Autoliv, Inc. Q2 2009 Earnings Call Transcript

Jul.21.09 | About: Autoliv Inc. (ALV)

Autoliv, Inc. (NYSE:ALV)

Q2 2009 Earnings Call

July 21, 2009 9:00 am ET

Executives

Jan Carlson - President and Chief Executive Officer

Mats Wallin - Chief Financial Officer

Mats Odman - Vice President of Corporate Communications

Analysts

Tim Rothery - Goldman Sachs

Rod Lache - Deutsche Bank

Thomas Besson - Bank of America-Merrill Lynch

David Leiker - Robert W. Baird

Adam Brooks - Sidoti & Co

Keith Lester - One Investment

Essen Peterberg - SEB Enskilda

Himanshu Patel - JPMorgan

Brett Hoselton - KeyBanc Capital Market

Richard Howe - Polaris Capital

Operator

Good afternoon ladies and gentlemen and welcome to the Autoliv’s Conference Call. My name is Louise; I will be your coordinator for today's conference. For the duration of the call you'll be on listen-only, however, at the end of the call you'll have the opportunity to ask questions. (Operator Instructions).

I am now handing you over to Mr. Jan Carlson, President and CEO to begin today’s call.

Jan Carlson

Thank you, Louise. Welcome everyone to our presentation for the second quarter results. Here in Stockholm, we have our new CFO, Mats Wallin, and our VP, Corporate Communications Mats Ödman and me Jan Carlson, Chief Executive Officer.

Mats Wallin has been with the company since 2002, and served as Corporate Controller. Welcome Mats to your new role here in Autoliv. At the same time I would like to extend sincere thank you to Marika Fredriksson for her contribution to our company and also wish her the best of success in her new [role] as CFO for Gambro.

As usual we will start with a review of the quarterly results including an update on the Action Program, followed by the outlook for our company in the near-term. After the presentation, we will remain available for questions. You can find the slide material through a link on the front page of the Autoliv corporate website on the financial report.

Moving on to the next page, we will find the safe harbor statement, which as you know is an integrated part of this presentation. This presentation includes some non-US GAAP measures under reconciliation of the US GAAP are disclosed in the quarterly press release and the 10-Q filling.

Moving on to the next page. During the quarter global light vehicle production was 4 percentage points better than expected and up 17% sequentially from quarter one. In addition the quick implementation of our actions to right size our company has resulted in further cost savings with the best our margin improving effect than expected.

As a result, we did not only meet, but exceeded our guidance for the second quarter, generating an operating profit before restructuring charges.

In the second quarter, the net headcount reduction was 200; however the gross reduction was close to a 1,000 permanent employees. The gross headcount reduction of indirect staff was almost 600 and close to 400 were in high cost countries.

Despite 35% drop in light vehicle production in our major market, we managed to generate positive free cash flow of close to a $100 million. This was mainly due to our actions and continued control over working capital. In addition, our tight scrutiny over any capital expenditures continues. This strong cash flow enabled us to pay down close to a $100 million of net debt.

Moving to the next page, we have the financial summary for the quarter. Our sales of almost 1.2 billion were more than 5 percentage points better than expected in our guidance. This was mainly due to various European vehicle scrapping incentive programs and a steep recovery in China and a better platform mix in North America.

New business also continued to contribute to the favorable outcome. For instance, the Ford F-Series along with the Lambda and [Theta] platforms and also the Toyota Rav4. Excluding restructuring, we managed to achieve an EBIT margin of 1.7% despite an organic sales decline of 28%.

And lastly, our free cash flow was significantly better than expected at the beginning of the quarter. It was even 9 million better than for the same quarter last year, when sales were 0.7 billion higher. So overall, we are pleased with our profitability and cash flow improvement especially in today's market condition.

If we move again to the next page, we have the details behind our strong cash flow performance. Our free cash flow of $95 million was supported by a 72 million reduction in working capital. More than half of this was due to inventory reduction.

In addition, we have continued to cut our capital expenditures if generates a positive spread over depreciation and amortization and we expect this to continue. We now estimate our CapEx to be between $150 million to $200 million this year -- $150 million to $200 million this year.

Also, we were able to minimize the direct impact of GM and Chryslers Chapter 11 filing to be around $1 million combined or less. On the other hand, the environment remains uncertain as another tier1 customer and once again significant supplier recently filed push after 11.

Turning the page, we have the latest second quarter light vehicle production figures from CSM and J.D. Power. The quarter two annualized run rate of close to 55 million vehicles was up 8 million from the first quarter run rate. In NAFTA and Western Europe, where we generate more than 70% of our sales, light vehicle production declined by 35%. In rest of the world, we saw a net decline of close to 1%. A decline in Korea of 22% was mostly offset by increases in China and India.

