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Autoliv Inc. (NYSE:ALV)

Q4 2011 Earnings Call

February 1, 2012 9:00 am ET

Executives

Jan Carlson - President and CEO

Mats Wallin - CFO

Mats Odman - VP, Corporate Communication

Analysts

Himanshu Patel - JPMorgan

Rod Lache - Deutsche Bank

Stefan Burgstaller - Goldman Sachs

Brett Hoselton - KeyBanc

David Leiker - Robert W. Baird

Peter Nesvold - Jefferies

Thomas Besson - Bank of America-Merrill Lynch

Hampus Engellau - Handelsbanken

Philip Watkins - Citi

Björn Enarson - Danske Bank

Agnieszka Vilela - Carnegie.

Richard Hilgert - Morningstar

Johan Dahl - Erik Penser Bank

Philippe Barrier - Société Générale

Anders Trapp - SEB

Operator

Good day and welcome to the Q4 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jan Carlson, CEO.

Jan Carlson

Welcome, everyone, to this earnings presentation. Here in Stockholm, we have our CFO, Mats Wallin; and our VP Corporate Communication, Mats Odman; and myself, Jan Carlson, President and CEO.

We will open with a review of our fourth quarter results, including an overview of general business conditions. Then we will discuss our guidance for the first quarter and our full year indication for 2012. At the conclusion of this 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. During the presentation, we may reference some non-U.S. GAAP measures. The reconciliations to U.S. GAAP are disclosed in our quarterly press release and in the 10-K.

Moving on to the next slide, we continue to execute on our operational and growth strategies. We outperformed the global light vehicle production for the ninth consecutive quarter. Consequently, our full year sales exceeded $8 billion for the first time ever. We also continued to deliver double-digit margins for the eighth consecutive quarter and achieved our margin guidance for both the fourth quarter and full year 2011.

Our growth in active safety continues at a strong pace and we remain on track to achieve a 30% market share by 2015. For full year 2012, we expect more than 1 percentage points of our company's total outperformance versus global light vehicle production to come from growth in active safety.

In China, we grew almost four times more than light vehicle production and reached close to 35% market share in airbags and seatbelts. For full year 2012, we expect to grow more than two times the light vehicle production in China.

As to the antitrust investigations, I can only say that they are still ongoing and we therefore cannot provide any additional information at this time. Overall, we continue to balance our margin and cash flow performance with long-term growth.

Turning the page, we have our fastest growing product line, active safety. Over the last four years, we have completed three radar acquisitions and now have one of the most comprehensive product portfolios in the automotive industry. In 2012, we expect to almost double our radar sensor production from last year. This is partially due to more standard equipment on model such as the Mercedes B-Class. Consequently, our investments in RD&E and acquisitions in active safety are paying off.

Moving on to the next page, we achieved record sales and gross profit for the fourth quarter. Our organic sales growth was 2 percentage points below our expectation mainly due to the flooding in Thailand and some softening of production in Europe. However, our organic sales of 7% was 6 percentage points better than the global light vehicle production.

Despite the lower-than-anticipated organic sales growth, we achieved an EBIT margin of 11%, including $6 million of expenses related to the ongoing antitrust investigations.

And lastly, for the fourth quarter, our earnings per share, return on capital employed, return on equity, operating cash flow and EBIT margin were all second best ever.

Turning the page, we achieved record sales, gross profit, EBIT and earnings per share for the full year. This was despite significant commodity headwinds and/or RD&E investments for active safety growth along with the negative effects of two natural disasters and ongoing antitrust investigations.

Our organic sales growth of 9% was almost three times better than global light vehicle production. In addition, we had a 2% sales benefit from the acquisitions during 2011. Return on capital employed, return on equity, operating cash flow along with EBIT margin were all the second best in the history of our company for a full year.

Turning the page, our cash flow from operations was $293 million in the quarter and $758 million for full year 2011. This strong cash flow has allowed us to reduce our debt and create shareholder value by investing in future growth initiatives while increasing the dividend to record levels. During the year, we more than doubled our dividend payment to $154 million from $58 million in 2010.

