Autoliv Inc (ALV) 2014 Q2 法說會逐字稿

Good day and welcome to the Q2 2014 Autoliv Incorporated earnings conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Mister Thomas Jonsson.

Please go ahead sir.

Thank you, Ann, and welcome, everyone, to our second-quarter 2014 earnings presentation.

Here in Stockholm, we have our Chairman, President, and Chief Executive Officer, Jan Carlson, our Chief Financial Officer, Mats Wallin, and myself, Thomas Jonsson, Vice President of Corporate Communications.

During today's earnings call, our CEO will provide a brief overview of our second-quarter performance while our CFO will provide some further commentary around the financial results and outlook.

Then, at the conclusion of our presentation, we will remain available to respond to your questions and as usual, the slide deck is available through a link on the homepage of our corporate website.

Turning the page.

Here 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 in the 10-Q that will be filed with the SEC.

I will now turn it over to our CEO, Jan Carlson.

Thank you, Thomas.

Good morning and good afternoon, everyone.

If we turn the page and we have a look on the highlights for the quarter, record sales drove another quarter of solid financial performance.

Our organic sales growth of 7.4% and operating margin of 9.3% were both better than guided, mainly due to a better-than-expected vehicle production in most regions and active safety.

Adjusted earnings per share of $1.45 was negatively impacted by $0.07 due to increased interest expense, resulting from the USPP depositions and $0.06 related to tax items.

These effects more than offset the EPS improvement from increased sales.

A return on capital employed and return on equity of 25% and 14%, respectively, continued to track above historical levels.

During the quarter, we returned approximately $146 million to our shareholders by repurchasing close to 1 million shares and paying a dividend of $0.52 per share.

We have settled, subject to certain approvals, the US class-action lawsuits for a net cost of approximately $70 million.

And lastly, our active safety organic sales growth was close to 40% during the quarter.

I would here like to extend a sincere thank you to the Autoliv team for their continued focus and commitment to quality while delivering these solid financial results.

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

During the second quarter, these platforms represented around 75% of our organic sales growth and roughly 7% of our total group sales.

This strong model mix contributed to our outperformance in all major regions when comparing to the light vehicle production.

Looking on the next page, we have our market position based on the delivery figures for the second quarter.

We continued to enhance our overall market position as we grew faster than the light vehicle production in almost all product areas.

As we mentioned last quarter, the year-over-year change in seatbelts is a temporary changeover effect as we phase out all programs now and ramp-up new programs during the second half of this year.

In particular, strong growth rates with -- in newer products like advance seatbelts and active safety is evidence that our investments in technology are paying off.

Looking now on to our market conditions on the next page, the overall light vehicle production growth outlook for this year remains relatively unchanged from the beginning of the year of approximately 3.5%.

Within Asia, growth in China this year is expected to be close to 10% while the rest of Asia is now expected to be relatively flat.

The Japanese market continues to be a pleasant surprise and is now expected to be almost flat year over year versus a decline of 8% in the beginning of the year.

In the Americas, the growth rate is slowing.

However the US SAAR remains stable tracking above 16 million vehicles with relatively healthy inventories overall.

The core economic conditions in South America resulted in a 17% light vehicle decline in the first half this year.

The situation there is expected to stabilize and slightly improve sequentially during the second half, despite a very uncertain environment.

Vehicle registrations in the EU27 continued to improve and appear to be on a stable recovery.

However, in the second half, light vehicle production is expected to be relatively flat year over year after a 5% increase in first half.

So overall, the better-than-expected light vehicle production growth in Western Europe and Japan from what we expected at the beginning of the year is contributing to our better-than-expected organic sales growth for full-year 2014.

Moving the page, as we mentioned last quarter, our industry remains under heightened focus on quality.

Unfortunately, through mid July this year for passive safety products, our industry has already announced more recalls than in 2012 and 2013 combined.

To date, more than 17 million vehicles have been recalled globally for safety-related reasons.

Autoliv has been involved in approximately 26,000 of these announced recalls.

This confirms that our overall strategic vision of zero defects and execution of focus on quality is paying off and is the only way to go to provide long-term value to our customers and other stakeholders.

Therefore, quality remains our first priority as saving human lives is front and center of what we do each and every day.

Now I would like to turn it over to our CFO, Mats Wallin, who will comment on the financial results for the second quarter and our financial outlook.

Thank you, Jan.

Look upon our financials on the next slide.

We have our key figures for the second quarter.

Our sales of almost $2.4 billion was the best ever for the Company due to our strong organic sales growth in all major regions, with China and active safety accounted for roughly half of the growth.

This strong sales growth drove our second best gross profit ever, which was an 8% year-over-year improvement in our better-than-expected operating margin result.

Looking now at our modern development on the next slide.

Our adjusted operating income increased 10% year-over-year.

The 9.3% adjusted operating margin was 30 bps better than our guidance and 20 bps better than the same quarter last year.

