Autoliv Inc (ALV) 2015 Q2 法說會逐字稿

Good day and welcome to the Q2 2015 Autoliv, Inc., earnings conference call.

For your information, today's conference is being recorded.

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

Please go ahead.

Thank you, Clauda; and welcome, everyone, to our second-quarter 2015 earnings presentation.

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

During today's earnings call, our CEO will provide a brief overview of our second quarter along with an update on 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'll remain available to respond to your questions; and as usual, the slide deck is available through a link on the homepage of our corporate webpage.

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

During the presentation, we will reference some non-US GAAP measures, and the reconciliations to US GAAP are disclosed in our quarterly press release and the 10-Q that will be filed with the SEC.

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

Thank you, Thomas.

Good morning and good afternoon, everyone.

If we start by turning the page, we had another quarter of strong growth and solid financial performance, which is a result of the Autoliv team's relentless focus on quality and operational excellence.

Our organic sales growth of 6.1% during the quarter was most impressive considering the global light vehicle production declined year-over-year and organic sales in China did not develop as originally expected.

This is evidence that our actions to strengthen our global footprint is the right strategy, which provides a better resilience against volatile markets.

This, along with our good cost control, resulted in our better-than-expected adjusted operating margin of 9.5%.

In addition, our adjusted return on capital employed of 24%, return on equity of 17%, and earnings per share of $1.62 shows our strategies for growth and capital structure are creating shareholder value.

During the quarter, we paid a record dividend of $0.56 per share and we returned $49 million to shareholders through the dividend program.

Lastly, within our Electronics segment, we had another strong quarter with 26% organic sales growth in active safety and are expecting to expand our capabilities in active safety as illustrated on the next page.

I'm pleased that we have reached agreements on two business opportunities.

Our first agreement is to enter into an intellectual property license with Volvo Car Corporation.

This intellectual property includes advanced driver assistance algorithms and certain active safety features such as ACCPlus and emergency maneuver and intersection assist, along with sensor fusion algorithms and system capabilities.

The second agreement is to acquire MACOM's Automotive Solutions business, which is subject to customary regulatory approvals.

In includes 25 technical, commercial, and manufacturing support employees.

Technologies included in this opportunity are embedded GPS modules, Electronic Horizon software and hardware, along with other radio-frequency products and intellectual property.

The 2015 annual revenues of the MACOM Automotive business are estimated to be around $90 million, and we anticipate this transaction to be margin-accretive upon closing.

These transactions are expected to improve our competitive position in active safety, and both are examples where we are expanding our safety system integration capabilities while adding to our building blocks towards autonomous driving.

If we turn the page, we have highlighted some of the key models that are contributing to our strong organic growth.

During the second quarter, these models contributed to the majority of our overall net organic sales growth.

On an annualized basis, these models represent approximately 6% of Group sales.

If we turn the page again, we have our delivery figures for the second quarter.

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

In particular, strong performance with newer products such as advanced seatbelts, knee airbags, and active safety products illustrates our investments in technology continue to pay off.

As we mentioned last quarter, electronic control units have already started to recover due to the timing of the new program phase-in.

If we now look to our development in China and turn the page, we see that during the quarter we have an increased uncertainty in China around the light vehicle production and underlying market conditions.

So far this year, there has been a steady decline in the light vehicle sales and production growth rates, while the negative trend of higher new vehicle inventories that began in 2014 has continued.

In addition, we now see certain customers expanding summer shutdowns or reducing working hours during quarter three in an attempt to balance inventories with lower underlying demand.

For Autoliv during first-half 2015, we have seen a sales decline with global OEMs due to a weaker demand at VW and Nissan and the phase-out of certain models that General Motors, while organic growth with Chinese OEMs has been about 17%.

This sales mix is unfavorable for us, since the content per vehicle is 70% higher with global OEMs than with local Chinese OEMs.

Looking now on to the second half of 2015, we see our organic growth in China resuming due to launches and our continued strong growth with several Chinese OEMs.

Despite all these uncertainties, we remain confident in the long-term growth prospects for China.

We will maintain our vertical integration strategy, strong engineering presence to support our customers, and are taking several actions to mitigate the margin effect of lower growth.

Looking now upon the overall market conditions by turning the page, the most recent figures from IHS for full-year 2015 indicates the global light vehicle production will grow by 1.8%, down from 2.4% at the beginning of the year.

As we alluded to on the previous slide, during the second half of 2015 the light vehicle production growth in China is expected to slow to approximately 5% year-over-year.

In Japan, the light vehicle production is expected to decline by 2% year-over-year during the second half of this year, while rest of Asia is expected to increase by 4% year-over-year.

In the Americas, the outlook remains mixed.

In North America, the light vehicle production growth is expected to be 4% for the second half of this year, driven by the strong US SAAR, while inventories remained relatively low.

In South America, the weak economic conditions continue, where the light vehicle production is now expected to decline by 15% year-over-year for full-year 2015.

This is versus a flat expectation at the beginning of the year.

In Europe, the overall light vehicle production for full-year 2015 is improving and is now expected to increase by 2% year-over-year.

However, Eastern Europe light vehicle production is expected to decline by 2%, and Western Europe is expected to increase by 4%.

To conclude the light vehicle production outlook, the growth rate in China is slowing and the deterioration in South America continues.

These negative trends are partially offset by an improving situation in Europe, while North America remains relatively unchanged.

Turning the page, we have highlighted some segment activity.

In our Passive Safety segment we now estimate that we will supply up to 20 million replacement inflators, mainly during 2015 and 2016, based upon committed orders and customer inquiries.

In addition to this, we have seen an increase in new business awards for frontal airbags over the last 12 months.

As many of you know, we acquired Delphi occupant safety business in 2009 and 2010, and since then we still apply some airbag modules with inflators produced by ARC.

Therefore, we're tracking the current situation closely.

