sales growth of 17% continues to outperform the light vehicle production, mainly due to models with both local and global brands where we have a high content per vehicle.

Our organic sales growth in rest of Asia was 8 percentage points better than the light vehicle production, mainly due to a favorable mix in India, South Korea, and Thailand.

And lastly, in active safety, we had another quarter with exceptional organic sales growth of 67% year over year.

We are proud of the progress we are making with our growth strategy, and these results, it's evidence that our investments for growth are paying off.

Now, looking on the next page, we have our delivery figures for the third quarter.

We continue to see strong unit growth in all product areas except seat belts and side curtain airbags, where we grow roughly in line with the market, due to our already high market shares.

It is encouraging to see, with certain customers, a shift from pretensioners to active seatbelts, where the content per vehicle is higher.

In our fastest growing business area of active safety, we aim to reach our Company long-term EBIT margin target of 8% to 9% within two to three years.

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

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

Thank you, Jan.

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

Our sales of $2.1 billion was the best ever sales for the third quarter, due to the strong growth in all regions, especially China and active safety.

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

Moving on to our EBIT development, on the next page, the EBIT margin of 8.8% was 30 bps better than our guidance.

As shown by the chart on the left, this improvement versus our guidance was driven mostly by the better than expected organic sales growth, which was partially offset by currencies mainly related to the Turkish lira.

When comparing to the prior year, as illustrated by the chart to the right, organic sales, raw materials, were 160 bps and 30 bps, (inaudible) better than the same period last year.

These favorable items were offset by adverse currencies of 80 bps, and higher RDE, net, 10 bps, of which half was higher cost, half was lower engineering income.

In addition, the combined footprint effect of 130 bps is mainly attributable to our buildup for growth, including vertical integration, and around one third is related to operating inefficiencies in Europe.

The depressed Western Europe market continues to negatively impact our margins, which we are addressing through our capacity alignment on the next slide.

Where during the third quarter, our savings from our capacity alignment was $3 million, while the cash outlay was $5 million.

For the full year 2013, we now expect expense between $20 million to $40 million, with a cash outlay in the range to $20 million to $40 million, and generate $12 million in savings.

Looking now onto our cash flow on the next slide, our operating cash flow of $206 million was the best ever for the third quarter.

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

CapEx, net, of $93 million, was 4.4% of sales.

However, we still expect our capital expenditures to be around 4.5% of sales for full year 2013.

This level of investment is required to support our growth initiatives.

Our free cash flow generation was $113 million, of which we paid $48 million during the quarter for the dividend.

This dividend level represents a 7% increase year over year.

I will now turn back to Jan for a general business update and closing comments around our outlook.

Thank you, Mats.

Moving on to the next page, then, (inaudible) Frankfurt Auto Show, we announced a new adaptable seat belt to improve safety for all occupants, especially children.

This new product is purely a mechanical solution, without electronic sensors.

That offers adaptability to the size of the occupant and crash severity.

This unique seatbelt innovation can substantially reduce the load of small occupants, while also improving the protection for larger occupants, as illustrated at the top of the slide.

This is yet another successful outcome of our investments in RD&E for growth.

I would like also to mention that Autoliv recently had two other innovations nominated as finalists for the 2013 Automotive News Pace Award, which recognizes companies with superior innovation and technology investment.

These examples reinforce our commitment to continuous innovation in automotive safety, which has made us the clear market leader.

Turning the page, we have some of the key models that contributed to our strong organic sales growth during the quarter.

Luxury models in Europe include the Mercedes E-Class for both active and passive safety, Volvo V40, and Range Rover Sport.

In addition, the Renault Clio and the GM Lambda platform, where we have both increased our content per vehicle, are performing very well, as is the Nissan Sentra.

In China, the Haval H6 SUV from Great Wall, where we have 100% of the safety content, and the Hyundai Santa Fe and Ford Kuga, are all showing strong demand.

