Autoliv Inc (ALV) 2015 Q3 法說會逐字稿

Good day, and welcome to the Q3 2015 Autoliv, Inc.

earnings conference call.

Please note today's conference is being recorded.

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

Please go ahead, sir.

Thank you, Loraine, and welcome, everyone, to our third-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 and Investor Relations.

During today's earnings call our CEO will provide a brief overview of our third quarter along with an update on general business conditions, while our CFO will provide further commentary around the financial results and outlook.

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

If we turn the page we then have the Safe Harbor statement which is an integrated part of this presentation including 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.

With that I will now turn it over to our Chief Executive Officer, Jan Carlson.

Thank you, Thomas.

And welcome, everyone, once again.

Looking first onto our third-quarter highlights.

And we do that by turning the page.

We had another quarter of exceptional sales growth and solid financial performance, despite the slightly negative globalized vehicle production and a declining Chinese market.

Our organic sales growth of 8.4% was better than guidance as we experienced strong growth in all regions despite our decline in China.

This quarter once again is evidence that our balanced global footprint is the right strategy and provides more resilience against volatile market conditions.

This growth drove our better-than-expected adjusted operating margin of 9.4%.

Our adjusted return on capital employed of 22%, return on equity of 16% and earnings per share of $1.53 shows that our strategies are creating shareholder value.

We also returned $49 million to our shareholders through the dividend during the quarter.

Within our Electronics segment we had another strong quarter with 36% organic sales growth in Active Safety.

We also took further steps to expand our Active Safety product portfolio and capabilities through various M&A activities, as illustrated on the next page.

In the third quarter we are pleased to have closed the MACOM automotive solutions acquisition in mid August and also announced that our Electronic Horizon product from this acquisition is now market ready.

We are also pleased to have signed a license agreement for certain IP with the Volvo Car Corporation.

In addition we joined the DriveMe project which marks our second global OEM where we are participating in autonomous driving projects.

Thirdly, we announced that an agreement where we intend to form a joint venture with Nissin Kogyo in the area of brake control systems.

This pending transaction, which is subject to customary closing conditions including confirmatory due diligence and regulatory approvals, is anticipated to close in early 2016.

In addition to these three transactions we had several vision and radar launches during the third quarter.

As some of you experienced at our recent Capital Market Day, we showcased our new Active Safety technologies that we will launch later this year.

For example, our real life safety approach demonstrated how our stereo vision technology outperforms other products.

Our internally developed mono vision system will also launch later this year and will offer autonomous emergency braking features during 2017.

We believe that autonomous emergency braking will be designed into the majority of the vehicles produced in the developed markets from 2019.

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

During the third quarter these models contributed significantly to our overall net organic sales growth.

However, on an annualized basis these models represent only around 6% of our group sales.

If we turn to our market position on the next page, we have our delivery figures for the third quarter.

We continue to improve our underlying market position as we grew at least in line or faster than the light vehicle production in all product areas.

Seatbelts and electronic control units were essentially in line with global light vehicle production due to our weak organic sales development in China for the quarter.

Active Safety products were boosted by the MACOM acquisition.

Overall this performance illustrates our investments in technology for growth continuing to pay off.

If we turn the page and look into the China situation.

During the third quarter we have seen a continued uncertainty in China around the light vehicle production and underlying market conditions.

For the first time since 2008 the year-over-year quarterly light vehicle production declined in China by more than 5% and for the full year 2015 is now expected to increase only 2%.

This is more than 5% lower than the IHS expectation in the beginning of the year.

On the positive side the actions taken by OEMs over the last few months seemed to improve the industry situation and now the government is creating various stimulus programs.

Assuming these incentives take hold and the IHS LVP outlook is correct, quarter three could mark the current trough in pure volume terms.

For Autoliv during quarter three sales growth was lower than expected due to our continued negative vehicle transition mix and lower volumes on new model launches due to the general light vehicle production design.

Despite these effects we managed to outperform the light vehicle production during the quarter.

Even with all of these uncertainties we remain confident in the long-term growth prospects for China.

However, in the near-term, to mitigate the margin impact of lower growth, since Q1 we have made discretionary spending cuts, reduced net headcount by 13% while at the same time increasing our engineering capabilities.

Looking now on to the macro market conditions on the next page.

The most recent figures from IHS for full-year 2015 indicate the global light vehicle production will grow by less than 1%, down from 2.4% expected in the beginning of the year.

During the fourth quarter the light vehicle production in China and rest of Asia is expected to be roughly flat year-over-year while Japan is expected to decline by 3%.

In the Americas the outlook remained mixed.

In North America light vehicle production is expected to grow approximately 2% in fourth quarter driven by a strong US SAAR while inventories remain relatively low.

In South America the weak economic conditions continue where the LVP is not expected to decline by almost 30% in quarter four.

In Europe the overall light vehicle production is improving and is now expected to increase approximately 1% year-over-year in fourth-quarter.

However, the mix is different between Eastern Europe and Western Europe where Eastern Europe is expected to decline by 5% while Western Europe is expected to increase by 4%.

To conclude the full-year 2015 light vehicle production outlook, the growth rate in China is lower than expected at the beginning of the year and deterioration in South America continues.

These negative trends are somewhat offset by an improving situation in Europe while North America remains relatively unchanged for the time being.

Now our Chief Financial Officer, Mats Wallin, well comment on our financials and outlook.

Please go ahead, Mats.

Thank you, Jan.

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

Our sales of $2.2 billion was driven by strong organic sales growth with volume makers in Europe, non-US OEMs in North America Active Safety including acquisitions and the inflate replacement business.

The consolidated net sales was negatively impacted by currency translation effects of around $220 million.

Our gross margin improvement is mainly due to high organic sales, product mix, net currency effects and commodity costs.

