Autoliv Inc (ALV) 2017 Q2 法說會逐字稿

Good day, and welcome to the Autoliv, Inc.

Second Quarter Financial Results 2017.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Anders Trapp, Vice President, Investor Relations.

Please go ahead, sir.

Thank you, Lisa.

Welcome, everyone, to our Second Quarter 2017 Earnings Presentation.

Here in Stockholm, we have our Chairman, President and CEO, Jan Carlson; our Chief Financial Officer, Mats Backman; and myself, Anders Trapp, Vice President of Investor Relations.

During today's earnings call, our CEO will provide a brief overview of our overall company performance and outlook as well as an update on general business conditions, while our CFO will provide further details and commentary around the financial results and outlook.

Then at the end of our presentation, we will remain available to respond to your questions, and as usual, the slides are available through a link on the homepage of our corporate website.

Turning to the next page, we have the safe harbor statement, which is an integrated part of this presentation and includes the Q&A that follows.

During the presentation, we will reference some non-U.

S. GAAP measures.

The reconciliations of historical U.S. GAAP to non-U.

S. GAAP measures are disclosed in our quarterly press release and the 10-Q that will be filed with the SEC.

Lastly, I should mention that this call is intended to conclude at 3:00 p.m.

CET.

So please limit your questions to 2 questions per person.

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

Thank you, Anders.

Looking on the second quarter highlights by turning the page.

We had another quarter of solid financial performance while taking additional steps to strengthen our market position for the long term.

Our organic sales growth for the quarter of 0.2% was slightly better than the global light vehicle production, primarily due to our strong growth in active safety in all regions, excluding North America.

However, our organic sales growth was lower than our guidance due to weaker light vehicle production in China and North America than we anticipated at the beginning of the quarter.

This was partially offset by stronger-than-expected demand for our products in Europe.

This resulted in an adjusted operating margin of 8.4%, essentially in line with our guidance due to our improved operational leverage, a strong operating cash flow of close to $180 million and an adjusted earnings per share of $1.44.

During the quarter, we returned $210 million to shareholders through dividends and share repurchases.

Consequently, our leverage ratio increased to 0.7x, while we had an adjusted return on capital employed of approximately 18% and return on equity of approximately 12%.

To support our growth opportunities, we are pleased to have hired more than 1,300 engineers over the last year, especially given the war for talent.

As a consequence, we now expect our RD&E net to be more than 7% of sales for full year 2017.

However, mitigating this effect on our operating margin, we see improving leverage in our gross margin development.

Also, during the quarter, China approved an update to their NCAP, which adds rear-seat safety, pedestrian protection and active safety to their rating score.

It is expected that this will have a positive effect on the safety content per vehicle in China over the next decade for our products.

And lastly, we are pleased to have recently announced 3 technology corporations, thereby further strengthening our presence and product offerings in active safety.

Looking more on the details of this corporation on the next page.

The 3 agreements include Velodyne, NVIDIA and Autotech Ventures.

Relating to LiDAR, we signed a commercialization agreement with Velodyne, a market leader in LiDAR technology.

Under this agreement, Velodyne, as Tier 2, will supply their next-generation integrated laser and detector multi-chip module to Autoliv.

Autoliv will then design, develop and manufacture high-volume automotive-grade LiDAR sensors and software to be sold to our traditional OEM customers as well as to shared mobility customers such as the robo-taxi market.

We intend to deliver prototype LiDAR sensors in low volumes during 2018 and 2019 and are preparing for serial production in 2020.

Related to our Zenuity software platform, Autoliv and Volvo Cars have partnered with NVIDIA for the next generation processing platform.

This visual computing platform, with artificial intelligence and deep learning techniques, will enhance the object recognition, enabling the Zenuity software to better anticipate threats, and thereby, navigate more safely through potential hazardous situations.

Our partnership targets to utilize this processing platform on the Zenuity Level 4 software to be launched in 2021.

And lastly, Autoliv agreed to invest $15 million in Autotech Ventures, a venture capital fund, which specializes in ground transportation technologies.

This investment will provide another source to identify tech startups in the area of highly automated and autonomous driving.

Looking now on our business outlook, on the next page, we see strong momentum in both our segments.

Within passive safety, we will see the early ramp-up towards the end of the second half of this year from business awarded in 2015 that was well above our current market share.

This should result in outperformance versus the global light vehicle production and our market in the upcoming years.

We expect RD&E in passive safety to peak during second half of 2017, and thereby, expect to see operating leverage on this business beginning in fourth quarter 2017.

Within electronics, we continue to see lower organic growth for some upcoming quarters, mainly due to product mix and the timing of new programs launched in restraint controls and brake systems and certain areas of active safety.

However, the organic growth for our core vision, radar, ADAS ECUs and products continues in the mid-teens.

During the quarter, we were awarded business with new customers in restraint controls and active safety.

In addition, so far this year, we have been awarded several smaller active safety orders with Asian investment OEMs.

However, the larger active safety orders, we are targeting in the fall in the later part of this year.

Lastly, our products software joint venture, Zenuity, is off to a good start.

During the quarter, the joint venture hired close to 400 employees and consultants, which includes around 100 engineers that Autoliv and Volvo each contributed with.

For the quarter, the Autoliv share of the net cost for the joint venture came in better than expected, around $8 million.

We now expect the Autoliv net cost to be around $35 million for full year 2017.

We're also pleased with the level of customer interest in the Zenuity software beyond -- software offering beyond the current customer.

Looking now into our production volume on the next page.

We have summarized our delivery quantities for the second quarter.