As shown by the shot on the left, the improvement versus guidance was mostly due to our strong execution on the high organic sales which was partially offset by 30 bps, or warranty, and probable field action costs.

When comparing to the prior year as illustrated by the shot to the right, the benefit from organic sales and currencies was 140 bps and 50 bps respectively.

These favorable items were partially offset by other net 180 bps, which includes the increased cost in our footprint to 140 bps and 40 bps related to the warranty and probable field action costs.

As we have noted previously, the increased cost in our footprint mainly includes our buildup for growth, including vertical integration and operating inefficiencies.

Moving to the next slide, our operating cash flow of $86 million was impacted by the $65 million payment for the US class-action lawsuits and timing effects in our working capital.

We target full-year 2014 operating cash flow of at least $700 million, excluding discrete items.

We now expect DNA to be 20 bps higher than 2013 levels and CapEx net to be -- remain in the range of 4.5% to 5% of sales for full-year 2014.

Lastly, during the quarter, we returned $146 million to shareholders through dividends and shared repurchases.

Looking now at our financial outlook on the next slide.

We have our guidance for the third quarter.

Based on our customer [calloffs], organic sales are expected to increase 6% year over year, mainly due to the strong growth with Japanese OEMs in North America as well as China and active safety.

Sequentially, organic sales are expected to decline by roughly 5%, mainly due to the seasonality effect of summer shutdowns during Q3 in Europe and North America.

As a result, we expect to achieve an adjusted operating margin of around 8.5% in the third quarter.

Year over year, higher cost for RD&E net and mainly the ramp-up of capacity for growth in vertical integration are expected to essentially offset the benefit from organic sales, commodity costs, and currencies.

Sequentially, the adjusted operating margin decline is mainly due to the lower organic sales net effect.

On the next slide, we have our outlook which excludes cost for capacity alignments and antitrust matters and assumes mid-July exchange rates prevail.

Based on our stronger-than-expected first-half sales, our full-year 2014 organic sales growth indication is now more than 6%.

Our operating margin remains unchanged at 9% due to increasing engineering costs and active safety.

We estimate RD&E net to be less than 6% of sales and commodities to be a tailwind of $16 million in full-year 2014.

Excluding any discrete items or nonrecurring items, we now expect an underlying tax rate of 29% and target an operating cash flow of at least $700 million in 2014.

Regarding our capital structure, we still aim to reach 0.5 times leverage ratio; however, we are unlikely to reach this target by the end of this year without something else, such as an acquisition.

We are executing our plan; however the results in Brazil are not as anticipated due to the unexpected drop in LBP.

In conclusion, we continue to see 2014 as a transition year where we are addressing margin challenges and adjusting our footprint to meet the evolving market trends while implementing our strategies towards our long-term targets.

Turning the page, I will now turn it back to you, Thomas.

Thank you, Mats.

This concludes the formal comments for today's earnings call and we would now like to open the call up for questions.

So with that, I [leave the word] back to you Ann.

(Operator Instructions) Brian Johnson, Barclays.

Just a couple of questions around the implications for third quarter.

If you look at your operating margin guidance -- (inaudible), to what extent is active safety investments part of the R&D expense?

Is that primarily the R&D expense that you're investing in there?

Second, the capacity alignment cost, your expenses are ahead of the cash outlay so obviously the cash comes in the future.

Do you expect that level of expenses to continue in the next year or does this year wrap it up?

And thirdly, I guess a more strategic question, just where do you think you are on your camera-based active safety development efforts and what do you see is the potential for stereo versus mono system?

So really two sets of questions, one around expenses and capacity costs in the next couple of quarters, and the second around your strategic position in cameras.

Okay, if we start with expense in the third quarter and the margin effect, we are aiming to invest or spend more money into engineering and active safety, so for second half of this year, we are intending to increase the engineering spend with $15 million.

And that is, of course, one of the reasons that you see the guidance that you see for second half of the year.

So, $15 million more in engineering related to active safety.

When it comes to capacity alignment, we are increasing the range from 20 to 40 to above 40 because we see that the development of light vehicle reduction in Europe needs to -- we need to take action based on the levels we see.

There is an improvement, but this improvement isn't enough for coming back to old levels, at least not for quite some time.

So therefore we have seen the need and we are increasing the spend.

Whether this is going to sustain into 2015 is too early to say.

We will come back with that in our January quarter after quarter four.

When it comes to the camera and the technology, we are doing development of algorithms for monovision, we're doing development of algorithms for stereovision, and we are launching our product here in next year.

We are also cooperating with mobilize so we have quite a breadth of -- quite a width of the development in our camera activities, but we are available both in mono and in stereovision.

I think it's too early to say which technology that will prevail down the road.

We will have to see that later on.

And any reaction to the press accounts -- ZF's interest in TRW?

What could it mean for potential -- have you been approached as well or is that just a unique transaction that is out there?

We are, of course, aware of this and we have also discussed this internally inside Autoliv.

I think we have said before that TRW combination on to us with TRW would have significant antitrust implications.

