Autoliv Inc. (ALV) CEO Discusses Q2 2013 Results - Earnings Call Transcript

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Autoliv Inc. (NYSE:ALV)

Q2 2013 Earnings Call

July 19, 2013 8:30 am ET

Executives

Jan Carlson - Chief Executive Officer, President and Director

Mats Wallin - Chief Financial Officer, Principal Accounting Officer and Vice President

Analysts

Ravi Shanker - Morgan Stanley, Research Division

Brian Arthur Johnson - Barclays Capital, Research Division

Rod Lache - Deutsche Bank AG, Research Division

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Stephan Puetter - Goldman Sachs Group Inc., Research Division

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

Thomas Besson - CA Cheuvreux, Research Division

Hampus Engellau - Handelsbanken Capital Markets, Research Division

Agnieszka Vilela - Carnegie Investment Bank AB, Research Division

Richard J. Hilgert - Morningstar Inc., Research Division

Ryan Brinkman - JP Morgan Chase & Co, Research Division

Operator

Good day, and welcome to the Q2 2013 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jan Carlson. Please go ahead.

Jan Carlson

Thank you, Chloe. Welcome, everyone, to our second quarter earnings presentation. Here in Stockholm, we have our CFO, Mats Wallin; and our VP of Corporate Communications, Tomas Jonsson; and myself, Jan Carlson, President and Chief Executive Officer.

I will start off today today's earning call with a brief review of our second quarter results. After that, our CFO will provide some commentary around the financial results. Then, I will conclude with an overview of the underlying market conditions and how we see our business evolving throughout the remainder of 2013. At the end of the presentation, we will remain available to respond to your questions. And as usual, the slide deck is available through a link on the front page of our corporate website.

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

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

Moving on to the next page. We had another solid quarter of financial performance despite a depressed Western Europe and the light vehicle production decline Japan. Our sales and operating margin were both better than guided, mainly due to stronger-than-expected organic sales in Europe, Japan and North America. Our earnings per share of $1.48 was primarily driven by the organic sales growth, financial net and taxes. Our steady operating cash flow continues, where we achieved $192 million for the quarter. We continue to deliver industry-leading return on investment with the return on capital employed of 23%. Once again, I would like to extend a sincere thank you to the entire Autoliv team for achieving this result in a very mixed and challenging environment.

Turning the page. Our sales in Europe was better than expected at the beginning of the quarter. This, along with our favorable model mix around premium brands, allowed our organic sales to outpace the European light vehicle production by 3 percentage points. However, the operational inefficiencies in Europe will continue throughout the year, somewhat longer than expected. In Japan, our organic sales decline of 4% was 3 percentage points better than the light vehicle production decline, since we have a low content per vehicle on certain models where the year-over-year decline was higher. In China, our outperformance of light vehicle production of approximately 6 percentage points was once again driven by high-contented models. For example, we grew by 38% with the local Chinese OEMs. And lastly, organic sales growth in active safety was more than 70%. This strong growth was driven primarily by our radar technology with Mercedes and General Motors. We expect strong growth in active safety to continue, as OEMs are increasing adoption rates of our radar sensors. We are pleased with the progress of our defined growth strategy, and the investments we have made are paying off.

Looking now on the next page. We have our production figures for the second quarter. We continue to see strong unit growth, in particular, active safety sensors and frontal bags, where we see an increasing demand for knee airbags. Overall, we continue to enhance our overall market position despite the unfavorable geographic mix from the recessionary-level light vehicle production in Western Europe, where we have a high market share.

I will now turn it over to our CFO, Mats Wallin, who will provide more color on our financial results for the quarter. Please go ahead, Mats.

Mats Wallin

Thank you, Jan. If you now turn the page. We have our key figures for the second quarter. Our sales of almost $2.2 billion was the best-ever quarterly sales during the strong -- due to the strong growth in Asia and active safety. This strong sales performance drove the profit and EPS improvement versus last year and our better-than-expected result versus our guidance.

Moving on to the EBIT development on the next page. The EBIT margin of 9.1%, as illustrated on the chart to the left, organic sales and raw materials were 130 bps and 20 bps, respectively, better than the same period last year. These favorable items were mainly offset by currencies, 40 bps; RD&E net, 20 bps; and the combined footprint effect from our buildup for growth, including vertical integration and operating inefficiencies in Europe. Our EBIT margin performance versus guidance was 60 bps better, as shown by the chart on the right. This was driven by our better-than-expected organic sales growth. As mentioned for several quarters, the depressed Western Europe markets continues to negatively impact our margins, which we are addressing through our capacity alignment on the next page.

