Autoliv Management Discusses Q4 2013 Results - Earnings Call Transcript

Jan.31.14 | About: Autoliv Inc. (ALV)

Autoliv (NYSE:ALV)

Q4 2013 Earnings Call

January 31, 2014 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

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Ravi Shanker - Morgan Stanley, Research Division

Erik Golrang - ABG Sundal Collier Holding ASA, Research Division

Joseph Spak - RBC Capital Markets, LLC, Research Division

Brian Arthur Johnson - Barclays Capital, Research Division

Stephan Puetter - Goldman Sachs Group Inc., Research Division

Dan Galves - Deutsche Bank AG, Research Division

Richard J. Hilgert - Morningstar Inc., Research Division

Hampus Engellau - Handelsbanken Capital Markets, Research Division

Agnieszka Vilela - Carnegie Investment Bank AB, Research Division

Andreas Brock - Nordea Markets, Research Division

Thomas Besson - Kepler Cheuvreux, Research Division

Anthony Deem - KeyBanc Capital Markets Inc., Research Division

Operator

Good day, and welcome to the Q4 2013 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference call over to President and CEO, Mr. Jan Carlson. Please go ahead, sir.

Jan Carlson

Thank you, Morrine. Welcome, everyone to our fourth quarter and full year 2013 earnings presentation. Here in Stockholm, we have our CFO, Mats Wallin; and our VP of Corporate Communications, Thomas Jönsson; and myself, Jan Carlson, President and CEO.

During today's earnings call, I will provide a brief overview of our quarter 4 and full year 2013 performance, along with the current outlook for our business, while our CFO will provide some commentary around the financial results. Then at the end, in conclusion of our 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.

As you have already noted, we have improved the format of our quarterly earnings report and we hope you like it. And we take any feedback and welcome any feedback from all of you and please send that to Thomas Jönsson.

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 and measures. The reconciliations to U.S. GAAP are disclosed in quarterly press release and the 10-K that will be filed with the SEC.

On the next page, looking at our fourth quarter highlights. Record sales drove our solid financial performance. We achieved close to 15% organic sales growth and a double-digit EBIT margin. Our adjusted operating margin and record sales were both better than guidance, mainly due to stronger-than-expected vehicle production volumes in all regions. China contributed close to 1/2 of this sales improvement.

Adjusted earnings per share of $1.70 was the third best ever and increased year-over-year, mainly due to our improved profit performance. Our exceptional operating cash flow of $300 million was the second best ever for a fourth quarter, and we continue to deliver strong returns with a 27% return on capital employed and a 16% return on equity.

During the quarter, we started to adjust our capital structure by repurchasing approximately 1.6 million shares and announced a dividend increase for quarter 1 2014.

Lastly, I would like to take the opportunity to sincerely thank the entire Autoliv family for their commitment to quality and our customers, and also creating shareholder value during 2013.

Turning the page, we have here some of the key models that contributed to our strong organic sales growth in China during the quarter. Most of these models are rated 5 stars according to the China NCAP and hence, have a content per vehicle close to the global average of approximately $300. We benefit from this as we have approximately 50% market share on these models. And consequently, as a result of our strong growth, with both foreign and domestic OEMs, we believe our market share in China has reached 37% for seatbelts and airbags combined.

I will now turn it off to our CFO, Mats Wallin, who will comment on the financial results for quarter 4 and full year 2013. Please go ahead, Mats.

Mats Wallin

Thanks, Jan. Moving on to the next slide. We have our key figures for the fourth quarter. Our sales is close to $2.4 billion with the best ever due to our strong growth in all regions, especially in China, as well as Active Safety. These 2 growth areas combined accounted for more than 1/2 of the year-over-year organic sales growth for the quarter. This sales performance drove our record gross profit for the fourth quarter and our better-than-expected EBIT result.

Looking at our margin development on the next slide. Our 10% EBIT margin was 100 bps better than our guidance and 60 bps better than the same period last year. As shown by the chart on the left, the improvement versus guidance was mostly due to our better-than-expected organic sales growth. In addition, slightly favorable commodity prices and materials were offset by currencies.

When comparing to the prior year, as illustrated by the chart to the right, the benefit from the organic sales, commodity costs, were 270 bps and 30 bps effectively better for the same period. These stable items were partially offset by other currencies, 70 bps; higher RD&E net, 20 bps, primarily due to the high RD&E net in Active Safety.

In addition to the combined footprint effect of 150 bps is mainly due to our build up for growth, including vertical integration and operating inefficiencies.

The depressed Western European market continues to negatively weigh on our margins. We are addressing this through our capacity alignment as highlighted on the next slide.

Well, during Q4, the savings from our capacity alignment was $3 million, while the cash outlay was $6 million. In addition, we expensed $33 million for future activities. For full year '13, we expensed $40 million with cash outlay of $20 million and generated $12 million in savings.

During 2014, we estimate both capacity alignment costs and cash outlay to be in the range of $20 million to $40 million. In full year '14, we expect to realize an additional $12 million in savings throughout the year and expect to see further savings 2015 to 2017 from these activities.

