Autoliv Inc (ALV) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2014 Autoliv earnings conference call. For your information, today's call is being recorded. At this time, I would like to turn the call over to Mr. Thomas Jonsson. Please go ahead, sir.

Thank you, Bertrand, and welcome, everyone, to our third quarter 2014 earnings presentation.

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

During today's earnings call, our CEO will provide a brief overview of our third quarter performance and general business conditions 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. And here we have the Safe Harbor statement which, as you well 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 and the reconciliations to US GAAP are disclosed in our quarterly press release and in the 10Q that will be filed with the SEC.

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

Thank you, Thomas. Good morning, good afternoon or good evening, everyone. We start by turning the page. As we are all aware, our industry remains under a heightened focus on quality where we unfortunately this year have seen an unprecedented number of vehicle recalls for safety related reasons. The industry is being affected by this difficult situation and we are evaluating our capacity to determine how we can best support our customers and the consumer.

Turning now to our results. Record sales drove another quarter of solid financial performance. Our organic sales growth of close to 5% was lower than expected due to an unfavorable vehicle mix in China, both with local and global brands. Despite this, our adjusted operating margin of 8.5% was in line with our guidance due to good cost control and overhead.

Our adjusted earnings per share of $1.25 was impacted by $0.08 of interest expense, resulting from our [debt] (inaudible) in second quarter and $0.04 related to tax items. These effects more than offset the EPS improvement from higher sales and fewer shares.

Return on capital employed and return on equity of 21% and 12% respectively, continue to track above historical levels. In addition, we delivered on operating cash flow of $212 million, which is a new record for a third quarter. And we returned $288 million to shareholders during the quarter.

Lastly, our organic sales growth in active safety of approximately 30% is in line with the growth of active safety markets.

I would to again thank the entire Autoliv team for delivering another quarter of quality and operational excellence and solid financial performance. Our first priority is quality as saving human life is front and center of what we do each and every day.

Turning the page. As our organic sales in China for the third quarter came in lower than our expectation, I thought it would be helpful to explain a little bit around the situation. Growth markets like China show greater uncertainty and volatility since it is very difficult for OEMs to precisely predict consumer demand, which can result in an erratic production schedule.

As you can see on the slide on the upper right, our call-offs for the quarter did not materialize from what we saw in the beginning of the quarter. These significant changes to our build schedules with certain customers resulted in a negative vehicle mix. A similar situation happened last year in fourth quarter, as you can see by the short on the lower right. But in that case, it led to an unexpected growth increase.

Based on our current visibility, we expect a negative model mix to continue for the fourth quarter, however we believe this is a temporary situation that will not continue for 2015. Therefore, we remain confident that the China market will continue to be an important part of our long-term growth.

Looking now to our market position on the next slide, we have our delivery figures here for the third quarter. We continue to enhance our overall market position as we grew faster than the light vehicle production in most product areas. The negative year-over-year change in seatbelt that we saw in the first half of this year continued during the quarter due to slower organic growth in China.

All other products are essentially performing as expected. In particular, newer products, like advanced seatbelts and active safety, is evidence that our investments in technology for growth are paying off.

Looking now to the next page, we have some of the key models that contributed to our solid organic sales growth. During the third quarter, these models had a strong organic sales growth for Autoliv and represent approximately 9% of our total sales.

When comparing to the light vehicle production, this model mix contribute to our outperformance in Europe and North America in particular with our active safety products.

Turning the page again, the current global light vehicle production outlook for full-year 2014 is 3.3% year over year, slightly lower than the 3.5% expected earlier this year. Within Asia, the light vehicle growth rates in China are slowing. In first half, light vehicle production growth was 11% while the light vehicle production growth for the second half of this year is expected to be approximately 8%.

In Japan, the light vehicle production continues to be a positive surprise and is now expected to increase almost 2 percentage points year over year versus a decline of 8% in the beginning of the year. In contrast, the rest of Asia is now expected to be down 2% versus expected to be up 3% in January.

In the Americas, the outlook is mixed. The US SAAR remains stable above 16 million vehicles with inventories of approximately 64 days, however the North America light vehicle production growth rate is slowing in the upcoming quarters.

In South America, the poor economic conditions have continued into the second half of this year and consequently, also the light vehicle production is revised down again to a year over year decline of 16% versus an expected increase of 2% in January this year.

Vehicle registrations in the EU27 continue to improve with a slow recovery. This in combination with a fairly disciplined light vehicle production leads us to believe that the inventories are at the lowest level since 2010.

To conclude, we believe the general market conditions remain mixed with an increased uncertainty.

Now I would like to turn to our CFO, Mats Wallin, who will comment on our financial results and outlook.

Thank you, Jan. Looking upon our financials on the next slide.

