Autoliv Inc (ALV) 2016 Q2 法說會逐字稿

Good day and welcome to the Q2 2016 quarterly earnings conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to Thomas Jonsson. Please go ahead, sir.

Thank you very much, Sylvia, and welcome everyone to our second-quarter 2016 earnings presentation. Here in Stockholm we have our Chairman, President and CEO Jan Carlson, our Chief Financial Officer Mats Backman and myself Thomas Jonsson, Vice President of Corporate Communications.

During today's earnings call our CEO will provide a brief overview of our overall Company performance as well as an update on general business conditions while our CFO will provide further commentary around the financial results and outlook. Then at the conclusion of the presentation we will remain available to respond to your questions and, as usual, the slide deck is available through a link on the homepage of our corporate website.

So if we turn the page, here we have the Safe Harbor statement which is an integrated part of this presentation and includes the question-and-answer session that follows. During the presentation we will reference some non-US GAAP measures and the reconciliations of historical non-US GAAP measures to US GAAP are disclosed in our quarterly press release and in the 10-Q that will be filed with the SEC.

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

Thank you, Thomas. Looking first on our second-quarter highlights by turning the page, we had another quarter of solid financial performance. And I would like to thank the entire Autoliv team for delivering quality and operational excellence.

Our organic sales growth of close to 8% was around 2 percentage points lower than our guidance due to fluctuating customer call-offs in China in North America, which was partly offset the continued positive development in Europe. Including acquisitions, consolidated sales grew more than 12%. Despite our lower than expected organic growth, we delivered an adjusted operating margin of 8.6%, in line with our guidance.

This resulted in an adjusted EPS of $1.75, an increase year over year of 8%. Including the impact of recent acquisitions we continue to deliver strong adjusted return on capital employed of 20% and return on equity of 16% and returned $51 million to shareholders during the quarter through dividends.

In active safety we had an organic sales growth of 30%. However, as we have previously mentioned, we expect the organic growth year over year to slow somewhat in this business area.

In addition, during second quarter, we consolidated the Autoliv-Nissin Brake joint venture. And we have received two important new business awards with global OEMs within our electronic segment.

Looking ahead on the next slide, our strong order intake continued during the first half of 2016. Recently we have experienced an acceleration in the ramp-up of new business awards within our passive safety segment and we foresee even more opportunities in this fast-changing environment. Due to this positive development, we now expect to surpass our end-of-decade sales growth rate target of 7% as we navigate through these unprecedented times in our safety market.

As a consequence, we expect to add approximately 1,000 engineers over the next 12 months to support recently awarded projects in addition to the more than 500 engineers we have added so far this year. Therefore, in full-year 2016 our RD&E net will continue to run in the range of 6.5% to 7% of sales as we have seen during first half of 2016. This step-up in RD&E from 6% to 6.5% of sales, which we have communicated since our Capital Market's Day last October, is expected to continue through 2017. In summary, we are pleased that we are able to capture significant future business and balance further investment for growth with healthy operating margins within our long-term target range of 8% to 9%.

Looking now upon our current production volumes by turning the page, here we have our delivery figures for the second quarter. We have had another strong quarter where we grew faster than the global light vehicle production in most product areas. High value-added seatbelts, side airbags and electronic control units continue to show strong growth.

In addition, active safety products and break controls were boosted by acquisitions. Overall, this performance illustrates our investments for growth continue to pay off with strong volume growth.

Looking into our model mix on the next slide, here we have highlighted for you some of the key models that contributed to our strong organic growth during the second quarter. These models contributed significantly to our overall organic sales growth and once again our electronic products are in all of these models with the exception of the Prius. On an annualized basis these nine models represents around 10% of our group sales.

Turning the page, during the second quarter we continued to see a steady growth in China. This is a continuation of the strong market growth in quarter four last year initially stimulated by government incentives and favorable interest rates. For the first half of this year we have seen the light vehicle production and a light vehicle sales increase of around 6% and 8% respectively. This has resulted in an overall light vehicle inventory improvement during the second quarter as the market and OEMs adjusted to continued government incentives.

We continue to monitor the situation closely as the light vehicle production in China will likely remain volatile as we once again have experienced during the second quarter. Our sales in China was a new second-quarter record due to strong organic growth. This has resulted in our first-half organic sales growth in China of close to 12%, which is roughly 2 times the light vehicle production.

Looking ahead, we expect our strong performance in China to continue. However, as we have seen in the past, this market is very difficult to forecast.