But we are continuing to monitor to see whether this transaction will happen and then what will be at the follow-on to this.

Okay, thanks.

Brett Hoselton, KeyBanc.

First, on the capital deployment front, can you help us understand how you're thinking about achieving your targets, not necessarily in terms of what mechanisms you're looking towards, and I understand that's either M&A or share repurchase, but in terms of how you perceive the actual timing of the targets.

I think there's a general impression in the investment community that you're going to get to the 0.5 leverage ratio by the end of this year and by hook or by crook, you're going to get there.

But it sounds kind of like you're saying you know what?

We may not get there.

Yes, I think as we said regarding the timing, this requires something else than what we have done today, like an acquisition, in order to get there by the end of the year.

Okay.

So I guess what I'm trying to ask is, do you expect to get there by the end of the year?

It will, of course, all depends on what kind of events which will take place in the second half.

And that is something we have to wait and see for.

We are aiming to get there and we haven't given up on getting to 0.5 but as Mats is saying here, this -- with the tools we have used and that we have as a tradition to use, you will not be able to get there unless you do an acquisition or something else would happen.

Okay.

So when I think of your GAAP -- you guys have referred to it as the GAAP to get to the 0.5, I'm guessing it's like around what?

$700 million or something like that now?

Is that -- do you have a number?

We are in the ballpark of close to (inaudible) cash position of close to $300 million.

So that is a quite fair approximation I think what you are saying.

So I guess what the investment community is struggling with here is assuming you aren't able to make an acquisition, which you may, but assuming you aren't, are you --?

There is a general impression that you are probably going to put the pedal to the metal on the share repurchase and just make it happen via share repurchase by the end of the year.

But it sounds like what you're saying is that may not necessarily be the case.

Is that correct?

It's not about putting the foot on the pedal here.

I think we are bounded with restrictions.

You cannot buy up to a certain levels as we are listed in Stockholm and listed in New York.

We have restrictions on the amount we are buying to.

And if you look into the volumes that we have at hand that we can buy to, we are not buying far away from what is possible for us to buy.

Okay, fair enough.

Switching gears, on the M&A front, can you kind of describe what is changed, if anything, since last quarter?

Last quarter, you defined for us fairly clearly what your targets are, valuations, and potential opportunities and so forth.

Have you seen any material shifts or changes in that M&A front in terms of whether it be valuations are opportunities or companies for sale or anything along those lines?

There has been -- there are rumors out there about Mobileye and the valuations related to that thing and there are also the Fed F initiative to TRW that is out there.

So there are things happening in the space.

We cannot see anything for us that right now is imminent of that kind to us.

So, if you refer to -- if we have anything right now that is changing, I don't think we can say that.

We are still looking for acquisitions and we're still equally interested in doing this as we have been communicating about.

And maybe what is happening is that the movement is -- there's trying to be more movement out there but that's only speculations.

Okay.

Thank you very much gentlemen, I do appreciate it.

Hampus Engellau, Handelsbanken.

Thank you very much.

I have two questions if I may.

First question is regarding your active safety business, which seems to be growing faster than both I and you expected and you have your target for next year, which maybe is not impossible to achieve on this or [rather] this year.

I was wondering a bit if you could talk about what is doing better than you expected when you initially relaunched your target for next year and if you are contemplating updating your target for the $500 million in terms of sales next year.

That's my first question.

Second question is more related on a more broad-based and that is if you are seeing more business opportunities on the back of recalls, etc., and problems that some of your competitors have had?

Thanks.

We will take the first one regarding active safety.

We are seeing some higher take rates out there so that is one of the reasons that has also increased the numbers.

We haven't changed anything with respect to our target and we haven't given any target for this year either.

We will see how that plays out later on this year.

We are staying with the target of aiming for $0.5 billion in 2015 and what will come beyond 2015, we will discuss at the later stage, maybe in our earnings call in January or at a later stage in the beginning of 2015.

When it comes to business opportunities as a result of the recall, so far, we have not seen anything that is affecting us or that is improving our situation.

It has not been the case so far.

It remains to be seen how this is playing out.

It has been quite substantial recalls doing second quarter and probably that will take some time if there will be an exchange of pattern.

Thank you very much.

Ravi Shanker, Morgan Stanley.

A couple of housekeeping type questions and one more strategic question.

On the active safety business, your revenues are growing at a very fast clip but your content per make has been coming down, is that more to do with mix or is it pricing that's coming down as the product gets a little more mature?

Do you mean content per vehicle coming down?

Yes.

Our content per vehicle you mean or what?

(multiple speakers)

I'm just saying your revenue per unit in active safety business has been declining over the last couple of years.

Okay, revenue per unit.

That is a shift of product.

If you -- we have been selling in the past more expensive night vision cameras and radar heads and we are ramping up vision systems which, per unit, is the cheaper product.

We are also seeing generation shifts within our radar technologies that is going from an older, more expensive into a newer, less expensive.