During the second quarter, the savings from our capacity alignment was $3 million, while the cash outlay was $4 million, and we expensed $3 million. For the full year 2013, we expect to expense in the range of $25 million to $50 million as previously indicated. We now estimate the cash outlay to be between $30 million and $40 million for full year 2013. As we mentioned on the previous earnings call, we expect the initial savings to be close to $15 million in full year 2013.

Looking now on to our cash flow on the next slide. Our operating cash flow was $192 million for the second quarter. We continue to be on track to achieve our operating cash flow target of $0.7 billion for this year. CapEx of $88 million was slightly more than 4% of sales. However, we still anticipate capital expenditures to be around 4.5% of sales for full year 2013 to further support our growth initiatives. We achieved a free cash flow of $104 million in the second quarter. During the quarter, we paid a dividend of $48 million, which corresponds to a 7% increase year-over-year.

I will now turn back to our CEO, Jan Carlson for general business, market update, our outlook, and closing comments.

Jan Carlson

Thank you, Mats. We continue by turning the page. And thereby, I would like to take a few moments to recap our key business targets and some recent examples of our continued investment for growth. Our sales target is to grow our sales organically at least in line with our market, and grow faster than our market, including acquisitions. Supporting our growth strategy, we announced during the quarter further capital investments for vertical integration in China and airbags in Thailand to increase needed capacity and remain competitive. In addition, we announced our new stereo vision camera system to address market needs from the new Euro NCAP.

Our long-term U.S. GAAP reported operating margin target is 8% to 9% through the business cycle. Keep in mind that implied with this long-term range, we will have quarters where we operate above and even below the range, depending on where we are in the business cycle. A new objective we have introduced is that we target EPS to grow faster than our organic sales growth, excluding the effects of currency. And lastly, we have updated our debt limitation policy to have a leverage ratio target of approximately 1x and to be within the range of 0.5x to 1.5x. We have committed to start adjusting our capital structure this year, and we intend to be within the range of our policy at the end of 2014.

Looking now at our current business climate on the next slide. The EU27 vehicle registration demand continues to remain weak and near the lowest levels in 20 years. Looking to the third quarter, the light vehicle production invest in Europe is expected to be the lowest level since the trough of the financial crisis in quarter 1, 2009. This weakness in Europe continues to affect virtually all OEMs with a few exceptions among the luxury brands.

The light vehicle production in Western Europe for full year 2013 is now expected to decline by approximately 3% year-over-year. However, sequentially, the light vehicle production is down 12% in second half from the first half this year. We, therefore, remain cautious about Europe, as we see no signs of a cyclical rebound or economic recovery and there could be even risk for further production adjustment.

Turning now to the Americas on the next page. The overall market situation in North America continues with a steady and stable recovery. As the U.S. SAAR continues to run slightly above 15 million with relatively healthy inventory levels of approximately 60 days. Although the production growth rate is slowing in North America, the replacement cycle remains positive, and the light vehicle production is expected to increase 5% from 2012.

In South America, the light vehicle production recovery continues and is expected for full year 2013 to increase by approximately 6% year-over-year. In addition, we are benefiting from the new law in Brazil mandating frontal airbags in 2014.

Turning now to Asia on the next page. In China, the year-to-date sales of light vehicles are up 12.5% from the record levels in 2012. Light vehicle production in China is now expected to grow by 7% in the third quarter and around 10% for full year. During the fourth quarter, China is still expected to reach an annual production run rate of 20 million vehicles. In addition, some local Chinese OEMs, like Geely, Great Wall and Chery, are increasing their safety content per vehicle as they strive to increase the safety rating of their vehicles. In Japan, light vehicle market appears to have stabilized to the pre-tsunami levels of 2011 and is expected to remain fairly constant throughout the year. In South Korea, the light vehicle production is expected to be flat year-over-year, while India is expected to decline 3% in 2013. In other Asian markets like Thailand and Indonesia, we continue to see a steady light vehicle production growth, in addition to the increased airbag penetration in Thailand.

So to conclude, our overall market situation remains a demanding combination of a depressed Western Europe and growth markets.

Looking now to the outlook on the next page. We have the guidance for the third quarter. Based on our customer call-offs, we expect an organic sales increase of close to 6% year-over-year. This increase is related to our continued strong growth in active safety, China and Rest of Asia. This growth is partially offset by the continued light vehicle production declines in Europe and Japan.