Lastly, the China NCAP is currently considering various improvements to the test rating system around rear-seat, side and pedestrian protection along with autonomous emergency braking. These would all positively affect the content per vehicle over time in the world's largest light vehicle market.

Now looking onto the macro market conditions by turning the page, the most recent figures from IHS indicate the light vehicle production increase of roughly 5% year over year for third quarter, mainly driven by China and North America. During the third quarter, the light vehicle production in China is expected to rebound from the drop last year and grow 16% year over year while Japan shows an increase of around 1% and rest of Asia is roughly flat year over year.

In the Americas, the outlook remains mixed. In North America the light vehicle production is expected to increase around 4% in third quarter, driven by a solid US SAAR and reasonable inventory levels. In South America, the weak demand is expected to continue in third quarter, resulting in a light vehicle production decline of 3% year over year.

In Europe, the overall light vehicle production continues its steady recovery. However, the light vehicle production for third quarter is expected to be relatively flat year over year which includes an increase of around 1% in Western Europe.

According to the latest IHS figures, the global light vehicle production is now expected to grow 2.8% year over year for full-year 2016. This is 40 basis points lower than expected in January and assumes a mid-single-digit growth rate in China with stable North America and a continued recovery in Europe.

I will now turn it over to our CFO, Mats Backman, for the financials and an update on our 2016 outlook.

Thank you, Jan. Looking now on the next slide, we have our key figures for the second quarter.

Strong organic sales growth in Europe non-US OEMs in North America, China and active safety products and acquisition resulted in a record sales of $2.6 billion and this is for any quarter. Our consolidated net sales increased by close to 12% despite negative currency translation effects of around $37 million. Our record gross profit also for any quarter is mainly due to high organic sales, lower commodity costs, favorable currency impact and acquisitions.

Our adjusted EPS of $1.75 was 8% better than the same quarter last year. This improvement is mainly due to a strong growth which has resulted in improved profitability and also a lower tax rate. Despite investments for vertical integration, inflator replacement capacity and acquisitions, our adjusted return on capital employed and return on equity remain above historical levels.

Looking now at the operating margin development on the next slide. Our adjusted operating margin of 8.6% was slightly better than our guidance. Looking on the chart to the left, our operating margin improvement versus guidance was mainly due to better cost control which essentially offsets the effect of lower than expected organic sales growth and higher RD&E.

Compared to prior year as illustrated by the chart on the right-hand side, our adjusted operating margin was 90 basis points lower than last year. The benefit from organic sales growth, commodity cost and favorable currency impact were offset by higher investment in RD&E of 110 basis points to support our future growth and also other, which primarily includes launch costs, investment for growth including vertical integration and the impact from acquisitions.

Looking now for the next slide, our second-quarter operating cash flow of $103 million was negatively impacted by the timing effects of working capital, partly related to tax payments. Our full-year 2016 operating cash flow estimate of $800 million, excluding any discrete items, remains unchanged from our earlier indications. CapEx of 5% of sales for the second quarter was lower than expected and that is mainly due to timing of expenditure.

As we mentioned last quarter, we expect the full-year 2016 CapEx to be in the range of 5% to 6% of sales. This is partly due to increasing our inflator capacity to supply additional inflators during 2017 and 2018.

During the quarter our capacity alignment activities included a cost of $3 million and a cash outlay of $22 million. For the full year we still expect our capacity alignment activity cost to be around 30 basis points and a cash outlay of around $90 million. For full year the capacity alignment savings are now expected to be around $28 million and commodity cost savings are estimated to $27 million.

Looking now to our segment reporting on the next slide, we have summarized our segment reporting for the second quarter. In passive safety organic sales growth of close to 6% was primarily driven by strong growth in Europe, North America, China and Japan and in particular with airbags and high value-added seatbelts. This strong growth was impacted by a negative 2% currency translation effect.

Consequently, consolidated sales in passive safety increased around $70 million to $2 billion. In passive safety the 10.4% operating margin was a result of higher organic sales and positive product mix and favorable commodity costs which were partly offset by higher RD&E.

In Electronics the strong organic sales growth of close to 19% was primarily driven by new model launches and high customer take rates in active safety while acquisition benefit was about $150 million. The strong growth resulted in a consolidated net sales of $0.6 billion for the segment. The 2.5% operating profit margin for the electronic segment was affected by higher RD&E and the impact of acquisitions.