So thereby you are seeing more unit per sales dollar.

All right, so it's a mix thing and not a pricing issue?

It's predominantly a mix thing.

Got it.

And the other question is you had your full-year tax rate at 29%, but you had a slightly higher tax rate in the second quarter.

Does that mean your tax rate for the second half of the year is going to be below 29%?

I think, first of all, the tax rate we had now for the second quarter was mainly related to some discrete tax items, but we believe that, for the full year, still the 29% tax rate is our best indication, excluding any potential new discrete items which can arise.

Okay, and just to go back to the M&A question, does this potential transaction kind of get you or some other people in the industry kind of off the fence about doing some deals that maybe you were a little hesitant to do before either because evaluation or other reasons, but maybe jumpstarts even bolt-on that M&A in the industry or do you think again this is more of a one-off and the industry is going to see where this goes before anything changes?

I think this is the one case that we see right now.

We will have to see what will happen throughout the industry if there will be more movement or not.

This is one case and it's -- you can't say that it's something starting just because you have one case.

We will have to see.

When it comes to our appetite for acquisitions, I think it's very, very key to point out we are very focused.

When we look for acquisitions, we are looking to the right acquisitions in the area of active safety, and there are several factors we are factoring in, the product type, sort of the integration into Autoliv, etc.

So I don't think our risk level has increased or anything because this is happening right now.

Very good, thank you.

David Leiker, Baird.

Couple of things.

First, clarification on R&D spend.

When you said you're going to spend $15 million more in the second half, is that versus last year or versus the first half of this year?

Versus last year.

Versus last year.

So that R&D spend is coming down from where you were in the first quarter.

Is that just the timing of when programs launched or do you have your technology in place and your spending can come down and you leverage that on revenue?

How should we look at that?

You should look at this in -- I think it's two things -- combination of two things.

It is product development that we're seeing needs and opportunities to spend more money into product development.

We're also seeing possibility to spend more when we are executing our order books.

So it's two things that we are going to use this money for right now.

The [$50] million was an increase from last guidance.

Oh yes, that's right.

Right, right.

(multiple speakers) well, what -- can you remind me what your last guidance was?

(multiple speakers)

We had around $90 million in spend in active safety.

You're right, absolutely, yes.

Around $90 million.

Okay, and then could you break out what you -- I don't believe I saw in your release the revenue growth in North America and South America.

You have them lumped together as Americas.

Unless I missed it.

What did you say?

Could you repeat the question again?

Yes, I think in your release you had revenue for Americas.

I was wondering if you could break out what the revenue growth was in North America and South America separately?

We haven't broken out that but it is around zero or slightly negative actually for the quarter that went by and that is due to that significant drop in light vehicle production in Brazil.

Okay.

And then the last, here, your alignment costs have gone up.

I presume that's moving west to east.

Is that because of the cost of making the transition or are you moving more than what you thought you were going to do?

When you take it -- the capacity alignment, we are seeing need to do more, and it's also somewhat of a timing effect.

We see maybe the possibility to do things earlier than we might have been seeing before, so it's a combination of taking actions a little bit earlier that could've come later and also to do something more.

And that is the reason why we are increasing from 20 to 40 to above 40.

Are these capacity reductions or is it the moving in the footprint from west to east?

It's a combination of it.

It's a moving capacity production, but it's also an adjustment to the light vehicle production long term that we will see.

Even though Europe is recovering and it is recovering, maybe car sales is up now 6.5% for first half of this yea.

, We're seeing that levels are low and will most probably stay at a low level for quite long future.

One last question here, kind of related.

Your capital spending is up about 30% year over year.

Where -- what are the primary uses of that capital spending?

Where are you putting assets in place?

I think there are two areas which we should think about.

China is doing approximately 25% our CapEx this year, but we also spend quite some in active safety also.

Okay, great, thank you very much.

Ryan Brinkman, JPMorgan.

Hi, thanks a lot, congrats on the quarter.

I see that you maintained your margin outlook for the full year of about 9% and I think you've been guiding to this level since, I think, the 4Q 2013 earnings call.

Yet you beat your 1Q margin guidance by 60 bps and now you've beaten 2Q by 30 bps, so can you kind of talk about the decision on your part to stand pat there on the full-year outlook?

Is it maybe because you see some sort of incremental headwind in the back half of the year that you didn't at the time of the 4Q call or is it maybe that you're just being conservative?

I think the main driver for keeping the margin here is the spend in active safety and as you have seen now for today, we're spending another $50 million in active safety.

And in the last call, when we talked about the full-year margin, we wanted to spend another $10 million there, so it's basically -- those are the main drivers for that the margin remains the same despite higher sales.

Okay, that's fair.

And then, your organic growth rate was 7.4%, I think, in 2Q, so that's 5 points better than what IHS says that the industry rose, I think 2.4% globally into Q. So IHS is saying that the global industry is going to rise 5 points -- 5 percentage points in 3Q, but your guidance is for 6% or more.