Sequentially, our organic sales are expected to decline roughly 7%, which is related to the normal seasonality of customer summer shutdowns. In the third quarter, we expect to achieve an EBIT margin of approximately 8.5%. Year-over-year, the margin decline is mainly due to currencies, higher costs related to our footprint, and an unusually high engineering income last year in the third quarter that we do not expect this year.

On the next slide, we have our indication for the full year. Based on our better-than-expected organic sales growth in the first half of this year, we are zooming in on the upper end of the previously communicated 2% to 4% range. Therefore, our indication for an organic sales growth is around 4% for full year 2013. Our full year 2013 EBIT margin indication of approximately 9% remains unchanged, as operating inefficiencies in Europe and currencies are expected to offset the benefit from the higher organic sales growth.

Turning the page. We have summarized our sales and margin outlook from the 2 previous slides. All figures related to our outlook assume that mid-July exchange rates prevail and excludes costs related to the ongoing antitrust investigation and capacity alignment.

In the third quarter, consolidated sales are expected to increase 5%, while the indication for full year 2013 is for sales to increase around 3%, unchanged from April. We expect the tax rate, excluding discrete items, of approximately 27%; capital expenditures of approximately 4.5% of sales; and an operating cash flow of approximately $700 million, excluding antitrust, all to remain unchanged from previous outlook.

So to recap, we delivered another solid quarter of financial performance in a very mixed environment and remain focused on executing on our strategies.

So if we turn the page, we conclude the formal comments of today's earnings call, and we would now like to open it up for questions. And with that, I leave the word back to you, Chloe. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] We'll now take our next question from Ravi Shanker of Morgan Stanley.

Ravi Shanker - Morgan Stanley, Research Division

I have a question on the active safety. The 70% improvement was pretty stunning. Is that something you had expected or was it a surprise? And do you see any pull forward from future business as a result of this?

Jan Carlson

We said that this is a better-than-expected quarter. We have been having an organic sales last year of over 40%. We are expecting the organic sales to continue, but this quarter that went by was somewhat better than expected. The main reason for the good result here is the rollout of the radar products on the GM vehicles in the U.S., and also the continued rollout of the Collision Prevention Assist to Mercedes, also primarily in the U.S.

Ravi Shanker - Morgan Stanley, Research Division

So going forward, were looking at a reversion back to the 30%, 40% range?

Jan Carlson

We haven't any given guidance actually for the organic sales, but we should continue to see a strong growth continued forward.

Operator

We'll take our next question from Brian Johnson of Barclays.

Brian Arthur Johnson - Barclays Capital, Research Division

Yes. I want talk a little bit about what you might have seen in pricing and if there are any changes, because you've got some great growth in China where the content is outpacing the market, but in the more developed markets, even with all this great active safety growth, the outperformance on a revenue basis is more nominal. Can you kind of just -- we know the basic map that you always talk us through, but anything different vis-à-vis this quarter in terms of the offsets from pricing versus some of the content and -- content growth you've been seeing?

Jan Carlson

No, there is no real difference in this quarter compared to other quarters. Over many years, we have been running between 2% and 4%. We are running within that range as of today. As usual, when you introduce new products, new products tend to have a higher price decrease in the earlier phase of introduction. And I think that is the same now as it has been in the past so really not any change.

Brian Arthur Johnson - Barclays Capital, Research Division

And by new products, would that apply -- does that mean that there are some pressures that could develop in China? Or is the -- when we see 600 basis points outperformance there, it's really that content growth is even greater and already reflecting some of those givebacks?

Jan Carlson

When you look to the content growth in China and you see that it's a result of a long-term investment in production footprint, in development capacity, and a focus to be close to not only the foreign OEM but the Chinese OEMs. We have worked consistently towards also the Chinese OEMs and we are happy here to see that high-contented vehicles and the Chinese OEMs, in general, are growing fast. Chinese OEMs, overall, with us, had a sales growth of close to 40% on -- compared to a production increase of 7%. So I think that is the situation.

Brian Arthur Johnson - Barclays Capital, Research Division

Great. And just final question, Americas, the organic growth lagged the vehicle production growth by about 200 basis points. Europe was ahead. I understand the premium story in Europe. But anything in driving that negative to the market in Americas?

Jan Carlson

No, I don't think there is anything in particular. There was some models there running out, et cetera, but I don't think there was anything in specific around that.

Operator

We'll take a question from Rod Lache of Deutsche Bank.

Rod Lache - Deutsche Bank AG, Research Division

A couple things. One, I hate to ask you to do this, but would you mind repeating the comment you made on Slide 7 about the year-over-year impact of margins from these individual parts: the organic sales, raw material, RD&E and footprint?