Looking now to our guidance on the next slide, we have our guidance for the third quarter based primarily on customer call-offs. Our organic sales are expected to increase year on year with about 6%, mainly due to strong growth in Europe, North America and China. In addition, acquisitions are expected to add about 6% year on year in the quarter and that's primarily related to ANBS.

Sequentially our consolidated sales are expected to decline by 5% and that's mainly due to the normal seasonal effects. As a result we expect to achieve an adjusted operating margin of around 7.5% for the third quarter. Year on year the benefit from higher organic sales and lower commodity costs are more than offset by higher RD&E and costs related to the ramp-up of capacity and new technologies for growth along with the impact from acquisitions. Sequentially, the adjusted operating margin decline is mainly due to the lower sales effect.

Looking now on the full-year 2016 on the next slide. Our full-year 2016 indication has been updated to reflect higher RD&E costs and slightly lower sales growth. Our organic sales growth for the full year is now expected to be around 7% which is 2.5 times better than the latest LVP according to IHS. This update for more than 7% is due to lower LVP in the second quarter and the second half of 2016 while the sales effect from acquisitions and currency remain relatively unchanged.

Our adjusted operating margin of more than 8.5% for the full year is now changed for more than 9%. This change is due to higher RD&E to support our higher order intake and slightly lower organic sales growth in the full-year 2016. Year on year the positive margin effect from organic sales, commodity cost and currencies are more than offset by higher RD&E investment and costs related to the ramp-up of capacity and new technologies for growth and the impact from acquisitions.

On the next slide, we have summarized our outlook which excludes cost for capacity alignment and antitrust-related matters and assumes mid-July exchange rate. Our consolidated sales growth for the third quarter is expected to be around 12%, mainly due to a strong organic sales growth and acquisitions, which are slightly offset by negative currency translation effects. For the full-year 2016 indication our consolidated sales net is expected to grow more than 10%, mainly due to a strong organic sales growth and acquisitions which are slightly offset by negative currency effects.

Based on these sales assumptions, we expect an adjusted operating margin of around 7.5% for Q3 and more than 8.5% for full-year 2016. Excluding any discrete items we still expect a 29% tax rate for the full year. Assuming our present currency mix and exchange rate we believe the positive translation effect excluding revaluation effect could neutralize the unfavorable translation effects on EPS during the second half of the year.

To summarize, these estimates indicate strong growth with an operating margin in the upper half of our long-term range. And that is despite higher RD&E, higher investment to support future growth and the impact from acquisitions.

Turning the page, I will now hand it back to Jan for some closing comments before the Q&A portion.

Thank you, Mats. I have not so much concluding comments at this stage. But this concludes the formal comments of today's call.

We would like to open it up now for question and answers. So I turn the call back to you, Sylvia.

(Operator Instructions) Rod Lache, Deutsche Bank.

Hi everybody. I had a few questions.

One is you're hiring 1,000 engineers as you are getting more business. And I was wondering if you can give us some more color on how that's affecting the organic growth expectations over the next few years? I think previously you had been talking about 6%, 6.5% long-term growth guidance.

Yes, we believe this will increase the organic growth for the coming years. And thereby we are also likely to increase the target beyond the $12 billion for the end of the decade that we set out at the Capital Market Day. And we see the need to be able to execute on this very strong growth, to be able to relatively short after a CMB update the target to do this investment.

Can you give us some idea of what 50 basis points or so of additional R&D corresponds with in terms of organic growth?

We have not been able to summarize that at this stage. This has been a quarter very intense with new business coming our way while we are at the same time executing on deliveries with the highest focus on quality. We will have to be back to you about that, but we see already now that $12 billion will be updated in a positive way.

Okay. And at a higher level it looks like your 2016 revenue guidance is a little over $10 billion and that is up nicely from a little bit over $7 billion in 2010.

But the 2016 EBIT at this point looks like it's maybe 860, something kind of similar to maybe a little bit down versus the 880 that you had in 2010. And obviously there's a lot of R&D and footprint costs and things like this, but clearly the objective for the Company is to ultimately grow their earnings.

Can you give us some idea of just in that context having seen not as much progress on the earnings side what we should be thinking about going forward? It sounds like 2017 is another significant investment year.

Well, you are right in that sense. If you look to the 2010 we came out of a recession and we had a very steep rebound, of course, generating a lot of opportunities for strong earnings because of the fast rebound and high utilization of capacity.

If you compare our 2016 with 2010 we have created a significant position in our active safety space. We are growing faster than ever or at least in a very long time in our passive safety segment. We are increasing our target beyond or likely to increase the target beyond the $12 billion by the end of decade.