Our adjusted EPS of $1.53 was 22% better than last year despite lower consolidated sales.

This year-over-year improvement is mainly due to the improved profitability, lower interest net and share count, which were partially offset by a higher tax rate.

Despite investments with vertical integration, inflate replacement capacity and acquisitions our adjusted return on capital employed increased slightly to 22%, while our adjusted return on equity increased to 16% as a result of our higher earnings and share repurchase program.

Looking now our operating margin development on the next slide.

Our adjusted operating margin on 9.4% was 40 basis points better than our guidance.

Looking on the [short] to the left, our margin improvement versus guidance was mainly due to the better than expected organic sales growth and lower than expected RD&E net.

These were partially offset by unfavorable net currency effects of 60 basis points, mainly related to their revaluation effects from the Turkish lira and the Chinese renminbi.

In addition, the quarter was negatively impacted by one time SG&A costs related to our recent M&A activities of close to 15 basis points.

Compared to prior year, as illustrated by the chart on the right, our adjusted operating margin was 90 basis points better than last year.

The benefit from organic sales and commodity costs were partially offset by higher RD&E net, currency effects and other net which includes increased (inaudible) costs for growth and vertical integration.

Looking now to our cash flow on the next slide.

We had another strong operating cash flow for the third quarter of $191 million mainly due to better adjusted operating income.

Although CapEx net of 4.4% of sales was below the range of 5% to 6% we managed in the last quarter, we expect to come back to this range during Q4, partly due to the ramp up of the inflate replacement program and vertical integration.

Therefore for full-year 2015 we expect CapEx net to be in the low end of 5% to 6% range.

As we mentioned at our recent Capital Market Day, we expect CapEx in the coming years to remain in the high end of the range, 4% to 5% of sales, to support our organic sales growth target.

For the full year 2015 capacity alignment program we estimate that cash outlay was $60 million while we plan to expense more than $90 million for further capacity alignment actions and expect savings this year of close to $20 million.

As we mentioned at our Capital Markets day, looking behind 2015 we expect annual restructuring to return to an average normal level of around 30 basis points per year on a recurrent basis.

For full-year 2015 we still expect strong operating cash flow of around $0.8 billion excluding the antitrust settlements.

During the quarter we invested more than $220 million in CapEx and M&A for growth while returning $49 million to shareholders through a dividend.

Our leverage ratio is now 0.6 times within our long-term range, as we commented at our Capital Markets Day.

Looking now at our next slide, we have summarized our segment reporting.

In Passive Safety organic sales growth of close to 7% was primarily driven by airbags including steering wheels in North America and Europe along with inflate replacement business.

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

The net effect was a total net sales decline of $66 million to $1.8 billion.

For the quarter the reported operating margin of 8.1% for Passive Safety was negatively affected by capacity alignment costs.

Passive Safety CapEx were roughly in line with last year.

In Electronics the strong organic sales growth of around 70% was primarily driven by new model launches, higher customer take rates in Active Safety while acquisitions added around $11 million to the top line.

This strong growth was negatively impacted by a 9% currency translation effect which resulted in a consolidated net sales of $0.4 billion for the segment.

For the quarter in electronics currency transaction effects negatively impacted the margins.

Looking out -- our outlook on the next slide.

We have our guidance for the fourth quarter.

Based mainly on customer (inaudible) our organic sales are expected to increase year-over-year by around 9%, mainly due to the strong growth in Europe, North America, Active Safety and the inflate replacement business.

Sequentially our consolidated sales are expected to improve by around 12% mainly due to the seasonality and acquisition effects along the new model launches in China and the [reflate] replacement business.

As a result we expect to achieve an adjusted operating margin of around 10.5% for the fourth quarter.

Year-over-year benefit from high organic sales, lower commodity costs and currencies are partially offset by higher RD&E costs in electronics and costs mainly related to the ramp up of capacity for growth including vertical integration in China.

Sequentially the adjusted operating margin improvement is mainly due to the higher consolidated sales which is partially offset by higher RD&E net.

Looking now upon our full-year 2015 outlook on the next slide.

Based on our fourth-quarter guidance, the implied organic sales growth for full-year is around 7%.

This strong growth is mainly due to Europe, North America, Active Safety including acquisitions, and the inflate replacement business.

Since most of the 2015 inflate replacement business falls during the second half, this implies an organic growth of 2 to 4 percentage points of organic sales growth.

However for full-year the inflate replacement business is 1 to 2 percentage points of around 7 organic sales growth.

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

Year over year the positive effects from organic sales, commodity costs, currencies 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 more than $40 million from prior year assuming comparable currency rates and commodity costs to improve around $37 million year over year.

In summary, these full-year 2015 estimates support an improved organic sales growth and margin improvement ?- performance during the second half from the first half of this year.

On the next slide, we have summarized our outlook which excludes costs per capacity alignments and antitrust-related matters and assumes mid-October exchange rates.

Our consolidated sales in Q4 are expected to increase by more than 3% due to strong organic sales growth and acquisition effects, which are partially offset by a negative currency translation effect.

The full-year guidance of consolidated sales is still expected to decline by 2% due to negative currency translation effects which more than offset the organic sales growth and minor acquisition effects.

Based on these sales assumptions we expect an adjusted operating margin of 10.5% for Q4 and of around 9.5% for the full-year 2015.

For full-year 2015 we now expect an underlying tax rate of 32% excluding any discrete items.

Also assuming our currency mix and mid-October rates we believe 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 year-to-date performance despite making record investments this year in RD&E and CapEx for future growth.

The execution provides a solid base for continued strong organic sales growth combined with a margin improvement in the fourth quarter.

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

Thank you, Mats.

And before we open up the call up for Q&A I would like to remind everyone that we have a webcast available on our website from the recent Capital Markets Day where we outlined our end of decade targets and showcased latest technology innovations.