We have our key figures for the third quarter. Our record third quarter sales of $2.2 billion was mainly driven by the growth in active safety and China, as well as Japanese OEMs in North America. This sales growth drove our best third quarter growth profit ever, which was a 5% improvement year over year. Despite higher CapEx this year, our return on capital employed remains at the same strong levels as last year.

Looking now at our margin development on the next slide. Our adjusted operating margin of 8.5% was in line with our guidance, despite lower than expected organic sales growth. If you look to the chart on the left, the lower profit generated from the lower than expected organic sales growth was essentially offset by lower overhead cost as a result of tight cost control and favorable currency FX.

When comparing to the prior year, as illustrated by the chart to the right, the benefit from organic sales and currencies was 90 bps and 70 bps respectively. These favorable items were offset by higher RD&E net 70 bps, mainly related to active safety, and others net 130 bps, which includes the increased cost in our footprint.

As we have noted previously, the increased cost in our footprint mainly includes our buildup for growth, including vertical integration and operating inefficiencies in South America. We are executing our plan to improve operating inefficiencies, where we see improvements with steering wheels in Europe, however the results in Brazil are not as anticipated due to the weaker market.

Moving now to the cash flow on the next slide, our operating cash flow of $212 million was the best ever for a third quarter. We expect to deliver an operating cash flow of at least $0.7 billion for the full year, excluding discrete items. We now expect CapEx [net] to be in the upper end of the range of 4.5% to 5% of sales for 2014 and D&A to be roughly 10% higher than last year.

Lastly, during the quarter, we returned $288 million to shareholders through dividends and share repurchases.

Looking now at our capacity alignment on the next slide. During the third quarter, we expensed $10 million for future activities and had a cash outlay of $11 million. For the full year, our estimates for the capacity alignment cost and cash outlay are both expected to be more than $40 million. In full year 2014, we now expect to realize an additional $8 million savings throughout the year, which reflects some delays. This is in addition to the $12 million in savings we had in 2013.

As these activities are implemented, we expect to see increased savings in 2015 with further savings in 2016 and 2017 from the implementation of these activities. Also, we are evaluating the need for further actions in 2015 based on the current business condition mentioned earlier.

Looking now onto our outlook on the next slide. We have our guidance for the fourth quarter. Based on our customer call-offs, our organic sales are expected to increase 2% year over year, mainly due to the strong growth in active safety and with the Japanese OEMs in North America. Sequentially, our organic sales are expected to increase by roughly 5%, mainly due to the ramp-up on new model launches. As a result, we expect to achieve an adjusted operating margin of around 9.5% in the fourth quarter.

Year over year, higher costs for RD&E net, primarily in the active safety, 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 increase is mainly due to the organic sales increase and the seasonal effect of higher engineering income in the fourth quarter.

On the next slide, we have our outlook which excludes cost for capacity alignments and antitrust matters and assumes mid-October exchange rates prevail. Based on our slightly lower than expected second half sales, since our early indication, full year 2014 organic sales growth is expected to be 5.5%. The currency effect on the full year 2014 sales is now expected to be negative 1% due to the recent strengthening of the US dollar. Despite these changes in assumptions, our adjusted operating margin remains unchanged, 9%.

Some of our full year 2014 planning assumptions include RD&E net to be less than 6% of sales and commodities to be a tailwind of around $20 million in 2014.

Excluding any discrete or nonrecurring items, we now expect an underlying tax rate of around 30% and an operating cash flow at least $0.7 billion.

Regarding our capital structure, it is unlikely that we will reach 0.5 times leverage ratio by the end of this year, despite shareholder returns of close to $0.8 billion over the last 12 months.

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, Jan. Thank you, Matt. And this concludes the formal comments for today's earnings call. And we would now like to open up the call for questions. So with that, I leave the word back to you, Bertrand.

(Operator Instructions) Itay Michaeli, Citi.

Just maybe hoping to talk a little bit more about the China mix issue, what specifically it was. Was it tied to launches or customers? And then what gives you the comfort that this issue won't repeat going into 2015?

What happened was that we base our guidance on call-offs. And we had call-offs in the system at our guidance in July that pointed to the organic growth that we had in. During the quarter, our build schedules were revised and it was revised down. And when that happened, it happened from car manufacturers where we have a higher content and two platforms and also two manufacturers that have a high dependence to Autoliv. And that is the result ending up with the lower sales in China and thereby also a lower organic growth for the Company.

When it comes to 2015, we are reviewing the situation right now and to the best of our estimate, based on the situation we can see, we believe that this has the chance to stop now after quarter four and will not continue into 2015. That is our best estimate as of today.

And then just a couple of follow-ups. Any initial preliminary outlook for tax rate beyond 2014? Looks like it's been picking up a little bit in the last few quarters. Any early guidance beyond 2014?

We believe that the tax rate in the longer term will be in the low 30s.