And this doesn't come for free, as we all understand. We are investing for growth for the future, but we are also communicated as late as nine months ago that we will improve margins over time and we hold on to that we will improve margins over time. But the growth that we are experiencing now is higher than in faster than what we saw in the CMD.

So, therefore, we are also seeing the near-term margin coming under pressure because of investment for growth. But long term we hold onto that we should be able to improve margins.

Okay. And just lastly, can you just give us any color on your latest view on the magnitude of the recalls? I think certainly the magnitude is bigger in terms of absolute volume versus the last time you had communicated some view on the impact on Autoliv.

And maybe some color on the active safety wins. Is there anything new that came to you during the quarter?

During the quarter, of course, a lot of the order intake is coming from the passive safety side. And I think it's likely to say that the Takata overall situation is affecting or giving the result in a positive order intake for Autoliv.

We are seeing the positive order intake in passive safety across the board. It's not only front airbags or replacement business. This is running business coming our way in combination with the replacement of inflators for sustainable supply that is coming our way.

So we are seeing the increase and, of course, it's likely that customers get worried about the situation for Takata and their ability to survive. Also given the fact that you can read in the press of restructuring of Takata and it's not clear what turn that will take. So this is we believe one of the reasons why customers turn to a Safe Harbor in Autoliv for high-quality supply.

(multiple speakers) We have also experienced a good order intake on the electronic side. And we have captured a new system supplier and new system order it in the electronic space that is important business for us. So also there we are seeing a positive development.

Do you have an estimate for the recall magnitude at this point? Any update there?

No, I don't. I would think and I would guess that it's over 100 million inflators in total that is up for recall. But I don't know for sure.

Okay. Thank you.

Erik Golrang, Nordea.

Thank you. I have three questions.

First one, if you could say anything about the -- you say that order intake is very strong here and you say that the $12 billion 2019 end-of-decade target is too cautious but then I think of sort of the magnitude of orders in relation to sales currently. I think based on your market share comment is it fair to say that they are around 25% sort of above the current pace of sales?

And then a second question was based on what you see today, I mean now you get a lot of extra cost here initially to prepare for this ramp-up of new business. But based on what you see today when will there be a sort of better match between development and engineering costs and actual sales production levels?

Then the final question is if the cost for Toyota's recall is that in the EBIT margin guidance? Or is that elsewhere or not taken into account yet?

If you look to the market share gains and the order intake it's a question for the longer term as we have communicated. You should remember now that we are seeing 18 months of very strong order intake here. We communicated more than 50% order intake of available business in 2015 for passive safety, for all products in passive safety, in total more than 50%.

Now we have seen another six months of strong order intake and that's why the increase in investments have grown. This is a very special situation that we haven't seen in the past.

So how long this will continue is hard to say. We comment in our release today that it is likely to continue at least for some quarter here with a strong order intake. So depends on how strong this order will be and how it will go before you arrive back to a better, as you call it, match between RD&E and sales.

We said here also that we will run between 6.5% and 7% throughout 2017, 6.5% and 7% of sales on RD&E throughout 2017. Then we will be back next and discuss and elaborate beyond that. When it comes to the order cost I leave it to you, Mats.

No, we don't have any accruals related to the Toyota recall and it's not included in guidance.

But as you have seen probably there is a change now from what we communicated in the first quarter. The 10 to 40 has now become less than 20.

Thank you.

Ryan Brinkman, JPMorgan.

Hi, this is Samik on behalf of Ryan. My questions are more firstly more nearer term.

You guided to roughly 10% organic growth this quarter and came in slightly below that. So I was wondering if you were able to bucket that roughly I think 230 basis points of underperformance out of your guidance into what drove that. Like is it production or was this something customer specific or was it take rates on some of your products?

This is related to call-offs. As you know we guide the quarter for based on our call-offs. So we saw a weakening call-offs in China and in North America compared to what we saw in April throughout the quarter.

That was partly offset by stronger call-offs in Europe. The decline in China in North America is also confirmed. If you look to the IHS forecast out of April and you look at the IHS forecast out of July you can see that China light vehicle production has been cut in half and also North American light vehicle production has also significantly declined.

It's 3% declined. So that is confirmed.

And the fluctuations in call-off there was the reason why we were down in organic sales. It also points to how difficult it is to forecast and how much it can change, in particular when it comes to China.

Okay, got it. And just to confirm, does your updated expectation for organic growth in 3Q imply that 4Q will be roughly flat in terms of organic growth or flat to maybe slightly up zero to 1%? Are we reading that correct?