Within passive safety, our seatbelt volumes had a favorable mix towards high value-added products, such as active seatbelts and pretensioners.

And our airbag products overall performed slightly better than the global light vehicle production due to our strong passive safety growth in Japan, India and South America, which was partially offset by a decline in North America.

Within Electronics, our active safety unit increased 4%, mainly due to core active safety products, which includes the favorable mix towards ADAS ECUs and radar, while our restraint control unit volumes declined, mainly due to the timing of product launches.

Looking now into our new model launches on the next page.

Here, we have highlighted some of our strong-performing models during the second quarter.

These models contributed significantly to our overall organic sales growth during the quarter, where our content per vehicle on these models is in the range of $70 to $500.

On the annual basis, these models represent around 8% of our group sales.

Another new program launches, in addition to these models, should enable Autoliv to outperform versus the global light vehicle production in the second half of 2017.

Looking now on the market conditions on the next page.

We continue to see some uncertainty in the light vehicle market, in particular, in North America and in China.

During the second quarter, the inventories remained above normal levels in China and the U.S. due to softer demand than the underlying light vehicle production, while the inventory levels in Europe remained stable based on our internal estimates.

For third quarter, the overall global light vehicle production is expected to increase by approximately 2% year-over-year, according to the latest IHS figures.

This assumes light vehicle production in Asia remains strong, where China, Japan and Korea are expected to increase 1%, 5% and 24%, respectively.

In North America, the light vehicle production is expected to decline 7% in Quarter 3, while South America is expected to continue its recovery, with a year-over-year increase of 21%.

In Europe, vehicle registrations continue to show an improvement in the EU27 countries for the first half of 2017.

And light vehicle production is expected to increase 4% year-over-year in third quarter.

This is driven by a 3% increase in Western Europe and a 7% increase in Eastern Europe.

Looking at the latest full year 2017 light vehicle production numbers, IHS now estimates a 1.9% year-over-year increase versus a 1.6% back in January.

This year-over-year growth is mainly driven by increases in Asia and Europe of 2% and 3%, respectively, while North America is expected to decline 3%.

The current LVP figures indicate a 3% increase during first half of 2017 and 1% increase during second half of 2017.

We continue to monitor the situation closely and are ready to adapt to specific market fluctuations on a case-by-case basis.

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

Mats, please go ahead,

Thank you, Jan.

Looking now on the next slide, where we have our key financials, where we had a record gross profit for any second quarter.

This resulted in a gross margin improvement of 60 basis points year-over-year, primarily due to our improved operating leverage.

Our sales of $2.5 billion were driven by strong organic sales growth in Japan, India and South America, along with core active safety products and inflator replacement sales.

However, the consolidated net sales declined by around 1% compared to prior year due to negative currency translation effect of close to $40 million.

Our adjusted EPS declined year-over-year to $1.44, mainly due to higher RD&E net cost of Zenuity and a higher effective tax rate, including discrete items, while the combined effect of this was around $0.38 per share.

Our return on capital employed declined versus previous year, mainly due to the equity method from Zenuity.

Our return on equity declined versus previous year, mainly due to the net income effect from Zenuity and the higher tax rate in the quarter.

Looking now at the operating margin on the next slide.

Our adjusted operating margin was essentially in line with our guidance despite a close to 2% unit lower-than-expected organic sales growth.

A slightly positive net currency and commodity effect was offset by higher RD&E net, while the net operating leverage effect, which include the impact on lower-than-expected organic sales growth, was minimal due to good operational efficiency.

Compared to prior year, as illustrated by the chart, our adjusted operating margin was 20 basis points lower.

The net operating leverage from the organic sales growth and slightly favorable currencies was more than offset by the planned higher investments in RD&E to support our future growth as well as the unfavorable impact from raw material prices.

Looking now for cash flow on the next slide.

Our operating cash flow of $179 million was better than last year, primarily due to positive timing effect in working capital.

Consequently, we still expect the full year '17 operating cash flow to be more than $800 million.

CapEx of 5.4% of sales was within our range of 5% to 6% and we still expect to remain within this range for the full year of '17.

Our capacity alignment cost for full year '17 is expected to be around 25 basis points, with a cash outlay of around $30 million.

The commodity cost increase in second quarter year-over-year was around $7 million and around $14 million year-to-date.

We now expect the full year '17 negative impacts of commodity costs to be around $30 million, which is around $10 million better than we expected in our full year '17 indication on April 28.

Looking now to our segment reporting on the next slide, while we have summarized our segments reporting for the second quarter.

In passive safety, organic sales growth of close to 1% was primarily driven by strong growth in Japan, India and South America, in particular, with frontal airbags and high value-added seatbelts.

This strong growth was negatively impacted by a currency translation effect of about 1.5%.

Consequently, consolidated net sales in passive safety declined by $13 million.

In passive safety, the 10.5% operating margin was a result of higher organic sales, operational efficiency improvement and lower capacity alignment costs, which were partly offset by higher commodity and RD&E costs.

In Electronics, the organic sales decline of around 1% was primarily driven by timing on new model launches in restraint controls and brake systems, which more than offset the positive active safety organic growth.

In addition, negative currency translation effect of about 2% resulted in a net consolidated sales decline of $20 million for the segment.

The 1.9% operating margin for the Electronics segment was affected by higher RD&E, mainly driven by head count increases and the negative impact from lower organic sales.

Looking now for outlook on the next slide, where we have a guidance, which is primarily based on customer call-ups for the third quarter.