And then just lastly on active safety, it looks like the unit shipments were again very strong. We have revenue strong as well, but the revenue per unit did decline a bit sequentially. Can you talk about what's happening there in terms of mix between night vision versus radar and other vision systems? And then how the mix changes may be affecting, if at all, your margin outlook for active safety over the next 12 months or so.

When it comes to the unit shipment versus revenue, it is a mix effect where we are seeing more units shipped of radar vision, which has a significantly lower sales per unit than, for instance, our night vision camera. So that shift has been going on for some time and it's continuing. So that's why you see unit growth higher than organic sales growth.

When it comes to margin outlook, we have said that we have a target to reach our corporate average of 8% to 9% for active safety during 2016.

There's no change to that you don't believe with the mix?

No change to that.

Ravi Shanker, Morgan Stanley.

If I can just follow-up on China again. Was this an issue where the OEMs just got too trigger happy and built too many units and built-up the inventory and so they're now kind of just draining that swamp? Or is there -- have you seen any particular shift downwards in underlying demand itself?

We have not seen any significant shift. You have seen some changes on the overall forecast from IHS, but we have not seen any significant underlying shift. This was, as we have explained here, for us more of a vehicle mix shift where there was a sudden change in the call-offs too coming our way here and it had a negative impact.

So that is the situation we faced here in quarter three adding a negative impact. And as we also explained here on this slide, we saw erratic production also in quarter four last year, but then it was to the opposite, it had a positive impact.

We should remember that the Chinese market is fairly complex with a lot of car makers. It's a relatively giant market that is growing very fast and production planning isn't so easy all the time for the OEMs and of course not for us as a part supplier.

Understood. And we have that same issue as well. On R&D, if I remember right in the last call, you had said that R&D in the second half of 2014 is probably going to be up about $15 million or so versus the second half of last year, but it was up I think about $17 million this quarter itself. Is that number now higher for the second half or is there something timing related going on?

We have said that we upped the active safety investment with $15 million last quarter and as you know, we have increased expanding active safety during the year because we see a need for technology development and we see opportunities in taking advantage of this growing market.

We have said that R&D in general would be between 5.5% and 6% for the year. And we stick to that for the year. You see that for this quarter R&D net is higher than 6%, but we have said for the year it will be below 6%.

We will continue to invest in R&D going forward and that is because mainly of the growth that we see in opportunities in active safety.

And just lastly, a couple of forward-looking questions. You're ending the year with some pretty good margin momentum, just like you did last year. But in the absence of incremental restructuring, do you think that you can continue this momentum into next year and maybe do 9.5% or 10% EBIT margin for next year?

And also related to this, you opened your comments talking about the competitive situation within the difficulties that one of your chief competitors is having. And I think you've been quoted as saying that you're seeing some benefit out of that. Is there any way to quantify that and does that show up in 2015?

Well, it's too early. We normally don't talk about the following year until we guide for the year in January. We are seeing good movements in our steering wheel issue that we talked about already in January. We are not seeing so good movement in the Brazil issue because of the problem in addition this year with the declining light vehicle production.

We are seeing good execution in our vertical integration, so that's so much about what we have talked about regarding issues in vertical integration and investments for growth.

When it comes to margin for 2015, we will come back to that in January.

And Takata, anything from there you can quantify?

Well, when it comes to Takata and it comes to the quality issue we of course, as we said before here, it's a very difficult issue for the industry as a whole. We have seen some business coming our way as a result out of this situation. And that is as much as I can say today in this matter.

Brian Johnson, Barclays.

Yes, probably more of a strategic question, then I have a housekeeping one. Let me just do the housekeeping one first, which is 2015 you said low 30s. Can you get anymore precise? Is that 30%, 32% or do we have to wait till the guidance session?

Yes, first of all I mean we have now an indication for the full year of around 30%. We don't guide for 2015 per se. What we are saying is that given that we are a US Company and having a US tax rate, we believe that longer term the tax rate for the group will be in the low 30s.

And then again, just thinking through next year without getting into guidance, just the trends of spend, you've talked about an 8% to 10% operating margin target through the cycle. But do you see stepping up investments in active safety? And if so, would that, I guess, put you at the lower end of that?

And the second sort of also related to margins just is this restructuring program likely to continue into 2015 as well?

When it comes to margins, as we said, we have a long-term margin target over the cycle of 8% to 9% and now we are guiding for 9%, approximately 9% this year. We will continue to invest and so we have done this year, we will continue to invest in next year too in active safety. We believe long term this a growth area for us and we have also been seeking acquisitions in this area to use our strong balance sheet to grow this business.

When it comes to margin again here, we will come back and speak more about the margin outlook for the Company in January.

Okay, but it's fair to say the -- and will restructuring continue into next year?

Well, we said we have more than $40 million here in 2014 and we should not exclude that this will continue into 2015. It is all depending on the situation in the market and what amount that in such case will be. But there is a lot to do when it comes to restructuring to allowing the capacity with the demand. If you look to Europe for instance, the volumes in Europe are quite far away from what they were before the previous recession.