Jan Carlson

We can do that if you want. We talked about the margin compare, where we illustrated -- we talked about the slide to the right there to start with, and you may take it, Mats.

Mats Wallin

Yes, if you...

Rod Lache - Deutsche Bank AG, Research Division

Talking about the versus the prior year.

Mats Wallin

Versus the prior year, yes. And we estimate that the impact of the high organic sales, but also the positive raw material effects, they are 130 bps and 20 bps, respectively. So they are improving the margin. But then they are mainly offset by negative effects from currencies, 40 bps; RD&E net, 20 bps; and the remaining bar is related to the combined footprint effect from our buildup for growth, including vertical integration and operating inefficiencies in Europe.

Jan Carlson

What you see there is -- on the footprint side, is a combination there of the buildup for growth that we have been talking about for a long time and also talked a lot about last quarter, and the vertical integration and the combination of operating inefficiencies.

Rod Lache - Deutsche Bank AG, Research Division

In the R&D net part of it, you reported RD&E as a percentage of revenue at 5.9% versus 6.1% last year. So is the reason it's a negative, does that have something to do with reimbursements?

Mats Wallin

I don't think there is -- it's not related to engineering income. This is more related to that we invest more in RD&E. So it's more from the cost side point of view.

Jan Carlson

If you look to the RD&E overall, this year, it will be up $45 million compared to last year.

Rod Lache - Deutsche Bank AG, Research Division

Right. I was just looking at it as a percentage of sales for the margin effects, but I guess I can revisit that. For the third quarter guidance, the 6% revenue growth, 8.5% margin, so you're effectively guiding the earnings of $175 million versus last year's $197 million. You have over $100 million of revenue growth, which, I would think, adds maybe $20 million to EBIT. Can you just kind of give us some color on the offsets that you see there that would result in an earnings decline?

Mats Wallin

The biggest offset is actually in the RD&E net, and we estimate that, that offset impact is 1.4% on the margin. And approximately half of that, a little bit more than half is related to engineering income. And as you maybe remember, last year's third quarter, we had an unusually high engineering income. And this year, it's sort of becoming more normal. So that's why it's also more than half of the 1.4%, it's related to that. And then we also estimate that we see more negative currency effects year-over-year of around 30 basis points. And then basically, the remaining item is, again, the same explanation as we had for the second quarter. It relates to changes in our production footprint and operating inefficiencies.

Rod Lache - Deutsche Bank AG, Research Division

How -- for the full year, how large is the footprint inefficiency? And how should we be thinking about that as we look out to 2014?

Mats Wallin

For 2013, we estimate that the impact for that is around 80 basis points for the full year. For 2014, we have to come back to you in January next year.

Rod Lache - Deutsche Bank AG, Research Division

But does it -- just to...

Jan Carlson

If you look to that 80 basis points, you can say half of that is related to buildup and related to -- the other half is related to inefficiencies.

Rod Lache - Deutsche Bank AG, Research Division

Okay. But directionally, could you provide any color on whether next year is a kind of similar year, more significant or less in terms of the -- these inefficiencies?

Jan Carlson

Well, when we talk about inefficiencies, you recall we said in February that we would have hoped to see this going away by July time frame. And now we are seeing this taking longer time than we have expected. We will work very focused to make this go away throughout the year. But we have to come back in next earnings call and even in January to see if there would be anything remaining. But I can assure you, we are staying in focus to make this go away fast.

Operator

We now take our next question from David Leiker of Baird.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Active safety, you break out the unit volume there. What portion of your revenue was active safety? What's the run rate on that right now?

Jan Carlson

Yes. The run rate on the revenue, we haven't any given guidance on the run rate. We made $220 million roughly last year, and we haven't given any outlook on the run rate -- on the full year run rate as of right now.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Okay, we can work through that. And then I want to come back to this, but for inefficiency item. What's the source of those inefficiencies? Are those launch-cost related?

Jan Carlson

We are operating here with very unutilized plants in some cases. We are operating in an environment in Europe, where light vehicle production there this quarter, actually quarter 3, is going to reach the worst level since 2009, when the overall run rate of light vehicle was 46 million units. So we are working on depressed levels. And when you deal with this, you have a capacity alignment to align capacity with the production levels, and you have also to change the footprint. And some of these discussions that we have and activities that we have are taking longer time than what we have thought originally. And this could be all sorts of things involved with changing the production footprint.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

So it's a capacity utilization issue not a manufacturing issue.

Jan Carlson

It's a capacity utilization issue. It is -- that is the predominantly the case, yes.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

And then -- so can we just dial down one more level there? How many plants are you looking at realigning, relocating, closing? And how many are you opening? And where are you in that process?