But with that we conclude the formal comments of today's call.

And we would now like to open it up for questions.

So with that I leave the board back to you Loraine.

(Operator Instructions).

Fei Teng, Credit Suisse.

Firstly, just on the organic growth in Q4, you are guiding for plus 9%.

Could you go into a bit more color about what is driving acceleration in organic growth in Q4, given that production growth is slowing from Q3 into Q4?

In particular, do you see the outperformance in China could accelerate in Q4 versus Q3 and could we see outperformance there for the full year?

That would be my first question.

Maybe we'll take one by one.

So, what is driving sort of the growth for the fourth quarter is basically a blend of growth in inflate replacement business, Active Safety, but also an underlying growth in Europe and North America.

And on China, sorry?

If you look to the incentive programs from the government, you have seen reports coming from various sources of a positive impact in beginning of October.

We can confirm that.

We are also seeing a positive impact so far into this quarter coming from the incentive program.

To what extent this will remain for the rest of the quarter is uncertain.

We don't know.

There has been quite big volatility in the past with short notice in China, so we don't know.

But we can confirm a good start.

And as we said here in the slide, if this continues and the figures are right also from IHS it might be the trough that we saw in quarter three.

The guidance that we have is based on the call offs, the current call offs that we have in our systems.

So that is as far as we can see today.

And just in terms of outperformance in China in Q4 versus production, (multiple speakers) accelerate?

Yes, it is uncertain.

We have referred to outperformance in the past, but it is uncertain to what extent we will outperform for the fourth quarter light vehicle production or not.

It is a little bit based on the volatility, it is a little bit too early to say.

We do not believe we will outperform the light vehicle production for the full year.

But for the quarter it still may happen.

We don't know that yet.

Understood, thanks.

Just on currency as well, back in Q2 you said currency would be positive on operating income for Q3.

It looks like it has been negative in Q3.

What was the reason for that?

What has driven that and what do you expect for Q4 now?

Yes.

So what we have seen in the third quarter here is that we have seen revaluation effects coming out mainly from the Turkish lira.

So it's reevaluation in our balance sheet items going into our P&L, that is sort of the main factor for this negative factor in Q3.

And that is also one of the main factors for the negative dollars you also see on year-over-year for Q3.

For the outlook for the year we still believe that translation affects the positive ?- the negative translation effects will be able to be offset by positive transaction effects for the full year on our EPS level.

So we still believe that we can achieve a balance there for the full year on EPS.

But that is excluding any other revaluation efforts.

Understood, thanks.

And just a final question.

Can you give us any update on the market share that you are winning on new orders for airbags for longer-term business?

We have talked before about an increased order intake on frontal airbags.

As you know, we don't discuss particularly much the order intake as it has -- historically have had less of a meaning for us due to the success of different platforms.

But for the frontal air bags we have commented in second quarter we have taken 50% of the orders, which is significantly higher than our global market share of 30%.

We can confirm this continues into quarter three.

Thank you very much.

Erik Golrang, Nordea.

I have two questions.

The first one on the growth trajectory there for Active Safety, Mercedes clearly being an important customer for you there and they have a quite strong development.

How dependent are you on continued good performance for Mercedes for that good growth number to extend into Q4 next year?

Mercedes is an important customer of ours and if they do well we have a good impact coming from that of course.

We also have seen good impact on other product areas on the (inaudible) side as well which has contributed to the stronger than expected growth in second quarter.

But Mercedes is definitely an important part of it along with other important customers.

Okay, then the second question following up on an earlier question here on the replacement inflators.

Could you say something about, based on your current production of replacement inflator and the orders, the volumes you have signed, when do you see production of the replacement volumes fading?

Is that ?- are we ramping up into mid-2016 and then declining from there, or what does the production profile look like?

Well, for the time being it looks like we are producing into 2016.

This is a fluid situation and we are working with quotations as we speak for further projects, etc.

The best estimate still remains to produce up to 20 million during 2015 and 2016.

But to what extent this will fade mid-2016 or start to fade mid-2016 or later 2016 it is impossible to say actually today.

And I think we all understand that because of the volatile situation with it.

We don't know that currently.

But the absolute majority of the production we have been talking about is during 2015 and 2016.

Thank you.

Ryan Brinkman, JPMorgan.

This is (inaudible) on behalf of Ryan Brinkman.

Just again going back to the replacement inflator business here and I'm curious to know when you're guiding the 4Q of sequential sales increase of 12% from 3Q 2015, how much of that is being driven by the ramp-up in the inflator replacement business?

If you look to the overall organic growth of the inflator business we have communicated is to be approximately 1% to 2% for the full year.

As you understand, this is coming, almost all of it, during second half.

So you should say 2% to 4% coming of the second half organic growth from the inflator replacement business.

Okay and there any color you can provide on how the ramp-up -- in how the ramp-up is expected to drive this sequential sales increase or is that something you are not (inaudible) at this point?

I would say we are in a good volume production for the time being.

And there might be one or the other projects still remaining to ramp-up.

And as I said to the other question, it is a fluid situation.

We are looking into quotes for further businesses here as well.

So there might be further ramp ups here.

But we are in production of a good part of the volume already.

And secondly, on the margins, the 10.5% margin in 4Q that you are guiding to, that is one of the strongest margins I have heard you guide to in the last few years.

What is driving that?

Is that sort of reflecting a higher than normal level margin on the replacement inflator business coming through in 4Q?

I think the main factor for our higher margins is really coming out of higher sales.

It is coming out of positive material effects.

Those are the two ones ?- also in combination with currency effects.

So that is what is driving the margin.

Okay.

And are you specifying anything in terms of if the margin profile of the replacement inflator business is different from -??

We don't talk to margins on products.

Got it, got it.

And just a follow up.

What is the update in terms of benefit from commodities that you expect for the full year now?