Our organic sales are expected to be in the range of 0% to 2%, mainly due to strong growth in Europe, China, South Korea, South America and active safety.

Sequentially, our consolidated sales are expected to decline by 2%, mainly due to the decline in global LVP and seasonality effect from the second quarter into the third quarter.

As a result, we expect to achieve an adjusted operating margin in the range of 7.5% to 8% for the third quarter.

Year-over-year, the benefit from higher organic sales are more than offset by the negative impact on currencies, commodity costs, higher RD&E costs related to the ramp-up of capacity and new technologies for growth.

Sequentially, third quarter from the second quarter, the adjusted operating margin decline is mainly due to lower consolidated sales caused by the normal seasonality effect and negative impact from currencies.

Looking now upon the full year on the next slide.

Our full year '17 indications remain unchanged from February 2 for adjusted operating margin.

However, we lowered our organic sales growth indication to about 2% from about 4%, mainly due to lower demand in China and North America during second quarter and the second half of 2017.

These effects are mitigated by strong organic sales growth in Europe, Japan, India, South America and active safety, which is partly offset by lower sales in restraint controls and brake systems.

Our overall outlook for inflator replacement sales in 2017 remains unchanged from what we have mentioned last quarter.

As a result of improved net operating leverage, we anticipate an adjusted operating margin of around 8.5%.

Year-over-year, the positive margin effect from organic sales are more than offset by the negative impact on commodity costs, the higher RD&E and costs related to the ramp-up of capacity and new technologies for growth.

And summarizing our outlook on the next slide.

Our outlook excludes costs for capacity alignment and antitrust related matters and assume mid-July exchange rates.

Our net consolidated sales for the third quarter are expected to increase up to 2% as the currency translation effect is minimal.

The full year '17 indication is for a net consolidated sales increase of around 3%, which remains unchanged from April 20.

The lower organic sales growth of around 2% from the 4% earlier indication is offset by a lower currency translation effect of around 2 percentage points.

Based on these sales assumptions, we expect an adjusted operating margin in the range of 7.5% to 8% for the third quarter and around 8.5% for the full year '17.

Despite increasing our RD&E net to more than 7% from the high end of the 6.5% to 7% range, our full year '17 adjusted operating margin remains unchanged due to better operating leverage and lower-than-expected commodity costs.

For full year '17, excluding any discrete items, we expect a tax rate of around 30%.

In summary, these estimates indicate an operating margin within our long-term range, despite higher RD&E, higher investment to support future growth and higher commodity costs.

Turning the page, I will now turn it back to Jan before we go into the Q&A.

Thank you, Mats.

Before we open it up for Q&A, I would like to thank the entire Autoliv team for delivering another quarter of solid financial performance and for the continued relentless focus on quality, as we together navigate our company through both opportunities and challenges.

This concludes our formal comments for today's earnings call.

And we would now like to open it up for Q&A.

So I turn the call back to you, Lisa.

Thank you.

(Operator Instructions) We will progress to our first question today, which comes from David Lim of Wells Fargo.

The question I have is, can you give us a little bit more color on the North American sales drop.

I know that in the press release, you guys talk about platform shifts within GM as well as some color in China related to the underperformance.

And then I do have a follow-up.

In the North America -- and it has been a blend of some of the outface of some of the noncore products in active safety.

We have had some declines in some of our brake business, and also, some model shift that has been coming out of our sales mix on top of the declining light vehicle production.

So there is some of the mixes, but there is an underlying decline in the light vehicle production in North America.

In China, you can see that we have an outperformance of the light vehicle production.

And that is despite a lighter light vehicle production, where we were affected by some of the Korean automakers, in particular.

And whether that is related to the underlying condition between the countries or not, we cannot speculate in.

But that is the only one that we could see being specific to us.

And that was sort of a change versus what you saw exiting Q1, correct?

We saw a lighter light vehicle production.

We indicated in our release a little bit in April that we saw signs of some lighter trends in both North America and China, as you recall.

But it became lighter than what we thought in April.

Got you.

And then -- and my follow-up was on the vision order.

Can you summarize again how many vision wins you have.

I think it was Volvo, Mercedes.

And then now is it 2 additional -- and then one additional and then one that you just announced, is that correct?

We -- as we said, we participated and we took, we believe, last year about 25% or in that range.

But we haven't quantified that in that percentage terms so far this year.

We have said now that we have taken a number of orders.

We have one additional vision business this quarter.

And we have been taking a smaller, a couple of smaller other orders as well, including radars, in both Western and Asian OEMs.

And we also have one new Asian customer among us here, too, in this quarter.

We'll now move on to our next question today, which comes from Rod Lache calling from Deutsche Bank.

You mentioned an expectation of exceeding light vehicle production this year.

But I'm not sure I'm seeing evidence of that at least in the first half.

And those numbers included some benefit from the inflator replacements.

And it seems like you're talking about 2% organic growth for the full year.

IHS is talking about light vehicle production growth of 2%, so that's more or less in line.

And probably your number includes about 50 basis points from the inflator replacements.

So what am I missing as far as the outperformance in those numbers?

Well, what we are seeing here now is a slight lighter trend in the light vehicle production starting in quarter 2 in North America and in China.

And when we build our forecast here, as you know, we build it at least to the very largest extent on the imminent quarter on our call-offs.

We have tried to look into the rest of the year building it bottom up based on our own information, and thereby, we come to the range for the quarter because of uncertainty, difficult to project and to forecast.

And to the extent, IHS have taken into account that the same trend or not when they come out with their full year light vehicle production, the number remains to be seen.