Jan Carlson

We haven't talked about how many plants, and we have not been specific in plants because we have discussions with different parties in this capacity alignment process. And we don't want to go and forego those discussions and talk about how much and how many and how many people involved or et cetera around that. The change here from previous quarter is that it's taking longer time. And I think it's important to state that. It is not bigger issues. It is not different issues. It is not other issues. It is things that takes longer time than expected and therefore, will continue into second half from the first half.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

Okay. So then the last item here, so if we look on Slide 7, that footprint item is the utilization impact of what you're -- the problems that you're addressing. So the next slide, capacity alignment is the costs of actually making those relocations in terms of physical changes and headcount reductions and things like that, is that the right way to look at that?

Mats Wallin

It's a blend. It's -- this footprint bar is a blend of both cost for buildup for growth to face the vertical integration we have connected to the growth, but it's also including operational inefficiencies.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

And then the capacity alignment one on Slide 8 are actually the charges for executing those changes, right?

Mats Wallin

Yes, yes, exactly. Those are the charges and you can see also the savings we're expecting now for the full year of close to $15 million.

Jan Carlson

And as we said, basically, 50% of this is related to buildup, and 50% of this is related to the issues.

Operator

Our next question comes from Stephan Puetter of Goldman Sachs.

Stephan Puetter - Goldman Sachs Group Inc., Research Division

Two questions from my side. The first one, if you could just help us understand a little bit what's going on in Europe? So it seems like the second quarter production came in significantly better than expected at the beginning of the quarter, but also, we were up year-on-year, let's say, 100,000 cars or so. And now it seems like the outlook for the third quarter is that we'll be down year-on-year, so the summer production will be lower. And at the same time, it seems that the industry is sort of destocking again by 100,000 vehicles. So why did car manufacturers overproduce in the second quarter if car sales were not really improving? And let's say, can you give us a little bit of color, which manufacturers or which area in the manufacturing space, the volume, the premium has been driving this? And my second question is just trying to understand a little bit the reconciliation of your guidance. I think I'm very, very clear on the volume outlook for both -- I'm sorry, the revenue outlook for both Q3 and Q4 implied. Where I'm struggling a little bit is on the margin. If I just plug in the 8.5% you're guiding to for the third quarter, it implies a significant step-up in profitability of, let's say, 9.5% and -- or maybe even a bit more for the fourth quarter. Should I read a little bit of conservatism into the third quarter? Or do you expect a significant improvement in the fourth quarter? And while I was talking, sort of the usual question I like to ask. In terms of further acquisition opportunities, is there anything more meaningful, or is the pipeline still relatively difficult given how well active safety is going?

Jan Carlson

Thank you very much. There was 3 questions. It was around mix and around acquisitions and then some comments around the guidance in the middle. So if I start off with the mix in Europe, you could say we had a good situation in Europe, where premium brands, in particular the BMW, Mercedes and others, had a relatively better quarter, and we had a better mix than we expected earlier in the year. So whether that will continue into quarter 3 or not, it's very difficult for us. And why this turned out, in fact, to be a better production situation for them, whether there was sort of better planning or underestimated planning or not, I'm not sure really I'm the right guy to answer on here. We had a good strong growth with those car manufacturers that gave us a good effect. And of course, also as we said, Mercedes and Daimler, Mercedes there is the taker also of active safety for us, so that has also a second order effect coming into also affecting the North American growth. We expect the mix throughout the year to be -- continue to be good, so we also expect us also into quarter 3. When we look to the customer call-offs, we expect a lot of growth to come from -- continue to come from active safety, and we also continue -- expect a continued growth from European premium brands here in quarter 3. I would also like to add that we also see that same thing as of now for the Chinese OEMs and also in other areas. If I turn the question to you, Mats, for the second part, I can come back with the acquisition.

Mats Wallin

Sure. And trying to sort of make the journey then from where we are today and having the second quarter now behind us, is that in Q3 compared to the second quarter, we have 7 percentage points lower sales in the third quarter compared to the second quarter. And the reason for that is basically the vacation period, the summer shutdowns we are seeing and which is sort of more of a seasonality-related nature. But then when we go from the third quarter to the fourth quarter, then the fourth quarter is sort of without that vacation period. But in addition to that, the fourth quarter is also the quarter where we normally see higher engineering income. So the engineering income is sort of from, also from -- what we have seen in the past is very high in the fourth quarter. And that is also one of the reasons we also see, generally speaking, better margins in the fourth quarter compared to the third quarter. I hope that can help you to understand the walk.