Over the last 12 months, we have been awarded around 30% of the active safety contracts we have quoted.

These awards include expanding our customer base in active safety as well as a system integration award with a new global customer.

Looking ahead, we believe future autonomous emergency braking safety systems will require highly reliable sensor fusion solutions where redundancy is critical.

These systems will likely include some blend of radar, lidar, and vision sensors and perhaps even Electronic Horizons, depending on the level of automated driving.

Now our Chief Financial Officer, Mats Wallin, will comment on the financial outlook.

So I turn it over to you, Mats.

Thank you, Jan.

Looking upon our financial results on the next slide, we have our key figures for the second quarter.

Our sales of $2.3 billion was driven by a strong organic sales growth in active safety, several brands in Europe, transplants in North America, and the inflator replacement business.

Consolidated sales was negatively impacted by currency translation effect of close to $240 million.

Our adjusted EPS of $1.62 was 12% better than last year mainly due to the lower share count resulting from the share repurchase program and a lower tax rate.

Despite the higher CapEx trend, our adjusted return on capital employed remains roughly the same level as last year, around 24%, while adjusted return on equity increased to 17% mainly as a result of our share repurchase program.

Looking now at our operating margin development on the next slide, our adjusted operating margin, 9.5%, was 50 basis points better than our guidance.

If you look to the chart on the left, lower-than-expected RD&E net and overhead costs essentially drove the margin improvement versus our guidance.

When compared to the prior year, as illustrated by the chart to the right, our adjusted operating margin was 20 basis points better than prior year.

The benefit from organic sales, commodity cost, and currencies was partially offset by higher RD&E net and Other net, which also includes increased footprint costs for growth.

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

We continue to make progress to improve operating inefficiencies in Brazil and Europe.

However, deteriorating market conditions in Brazil and Russia continue to hamper the situation.

Looking now to our cash flow on the next slide, our operating cash flow of $154 million was negatively affected by timing in working capital.

CapEx net of 4.8% of sales in Q2 was below the range of 5% to 6% that we indicated last quarter.

This was mainly due to timing; therefore we expect higher CapEx for the second half of the year, mainly due to the ramp-up of the inflator replacement program and vertical integration in China.

For full-year 2015, we expect CapEx to remain in the range of 5% to 6%, which is essentially 100 basis points higher than our long-term target range of 4% to 5% of sales, mainly due to the inflator investments mentioned earlier.

Related to the capacity alignment program for full-year 2015, we estimate a cash outlay of around $60 million, while we now plan to expend more than $90 million for further capacity alignment actions and expect savings this year of close to $20 million.

We believe that this expense will conclude the capacity alignment program currently underway.

Going forward over the long term, we expect the annual restructuring expenses to return to more normalized levels.

Looking out for the remainder of 2015, we expect another strong year of operating cash flow, or $0.8 billion excluding the antitrust settlements and any other discrete items as we saw during Q1.

Looking out at our next slide, we have summarized our segment reporting according to our new organizational structure.

In Passive Safety, organic sales growth of close to 6% was primarily driven by airbags in North America and Europe, steering wheels in Europe, along with inflator replacement business.

This growth was impacted by a negative 10% currency translation effect.

The net result was consolidated net sales decline of $89 million, to $1.9 billion.

For the quarter, the reported operating margin for Passive Safety was negatively affected by capacity alignment costs.

Last year, this segment was negatively impacted by class action settlements.

The CapEx increase year-over-year in Passive Safety mainly reflects the inflator replacement program and activities in China.

In Electronics, the strong organic sales growth of 8.3% was primarily driven by active safety launches and better customer take rates.

The growth was negatively impacted by 9.2% currency translation effects, which resulted in a consolidated net sales of $377 million for the segment.

For the quarter, the lower reported operating margin in Electronics was mainly a result of our investments in RD&E and negative currency transaction effects.

Looking now to the next slide, we have our guidance for the third quarter.

Based mainly on customer call-offs, our organic sales are expected to increase year-over-year by more than 7%, mainly due to the strong growth in active safety, Europe, North America, and the inflator replacement business, along with a moderate growth in China.

Sequentially, our consolidated sales are expected to decrease by around 5%, mainly due to the seasonality effects in Europe and South Korea.

As a result, we expect to achieve an adjusted operating margin of around 9% in the third quarter.

Year-over-year, the benefit from organic sales, lower commodity costs, and currency are mostly offset by RD&E cost in Electronics and costs mainly related to the ramp-up of capacity for growth and vertical integration in China.

Sequentially, the 50 basis points decline in our adjusted operating margin is due to the seasonality effect and higher RD&E.

Looking now upon our full year on the next slide, our full-year indication which remains unchanged (technical difficulty) both organic sales growth and adjusted operating margin.

We anticipate another strong year for our organic sales growth, or more than 6%, which is more than 3 times an expected global light vehicle production.

This strong growth is mainly due to active safety, Europe, North America, and includes the inflator replacement business.

As a result of our continued execution, we estimate our adjusted operating margin of around 9.5% for full-year 2015.

Year-over-year, the positive effects from organic sales, commodity costs, and currency are partially offset by higher RD&E net and costs mainly related to the ramp-up of capacity for growth and vertical integration.

For the full year, we still expect RD&E net to increase by around $50 million from prior year, assuming comparable currency rates, and commodity costs to improve around $34 million year-over-year.

As you can see on the Q3 guidance and full-year indications, these full-year 2015 estimates imply a continued improvement in organic sales growth and margin performance during the second half of the year.

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

Based on these currency assumptions, consolidated sales in Q3 are expected to decline close to 2% due to negative currency translation effects, which more than offset the strong organic sales growth.

Our full-year 2015 indication for consolidated sales is now expected to decline by around 2% due to negative currency translation effects, which offset the organic sales growth.

Based on these sales assumptions, we expect an adjusted operating margin of 9% for Q3 2015 and around 9.5% for full-year 2015 indication.