On to the next page. We see that the US light vehicle inventories had been reduced to 63 days. This represents approximately 2.2 million vehicles. This would suggest that the OEMs have now adjusted light vehicle inventories to be in line with their current [quarter].

Moving on to the next page, we have the Autoliv production figures for the second quarter. The volumes in our seatbelt business decreased by 25%. This was essentially in line with globalized vehicle production, thanks mainly to new business and to China.

For sight systems, we continue to outperform the Triad, where there is a significantly higher penetration than in rest of the world.

For steering wheels and frontal airbags combined, the decline was essentially inline with the Triad. And for electronic control units we outperformed the global light vehicle production and this was mainly due to market share gains in North America and new business in China. We believe our overall market share remain relatively unchanged after this quarter.

On to the next page, we have the gross margin trend. Low organic sales had a negative effect of more than 610 basis points. However, we were able to compensate 160 bps primarily in labor and other cost savings. In addition, favorable currency and commodity effect reduced our cost by 60 bps combined.

In this way the declining gross margin was limited to 390 basis points despite an organic sales decline of 28%. And I might mention that the impact due to supply disruption was limited to $1 million during the quarter.

Moving on to the next page, we have the operating margin, and the dash line on the slide you can see here for 2008 and 2009, excludes restructuring charges. The decline in sales effect on our operating cost was 440 basis points. This is in addition to the 390 basis points from the previous slide.

Actions to reduce SG&A and RD&E generated approximately 190 bps of margin improvement, and our total margin improvement effect was 3.5% including the savings on the gross margin. We thereby achieved an operating profit of 1.7%, excluding restructuring charges.

Moving on the next page, we have the summarized results achieved so far by the Action Program and other actions In second quarter, we accrued $32 million related to further restructuring activities, and we now have $59 million accrued on the balance sheet.

During the quarter, the cash outlay was close to $21 million. As we continue to evaluate our global capacity footprint, we have found more improvement opportunities. And these may result in more than $75 million in restructuring costs than we have anticipated so far for 2009. We will come back to you after the third quarter report with more information about this when we have completed the evaluation.

Turing the page, we have our associate development. During the second quarter, we have reduced our net headcounts by more than 200 to 33,400. This includes an increase of temporary manufacturing labor in low cost countries for volume increases in China and India. Therefore, these changes in headcount mix have, of course, reduced our rate even going further.

Since June 2008, when we introduced the Action Program, the headcount reduction net has been 10,000 or almost 25%. One quarter of these 10,000 were indirect staff, approximately 68% were permanent employees and more than 50% were in high cost countries.

Currently, close to 11% of our workforce are temporary employees, while 55% of our workforce are in low-cost countries. We will continue adopt and right-size our manufacturing footprint to the different trends in light vehicle production in each country and in each region.

Moving on to the next page, we have the commodity impact on our business. The commodity industries remain well below 2008 levels and near levels last seen in 2005. For the second quarter, we had a net positive effect of $3 million. Considering the lower volumes, we still anticipate a benefit of $50 million for commodity prices for full year 2009.

Moving on to the next page, we have updated our liquidity position. Our combined cash and revolver capacity of $1.2 billion remains unchanged from quarter one, despite paying down almost $100 million in net debt during the quarter. As illustrated, we have used $600 million of our cash to pay down the revolving credit facility. Our upcoming debt maturities until 2012 are close to $300 million and we could therefore repay the full amount from our cash on hand. In addition, as you know, we do not have any financial covenants on our debt.

During the quarter, we issued a $77 million medium-term note and the EIB; the European Investment Bank Board approved our €225 million loan application. However, the final documentation remains still to be completed.

Therefore, we continue to have a significant liquidity cushion even if market conditions were to worsen or for potential industrial consolidation opportunities.

On to the next page, we show in the table to the right, how the global light vehicle production has been cut each successive forecast division, except for the recent update. As we have highlighted during our quarter one earnings call production perhaps has been persisted for the last 15 consecutive months.

And there is general industry belief that we have seen the low point in the global light vehicle production during quarter one. However, recoveries do not get well in trends in all regions and this could cause further market uncertainty and turbulence in the future coming quarters. For example it is unclear what the full effect will be from various vehicle scrapping programs throughout the world.

Turning to the next slide, looking specifically at the third quarter, we have the latest global light vehicle production figures. The forecast of 13.6 million vehicles is 14% below 2008 levels. However, when looking at the sequential trend from quarter two, light vehicle production is essentially flat despite the fact that third is seasonally weak quarter.

In NAFTA and Western Europe, combined the anticipated decline is 16%. China and India are the only exceptions to the downturn they are expected to show production increases of 18% and 5% respectively.

Turning to the next slide, we have the latest full year, global light vehicle production. As illustrated 2009 is expected to decline 19% from 2008. For our two largest markets combined and the Triad, the decline is almost 27% versus prior year.