The full-year commodity benefit is expected to be $37 million, up $3 million from last quarter where we saw $34 million.

Great, thanks for taking our questions.

Thank you.

Rod Lache, Deutsche Bank.

You made a comment earlier about the majority of vehicles in western markets having Active Safety in the next few years.

I know there was a hearing in Washington earlier this week on ways to improve Active Safety and the [NiTS] administrator said that there would be changes to the NCAP eminently.

And they also highlighted that the 10 companies that are voluntarily adding this in the US at least.

Can you just give us an update on what your expectations are for the timing of some of these changes and the timing of adoption?

What do you mean exactly when you say the majority of vehicles?

Is it -- anymore detail that you are hearing from your customers?

Okay, so when we talk about the maturity of the vehicles we mean the majority of the vehicles in the developed markets.

I don't think we have specified beyond that, but that is the totality we are talking about.

Then if we talk about the timing of the Euro NCAP, so already today of course you need Active Safety content in order to get five stars.

And I think by 2018 that will be driven all the way down to three star.

Meaning that from 2018 you probably need a multiple sensor solution and by 2020 you definitely need multiple sensors under Euro NCAP to get to five star.

And also from next year 2016 there is a dual rating system being introduced in Euro NCAP which we also think will drive adoption.

And then on the US, the 10 manufacturers, that the September initiative that was out, I don't think there is a timing set on that initiative yet so we have to wait and see a little bit, that would be my base answer.

Okay, but do you have an expectation for when the majority would have that in North America as well?

And do you have any insight into the timing of the NCAP changes in North America?

No, not really.

we don't have that.

We are following this as you do.

As Thomas alluded to here, we believe that AEB functionality will be offered on a majority of the vehicles in the developed markets.

We believe that it is going to be driven in performance wise by Euro NCAP where North America will follow thereafter.

That is the thing we are seeing for the time being.

And as you know, the AEB functionality, it is a good part of the total reason why you equip the vehicles with sensors, cameras and radars and also for the more advanced systems going forward.

Okay, and just lastly I wanted to ask about R&D, which was better than expected this quarter again.

We would think that something along those lines is fairly predictable.

Could you just explain what actually happens when there are these somewhat lower than expected R&D spending?

And is that something that just gets pushed out to 2016?

No, I think this is to do with a lot of different factors, it is engineering income, it is hiring of people, it is professional services, it is something that is affecting the quarter from one quarter to the other.

We have guided for 6% to 6.5% for this year and we believe that we will be within that range for the year.

Okay, great, thank you.

David Leiker, Baird.

Hey, Mats, I just -- I have been in and out a little bit here.

But on slide 10 with the bridge on operating income, I was wondering on the right-hand side of that chart if you could provide some of the color behind the others net block on the far right-hand side there?

Right.

I can do that, I mean it's -- that is the area where we talk about the cost for our growth and where we now invest for further growth.

You can see this Company is growing quite a lot.

We have been investing in areas like [DE&A], production overhead and that relates very much to our growth market, it relates to also our vertical integration.

Okay, and I just want to reconcile that then with your income statement where you show in other non-operating items $8.2 million of profit versus $1.9 million negative year ago, almost a $10 million swing.

Is that in this bucket or does that show up somewhere else below the line?

This other net where it would show up in our income statement, I would say that it shows up quite a lot in our production overheard where you can find it in our gross margin, for example.

Yes, I am looking at specifically the line on your income statement that is below the operating income line called other non-operating item.

Oh, other financial items.

I see.

Yes, yes.

It looks like a $10 million swing.

That is in a currency effect coming from cash we have out in our units which have been revalued into their reporting currencies.

And we have got some positive impact on our cash revaluation.

And that is showing up in the other financial items.

Okay, great.

And then on the RD&E line, you have a pretty good positive variance there as well.

And you called it out but you didn't give any color behind it.

No, I mean it is -- we talked about the RD&E investment we are doing and we will continue to invest in RD&E.

And as also Jan said earlier, we will see a higher RD&E.

We expect to see a higher RD&E now to come in the fourth quarter along with the lines we talked about in RD&E range relation to say between 6%, 6.5%.

But sometimes it is timing and you can have timing of cost, you can have timing on income.

But the long trend is still that we invest more.

And it is mainly in electronics.

You usually get your reimbursements in the fourth quarter.

Did some of those hit the third quarter instead this year?

I don't know exactly sort of the timing there between Q3 and Q4.

But you are right, we usually get a bigger bucket in the fourth quarter.

Okay, and then one last item.

On China over the last four months or five months as the auto sales there have slowed down everybody has done some belt-tightening and cost actions there, you have done it as well.

On the other side of it here some of these mid-month data points are suggesting double-digit sales increases.

So, the question for you is, does that higher sales volume going through the tighter cost structure, is that a positive for you on contribution margins?

Or does that create bottlenecks that drive some inefficiencies and it could actually go the other way?

I don't think it is driving inefficiency in that sense.

We are not overdoing the mitigation effects here.

We are taking immediate actions all the time when we see excess capacity and shrinking volumes.

And as we commented here, we have reduced quite significantly our temporary workforce, we have been forced to do so, and we have reduced headcount over the last couple of quarters, total headcount with 13%.

Or if you look to production work force with almost 20%.

This is similar, no other comparisons to the two things here, but this is similar to what we did during the financial crisis.

Early out with a capacity reduction at the same time as investing in technology for the future.

We all also during these two quarters increasing engineering headcount with 5% to invest for the future because we believe in China long-term.

So, if this plays out where we could see double-digit volume gains here in the fourth quarter, your position that you benefit from that.

You are not going to struggle to meet demand if that comes through, are you?

No, we don't believe so.

What we have done is that we have been forced to -- and it is always negative when you are forced to reduce headcount and take out people.