Stephan Puetter - Goldman Sachs Group Inc., Research Division

Yes, that's very clear.

Jan Carlson

And then when it comes to acquisitions, we have essentially nothing new to report on this one. And we are having talks ongoing as we have had for a long time, but to what extent this is going to lead somewhere, et cetera, we have nothing new to say as of right now. So nothing new to report on acquisitions.

Operator

Our next question comes from Brett Hoselton of KeyBanc.

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

Wanted to talk a little bit about margins and just some clarification. Looking at the year-over-year walk from the third quarter of '12 to the third quarter of '13, it looks like you're kind of looking for an approximate decline in margins of about 160 basis points, if I did my math correctly. I thought that you had attributed about 140 basis points to RD&E net and about 30 basis points to FX, which will be 170 basis points and then you've got these operating inefficiencies. So somewhere I think I've got my math wrong or I misunderstood some things, so I was kind of wondering if you could kind of walk that through again for me.

Mats Wallin

First of all, you have growth compared to last year. So there is an organic sales increase of close to 6% for the third quarter, and that is the piece you need to have in your roll forward. And that is, of course, adding on to the results.

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

Did you -- and I apologize, did you quantify the changes in the production footprint and operating inefficiencies impacting the third quarter specifically? I know you gave the -- rather the full year of 80 basis points I believe it was, but is there a third quarter impact?

Mats Wallin

It's a bit around 130 basis points.

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

Okay. And then as we think about next year, it sounds like the operating inefficiencies will hopefully be resolved possibly as you move into the first half of next year. So you have some easier comparisons there potentially. It looks like you should get some restructuring savings next year. Production, potentially a bit of a tailwind next year, and then you've price downs and inflation and that sort of thing, which will be the usual headwinds. But net-net, it appears as though kind of the pluses outweigh the minuses in terms of your margins into 2014. Are there any other significant positives or negatives that might impact your margins into 2014?

Jan Carlson

I think you mentioned a lot of positives. There might be also negatives. You never know. It's too early for us right now to talk about 2014. We'll have to look into light vehicle production and how it will play out. Western Europe is on very low level. Could it be worse? How is the growth looking like in other regions? And how is that playing out? So too early to say at this stage.

Brett D. Hoselton - KeyBanc Capital Markets Inc., Research Division

Okay. The -- and then finally, we've seen some indications that the EU is moving on some of their investigations here in some other areas, and I'm wondering if there is any update as far as you see. I mean, is there any read-through that you see into your investigations in terms of whether timing or magnitude or anything along those lines?

Jan Carlson

I don't think we should draw any conclusions out of the recent information from other parts of other investigations into our case. At least, we are not doing that. And besides that, I have no other comments to the EU investigation.

Operator

Our next question comes from Thomas Besson of Kepler Cheuvreux.

Thomas Besson - CA Cheuvreux, Research Division

Three quick questions, please. I'd like to come back to Europe first. I'm concerned that you effectively use euro collapse for your comments about Q3 outlook in Europe and not IHS or NRC's [ph] forecast. Second, I'd like you to comment about LATAM, where you suggest a 20-plus increase in production and where we start seeing negative signals in terms of undemand [ph] . So what's your outlook for LATAM getting into Q3, Q4? And lastly, you had an extremely low net financial charge in the quarter. Is it something which was a one-off? What was that? And what should we expect for normal quarters ahead, please?

Jan Carlson

Could you repeat your second question there, so we get that right?

Thomas Besson - CA Cheuvreux, Research Division

Absolutely. So second question was about LATAM, South America, where you report that production was 22% up in Q2, 13% better than what you forecasted. I mean, in Brazil, we've seen demand start crashing in June, and the outlook doesn't seem to be necessarily positive. So I was very surprised to see the spike in production in LATAM in Q2, and I wanted to have your outlook for the region.

Jan Carlson

Okay. Very good. We can start with your first question there. And the call-offs is the basis for the Q3 guidance, so that's right. We have, for the full year indication, used for the outer quarter IHS numbers as a basis. So that's the case. When you talk about LATAM, if you read IHS numbers as a guidance, you see that IHS number has basically 0 development in quarter 3 for South America. So it was 22% in second quarter, and then it was basically 0. And if you then look into quarter 4, they even talk about a negative actually in quarter 4 development, the light vehicle production development. I don't think we have too much of a different view on South America than -- on light vehicle productions than what IHS has. You should recall that it's also a matter of mix. Our sales down there is very much a matter of mix. In addition here, light vehicle production is one thing, but also the airbag penetration is another thing. So market growth and sales growth might be different significantly due to this. Next part was the financial part, and I'll leave that to Mats.