We don't know.

We are seeing this in our numbers.

And as you say, it points to being in line to the IHS numbers.

But this is our best estimate that we have for the time being.

Okay.

Any preliminary comments on -- I presume that you're seeing an acceleration into 2018 just given that 3 years ago, there was -- the issues with Takata release started to accelerate.

So can you give us any color for what preliminary you'd be expecting in that time frame?

We don't have any good numbers to give you.

But as we have said, we should start to see the benefit from the strong order intake in 2015, starting in 2015 through '16 and now into first half of 2017, come through in Quarter 4. So that also means that we should start to see a better improvement in relation to light vehicle production in Quarter 4, which means more looking to outperformance in Quarter 4 and then continuing that into 2018 when we have a bigger launch portion of this order book.

Okay.

And just lastly, I think at last call, there were something like 25 LiDAR companies that are focusing on automotive.

And obviously, you guys made a selection here of Velodyne.

Is there -- is this an exclusive relationship in either direction?

Are you free to use whichever companies appear to be gaining momentum and improving the technology?

No, this is not an exclusive relationship.

And this will give us opportunities also to potentially work with others.

We have now signed this MOU with Velodyne because we believe this gives us an opportunity to get their technology, to get into volume production, and hopefully, get into volume production within 2020 and to be able to produce prototypes relatively early.

But we have opportunities to also work with others.

But now we have this company selected, and we believe their technology is very promising and have a technology that can also bear with us for the longer haul.

Our next question today comes from Emmanuel Rosner of Guggenheim.

So just first trying to get a final point around sort of the benefit from the new business launches.

So I know you've quantified in the past that you had been winning maybe an extra sort of 10 point of share on the passive safety or on the airbag side.

Over what sort of time period should we expect that to get reflected in your revenue buildup over the next few years?

We -- you should start to see this order -- increased order book starting in 2015 through '16 and into '17 to start coming through by fourth -- starting ramp-up in a smaller way in Quarter 4 through 2018 through 2019 and so forth, which means that you, in general, can say you have 24 months lead time or a little bit longer maybe from when you take the order to when you have started production.

So if you have orders taken in 2015, they start to come through in 2017 and orders in '19 and '18 and so forth.

Okay.

And then I guess, sort of like looking beyond that with the Takata assets being sort of finally purchased by Key Safety Systems.

Do you see a risk that some of these share gains could prove to be temporary in your discussion with automakers?

Is it sort of like a sense that looking that we give you extra share because we really need to take that business out of Takata, but now obviously, this sort of like -- the assets at least are back in business more seriously?

I think our relentless focus on quality here and our execution and performance is the best safeguard to keep this business.

I am not fully sure also that the discussions with Takata, KSS and their agreement is fully signed and sealed.

And whether that is up for further discussions, I cannot judge.

The only thing I can know is that we get customers as of very recently still asking us for support and asking us for help.

So what's going on there, we don't really know.

You also saw that there was another recall on a one type of a desiccant inflator here coming out and what implications that will be, we cannot even comment on.

So I think our product offering here turns to be a reliable one, and it turns to be very interesting for customers.

And then just a very quick point on just the partnership on LiDAR with Velodyne.

So you're mentioning this production readiness during 2020.

Are you able to comment on what sort of like LiDAR technology you're targeting by then and then maybe sort of like basic price point?

We are -- they will supply their ASIC engine to us, their multi-chip module, their MCM, their ASIC engine.

This is laser and detector.

It is for rotational and nonrotational designs.

So that's what they will provide us as of right now.

It's a semiconductor-based technology.

And we will also, of course, work with Velodyne for future technologies.

And as we have a relationship with them, we hope and we believe that this could also lead to next generation and coming generation technologies.

But as I said on the earlier question here, this is not an exclusive deal.

So we will keep our eyes open.

But now we have this relationship, and we are very happy with it.

Now we will move on to our next question today, which comes from Vijay Rakesh of Mizuho.

Just a couple of questions here.

When you look at the December quarter, I know you said you see passive safety picking up on the airbag side.

Any thoughts on -- when you look at it, any thoughts on how that should grow sequentially or year-on-year versus what you've been doing?

And also, should that imply the operating margins for the full -- for December quarter should be 9%-plus, should be north of 9%, given you're still keeping that 8.5% for the full year?

We have given the guidance for the full year, and we have given the guidance for the quarter.

You can reverse-engineer and come to the implied margin for the quarter.

We don't have any other guidance to give to you for the fourth quarter today.

The only thing we would like to mention here is, again, the strong gross profit coming out of Quarter 2. We have actually, in fact, record gross profit for any second quarter in the company's history.

We have the strongest gross margin since 2010, which points to an increased operational efficiency in our business.

This gives us opportunities, of course, to invest in future technologies in electronics area.

And as we go, we have also said that R&D expense in passive safety will peak during second half of the year.

We've continued improvements in the operational efficiency.

You should then look to, potentially, for the margin expansions in the passive safety business.

But we will not give any guidance more on that here now.

We might comment on this in the Capital Market Day, and then of course, for 2018 in the earnings call in February.

And just one more follow-on.

If you look at the buybacks you did some in the second quarter, I believe you still have, what, $3 million-plus of buyback authorization left.

Any thoughts on how you see capital returns or buybacks for the rest of the year?

You are right, we still have a mandate of $3 million.

So that's correct.

And we did buybacks of $157 million in the quarter.

And this is -- I mean, this is a tool we can use in order to normalize the leverage ratio.