For full-year 2015, we expect an underlying tax rate of 31%, excluding discrete items.

Also assuming our currency mix with a mid-July rate, we believe the positive transaction effects, excluding revaluation effects, could neutralize the unfavorable translation effects on EPS for full-year 2015.

In conclusion, we are pleased with our execution and strong first half in 2015, which provides a strong basis for continued strong organic sales growth, combined with margin improvement in 2015, despite making record investment in RD&E and CapEx for future growth.

On to the next; I will now hand it back to you, Thomas.

Thank you, Mats.

Before we open the call up for Q&A, I would like to remind everyone of our Capital Markets Day which will take place on October 1 and 2, where we look forward to showcasing our latest technology innovations and provide an update on our business outlook for the future.

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

So with that, I leave the word back to you, Clauda.

(Operator Instructions) Joe Spak, RBC.

Thanks; good afternoon over there.

My first question is on the updated replacement business commentary.

I think previously you said it would be a 1% to 2% benefit this year.

Is that 20 million units roughly in line with that comment?

And then continuing on, how do we think about how much of that replacement business you expect to retain, or some conversion into new wins?

I know you talked a little bit about that as well.

Okay, first of all, regarding the organic growth for 2015, we still believe it's between 1% and 2% of our organic growth.

If you take the second part of your question on sustainable business, we divide this up in two things.

On the sustainable replacement, which means that it's not only replacing the recalled parts but a continued supply with later, we expect to see a little bit short of 1 million units for the coming maybe two to four years, depending on the program.

What is more important to point out is that we are seeing an increase in order intake on frontal airbags, and I think that is the bigger sign of business coming our way.

Normally, we are seeing a global marketshare in frontal airbags of around 30%.

We have for the first half of this year seen order intake on frontal airbags of 50%, so a significant step-up in relation to our global marketshare, and that is a good sign for the future.

Okay; that's helpful.

The second question is just related to the Volvo announcement.

Can you give us a little bit more detail there?

First of all, how exactly is that going to work?

What functionality does it specifically give you?

Is it actually technology that Volvo themselves are using today, or is it technology they abandoned?

Because at least on the vision side I think it's been pretty well reported that they're using some other third-party technology.

So maybe additional color there.

This is a system that are in place today at Volvo.

It also includes opportunities to gain further development of the current system.

This is system development -- system integration software.

It is not specifically detailed to algorithms or parts of software related to vision systems or so forth.

It is on the system level that is fitted into the Volvo cars today that we are working with.

And this will give us capabilities more towards the strategy we have of being a system integrator for the future cars.

Okay.

Does that mean some of the investment you are making on your own algorithms is pulled back now, because you're happier with this technology?

Or does that continue?

No, I wouldn't say it is something we are pulling back on.

It's sort of -- this gives us maybe shorter time to market than what we have anticipated otherwise.

We see that this give us mostly a timing advantage to be able to offer up this system capability to other customers.

Okay, thanks.

I'll pass it on.

David Leiker, Baird.

Hi, good afternoon.

This is Joe Vruwink for David.

Hoping you could discuss a bit more your segment exposure in China.

I appreciate the comments about what domestic automakers versus the global automakers means.

When we look at segments, so leaving customers aside, it still seems like there's pockets of the market -- SUVs, MPVs, for instance -- that continue to do very well; small, compact cars not so well.

So just wondering, A, are you seeing the same segment trends?

And B, what might be that implication for Autoliv?

We are seeing basically what you see also.

We are seeing that the market in China is different between Chinese OEMs and global OEMs.

If you look to our own performance, we have a quite strong outperformance among the Chinese OEMs, but we have seen an underperformance on the global OEMs.

The reason for that is also if you look to the content per vehicle when global OEMs are declining: content per vehicle is approximately 70% higher on the global manufacturers than the Chinese manufacturers.

So from a sales point of view, the decline of global OEMs have a higher impact on us.

If you look to our marketshare in China, we have roughly 25% marketshare on Chinese OEMs and we have roughly around a little bit more than 35% marketshare on the global OEMs.

So the effect of global decline is hitting us more.

We have also seen a model transition effect here, in particular on certain GM platforms as I mentioned during the slide presentation here, that is affecting us.

Also the general decline on Japanese OEMs like Nissan has hitted us and also BW.

We confirm that SUV, smaller SUVs are growing among Chinese OEMs, and remains to be seen how that is affecting us going forward.

But the new launches that we have been talking about and that we still see will give us a better boost in second half of the year, we expect.

You saw an organic decline.

We expect to return to organic growth already in third quarter.

But it's uncertain whether we will outperform the full market for the year, as we have been alluding to before, due to the decline in volume, and also this negative effect on global OEMs.

So I think just given the news out of China in recent weeks, a lot of investors are looking for some degree of comfort that China is not a looming disaster, let's say.

Would you expect -- even let's take your business with the local Chinese automakers: do you have confidence in the market, the fact that that segment continues to grow very strongly?

Whereas if there were looming clouds on the horizon, you would expect more of a broad-based weakness, let's say, across all your customers?

It's a hard question.

We don't have any crystal ball here in this room either, so it's hard to say.

The best estimate, when we put together our collective knowledge with our Chinese teams and what we see overall, generally speaking we believe that Chinese OEMs will continue to have a positive development in second half.

I think the uncertainty we have seen over the last one, two months in China can throw everything up and down here; so it's hard to say.

The best estimate we believe is a continued positive development for Chinese OEMs in second half for the time (technical difficulty)

Okay; then last one for me.

It would seem like just given the China outlook moving a bit lower, Brazil has been a headwind, the inflator updates -- that's a lot of new headwinds, let's say.

It would seem like something got better relative to three months ago.

Are you seeing better growth out of the US and Europe than you originally expected for the second half?

I think we are seeing a good development for ourselves.