And then to the next page, we have our financial outlook for quarter three and the full year 2009. In quarter three, organic sales are expected to decline between 15% and 20%, while consolidated sales are expected to decline between 20% and 25%. Given the current exchange rates, excluding restructuring charges, we expect quarter three EBIT margin to be positive 1% to 3%, excluding restructuring charges.

For the full year 2009, we anticipate our organic sales to decline 3% to 5% less than the light vehicle production in Western Europe and NAFTA. This implies an organic sales decline of 22% to 24%, assuming the forecasted 27% light vehicle production decline.

Based on these assumptions and the customer call offs, we should generate a small profit resulting in an operating margin of at least 1% for full year 2009, excluding restructuring charges.

So, to summarize thanks to our actions and the improving light vehicle production, we are already back to profitability, excluding restructuring costs and we are generating a positive free cash flow even in these difficult economic times.

Moving to the next page, this concludes the formal presentation of today's call. But, before we start the Q&A, I would like to turn to the entire Autoliv team to acknowledge and give serious thank you for your support and your commitment to quality, delivery and safety during these tough times. Thank you all for an excellent job.

We would now like to open up for questions and I leave the work back to you Louise. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Tim Rothery from Goldman Sachs.

Tim Rothery - Goldman Sachs

Two quick questions. When we look at your full year guidance and given what you have now given us third quarter guidance and obviously what you have reported in the first-half. It looks fourth quarter margin should be in the region of 5%, possibly even closer to 6% in the quarter.

Is there any thing in particular in terms of timing of benefits coming through in the quarter which is likely to make that particularly strong and how much should we use that as an expectation or as base for run rate going in to 2010. And then my second question is just in terms of CapEx, first half around 70 million, just what's your expectation for the full year now and also thoughts in terms of how this might ramp up in 2010.

Jan Carlson

If we look in to you start with your first question there and talk about the fourth quarter, I think your calculation of the 5% to 6% eventually is a good sanity check of our own calculation to start with. So I think that's probably not so far out, if you reverse calculate what we have presented here.

And thinking about fourth quarter, fourth quarter is normally and always seems so far is a seasonally strong quarter and you have many project that is finishing up, you have engineering income et cetera. So and seasonally you have a fourth quarter effect that we also expect to happen this year. If we assume that we are now having the continued raw material benefit that will continue also in the fourth quarter, that stable prices on raw material, we would benefit from that in fourth quarter.

And we have light vehicle productions up on a run rate of 58 million vehicles compared to the 53 million vehicles that we are seeing in or 55 million vehicles that we are seeing in quarter three and in quarter four. So you have this step-up in sale, which we should be able to take benefit from.

And we have of course the Action Program that will continue to generate effect when we go along sequentially. We have talked about an annual benefit on the Action Program of around $300 million for the full year and we have seen the benefit of the Action Program so far of $75 million for second quarter. So that is of course the components that should build up through the fourth quarter part of the 2009.

Tim Rothery - Goldman Sachs

So to take, maybe so I am being sort of stupid a bit, if you were to see a 58 million run rate next year barring the seasonal impact from engineering income then there is nothing strange in terms of the fourth quarter margin?

Jan Carlson

Let us do so, that we come back to that when we come further on here after fourth quarter or later on here during the year. And we normally do not give indications this early in the year for the following year. But we of course expect the effect of the Action Program to stay where they are of course.

Then coming back to your second part of the question, the CapEx level; we have said in our previous earnings call close to $200 million for the year 2009. We have revised that figure is slightly down to $150 million to $200 million for 2009. Looking ahead, we have said that historically CapEx has been round 5% of sales. We have revised that figure to be slightly north of 4% of sale looking forward. So that’s more to that level you should look upon.

Operator

Our next question comes from the line of Rod Lache from Deutsche Bank.

Rod Lache - Deutsche Bank

I think you just mentioned $300 million of cost savings. I seem to recall $250 million. I am wondering whether first of all this is an upward revision. And secondly, when you look at the $73 million of savings on the gross profit line of $18 million in SG&A, and $16 million in R&D, it looks like the run rate is in excess of that $300 million. So, can you just reconcile that for us?

Jan Carlson

I think you are right, Rod. We have said $250 million to $300 million. And based on the achievement, we have seen so far and based on what we can see looking ahead, we have come to a figure to stay with $300 million, around $300 million. I think that is about as a good indication as we are seeing.

We do not see as of today and cannot commit to higher run rate on the savings effect than $300 million. If you then look to the margin effect of all of that, it is not margin improving as you know, this is capacity adjustment also.

Rod Lache - Deutsche Bank

Is the $300 cumulative since of June of '08 beginning or is that a number that refers to '09 versus '08 cost savings?

Jan Carlson

Figure reverse -- in referring '09 to '08.