And as you know, I mean, we're not guiding on -- when it comes to buybacks, but we're still in the lower end of the range, even though we increased it in the quarter.

Our next question today is coming from Victoria Greer of Morgan Stanley.

Just 2, please.

And firstly, on the China NCAP ratings adding passive safety in there.

Could you give us a bit more detail around what the ratings are and the timing?

And also, just remind us what your content for car is in China in passive versus overall.

And then I wanted to just ask on the RD&E.

Obviously, it's been higher in the quarter, and you're expecting them to be higher for the full year.

Could you break down for us how much of the increase is in passive, how much is in active?

And I guess, wondering a little bit on the active side given that the top line is still a little bit slower, you have got visibility for 2019 acceleration there, but maybe not 2018.

And I guess, my question is, why not just hold off on some of the hiring in the active business for now, while the top line growth is a bit slower?

Yes.

When it comes to the China NCAP, as I'm sure you know, it is valid, and the update will be valid from July next year.

There's been some minor updates recently.

But overall, it's been confirmed that the new rating clearly will provide much more stringent and strict requirements on frontal and side protection, not least in the rear of the vehicle, for the first time include both active safety and pedestrian safety.

And to get a 4 star or more, you will need to have offered those types of products.

It's not really changed much from what we said last time around.

To give you a figure on exactly what this will mean in terms of content per vehicle is, at the moment, not really possible considering that there are so many different ways to -- for the OEMs to choose how to achieve the required status that is necessary.

So unfortunately, we cannot really give you that figure.

We are trying to find out, and we might come back when we have a figure to give you.

But at the moment, we cannot.

And just where you are today?

Because you're lower today, I think, in China on content per car or the industry on passive.

Where is the gap today between China and Europe?

Content per vehicle today is around $210 average in China.

It varies between Chinese OEMs and global OEMs, where you have -- Chinese OEMs may be in the range of $140, $150 per vehicle, and you have global OEMs, $270, $260 per vehicle.

But the average is $210.

When it comes to the R&D, to your point there, the split between more than 1,300 people that we have hired is around 754 Electronics and around 550 for passive safety.

When you look to the passive safety engineering recruitments, it's more or less all related to execution on our order book, which means application engineering.

When you look to the recruitment in Electronics, it is a split between technology development, and also, execution on our projects.

And about 3/4 of the amount of the people, 3/4 of the 750 are software engineers to be mentioned here on the Electronics side.

To your point about delaying hiring of people, maybe that would be a good idea to wait for the revenue to come.

But this is a war of technology development.

This is to stay in the lead.

This is -- if we would wait another year or so before hiring people and developing, we would fall behind.

We have no other opportunity but to keep up the pace here.

If we want to stay in the lead, if we want to continue to develop our product, we better do it now, because otherwise, competition will run ahead of us.

And unfortunately, you don't see the benefit from it until later.

But that's how it is with this business.

Either you try to fight -- you invest in it or you don't.

That's our opinion.

Thank you for the China content per car for passive.

Can you just remind us versus that $210?

Where is that today in Europe and the U.S.?

In the U.S., it's -- and in Europe, it's ballpark around $400 per vehicle, more or less the same.

And we'll move on to our next question, which comes from Chris McNally of Evercore ISI.

Just a quick one, maybe I missed it.

In terms of the new guidance for fiscal year '17 from an EBIT margin perspective, so you reduced the organic by 2% and you raised the higher R&D.

You mentioned an offset of commodities of $10 million.

What else is the delta?

Because you would think the first 2 could be, I don't know, $50 million weighing on the operating margin.

So what were the other positive offsets to keep the EBIT margin the same?

I mean, it's very much due to what Jan said when it comes to the gross margin and the gross profit.

I mean, what we can see is a higher efficiency and kind of a better kind of operational leverage that will compensate.

And that will be more clear, I mean, if we -- like Jan said that we will start to see the higher volumes coming through by the end of the year, and that will have an effect in our plans.

So it's very much due to operational efficiency, the leverage.

Okay.

That's great.

That's very clear.

And then just one real quick one.

The R&D at 7%-plus.

How should we think about that in 2018, because obviously, you mentioned 1,300 engineers.

So some of these are fixed costs.

Should we model 7%-plus sort of going forward as the new 6.5% to 7%?

We haven't given any guidance on this one.

We are saying that the peak is being reached sometimes during second half for PAS (Passive Safety).

And then you should see the increased growth coming from the launch of the order book that we have talked about here in the call that will start coming through throughout 2018.

And what that will mean in terms of R&D in relation to sales for the exact number you're modeling, we may elaborate on the Capital Market Day, but at the latest in February.

Just a reminder that there's a limit of maximum 2 questions per participant.

We have a long queue of callers who want to ask questions.

So please respect that.

Our next question today comes from John Hernander of Nordea Asset Management.

John Hernander from Nordea here.

I have 2 questions.

The first one comes back to active safety and your comment around orders.

I mean, your previously elected full product offering, but expanded rapidly in the beginning of '16, and you mentioned, as you said before, that you gained around 25% market share on the orders in 2016.

With your comment in the report that you have lower order intake in the first half despite your customers being more comfortable, I guess, with your product offering, what's the reason for the weaker development in the first half given that they'll have these products out in the market now for more than a year?

That's the first one.

And the second on the passive side, coming back -- I'm sorry to come back to the market share gains comment here.

But just trying to quantify and understand it assuming that you've gained 10%, 12%, 13% market share, it should mean around $3 billion more sales over a platform period.

So if we assume around, I guess, 6 years lifetime on a platform, it means that your organic growth contribution from the market share gains alone could amount to around at least some 5%, 6%.