Capital expenditures were $100 million for the fourth quarter and $357 million for the full year. $135 million of these capital expenditures or close to 40% were used to support our growth initiatives. Looking ahead, we anticipate CapEx to be approximately 4.5% of sales in 2012.

The working capital percentage remained very low at 6.2% of sales despite increase in our operating working capital to support sales growth. Our strong cash flow performance over the last several years has resulted in our strongest balance sheet ever as illustrated if we turn to page.

We have managed to reduce our gross debt to $666 million and achieved a net cash position of $92 million at the yearend 2011. We believe it's prudent to maintain a strong and flexible balance sheet due to reasons such as uncertain macroenvironment and our investments for growth and acquisitions.

During the first quarter in 2012, we will be remarketing the equity units which will result in the lower cost of borrowing. Subsequent to this remarketing, the change of the equity units for common shares will increase the average fully diluted shares outstanding to approximately 94.7 million shares in 2012, assuming everything else remains the same.

Turning the page, we have the fourth quarter light vehicle production according to IHS. We outperformed the light vehicle production in all regions except Japan. This underperformance is mainly due to the fact that the mix in Japan has shifted over the last two quarters to vehicles with lower safety content as a result of the tsunami.

Our outperformance in the Americas, Europe, China and rest of Asia is mainly attributable to our continued strong platform mix and a strong order intake in prior years.

Turning the page, we have the production figures for the fourth quarter and full year 2011. We estimate that our strong outperformance versus the global light vehicle production along with acquisitions has resulted in an increase of our global passive safety market share to approximately 36%. During 2011, we almost doubled our active safety sales from 2010 where we believe our market share is 20% approximately.

Turning the page, for the fourth quarter, the negative commodity effect of $25 million year-over-year was in line with our expectation. Consequently, the full year 2011 commodity effect of $95 million negatively impacted margins by 1.2 percentage points.

This concludes our formal comments for 2011. Looking ahead into 2012, assuming current commodity prices will prevail, we expect a negative effect of approximately $16 million in the first quarter and to be flat for the rest of the year.

Moving to the next page, we have the first quarter light vehicle production according to IHS. The overall global light vehicle production is expected to be up 2.3%. This increase is almost entirely driven by the 1 million vehicle recovery in Japan where we have lower market shares than in most other regions. In contrast, IHS expects a 12% year-over-year decline in Europe. Even in China, they expect the light vehicle production to be down 4% year-over-year.

Despite these negative trends, our organic sales are expected to grow twice as fast as the global light vehicle production. This is due to our strong process in growth markets along with our favorable platform mix.

On to the next page, we have the light vehicle production outlook for the full year 2012, again according to IHS. As illustrated, the growth outlook has declined from 11.4% to 4% within the last six months. Consequently, since July, IHS has reduced their light vehicle production expectation by nearly 6 million vehicles to approximately 78 million units. Also for the full year 2012, we expect to continue to outperform the global light vehicle production by close to 3% despite a 8% year-over-year decline in the important European market.

On to the next page, we have our Q1 guidance and our full year indication for 2012. As usual, our outlook is primarily based on customer call-offs for the current quarter and the IHS light vehicle production forecast for the remainder of the year.

Due to ongoing shifts and adjustments in light vehicle production, we will need to align our manufacturing capacity with the demand in the individual markets. We currently believe this cost would be more than $50 million during 2012. All figures related to our guidance and outlook assume mid-January exchange rates and exclude costs for the antitrust investigation and capacity alignment.

For the first quarter, we expect consolidated sales to increase approximately 2%. This is driven by an organic sales increase over nearly 5%, which is partially offset by a negative 3% currency effect for the quarter and full year.

Given these sales assumptions, we expect an operating margin of around 10% in Q1. For the full year, consolidated sales are expected to increase by approximately 4% year-over-year, while our organic sales are expected to increase by approximately 7%.

During 2012, we intend to invest more than $60 million in additional research and development activities. Based on these assumptions, our EBIT margin indication is expected to be in the range of 10% to 11%.

In conclusion, we continue to grow our company, invest in R&D and are aligning our footprint to the market trends. We have had eight consecutive quarters with double-digit operating margins and expect to continue to have such margin also for this year.