But in this case we have taken out temporary workforce and we would expect to take that back within short notice if need be.

Okay, great.

Thank you very much.

David Lim, Wells Fargo Securities.

The question that I have is on AEB, I think you mentioned 2019.

Are you seeing OEMs side for more of a fusion system, a radar camera system or just a camera system?

Can you sort of give some more color on that?

And then I think in the past you mentioned a 30% win rate.

And wondering how that has been shaping up for you guys in the last quarter?

If you look to what we believe is going to be the major driver for the imminent future, the next couple of years to come, we believe it is going to be mono vision cameras that will be the dominating sensor for AEB and for that level of functionality meeting those level of performance.

For the long haul when rating tests will sharpen up and we see changes in Euro NCAP and others, as we demonstrated in the Capital Market Day, comparison between a [fused] system and also comparison between a stereo vision camera and a mono vision camera, we believe that fused system and more advanced system will start to take over.

If you look to the order intake, as you commented about, we have commented that for Active Safety system as a whole over the last 12 months, we believe we have participated in roughly 80% of the business.

We have quoted on 80% of the business.

And out of that business we have quoted on we have seen over the last 12 months a success rate of approximately 30%.

Is that rate still continuing or is it ?- or has that fluctuated any bit in the last quarter?

And then just to clarify, so on the mono vision you feel that that is going to be the majority in the near-term, but eventually it could be more of a fusion system longer term, is that ?- did I correctly understand that?

Yes, I think if you start with the latter part.

I think that is a correct thing.

We are launching our stereo vision camera here with a fusion controller, with the updated radar system.

We are launching that now later this year.

And we believe that for the time being mono system might be the one that is the most penetrated technology for AEB.

But as I said, we believe this will change for several reasons.

When you -- coming back to the 30%, we don't elaborate on this.

We talked about this in second quarter and we don't elaborate changes on order intake for this kind of products on a quarterly basis.

We believe the impact long-term on the sales will vary so much due to take rate that it doesn't really have any meaning to do any quarterly update on this one -- not for us.

And my final question is obviously China with their new tax -- seeing some level of -- some good acceleration in the quarter.

And I know that customer call offs, you provided that in your guidance.

But what is the probability that those call offs could have greater or more potential upside going into Q4?

Is that a possibility that you may see?

We are guiding to the best of our knowledge based on the call offs.

And as we said earlier here, these call offs can change positively or negatively within very short notice.

I don't simply know here.

We heard here that there was an interest rate change in China just an hour ago of a quarter of a percent or so.

What is the meaning ?- what the meaning of this is and how this will affect anything if it does or if there will be other changes, I don't know simply.

I cannot say.

This is the best that we have for the time being.

Great, thank you so much.

Appreciate it.

Anders Trapp, SEB.

Most of my questions have been answered actually, but just some kind of clarification.

I know it has been asked several times, but when it comes to the inflator replacement business and the contribution to growth, I know what you said about 2015 and that total 20 million units is what you are talking about for 2015 and 2016 together.

But, what would the growth rate ?- growth contribution be in 2016 under your current scenario?

If you talk about the contribution margin or gross margin ?-?

Contribution to sales.

In 2016 you mean or ???

Yes.

We will come back to that.

We have not looked into 2016 specifically yet unfortunately, I'm sorry for that.

At this time of the year we limit ourselves to the end of the year and fourth quarter.

So we don't know that yet.

We will see.

I guess that means you are not going to want to answer my next question also regarding footprint savings and commodity costs for next year.

Probably not (laughter).

All right.

When it comes to China then and the mix shift that have been happening during this year -- quite big mix shifts between from, I don't know, Western stock of course to domestics, etc.

What has that done to the average supply value per car or content per vehicle in China?

What is happening?

It is it actually falling if you look at the total average?

We do a more thorough summary of this at the end of the year when we compile material for our annual report.

But we don't think it has been falling.

So far when we look into the data it seems to be for the time being relatively stable, actually.

And we believe it is currently around $220 in average for the content per vehicle whereas as of today $8 is for Active Safety.

And we alluded to in the Capital Market Day that by 2019 that number will probably double in China.

But we believe it is relatively stable around $220.

All right, thank you.

Thomas Besson, Kepler Cheuvreux.

I will be quick and with two questions.

I would just like to make sure I understand correctly what you said with R&D during the presentation.

Did you say that you still expect $40 million higher R&D for the year as your ???

(inaudible - microphone inaccessible).

Sorry?

At comparable rates, yes.

At comparable rates.

Okay.

Because you are for the time being down [15].

So what rate should we use to understand the dollar amount you are talking about for 2015?

I am sorry if slow it ?- well basically, or can you give us the dollar amount which is implied for your comment?

Because I must say, I misunderstood you in previous calls on that.

All right.

But as I said, coming back more than $40 million higher RD&E net at comparable rate.

And we have also said that we expect an RD&E net in relation to sales to be between 6% and 6.5%.

Sorry?

Yes, 6% to 6.5%, okay.

But you don't want to give the amount of R&D in dollars for this year?

I don't have that with me.

We don't have that for the time being, we are sorry.

This is the information we have today.

And sorry for that.

Okay.

Two other quick questions.

Can you say in the third quarter how much of the 8.4% organic growth was from the replacement business of the inflator business?

Was that already around the 4%, 2% to 4% you were mentioning for the second half?

We have not divided up this, we have said it is between 2% and 4% for ?- we have said between 1% and 2% for the year before.

And as most of it or almost all of it is coming second half it will imply 2% to 4%.

But we have not divided it up between the different quarters.

Okay, so it is fair to assume 2% to 4% for Q3, 2% to 4% for Q4 and we don't need to know (inaudible).

Thank you.

Last question.

I have been surprised by the amount of non-operating items in your P&L this quarter, other income and expenses this quarter of $46 million.