Is that a ballpark number?

I mean, of course, it's going to be gradually ramped in, but -- And how should we think of leverage on that sales going forward?

You looked at a weaker -- as you said that you expected weaker order intake.

We have taken a number of orders, and we also said that the orders we are targeting here and that we are assuming into are coming here towards the end of this year.

Some -- still, I would say that for us, with the product offering that we have a blend of radar, a blend of vision and ADAS controllers, et cetera, the number of available orders is still much smaller than what it is in passive safety.

So it's more like you have the customer relation, you're targeting an order, you work on prototype cars, you work on specific platforms and you target the orders.

Then you don't miss -- you don't win them all, you lose some and then you target to win the ones that you're focusing on, of course.

For us, now this is -- happens to be so that the wins that we are looking to are very much centered here in fourth quarter.

And that is then remains to be seen when we conclude the year or -- whether we are behind or weaker or not.

That remains to be seen when you conclude on the year.

We have a good product offering.

We have a good -- and good relation and good demos with a lot of our customers so far.

So that's what we can comment on, on the order intake as of right now.

On the passive side on the forecast and the launch of the products and the launch of the order book here, I'm sure we'll be able to give you some more color on this one when it comes to the Capital Market Day.

I'm not sure we have a lot more information to give today.

But...

No, and I think, it's a fair question as well, looking on the leverage, on the additional volumes, and I mean, as we have said previously, when it comes to investments and what we're doing for to meet this from a capacity point of view, we are not investing that much when it comes to brick and mortar.

We are talking more of new lines, meaning that we will be able to increase volume in existing facilities to a large extent.

So we feel confident when it comes to the leverage, but I can't give you any numbers on that.

Our next question today comes from Brian Johnson of Barclays.

Yes, a couple questions sort of on passive and active.

On the passive side, any evidence of I mean, a couple things, spill-over from the progress on this Takata-KSS deal around your market shares or -- second question kind of within the passive safety, on just the pricing firmness and pricing discussions in the market.

There is no change, you can say, on the -- there is nothing new than what we have seen for some period of time now with respect to the Takata case or less or more or something.

There hasn't been any changes as a consequence of the KSS and Takata discussions.

We have not seen it.

When it comes to the pricing and the pricing pressure, there hasn't been yet any changes there either.

It remains to be seen whether that will be any difference going forward.

I'm not so sure about that.

We're still seeing the same pricing environment of 2% to 4% that we have seen for a long period of time.

Okay.

And in terms of Zenuity, any impact of kind of Volvo's headline-grabbing announcement on EVs and hybrids?

We all thought it was (inaudible).

There were recent moves for an all-electric vehicle in China and just the sort of more aggressive posture Geely and Volvo seem to be taking together towards next-generation autos?

I guess, the power train decision ongoing from a combustion engine to EVs or hybrids is not really controlling their -- the level of autonomy in the vehicles.

So I think their focus and their vision is to have no one killed in a car from 2020 and onwards.

And that's their target that we are looking to support in terms of a safer car through a better ADAS system and through a high level of autonomy in Zenuity.

Okay.

But to say it is affecting in all other plans at the pace at which they're going to roll out autonomy...

We haven't seen any.

From the horizon where we can be from Zenuity -- speaking for Zenuity here for a change.

And from Autoliv side, we have not seen that there would be a shift in focus from autonomy to electricity in Volvo.

We cannot see that.

Yes, I meant the opposite.

Are they just trying to be more aggressive overall with next generation technologies?

Yes, that you can say.

I think that there has been, if look to, you should ask the Volvo team about.

But they have only 4-cylinder engine in their new fleet of their 90 vehicles, et cetera.

So there has been a move towards probably smaller engines or at least in volume size, and that for some time also the hybrid strategy.

And you can see that's probably our next step coming from the Volvo side now.

Okay.

Just final question because it relates to Geely-Volvo.

Would the Chinese parent become a customer of Zenuity as well at some point?

The Chinese, if they're going to be a customer to Zenuity?

We sincerely hope so.

We'll now take our next question today from Erik Karlsson of Bodenholm.

The first one is on the incremental costs in R&D and costs related to the ramp-up.

And you made some great comments on the gross profits and it's not yet translating to record EBIT, of course, for those good reasons.

And we don't know exactly what sales volumes would be in the future, of course.

So it's hard to relate it to sales.

But I would love to hear your views on just these costs from an absolute level.

So at what point do you think the growth in RD&E and ramp-up costs will slow from an absolute perspective?

As we've said, we believe that the peak will be reached in passive safety already this year.

And when it comes to the Electronics part, it is depending on the steps we see in future orders as I alluded to a lot of our order intake is back-end loaded here, also, their technology development that we can see, we can benefit from.

You know as much as I that this world of electronics, autonomy and Level 4, Level 5 is including a lot of collaborations, new technology.

We are gaining LiDAR technology here now.

Maybe there is connectivity around the corner.

There may be other things that is coming in this space.

So at some point in time, the strategy for us is to say that this is for us and this is not for us.

But we have had LiDAR on the pyramid for some time.

And now we have taken that onboard, which is also a part of the increased effort now.

So to your point, I cannot answer in absolute terms for the totality, as the totality includes Electronics.

It depends on the future a little bit.

For passive safety, it is this year.

And if we take the Electronics out -- appreciate your comments there regarding uncertainty and order intake.

But is there a risk -- I'm sorry to ask a negative question, but is there a risk on the passive side that you overshoot previous projections and you have to grow costs there more than previously anticipated for some reason?