Rod Lache - Deutsche Bank

The 3% to 5% excess growth over the production changes, do you anticipate being able to sustain that into 2010? And, would you expect just, if there is some impact in paybacks from the scrappage scheme in Europe?

Would that be something that actually affects you less just given that it seems to be smaller vehicles?

Jan Carlson

Well, we believe that we’re suffering a little bit from the increased program, as we are under represented relatively on the A and B segment in Europe. We are through our leading technology, we have traditionally being introduced on the high-end vehicles based on the technology position that we have had and therefore in this place of sourcing between different supply base, we have been negatively impacted on the lower segment. We believe that we will take this back during the next year, just indication that we can see for the time being in our outlook.

Rod Lache - Deutsche Bank

Great, and just lastly, there is a comment in the text of your release saying that you expect tax benefit of 30% going forward. Its looks like you are turning profitables so could you just tell us if that's correct and is the EIB loan or term loan or is that a revolver?

Mats Wallin

I’ll say that I mean the tax benefit of 30% is principally, what we’ve said also in the last quarter and that is really you know the best estimate we can do in this world, but as you know I mean we will see losses some profits in different areas all over the world and our best estimate is really a benefit of 30% assuming in net loss before taxes expense.

Rod Lache - Deutsche Bank

Okay, and that EIB loan?

Mats Wallin

What's the question on the EIB loan?

Rod Lache - Deutsche Bank

Is that a term loan or is that a revolver that you’re seeking?

Mats Wallin

It's a term loan, it's not the revolver.

Jan Carlson

It's a term loan with an in average 7.5 year maturity.

Operator

Your next question comes from the line of Thomas Besson from Bank of America-Merrill Lynch.

Thomas Besson - Bank of America-Merrill Lynch

Just a quick question and sorry to ask you, it maybe aggressive, which isn’t fact aggressive at all. Are you not leveling with your Q3 guidance Jan, because looking at any other forecast for production in Europe and the source you have used, we have much higher numbers than what you have shown us here.

I mean was attending in Paris this morning a presentation by Faurecia, which has quite a lot exclusive to Europe and they seem to expect European production to be flat in Q3. So, don’t you think you’re going to do much better, when you say in Q3?

Jan Carlson

Well, I think, that this is our guidance, you know they have the obvious answer, this is our best estimate. Let me elaborate a little bit on this one. You have the CSM forecast, you have the JD Powers forecast and for this quarter we see a bit of a difference between JD Powers and CSM. We are seeing JD Powers being much higher or relatively higher than CSM for Europe in particular. And on top of that, as you know, we are factoring in the customer call-offs, when we guide for the top line.

So the guidance that we have is looking in our own customer call-offs in our own ERP system comparing that with the CSM and with JD Powers and that has given us this conclusion. So, that is why we are coming to the guidance that we have. If you look on the bottom line and you look into the situation for the operating margin, we believe it fairly strong quarter to come out same as quarter two.

You know, seasonally third quarter is the weak quarter. And to be able to come out at the same, if you take the mid-point of the guidance in the ballpark of the same level, we believe it’s pretty strong actually. We have less of engineering income normally in the third quarter, as we have less of product etcetera.

Thomas Besson - Bank of America-Merrill Lynch

Let me say, differently Jan, you are saying that global production is going to be sequentially flat in Q3. While normally its weak quarter, but this time you expect it to be sequentially flat and raw materials are going to be a $25 million benefit while it was only a $3 million benefit. You have done $1.7 million in Q2, so $1.5 million to 3 million should be easy, no?

Jan Carlson

Yes, I think, you are absolutely right on that one. But, as I said, the customer call offs is also including a vehicle mix throughout for second quarter where contract is phasing in and phasing out. And if you take, the raw material prices, you are absolutely right, $25 million but that is year-over-year.

If you look sequentially, quarter-to-quarter, it's rather flat. Actually, the raw material prices has not really decreased moving from quarter two to quarter three. So, if you take that on the same, on the same impact we basically think that is sort of the right guidance.

Thomas Besson - Bank of America-Merrill Lynch

Okay. If I try to buttress myself in too soon than like Tim was trying to earlier, given the kind of operating leverage we're already seeing in your gross margin sequentially, should we expect you to possibly be close to your historic margins on a very interesting turn or is that way too ambitious?

Jan Carlson

As I said before in my previous answer, let me come back to that, when we are coming closer to 2010, we don't give an indication of it. I think this recession; we are in, for the time being is far from over yet. So, let us take one step at a time. We think we have done a pretty good quarter behind us, then we will continue now to make all efforts to continue to improve in quarter three and quarter four.

Operator

Thank you. Your next question comes from the line of David Leiker from Robert W. Baird.

David Leiker - Robert W. Baird

Good afternoon. The bunch of numbers moving around I think I missed something here, but $300 million of cost savings, how much of that is running in your P&L as reported during Q2?