And lastly, within the active safety, we continue to see strong growth with our radar and camera sensors, where combined, our units delivered have more than doubled from the same quarter last year.

Onto the next page.

We continue to see mixed and challenging market conditions.

The EU27 vehicle registration remain weak.

However, on a last 12-month basis, demand has been flattening during quarter 3. And based on our calculations, we now see a declining inventory trend.

Although we see no real signs of a cyclical rebound or economic recovery, hopefully the worst is behind us.

A stable recovery continues in the Americas, where the US SAAR has been between 15 million and 16 million for several quarters, and inventories remain healthy.

Although the US vehicle replacement cycle is positive, growth is slowing.

In South America, despite fluctuating light vehicle production, we are benefiting from the increase in frontal airbag adoption due to the legislation in Brazil.

In China, the year to date light vehicle sales and light vehicle production are up 13% and 11% respectively.

Therefore, inventories appear to be trending downward.

In quarter 4 2013, China is expected to reach an annual light vehicle production run rate of approximately 20 million units.

The light vehicle production in Japan is approximately 700,000 vehicles better than expected back in January, and rest of Asia combined is expected to increase approximately 8% in quarter 4 this year.

Looking ahead into 2014 according to IHS, we foresee a challenging light vehicle production mix, where the developed markets are expected to be flat, while growth markets increase by approximately 7%.

Turning the page, we have our guidance for the fourth quarter, and based on customer calloffs, we expect organic sales to increase more than 9% year over year.

This increase is related to a continuation of strong growth in all regions, especially China and active safety.

And sequentially, our organic sales are expected to increase roughly 5%, mainly related to China, Europe and South Korea.

In the fourth quarter, we expect to achieve an EBIT margin of approximately 9%.

Year over year, the EBIT benefits from the increase in organic sales is expected to be more than offset by adverse currencies, higher RD&E, net, and the footprint mainly -- the footprint effects mainly related to our buildup of growth.

On the next slide, we have our financial outlook, where all figures assume the mid-October exchange rates prevails, and excludes costs related to the antitrust investigation and capacity alignments.

Based on our better than expected organic sales in the third quarter and expected strong fourth quarter, we are raising our full year 2013 organic sales growth to be more than 5%, from around 4% in July.

Consequently, consolidated sales are expected to increase to approximately 9% in quarter 4, and approximately 5% for the full year 2013.

Our full year 2013 EBIT margin of approximately 9% remains unchanged, as currencies and operational inefficiencies offset the benefit from the higher organic sales growth.

Excluding any discrete tax items, we now expect a full year 2013 tax rate of approximately 28%.

So to recap, we deliver another quarter of strong growth and solid financial performance, and remain focused on executing all our strategies to overcome the modern challenges facing our Company.

If we turn the page, this concludes the formal comments of today's earnings call, and we would like to open it up for questions.

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

Thank you.

Thank you.

(Operator instructions) We'll take the first question from Joseph Spak from RBC Capital Markets.

Good afternoon.

Thanks for taking my question.

The first one would be on the active safety comment.

I know you think you revised it slightly, so correct me if I'm wrong.

But you talked about getting to the lower end of the range basically over the next two to three years.

Can you give us basically some indication as to how far below that target you are now, and basically how much of a drag is it?

We haven't given any indication, and we are not guiding on product areas or regions, or disclosing that in particular.

We are feeling that it would be timely to come out with an indication of when we would reach the corporate range, and we did that as we have out the sales target of $500 billion for 2015.

I also wanted to say that in the final press release, it says that we are going to be within the range of 8% to 9%.

That is the correct statement that is out there on the release coming out at 1.00 pm Central European Time.

Okay.

And then staying on active safety, if you just look at the year over year units you guys reported, which was an impressive, I think, 114%, versus the organic sales, which was also impressive, but it's 67%, and if we assume the difference is price, and it has been running in that range.

But is that mostly just a function of the cost of some of these products coming down, do you realize some more scale, or are there competitive issues there?