If we now turn the page, we will conclude the formal presentation of today's call, and we would like to open up for questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions) And we can take our first question from Himanshu Patel of JPMorgan.

Himanshu Patel - JPMorgan

Two, three questions. One, you mentioned in your Q1 guidance is based on what you're seeing from your production schedules from the OEMs. How are those call-offs schedules looking versus IHS's Q1 production forecast?

Number two, you did a lot of restructuring during the Lehman downturn, and it sounds like you're enacting another restructuring plan. Can you talk a little bit about just kind of the payback period we should think about on kind of the new $50 million investments that you're thinking about?

And then just a housekeeping question. North American production in 2012 is expected to be up, but I think there is quite a bit diversion between the Japanese and Detroit car makers. Can you just talk a little bit to your intra-North American OEM mix?

Jan Carlson

We believe that IHS is fairly accurate as far as we can gage from what we are seeing in our call-off systems. And as we said, we're basing our Q1 guidance on the call-off systems.

When it comes to payback we don't have a good estimation of this. We're in the planning period right now for this capacity alignment. We believe though it will be longer than the previous program that we had, as we just went through a program, and this is capacity alignment, but somewhat longer.

I refer to the final part to Mats. He is right now looking on the figures.

Mats Wallin

New domestic is supposed to be up 14%, whereas the Detroit 3 is zero.

Himanshu Patel - JPMorgan

But what is Autoliv's mix of new domestic versus Detroit 3 customers within the North American region?

Jan Carlson

We believe it's almost 56%, but we can come back and confirm that to you.

Operator

Our next question comes from Rod Lache of Deutsche Bank.

Rod Lache - Deutsche Bank

First a question on the run rate of the antitrust investigation costs. Is that something we should assume is sustained at this level for the foreseeable future? Is this something that's lumpy? Any kind of just general thoughts on how we should be thinking about that going forward?

Jan Carlson

We don't have any estimation of the future cost of this, as we said, an ongoing investigation. And the level of activities, et cetera, is impossible for us to predict and thereby also the level of cost unfortunately, Rod.

Rod Lache - Deutsche Bank

You've said previously that the trajectory of price deflation is towards the upper end of its historical range, at least in 2011, close to 4%. How are you thinking that progresses in 2012 in light of some weaker volumes in certain key markets such as Europe? Is there an expectation that you'd be able to mitigate that?

Jan Carlson

Over the cycle, it has been between 2% and 4%. And as you recall, it was in the lower part of the range during the crisis and in the upper part of the range. Recently it has been 3% and 4%. We cannot speculate of the future of it. I have no reason to believe that it will go outside the range though for this year. It all depends on how the year is developing. But between 2% and 4% is my best estimation for 2012. We'd be back to you after the first quarter and see if there has been any change.

Rod Lache - Deutsche Bank

But just generally, do the negotiated price-downs moderate or are they sensitive to actual volume performance?

Jan Carlson

Well, it's always a discussion about volumes and if the volume commitment is coming through or not. Generally speaking, you know how it is in this industry. It's always a tough pricing pressure from our customers, and I expect that to remain also in 2012.

Rod Lache - Deutsche Bank

I think you'd said that significant portion of your hires in recent years just post the trough of the crisis have been temps. And I just want to get a sense of where your temporary staffing levels are today? You mentioned on this call that the paybacks would be longer from any restructuring than historical. I am just trying to foot these two comments, because it'd seem that usually if you have more temporary staffing that you'd be able to effect a quicker and just more impact for restructuring.

Jan Carlson

We have a fairly even level of temporaries over between the different parts of our company. But this capacity alignment is more to follow our customers and to grow with our customers and where the customers are growing. And we will of course look into the possibility and also to use temporaries that's a part of this capacity alignment, but fairly even distributed across our company's temporary level.

Operator

Our next question comes from Stefan Burgstaller of Goldman Sachs.

Stefan Burgstaller - Goldman Sachs

First of all, if we look at Europe, you're highlighting that the market production rates in Q1 moving relatively weak. But I think there is probably going to be a big difference between the German OEMS and the volume class. To what extent do you think you can benefit from this potential positive product mix and then actually can you confirm that this is happening?