Looking now onto our cash flow on the next slide. Our exceptional operating cash flow of $300 million includes the $35 million contribution to our pension liability. During 2013, reduced our pension liability by $108 million. Thanks to this Q4 performance, we achieved more than $800 million of operating cash flow for 2013, surpassing our target of $700 million. Both operating and free cash flow for full year '13 were the second best ever for our company.

CapEx net full year '13 was 4.3% of sales, slightly better than our target of 4.5%. To support our growth initiatives in full year '14, we expect capital expenditures net to remain around the Q4 '13 levels, in the range of 4.5% to 5% of sales. During the quarter, our free cash flow generation of $187 million was returned to shareholders through dividends and repurchases of $196 million.

Looking now at our full year '13 results on the next slide. We increased our sales close to $600 million due to our 7% organic sales growth, which led to a record sales of $8.8 billion. This is evidence that our investment for growth in China and Active Safety are paying off, as these business areas combined accounted for 70% of our growth.

We delivered a solid adjusted EBIT margin of 9.2% for full year '13 despite 60 bps of negative currency effects. As we have noted throughout the year, the benefit from organic sales growth, lower commodity cost were mostly offset by increases in RD&E net and 110 bps of footprint cost, mostly related to growth, vertical integration and operating inefficiencies.

In addition to the strong cash flow mentioned earlier, we had an adjusted EPS of $5.82. This excludes $0.34 per share of the cost related to capacity alignment and anti-trust investigation and $0.41 per share for discrete increase in the valuation allowance on the deferred tax assets in Europe. This is a noncash, nonrecurring allowance on our deferred tax assets.

Lastly, we had another year of solid returns with return on capital employed of 23% and return on equity of 14%.

I will now turn it back to our CEO for further comments.

Jan Carlson

Thank you, Mats. We move immediately to the next page. We have here our delivery figures for the full year 2013. We are pleased with our strong volume growth in virtually all of our product lines.

It is encouraging to see higher growth rates with newer products like in the airbags, active seatbelts and Active Safety, which increased the content per vehicle. As a result, we continue to enhance our overall market position despite the unfavorable geographic mix from the depressed light vehicle production in Western Europe, where we also have a high market share. We now believe our market share to be around 37% in Passive Safety.

In our fastest growing area, Active Safety, we believe we are taking market share, and we are on track to reach approximately 24% as we communicated at our Capital Market Day last May.

Onto the next page. We're proud of the innovations that we announced over the past year. During 2013, we launched another world's first with night driving assist sensor fusion. We also launched our first-generation Bag-in-belt. Both of these were on Mercedes S-Class. We also introduced our Stereo Vision camera and Relative Velocity Control retractor. Both of these new technologies are expected to be in production within 2 years.

We believe all these products will help to improve our customers' safety performance under the evolving changes to the test ratings. These are further examples that reinforce our commitment to continuous innovation in automotive safety, which has been -- made us the clear market leader. We believe that our safety focus, both on protection and prevention, is the right long-term strategy leading towards the third level of safety, autonomous driving.

On the next page, we have a recap of 2013. We have strong organic growth of 7%, which resulted in solid financial performance and cash flow generation. Our record sales were primarily driven by all-time-high sales in China and Active Safety, which grew 26% and 57%, respectively. As a result of this growth, China represents 16% of our sales, while Active Safety now is 4%.

As we announced in May 2013, we began to adjust our capital structure towards our leverage targeted range by repurchasing shares and increasing the dividend. We returned approximately $340 million to our shareholders in combination of dividends and share repurchases during the year. We also had our long-term credit rating upgraded to A- from BBB+ by S&P, which is in line with our debt policy to remain strong investment grade through the cycle.

During 2013, we continued to address our margin challenges, have taken further actions around our capacity alignment program and continued to invest in growth markets and vertical integration. All of these initiatives support achieving long-term sustainable margins and increasing shareholder value.

Onto the next slide, looking to the outlook. We expect to see solid light vehicle production growth in 2014. Within Asia, we foresee strong demand in China continuing and expect a new record year for light vehicle production, while Rest of Asia is expected to see some moderate growth.

On the other hand, the light vehicle production in Japan is expected to decline after a strong first quarter pull ahead in demand due to the consumption tax being implemented in April.

In the Americas, the growth rate is slowing. The U.S. SAAR continues to track in the range of $15 million to $16 million with healthy inventories, while in South America, we continue to see a fluctuating light vehicle production.

Vehicle registration in the EU-27 are improving slightly on a last 12-month basis. However, they are still at low levels. This, in combination with strong export demand, mainly due to luxury brand, is positively affecting inventories. However, consistent with the view that there are no real signs of an economic recovery or cyclical rebound at this time, the light vehicle production growth in Europe is expected to be slow.

Therefore, the underlying market trend continues in 2014 with flat light vehicle production in the Triad, while essentially all of the light vehicle production growth is coming from the growth markets.

Turning the page, we have some of our key model launches, which should contribute to our organic sales growth in 2014. Looking at the launches illustrated, we expect these platforms to each have an annual sales of between $10 million to $210 million for Autoliv, while our content is in the range of between $130 million to -- up to $400 million per vehicle. We, therefore, expect to continue to have a very diversified platform mix and another good launch year.