We are ramping up these vision systems which, per unit, has a lower price than products we have running in production on a higher pace earlier, so that there is slightly a change in the product mix, and that is an explanation to it.

Okay.

And last one from me, you talked a little bit about Europe and the inventory declined.

I mean, would you characterize current inventory levels as healthy and right-sized, or will they be at that -- at a proper level, you think, by the end of the year?

We don't have a good view on that.

We can only conclude that between what, as far as we can see, that production volumes, the sales volume, it's kind of closer to each other, and thereby, kind of declining.

We don't have any outlook for the end of the year.

Okay.

Thanks a lot, guys.

Thank you.

Our next question comes from Erik Holland from ABG.

Thank you.

The first question -- I had some disturbances on the line there initially in the call.

Just wanted to see if you could confirm if there was any change to your ambition to do something with the balance sheet before year-end.

After --

(multiple speakers) -- okay, sorry.

Go ahead.

Okay, second question.

On the headwinds going forward, will continue here into 2014, the adjustment to the Euro footprint and negative mix.

Could you give any indication of the magnitude there, especially perhaps on the footprint adjustment, that that's where you should have the best visibility?

And then also, the third question is, these extra costs you experienced due to difficulty in sorting some components in Brazil, if you could quantify that?

Thank you.

I'll start with the balance sheet.

We are sticking to our commitment to start adjusting capital efficiency before year-end.

This was announced in the Capital Market Day, and we have no change to that commitment.

If we look to the headwind, to be able to quantify that, I have to say we are not ready with any figures yet for 2014, and it's too early to say.

So we will have to come back on any potential impact for this, into 2014, and for how long and how much.

We can already -- the only thing we can already say today is that it will continue into 2014, and that is what we are saying in the release.

When it comes to the cost for sourcing in Brazil, it is a significant disadvantage to not be sourced inside the country, as we all know, due to the obstacles of importing goods.

We have had a difficulty to find proper component supply inside Brazil, whether it is to find components to our inflator, for instance, or other parts.

I have no quantification -- quantities, and to quantify -- to give you here, or levels to give you of it as of today, unfortunately.

But it is affecting us now when we see a step up in growth from first half to second half.

Okay, thank you.

The first one -- just one follow up on Europe, there.

If I understood you correctly, you said there's a negative mix now in Europe.

I'm guessing that's related to steering wheels, is that correct?

That is correct.

So we still look upon -- is it now a mix, a negative mix in general for you, if growth in Europe would be better than elsewhere?

While we are not commenting so much around that, we are seeing significant growth in steering wheels.

We are seeing unit growth here in steering wheels for the quarter that went by, 30%.

And that is coming into plans where we are also up for ramp up of already ongoing programs, significant ramp ups.

And those are also a part of the capacity alignment program that we are executing on in Brazil.

So, significant growth, together with also launches in quarter 3, and also, upcoming launches in quarter 4, is making this unfavorable for us.

In general, of course, it's good to get new business.

But unfortunately, today, this is having a negative effect.

Thank you.

Thank you.

The next question comes from Ravi Shanker from Morgan Stanley.

Thanks.

Good afternoon, everyone.

So, if you can just update us on your long-term view in Europe, just given the little restructuring you're doing.

Are you anticipating some kind of rebound there in the coming year, or are you looking for pretty much flat -- or, low single digit growth going forward?

It's very difficult to say how it will.

We believe, for the time being, it has flattened out, and it has stabilized.

The decline has leveled off.

We have a difficulty to predict how it's going to look like going forward.

We can only see that if you look into the macro situation, with very high unemployment in many countries, it would appear that it will take time for the car sales to rebound in a big way.

So, from our view, we are determined to execute on the capacity alignment program to what we can foresee today, and that is exactly what we are doing with the accruals we had made, and also the indication for the full year.

Got it.