Yes, I think you are reading that, based on an increasing difficult comparables in fourth quarter you are seeing a lower growth. You should also remember that we have a day effect that we are seeing that was high, we had another 5% boost in first quarter that will come back in the fourth quarter. So the numbers that you see there it should be added back roughly 5% for the day effect.

Great, got it. And just on the housekeeping side, we noted that even after the consolidation of Nissin Kogyo the minority interest line, noncontrolling interest line was still close to zero. Is that more a reflection that after the integration costs you didn't really have any income from that venture?

Yes.

Okay great. Thanks. Thanks for taking our questions.

Hampus Engellau, Handelsbanken.

Thank you very much. I have three questions.

Maybe starting off the Nissin Kogyo cost guiding between $20 million and $30 million. If you could perhaps say how much is PPA and how much is integration cost? And second question is on how much if you could quantify market shares during the second quarter in order intake passive safety.

And the last question is more of a general basis is how the industry has reacted to this accident we had with the Tesla. Our OEMs becoming more concerned about technology, have you seen more interest for your vision systems or what have been the implications of that accident? Those are my three questions.

Thank you.

Maybe I can start with the Nissin Kogyo question. We guided for $10 million in terms of integration of PPA in the second quarter and now we're talking about the $20 million to $30 million for the full year. Looking on the split in terms of integration and PPA I would say it's basically 50/50.

Okay, and if we take the market share and the order intake side it is even though we are seeing 18 months of very strong order intake it's too early for us to talk about market share gains. Of course, this is going to affect us that we are now even indicating an upwards revision of our long-term target. And it's likely also to affect the market share, but we will come back to that and we are elaborating on this in our annual report. So bear with us here for another six months and we will communicate what we believe on our market share and also take into account a likely continued strong order intake here at least for some quarter.

When it comes to the accident on the Tesla I think it's a very sad thing and it's a very sad thing for, of course, the families and everybody that is involved in it but also for the industry and for the technology. I think we have advocated all along that you have to take this stepwise and you have to be very rigorous in all the tests and validations and everything that you do. But it's also new technology and you have to educate drivers and you have to have good control for how to hand back responsibility to the driver, etc., etc.

What is important is that we take this careful as an industry. We move forward because ultimately autonomous drive and self-driving cars will be a great support to save more lives in the streets. And we are working on this from a horizon of robustness, quality first rather than pushing technology out to the streets.

Thank you.

Brian Johnson, Barclays.

Yes, good morning and good afternoon respectively. You know, with the comments you've made about the longer-term outlook improving and the engineers that you've been hiring, can you give us a sense of how that splits out perhaps between traditional passive safety airbags and seatbelts, passive safety Electronics and then active safety both in where you see the upside to revenue and where you're adding the headcount?

Well, we are expecting to hire over the next 12 months maybe up to 500 people on the electronic side whereof you see a big portion of this is engineers in the active safety part. And related to this is also, of course, the strength of these software people that we are bringing on board. And the software people it's already today the majority of the people, of the engineers that we have in our Electronics arena.

So this is, of course, an important part. But it's also a strong part that is going into passive safety to be able to cope with the order intake. As you see here we are hiring up to 1,000 people over the next 12 months in total, so it's a blend of both Passive and Electronics people.

Okay, and second question, one I often ask you, despite the Toyota recall you're leading quality record in the airbag space with the well-publicized issues with the competitor. Is there any evidence that as OEMs look for future sourcing and as they resource some of the contracts that they recognize the need to pay up, if you will, for that dependability and reliability?

Well, I think what customers are seeing here with the trust they give us in order intake is the track record that we have, the focus on quality first, the ability to execute on more business and also taking the consequence out of it by investing for growth. It's not that we are trying to make short-term wins here on order, big orders coming our way. We realize that you have to take the steps necessary to safeguard quality by investing for growth.

And this is absolutely our first priority in everything we do here, in particular when we have more things to do inside the Company to take these steps. Customers are always looking for a cost optimization. But I think when this is progressing here everybody realized that not paying for quality is even more expensive.

Okay thank you, Jan.

Matthew Stover, FIG.

Thank you very much. I have two questions.

The first is if you could provide some more clarity on the discrete financial impact for the other items. I believe it was start-up vertical integration and acquisition related. But if you could just kind of box that with some numbers or percent of sales that would be really helpful.

Are we talking in terms of guidance or the actuals?

No, well, that's going to be the next question. So if you want to hit them both.