Onto the next page, we have our guidance for the first quarter. Based on customer call-offs, organic sales are expected to increase approximately 7% year-over-year, mainly due to a continuation of strong growth in China and Active Safety, as well as Japan. Sequentially, organic sales are expected to decline roughly 3%, mainly due to the seasonal effect of fewer production days related to the Chinese New Year in the first quarter. In addition, we see drop in demand following the quarter 4 surge in South Korea from the quarter 3 labor disruptions last year.

In the first quarter, we expect to achieve an EBIT margin of around 8%. Year-over-year, higher cost for RD&E net and the ramp-up of capacity for growth and vertical integration are expected to more than offset the benefit from organic sales and commodities. Sequentially, the EBIT decline is mainly due to the lower organic sales effect and higher RD&E net.

On the next page, we have our indication for full year 2014. Year-over-year, our organic sales are expected to increase approximately 5%. This is mainly due to continued strong growth in Active Safety and China as -- and as well as in Americas. Our early indication is for an adjusted operating margin of approximately 9% for full year 2014. Year-over-year, higher costs for RD&E net and ramp-up of capacity for growth and vertical integration should essentially offset the benefit from organic sales, decreasing margin challenges and commodities.

On the next page, we have our financial outlook summary where all figures are in -- excluding costs related to the capacity alignment and anti-trust investigation and assume that mid-January exchange rates prevail. Based on these exchange rates, the effect on sales is expected to be slightly unfavorable in quarter 1 '14, however, no effect for the full year.

We estimate the RD&E net to be less than 6% of sales and commodities to be a slight tailwind of approximately $20 million for the full year 2014. Excluding any discrete or nonrecurring tax items, we expect an underlying tax rate of approximately 28% and target an operating cash flow of at least $700 million for the full year 2014.

Regarding our capital structure, we have increased our repurchase mandate by 10 million shares to 11.6 million shares in the mandate currently. As communicated earlier, we aim to reach 0.5x leverage ratio by the end of this year.

To summarize, 2014 will be a transition year as we address margin challenges, continue to adjust our footprint to the new market while implementing our strategies towards our long-term targets. We believe that through a combination of this and our continued focus on quality, we will be able to achieve margin improvements beyond 2014 as we position our company to capitalize on long-term industry trends.

If we turn the page, we have come to the conclusion of this formal comments for today's earnings call. And with that, we would like to open it up for questions. And I leave the word back to you, Morrine. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] We will now take our first question from Ryan Brinkman from JPMorgan.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

I just -- we've been noting that your organic revenue out-performance relative to global light vehicle production has really accelerated in recent quarters. It was actually negative in 2012 and then just kind of marched steadily higher throughout 2013. I think it was like just less than 1% out-performance in 1Q, now it's 8%. The greater Active Safety sales that you disclosed in your reports as part of this, but seems like only a minority actually. So can you kind of help us better understand? You talked about China market share. What else in your base business is getting better, content per vehicle, et cetera, that could allow this type of change here?

Jan Carlson

We are seeing a significant growth in South America, and we are seeing significant growth in the fastest-growing market in -- and the biggest market in the world is in China. And we are seeing a significant growth in Active Safety. This is both in giving us an opportunity to get more content on the vehicle, but also to grow top line effectively. So the position for growth and the investment in technology has enabled us to continue a good growth story.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Okay. And then just a question on sort of capital structure/buyback cadence. It says in the quarterly report this morning that the firm regularly evaluates the possibility of new debt issuances. And I think there was some about it too back at the Capital Markets Day in May. I'm curious if you would do this in the absence of a material acquisition, if you'd want all that cash. And then if so, would you consider a potential accelerated share repurchase program now that you're buying back more stock?

Jan Carlson

We are focused to grow the company through acquisitions, and we have had a strategy all along to further develop our business by building a balance sheet, being ready for acquisitions when they -- when the opportunity arrives. This strategy is still valid. We have, in the Capital Market Day, communicated the change of the capital structure towards the range between 0.5x and 1.5x, and we communicated also to start this journey. The tools we have at our hand is, of course, acquisitions to grow the business, share buyback program and dividends. And traditionally, we have used buybacks and the dividend in a combination to -- for direct shareholder return and that will probably continue. We, of course, are focusing on acquisitions, but that is a difficult situation. If there are no acquisitions, there are no sellers. There are no sellers.

Ryan J. Brinkman - JP Morgan Chase & Co, Research Division

Okay. And is the acquisition environment made any more difficult by just rise in equity values, et cetera? Or are there still assets available at reasonable prices that you could potentially pull the lever on?

Jan Carlson

We have discussions on and off with potential targets that we do not comment on, on these calls. But the situation is that Active Safety is a very interesting area for the market right now and for the holders of the assets. That hasn't made it easier to find the targets we are -- or the interesting targets we look for. And so I say, there isn't really any change based on the development. It is a situation where people will see growth opportunities in Active Safety, and we believe, therefore, they hold on to their assets.