And if I can just go to the statement of the Brazil uncertainty that you had in your original release, can you just talk to what your view is on the regulations there right now, and the potential for penetration growth in that market?

Well, we believe there is a law making frontal airbags mandatory from 2014.

There is an increase for ourselves in growth, as you could hear us telling here on this call, and we have said that we have reached the 49% organic growth, which is significantly outpacing the light vehicle production.

So we continue, this is going to be beneficial for us from a top line point of view.

Unfortunately, the supply chain is now where we want it to be, with enough local supply.

And that's being a drag on our margin.

Got you.

The uncertainty is more about the supply chain, and not so much about the implementation of the regulations.

We have not picked up any indications yet from governments or from customers that they will not fulfill the legislation.

We -- not yet.

Got it.

And just finally, can you comment on your M&A pipeline right now?

Are there any deals that you think you can move on rather quickly?

We are always looking.

That's a part of our strategy for M&As.

But there is nothing imminent for the time being.

Good, thank you.

Thank you.

Next question comes from Brian Johnson from Barclays.

Yes.

It sounds like you're not ready comment on the kind of quarterly progression through 2014 of some of these inefficiencies.

But if we go out to 2015, do you think those are going to be largely behind you by that point?

We would certainly hope so, and that is the case.

If we are not ready to comment on 2014, we are not ready to comment on 2015.

But we will, for sure, hope that that will be brought out of our way by 2015.

And I guess the second question, around margins, how are the pricing discussions with OEMs going?

And is there anything either better, or not as good, in terms of the price-downs they're looking for, as we get to the close of the year?

For the quarter that went by, we are within the range.

You know the range is 2% to 4%.

So for the quarter we went through here, there is no change.

Okay, thanks.

Thank you.

Next question comes from Thomas Besson from Kepler Cheuvreux.

Thank you very much.

Can I first ask for a clarification on the difference between your statements?

Can you explain how, practically, you can have two different statements in two languages?

Second, can you tell us -- remind us what the target is in terms of balance sheet [releveraging]?

Because 3.2 million shares, even if you were to buy back all of these in Q4, it would still put you far away from your target, if I'm correct.

Can you effectively quantify that?

And third, your gross margin has been declining now for a number of quarters.

Is it reasonable to believe that by 2015, 2016, assuming that the active safety business effectively converged with the rest, we should get back to a [20 plus] gross margin, or is it too ambitious?

Thank you very much.

I'm not sure, Tom, that I picked up your first question.

What was your first question?

My first question was a clarification about how you could have two different statements sent, in Swedish and English.

Is there a -- was it an earlier version you sent, or a completely different version, or a new translation?

Just wanted to understand how it was practically possible.

Oh.

Practically possible was that we picked the wrong version of the release.

You know, this making a release, it's a work in progress, and we picked the wrong version.

And so that is very unfortunate, but that's how it happened.

That's how it was.

When it comes to your second question of balance sheet target, you know that we have been targeting a leverage ratio of 1, and that was communicated on the Capital Market Day, with the range between 0.5 and 1.5.

And when it comes to gross margin, we don't guide on gross margin, so we are not giving any indications on gross margin, nor has all the imminent guidance for the quarter of the year, and not in the outer years either.

So unfortunately, I have not any information to give you on that one.

Coming back to the second part of your question, just to be more complete on that one, we have a current mandate of 3.2 million shares, for management to buy back shares, that can of course be extended by the Board, at the Board meeting upcoming.

If so, it would be the decision of the Board.

(inaudible), is it possible to imagine that you could have both buybacks and [special deals], or are you willing to focus on buybacks if you do go that way?

That is a discussion that I would refer to the Board for.

But traditionally, you know we have a strong -- we have had a strong combination of opportunistic buyback and good dividend in the history.

But that would be a discussion for the Board.

Good.

Thank you very much.

Thank you, Tom.

Next question comes from Rod Lache from Deutsche Bank.

Good morning, everyone.

It's actually Pat Nolan on for Rod.