If you look to our outperformance in both Europe and Americas, we are seeing a good performance in both of those regions.

And this is the strength with being a true global company: when things is happening like it is right now in China, we increase the resilience as a global company, are able to maintain and continue, even though you see in major markets a decline.

So there are pockets of improvements here.

Also, the active safety growth that we are seeing here for the quarter is maybe somewhat better than we originally expected.

It's in line with the growth that we have been talking to, or coming down to the levels we have been talking to.

But we are seeing also a positive development there, so that is the balance between the different areas.

Great.

Thank you.

Ryan Brinkman, JPMorgan.

Okay, great.

Thank you very much.

Just a follow-up on that last question about China.

I'm curious if your full-year organic revenue growth guide, which was encouragingly maintained, if that's predicated upon IHS figures ours or something more conservative than IHS, given the comments that you made earlier about customer call-offs, summer shutdowns, etc..

We normally based our quarterly guidance for -- on call-offs; and then we use IHS as a basis for the outer quarter within the year and for the indication that we give.

So Q3 basically based on call-offs and Q4 aligned with IHS.

Of course, we are doing a review in particular when it comes to China and we see the uncertainty.

We are reviewing this.

So I would say this is a blend of our own work intensively done for this forecast and IHS numbers.

And as you have seen, IHS has very drastically revised down the Q3 numbers here and the Q2 numbers; they're also revising their Q4 numbers, but then in the other direction.

So we would look upon that nuance here and the change they made; and then we of course overlay that with our own opinion.

I see; okay.

Thanks.

That's helpful.

Then just maybe a couple on the Automotive Solutions business.

I mean firstly, it looks like the price to sales acquisition multiple was really quite reasonable for the type of business that it's engaged in.

Can you help us at all with what type of multiple of trailing or forward EBITDA or earnings that you might have paid, or anything qualitatively to point to, at least?

I know you talked about the margins being higher.

Anything more about the financial performance of the business?

No.

You know this business hasn't closed yet, so we may come back and give you more color on that after closing.

We have communicated here that this business is accretive on the margin on Group level, and that's the financial information we have left so far.

We stay with that and may come back after closing.

Okay, that's fair.

Maybe just a nonfinancial question then.

Can you talk about if the motivation was more to expand into a new active state for your Electronics area, or to expand or enhance your current ADAS offerings?

Any kind of detail at all on who their customers are, or what their geographic exposure is, or anything like that?

Again here we stay out of more details around customer base, etc., as the business hasn't closed yet.

Our motivation for buying this business is a combination of the product offering that is an important part going forward into advanced driver assistance, but also most probably the autonomous driving.

We are looking even more interestingly into Electronic Horizon, which is today in development within the Automotive Solutions.

It is prototypes in place.

It gives a very interesting piece to us when we are working for safety into the future car.

So it's a combination of the existing order book and business and the, we believe, very interesting opportunity to add a building block for our offering in autonomous drive.

Okay, great.

Thanks for that color.

Thank you.

Erik Karlsson, Bodenholm Capital.

Hello; thanks for taking my question.

I had a question on your margins in the long term.

The trend will obviously be that the proportion of active safety that you sell will go up over time, and you seem to be doing really well in that area with your initiatives.

I understand it's less profitable today then your existing bread-and-butter business, if I may call it that; but how do you look at margins in active safety over the long term?

We haven't given any specific guidance more than we have said in the past.

There wouldn't be any reason that the active safety business would at some point reach corporate average at least.

We haven't said anything why and when and so forth and the timing of it.

You know this is very much related to the investment you are making, how fast you are growing, how much you spend in engineering, and so forth and so on.

So that's where we say.

We may come out in the Capital Market Day in the beginning of October and tell you some more about what we see and a little bit more on the future outlook, so we defer any answer to this question to the Capital Market Day.

Thank you very much.

Thomas Besson, Kepler Cheuvreux.

Thank you very much.

A few questions for you.

Coming back to China, would you mind sharing with us what you are currently assuming internally for H2 in 2016 in terms of production?

And the same question goes for global production for H2 in 2016, please.

Did you say H2 2016?

No, no.

H2 2015 and then 2016, both for Chinese production and for global light vehicle production, please.

Your internal assumption for the market.

We use the IHS, as we alluded to.

We use a combination of the HIS and our own opinion.

But if you look to the IHS numbers for H2 2015, it is up 4.6%.

So H2 combined light vehicle production is up 4.6% according to their latest number here of July 16.

2016, I don't have at hand any number for it, unfortunately.

I'm sorry.

Okay.

But just so that we're totally clear, you have a backup plan for potentially much weaker industry volumes, just in case?

Because we've seen the --

Well, as we said, we look at these number -- this number that I just referred to, the 4.6% for H2 2015, it's an IHS number.

We are looking ourselves and overlaying what we see from customers, what we have seen in first half, and trying to do our best estimate as of that when we are doing our guidance.

But this is the 4.6% IHS number that I'm referring.

Okay, great.

On the acquisition you have announced last night, can you indicate if it's included in the unchanged guidance now, or if we have to take it on top of the unchanged guidance for the full year?

It's not included in the guidance.

Okay, great.

Very clear.

Just want to check one quick other point, please.

Am I correct to understand that you were talking of up to 25 million?

I know you are talking of up to 20 million inflators for in 2015/2016, or did I miss something?

No.

Well, we have been talking about building capacity up to 25 million.

Now we talk about inquiries and orders for up to 20 million.

So in the past it has been a capacity number, and now it is an inquiry and order of supply up to 20 million.

We are building and adjusting the capacity to this number for the most of it.

Some of the long-lead items we are continuing to build for 25 million.

But this is a -- when you build an inflator it's a lot of different parts and components, everything from the generants like the guni that we use, or the igniter, or the assembly lines, etc; and some of these long-lead items are still building up.

But it's a smaller amount of the total investment if you build an inflator.