Maybe in order so I think as we had basically the same explanations and to some extent generic maybe it's best if I make a kind of -- if I walk you through kind of a bridge between the actual last year and third quarter and the guidance to give a flavor a little bit of where we see the differences and also a little bit the flavors on the other items well, if that is the best way maybe.

That sounds good. Sure.

So I mean if we are starting with the third-quarter 2015 then we had an adjusted operating margin of 9.4%. We are as you have seen we are grading for growth in the third quarter this year which will yield additional income then for the third quarter this year. And we made an assumption there, so approximately 120 basis points in positive impact year on year. On top of that we have, as you know, we guided for about 20 bps in terms of positive raw material effect and there we are ending up with about 10.8% with adjustments on last year's margin.

And then we have the items that are offsetting that number. And first of all, like Jan also talked about, we have the RD&E. We're talking about 110 bps if you are looking into the third quarter and that is corresponding to the second quarter as well.

We have acquisition effects in total and mainly relating to A.M. Best but a small amount also from the MACOM acquisition and that is about 70 basis points. So then we're ending up with 9% in comparable numbers. On top of that, we have depreciation and amortization which is high this year, so that's another negative of about 50 basis points, taking us to 8.5%.

Then when we are getting into the residual between the 8.5% and the guide at about 7.5%, then you are getting into the other box, so to speak, to a large extent. Then we are talking about structural investment for growth that are sequentially flat. And I think that is important to remember.

But where we see a negative relative impact in the third quarter due to lower sales in the third quarter as we are flat on the cost, but due to the low the seasonally lower top line in the third quarter we have a negative relative effect. I think that gives the picture for the second quarter, third quarter and into the fourth quarter, as well.

But on the start-up there's the start-up expenses and then the integration expenses. If I'm doing the math right or the implication you've got for the integration another 10 or 20 for the balance of the year.

And are there other start-up expenses that we should take into account as we flow through? I would assume that because you call that in the slide for the third quarter.

No, no, but I mean we talked about the slightly lower margin on the acquired business, as well. So you have a kind of margin impact on that one, as well, year on year.

Okay, that makes sense. The second question is on the recall related, you've held tight on the volume at $30 million but we have seen a few more recalls announced. And so I'm just wondering if we should just assume that that number should increase or if there is some reason why we should assume that shouldn't increase despite the fact that the aggregate number of recalls is rising in the market?

You mean if our number of recalls should increase?

The $30 million.

Yes, the $30 million number because what we've seen, Jan, is the public numbers related to Takata going up over the course --

It works like this. The customer wants to be safe and to have a grip over when they can supply when they go out. And they do this, of course, as fast as they possibly can but we probably know a little bit more in advance as we are in discussions with our customers how much and when should we supply.

We know that and we are disclosing to the extent we know of our production volumes to you. So that is why some of the $30 million maybe a little bit ahead of the market. And that's why when you see and read about recalls we may already have known them for a little bit and thereby included already in the $30 million.

So when we think about that $30 million what number should we envision as there being kind of a relative to the public number? Would you see that higher than the public number that we know about right now?

I cannot comment specifically on this one. I think that might be some of it that is in there or not in there. This is also a fluctuating number.

We have said up to $30 million and you remember we increase this from up to $20 million to up to $30 million. So that is the increase that we have given based on the increasing recall activities. And where you are in this one it's too granular to give you any more specific number as this is a changing environment as of today.

Okay, thank you very much.

Joe Spak, RBC Capital Markets.

Thanks for taking my questions. I guess continuing on to sort of some recent discussion about the margin progression, so if we normalize for the days impact you are running about 5%, 6% organic growth in the back half.

And then you have the comment where you are looking for 7% which I guess is over the planning period portion. Given that this is the order intake is now and that takes a couple of years to flow through, is it fair to assume that accelerates over the planning period to something above 7% in the later years?

Well, from the math you would say that's fair to say because this will take, as you said, a couple of years for this to flow through. And the start of production here you may not see it into 2018 of any magnitude and then maybe some of it into 2019, as well. So yes, you are right.

And if you remember from the Capital Market Day the total growth assumption was around 7% annually and the organic part 6%.

Okay, so the 7% is still a total number?

That was the total back when we gave the target in October last year.

Okay. So then if we assume that the 5% or 6% that you are exiting this year is about the right run rate as we comp against some of the initial replacement and that's let's say that's a good number four 2017 and you're talking about the higher costs, do you still think that's a there is enough volume there to offset the additional investment and the normal pricedowns that you get margin expansion? Or is that the margin expansion also pushed out further into the planning period?