And secondly, can you just clarify on active safety how much growth you expect, and can you shed a bit of light on how you think the profitability in that segment will develop? Is it still a drag on profits and then do you expect that to improve? And then just assuming that there is no news on the antitrust investigation, can we assume similar cost in Q1 compared to the fourth quarter?

Jan Carlson

If you take the vehicle mix in Europe, it is a platform mix that is positive to us. We are well present on the platform. So on the good selling cars for us like the Ford or the BMW 5 Series, Mercedes E-Class, et cetera, and we are also well positioned on the cars that has launched during the fourth quarter. So it's a platform mix. Then you can say that the German car OEMs are higher representative on the premium segment. We've had been a well selling segment. So from that point, you're right. We expect this continue for as far as we can understand 2012.

Then if you take the profitability and on the active safety, we have said that long-term wise, there would be no reason why active safety would be in line with corporate average. As of right now, due to heavy technology investments, we have somewhat lower profitability in the active safety arena.

And the third part of your question was cost for antitrust. As I said, we have no comments to the cost of the antitrust investigations more than they are ongoing and we will have to take it when it comes.

Stefan Burgstaller - Goldman Sachs

My question is on the legal cost, not any potential fines, et cetera.

Jan Carlson

I understand that, and that's my answer. We don't know the activities as this is an ongoing investigation and you know to what extent the activities will decrease or increase, we don't know and we'll not speculate on it.

Operator

Our next question comes from Brett Hoselton of KeyBanc.

Brett Hoselton - KeyBanc

You had a pretty significant step-up last year in terms of RD&E in 2011 and now you're looking for another additional step-up in 2012. Is this in your mind going to be kind of an ongoing trend? Should we continue to expect R&D as a percentage of sales to continue to trend upwards into 6%, 6.5%, 7% range with an incremental bump-up each year of a fairly significant amount? Or is this second step kind of your expected final significant step-up?

Jan Carlson

We have said that R&D expenses should be at 6% of sales or below 6% of sales. And that is what we have said and that is still valid. We are expanding this money, because we believe we can see the growth benefits from it. And as you heard during my presentation, more than 1% of the total outperformance is coming from active safety and we are doubling our sales for more or less from 2010 to 2011. So we believe these are the right investments for us to do.

Brett Hoselton - KeyBanc

And the restructuring, I know that it's still very early. You're still on the planning stages. But generally speaking, can you talk a little bit about the regions that you're looking at doing some additional restructuring?

Jan Carlson

This is in the planning period and we have not any further information to give to you at this stage. We will be back in Q1 when we have come further into the planning.

Operator

Our next question comes from David Leiker from Robert W. Baird.

David Leiker - Robert W. Baird

A question for you as it relates to this overall resources within the company, your revenue today is running 60%, 70% higher than it did two years ago and in that ramp-up of volume. I just want to get some sense if you've been able to bring your resources not from a segment manufacturing perspective, but from a management perspective and middle management and just all of those other operational aspects. But if you have those resources in place with a level of volume or if there is a need to put more resources in there or there is room to leverage them going forward, just what your thoughts are on that?

Jan Carlson

I think we're all very accurately staffed when it comes to capacity and being able to cope with a growth. And there is a continuous focus on the talent management on t whole levels in our group. And one of the absolute most important assets that we have in our company is people of course, and therefore there is a focus on this one. And I believe the people are doing in extremely well done job for our company.

Operator

Our next question comes from Peter Nesvold of Jefferies.

Peter Nesvold - Jefferies

First, maybe just housecleaning question, so it sounded like in the prepared comments you said that the RD & E expenses will be $60 million higher in 1Q. And I assume that means year-over-year, so to roughly $175 million and then flat year-over-year in subsequent quarters, is that right?

Jan Carlson

Like we have said $60 million, for full-year, year-over-year.

Peter Nesvold - Jefferies

And how do you expect it to be, as a distributed, as a front-loaded or evenly balanced?

Jan Carlson

Let us queue in that for a while and we can be back to you in sometime. It would not be a huge difference between the quarters over the year but we can come back to you at a little bit later stage.