Because it hasn't changed much?

Say again?

It hasn't changed much, therefore, so it's really a marginal change?

Yes, it is.

We are now talking about the number and the number of units we expect to build and supply, instead of talking about capacity.

That I think is the change in here.

And on 2016, the light vehicle production globally, IHS currently has at 2.9%.

Okay, great; thank you.

On the one-off costs, you've talked about the end of your alignment period.

What would you call the normalized one-off cost?

Something like $20 million, $25 million?

$25 million, $30 million as we had in the past?

Or higher because you have higher revenues today?

We will have to come back about the long-term of this and what is the normal level in our Capital Market Day.

Okay, great.

I have one final question.

Sorry, I asked a lot of questions; I understand I am a bit overdoing it.

On buybacks, can you explain why you slowed significantly the pace of buyback over Q2?

Well, I don't think we bought back any shares in the second quarter, and I don't think we ever could have done buying any back shares either, as we potentially would have been insiders on the acquisitions and some of the agreements we have announced today.

Okay.

Very clear.

Thank you very much.

Sheila Weekes, Bank of America Merrill Lynch.

Thank you for taking my questions.

My first one is just on China.

You mentioned that you've got lower content with the local OEMs.

Do you mind just specifying what percentage that is?

And then also, how do we think about the margin that you achieve with the local OEMs?

The margins we are not commenting specifically.

So we don't comment on margins either by segment or country or so.

If you look to the supply value, our supply value in China is on the average around $73.

And if you look to the global OEMs, it's above $80, between $80 and $90; and if you look to the Chinese OEMs it's slightly below $50.

So, you have a quite significant difference there between the supply value on Chinese and global.

Thank you.

On the replacement inflator business, is there any change in terms of the phasing in 2015 and 2016, and how we should be thinking about where those sales will actually come through?

No, we have not -- we have talked about that we would have a ramp-up here starting in second half, and that is exactly what is happening.

We are ramping up here initially in the second quarter.

We'll continue now quarter three; being in production quarter four.

And we said before in the very early stage that we saw the totality two-thirds in 2016 and one-third in 2015.

This might have changed a little bit, but I can't give you any big color.

This is fluctuating quite a bit as you have seen a lot more recalls happening here.

So it's a difficulty for us to give you any exact numbers.

Thank you.

Richard Hilgert, Morningstar.

Thank you for taking my question this morning.

On the acquisition, apologies if you addressed this already, but I had to step away for a minute.

Are you bringing in-house any integrated circuit fabrication?

Or will MACOM be more like a contract foundry business for you for chips?

And this Electronics business, MACOM will be a supplier to you for the modules and the other technologies that you are acquiring?

MACOM today uses external subcontract manufacturing for their products.

To what extent we will when this is closed change that and how we will handle it, we will have to come back to you.

I will stay out of any commentaries, as this business hasn't closed yet, about our strategy going forward around it.

But as of today, it is a contract manufacturing arrangement that MACOM uses today.

Okay.

Then most companies like MACOM in this sector, they supply not just automotive but other sectors as well.

But they generally have EBIT margins in the 20% to 30% range.

Does that sound unreasonable for the business that you are acquiring?

I'm staying out of any such comments at this stage.

The only comment we have to say here is that this is accretive on the Group margin for Autoliv.

Very good.

Thank you.

Brian Johnson, Barclays.

Yes, good morning and good afternoon, depending where you are.

I'll be the one person who doesn't ask about China.

I want to talk a bit about the Electronics division or segment.

Two things.

One, margins overall -- well, let me start with organic growth.

Organic growth was flat year-over-year.

Is that timing of programs?

Is it just that the -- it should be in the passive safety electronics?

Is that what we're going to see as you shift back to safety, or was there something going on in the quarter?

If it is the passive sales, the Electronics you are referring to, what we see there is that we haven't changeover of models for the moment, so that's why a little bit slowing down on the growth.

But then we should kick in with new models later on, so it should come back.

So that's the model changeover?

And second, around the op margin, down year-over-year despite 8.3% revenue growth, is that due to the investment?

Is that due to lower margins currently in active safety?

It's two factors basically.

First of all, we invest.

We have higher investments in RD&E; and as you have heard, we have around $50 million higher investment this year at comparable rates, and a big part of that is related to Electronics.

That's one factor for the margin.

The other factor is also that Electronics is buying quite a lot of materials in dollars, but we have quite substantial activities in the euro zone.

So we are impacted in Electronics segment by negative transaction effects year-over-year.

Okay.

Due to the strong dollar.

Okay, thank you.

Okay, thanks.

Brett Hoselton, KeyBanc.

Good afternoon, gentlemen.

Wanted to take a step back, thinking about the active safety, ADAS, integrated vehicle, so forth.

Two questions.

One, OEMs.

What kind of interest are you seeing expressed by the OEMs in terms of -- what kind of interest level is there in actually having a system integrator?

I think that's the direction you're heading.

But what kind of interest do you see at the OEM level in that capability at this point in time?

And if it's just at an early stage, how do you see that developing going forward?

Is that something that you think is going to be in demand a year from now, five years from now, 10 years from now?

Then second question would be, as you look at the building blocks that you've added, what other building blocks do you think you might need to add in the future to become that system integrator?

If you look to the demand, I think it is varying from OEM to OEM.

You may have one or the other or a couple of very advanced, premium OEMs that are looking to do this themselves for their foreseeable future to a large extent.

I don't think when you run into a full-fledged autonomous driven car that any OEM can do this by themselves or any company can do this by themselves.

This will be a combination of or cluster of suppliers, OEMs working together.

I also believe when you look to the software complexity generally in the autonomous-driven vehicles that you will see more and more collaboration over and between different players to develop complex software.

So I think that on the other hand, you may have another level of OEMs, a set of OEMs that are going to rely upon suppliers, advanced system suppliers, to guide them into autonomous-driven cars.