Operator

And we will now take our next question from Ravi Shanker from Morgan Stanley.

Ravi Shanker - Morgan Stanley, Research Division

A couple of questions. In your release, there was a comment that indicated that you expected margins to improve beyond 2014. That seems like a subtle change of messaging versus your earlier indications of margins. Probably long-term margins will be flat or even downwards at current levels. Is that the case? And if so, what's changed?

Jan Carlson

Well, if you look to the year, we are in the year of transition when we are reinvesting for growth and we are dealing with our margin challenges. We have commented that we believe our margin challenges will improve over 2014, thereby leave room for improved profit margins. And we are also investing for growth where we see that we are taking, in effect, investments for growth, and those assets are not fully utilized during 2014. So when we see the utilization of our investments for growth being increased, we also should see a contribution to margins. So that is the effect that we see in the transition of 2014, and we believe that could open up for margin expansions after '14.

Ravi Shanker - Morgan Stanley, Research Division

Okay. But are you changing your long-term margin goals?

Jan Carlson

We are not changing the long-term margin targets. We have said that 8% to 9% over the cycle. And we are, right now, in, we believe, in good times. We are seeing good market conditions out there, and we are also in a situation inside Autoliv that we are investing for growth in this good cycle. And therefore, we have communicated that to be able to achieve long-term targets of 8% to 9%, some quarters, we should be above the target and some quarters, we'll be under the target. And we are now seeing investments for growth even in a situation where markets are good. So there is no change to the long-term margin targets.

Ravi Shanker - Morgan Stanley, Research Division

Got it. On Active Safety, can you achieve your long-term Active Safety goals, I mean, even beyond the 2015 target organically without acquisitions?

Jan Carlson

While we have defined our target to start with here for 2015 financially by reaching $0.5 billion, we have communicated our target to reach the market -- margin range of 8% to 9% by 2016. And beyond that, we haven't set out any targets. We are committed to drive leadership in Active Safety long term, and that's why we are investing in technology. But financially, we haven't set any targets beyond the 2 ones I have mentioned.

Ravi Shanker - Morgan Stanley, Research Division

Okay. And just finally, one housekeeping question. I apologize I missed this. What was raw material impact on numbers for the whole of 2013?

Jan Carlson

We had raw material impact -- a favorable raw material effect of $23 million for the full year. We had, in the fourth quarter, a favorable effect of $8 million.

Operator

And we will now take our next question from Erik Golrang from ABG.

Erik Golrang - ABG Sundal Collier Holding ASA, Research Division

I have 3 questions. The first one is on market shares in China, which seems steadily moving higher. What's the risk here of a step-down maybe sometime out? Is there anything, order intake, today in order -- in not just China that could suggest that this positive market share trend will all break or even reverse?

Jan Carlson

Well, there is always risks with the mix effects and the platforms being -- running out and the replacement of platforms that could affect the market share somewhat, you could say, from one year to another. But overall, we believe we have a very solid position in China, that is, we don't see any major risks to as of right now. You can never exclude, in a fast-moving market like China, that there could come new competitors that could change the situation. That is not impossible and should not be excluded. But we are, for the time being, having a very good position. We are increasing shares, both with the foreign OEMs, as well as with the domestic OEM. We are growing 40% plus during quarter 4 here with both segments. So right now, we believe we have a good position.

Erik Golrang - ABG Sundal Collier Holding ASA, Research Division

Okay. Second question is on cash flow. It came out quite a bit stronger for '13 than you guided for, $840 million, almost versus $700 million guided, and now you say at least $700 million for this year. Is that just a very cautious guidance? Or is there any particular reason for why it should drop year-on-year?

Mats Wallin

I think we have to -- ought to remember that the improvement we now saw in our cash flow for the fourth quarter was very much coming from our working capital and the timing on the working capital. We had a good cutoff in the fourth quarter and that, of course, helped the cash flow. So if you go then further in 2014, at least $700 million, we think, is an appropriate forecast for that year.

Erik Golrang - ABG Sundal Collier Holding ASA, Research Division

Okay. And then the final question, just an indication, your 5% organic growth guidance. You did -- you made some comments on light vehicle production expectations for this year. But what kind of global LVP growth are you using for that 5% organic growth?

Jan Carlson

Well, we are looking on various statistics or so, but for the full year, we are looking a lot to the IHS numbers. For the quarter that is coming, the first quarter here, we are basing it on our call-offs.

Erik Golrang - ABG Sundal Collier Holding ASA, Research Division

Okay. And for the full year then, what's this IHS as currently?

Mats Wallin

I'd say 3.5% full year currently for '14.

Operator

We will now take our next question from Joe Spak from RBC Capital Markets.

Joseph Spak - RBC Capital Markets, LLC, Research Division

Just maybe some more details on some of the cost you talked about for 2014. I think I heard you say RD&E of about 6%. That's obviously, the -- a little bit towards the -- or it is, I guess, at the upper end of the range you guys have historically talked about, 5.5% to 6%. Should we expect that you remain at that upper end for a couple of years here? Or does that, beyond '14, start to trend back downwards as you get a little bit more leverage?