Good morning, Pat.

Most of my questions have been answered, but I just wanted to revisit the walk for Q4.

So, based on the 9% revenue growth, your sales are going to increase by about $185 million.

If you did the typical 30% incremental, there would be an improvement on EBIT of about $55 million.

But the guidance implies something closer to $10 million.

Now, there is -- can you help us think about what the big buckets are between the difference -- you know, how much is R&D, how much is the startup costs.

Just trying to -- the buckets in Q4 just seem a little bit bigger than I would have expected.

Yes, I will try to help you with that.

If you sort of think about Q4 in relation to last year, the first big bucket to mention is the currency headwind, and we estimate that the impact of that headwind is around 70 bps.

The RDE investments have also increased this year compared to last year, and we estimate that impact around 50 bps.

We have some positives on raw materials, 30 bps, and then we have also more costs in our footprint.

So the cost in the footprint is increasing, in order, first of all, to build up for the growth we have, but also to build up for more vertical integration.

And we estimate that the impact being sort of the remaining part of that journey you were asking for.

That's helpful.

And just briefly, on the mix, the mix from your comments in the release, Jan, is that mix comment mainly related to the mix of active safety versus passive safety, or is that a platform exposure comment?

The mix, in terms of --

In terms of 2014, when you talk about the mix headwinds continuing.

Is that related to active safety versus passive safety, or is that kind of a platform mix comment?

Oh, it's more related to the different products in the different regions.

Okay, thank you.

Thank you.

The next question comes from Brett Hoselton from KeyBanc.

Good afternoon, Jan, Mats.

Good afternoon, or good morning.

I wanted to ask you two questions.

One, just on the progression margins into 2014, and I understand you're not prepared to forecast them initially.

But as we think about these issues related to Europe, Brazil, and then the investment in active safety, do you see the pressure on your margins increasing relative to where they where in 2013, or is it that they will decrease, but they will still exist, to some extent, in 2014?

We haven't made an analysis of the full year 2014, or how the margins will play out.

We are working on that during the fourth quarter.

So unfortunately, I don't have any more color to give you on that one.

When you look to the active safety part, it's a deliberate investment we are doing, and I think you can see here on today's release, it's out there being paid off significantly, in terms of very strong growth, but also reaching the indicated corporate targeted margin range within -- not too far in the future.

So I think the investments we are doing there will continue, and they will pay off.

When it comes to the supply chain issues we have mentioned here into Brazil, it takes time to resolve.

To find the right supply base will take some time to resolve.

And when it comes to the European inefficiencies, we are working as hard as we possibly can.

But how this will affect the full year margin impact, it's too early to say, unfortunately.

I don't have any figures to give you.

And then as we think about the capacity alignment program that you're pursuing this year, obviously, you're expecting to get some savings on that.

Do you anticipate seeing any material savings in 2014?

And then, of course, more in 2015.

But do you expect to see some savings in 2014, and have you -- can you kind of roughly quantify those?

What we can say, so far at least, that we know that we have $68 million in the balance sheet today to execute on.

We expect to take costs [2013] between $20 million and $40 million.

And if you take that all together, we believe that the cash out of this will be done during 2013 and 2014, that will be the bigger buckets.

There will be some also going out 2015.

And we expect a payback of that, between two and three years' payback as from the time of the cash out.

To be more precise about what that means for 2014, we have to come back in January, and the possibility of giving more information at that time.

And then my second question along the lines of capital deployment, what I'd like to know, or I was hoping you could refresh us on, is the priority of your capital deployment, whether it be share repurchase or acquisition.

Secondly, the amount of your capital deployment, and by that, I mean that -- I believe in your Analyst Day, you were talking about getting that net leverage ratio of 0.5 to 1.5 by the end of 2014.

And so I was hoping you could kind of quantify, in your minds, what that means in terms of how much you intend to deploy.