Rod Lache, Deutsche Bank.

A couple quick ones. Could you just remind us what your exposure is within China to the Japanese OEMs? Are you over levered to them in that market?

We have two Asian OEMs inside China. We have an exposure of the ballpark 50%. And to Chinese OEMs in China we have an exposure of around 20% and to Japanese OEMs around 20% inside China for this quarter that past.

So Asian OEMs inside China, ballpark 50% and Japanese OEMs 20% and Chinese OEMs ballpark 20% for third quarter.

And your active safety business I believe is tracking to the mid $400 million range this year. You had previously indicated $500 million for 2015 this year is exceeding your expectations it sounds like. Is the $500 million still a reasonable number to expect for next year?

Yes, I think that it's a reasonable number to expect. I think based on what we can see right now, we will come close to the $500 million target maybe already this year.

So next year might exceed the original $500 million by 2015.

Let's come back to that next year, but it might be the case, yes.

And then just lastly, I was hoping you might be able to just elaborate a little bit on the margin. You're maintaining your margin guidance despite lower organic growth. You said that some of that is just controls of overhead. Are there spending items that would have occurred this year that are being deferred into next year as a result of some of the actions you're taking? Do you have any thoughts that you can provide at all on footprint, RD&E and restructuring savings as they appear today looking out to next year?

I think first of all just to give a little more flavor of what's helping us to keep the margin, of course yes, it's a cost control itself, but it's also that we are all positive on currencies. We're also positive on raw materials. So all of these three combined is sort of helping us to have around 9% margin for this year. So that's what's driving it.

So it's not so much costs being deferred from this year into next, if I'm hearing you correctly?

No, I think it's more that we are -- talked about focusing on cost and keeping costs so to say down if we are not deferring anything really. It's more that we are -- we have a good cost development in combination with raw materials and currencies.

And can you give us any color at all on footprint RD&E or cost restructuring savings beyond this year?

No, I don't think we have that at hand. As we have said, we will continue to invest in R&D and active safety, but when it comes to the effect out of this for 2015, let us come back on that in January.

Brett Hoselton, KeyBanc.

Just first simple question would be the sales guidance 2014. Looks like your FX is going to be a pretty good headwind. Can you kind of just bucket, just very roughly, is that -- how much of that is the euro versus maybe other currencies?

If you now look into the sales guidance and now we are talking about the translation effects on our sales. And what we are seeing there is that especially the Japanese yen and dollars, which is impacting us negatively versus the previous guidance for 2014, but also the euro-dollar. It's approximately an impact somewhere between 2% to 2.5% impact coming from those months.

And would you kind of say it's half of one, half the other or is one particularly much more significant than the other one?

I don't have the numbers like that of in terms of the significance, but they are contributing quite a lot compared to previous guidance. And if you just look into what we are talking about is that that sort of reduces our -- in the translation our sales number with around $110 million. But it also reduces our costs, so from the EBIT point of view, it's an impact of around $10 million, but it's not impacting the margin of the Company. It's more impacting the dollar value.

So we estimate that the change from the currency impact in terms and translation compared to previous guidance to today, it impacts the EPS of around $0.06.

And I apologize, I had to step off for a moment on the call, so you may have commented on this in your opening comments, so if I'm asking you to repeat something, again I apologize. But how do we think about the rate of share repurchase or pace of share repurchase relative to your margin targets of 0.5 to 1.5? And maybe to begin with, what, based on the current balance sheet, kind of a dollar amount do you calculate as needing to expand to get to that 0.5 level? I think in the past you've kind of talked about $800 million or something like that. But where is that number at today? And then how do we think about that as a target? Is there a particular timing date? What are your thoughts there?

I think what you are maybe asking is sort of what -- how big is the gap now. And if you now look into our leverage ratio, including also our pension liability, because that's how we define our leverage ratio, then we are at a net debt of 0.1. So it's really the gap between 0.1 up to 0.5 we are talking about now if we are referring to this 0.5 target.

Yes, and I guess what I'm wondering is to begin with, how much is that? Is that $500 million, $600 million? How much is that in terms of dollars? And then second question I have, which is more important, is how do we think about your achieving maybe the lower end of that guidance of 0.5? Is that something that you hope to do in 2015?

We don't have a target for 2015. Our long-term targets of course and leverage around 1 with a range of 1.5, 0.5. That is our sort of long-term target. But we haven't sort of communicated anything specific for 2015. Our aim has been first to reach 0.5, which we believe it now unlikely to be at the end of this year.