Peter Nesvold - Jefferies

And then there is a follow-up question, why are you restructuring again? I mean, it suggest that the geographic imbalance that you're seeing in terms of demand versus capacity is more than just the slowdown that we're currently seeing in Europe. Am I right in thinking about that, are you shifting high cost manufacturing capacity to low cost countries again, any additional color that you can provide outside of just like a 2012-debt in terms of the European demand will be helpful?

Jan Carlson

It is if you look over a longer time frame there is a huge shift in vehicle production across the globe. If you take the years 2007 up until 2017 you're going from a total volume of below 70 million vehicles to over 100 million vehicles. If you look to the established markets it was a production of 40 million units in 2007 and it is forecasted by IHS to be roughly 40 million units in 2017.

And to be able to adjust for the shift in vehicle mix and to get the right attention to our customers, where the customers are going to produce, we see a need for a capacity alignment. And that is the reason for why we're doing this.

Peter Nesvold - Jefferies

I remember that slide in your deck and you've had in there for a while, so I don't want to put words in your mouth, but it almost sounds like this must be part of a long-term plan that you've had in place as opposed to perhaps restructuring for which the catalyst was some of the weakness we're seeing this year in Europe.

Jan Carlson

As we said, we have continued to invest for growth in growth markets and for technology and active safety. And this is following our strategy that has been in place, as you said, for quite some time actually. And then when you see different trigger points and when you have opportunities to do this and you see the real needs, then you trigger certain parts of your strategy. And it's more from that horizon that this is coming right now.

Operator

Our next question comes from Thomas Besson from Bank of America-Merrill Lynch.

Thomas Besson - Bank of America-Merrill Lynch

One on the evolution of emerging market margins, we've seen the growth in light vehicle production, specifically in China, slow over the second half of 2011. Can you comment on the evolution of your margins in these regions and confirm that they've been historically extremely high?

Second, can you comment on your flexibility in terms of CapEx and R&D? Can you give us your estimated CapEx for 2012?

Mats Wallin

Estimated CapEx is 4.5% of sales. That is the estimation that we have. The other question you have about flexibility, we can only refer back to the disaster times we had in 2008 and 2009 where we really took fast actions and very drastic actions and really did big change of the company due to the necessity from a market perspective. We reduced 25% of our workforce in nine months, which is of course a very drastic situation. But we did it very, very quick, because we felt it was necessary.

If something would happen that that would go beyond what we're seeing today, we would act very fast from CapEx point of view, from every possibility to mitigate the situation. There will be no change, Tom. So I have nothing to say more concrete in terms of how much would be reduced CapEx in relation to sales and so what would it mean for workforce reductions, et cetera, given that light vehicle production would drastically decline. We'll only point to the history.

If you then take the first part of your question which is the margin, we don't talk around margins for a different part of the world and for different regions. The only thing we have said is that margins vary from region to region. And in general, if you have a fully utilized part, you entertain somewhat higher margins. And that's what we have said and that's what we can say today too.

Operator

Our next question comes from Hampus Engellau of Handelsbanken.

Hampus Engellau - Handelsbanken

Just a clarification on your outperformance in Europe during the quarter, because that's related to platform mix versus OEM mix. The third question is related to active safety. You're targeting reaching a 30% in global market share by 2015. Do you need to spend additional CapEx to reach that and then how much? And then also, is that including current product offer or is that including maybe additional product launches? And the final question on active safety. What kind of a price pressure do you see in active safety?

Jan Carlson

Well, I think it's somewhat both. In many cases, it is premium OEMs that have a good platform and good selling vehicle mix. So I think it is a mixture of both, whereas the platform mix has been very good for us. We have been able to target the right platforms and have had successful launches also in the past, having a high content on the launches just recently coming out.

Hampus Engellau - Handelsbanken

Active safety, what kind of an additional CapEx do you need to spend to reach 30% global market share by 2015? What kind of a price pressure do you have in active safety currently?

Mats Wallin

If you have a new technology, it's traditionally somewhat higher, because it's new technology. It has a tendency to go down faster. But so far, if you talk about the CapEx and you talk about the level of CapEx, it's very smaller part of the total CapEx for the group. And that is due to that if you look to the total amount of sales of active safety, even if it is growing fast, it's still a smaller part of the total turnover and therefore also a smaller part of the CapEx.