Jan Carlson

We said in the script here, the presentation, less than 6%, and that is what we have communicated. We have said between 5.5% or 6% or less than 6%. There hasn't been any change to where we have been for the time being. So we remain -- we would remain committed to be less than 6%. Beyond that, we haven't given any further guidance. If you look into the future years, we believe we will hold on to -- as it looks today, we will hold on to less than 6% going forward.

Joseph Spak - RBC Capital Markets, LLC, Research Division

Okay. And then on the raw material savings, I guess I just want to know a little bit where you're seeing the savings. Maybe you can mention some of the commodities. Looks like, on steel and resin -- might be a little bit higher. So I just -- maybe a little bit of color there.

Jan Carlson

Well, if you look for 2014, we believe we'll have a tailwind of approximately $20 million or slightly below $20 million for raw materials. Most of that, 3/4 of that, will come, we believe, from steel, having the steel prices we can see today.

Joseph Spak - RBC Capital Markets, LLC, Research Division

Okay. And then last one for me, just on the CapEx. I think in the past, you guys have talked about 4% to 4.5%, and now you're saying 4.5% to 5%. So -- and I apologize if you already discussed this in the prepared comments. But is that sort of -- are we in a temporary period of higher capital spending? Or is that the new range we should be thinking about?

Mats Wallin

We talked during the Capital Market Day that in order to support the growth we are seeing, we need somewhere between 4% and 5% over the years. So -- and I think given now what we announced, having in front of us, for 2014, we will invest quite a lot in -- for more growth, but also in vertical integration. And that will come now into '14, and that's why we see now, being in the higher end of that range, between 4.5% and 5%.

Operator

We will now take our next question from Brian Johnson from Barclays.

Brian Arthur Johnson - Barclays Capital, Research Division

Just want to follow-up on the China story here. And in particular, I know you don't report geographic margins. But can you give us a sense of the margins in Passive Safety in China, just directionally, versus those in Europe and North America? And if -- and how you're kind of thinking about the sustainability of that going forward?

Jan Carlson

Well, I think you said it yourself. We don't comment on geographical product margins. So there aren't anymore color, really, I can give you to it more than -- as China is becoming more and more in the important and sizable market for all of the OEMs or many of the OEMs, prices are tending to be more and more global.

Brian Arthur Johnson - Barclays Capital, Research Division

Okay. Is there sort of a scarcity premium you could command in China because of the rapid adoption of Euro NCAP compliant product?

Jan Carlson

We believe we have a very good -- we believe we have a good footprint or a very good footprint in China, including development centers and including also vertical integration, which we are also working on and even improving further here during the year and into the future. So we believe, thereby, we are an interesting supplier for many of the customers, in particular, those that have ambitions to drive 5-star rated vehicles and also, down the road, looking for an increased export portion.

Brian Arthur Johnson - Barclays Capital, Research Division

Well, I guess, just final question around that. Are you in the position, one of your competitors in China, where margins are perhaps lower than global because you're still building in or building up capacity? Or are you kind of where you want to be in capacity and you get to enjoy kind of the benefit of this growth?

Mats Wallin

As I said, we are not commenting on margins in China, and we are not commenting on margins per regions. So I -- afraid I can't give you any kind of more details and colors to it. Some years ago, we've made a comment in some of the earnings call to say that we could have slightly better operating margins in China due to high utilization in the fast-growing markets. We made that comment some years ago in an earnings call, I think.

Operator

We will now take our next question from Stephan Puetter from Goldman Sachs.

Stephan Puetter - Goldman Sachs Group Inc., Research Division

The first one is just to come back on the organic growth and connected to that, the operational gearing. You basically expect 2014 to be, let's say, another year of transition. Could you share with us a little bit what your end market expectations and maybe just briefly split by the various regions if -- for your 5% organic growth target? Are you -- by how much do you expect to surpass market growth? And then attached to that, what could be a source of upside for, let's say, the low operation gearing you expect? Is this largely a reflection of European volumes for capacity utilization? Is that relatively low coming back? In other words, incremental margins in Europe, should they be relatively high? And then a second, probably very easy question. I mean, obviously, big focus right now is the drop in emerging market currencies, and it seems to me that your exposure is relatively limited. And is it fair to assume that this is -- or your -- let's say, your guidance for relatively limited FX exposure is largely due to the fact that the euro is basically helping to offset this on the other side? Any more color you could give on this would be helpful.

Jan Carlson

Well, if we'll start with the organic growth, we are guiding here for approximately 5% organic growth for the full year. And if you compare to what we have said before here, the light vehicle production according to IHS, over 3.5%% for the year, then it would be an out-performance looking into the full year. We are not giving any guidance in specific for the different regions and how that is evolving at this time for the full year. So unfortunately there, I cannot give you any guidance or more color or details to it. The currency question, maybe I turn over to you, Mats?

Mats Wallin

Yes. As you know, we are trying to naturally hedge as much as possible. We are trying to buy and sell in the same currencies. But we can't cover it all, so we have a net exposure around $1.7 billion, around 20% of our sales. And as you know, also last year, '13, we had quite some headwind in this in Q4. We saw a special headwind with -- particularly [ph] around Brazilian real. Now looking into 2014, given the mix we have with our net exposure, $1.7 million, we believe, given the mid-January rates and the guidance we are doing that the currency and transaction aspects, net aren't significant.