I think what you should look to, Brett, also is the speed of shareholder return we had in third quarter. We had a record shareholder return in third quarter in combination of buybacks and dividends of close to $290 million. So we are doing this as a part of our correction of the capital structure, according to our target, and also both in accordance to our aim to reach 0.5. Now we are ending up here in end of October seeing where we are and we find it unlikely that we will reach 0.5 with the timing we had in mind at the Capital Market Day in May last year.

So how would you recommend that we think about the pace of that share repurchase? In other words, you did $95 million in the first quarter, you did $97 million in the second quarter and you did $290 million in the third quarter. As you kind of look forward, do you think that $97 million is more representative of kind of the pace or do you think $290 million is more representative of the pace? Or is it just we're not sure?

I think, Brett, it is -- factually it's also a combination of dates available. If you that are following us, you see we have extended the periods. We bought back shares also in the third month in the third quarter, which we haven't done in the first half of this year. We also had more available dates due to an earlier earnings release in July than we had in first quarter. And then there was more available days also here in -- so it's a combination of pace, extended period and days available for opening for trade.

And then I think we should remember that that $288 million was the repurchases and dividend combined and the other numbers you mentioned were only repurchases, right.

Richard Hilgert, Morningstar.

Wanted to circle back to the effective tax rate. At the beginning of the year guidance was 28%, went up to 29% and now we're up to 30% with going forward being a low 30% number. Curious to know between the beginning of the year and now, what's happened in your outlook that's caused the uptick by over 200 basis points?

It's mainly that the mix between countries in terms of where we have profits, where we have losses and how we do earnings has changed over the years. So that the picture we saw at the beginning of the year has been different now throughout the year and that's why we have been moving from what we guided for at the beginning of the year up to where we see today.

On the engineering R&D, should we expect that line item to tick up further, given your comments at the beginning of the presentation about customers' increased or heightened focus on quality?

No, I don't think that is the reason why we should increase engineering spend or why we have increased engineering spend primarily. We have increased it due to investment in technology for active safety. We will be back in January with our outlook for engineering spend for the year in 2015, but we have not increased spend for quality reasons.

So there's no real increase in staff or anything as a result of customers' heightened focus in this area?

We have had focus on quality for many, many years. We have special initiatives on quality focus starting in 2010. We have quality as a natural first focus in everything we do all along. So for that sake we have not added more people just because of what's going on right now.

Thomas Besson, Kepler.

A few questions as well on my side, please. Firstly, on the new reporting segments you plan to implement next year, I'm just I mean candidly curious, Jan, why do you do that now? I mean you used to run the electronics business, so why was it not grouped as a starting point with the active safety business, first? And second, could you give us a rough idea of the relative size of each business on your 2014 kind of guidance for revenues? What would be the relative weight of the two businesses, please? And are you going to report margins for each of these?

If I take the first part, maybe Mats can elaborate on the second part. The first part, why we are doing this reporting structure here is that active safety and electronics is growing fast in our Company and it's becoming a larger part of the group. So that is the prime reason why we are doing this.

When I was running the electronics division in Autoliv 10 years ago or so, we didn't have active safety as a part of our product portfolio. It was restraint electronics we had. And now we have a whole new product area in this group that is growing fast here in our Company. And that's the reason why we are putting it together. We are seeing synergies coming out of this and that's why this structure is formed.

And when we put it together and it's reaching its certain size, you are obliged to report it under the US GAAP rules. So that's why. Maybe you can elaborate more on what we are going to report now.

No, I think it's right. I mean the US GAAP rules are clear and when you get to a certain size. And I think they basically have a 10% threshold in terms of sizing or to become a reportable segment. And that's basically where we are heading there when we are combining passive electronics and active safety.

And what about the size of each business and are you going to report margins for both segments or just revenues?

We will report margins for both segments. That's the expectation. So that will be on shorter version of an income statement. Not the full way down, but it will be in shorter version for the passive electronics and active safety together as an electronic segment together.

And the weight of each division please, roughly?

Well, the weight of this division, you will see that when we report the outlook and we will come back with this. The first time we will report the segments will be in quarter one 2015. And we have not started to work on that. We don't have any figures yet to give you around how this looks like today. We will come back to that probably before the quarter one earnings release so that all of you have a chance to get warmed up and be prepared of what we are going to report at the release date. So you have some background numbers during first quarter. But I have nothing to give you today.

Second question please. On gross margin and the impact of the rising share of active safety, is it fair to assume that theoretically these businesses that require higher R&D spend also bring in higher gross margins on top of faster growth? And when are we going to start seeing your gross margin getting back towards or above 20% in your view?

We are not guiding on gross margin as you know. We have discussed this before on these calls and we are not guiding and giving no outlook on gross margins. We have not given any specific gross margin figures either on active safety or other business as of today. We have said that we should see no reason why the active safety business long term should not generate corporate average at least. So that has been the sort of long-term communication around the margin, but that is operating margin. Besides that, we have no gross margin target.