And then third, just to confirm -- and again, I might be mistaken here, but I think that you had said in your Analyst Day that you would hope to do that by the end of 2014.

So, priority amount and timing, so far as capital deployment is concerned.

We would like to grow the Company, because we think that we can generate a long-term shareholder return and benefiting the shareholders by making acquisitions.

And our track record, we believe, has proven that.

So that would be our priority.

Now we have been given a promise, and we are sticking to this commitment to start to adjust the balance sheet before year-end, so we will start the journey before year-end, and we are committed to do so.

We are committed to also be within the range by end of 2014.

But as I said, the priority would be to do acquisitions.

I also commented here before that we don't have any imminent acquisitions ongoing, so I guess, then, it would be other means of correcting the balance sheet.

When it comes to the amount that we are going to do, as I said, we are committed to be within 0.5 leverage by end of 2014.

And Mats, maybe you can help us out in how much that would be in dollar terms.

It's approximately $800 million.

Thank you very much, gentlemen.

Thank you.

The next question comes from Hampus Engellau from Handelsbanken.

Thank you very much.

I just want to revisit the capacity alignment that you have in Europe.

And if I understand, you're taking a lot of incremental charges in fourth quarter, given what you're guiding for the full year.

And does this mean that you're taking the charges and you'll continue to do your capacity alignment for next year's also?

And will there incremental charges for next year, or is the things you're taking fourth quarter kind of assessing what you will have going forward?

We have not.

Depends on the development in Europe.

We haven't concluded on the 2014 yet.

But I don't think you should exclude that it will be further provisions taken also into 2014.

And if so, when should we start -- I mean, should we start to see benefits from the second half of 2014?

Like I say, I think Mats partly answered this question before, as much as we can.

What -- the benefits and the savings comes when you make the cash out.

It's not until you make the cash out that you can really see the benefits and the savings coming into the Company.

So as the majority of provisions we have will go out in 2014, progressively throughout 2014, you will see an acceleration of savings as the cash out goes out.

The full benefits of this will be seen when the cash is paid out, and that is continuing into 2015.

So it's not only until later 2015 you could start to see the full run rates, benefit run rates of the to date accrued restructuring.

Okay, and maybe a last question about your vertical integration investments, and also, capacity investments, which is -- when do you think that you're going to see these capacity investments and -- filled up, and seeing higher capacity utilization going forward?

Well, I think we already see here an increase in the utilization.

As we commented early in the year, we will see an increased utilization throughout the year, and we are seeing this filling up in growth markets where we have been investing for growth.

When it comes to the underutilized capacity in Western Europe, I don't think we -- with the plants that we have, see -- we'll see these plants being filled up without aligning the capacity in it.

So I think there is two very different situations in the growth markets, where it's filling up and it's progressing as we think is planned, and in Europe, where it has to be aligned.

All right.

Thank you very much.

Thanks, Hampus.

The next question comes from David Leiker from Baird.

Please go ahead.

Good afternoon.

Hey, good morning, David.

I just want to follow up on that last comment, Jan.

So, how much capacity -- I don't know if you've put a number on this.

But how much capacity in Europe do you need to take out?

We haven't quantified, in terms of number of plants or number of headcounts or anything to be able to take out.

It is capacity underutilized in Western Europe that we have to align with the demand we see.

So that you move your footprint from west to east, the intention is to reduce the overall capacity in the broader European region, right?

As an example, we are closing down one factory as of right now.

We are in negotiations with (inaudible) Germany.

And we could not exclude that this will continue, potentially, in other parts of Western Europe.

So that's what's happening.

But that deal will remove some of your capacity east.

That's not incremental capacity.

I mean, I guess what I'm trying to get at is, between moving west to east, are you also taking capacity down in terms of absolute size, including both regions?

Well, the European light vehicle production is much more down than we had when -- some years ago.

And we have not aligned the total capacity to the total volumes.