That suggests a slowdown from 5 points of outperformance to something like as little as 1 point of outperformance.

Is there something you're seeing there?

Harder active safety comps or some adverse customer geographical mix that would suggest less outperformance in 3Q or, again, do you think maybe you are being conservative?

Our guidance for the quarter is based on our calloffs so I don't think you should read too much into the IHS figures for the -- for the quarter three now in terms of outperformance.

Okay, and then just last question regarding M&A, can you share how large of an acquisition are you comfortable with?

Could we just look at your leverage ratio where you're comfortable taking that?

And then -- or could you, under the right circumstance, spend even more?

And then maybe it's a related question.

If the value of a tier 2 active safety supplier that supplies both you and your competitors is partly driven by that company supplying your competitors, and then you purchase that company, is there a risk that you're overpaying if you no longer wish to supply your competitors?

Or would you be comfortable supplying your competitors as a tier 2 active safety (inaudible) -- how to kind of think about those issues?

If you look to the amount of money we have been -- had for an acquisition, we have talked about an amount of $1 billion or so.

I would like to add to this, it is very much depending on what type of transaction it is and what type of asset we're looking to and how the combination of that into Autoliv would look like.

So -- but we have mentioned a figure before of $1 billion and we stick to that number for now but with the caveat it's very much depending on the type of transaction.

When it comes to tier 2 and buying a tier 2, that you will have to look to from a case-by-case.

If that would be something.

If you are referring to the Mobileye situation and that they have as a business ideal of supplying tier 1's, and that is now a situation where they are going public probably according to the rumors.

So that probably was going to happen with them if you read the papers right.

Okay, does it make sense to buy Mobileye or are they just too expensive?

Well, there has been valuations of around -- I don't think corresponding to between $3 billion and $5 billion or so.

And I don't think that is something that we're looking at.

Yes, that is super-high.

Okay, thanks a lot.

Congrats on the quarter again.

Joe Spak, RBC Capital Markets.

I guess just quickly on the housekeeping side, if you look at what you're saying for the year in the third quarter you can get sort of the implied fourth quarter margin, obviously still some pressure, besides the additional capacity alignment cost and the higher RD&E spend, is there any other factor we should consider?

One thing is the seasonality effect in the fourth quarter that is typically higher engineering income coming in the fourth quarter.

So -- as a benefit for you you're saying?

As a benefit for us, yes (multiple speakers)

I guess your -- if I take your guidance at your word, it still sort of implies pressure year over year.

So is it mainly just driven by those two factors, the capacity costs and the higher RD&E spend?

If you look into year over year for the full year, there are two main items which are impacting the margins.

You get higher sales, but you also need to support for further growth and so we spend a quite lot more money in our footprint to support growth, but also vertical integration.

That is one piece of it and the other pieces are spend in investments in RD&E, where the bigger part is active safety.

Okay, that's helpful.

Just as active safety ramps here and you continue to sort of bid for new active safety and you get more ingrained with the automakers, has that changed your view that all on where you think you need to -- what types of products you need going forward in terms of whether -- -- and the decision as to whether you build organically or go out and buy it?

I guess, has any of your further work with the automakers changed your thinking on how quickly you need to get from where you are to where you want to be?

I think you have to monitor the situation constantly and see how technology is evolving and how the possibilities are evolving.

And we're talking about autonomous-driven vehicles that wasn't even on the map five years ago, so it is something that is happening quite fast and I think we are monitoring this very intensively.

But the base we have today with our sensing products and also our electronics products generally, giving us a good base for developing into new and other areas.

Okay, and last one for me.

Just on the brake control unit business that you started, I think you've previously indicated that maybe it was a little bit tougher to sort of win some business there than you thought.

Has there been any progress on that front?

And if there hasn't been any progress, does that change your thinking on your potential in that market at all?

So far it hasn't changed our thinking, but it hasn't been that easy.

It is a quite big change for customers to think in a combination of stability control and airbag controllers and integrating this.

So it has been more difficult than what we had hoped for.

But so far we are not changing the strategy of it.

And is the recent increase focus on recalls and qualities, does that help or hurt you now that it's integrated?

I think everybody realizes that quality is extremely important and that your priority has to be quality all over.

And in that sense, I think our theme of our initiatives and focus on quality is helping us.

It hasn't helped us in terms of new business yet.

That is, I would say a little bit too early to say what is going to be the result out of what's happening out there but so far, we haven't seen any effect in terms of new business.

Okay, thanks a lot, guys.

Itay Michaeli, Citi.

Just two questions for me.

One, just to clarify on active safety.

So is the goal for 2016 margins still intact or is that perhaps off the table now with the incremental investments you are making?

We are still aiming to reach 8% to 9% during 2016.

Okay, great.

And then just on the quarter, you mentioned the organic sales was a positive contributor to your margins versus original expectation.

Was that mostly just a regional driver, meaning, just strong sales in China and Japan or was it more on a product or execution related?