Last question for me please and another try. I understand you don't communicate on your own targets for 2015, but you say on the front page of your press release today that you expect the deceleration that you see in H2 2014 to last in H1 2015. Can I ask what's your budget assumptions for the change in global light vehicle production in 2015? And any color you would like to give by region would also be appreciated. Thank you.

Thomas here. I think it's a little bit early to talk by region maybe, but if we look at the general LVP forecast, it's come down from the January forecast was at 4.7% for 2015 as a full-year and now it's slowly and gradually been coming down. And when you look at the latest October 16 number, it's down to 3.4% for the full year 2015. And I think that gives a pretty good view of what's happening. We don't have any other or better forecast than that -- what has happened in the IHS numbers I think.

David Leiker, Baird.

A couple of things. I think we kind of danced around this topic in a couple of other different ways. But I want to see if we can dig into the margin headwinds a little bit in terms of how long you think they continue to be a drag on you. Why don't we just start with China and the vertical integration? Where are you in the process of that and when does that cease to become a headwind?

Regarding the China, we believe that we will start to see some first contributions from the vertical integration by the beginning of next year. But then it will gradually be something which is improving over some years because there's quite big projects going on there.

But in terms of ceasing to be a drag on margins, early 2015 we should see that start to improve.

You'll start to see the first contributions to come in the beginning of next year.

And then it sounds like the steering wheel move in Europe that you might start to see some impact from that right now? Is that (multiple speakers)?

We believe that we are according to plan regarding steering wheels in Europe. And so that improvement plan is basically on track. (Multiple speakers)

Have margins started to improve there sequentially though?

If you look to the steering wheel year over year, we saw a positive improvement in third quarter and we expect that now to continue from herein onwards.

And then the issue in Brazil, I mean this had been a headwind for you from a transactional perspective. It sounds like it's now also an overhead of capacity utilization issue. Is that right?

First of all, it's sort of two things with Brazil. First of all, we need to get in supply in Brazil, inside Brazil so we can get more efficient in our operation there. But of course, when we see now also LVP development being negative for us this year, it takes longer time. It's more difficult to develop a supply chain like that and especially when you see such a swing in LVP going from a plus 2 at the beginning of the year for 2014 down to minus 16. But you are also right, Dave, there is also a utilization issue when this is going south as we see here with light vehicle production declining expected 16% for the full year. And it was expected to be up 2% in January. So there is also a utilization issue.

Yes, sequentially the volumes in Brazil seem to have stabilized where we are the last quarter or two.

Right.

Are you in the process of taking capacity out in reductions or what's your thought there?

We have also the airbag legislation kicking in, so even though you could see an 18% LVP reduction year over year in Brazil, we could see a decline in sales of 10%. So we are outperforming sales due to the airbag legislation and the increased take rate. But still, there is a problematic area as a whole, as Mats also explained and touched to here.

And then the last item here is if you look at the active safety headwind that you've been facing, as the volumes have come up and the gross margins are okay, it's the R&D side of the equation. Are you at the point yet that that business is profitable for you today?

We haven't communicated that and we will -- you will see it in our segment reporting and you can see that in the beginning of the year. We haven't said more than it is still a drag on our margin.

And then two last things here. Can you give us any additional color in particular of what automakers or what vehicles in China caused you some problems in the quarter?

It's both foreign OEMs, outside OEMs and Chinese OEMs. But it's not all of them, of course. It is a couple of them on one and the other side that is causing us some problems.

There are a few there that have high content vehicles and that is important for us. That hasn't done so well. And then you have some others, foreign OEMs out there also too that hasn't done so well. And these are cars or car makers that we have a lot of good platforms to and those haven't been selling well.

And then one last item here on the airbag issues. And understandable that there's a bigger picture here in saving lives. But what we've seen in some of these recalls is that the component is relatively easy to swap out, the injector inflator, relatively easy to swap out with somebody else's inflator that you potentially could see revenues from that sooner rather than waiting for a vehicle change or design change that would push any impact for you out further. Is there an opportunity for this to put it kind of step out and help out in the recall process?

We are looking into what capacity we have available, about how we can organize the resources, David, and we have at hand to help out the situation for our customers, and at the end of the day, also for the consumer. And of course, that could be an opportunity for us. We haven't said more than we have seen some business as a consequence out of this coming our way, but in what shape or form, more than that, we haven't said.

Anders Trapp, SEB.

I have a couple of questions. First, of course, there's been a lot of recalls lately not involving you so much though. So, an interview today with you, Jan, today where you according to the journalist basically said what happened to them is very unlikely to happen to you because it's different in technology choices. Is that correct by the journalist or is it more deeper than that?