Mats Wallin

Yes, we have 75 million in the quarter two. So we are seeing a saving from the Action Program of 75 million in quarter two.

David Leiker - Robert W. Baird

But on a cumulative basis, how much of that 300 is already realized?

Mats Wallin

125

David Leiker - Robert W. Baird

125, okay. Yes and the timing for realizing the balance of that by the end of the year or does that roll into 2010 as well?

Mats Wallin

By the end of the year.

David Leiker - Robert W. Baird

Okay. And how many incremental reduction in headcount is there coming, do you think?

Mats Wallin

I can’t go into that sort of more specifically as we all have not finalized. We are in the negotiations with unions et cetera and we have not finalized all the detail plans, but as you can see, we have reduced during the quarter 1000 permanent employees.

David Leiker - Robert W. Baird

All right.

Mats Wallin

We had in the previous quarters reduced sort of like in the ballpark of 4000 employees. We should look more on the level of the second quarter in reductions. To this Dave, you have to add the temporaries that we can foresee in and also sort of employees may happen when the market is improving in the growing market.

So, let me come back to the headcounts when it comes, but we will continue the efforts in headcount reduction gross, but it maybe offset with capacity increases in the growing region.

David Leiker - Robert W. Baird

Okay, great. And then just like a question here on China, do you have any further clarity on a timeline for content in China, approaching something that’s closer to the Europe and North America?

Jan Carlson

Not any update more than what we have said before. We believe the content in China is around 190, slightly, south of 200, and we are seeing an improving focus, or increasing focus on safety for all the car manufacturers in China, but I have no figure at hand Dave that I can give you today on sort of this timing for on 250 or so, unfortunately. We are looking into that…

David Leiker - Robert W. Baird

Are you seeing any data today that are being introduced that have $400 of content in them? Or does that not happen yet?

Jan Carlson

Yes, we are seeing cars in China that has -- we have a car here that we are launching a [yearly] vehicle that over $350 of content in the cars. So there are definitely cars in China today, where it has a high level of content.

Operator

Your next question comes from the line of Adam Brooks from Sidoti & Co.

Adam Brooks - Sidoti & Co

Oh yes, just a quick thing on the cost, you guys have fully stripped out a whole bunch of cost. I mean, how much of this is really going to be temporarily versus, kind of long-term thing going forward. Just trying to figure out, kind of as far as the leverage, a few years out, once the growth really returns?

Jan Carlson

If you think about 300 million on the run rate of savings, as we are talking about here, you should think in the level of 50% being margin improving.

Operator

Thank you. Your next question comes from the line [Keith Lester from One Investment].

Keith Lester - One Investment

Okay, thank you. I'm just following on from that question of the margin improving part, is that above the gross margin line or below to gross margin line? And then as volumes starts to pickup again do you think you'll start to bring back on temporary employees, Q4 as you have a higher volume production?

Then the $300 million cost savings, does that include your comment of examining extra plans that you will talk to us about after Q3 or is that also new to come.

And then the last question was on cash grow, can you give us some sort of views that what you think you can do with working capital to sales, say may be benchmarking versus the year end ''08 by the year end ''09.

Jan Carlson

That’s a lot of questions. Let me see what we need to take. Should we take it one at the time?

Keith Lester - One Investment

Please.

Jan Carlson

Yeah, and we would look forward to sort of an increase of the workforce in quarter three and in quarter three, when if you looking on the temporary workforce when the market is sort of picking up. We will require to -- who we will take on board, extra resources to be able to cope with the increased production level. So that’s clear actually.

But that doesn’t take away that we are continuing the restructuring activity and that is too early to go in to the details of what it will happen but and we can't see that because we are in discussion with different parties here. But that will continue during quarter three and quarter four.

Your next question -- your next question was.

Keith Lester - One Investment

Okay and may be I’ll ask some thing -- I had a follow-up question to the previous one when you talked about costs being retained. You said about half would be retained of what was a margin improvement.

To what extent were those say -- costs that were been taken above the line which you mentioned, fix production overhead decline of 70 million, somewhat in the quarter or versus below the line we’ve seen efficiencies in SG&A and so on. If you could give us a sense as to what -- where you think the permanent reductions in cost have been taken?

Jan Carlson

Well, I can't specify on that. It’s a mixture of gross margin, but also overhead reduction. And as you have seen during second quarter lot of the margin improvement has been on the overhead side, where we have reduced indirect people in the second quarter. It’s a mixture between gross margin and overhead SG&A and RD&E.

Keith Lester - One Investment

Okay. And then the extra resource as you take on for Q3, Q4 were you saying there was predominately temporary employees?

Jan Carlson

Yes, predominate, but its going to be permanent employees also. And the reason for permanent or temporary it is varies from country to country, where the restriction of taking people on board might not differ between temporary and permanent employees. It might equal to the company or for the employee itself, whether sort of defined as temporary or permanent.