We don't think so.

There is always risk for a lot of things, but we don't think so.

This is our best estimate today based on what we see currently in the flow of orders in the passive safety.

And we have been now running strong order intake for 2.5 years.

So we don't think so.

This is the best we can give you today.

And one more, if I may, on the order intake.

Is there any reason, in your opinion, that the dynamics that you have seen over the last 13 months in order intake would not continue at least to the end of the year?

You cannot say that either.

I'm not so sure we will see a lot of big changes.

It's hard to comment.

As I said before in this call, I don't know if you have been along all the time, but the discussions with KSS and Takata may or may not be concluded yet.

And as I also said, we get still calls from customers asking us questions about future support, et cetera, in this case.

So we don't know.

We will not speculate into it.

We can only see that through second quarter, we have had a continued strong order intake.

We'll take our next question from Kai Mueller of Bank of America Merrill Lynch.

Just 2, if I may.

So first one on the organic growth.

So in the beginning of the year, we always said and even in the beginning of the call, you said the pickup in terms of the second half of the year.

Now I feel it's much more the fourth quarter given you guide to flat to 2% organic growth.

Is it really -- is it product related?

I mean, you said the call-offs haven't been great with your customers.

Is it just options that they're not putting in?

Is it broadly only the markets that is here?

And just trying to understand what the first question was, where is your outperformance coming from.

And I feel like the ball has been pushed back every quarter.

And in that line as well, your organic growth then playing into the margin, so you kept your margin unchanged.

We are running at 8.4%.

You're guiding for 7.5% to 8% in Q3.

So you need to really boost in Q4.

But just to understand we had on this other line always very positive numbers, again, this quarter $8.5 million.

Can you just explain again what exactly that is and give us some feeling if, for the full year, we should expect that line to be positive that could actually be supporting to the margin?

Or is it also a shift in terms of Electronics?

Because Electronics continues to be relatively weak.

Will we ever see that margin coming towards a level where we are at passive at the moment?

If you take the first part of your question, the pushed back, you see a better performance if you look to this in the fourth quarter.

And of course, something of it is coming depending on the range, coming from the launch that we have been communicating, the start of the launch of the order book that we should start seeing in fourth quarter coming.

So that is a part of it.

And then we see a weaker light vehicle production in what we can see from call-offs from customers in North America and in China.

But the visibility that we have is, of course, less and less the further out you get into the year.

So our visibility in fourth quarter is less than in third quarter.

If you look to the Chinese effect, in particular, you should also remember that the tax effect of the smaller car is reaching to the end of this year.

We had a 5% tax and then now we have 7.5% tax on smaller engines, and then going back -- supposed to go back to full tax of 10% from January 1, 2018.

That has the tendency to boost the car production and before the tax incentives are over.

So that should also point to somewhat stronger quarter maybe in China if that pattern still holds water.

But there is an uncertainty here.

And I guess, this is what we see bottom up when we look upon it, and that is what we've tried to reflect here today.

On the margin side, maybe, Mats, I leave that question to you a little bit.

Maybe if you could repeat, was it other income you're referring to?

Or...

Yes, exactly.

I mean, we've seen in Q1 a positive one this time.

Again, I remember it was something to do with earn-outs from the latent acquisitions.

Can you just give us a bit of color before you always have a negative number, could this be positive?

And is that really your margin booster this year and sort of maybe saves you?

No, it's not.

That's related to kind of onetime, and as you said, the MACOM effect in the first quarter.

In the second quarter, you have probably seen that we have a higher reported margin compared to the adjusted margin.

And that's not the normal case, so to speak.

So the biggest single item in other operating income this quarter out of $8.5 million is related to an adjustment of the restructuring provision that is positive.

But that is, as you can see, adjusted after the reporting -- reported operating income into the adjusted operating income.

So in terms of adjusted operating margin, it's a net 0 from that one.

And on top of that one, I mean, we have a onetime (inaudible) adding up to be a little bit positive in the quarter.

But you cannot expect this kind of development throughout the year.

Okay.

And then in terms of the Electronics margin?

On the Electronics margin, we are not guiding.

We have said for the long term that Electronics margin -- there's no reason why Electronics margin should not be at least the same as the passive safety margin.

We don't see different fundamentals here from the business that we should be there.

But we have not quantified well.

Okay.

But once you hit your target of $1 billion in sales, should we get towards there?

Or is that still far off?

As I said, we have not given you -- we have given you an indication of targets for $1 billion, but we haven't given you a margin indication.

It depends on the order intake.

We may or may not elaborate a little bit more on that in the Capital Market Day.

(Operator Instructions) Our next question today comes from Hampus Engellau calling from Handelsbanken.

I have more of strategic questions on active safety.

If I remember, at your last Capital Market Day, you presented a map of different technologies and you highlighted where you had the technology and where you were looking at either acquiring it or developing it on your own.

And given the 2 announcements, the NVIDIA and the Velodyne collaboration, I was interesting to hear, is this any specific technology that you feel that you're now missing to take the next level up to Level 4 and Level 5 autonomous driving packages?

That's my only question.

There are always specifics here, but I think we have taken very important steps, with a very -- one of the world's leading hardware suppliers for the automotive industry with a lot of competence will be useful for Autoliv, but also for Zenuity with our cooperation with NVIDIA.

That is a very big step we are taking here.

We have the other one that has been some questions throughout the quarters here around LiDAR, what we're doing, and now we're filling that gap, too.

There is, of course, another thing that is probably standing around the corner and that is connectivity.