Hampus Engellau - Handelsbanken

How is that portfolio looking currently? Are you expecting to launch more simplified products more suitable for small car segment?

Jan Carlson

It's going through an evolution where we started off with only a screen to monitor and then we added pedestrian detection and then we added animal detection. And it's also going through several technology changes, and we are working towards to having this coming out also with opportunities to offer it to a broader market, if you say, niche markets today predominately, but nothing that I can unfold here for you today. But that has been in our strategy all along to take down cost of the products.

Operator

Our next question comes from Philip Watkins of Citi.

Philip Watkins - Citi

I wonder if you could just comment on what you're thinking about acquisitions and dividends really and the context of that. And I don't know just a small housekeeping on net interest. So that's going down. Could you give an idea how that might look in 2012?

Mats Wallin

On the interest, it is so that we are now going to remarket our mandatory convert loan, which is $106 million loan today carrying an interest rate of 15%. And that will be remarket now at the end of Q1 and based on the current market rate. So we will due to that be able to reduce the interest rates. And also later on throughout 2012, we will also be able to do further payment backs for loans. We have today around less than half of our gross debt as short-term. And on that less than half, you could say $106 million will be remarketed and the remaining will be amortized.

Philip Watkins - Citi

And an idea of how it might actually go, the number for net interest, would you be able to give that or it's still too early?

Mats Wallin

I think it's a little bit too early to give a number on the interest rates. But as you can hear, with a 50% interest rate on this $106 million and compared to the rates we have today, it will be different.

Jan Carlson

And referring to the dividend, we have a record high dividend currently. And as you know, this is a discussion we have in the Board every quarter about the dividend rates and the dividend.

The use of balance sheet, as we said, earlier in our introductory comments, we are having a strong balance sheet due to our strategy of investing for growth and also that it is somewhat an uncertain market out there. Underlying this company is a shareholder-friendly company, but we are right now looking for investing for shareholders in growth. So that is what we are doing for the time being.

Operator

Our next question comes from Björn Enarson of Danske Bank.

Björn Enarson - Danske Bank

I have a few questions here on your outperformance that you expect for the full year. Is it possible to get some comments on that by region, just touch upon it? If you can give a few more comments, that would be helpful. And also on active safety, how we should look upon that by region? Is that basically Europe and North America?

Jan Carlson

We don't have that much of color to give you on the regional split, neither when it comes to the outperformance nor to the active safety. We look to a global outperformance both for first quarter and as we said for the full year. Active safety as such is of course to the extent right now much related to the premium OEMs. We have activities both, in fact in all radiance on active safety for the time being.

Björn Enarson - Danske Bank

And is that also in a relative sense the same kind of impact in also in the Asian region, Japan accessories in Europe for instance?

Jan Carlson

Not as of right now. We have ongoing discussions with customers also in Asia of course, but not to the same extent yet in Asia as it is in Europe and in America.

Operator

Our next question comes from Agnieszka Vilela of Carnegie.

Agnieszka Vilela - Carnegie.

I have a question again on active safety. Could you just remind us about the market size of the whole active safety market and also about the split between radar, nightvision and vision?

Jan Carlson

The current market size in active safety is approximately around $800 million for our part of the market that we are talking about, and then it's growing to beyond $2 billion by 2015. And what we talk about here is that sensor market, in addition to this, you should recall that we also announced our stability control, our integrated break control product that we have now a production order for. And that is we believe a $6 billion to $8 billion market, but that is a different order of magnitude.

Agnieszka Vilela - Carnegie.

And one more question on active safety just to confirm. Have you already reach breakeven for active safety?

Jan Carlson

As we've said, we are lower than corporate average. We don't comment specifically on the active safety market and on the different product lines from a profitability point of view. Long term, this should be no reason why we should no reach corporate average.

Agnieszka Vilela - Carnegie.

And do you hear about any new regulations that could drive safety content in the near future or in future? I think I've heard something coming from India that the government is discussing a legislation that would make the car producers to install airbags in the cars. Is that true? Do you hear anything similar?

Jan Carlson

We've heard the same thing, but I don't know how realistic and when that will come. But there are discussions going on.