Stephan Puetter - Goldman Sachs Group Inc., Research Division

Okay. Can I just have another go at the Europe question, maybe phrase it slightly different? I think when you talk about further realignment in Europe, the -- let's say, this implies automatically that this is still a region where capacity utilization is relatively low. So in other words, is it fair to assume that if the European market should -- recovered quicker than this currently anticipated by IHS that the incremental margin with Autoliv can generate out of this should be relatively healthy or is there something I'm missing?

Jan Carlson

No, I think it is a fair question. But capacity utilization isn't -- generally, isn't one thing that you can draw across a region. Capacity utilization is very much depending on the different lines, the different products and the different customers. If one segment is improving and doing better and you are not represented of those or you have underutilization or even capacity in the wrong place, that may not give an effect. For the European part, it has been generally a low volume for many years, and we have seen capacity utilization of below 50% in some of the product types and some of the factories that we are entertaining in Europe. If everything in every segment would go up, your assumptions may be right, but that's just speculation. We cannot say it is.

Operator

We will now take our next question from Rod Lache from Deutsche Bank.

Dan Galves - Deutsche Bank AG, Research Division

This is Dan Galves filling in for Rod. I want to -- we wanted to ask for a little bit more help on EBIT bridge into 2014. If we look at 5% sales growth, that should generate about $440 million of incremental revenue. If you assume -- if you were to look at a 20% to 30% gearing, that's $90 million to $130 million. But I think you guidance implies somewhere in the $25 million, $40 million range. I'm just understanding that you have capacity alignment costs, RD&E. Just wondering if you can help us with the magnitude of the gap between kind of a steady state incremental margin and what you're going to do in 2014?

Jan Carlson

Given the growth we're now seeing in 2014, we also need to invest for this growth, and we need to ramp up for more capacity in our growth markets. We also need to invest more in vertical integration. So that will impact the margin negatively by 130 basis points. You have also other parts in it, but the main parts are the ramp up. That will also result in higher D&A for the company. So the D&A will move up, given what we're seeing now with around 40 basis points as an aspect of that. We also need to support our growth to be -- more RD&E spend. So we expect also to -- RD&E to go up for 2014. So those are sort of the main items getting to -- the leverage not coming out really fully.

Dan Galves - Deutsche Bank AG, Research Division

Okay, that's very helpful. And then just as a follow-up, moving forward, could you remind us of what you would expect kind of over the medium term in terms of incremental margin to the EBIT line once the business reaches a more steady state, if the -- an auto business can ever reach a steady state? Could you just remind us of your expectations there?

Jan Carlson

Well, we have said contribution margin between 25% and 35%, depending on where you are in the cycle and so forth. So -- and midpoint is probably not a bad indication.

Dan Galves - Deutsche Bank AG, Research Division

Okay, and that's -- is that something that you -- it's just that -- so that's what's driving the margin expansion potential after 2014?

Jan Carlson

That's the contribution margin. You can't factor that all in, but the variable contribution margin is in the, we have said, between 25% and 35%.

Operator

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

Richard J. Hilgert - Morningstar Inc., Research Division

I wanted to follow-up a little bit on China. The Chinese manufacturers, are they, in effect, leapfrogging some of the other manufacturers in terms of the safety technology that they're implementing in their vehicles? Or are the Chinese manufacturers still looking for just a basic Passive Safety equipment that they can put in their vehicles because of the low per capita average income over there, making the cars more affordable? Can you tell a little bit about what's the mix of that, that's going on in China?

Jan Carlson

I think, in China, you see, you can't talk about China in this respect, that's one thing. It's a blend of a lot of things, everything from cars, with basically only lap belt, 2-point seatbelts in the front to fully equipped vehicles with equipment corresponding to the better vehicles and premium vehicles you can see in Europe or in Western Europe or in the U.S. So it's a blend of all of things. We see an increased attention from many of the Chinese OEMs towards safety. Safety is being highlighted in a lot of cases. There is a focus on China NCAP, which is driving content per vehicle in China. So you could not say that they are leapfrogging technology as I think the bulk of it is still very much towards seatbelts. And the seatbelt with pretensioners, frontal airbags and also further on side system. The later is though there -- still there to come. It's not widely penetrated in the -- among the Chinese OEM side systems.

Richard J. Hilgert - Morningstar Inc., Research Division

Okay, very good. Just one housekeeping item, please. You mentioned a leverage of 0.5% in your comments by year end. Can you give me a little bit more detail on that? What's the metric there that you're looking at?

Jan Carlson

We're looking at net debt to EBITDA, and we are aiming to reach this, and that is what we are communicated -- what we communicated back in May at our Capital Markets Day.

Operator

We will now take our next question from Hampus Engellau from Handelsbanken.