We all know that some automakers are doing this as a significant part of their trademark and some OEMs are not.

So it varies from OEM to OEM.

We believe we see already a demand of this system integration.

I mentioned here in the slide presentation that we have gotten a system order to a global OEM already where they have valued the system capability was the key differentiator and a possibility for us to get the business.

So this demand is already out there, and we believe it's increasing.

Then as far as additional building blocks, you've got the global positioning system capabilities now.

As you look at the technologies that are out there and what you feel that you need to control or have in-house, let's say, are there any, call it holes in your current portfolio that you look at and hope to fill at some point in time?

Well, I think what is important is of course to steer and to brake and to see and to -- it's a combination of environmental sensing and Electronic Horizon to be able to predict where you are going, where you are.

But it's also very important in autonomous-driven cars to be able to actuate: to actuate the car in one shape or form.

So we had been talking a lot about, even in the past, we are looking for also chassis systems, we are looking for other technologies, we are looking for vehicle-to-vehicle communication.

I think what you see us announcing here late yesterday was one step in that direction and the strategy we are executing.

So we hold on to our strategies and we execute accordingly, and that so far has been doing us well.

Excellent.

Thank you very much, Jan.

Fei Teng, Credit Suisse.

Hi, thanks for taking my question.

I wanted to come back to the replacement inflator business and the 20 million number that you gave.

Can you confirm this, that number is now the absolute maximum number that you produce over 2015 to 2016?

No, we cannot confirm that.

That is our best estimate today based on confirmed orders and inquiries.

But as you know, this is so volatile and so fluid that I cannot confirm that.

Can you give a split between what kind of volumes have been confirmed and what kind of volumes are still under discussion within that 20 million?

No, I cannot give you that.

This is a combination of inquiries that we are seeing with the likelihood of coming our way and confirmed business.

We have given you this up to 20 million as it looks today; so this is our best estimate today.

Okay, I see.

On China, just had a question as well.

Can you just explain if the problems you've had there in the past quarters in terms of irregular call-offs, are they still continuing on top of the new incremental headwinds?

Or has that receded now?

Will you repeat that last question?

Sorry.

I didn't get it.

So in past quarters, you said that you've experienced irregular call-offs from your customers, and that's been impacting your organic growth in China.

I was wondering if that problem has now receded, or if that's still continuing on top of the new problems that we've seen this quarter?

Yes, it's a mixed situation.

If you look to the situation here in quarter three, we are seeing increased summer shutdowns from several OEMs.

If you compare year-over-year on a normal quarter three, there is a difference this year of increased summer shutdowns, and many more days in certain OEMs than we have seen in the past.

Referring also back, to give you some more color without giving you any numbers or so, but it is the absolute majority of the up to 20 million inflators are confirmed business, and the rest is only inquiries.

Okay.

I see.

Thank you very much.

Hampus Engellau, Handelsbanken.

Thank you very much.

I have two questions.

First question is related to what you were referring to during the call on the ARC recall on airbag inflators related to your Delphi acquisition.

Could you quantify on the volumes you are looking at here?

That's my first question.

Second question is more related to these vision systems that you are about to launch.

If you could maybe tell us some more on when it's going to happen this year.

And also we've heard different rumors being floated on [TAM], models, etc.

Those are my questions.

Thanks.

If you talk about the ARC we are supplying as a result out of the Delphi acquisition; and the remaining parts we buy -- continue -- still buy from ARC.

It's ballpark about 0.5% of the number of units we supply in total in Autoliv.

So it's a very small amount that we have had.

We inherited a bigger amount that we have phased out ARC over time, over the years here, into Autoliv inflators; but we still remain supplying that amount.

If you look to the vision business, we are seeing a very good commentary from our customers on the vision business here.

We are in general seeing a quite satisfactory hit rate on the quoting business that we -- on the business that we're quoting.

Of the business we are quoting, we believe that we have a hit rate of around 30%.

So we are quite pleased with the reception and we are very pleased with, in particular, the stereo vision technology that we are seeing here.

They give us a very good commentary, in particular there, the combination and the redundancy: combination to radars and also the redundancy aspects of our system in total.

Thank you.

Anders Trapp, SEB.

Yes, hi there.

I have two very simple questions really.

Mats, you were talking about the return to a normalization level of cost for realignment or restructuring of your business.

Just wonder what the normalized level is.

I guess it's not $90 million.

Secondly, you were also, Jan, you were talking about a reason for not doing buybacks in second quarter was the potential conflict of being an insider due to the acquisition.

Now that acquisition is out in the open, there is no such conflict; so does it mean that you're indicating you might resume buybacks in the third quarter?

I can start with taking the second question.

You know we are very generally shareholder friendly, returning money to shareholders.

We demonstrate that by an increased dividend; we have had a quite substantial buyback program.

And we are generally shareholder friendly.

We have a strategy to execute and to build for growth, and we believe that when we could use our cash to build for growth and to generate shareholder value over time by investing our activities, we are doing that.

When we don't see that opportunity, we return money to shareholders, generally through dividend program or buyback program that we have used as tools in the history.

So, looking forward we will see how we can best use our cash to what we believe be an attractive Company to shareholders going forward.

So, generally, we will have the same approach looking ahead.

Mats Wallin

Okay, Anders, your question here about the normalized level, our plan here is to come back and elaborate along with this when we come to the Capital Market Day.

All right.

I'll wait for October them.

Thank you.

Agnieszka Vilela, Carnegie.

Hi.

I have three questions.

First question is with regards to the permanent airbag business that you are getting.

You said that your market share for the new orders in frontal airbags is today around 50% compared to previously 30%.

My question is: is it sustainable?

And also when will these orders translate into sales?

Okay.

Our current global market share that we produce and ship today is around 30%.

Order intake for first half of this year of all available orders that we can see and that we are aware of, we have -- we believe -- taken 50% of all the business.