You are now way above what I was expecting for the full year.

Should we expect the number in Q4 to be very small or do you still have some restructuring expenses to take in Q4 as well?

Our outlook on our capacity alignment program in terms of costs is for the four-year to expect more than $90 million.

And we have today accrued $84 million.

Okay, so most of it is done?

Thank you very much.

Sheila Weekes, BofA.

The first one, just returning to this organic sales guidance and the portion of replacement inflator sales in the quarter.

How much of the raise in guidance is related to higher inflator sales coming in the fourth quarter for the organic sales guidance?

No, the inflator sales has not really changed.

We have talked about the up to 20 million since before.

So that impact has start really affected the guidance.

This is no update as you can hear from what we see for this next year since quarter two, since our earnings call in July.

Has a certain portion of that though been pulled forward into Q4 versus what might have been expected to come in the first half of 2016 before?

Well, there are a demand that of course, as you can hear from the press conference yesterday, that there is an acceleration need or want or wish for -- from authorities and from manufacturers.

So what we can do we do of course to speed up the replacement production here.

But overall what has been the limiting factor is to get ready to get the lines qualified and validated and up and running.

Okay.

And on the Passive Safety Electronics, your organic growth ticked up quite meaningfully in the quarter after being negative and the first half.

What is driving this improvement and is that sustainable?

Or should we be thinking of this as just more lumpy in terms of how the organic growth is for that division?

We don't have any specific comments around the Passive Safety Electronics.

We had provided you at the Capital Market Day with our long-term view and we talk about we have broken out the Active Safety part.

But for the electronics as a hole for the quarter we have not given any specific guidance.

Okay.

You know how it is in a business like this, a model comes in and goes out and then you have end of production and ramp up.

So that is always happening.

And then lastly, just with respect to the pricing negotiations and in terms of how your contracts are structured.

There has obviously been some press articles discussing how certain German OEMs will be taking some steps to extract additional savings from their suppliers.

Have you been seeing any indications of pricing pressure in terms of your negotiations and what will be the timing of those negotiations?

So far we have not seen any changes from this particular OEM you are referring to.

It hasn't affected yet.

It remains to be seen and remains to see the consequences for them and what will happen.

Our product is not normally sourced due to type of engine, if it is diesel or petrol or hybrid or whatnot.

So it is neutral to that.

And to the pricing pressure, it remains to be seen what measures they will take.

We haven't seen anything yet.

And just one more quickly if I may.

On China, can you comment on what your capacity utilization is in China relative to the other regions globally at this stage?

As we had been taking out, as we said, 20% of the production workforce, it is somewhat lower the utilization for the time being by nature.

We can flex up and to the comment of an earlier question here is that production will ramp up fast.

We have available capacity.

We will bring up people and train and bring people up to speed.

But it is lower for the time being little bit than in the other regions.

Thank you.

Agnieszka Vilela, Carnegie.

If we can start to look at Americas and the bit longer trend there, I have seen that you've been outperforming the underlying production by some 10 percentage points looking at your organic growth since the beginning of 2014.

Could you just share with us what is the reasons behind it, is it the fact that the content is growing or taking market share or do you see any other reasons?

It is a good ??

it is several things.

We have a good product mix, we have important car lines ramping up here lately like the Ford F-150.

We have a good portion of Active Safety that we have commented on earlier where, as we also said, Mercedes and their success in the US where we are a significant contributor to the Active Safety part is giving us a boost.

And we have had over the years good launches into North America overall.

And now lately it is also giving us a positive effect here at the very end here now from the replacement business.

So there are several factors contributing to this good performance in North America.

Perfect, thank you.

And then looking at your cost savings program.

Should we expect any more cost savings coming from the capacity alignment program coming in 2016?

It is so that when we are now going out of the third quarter here we have accruals in our balance sheet related to severance to around $110 million.

And those accruals will be executed in the coming future here and that will also go for 2016.

And we count our payback based on when we do the cash out, not when we do sort of the accrual.

So that means that there will be payback coming on the cash out in the future.

We believe that the payback time is around three years for the older parts of the program and a little bit more than three year on the newer parts.

Thanks.

And I have a question on the Active Safety.

And you say that mono cameras will be the driver for the Active Safety or the most important segment in the coming future.

Can you just clarify what kind of products do you have there?

Because you say that you have the mono vision camera with AEB that will be launched only in 2017.

Can you still sell the mono vision cameras based on the Mobileye chips in the coming future?

I have to correct that.

If I said that it was a miscommunication from my side.

I don't think the mono vision will be the most important part for the future.

I think for the future will be a fused system being the most driving technology.

But for the eminent part, maybe a year or two or maybe somewhat longer, maybe three years or so, there might be mono vision being in there for AEB.

But we believe firmly that for real life safety and for the longer-term future towards same autonomous driver or autonomous drive will be a stereo vision in combination with some other sensors for the future.

That is what we believe.

We are launching -- as a part of our sensor suite we are launching a mono vision camera already this year.

But the customer choice has used to ?- use this camera for AEB functionalities in calendar year 2017.

But we will launch camera for other functionalities earlier than so.

Thank you, clear.

And my last question is on the MACOM acquisition.

Can you tell us about the Electronic Horizon?

What are the applications there?

And you also say that the prototype is ready.

Have you received any orders for that technology?

No, I don't think we have received any orders yet for this one.

We showed this at ITS here and friends just not too long ago.

As you know, this is a product where we are right now getting ready and market ready to take orders.

It was a part of the acquisition.

The main part of the sales and the volume today from the MACOM business is the GPS modules that goes into the system today.

We believe that the capability of the engineers that is coming with this business is giving us access to competence and technology that we will use then as a building block for autonomous drive.

Thank you.

Hampus Engellau, Handelsbanken.