Yes, that is correct. If you scrutinize this, this is not correctly that it's an airbag problem. This is in fact a component problem inside the airbag and the component is what you said, this is the inflator, the device that is inflating the airbag when the crash is happening. And inside this inflator you have a different type of generate and we have in our technology, in the Autoliv technology a different formulation with a different characteristic that doesn't show the problem that we believe is occurring in the Takata, inside the Takata inflators. So, our inflators are built on a different generate technology with a different shape and therefore this should not happen to Autoliv. And therefore we believe our technology is safe.

Very good. I also wonder if you should shed some further light on your Mono camera system offering, your own, basically with your own software, how that is developing?

We have said we have technologies that are launching next year and we believe that is on plan. So, apart from that I don't think we have given a lot of more comments to it but our technology and the products that we have ongoing for launch 2015 are on plan.

Is that launch first the half or second half?

Second half if know right.

Finally, you, Mats, said that you're still seeing 2014 as a transition year. I'm just curious as to how you expect to describe 2015 if that's a continued transition year or is it more like a harvest year?

I think we will start to see -- we're doing lots of things as we said. We are doing vertical integration, we are working with the steering wheel business in Europe and sort of many other things and we expect to see those benefits to come gradually in 2015.

Edoardo Spina, Exane.

I have just a few but I'll try to be very quick. First, quickly on Europe, if you can tell us if you've seen any recent changes to the production schedules from the OEMs, if you expect auxiliary to be stocking towards the end of the year in Europe.

No, Thomas here. No, we have not seen any changes in production schedules actually so far. We have not.

Secondly, on the vertical integration, I'm sorry. I'm not familiar. I wanted to ask if you could give us a very brief and high level maybe description of the project and also the timeframe, if we should see some benefits to your margins next year or on what timeframe from this vertical integration.

If we take the vertical integration, the main projects we're having there is in China and one product now coming up is our textiles in China where we sort of want to produce more textile inside that market. That's an example of vertical integration and we believe that that will start to show first positive contribution by the beginning of next year.

So with reference on China as well, on the passive safety in general, I read that the end cap regulation there would be benchmarked to Europe next year and at the same time in Europe I think there is a revision of our side impact test which should see you, or might see you very beneficially because you have very market share on the side airbags. Without asking for guidance for next year, but do you think from passive safety should we expect from Autoliv a high end outperformance versus the underlying LTV production given these changes to regulation?

I think it's very hard to make that direct connection. It is true that in 2015 there are some stricter regulations coming out of [Europe] end cap. I think for China end cap the timing is not as clear yet, so that's clear. But exactly what that will mean in impact for us I think it's a little bit too early to tell actually. So it's not only active safety that is actually becoming a bit more prevalent in [Europe] end cap, it's also passive safety becoming more --

I think what you could say it is that it will or could have a positive impact, of course, but to quantify it at this stage is too early.

Yes.

Just last two questions quickly. On active safety, if I can ask first if Mercedes is your biggest customer, now what percentage of sales do you get from Mercedes?

We haven't disclosed that percentage of sales to different customers. But you are fully right that Mercedes is one of our absolute biggest customers in active safety.

Can I ask if there is a model launch that you would like to point out to us, the next significant model launch maybe in active safety that we can see on your revenue maybe next quarter or the next couple of quarters? Or is that not possible?

Well, we have mentioned this call we have our camera, Stereo Vision camera and Mono Vision camera launching here in 2015 which is an important launch for us and there will be other launches coming out through 2015 too, but that is one example.

And that will be like a product launch for you, not necessarily linked to a specific car model launch?

Yes. Yes, that will go into a specific car but that will also be for us a new product that we'll be launching.

Joe Spak, RBC Capital Markets.

Good afternoon. And thanks for squeezing me in. Just to clarify your comments on the Takata business, that you've seen some business as a result of Takata. Is that future business that is being bid on you're seeing a little bit more come your way? Or is it actually replacement of some current business?

I will not comment on that today. We are seeing, as I said, some business coming our way but as I said or alluded to before here in the previous comment, we will not go into more details of what that is today.

Okay. And then two quick housekeeping. I thought you said D&A would be up 10%. Was that for the year? And if so, that seems like a pretty big step up in the fourth quarter. And also I imagine that's one of the other contributing factors to the EBITDA or the EBIT margin drag.

The D&A, 10 basis points is for the full year.

I'm sorry. 10 --? It's up 10% year over year?

No, 10 basis points.

10 basis points. That makes more sense. And then the last one is just on interest expense I believe you -- I know raised some funds earlier this year but I think you have some debt rolling off in the fourth quarter. Should we see that interest expense taper off here in the fourth quarter?

We will have in the fourth quarter one maturity to come on the old US [BP] and some other debt too. We will repay $125 million in the fourth quarter. That of course will be a little bit positive on our interest cost.

[Idris March], Polaris Capital.

I was away from my desk so I'm not sure if you asked this question. But again, on the inflators, is there a big difference amongst manufacturers? You mentioned generate technology formulation. Or is the difference more of a production quality control issue?