Well as we commented earlier, it depends on how the order intake will look from here and over the next six to 12 months and if it will continue to be as strong as it is. The good thing with a continued strong order intake would be that we probably will move market shares, but it's too early to say. The negative on that would be that you would continue to see increased investments or continued high level of investments than -- compared to a normalized situation.

So it's too early to say but longer term this should return to a more normalized level. But it's all depending on how fast you see new business coming your way.

And we will talk more about this and elaborate at the year-end numbers and see where this year have taken us. Last year took us to more than 50% of all available orders. So far this year has continued to be strong or very strong.

And then one housekeeping, I think earlier it was brought up that there was no noncontrolling interest from the Nissin JV in the quarter, the implication being that because of the cost it was pretty breakeven. Can you tell us for the back half should that remain fairly breakeven or are more of those integration and deal costs in the second quarter and we see a little bit of that in the back half?

If you look to -- there is not any forecasted changes or something than what we have seen so far. From an operations standpoint we have a very successful first quarter behind us with a positive first step of integration and we shouldn't experience any difference in the second half than what we are seeing so far.

But presumably there were additional deal costs in that first quarter. So I guess will we see some noncontrolling interests in the third and fourth --

It may be some positive aspects of it because you have $10 million out of the $20 million to $30 million coming in the second quarter. So some of it but not any major big differences. But some of it, maybe a little, yes.

Okay, thank you.

Brett Hoselton, KeyBanc.

Hey, good afternoon gentlemen. Let's see here, I think we got a pretty good split of the additional R&D expenses and so forth. My question here, and this relates back to Rod's initial question, which is we're increasing RD&E expense to the 6.5% to 7% range.

Do you have any general thoughts as to how long you're going to maintain this level of spending and where you might normalize that and when you might normalize? Is this something that's going to continue for two, three years or could it continue even longer? And then post that, where does the number go?

We've communicated in the CMV that when we said 6% to 6.5% we should come back to around 6% or below at the end of the decade. Now we are increasing this level to 6.5% to 7% throughout 2016 and 2017. Beyond 2017 we will see how this will come down.

And the numbers should come down in relation to sales over time because of the strong order intake that we are seeing. But as I keep repeating myself here it depends on the load of business that is coming our way. We will have to see how much we can take and what the customers are willing to give us.

So far, which is so positive for us, it's so good the trust we have from the customers and this is the customers' choice giving us this business and we are doing what we can to meet their expectations in terms of quality and delivery. But for 2017 we will run probably at 6.5% to 7%. We will give you more update during 2017 on how long and what the pace would be for the decline in relation to sales.

And then broadly speaking as you think about adoption rates for your active safety products, and you can kind of think about where they are at today versus where you had expected them to be at this point in time, would you say that the adoption rates or installation rates are higher or lower than where you plan -- where you would have expected them to be at this point in time?

If you go back a number of years or a couple of years back they are higher than what we expected a couple of years. You could see that we reached our $0.5 billion target earlier than expected.

We have been speaking about that growth rate would come down. You can see we are still running at around 30%. So they are higher.

We iterate here now that growth rates will come down at some point or harmonize more in relation to market growth. But we are seeing slightly higher take rates than we previously expected.

And then Brexit. I'm wondering if you can discuss if there is any either impact on Autoliv in your view either directly or possibly indirectly? In other words, maybe shifts in OEM production and so forth.

Starting maybe with the immediate effects from Brexit and that is very limited on Autoliv. Looking on the top-line exposure we have approximately 3% of the group sales. So it's a low number.

In terms of currencies we have less than 2% of the transaction exposure related to the British pound. And actually as we have the majority of the exposure on euro/pound and we are selling in euro a weaker pound is actually giving a positive impact even than we are talking about small numbers. So that's the moral of the immediate.

Elaborating on the more long-term effects I think that is difficult because then you're getting into the growth numbers in general in Europe. I don't know, Jan, if you have anything to add on the long-term effect.

No, I think you're very right. I think we will have to see. I think it's difficult to speculate.

The direct impact is limited as you said and you don't know where the cars are sold. And there is a production in UK that is not limited to UK.

So we don't think will be. But it remains to be seen when the negotiation starts between the European Union and Great Britain on the exit and if there would be any follow-on effect. I'm not in a position to speculate about it today.

Excellent. Thank you very much, gentlemen.

Okay, so then maybe before we take the next question I give this five-minute warning. We intend to keep this call to one hour and we have five more minutes to go.