Hampus Engellau - Handelsbanken Capital Markets, Research Division

I also have 3 questions. Maybe following up on the China -- in China NCAP, my questions were more regarding implementing China NCAP. What kind of a dynamic impact do you see this having on the local OEMs if you compare it to when we implemented the newer NCAP in terms of Passive Safety? Second question is more related to what kind of initiatives and also interest have -- the more domestic players in China had for Active Safety that had maybe global ambitions? And the last question is also related to China. And that's -- if I remember, it was third quarter or second quarter, I can't remember. But you've been investing in capacity in China. And back then, you said that given the startup of these plants, utilization was low and it had a negative impact on margin. And I was wondering, given the stellar growth we saw in fourth quarter, have that negative impact been removed? That's my 3 questions.

Jan Carlson

Okay. We start with the first one, the NCAP. I think it's probably going faster in China than what it did over the years when safety was introduced in Europe, we had many more years to reach the stage where we are today, and it's going faster. As many other things are doing in China, this is also going faster. And the focus -- and the pages we have shown here in the presentation confirms that focus from many OEMs in China, joint ventures, foreign joint ventures, but also the domestics ones, are really looking to having a better safety standard. You're also right that some of them -- as we alluded to in the previous questions, some of them are already looking on Active Safety. And they are looking for Active Safety Systems in terms of radar technologies, vision technologies for different functionalities, Lane Departure, Autonomous Braking, et cetera, and also, Night Vision Systems for that sake. So you can see the full width of the Chinese OEMs having a lot of equipment, including Active Safety and just driving to have Active Safety down to sort of the barebone minimum of it. Third question, I guess -- I don't know if this was -- answered your questions, but I'll leave -- before we take that, I'll leave the word to Mats.

Mats Wallin

Yes. Coming back now to the growth in China, how we support this growth, yes, I mean, utilization is, of course, coming with a higher growth, but we are also investing more. And if we look into 2014 and that we are now for the group come to having CapEx in relation to sales between 4.5% and 5%, around 1/3 -- we estimate 1/3 of our CapEx in '14 being related to China. And that will be a blend of growth directly, but it also will be investment for vertical integration. So also, '14 will mean more capital coming in to China to support the growth. So that's why you also see the D&A going up for the group '14 because that will take some time until it get utilized fully.

Operator

We will now take our next question from Agnieszka Vilela from Carnegie.

Agnieszka Vilela - Carnegie Investment Bank AB, Research Division

I have a question on buybacks. What's the rationale behind your -- limiting yourself to only one month of buybacks every quarter?

Jan Carlson

We have a stricter insider trading policy here in Autoliv that we have decided for ourselves. And we took a stricter position during the crisis, and that is preventing management and insider for trading and people that are seen as insiders to trade in the last month of the quarter. And thereby, also, the company is prohibited for buying back shares in the last month of the quarter. That is the reason why there has been no buyback in December.

Agnieszka Vilela - Carnegie Investment Bank AB, Research Division

But they still favor buybacks over, for instance, extraordinary dividend?

Jan Carlson

This is a question -- as we discussed on and off in the board, we are using a dividend as a powerful tool where we return almost $200 million last year in the -- to shareholders through dividends, and we are increasing this. On top of that, we have used buybacks as a mean to return further money to shareholders. But that is a discussion we have in the board, how to do this in the best possible way.

Agnieszka Vilela - Carnegie Investment Bank AB, Research Division

And then one question on Active Safety. Do you already have your assessment of the total market in 2013? And what's your market share today?

Jan Carlson

We believe we have reached 24% in our market share in 2013. That is to the best of our estimation as of right now.

Agnieszka Vilela - Carnegie Investment Bank AB, Research Division

And then you are almost $9 billion company. Don't you think that it would be of value to present your profitability, for instance, per region or per segment as your competitors do?

Jan Carlson

We are structured in 2 segments today. We are structured in Passive Safety segment and in the Active Safety segment. But as the Active segment is yet so much smaller and haven't reached the criteria, we are only reporting Active Safety as of today in terms of sales and not in terms of profit. As you can read from our report, we report sales top line also per region. So we are reporting according to what is there for U.S. GAAP.

Agnieszka Vilela - Carnegie Investment Bank AB, Research Division

Okay. And then my last question is -- because you mentioned that the Chinese OEMs are implementing more and more safety, what's your assessment of the average safety content in China in 2013?

Jan Carlson

We believe that the safety content in 2013 is reaching in -- $220 -- or approaching $220 per vehicle, the average safety content.

Operator

We will now take our next question from Andreas Brock from Nordea.

Andreas Brock - Nordea Markets, Research Division

I have a question on -- one follow-up question on China, one on the buyback program. Firstly, on China, you said that global pricing is becoming more like global pricing. You also said that margins, historically at least, when you made that comment on the conference call, margins then were higher. Should we interpret that those 2 comments as that -- whatever margins now are, that they are slightly coming down in China? And I'll wait with my second question.

Jan Carlson

As we are -- as I said, we are not making any margin comments on China and we are not commenting on the trend either. Actually, we are seeing a strong growth, and we have commented on the top line, but we haven't commented on margin trends per region as of right now.