This means that these orders will turn into sales, let's say, between 12 and 24 or 30 months from now.

So depending on the program, etc., it's hard to say when this is coming into play.

But that's normally the cycle from order to business.

And just a follow-up.

Could you specify your -- quantify sales for the frontal airbags for you?

The sales number for frontal airbags -- do you have that, Thomas?

We will have to come back to that.

I don't have on the top of my head our sales revenue for frontal airbags as of today.

I'll have to give you that number.

We will have to give you that number.

Okay, thank you.

Then my second question is on the capacity alignment program.

You're increasing your spending there.

Could you just remind us of the status there, and also what regions are most affected, and what you are seeing in the near future?

If we look to the capacity alignment program, we are seeing it's based on the light vehicle production of course globally.

This is absolutely mostly related to Europe.

We are seeing long-term our capacity footprint in Europe being not adequate to the long-term light vehicle production.

Therefore, we are now taking a step to do what we believe is a final part of this capacity alignment program that we have run for a number of years.

And then, as Mats said before, we will after that return to a more normalized level.

So it's related mostly to Europe; and what it will be and what kind of activities remains to be seen.

We will have to go through a lot of work before we can shed any light on that.

Okay, thank you.

And my last question is on active safety.

What is your view on the prices for such systems in the future?

Do you believe that the prices will go down when these systems will be more available and more popular?

Or conservative, do you think that you can get higher prices when, for example, you will have more features on such systems?

It's a blend of both, of course.

Depends on what you supply.

If you supply more content, the total price will go up; that's clear.

As we now broaden our offering a little bit here with the MACOM acquisition that we announced here yesterday, we have an opportunity to come and have a better total price on our product offerings.

So that is good for us.

Otherwise, as you know in the automotive industry the more mature the products are, the more prices are declining.

That's the history of everything that we are dealing with.

But new technology has generally slightly a steeper price decline that we have talked about also before.

Overall, we have not seen any change in average price decline; it is between 2% and 4%.

It has been so for many years.

Thank you.

Itay Michaeli, Citi.

Great; thank you.

Good afternoon.

Good morning.

Sorry, I want to go back to China.

It looks like you have a pretty good sense of visibility from your customers, at least in the short term, through customer call-offs.

So I was wondering what you are assuming roughly for China LVP in the third quarter -- I know you mentioned the 5% for the second half of the year, but perhaps more in the third quarter -- and how you think that kind of initially compares with I think IHS's view of the third quarter at about up 4%.

When we speak, we refer to the IHS numbers because otherwise it's only confusing as you have call-offs that are changing from time to time.

So the references that we give are the IHS number.

Our own estimates we keep for ourselves as a basis for the guidance.

On the IHS number today, in the latest revision it's 3.1% for the third quarter.

And that is a very steep revision down with 7.8% from over 10%, 10.9% as we saw in the April earnings call.

So a very steep decline is the IHS projection.

Okay.

It sounds like you view the IHS prediction as fairly reasonable at this point for the third quarter.

As I said, we always overly what we believe, taking into account our communication with customers in terms of shutdown days and what we are able to get.

To then give that in a translation to a number like IHS, that's not the way we are operating.

We are looking more to individual customers and their operating days, their volume projections, what type of content we have per vehicle, and then from there building it up.

So therefore it's difficult and confusing sometimes to translate that into a percentage, global percentage, for China for us.

That is, we could probably do that, but it's a quite hard work; but it doesn't make so much sense for us doing so.

It's more the basis for the overall sales that we can get out in the quarter.

No, that's a very helpful explanation.

Just to clarify, did I hear correctly before that you do expect the Company's organic growth in China to turn positive in the third quarter?

I thought I heard that earlier.

We said that we expect to turn to growth, to organic positive growth, in the third quarter and in the fourth quarter as well.

But as we also communicated, we doubt that we might outperform the overall light vehicle production in China for the year.

We said in the previous call that we believe we could do that; but now with a situation of so much lower volumes, in particular the OEM, and then referring to the content per vehicles as we said, that has a higher impact car-for-car to us, and also the lower volumes on launches, it might be difficult for us to outperform for the full year.

That is our best estimate today.

No, that makes sense.

Then just lastly on the cost controls in China that you alluded to, I think on slide 7, could you talk a bit more about what you're doing?

And perhaps as we think about modeling sensitivities for Autoliv in China, roughly what kind of decremental margins should we be thinking about if things were to get worse?

How much tightening specifically can you do on costs as the market slows?

We are continuing to invest for engineering, for vertical integration, executing on our strategy.

We are tightening the belt as fast as we possibly can when it comes to headcount and when it comes to cost related to other discrete items or hire increase or whatnot in the area of capacity or production capacity.

These are initiatives that are already ongoing and that will continue to the extent possible if volume slows down.

But as I also say, it varies from plant to plant and from product to product.

And that is giving us not a one-off, because some OEMs are doing good, some OEMs are doing worse.

And of course, the temporary reduction is something we are doing as much as possible.

Terrific.

That's very helpful.

Thanks so much.

Erik Golrang, Nordea.

Thank you.

I have two questions, the first one coming back to a previously discussed topic here on slide 9 and you talked about a 30% marketshare I think on orders for Electronics, what products do you include in that number?

And also the interest for the stereo and mono vision offerings, does that also include your own software and algorithms?

The 30% we're talking to here is not the Electronics segment; it is the active safety product, the active safety product part of the segment Electronics.

So this is 30% of the quotes that we have given and the hit rate of that which we believe we have won.

If you look to the stereo vision product that we see, we have seen a very, very good feedback from our customers that we have presented to.

We have presented a technology we are launching here later on this year.

And in particular when they look upon the robustness of the system, the performance of the system, they are impressed.

They talk about state-of-the-art, world-class, etc., of technology innovation systems here.