But it's more complicated than that, because when you ramp up, as we commented here earlier, when you have also -- when you are also seeing stronger growth in areas that -- light steering wheels, now, that we have been mentioning, you are aligning capacity, ramping up in plants, and at the same time, you are also filling with new launches.

We had launches here coming out in the third quarter.

We are seeing launches in steering wheels coming out in fourth quarter that is putting further strain on the alignment activities.

Okay, I understand.

Did the R&D -- if I'm looking at the numbers correctly, it looks like it's down about $10 million sequentially.

Is that some of the activity to start to better leverage the investments in active safety, or something else there?

Are you talking about sequentially from Q2 to Q3?

Yes.

I think there are two factors in the RD&E.

You have the engineering income, and you have the cost.

On the cost side, it is so that we also have a vacation period in Q3, and that means that some of the vacation accruals will be released in the third quarter.

And then it can look like the RD&E is down, and it is because of that seasonal effect.

Great, thank you.

And then as you look at the active safety and this target over the next two to three years, to be in the 8% to 9% range, how much of that comes from watching new business and sales, as opposed to the absolute dollar amount of spend declining?

It's a combination of it all, where you get better leverage on the investments we are doing in RD&E.

And you also increased the size of the business, so it's a combination of both factors.

And then the last item here, on Europe.

You called out premium -- you know, you have some premium brands and things like that, that helped on the mix side.

Is that the volume in those premium brands, is it launching new business, is it -- are you seeing better take rates?

If you could sort of bucket those for us.

Well, I don't have any good figures to give on the split, but it's a combination of both.

It's good volumes from premium automakers, where a good mix selling on the right platforms has contributed to better sales for us.

And it's also launch of new products like the S-Class, for instance, where we are launching four brand-new technologies.

So where it's giving us an additional, an incremental product mix, and also a better new footprint into the models.

Okay, great.

Thank you very much.

Thank you, David.

(Operator instructions) We'll now take the next question from Agnieska Vilela from Carnegie.

Please go ahead.

Yes, I have a question on your outlook for Euro NCAP 2014 for the new regulations there.

Do you get any comments from the volume manufacturers?

In your report, they want to -- do they want to opt for five stars, or do they think that they can be happy for four stars in Euro NCAP?

I don't think we have any good answer to look on this.

This is what we believe, is going to be, maybe some reluctance in the beginning.

But at the end of the day, we believe that we, as car buyers, are going to value the five star and the good rating on the vehicles.

And it was a similar story when -- in many years, when we went from four stars to five stars, where some automakers said that we would be good enough with four stars, and then some guys came out with five stars and everybody followed.

We believe that here, people are going to follow up to five stars, and thereby, also, the effect for us.

And can you evaluate how much the content in Europe would increase if the OEMs would have five stars today, if they opt for five stars in the future?

We haven't given any good figures on that one.

Maybe we're talking of -- you know, maybe some hundred dollars or so could be the case, if it would be installed.

Depending also how they saw the different parts of the Euro NCAP.

And then one question on both China and India.

What is your outlook for the content in these regions?

If you look to China, we believe that there is, over some years, going to be an increase from today's $210 average, maybe up to $220 average.

In India, it's slow.

It is a development that is slow.

You know they're coming from a very low base, and has a lot of initiatives on the safety side.

It's starting to move, but it's growing very slow.

What is important in China is the vehicle mix, and the mix of different cars, where you see a strong focus on safety.

But the average content is hampered and tempered by the inflow of very low content vehicles, like minivans or so.

So it's a little bit misleading to only look on the relatively low increase of average content in China.

And then my last question.

Do you have any news on the antitrust investigation in Europe?

No, we don't have any news on the antitrust investigations, really, to communicate to you today.

Thank you.

Thank you.

We'll take the next question from Richard Hilgert from Morningstar.

Thanks for taking my question, and good afternoon.

Hey, good morning to you.

I was wondering, you had mentioned the one plant in Germany where you've got some negotiations going on.