Agnieszka Vilela, Carnegie.

Thank you. I have two questions. The first one relating to the engineers that you are hiring.

It really looks massive. You will be hiring 1,000 engineers in the next year. And I wonder if you capture all of the costs of this ramp-up in the R&D costs or should we expect even an elevated other costs for you?

Well, this R&D cost that Mats was talking about here in the walk of the 110 bps, etc., that is the R&D cost but we have additional costs to this ramp-up besides the R&D cost. And it's by necessity when you see this increase you will have other costs for infrastructure inside the Company to run beyond $10 billion and going for more than $12 billion then by the end of the decade.

So other costs are involved, vertical integration and building up for growth. That it is clear besides the R&D.

And just a follow-up on that, do you think that you can get any relief from your customers that, for example, they will also be sharing some of the costs for the ramp-up? And also may be that you could see somewhat better pricing due to that?

I'm not sure to be able to comment on that. If you look to the pricing it's still between 2% and 4%, so it is within our long-term target range. I think this is a constant fight to the customers about the pricing and to get the best possible deal for us and they want the best possible price, and I think this is continuing.

I don't see any differences on the market conditions because of this change. I think this is the working market. It's very competitive and it still will be very competitive, so this change here of more business to us will not change that looking ahead.

Thank you. And then my last question is with regards to the recall by Toyota of your airbags.

Does it change your opinion about your quality or the kind of review process of your suppliers? And also a follow-up to that, do you see any kind of changing behavior from your customers because of that?

No, we haven't seen any change in the behavior from customers on this one. We are working, of course, extremely tight with Toyota. We don't see any change there.

We are learning every day this is a constant lifelong learning when you are in this business and we take all the opportunities to improve and to take lessons learned from it and this is what is most important. It's human to do things. The only thing you can do is to treat at the best possible way with the strongest focus on quality first and that is what we are dealing with here in this case and what we always do.

Thank you.

Okay, so I think we have time for one more and then we will have to end the call.

Mats Liss, Swedbank.

Yes, hi, thank you. Just a couple of questions.

First, regarding the target change you are indicating, the $12 billion here. What kind of change is needed for you to make a change? Is it 10% or could it be other issues that you change, time frame, etc.?

You mean the target change of the $12 billion or --

Yes, you indicated you had an upcoming change.

Yes, we have an upcoming likely to officially communicate this change because of the order intake and we'll come back to the number. That's too early to say.

But as we said, 18 months of strong or very strong order intake launching and ramping up here by 2018 predominantly and onwards will change the target. But how much we will come back to it.

No, I guess it was the Company policy how much of a change do you, well, need to do to make it worthwhile making this change?

It will be more than $12 billion. But I guess it's not a few percent or something, it's a change. But we will come back to that, when it comes to we will see what it means.

Okay, great. And then about the order intake, you have strong orders in passive safety. Is it the same all over in the US, Europe and China or is it a difference between those geographical areas?

We are seeing generally a strong order intake from all the regions. It varies more and more you know from customers to customer rather than from region to region. So we are seeing generally a strong interest for our product across the board and as we said it's basically on all product lines in the passive safety area.

And the final one here about, I mean you mentioned the lead time of two, three years, I mean some customers due to quality concerns, etc., would I guess be interested in getting your products earlier. Is it possible to do that or is it more like platform changes when you can make the change?

It is both. We are seeing both. We're seeing customers that are looking for platform changes or facelift changes and we are also seeing requests for running change and running production, as well.

And you can see this steep ramp-up of engineers here coming our way. And the number of projects to also talk about to be concrete, we are more than doubling the number of projects if you compare starting quarter two and starting new products in second-quarter 2016 compared to what we started in second quarter in 2014.

We have year to date increased with more than 50% new number of projects year to date this year compared to last year. So there is a lot of new activities and many of the customers want this as soon as they can. But it doesn't let itself fly to do that fast and then what the quality and the procedures that we have is allowing.

Okay great. Thanks.

Okay, so thank you very much. That concludes the Q&A session and I would then hand the word back to Jan. Jan, please.

Thank you, Thomas. I would like to thank everyone for participating in today's call and for interesting questions.

We are very pleased with our strong growth and executing during the first half of this year and we are also excited about the opportunities in front of us that is providing growth and margin development for the long term. We sincerely appreciate everybody's continued interest in our Company and we are looking forward to our third-quarter earnings call on Thursday, October 27. And until then I wish you all a great summer and goodbye for now.

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen, you may now disconnect.