Operator

(Operator Instructions) Our next comes from Richard Hilgert of Morningstar.

Richard Hilgert - Morningstar

In your prepared remarks, you had mentioned about Japan that there was an unfavorable mix. Is that correct?

Jan Carlson

Right.

Richard Hilgert - Morningstar

And we're also expecting R&D to go up, restructuring actions to occur, which would mean that there would be some disruption in your production. But yet for the full year 2012, you're anticipating to hold your margins to 2011 levels. And I was wondering if you could talk a little bit about where it is that you're going to make up the difference when you've got these three areas where margins are going to be a headwind for you?

Jan Carlson

First of all, we have to remember about 2012 and our guidance between 10% and 11% percent margin is that we expect to have higher sales for 2012 compared to 2011. And we talked about that and that higher sales, will of course give us more contributions. So that will itself be positive impact on the year-over-year basis.

And then that the fact we also will carry a more RD&E in terms of more than $60 million. We will have some more raw material expenses but anyhow thanks to the higher sales and thanks to everything else, we're doing in the company to improve our margins. We would be able to do 10% to 11% margin.

Richard Hilgert - Morningstar

So it's mostly the operating leverage that you're anticipating in 2012 that will make up the difference.

Jan Carlson

Yes.

Operator

Our next question comes from Johan Dahl of Erik Penser Bank.

Johan Dahl - Erik Penser Bank

I had my question answered. Thank you.

Operator

Our next question comes from Philippe Barrier of Société Générale.

Philippe Barrier - Société Générale

I'd like to ask three questions. First one is regarding the FX impact. You made some impact in terms of profitability or is it just a question of translation from foreign currencies to draw, producing some impact in terms of profitability? Second question is regarding the commodity price trends you have in your portrait of 2012 earnings? I supposed it's based on the forecast on (inaudible) price. You got some ways to edge this purchasing in terms of growth you can actually limit the impact in your cost for the full year 2012.

And the third question is regarding the change you expect in European comp prediction, which were negative in Q1. Do you see that risk of having quite high cost regarding fixed cost of the company in the first quarter, which will maybe a risk for the full year forecast?

Jan Carlson

Let's take the first question. If I get that right, the current FX effects we now have in our outlook is translation effects, and those effects should principally not impact our margins. You will have the similar impact on the sales, but you will also have corresponding impact on your cost side. So from the margin point of view regarding translation, we do not expect any impact.

On the hedging and regarding raw materials, we don't normally hedge on raw materials. And up to now, we're not hedging. So if we will have a change in raw material prices, that will impact us and that is also what we've been talking about for 2011 as well as for 2012 of around $50 million negative impact.

Mats Wallin

Commodity prices, they are based on the level we had here. Did we have a third question from you?

Philippe Barrier - Société Générale

What is the drop in light vehicle production in the first quarter? Will it effect our profitability for the full year?

Jan Carlson

It's all built in for the full year. So what we have in Q1 is part of also our full year guidance. What is important to say here is also that despite the drop in the light vehicle production here in the first quarter, we are outperforming the global light vehicle production. Despite that, you see a drop in Europe of 12% for the first quarter. We are outperforming the total global light vehicle production. So that is an important remark to make.

Operator

We can now take our next question from Anders Trapp of SEB.

Anders Trapp - SEB

I wonder what you say about the impact from the Thai flooding going forward. I don't know what you said about the fourth quarter. But are there any cost for that to be expected in Q1 and forward?

Jan Carlson

We expect in the first quarter to have an extra cost of around $3 million, and that is support to our guidance today.

Operator

Mr. Carlson, we have no further questions in the line.

Jan Carlson

Okay. Then I think we owe one clarifying remark regarding the split of the R&D cost over year. I hand it over to you, Mats.

Mats Wallin

Yes, thanks. We talked about that we will have more than $60 million increase of RD&E in 2012 compared to 2011, and that will come in the three first quarters of 2012 compared to 2011. And that will be evenly split between the three first quarters.

Jim Carlson

Okay. And with that clarification, now I'd like to thank everybody for your attention and your continued interest in our company. We look forward to speaking to you again in our first quarter earnings call earnings call on Friday, April 27, 2012. Thank you very much all of you.

Operator

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

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