What we had during the quarter is strong sales growth and it was contributing to the outperformance of our guidance.

It came from many parts around.

It was North America, it was Europe, we had strong sales in Japan and also in South Korea.

So, that was the regions that it did better in the quarter that helped us.

Terrific.

And then just a last quick housekeeping, any guidance on interest expense?

Does $18 million go up a little bit more in the second half of the year and sustain there or is $18 million roughly where you think you will be in the next couple of quarters?

In this quarter, as you know, we started off with the new USPP funding, but that was not the full quarter.

So the new USPP $1.25 billion, interest expense before tax was $9 million in this quarter, but when we come into a full quarter like Q3, it will be $12 million before tax.

Perfect, okay.

Great.

Thank you very much.

Richard Hilgert, Morningstar.

Just wanted to follow up a little bit on the recalls going on.

There seems to be one of your competitors in particular that gets mentioned in articles.

We saw BMW announce additional recalls yesterday because of inflator issue from that competitor.

I'm just curious, you said that there hasn't been any new business that's come on board yet, but how have the auto manufacturers been taking this?

Have they been out actually shopping around at this point looking for other inflator volume?

As I have said, we have not seen anything so far.

But I won't speculate, I will stay out of speculation of what would be the end result out of this and when everything is come a little bit further into this.

I don't know what's going to be the case actually, to be honest with you.

Okay.

And then the other question I had -- the issues that you talked about with respect to where you're at on margin guidance for this year, you mentioned the payment for antitrust, some of the capital spending that's going on.

But I was curious, what about South America?

Is that also an issue for your margins?

And if so, what kind of an impact is South America having at this point?

We haven't quantified the impact of South America or sales is around $150 million or slightly below in South America, but there is a negative impact on the margins due to South America.

We have communicated that for a couple of quarters now.

The situation there, with respect to light vehicle production, is, of course, not good.

We are executing programs to recover and we talked about supply chain and putting in place -- but as the volumes aren't coming as expected, this is making it more difficult for us.

So we will continue to see how we can adjust and see what will be our next step.

Is there also a currency issue with the margin for South America where you're getting a higher cost of your material or your work in process versus what you're collecting in revenue in South America?

There has been, of course, very volatile currency over the last years and when you are importing goods and haven't developed a supply chain inside South America, then, of course, that's a part of the exposure.

Okay, so that's also adding to it besides the volume.

Okay, thank you.

Rod Lache, Deutsche Bank.

I had just two follow-up questions on active safety.

First, regarding acquisitions, could you remind us what capability with an active safety you would be looking to augment?

In other words, where do you think you are stronger and what would be helpful to have improved capabilities in?

We are looking to actually increase our volume or our size and could get an even better economy of scale of our engineering efforts and our development that we have.

We are also increasing to get an even better footprint when it comes to customer contact and customer relations in the area of active safety.

We do products today, night vision and vision and radars, and we continue to aim to be there.

Could it also include chassis systems -- would also be a positive effect to it.

Okay, so it is not necessarily increasing capability, it may be if it's chassis systems, but it's more size and footprint that you're focusing on?

It's Size and footprint and it would help, of course, also the product development that we commented earlier here.

We are investing now $15 million more into the area of active safety and acquisitions could also improve and speed up product development that we see is necessary going forward

Okay.

And clearly, the revenue trends that you've got here in active safety are very strong and presumably some of that is the success you are having with this Mercedes contract that you won a few years ago and you've mentioned before.

Can you talk about just looking forward, this market for autonomous emergency braking?

You've highlighted it before.

Looks like it could be a big driver of growth in Europe and North America.

Have you won business with your radars and cameras beyond the Mercedes or BMW wins that have been mentioned?

Have you won business that extends into some of the higher volume mass-market names?

Yes, we have business with GM, for instance.

We have business with others so that we are present into other areas as well, with our radar products.

We have also in the area of sensing and blind spot detection also doing business with Chrysler and others.

So we are already present there in -- besides the Mercedes part.

When you tie it into autonomous drive, I think this is a stepping stone.

It's a first step for car manufacturers to take these products on board and work with it and then, from there, to go into the other areas.

Mercedes is one of those carmakers that are very much in the lead of this and we are working intensively with Mercedes for new programs as well.

Okay.

So there are new radar contracts and things along those lines that will be launching over the next few years, more in the mass-market that you have already -- you've got in your backlog?

Is that right?

We have more programs, yes, of course, that is coming.

Sure.

Okay.

How would you gauge your market share when you think about the wins that you're seeing compared with others in this area?

We are somewhere between 20% and 25% market share as of today and it's difficult to speculate at this point about our development to market share.

It's a fast-evolving market and we are not doing that to midyear term.

We will come back to that, and see how that is evolving when we also see how the market is growing.

Our best estimate is that the total market here is growing around 30% or 29% for the entire active safety market.

But that is a combination of vision, radar, and night vision.

Great.

Okay, thank you.

Johan Dahl, Erik Penser Bank.

Some quick questions.