Are you negotiating with other labor forces in other areas all simultaneously, or is the restructuring something that we could expect to be maybe one plant at a time, you know, going for a couple of months, and then another plant?

How would you characterize how you're going about your restructuring, your --

We would like to stay out of any more detailed comments about this, with respect to the ongoing discussions and the ongoing negotiations that we might have.

We are -- have announced, it is out that we are aiming to close one plant down in Germany.

And how this will play out, we will have to come if and when any other negotiations have started and been announced.

I'm sorry for this.

That's okay.

Is it primarily the negotiations with labor that you have to deal with in order to accomplish the restructuring?

Or is there also some government issues that you have to negotiate?

Or are there any other issues besides those two?

It varies from plant to plant and country to country.

But of course, when you close down a facility, wherever it is, it is affecting a town, it is affecting a community, and it is, some cases, a big thing.

It all depends on where the plant is located and how the unemployment situation looks like.

It will involve, of course, the unions and the people that are involved.

It can also involve the communities, local communities.

It can also be state governments or something like this, also being involved and having opinions about this, and they're trying to influence it.

And that varies from country to country, of course, but in every case, when you have to make restructuring like this, you have to pay a lot of respect to the people, to the local communities, and take it very carefully.

Okay.

Next subject.

There is, finally, the first vehicle with steer by wire in the marketplace today.

And you have the focus on active safety products.

You have a steering wheel business, and you've also got, on the other hand, a brake controller product in-house.

Would we be seeing, as part of your research and development, and some of your new innovation that's coming out, a steering controller product?

In other words, going more vertical in your product offering in the steering wheel business?

Well, we should not exclude any kind of development when it comes to electronic architecture where we can bring safety into the automotive industry, I don't think, really.

Our focus is to save lives.

That is the only thing that counts on a -- it's focused on, and from a product point of view and from our vision, is to be able to increase the lives saved annually from 25,000 to 150,000.

We haven't been engaged in steering column activities or steering system activities in that way, as so far.

What we believe is important when you talk about autonomous driving is that you take a safety approach on autonomous driving.

And autonomous driving for convenience, to make the driver less focused on driving the car, is the wrong approach.

We believe autonomous driving is a very vital and a very good support when it comes to save lives, and when it comes to increased road safety.

And rightly used, autonomous driving can help saving more lives on the road, and that's why we also pay a lot of attention to it, and are ready to invest.

I take your proposal here, and we should probably discuss that, if that could be an idea for us in the further development.

So, thank you very much for the idea.

(laughter) Thank you for taking my questions.

Thank you.

We'll now take a follow up question from Brett Hoselton from KeyBanc.

Gentlemen, thanks for taking the follow up.

Sure.

I was hoping you could just very, very roughly dimension these three margin headwinds -- the Europe, Brazil and investment in active safety.

I'm not looking for you to quantify them, but I'm wondering, are they the same magnitude, or is there one or two that are materially larger than the others?

No, we don't have any specific quantity, quantifying to give you on that one.

If you look to the three areas, as I think we said before, active safety is a negative effect on our margin, and that is due to that we are investing in the technology and investing for our future.

We are expensing the investment over the P&L, so that it's a deliberate one.

The situation in Brazil is something that is unfortunate from a supply chain, and we have talked about the European inefficiencies.

And you know, from the two that is obvious not an investment for the future in the way of new technologies or new product areas, I would say that the European one is bigger than the Brazil one.

Thanks a lot.

Thank you very much, gentlemen.

Thank you.

As there are no further questions in the queue, I'd like to hand the call back over to Mr. Carlson for any additional closing remarks.

Thank you very much, Marian.

I would like to thank everyone for your attention, and a continued interest in our Company.

We look forward to speaking to you again during our 2013 year, and earnings call on Friday, January 31st, 2014.

I wish you all a safe and relaxing holiday season, even if it's a little bit earlier.

But until then, thank you very much, all of you, and goodbye for now.

Thank you.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.