Mats Wallin

It's basically 2 items. First of all, we see around $1 million lower interest expenses. But in addition to that, we were also -- had quite big currency effects on our cash and loans, cash and loans which we have in other currencies than dollars. So those are unrealized currency gains on those items, and they were around $4 million.

Operator

Our next question comes from Hampus Engellau of Handelsbanken.

Hampus Engellau - Handelsbanken Capital Markets, Research Division

First, coming back to the capacity alignment program you're running. Given the wide range of guidance for it, and also the cost we've seen year-to-date, from what you see now, is the risk that this will continue into next year? That's my first question. My second question is more a general question around China. We hear that they're widening the corporate chasing restrictions today, 8 new cities in China. And I was wondering how do you see that affecting production given that you could have moved sales between quarters, et cetera?

Jan Carlson

Capacity alignment into 2014, too early to comment about 2014. You cannot exclude this to be the case. But we will come back to that at a later stage. It's all depending on how Europe is developing, as we all understand. And for the 8 cities here, there has been numbers out there than this could have an effect of 400,000 vehicles in production, these 8 cities. We believe that this will have lesser of an effect of the high-content vehicles because of the ability for people buying more expensive cars to pay the necessary price. And so for the high-content vehicles, it might be less of an effect. We should have in mind that 400,000-vehicle effect here on a run rate of 20 million vehicles produced per year, so we put it all also in the perspective.

Operator

Our next question comes from Agnieszka Vilela of Carnegie Hold.

Agnieszka Vilela - Carnegie Investment Bank AB, Research Division

I would like you to just clarify what you said about your outlook for Q3 and Q4. Is it correct that you said that Q3 is based on the call-offs? And then I think you said that the full year is based on the IHS, but I assume that you meant Q4.

Jan Carlson

Yes. You're right. That's the back -- I said the back end. Maybe that was not correct and it's clear. Thank you very much for this clarification. Q3 is call-offs, and outer quarter is basically IHS.

Agnieszka Vilela - Carnegie Investment Bank AB, Research Division

And then once again about your guidance for the second half of the year. When I compare it, the guidance that you provided today over the ones from April, I can see that now you guide for somewhat lower EBIT margin of 9.4% versus the implied margin of 9.1% in April despite the fact that you expect higher organic growth. And I assume that you knew already about the lower engineering income coming in, in the second half of the year. So is the main difference here these prolonged inefficiencies in production and so forth?

Mats Wallin

If you think sequentially, I don't think engineering income is sort of explanation here. Engineering income is an explanation when you do the comparison for Q3 year-over-year because we were unusually so high last year. But if you sort of go from the previous indication for the full year to the current one, then you see higher sales, and -- but the leverage on that higher sales is offset by more costs related to inefficiencies but also negative currency effects.

Agnieszka Vilela - Carnegie Investment Bank AB, Research Division

And my final question about your capital structure, you're saying that you will start to optimize it already this year. Do you have any decisions taken already?

Jan Carlson

We will come back to that at a later stage. No new information since the Capital Market Day as of today.

Operator

We now take our next question from Richard Hilgert of Morningstar.

Richard J. Hilgert - Morningstar Inc., Research Division

Most of my questions have been asked already, but I would like to hear a little bit more about what you see going on in China. We hear so much about how growth is slowing down in China and that there is the potential that we have an economic bubble over there that could burst even worse than what we saw in 2009 here in the United States. Wonder if you could talk a little bit about -- you've got a certain amount of growth that's occurring over there because of additional penetration of more safety equipment. What's the difference between what your growth experiencing there is because of the unit volume in China versus the amount of growth that you're experiencing over there because of penetration into additional vehicles and because of penetration of more technology into the vehicles?

Jan Carlson

There is a blend of it. It's hard to explain that here right now, the clear difference with it. We are expecting to continue into second half in quarter 3 in China, light vehicle production here for the year approximately 10%. We could expect to continue to outperform. Depending on the economic play out, you can always also see the effect if people would buy cheaper cars instead of more expensive cars and how the profile would look like. So I think it is a difficult case to explain. We are continuing positive -- continued positive on China overall. There might be ups and downs and bumps, but we expect to continue to outperform light vehicle production.

Operator

We'll take our next question from Ryan Brinkman of JPMorgan.