Keith Lester - One Investment

Okay.

Jan Carlson

That’s why it can be both.

Keith Lester - One Investment

Okay. And then the third question was, the $300 million figure that you put out for cost for the full year, you also referred in your remarks to some extra plans that you are engaging with, you’re under discussion. Is the benefit of those included in that $300 million or is that a plan, which we should look forward to more benefiting 2010 with some incremental phase?

Jan Carlson

It is what we have in our mind including the benefit.

Keith Lester - One Investment

Okay. And then the last question just on cash flow, if you can give us some sort of feels what you thought you could achieve working capital to sales for 2009 using 2008 as a benchmark?

Jan Carlson

Well, we have the working capital level is 10% of sales and we should be below 10% of sales that is as far as I can commit for the time being in this situation of rebound. So, that we are going taking through our target of 10% of sales.

Operator

Your next question comes from the line of [Essen Peterberg] from SEB Enskilda.

Essen Peterberg - SEB Enskilda

Thank you. This is to say, what’s your thinking about you are seeing your financial strengths in terms of buying financial weak competitors. I think technology and you will see a region to focus and should we also expect dividend being paid at? Thank you.

Jan Carlson

We start with last question, because it’s an easy one that’s the Board decision as you know, so I refer to the Board for the last one. But for the Board meetings I had here I’m not proposed on the agenda. But it will then look on the acquisition side, we are of course looking towards acquisition and potential acquisitions and that was one of the reasons, why we went out with the market offer to be able to participate in the restructuring on the industry.

The thing is that there is not that many acquisitions that we would like to do. There is out there for sale. They need to be a digital situation, either its assets that we would like to have it for sale and then we are very interested in buying them and looking to them or they are not. So, we will continue to monitor this, but in this situation, we have the continued distress in particular on the supply side. I believe there is more to come more opportunities here maybe within the 6 to 12 months.

Operator

You have a follow-up question from the line of [Keith Lester from One Investment].

Keith Lester - One Investment

Hi, just one question, just as your customers are now maybe thinking a bit more forward and then in views, can you give some sort of senses to degree to what you start to see product development discussions and new launches and product penetration discussions, re-igniting with some more [vigor] now.

Jan Carlson

Yes. I think there is an interest very much still from many of our OEMs, when it comes to small car safety. I think a lot of our customers are looking towards safety, performance on the smaller vehicles.

There is a clear trend towards the green environment and to lower emissions and lower fuel economy and the better fuel economy and what implications this will have on the safety performance is an increasing topic and as you know we have since a year launched a special activity towards small car safety. So, that is an interesting discussion that we are having and that we'll continue.

Keith Lester - One Investment

And you think these discussions are now more and more active than they may be were when they were worried about the financing a quarter or so ago?

Jan Carlson

Yes. I think the [EORs] they have sort of focused on how can we sort of maintain and how can we continue to perform on the safety rating in a smaller vehicle from many perspectives, yes.

Operator

You now have a follow-up question from the line of Thomas Besson from Bank of America-Merrill Lynch.

Thomas Besson - Bank of America-Merrill Lynch

Yes, sorry. Hi, Jan sort of on the optimistic turn over we have no -- is it still a good time for you to get positive commercial terms to continue to transfer R&D efforts to customers or are they already looking at recouping some of the gains you are generating from the restructuring efforts you have been able to implement and that they will not be able to implement themselves?

Jan Carlson

You mean on the engineering side or?

Thomas Besson - Bank of America-Merrill Lynch

No, overall. They are going to see your profitability swing much quicker from the deep losses into profits than they can, what they can achieve themselves. So my question is are they still deeply concerned by their own supply and therefore allowing you [flash] EBITDA in commercial terms or is it already the time back to negotiate to be able to keep your savings?

Jan Carlson

It's always top negotiations with our customers. I think they have really never relaxed on that part of the story. So the pricing pressure has been in the range of 2% to 4% and I think we are not going to come by here with an easier situation. We have said here on the last quarter, on the last call that is was on the lower part of the interval. For the time being, it is still like that.

But, you know when the world is turning around and the supply base is getting healthier and things are going back to more normal. I think we will see the same pricing pressures we have seen before. I don’t think there is any real change on that one. And we have not gained any significant contribution from our customers on the raw material prices, you remember when they went up.

And on the way down there is still claims from our customers to get paid back, we are fighting back as much as we can due to the situation of lower volumes. So it’s a constant fight that is still the same, really.

Operator

Your next question comes from the line of Himanshu Patel from JPMorgan.

Himanshu Patel - JPMorgan

On the operating leverage for the business, I think in the second quarter the contribution margin were to be about 35% on new revenue at the EBIT line.

Can you just talk through how you think about contribution margin on an more normalized basis. Should we think about that into 2010 or does that moderate into sort of the mid 20s rate down the road?