Firstly, as your plans and activities develop with regards to the capacity alignment program, can you be in any way more specific with regards to how those savings will come in in the coming years or is it still just a three-year payback period?

Secondly, I wonder what's the logic behind the gross debt position in the Company?

That's about $1.8 billion in gross debt.

Are maturities coming up that are mitigating that or where do you want to be in this perspective?

And finally, is share redemption program -- is that an option on the table for the fall, or do you see any special drawbacks with such a method?

Thanks.

Yes, when it comes to the savings on them, we have no more specifics to give you than the payback of the capacity alignment is between two and three years after the cash out.

And that's sort of what we have communicated and we have no more details to give you.

Regarding the debt situation, you have to remember that we have also issued the target last year of the new defined, deleveraged target where we are heading for one.

We believe that this new debt will support that target very well.

We saw also, of course, when we did this funding, a good opportunity to do this funding.

It was with good terms and it was without financial covenants.

We know that we have also maturities to come this year.

We had one already in April regarding our mandatory convert of $107 million and there will be more maturities to come in the fourth quarter on the old USPP debt, around $125 million.

So it sort of supports both the maturity profile as well as the leverage profile.

I mean your [minded] supports the ongoing operations as they are today, that's how we should interpret it.

And also the question on the redemption program.

We have not discussed it.

This is a question we probably should discuss in the Board.

I wouldn't speculate on that.

We have no such activities, at least at this point in time.

And whether that is going to happen or not, we will have to come back to it in such case.

Thanks.

Thomas Besson, Kepler Cheuvreux.

Just some follow-up questions please.

Can we come back on the 180 bps that negatively affected your gross margin and actually lead to a decline in gross margin despite the solid organic growth?

Can you try to help us understand what's exactly involved in these warranty and field action, whether this was the few tens of thousands cars that were recalled and how long we should expect the ramp-up cost for capacity to last and affect your gross margins of the first question?

If we start with the 180 bps, they are basically in two parts.

The first part is the footprint -- increased cost in our footprint of 140 bps and that is to support -- mainly to support our growth for the future.

But it's also to support the vertical integration, and we will see now during the year here that our D&A will also go up.

It's related to the footprint, so we will see an increase for the D&A around 20 bps for the full year.

So that is what we basically are having in the footprint part.

In the other part, we have the warranties and the probable field action costs, which is around 40 bps.

What was the next question?

My question was how long should we expect this to affect negatively your margin?

I understand the breakout between 140 and [14].

Yes, I think you'll see this also throughout this year.

There will be increased cost in our footprint and it will be towards a part of our -- and our guidance for the third quarter, but it's also a part of core, for our indication for the full year.

As you know, we are investing for growth in vertical integration, in particular in China, and as long as these investments are not utilized -- fully utilize, you could see a margin effect on it and we expect this to start getting into utilization very late this year and during 2015.

Okay.

Second question on the raw materials tailwind, do you mind repeating the figure you've given as your guidance for the full year?

I'm not sure I got it correctly.

Raw material tailwind for the year is expected to be $16 million.

60?

No, 16, one, six.

$16 million, okay, that's what I wanted to clear with you.

Thank you much.

Last one on M&A, maybe it's a philosophical question, but I wanted to have your view both on the fact that interest rates are at the low levels and your question -- well, your view about size versus focus on acquisitions.

So you are still willing to stay within your extended area of safety or you would be eventually willing to expand that into something like a bigger animal?

What's your view about the attraction of size in absolute terms?

I think size is important when it matters for economy of scale and you can use this to take better benefit of your engineering efforts and your investments; you can have a better contact with your customer potentially.

So I think that -- from the size aspect, what is important for us is that it's related to our business.

We are all about saving lives and there is a lot we can do in this industry going forward, also with new technology areas and new activities in active safety or even down the road towards autonomous drive.

We do not intend, as of today, to go away from that.

Good, thank you very much.

Brian Sponheimer, Gabelli & Co.

If I would go back a few years ago, there is about a six-month period where you weren't able to bid on GM vehicle contracts.

Are you feeling the effects of that at all right now and could that be a net positive as we go forward here looking into 2015, 2016?

If you look to the new business, all we had some years ago, we are since long out of that new business hold with General Motors and the effects out of this -- still remain quite some time before that will kick in of having any meaningful effect, or as we said already then that it will take several years before that new business hold will have any significant effect.

For the GM business, to what extent we have as a -- from a Company point of view and effect, you can always debate.

We have been able to take other business, compensating for the new business hold at least to some extent.

Okay.

And could you discuss a little bit your restrictions regarding share repurchase?

I'm trying to reconcile the $1.25 billion raised versus just the $100 million repurchased in the quarter.

I think you'd probably agree that the one thing you didn't need was more cash.

Could you explain your restrictions regarding a repurchase and maybe that would help us figure out the time frame in which you could reach that half turn of leverage?