How to deal with connectivity in the auto sector?

And in particular, maybe in some years out when 5G is coming and you have a different opportunity with bandwidth between car-to-car communication and car-to-road type communication and how to incorporate that.

But that might take some further years out before that is coming immediately to our table.

But it is a thing that we need to monitor and that we need to be prepared for as, I guess, the rest of the industry as well.

Our next question today comes from Ashik Kurian of Jefferies.

Just one question coming back again on your updated growth guidance.

Now you do flag weaker production in the second half in China and North America.

Just wanted to confirm whether is that in particular to any specific OEMs or based on your exposure?

Or is that a broader market weakness that you're seeing?

Or in other words, if the IHS forecast for the second half falls, then should your organic growth be higher than what you're currently guiding for?

As we said, it's always a blend of specifics, et cetera, but if you look to the IHS number as of July, they are down both in North America and in China.

And they were down, also, for June time frame.

So light vehicle production has been down.

I also mentioned that we have seen some specifics in North America related to some platforms being phased out where we didn't win replacement contracts many years ago.

And then also, the effect in North America from the GPS modules.

I also mentioned the specifics around a Korean carmaker in China that also affected us in second quarter.

But a lot of it was attributed to the lower light vehicle production.

And we see a clear trend here continuing, not really huge, not really big, but we see that we warned for in April, also continuing here into third quarter.

That's why the range.

If light vehicle production is rebounding, I'm sure it will be reflected in our numbers, too.

We'll now take a question from Joe Spak of RBC.

I guess, just a quick one on the buyback.

Why did you -- what was the rationale for restarting it all of a sudden.

I mean, the leverage hasn't really changed in the quarters living up to it.

So just wanted to better understand the rationale there.

No.

I mean, it was more kind of a normalization to get within the range.

Because if you remember when we reported the first quarter, we ended up on a leverage ratio of 0.4.

And we had our target of 1, with a range of 0.5 to 1.5.

So that is, first of all, to get within the range.

Okay.

I thought you've been sort of at that 0.4 for a little bit, but I can go back and check my numbers.

And then I guess, just one more on Velodyne.

So you are taking their ASIC.

It sounds like you're doing some of the software around it.

It sounds a little bit similar to, I guess, what you did with full year on night vision.

Is that a good guide at all for how much you're going to have to spend now on the software side to get that right?

And if it is, can you remind us how much you had to invest on that side to get that product to market?

I'm not sure we have any good number to give you here on the specifics on the investment.

But some of the increased investment we are seeing here in terms of engineers is also to prepare for this.

But we may come back to this a little bit on the Capital Market Day.

And just a follow-up.

Was there a consultation with Zenuity JV before you made such an investment?

On the LiDAR...

Partnership, yes.

We have a close relationship in talking about it, but we have had LiDAR in our pyramid that Hampus referred to before in the call.

We've had that long before Zenuity.

So this has been on our radar screen here for quite some time.

We'll now take a question from Ryan Brinkman of JP Morgan.

I'm just curious what gives you the confidence to maintain the margin outlook for the full year given that RD&E cost is tracking higher and organic growth is tracking softer.

What are the offsets that you see?

Is it currency, non-RD&E cost containment, product mix or some other factor?

I would say, it's mostly related to our operational leverage and what we have seen now in the second quarter as well as Jan alluded to as well.

I mean, we have a record high gross profit, and we have a very healthy gross margin as well.

So it is due to operational leverage and the kind of the operational efficiency we can see in the system, so to speak.

That's the big kind of mitigating factor to the negative.

We'll now take a question from Brett Hoselton of KeyBanc.

Just a quick question on Zenuity.

Can you talk about longer-term cost trends.

In other words, you've got fiscal '17 around $35 million.

Do you expect that to remain at that level for a few years as you continue spending?

Or do you anticipate that number to go up or down?

And in kind of what sort of a timeframe?

We haven't given you any longer-term guidance on this cost level.

We said in the previous call that we believe we should have $15 million a quarter.

Now with one quarter being a little bit lower, for the rest of the year, we believe it's going to be in the range of $15 million.

And beyond that, we will have to come back then into '18 and give you an updated number.

And we'll take our final question today from Agnieszka Vilela calling from Carnegie.

Just one question for me, also a strategic one.

Does your involvement in the JV with Volvo cars mean that your development within Autoliv for active safety would change?

I mean, doesn't it make sense that Autoliv would, for example, focus more on developing cameras and radar hardware and not spend too much money on developing the software, whereas the software development would -- could end up within Zenuity?

Well, that's a very good question.

I think we are working very tight today.

And as of today, the setup is that we work with the camera development and with hardware-related software development, and they work with a decision-making software development.

We have a very close cooperation and the whole purpose of this was to have it more on a pixel-based development rather than a preprocessed output from the camera.

And that would bring our development team in Autoliv closer to the development team inside Zenuity.

And that would be the best way to bring the efficiency out of it and probably also the result.

But to set up here as of today is we continue in Autoliv to develop it and then Zenuity develop their decision-making software.

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

I would like to turn the call back to the speakers for any additional or closing remarks.

Thank you, Lisa.

Before we end today's call, I would like to mention that our third quarter earnings call is scheduled for Thursday, October 26, 2017, and of course, also, our Capital Market Day is planned for September 14, 2017, in Frankfurt.

Please follow on our corporate website for more information around this and invitations and further details.

I would now like to thank everyone for participating in today's call.

We sincerely appreciate your continued interest in our company, and goodbye for now.

Thank you very much.

That concludes today's call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.

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