Andreas Brock - Nordea Markets, Research Division

Fair enough. Also, when it comes to the massive share buyback program, everyone is super happy about that, but should we interpreted that because -- since it's almost 3x as large as the last one, that you feel more relaxed when it comes to the anti-trust investigation and that, that will not have a large cash negative outflow?

Jan Carlson

Well, we cannot give you any comments on the anti-trust because we have not -- we have no new information. So let me first start to say that there are nothing new to say when it comes to anti-trust or progress or anything around this. Let me then add to that, when it comes to capital structure, given that fact, there is nothing new. We are -- what we have said, it's still there with the aim to reach 0.5x here within 2014. So how -- the way to reach then the 0.5x and the aim to go there, we have the tools we have talked about in this call. And before, we have dividends and we have the buybacks and we have, of course, have what we have been building our balance sheet for, primarily a possible acquisition.

Operator

We will now take our next question from Thomas Besson from Kepler Cheuvreux.

Thomas Besson - Kepler Cheuvreux, Research Division

Three, please. First, on gross margin, could you say where your view -- gross margin in the midterm, along with your 8% to 9% margin, because it has been drifting below what I would have thought a reasonable level, and it doesn't seem to be picking up despite organic growth?

Jan Carlson

Well, we -- Tom, we have been -- we had this question before, and we are not guiding for gross margins. So we don't have a lot of more colors to give you on this. You have seen our gross margin performance, and I think the gross profit was very, very high for the fourth quarter. But we aren't giving any guidance when it comes to gross margin.

Thomas Besson - Kepler Cheuvreux, Research Division

Okay. Could you comment on the U.S. automakers' inventory situation at the end of Q4 and how you see U.S. production going in Q1 -- I mean, H1 '14, please?

Jan Carlson

As we said, we believe that there is a healthy inventory situation in the U.S. I think it was 64 days exiting the year. We have seen them -- and what we believe is going to be the trend is some slower growth throughout the year, in particular in the U.S., but also for Detroit Three. So we believe that compared to last year, growth is coming down a bit, but still a growing market, which is very good.

Thomas Besson - Kepler Cheuvreux, Research Division

Okay. Last one, please. Can you remind us your exposure to countries where FX has been extremely volatile, countries like Turkey or Argentina in particular? And explain us how many of your contracts with automakers are now including automatic pass-through for this kind of currency volatility, if any.

Mats Wallin

Well, we -- if you look into -- as I said, we have 40 different currency pairs in our sort of basket of our net exposure. And that -- as we have said throughout -- to our team, we have seen headwind into these ones. And in some of those areas, we can get compensation, but what you have seen now is sort of the net to net numbers and net impact for the group. And for '13, it has been negative 60 basis points, negative basically on the margin for 2013 to them. To go into further details, how we are in different countries and different customers, it's too detailed to comment on.

Thomas Besson - Kepler Cheuvreux, Research Division

Okay. And what is the assumption then for the net impact in 2014 from FX, please?

Mats Wallin

If you look into '14 now, we have sort of based in the mid-January rates. And looking into the transaction FX and with its basket of 40 different currency pairs, we believe that the net of it is not -- as we can see, it's not very significant. But there is, of course, volatility in each currency pair. There are so many currency pairs into that basket. But as we can see it, given what we can see now, that can change, the net is not significant.

Operator

[Operator Instructions] We will now take our next question from Anthony Deem from KeyBanc.

Anthony Deem - KeyBanc Capital Markets Inc., Research Division

Brett is out, so I'm filling in for him. I got 2 questions. First, on margin progression through 2014, how should we be thinking about second half versus first half? We're starting now at 8% here in the first quarter, averaging 9% for 2014. So it seems like some of the growth investments you're talking about are front-end loaded. Can we assume 10% in the back half, 8% kind of in the first half? Or how should we be thinking about margin progression this year?

Mats Wallin

If you're looking into '14, we -- as you can see from our guidance here, I mean, we -- the margin development is very much dependent on -- that we have to invest more and we will invest more for growth for vertical integration. We will also invest more for RD&E. And for Q1, it's around 8% on the margin as we can see in our guidance. We also -- as you know, when we look into the pattern we see for the company throughout the year, we normally have more engineering income in the second half versus the first half, and that is sort of the normal pattern.

Anthony Deem - KeyBanc Capital Markets Inc., Research Division

Okay. And then my last question on share repurchase, can you quantify the amount of capital to deploy to reach your year end 2014 leverage target? At the low end, what would 0.5x be? And how should we be thinking about the pace of your share repurchases throughout 2014?

Mats Wallin

We haven't sort of said exactly how we are going to reach our aim of reaching 0.5x. And Jan talked about the possibility of acquisitions, we have the possibility of buybacks. We have dividends, which we recently announced. So how that blend will be like we will have to come back throughout the year.

Operator

As there are no further questions, I would like to turn the call back to the speaker any additional or closing remarks.

Jan Carlson

Think you, Morrine. I would like to thank everyone for your attention, interest and questions and continued interest in our company. We look forward to speaking to you again during our Q1 earnings call on Friday, April 25, 2014. So by that, I wish you goodbye for now. Thank you.

Operator

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

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