Ryan Brinkman - JP Morgan Chase & Co, Research Division

I'm just curious on the full year margin guidance from a very high-level perspective. Your outlook has been at 9% for a couple of quarters now, despite tracking 80 bps better than guidance in 1Q and 60 better in 2Q. And I understand the typical seasonality, but I think the outlook when 2013 guidance was first introduced was for some improvement throughout the year as your restructuring efforts take hold. So I'm just wondering if you're seeing some headwinds now that you did not originally anticipate at the start of the year that could pressure back half results, or if maybe you're just being cautious given the still choppy end markets.

Mats Wallin

Yes. It is such coming back to sort of the leverage on the higher sales we are now indicating for the full year. And that leverage is offset by more costs related to operating inefficiencies and also negative currency effects.

Jan Carlson

I think it's also important to say that we are increasing growth. We have also a good order intake. So I think that the company is growing fast. And of course, as we comment here, it's growing faster than expected. So it is a challenge to manage this environment between a very depressed situation in Europe that doesn't see and show a lot of signs for recovery, and even stronger growth here on other areas.

Ryan Brinkman - JP Morgan Chase & Co, Research Division

And then I think in the past that you've produced some really pretty interesting analysis in some of your marketing presentations regarding the inventory situation in Europe, and I'm curious what you think of the trend this year, particularly in 2Q, given the slower sales but the stronger production. Do you think this is entirely explainable by changes in imports and exports? Or what might we be seeing in inventory build again in 2Q? And does that somehow factor into your guidance?

Jan Carlson

Maybe it is so that the production level is coming closer to it. Still, we believe a high inventory level, but maybe it is so that the production levels are coming closer to the demand here in Europe. That could be one indication we could see.

Ryan Brinkman - JP Morgan Chase & Co, Research Division

Okay. And then just last question, it seems like your first half R&D expenses or ER&D (sic) [RD&E] expenses are tracking only roughly $7 million higher year-over-year versus the full year guidance for, I think, $40 million to $45 million. So did you always presume this cadence, or does it instead maybe signal that you're on track to spend a little bit less than was originally thought? If that is true, is that driven by any sort of conscious decision to pare back spending, or just due to efficiencies, cost savings or something else?

Jan Carlson

The best indication we have for R&D is to stay below 6% of net, between 5.5% and 6%. We have said that R&D today is expected to be $45 million more than last year. That is the best information I can give you today. Of course, when you see the strong growth in active safety and expect this strong growth to continue, then, of course, that is also affecting R&D.

Operator

Our next question comes from David Leiker of Baird.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

I guess one follow-up question here. On -- I hate to go back to this. I apologize. But on the capacity alignment, if I look at Slide 8 and I look at the same slide from Q1, a couple of things. One, you've lowered the amount of cash outlay that you expect by a pretty good amount and you've maintained the savings that you expect for the whole calendar year, expect a comment that you're seeing some delays in executing some of these actions. Can you just reconcile all of that for me, please?

Jan Carlson

Yes, I'm not sure really what you wanted to -- you want us to reconcile. But we are expecting the cost to be within the same range. When we come closer now to the cash outlay, you see that from what we expected to be the cash outlay in April, that is somewhat lower. But the execution on the accruals that we have made is unchanged. There are other things along these lines that is taking longer time than we have expected. So -- and that is actually no difference on that one.

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

So the cash outlay, is that because you're finding the cost of executing these changes is -- the cash cost of executing is lower? Or is it because some of that is being pushed out?

Mats Wallin

It's -- the implementation is somewhat pushed out. So that's why it's a little bit less cash out than we thought in April.

Jan Carlson

But there is, in fact, no changes to the structure of the program. As we have [indiscernible] ...

David Leiker - Robert W. Baird & Co. Incorporated, Research Division

I understand that. But it's that -- to me that would seem like the execution of the headcount reductions and plant changes are tied to the cash outlays. So if those outlays are pushed out, you still have $15 million of savings. It would seem to me that, that $15 million of savings would be pushed out as well.

Jan Carlson

We expect the same savings as we did in April. So there is no change to that. And the overall program, as you recall when we started talking about this, was to have the majority cash out in '13 and '14. And we talked about a 2- to 3-year payback after cash is paid out. That you'd now see the variance here between what we estimated in April. And there is some delays in some parts of the implementation, as Mats correctly said. But overall, we believe that restructuring program is on track.

Operator

We have no further questions at this time. [Operator Instructions] We currently have no further questions.

Jan Carlson

Okay. With that, I would like to thank everyone for your attention and continued interest in Autoliv, and I look forward very much speaking with you again during the third quarter earnings call on Thursday, October 24, 2013. Until then, I hope you all have a safe and relaxing summer holiday at some point. Thank you very much all of you, and goodbye for now.

Operator

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

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