I am sorry to come back on these inflators again, but I think yesterday we had (inaudible) again launching units and recalling in the US on the on back of the Takata inflators.

And I guess that is not included on your program with the 20 million units.

But my question is more related to what type of capacity do you have if you should get your fair share of this recall?

Well, it is dependent on what type of inflator it is and how it fits into the program that we are producing.

If it is a similar type of inflator we could use lines, we may be up and running faster.

We may need somewhat less of equipment.

But otherwise we believe that we, from an infrastructure point of view, are relatively well positioned, which means buildings and sites, etc.

But as always, you may need extra production capacity.

We don't build up that sitting and idling and waiting.

So, and that will or may be necessary also for additional business if it comes.

Okay, can we also go back to China?

You are gaining market share on the domestic OEMs and my question is more related that -- is the driver behind that is that new car assessment and China and content growth on the domestic OEMs or how should I look at your market share guidance in China -- on the domestic side?

Yes, well I think it is a combination of us being on site in China.

I referred to earlier here we are, even in difficult times in China, focusing on engineering development.

I said we are increasing engineering headcount with 5% when we are reducing capacity and production.

So I think we are focusing on technology.

We are on-site, on ground, good relations inside China domain with our people and capacity.

Then of course the China NCAP And also the fact China NCAP may come out later on this year with the even Active Safety part of the China NCAP and outline their strategy for it will drive content further on into China and also through the Chinese OEMs.

And Chinese OEMs may realize as a whole what do I know, but I would think they see the necessity of car safety if they are going to compete with foreign OEMs.

Okay, and then last question also coming back to these vision systems.

When you say you are launching your own mono vision systems by this year end, is that your own developed and (inaudible) and ship in that mono vision?

And will that be used for simpler versions of autonomous emergency braking or will the stereo vision system handle all the autonomous emergency braking features?

The launch we will have later on this year will be stereo vision, it will be mono vision with other functionalities, it will be 77 GHz and it will be domain controller for fusion of different sensors -- handling fusion for different sensors.

The camera that we are developing stereo vision and mono vision is our own camera with our own algorithm developed.

And as I said, the AEB functionality will come in place in calendar year 2017, mostly related to that customer program and the use of that for AEB.

Thank you.

Chris McNally, Evercore ISI.

Sorry, but my question is really another follow onto the fused product discussion for 2019, 2020.

And just considering really that the RFQs over the next couple years will really be for advanced features like AEB cyclist, AEB intersection, which at your CMD you referenced would be difficult with your first gen internally developed algorithm for mono.

My question is on these specific advanced RFQs where you are going up against a Mobileye monocular or multifocal offering will you be able to compete on a cost and performance basis?

Or will you have to use potentially a more expensive stereo fusion offering if your technology for mono only is not ready call it by that time frame?

Well, I think that our technology is state of the art.

And I think that our technology that we are developing is really a competitive offer as of right now.

And we are ready to evaluate that.

And I think we have demonstrated our capabilities at the Capital Market Day also.

And I think that we are -- if you look to the outer years where real life safety may have a different focus in rating tests, in legislations and also in consumer awareness, when you see how important it is to be able to trust the systems in bad weather conditions and in very difficult situations in intersections, etc.

We believe that we have a competitive offer.

We believe that we have talked about a low end system having a price of around $100 to $150 on the high end of a range of $250 to $300, which then means a fuse system of two sensors plus controllers.

We believe this is a competitive offer as of today.

Okay, so going into RFQs today for 2020 high-end AEB offerings you think you will be competitive, that is the take away?

We definitely think so.

Great, thank you so much.

Ashik Kurian, Goldman Sachs.

Most of the questions have been answered, so I'll just ask a housekeeping question.

Just so that I understand correctly, when you say the translation impact will be fully offset by the transaction, I kind of work that out to be at least 50 to 70 basis points of margin benefit.

And given ?- when I look at the first three quarters you have had, if anything, a net negative impact on margins from FX.

So why does all the benefit, if I am right, come in the fourth quarter?

Is that more of an accounting issue?

(Technical difficulty) hear a little bit (technical difficulty) can you repeat the question?

Sure.

So when you said the negative translation impact is going to be offset by the transaction in terms of contribution to margin, I worked that out to be at least 50 to 70 basis points of positive margin contribution this year.

And when I look at the first three quarters it seems if anything you had a slight negative margin contribution from currency.

That implies a massive FX tailwind on the margins for the fourth quarter.

I am just wondering what the mechanics of that is.

And why is all of it coming in the fourth quarter?

I think there are several aspects on currencies.

And margin is sort of a different feature here.

We have been talking about the impact on EPS on dollars and that is sort of how we also say that we think that given the rates we are seeing today that we could be able to offset the negative translation with the transaction on the dollar side.

But that said, also if you look also to what has happened during the year here until at least September is that even if the translation effect has been negative on the dollar side they have been positive on the margin side.

That's what we have been able to see now in the third quarter.

So the impact on margin dollar is not necessarily the same on translation.

And that is basically due to the cost structure.

Okay.

Just trying to work out the margin impact from currency on the fourth quarter.

But maybe I will take this question off-line.

Thank you.

Joseph Spak, RBC Capital Markets.

Hi, this is (inaudible) signing in for Joseph Spak.

Most of the questions have been asked and answered, but just to clarify -- it looks like the mono vision launches for this quarter (inaudible) next one are not your own algorithms, that is coming later this year.

But can you remind us of the functionality between what has launched this quarter and what is going to come with your own algos?

And secondly, is there an update on side airbags investigation and potential benefits from that later on?

Can you repeat the second part of the question?

What do you want to know about the side airbag investigation?

Has there been any progress towards that, any kind of actual (inaudible) coming from it?

Oh, that is too early.

I cannot comment on that part.

We don't see that -- how that has developed, etc.