So we are very pleased with the feedback that we get.

Thank you.

Then the second question is on Brazil and the news in the quarter or recently about another potential anti-competitive situation here.

You've been involved in this now in North America, Europe, and now then also potentially South America.

How should investors look upon this both in terms of Autoliv's historical performance and the future?

It covers a pretty big part of your business.

Yes, it is extremely unfortunate and very annoying, and it is something that is absolutely not acceptable in Autoliv.

This is a behavior that we are outrooting in Autoliv.

We saw this first subpoena coming from the Department of Justice in 2011, and we have seen other activities happening since then, and now this latest one in Brazil.

The activities on this we believe is misconduct or unlawful behavior potentially happening before 2011/2010 time frame.

That is our belief that we are seeing here, so this goes back some time to the time frame of the other bad behaviors that we have seen.

We are cooperating, of course, with the authorities.

We are doing what we can to help out and to make this progress in the right way.

I just wanted to assure you, as any investor listening into this, that this is nothing that Autoliv stands for.

And it's not acceptable in any means and in any way.

In terms of it potentially -- having had an impact on pricing historically, and how that could change going forward, any comment on that?

I stay out of any such comments on this one, as this as an ongoing investigation.

I will stay out of anything related to that.

Thank you.

(Operator Instructions) Ashik Kurian, Goldman Sachs.

Hi.

Thanks for taking my questions; I've just got two quick ones.

First one, you mentioned the increased order intake you are getting on airbags.

Just wondering where your capacity stands to deal with this increased growth, because on one hand you seem to be aligning your capacity in Europe.

So is the additional capacity up to 25 million that you're building in North America and Japan, would that be sufficient to cater to this increased order intake, or should we expect additional CapEx in the outer years?

And second question, if you can just give us what the FX tailwind was on operating margin in Q2 and what your updated guidance for the impact on the margins for the full year is going to be.

If you look on to the capacity, we believe that we will be able to cope with this.

This is an increased order intake, and we believe we will be able to handle that within the plants that we have.

Probably we will be able to do some investments in lines and toolings, etc., in the normal course of business.

So we don't believe that even this is a significant step-up from 30% to 50%, it would cause us any un-normal matters or problems.

And the next part, Mats?

Regarding -- if I got your question right here, you talked about the FX in the second quarter.

We had, of course, on the sales line but also on the EBIT line a negative translation affect.

As you know, more than 70% of our sales are non-dollars.

We have a negative impact there of close to 10% negative on translation.

On transaction and revaluation, transaction we are slightly positive.

On revaluation FX we were negative in this quarter.

So we estimate that the net impact on EBIT for the quarter was negative in dollars of around $6 million.

But the outlook on the effects is still that we believe that the positive transaction effects should, excluding revaluation of course, should be able to offset the negative translation on EPS.

So that's how we view the full year.

Then if you -- I think you also talked about other tailwinds.

The other tailwinds we're also having is of course the commodity costs.

We see for the full year a tailwind of around $34 million on those costs.

Did I answer the question?

Yes.

I think previously you mentioned something in the range of 30 to 50 basis points of margin tailwind from FX in 2015.

I was wondering if that is still the case.

I mean, if the impact on EBIT for the full year is flat, then I would assume it's a margin tailwind, because you will still have negative impact on your top line.

I was just wondering whether the range was still in the 30 to 50 basis points of margin tailwind.

We haven't really said it like that.

We have a tailwind on transaction, no doubt of that; and the structure of that tailwind is quite similar to what we saw also early in the year.

But I think the important thing for us is that we believe that that tailwind should be able to offset the negative impact from translation on EPS; and then I think you can follow the number from that.

If I could ask one quick follow-up, I know you mentioned over time active safety or the Electronics margin should be similar to the Corporate average.

We are seeing margins declining in Q1 and Q2 versus the previous year.

I presume it's higher investment in stuff.

Is there a timeline, or is there some point when the decline will stop?

So can you give us some color on when we can expect the margins to at least stabilize on this, on the Electronics side?

We haven't given any timeline so far.

We will potentially be back on this and give you some indication on margin outlook in the Capital Market Day.

So you have to bear with us for maybe another couple of months.

Sure.

Thanks a lot.

Thomas Besson, Kepler Cheuvreux.

Yes, thank you.

Just a very quick one.

On the significantly higher order intake for frontal airbag, could you comment on the pricing level you get for these new orders and whether this is going to be eventually a better business than it used to be?

Because my memory on that is that you took voluntarily your marketshare down for this kind of business because it was carrying lower margin than the rest of the Passive Safety business.

Well, I don't think it was around this.

It is working so in this industry, as we all know, that you can't get everything.

We had a superior technology on the side systems with a state-of-the-art curtain technology and side system overall performance; and therefore, we were more attractive in getting the side system business.

And if you look to our market shares today on side system, it's significantly higher than that.

And therefore we lost back on the frontal business, as customers don't want to give everything to one supplier normally.

We have gotten some full system cars, but that is not the normal habit.

I am not able and we are not commenting on pricing for special orders or for special situations in general.

So unfortunately, I don't have any good answer to give you there, Thomas.

Referring to the previous question we got here also on the capability related to these orders and this higher order intake, this is half a year of order intake.

So it's something that we will remain and see and follow how this will develop over the second half of this year, and therefore also deal with capacity along those lines.

But so far we don't believe this will be an issue beyond the normal course of business.

Thank you very much.

Ladies and gentlemen, that will conclude today's Q&A session.

I would now like to hand you back to Mr. Carlson for any additional or closing remarks.

Yes, I would like to thank everyone for your attention, of course, and for the continued interest in Autoliv and all the interesting questions in today's call.

We look forward to speaking with you again during our third-quarter earnings call on Friday, October 23, 2015.

I wish you all a very safe and relaxing summer until then, and I wish you goodbye for now.

Thank you.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen; you may now disconnect.