Jan Carlson

I think, if you look on contribution margin, we have told -- we have said, we don’t disclose, that actually no, but we have said between 25% and 35% is the range you should look towards. And longer term it hasn’t changed. You should look towards that part of that range also looking ahead.

Himanshu Patel - JPMorgan

So, when does that happen? Is that -- is it fair to say that the first few questions of volume recovery will still be at the high end of that, but maybe as we move into 2010, we sort of start moving towards the middle of that range?

Jan Carlson

Well, I think, not being too specific about it because we don't want to be too specific about it, I think your assumption is very right. When you are earning, the highest benefit of the leverage, as we are doing here, turning it around and seeing the uptake of it, you probably look to the higher range and then moving further into next year, etcetera probably moderate it downwards; you're on the right track there of course. That's as much as we can say.

Himanshu Patel - JPMorgan

Can you talk about the market share, you mentioned earlier that you thought your overall market share was stable in Q2, but what do you think on market share for new quoting activity, just given the level of distress and the supply base, do you sense that you're gaining any share on the new contract awards?

Jan Carlson

Hard to say actually, we don't have full visibility on sort of what it is, despite our situation in and the leading position we have in our market. My personal feeling is that we have been present in most of the quotations that has been out there, of course, and we have earned a favorable position to the competition base, but I have no clear view on that one.

We have got known also request from our customer base to quote our competitions product in some cases here during second quarter. We also got some programs into us on the airbag side. So, it has been -- the feeling has been, sort of favorable to us. But that's as much as I can comment.

Himanshu Patel - JPMorgan

And then lastly, you gave full year CapEx outlook, can you just give some color on second half working capital outlook?

Mats Wallin

On the second half working capital outlook, I think we just have to reiterate little bit that our target is to have a working capital below 10% of sales and of course we are working with old metrics, but that is what we can say for the moment.

Jan Carlson

We have been able to reduce inventories significantly during second quarter and to be able to continue these levels of reductions is very hard or now saying very difficult in the rebounding time, so you may see that bounce back a bit.

Operator

Thank you. Your next question is a follow up from the line of Tim Rothery from Goldman Sachs.

Tim Rothery - Goldman Sachs

Hello, just a follow up in terms of your thoughts on further restructuring. Given that you have now pulled down headcounts close to 20% to 25% from the peak which is broadly in line with how much vehicles also have fallen from the peak?

What’s the logic for doing more, is this about bringing demand capacity down further or is it now more a case of trying to address particular areas or particular geographies where you maybe see a different geographical [capacity] in terms of sales going forward?

Jan Carlson

As we said, no differences between the regions, some regions are increasing rapidly and some regions are not increasing that rapidly. And if you recall when we launched this program back in last year July, actually a year from today, we came out with this program and we then said it was a mix between reduction and margin improvement and I think we have seen during this year, the last 12 months that had went by a lot of the actions, the other actions not related to the original program has been capacity take down, due to the falling volumes.

There remain parts to still be done on the restructuring side to get the right structure in the company and we are seeking further -- we are seeing further opportunities and we are seeking now the possibility to make that also a reality.

Tim Rothery - Goldman Sachs

So, I mean do you envisage -- obviously you can't say March but June headcount in absolute terms coming down significantly from the levels that we see today or is it more…

Jan Carlson

As I said it's depends on what you mean significantly, but you have seen full 200 people net here in the second quarter in reduction. But as I also alluded to, you may see a significant increase coming here during second half on markets that are accelerating and the market that are rebounding.

But underlying there, you may continue to see headcount reduction, even if the net figure might be more of an increase. So that headcount net may go up, you will continue to see headcount reduction as an effect of the Action Program underlying there.

Operator

(Operator Instructions). We have a question coming through from the line of Brett Hoselton from KeyBanc Capital Market.

Brett Hoselton - KeyBanc Capital Market

That's right. I just want to make sure that I understand the restructuring. It sounds like we heard a 75 -- you did $75 million in the second quarter which implies an annualized run rate of $300 million. It sounds like what you are suggesting is that you are going to save a total of $300 million from 2008 to 2009, which implies that you are going to see an incremental increase in restructuring savings from the second to the third quarter of maybe $12 million to $13 million, because obviously you did $250 million or the annualized rate of the first half of the year is only $250 million.

So it sounds like you are going to save more money as you move from the second quarter to third quarter to the tune of may be $12 million to $13 million. Is my math right?

Jan Carlson

I think it very much correct. Yes, we are going to see an increased effect in the second half compared to the first half, yes.

Brett Hoselton - KeyBanc Capital Market

Okay. And then your impression of whether or not there is the opportunity to save more money this year beyond the $300 million?

Jan Carlson

I would not commit to more than $300 million. As that you have heard us saying, we have said between $250 million and $300 million and we are now saying around $300 million and I cannot commit to more.