We are working on several projects, as we said, and looking into quotes for (inaudible).

But that specifically I unfortunately cannot comment on.

The [clubman] that you talk about here that we are launching now is not our own camera, that is based on another algorithm.

You are very right on that.

What specifically that is including I cannot give you the details on what it is really doing and the different features on that one.

With respect to our own algorithm that we are launching here, that is based on, as I said, our own development software and hardware.

It is including AEB functionality and it is including the usual other blind spot detection, lane departure warning, etc.

So the normal things that you expect an advanced system to do is handled by our own algorithm and the technology we are launching.

Thank you for taking my questions.

(Operator Instructions).

Brian Johnson, Barkley.

Good afternoon, German, it is actually Steven Hempel on for Brian Johnson.

Just to follow up on that last question while she brought it up.

So the mono vision you are launching in fourth quarter with lane departure warning and lane keep assist, is that in-house technology from Autoliv or is that using the second tier?

As we said, this mini launch that she was specifically referring to is a second-tier.

The one that we are launching, is that what you are asking for?

Or did you ask for the mono ?- the Mini Clubman?

Yes, I mean on slide 4 I believe it actually says mono vision, and Mini Clubman is launching in 3Q.

And then in the fourth quarter you are launching ?-.

Yes, the Mini Clubman which was -- she was asking for, that is a second tier.

Okay, the mono vision in fourth quarter, that is in-house Autoliv technology?

Yes.

Okay.

And then in terms of your vertical integration strategy, I guess could you just remind us what inning you are in with that strategy?

Provide a little color on what has been completed so far, what is left and kind of what you expect from ?- in terms of the headwinds?

If you expect those to turn to tailwinds and what is the potential timing of that?

Could you repeat the question?

Yes, in terms of your vertical integration strategy, remind us just what inning you are in on that.

If you could provide a little color on what has been completed, what is left to complete and when you expect headwinds from that vertical integration program to turn into tailwinds?

Right.

This will be fully in place towards the end of the decade.

It is a several step program, we are doing two types of vertical integration, basically most of it in China.

We are doing it elsewhere too, but we are doing a pyrotechnical site in China where we are investing in (inaudible) manufacturing, igniter manufacturing, we are moving our inflator manufacturing into a special site for pyrotechnics.

That is an ongoing work to feed the Asian part of the world with pyrotechnics and also the growing market in China.

Then you have the textile campus outside Shanghai which is essentially cushion manufacturing and fabric manufacturing.

And that is on its way.

And this will not be fully completed -- still remains in several years.

But some parts of it is already up and running.

And this is gradually coming into place basically from now on and gradually in 2016 and 2017.

Okay, because I might have thought some of the vertical integration headwinds might be [seating] as you pointed to full year vertical integration costs being a headwind.

But then for fourth quarter there was no call out of vertical integration cost as being a headland.

It will be, it is what Mats referred to as cost for growth.

And that is what we refer to when we talk about the vertical integration and how we are growing that business.

So you will see that headwind into 2016 as well.

And we will maybe come back to how -- what portion of this and how it will develop during the year.

But it will continue into 2016.

Okay, and then what inning of the pedestrian airbag adoption cycle are we in?

And I guess is that mainly going to be driven by Euro NCAP or other global NCAP rating standards or actually OEMs and consumers action showing interest in this technology on their own?

I think you are seeing consumer interest at the end of the day.

All of the rating tests, etc., at the end of the move based on consumer interest.

And where we are in this cycle, we are very early to say for pedestrian airbags and for pedestrian protection.

We are providing it to some OEMs here and it is progressing, but it is not developed to the extent we would like it to be and it may take some time before it is.

Great, thanks for taking my questions.

Thomas Besson, Kepler Cheuvreux.

I will be brief.

I have two quick follow-up questions, please.

You said earlier on one of your questions that you had spent or you had put in your P&L $86 million for your [addressable] program in the first nine months.

We had $99.3 million delta between your reported and addressed operating income.

So, that is (inaudible) for the antitrust related models.

Can you tell us why these costs don't seem to go downward?

There have been some [settlements] and how long do you expect these to last?

That would be the first question.

On the antitrust you mean or ???

When I look at the difference between [6 or 5.2], which is your adjusted income for the first nine months and the $505.9 million there is a difference of $99.3 million, you said $86 million were related to the adjustment for [ramps].

So the remaining $13 million linked with the antitrust.

It doesn't seem to decline despite the fact that there have been some settlements over the last couple of years.

First question was how long is it going to last?

And second, should we expect these quarterly costs to decline at one point?

Very difficult to predict these kind of costs.

And as you can see and in our disclosures, we still have some ongoing procedures going on in several parts of the world.

And the costs we are incurring is in [plant] or either professional services, whereby (inaudible) costs or accruals where needed for settlements.

But to give an outlook that it's very difficult.

I mean, you can't really say really when you are able to settle another one.

It is impossible.

Okay, very last one question for me, please.

When you calculate your adjusted EPS do you adjust for the one-off you described the EUR8.2 million of ForEx accruals or not?

When we do the adjusted EPS we adjust it in the same way we do adjusted EBIT.

That means that it is basically antitrust and capacity alignment-related costs.

Okay, great.

Thank you very much.

As there are no further questions in the phone queue, I would now like to turn the call back to Mr. Jan Carlson.

And I would like to thank everybody for your participation and interest and questions.

But before I do that I would like to extend my sincere thank you to the Autoliv team for your relentless focus on quality and operational excellence.

And as we improve and further position our Company to save even more lives.

I would like then to thank you all for today's call.

We sincerely appreciate your continued interest in Autoliv.

And we look forward to speaking to you again on our fourth-quarter earnings call on Friday, January 29, 2016.

Until then I wish you all a safe and relaxing upcoming holiday season.

And goodbye for now.

Thank you.