You know, I think in this issue, as far as I'm aware, there is a technology difference between what Takata has and what we have. I cannot comment on difference in quality control, et cetera. I can only say that we have a very rigorous system in Autoliv and we put always quality first. So, I cannot comment.

What percent of your airbag inflators are made in-house? And who are your external suppliers?

We are making almost everything inside when it comes to inflator. You know we have extensive manufacturing and development across the world in Europe and in China and also in Japan and United States.

(Operator Instructions) Edoardo Spina, Exane.

Sorry, my line dropped before. It's Edoardo Spina from Exane again. Just two more very quickly. On the Mono camera, Mono Vision that you mentioned, I just wanted to understand where we are in product the cycle basically. Is this at the order level already? Or is it more in design phase, this product of your?

We have Mono Vision cameras in production today but we will also launch a monovision camera with our own algorithm here in second half of 2015. So it depends on what you're talking about in Mono Vision. We are in production in cooperation with Mobileye and we will launch our own technology here in 2015.

And that will cease the cooperation I guess.

Say again?

You will switch to your own camera, so that will end the cooperation with that product with (multiple speakers).

Well, as I said, we are in production with Mobileye and then we will launch another camera with our own technology in 2015.

Very last thing (audio break) to understand how you look at it, if for you it's a sort of a strategic priority to get to higher net debt levels or is something you just do slowly just to help the (inaudible), et cetera, but not a priority. I just want to understand how you approach it?

Well, it's important to us. Mats can probably comment more on it but what is important for us is to have an efficient capital structure. What is important for us is also to give shareholders a guidance of what we mean with an efficient capital structure and to also give out some guidance of where this is. And that's what we did in the capital market day in May. We gave a target of one leverage ratio with a range of 0.5 to 1.5. And we believe that is a part of the basic guidance to shareholders as part of our targets.

Okay.

I don't know if you want to add something.

I fully agree with that. [With] an efficient capital structure we think is important to grow the right value for our shareholders.

Philippe Barrier, Societe Generale.

Just a question regarding the leverage you mentioned, 1.5. A good way to increase leverage is to spend some cash to make acquisitions. I would like to know if there are still some funds which may be dedicated to acquisition. If you see no more opportunities given the recent price on the market or I think if you see some consolidation taking place in passive safety or opportunity on active safety (inaudible), now if there is still some aim to make acquisitions on the safety market?

Our target has been and still is to do acquisitions and to look for acquisition, in particular in the area of active safety. So we are, and the difficulty we have experienced is that there are few assets for sale to reasonable priced that we have seen so far. We have not been able to conclude any of discussions we might have had into any acquisition. And we are then using the tools we have traditionally used to return money to shareholders which has been buyback and also dividend.

The question actually if you may spend more cash to -- for buyback for dividends. Do you think that you can keep some cash available for M&A anyway?

Well, when we set out the target of one with the range of 0.5 to 1.5, we said that with our ambition to continue to do acquisitions and to continue to grow the Company and to leave room enough for doing acquisitions given that capital structure. So even though we would reach a leverage ratio of 1, we would continue to seek for acquisition when it makes sense to our strategy and it's particular in the area of active safety.

Hello?

Hello?

Yes.

This is Hampus?from Handelsbanken. My handset ran out of batteries. I couldn't hear you. This is a longer call than normal I guess. I have two questions if I may. First quarter is more related to your strategy. I mean you have your 2015 targets with that trend. At that time we are approaching 2015 at full speed, I guess it's more my question is related to will you present 2015 2020 strategy with your results or will that be a special occasion for next year?

Second question is more on if you're thinking like a little bit outside the box when it comes to reaching the 0.5 times on the EBITDA (inaudible), if a redemption would be something you would contemplate. Those are my questions.

Well, when it comes to 2015 you know we present a yearly guidance and first quarter guidance in January. When we are now set out our $500 million target for active safety in 2015 and then we have our margin target during 2016 which would be the year after. I would say it's not unlikely. It's likely that we will have a capital market day during first half, sometime during first half of next year to set out the next level of strategy and guidance for our Company.

And on the redemption, is that you would contemplate?

Can you explain more? What do you mean?

Like you create an artificial share and then you kill that share and by that you're returning shares to your shareholder in a more tax efficient way. Like we've seen it among some of the Swedish capital goods companies prior to the crisis I guess.

Yes. We have not thought about that at this point.

As we have no further questions at this point I would like to turn back the call over to (inaudible).

Thank you, Bertrand. I would like to thank everyone for many interesting questions and attention and continued interest in our Company. We look forward to speaking with you again during our quarter four 2014 earnings call on Thursday, January 29, 2015. Until then I wish you all a safe and relaxing fall and a holiday season coming up later on. Goodbye for now.

Ladies and gentlemen, that will conclude today's call. Thank you for your participation. You may now disconnect.