Brett Hoselton - KeyBanc Capital Market

Okay. Fair enough. And then, as far as the potential to wins and takeover business, an existing business from some competitors, let say Delphi or something along those lines, do you see that as having a meaningful impact on sales. Meaningful, meaning 1% or 2% of sales or something along those lines and if so, what kind of timeframe might that actually sort of take place?

Jan Carlson

It can be smaller individual programs that are resourced to taken over or by the customer moved from one supplier to the other. It could be sort of takeover a buy a business or piece of businesses etcetera, piece of business segment etcetera. It can be sort of a lot of things here.

I have no clear figure to give you more than as I said, with us having taken over here an airbag program during the second quarter from one of our competitors. As an example of that, this is happening right now.

From a timing perspective again, it's very difficult to say, it's very difficult to come up with a timing for it. I can't say, it can happen -- depends on when the sort of the parties are ready to sell or the customers are ready to resource.

Brett Hoselton - KeyBanc Capital Market

Yes, the program that you mentioned, can you provide kind of rough in-your-lines revenue run rate for that? Is at a $10 million program, is that a larger program, smaller program?

Jan Carlson

While this is an airbag program, it's sort of in the ballpark of -- I would guess around some $10 million. It’s a relatively smaller program, it's not any of material difference actually that would make any meaningful difference on this one. It's an example of that, what we are talking about is rather happening actually.

Brett Hoselton - KeyBanc Capital Market

And then, as you look at the terms of some of these programs, how are these terms possibly different than maybe the terms that you've had before on programs. In other words, pricing or commodities, escalators or anything along those lines, are the terms the same or they incrementally better than existing business?

Jan Carlson

This varies from phase to phase and this varies from negotiation to negotiation with the customers and what will happen. There is no real, as far as we can see on the discussions we have had on the, requires we have had any meaningful difference to it. There is not anything that is, sort of speaking out or sending out in either a positive or negative way.

Brett Hoselton - KeyBanc Capital Market

Okay. And then, as you look at your future vehicles or future contracts are so forth, changes in terms at all, I mean are they -- I guess my point is that, that you obviously have some distressed suppliers here in the supply base at Delphi, TRW et cetera, distressed supply base.

Is it -- as you're looking at these businesses, as you're looking at these contracts and so forth, the distress in the supply base, is it allowing you to benefit in the form of either, maybe better pricing or better terms, lower cost reductions, those types of things?

Jan Carlson

I cannot say that it's really causing us a better market situation that is distressed. There is, we should remember that all of the suppliers here in this safety path or safety segments are not under distress as you know. And I think the core level of competition is still fierce full among the suppliers here. You have, some of us that they are doing better and some of us are doing sort of worse. And if that is causing this situation to happen from time to time on various programs here and there and we have not lost any program for obvious reasons.

In this format, we have been able to pick up some of them, but to say that the whole industry in such a distress that we would benefit from it if not the situation.

Operator

Your next question comes from the line of Richard Howe from Polaris Capital.

Richard Howe - Polaris Capital

Thank you. I’d like to ask about you said earlier your CapEx is historically been 5% of sales and is now targeted at 4% of sales. That reduced target, how long will that be in effect?

And secondly what portion of your capital expenditure is for maintenance as opposed to growth and what I mean is, what is the amount of CapEx, the minimum amount of CapEx that you must spend to maintain the normal operating level of the company?

Jan Carlson

Well if you look on the 4% or slightly north of 4% of a outlook that we can see, we should stick to this level. This may change. As you remember we have had a significant investing period in China. We have invested ourselves quite a lot in China, which has caused the investment level to go up and we have expanded in general in the emerging market. And so we should be able, we believe today to say slightly north of 4% on the longer term basis.

Richard Howe - Polaris Capital

Right, but that will also include the expenditures for growth initiatives such as in China and elsewhere, is that correct?

Jan Carlson

On sort of a normal basis, yes, that’s true and I think historically we have been sort of investing for the future in China to a large extent and we have increased capacity and increased resources significantly in China.

Richard Howe - Polaris Capital

Now I know when things are normal your plans along those lines will continue, but just for my understanding of the company were you to decide that would not invest for growth, what amount do you feel would be necessary just to maintain your current level of operation?

Jan Carlson

Well, we haven't done that calculation to be quite honest with you. We are not looking on our company to sort of not invest for the future and invest for growth.

Operator

(Operator Instructions) We have no further question. So I'll hand back to your host for closing statement.

Jan Carlson

Very good. Thank you everyone for your attention and interesting questions. I look forward to talk to again on the next earnings call on October 20, 2009. And in the mean time, I wish you all a relaxing summer and drive safe and remember to buckle up. Thank you.

Operator

Ladies and gentlemen thank you for joining. You may now replace your handset.

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