Basically, we can do -- according to our sort of rules here -- internal rules, we can do repurchases the month after we have released a number, so you could say that the month before the quarter ends, we can't do repurchases.

Okay, so should we take that as a signal that share repurchases should ramp pretty significantly in the fourth quarter?

I don't think that's the --

After today, rather.

Yes, from the timing perspective, we basically have the midmonth -- one month basically open for repurchases every quarter.

And you can see the track record pretty clearly on our web page since we restarted back in the fall of last year.

You'll get a pretty good record on what has happened since by looking there.

Would you ever consider some sort of accelerated share repurchase some of your peers have used?

Well, that is a discussion we should have in the Board during the fall here with the situation as we have talked to.

We are aiming for 0.5 and we also said today that it has to be something else to happen in addition if we should continue this way of repurchasing shares through buybacks and the normal dividend that we have.

So we would have to discuss that in the Board.

There's nothing I would like to comment on today.

Okay, thank you very much.

Bjorn Enarson, Danske Bank.

Thank you.

You're mentioning again that you are taking some more efforts in investigating active safety and then [hurting] short-term profitability, are you as positive on the margin development beyond 2014 as you have been previously that you expect to see, I guess, some leverage on the investments in the period beyond 2014 and, thus, seeing better EBIT margins looking a little bit ahead?

We found that we could potentially see margin expansion as we commented on that already in January, when we see the steering wheel problems in Europe as we talked about and we talked about Brazil and we talked about the vertical integration drag.

All of these three things then sort of either being utilized in terms of vertical integration and issues going away.

The steering wheel part in Europe is following our plan.

The Brazilian part is not following the plan for the reason we commented on before due to the lower light vehicle production and the macro situation in Brazil.

So we still have opportunities that would affect our margins positively from vertical integration from the problems in Europe steering wheel going away.

But then also we have now for 2014 decided upon an increase investment in the active safety area.

Remains to be seen if we will continue this increased level of investments and also in active safety in 2015.

So, let us come back to that in January when we discuss the outlook for 2015.

But there are these opportunities still remaining there.

Jan, that's basically the question then.

If such investments could continue and then putting some sort of pressure on the EBIT margins, but if I understand, steering wheel and the vertical integration are at least proceeding according to plan.

Thank you.

(technical difficulty) (inaudible)

All right, great.

Thanks for fitting me in as well.

I had a question on active safety visibility.

So two parts to that.

One is, you have raised your engineering within active safety twice this year, is it fair to assume that that's connected to corresponding increases in your backlog?

That's question one.

And the second question is when you -- what kind of visibility do you have on take rate for active safety?

Many of these products are optional for a lot of your OEMs.

So when they do your callouts, does that change?

It clearly has, I guess, over the last first two quarters but what kind of visibility do you have on that?

And related to that, how quickly do they change the take rates?

Is this something that can be done pretty quickly then if they suddenly decide to increase the radar production on their cars from, for an example, 10% to 20%, is that something they can do pretty quickly?

Or does that require a little bit more lead time for you to sort of ramp-up?

First part, the increase of spend, it's a combination, as we said, of execution -- executing the programs we have and product development, so it's a combination of both.

And when it comes to the take rates, we have indications from our customers.

When we take -- and we quote a program of a certain level of take rates as a baseline for it.

And it happens that it's not the same, that it's higher.

It also happens that it's lower and that connects to your third question, how fast?

This can happen relatively fast.

One can decide that, from quite fast, we're going to go from a higher optional rate into even standard rates.

So that can happen.

And that also was one of the contributors here in second quarter, why our organic sales was up.

[That just] take rates were higher for active safety.

And sorry, if I can follow up, is that specific to the premium OEMs for the most part?

Is there some sort of trend that you can identify or is it a bit harder to predict?

No, I don't think the changes here you're talking about, all these patents about the take rate visibility or change isn't really any different from an OEM to an OEM or premium to more volume makers.

So that, I don't think, is a difference between them.

Okay.

And related to Mark's question earlier about warranty costs, I guess I'm a little puzzled as to the incre -- you highlighted pretty low level of recalls relative to the industry and yet you took the warranty cost up and I think you suggested that that's going to linger at that rate for the second half.

So is this caution on your behalf or can you just sort of help me understand that?

What do you mean we're taking the warranty cost up?

The 30 basis points that you -- was a headwind for you, relative to your guidance on operating margin.

My understanding was that that's going to linger through the second half of the year.

Correct me if I'm wrong.

No, that's not correct.

That was the impact for the quarter.

It's sort of a one-time impact you can call it.

Got it, understood, thank you for your time.

[Kenso Carnegie].

Sorry, my question has been answered, thank you.

There are no further questions in the queue at this time.

(Operator Instructions) I will now hand the call back to the speaker.

Thank you, Ann.

I would like to thank everyone for your attention and continued interest in our Company and interesting questions today in the call.

We look forward to speaking with you again during quarter three earnings call on Thursday, October 23 in 2014.

Until then, have a safe and relaxing summer and goodbye for now.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.