Autoliv's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Oct.23.12 | About: Autoliv Inc. (ALV)

Autoliv, Inc. (NYSE:ALV)

Q3 2012 Earnings Call

October 23, 2012; 09:00 a.m. ET

Executives

Jan Carlson - President & Chief Executive Officer

Mats Wallin - Chief Financial Officer

Mats Odman - Vice President of Corporate Communications

Analysts

Rod Lache - Deutsche Bank

David Leiker - R.W. Baird

Brett Hoselton - Key Banc

Stephan Puetter - Goldman Sachs

Björn Enarson - Danske

Hampus Engelieu - Handelsbanken

Anders Trapp - SEB

Richard Hilgert - Morningstar

Agnieszka Vilela - Carnegie

Ryan Brinkman - J P Morgan

Operator

Good day and welcome to the Q3 earnings conference call. Today’s conference is being recorded.

At this time I would like to turn the conference over to Jan Carlson. Please go ahead.

Jan Carlson

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

We will open up today’s earnings call with a brief review of our quarterly results, including an overview of our general business conditions. Then we will focus on the outlook and how we see our business evolving throughout the remainder of 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 statements, which as you know is an integrated part of this presentation. 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.

Moving on to the next slide, we continue to execute on our operational and growth strategies as we navigate through challenging times. Despite these uncertainties we deliver another solid financial result in the quarter with a 10.1% EBIT margin, in line with our expectations.

Our strong operating cash flow and balance sheet will enable our company to make the appropriate technology and capital investment as our long-term strategies for growth remain in tact.

The macro environment has gradually deteriorated throughout this year, particularly in Europe, where OEMs are increasingly idling factories. In this environment we take further actions to adjust our cost structure and we therefore now expect the capacity alignment costs that we announced back in February to be in the high end of the $60 million to $80 million range. We do not exclude that further actions will continue into 2013.

Over to the next page, we have some of our key figures for the third quarter. Our sales of more than $1.9 billion was the second best third quarter ever. Compared to last year, sales declined slightly due to currency. Organically our sales grew by 2%. This was one half of what we expected, primarily due to the short decline in our European sales, strikes among the soft Korean customers and slightly lower growth in China with the JOEMs around the political tension between Japan and China.

These negative effects were partly offset by our strong organic sales growth of 13% in the Americas. Our EBIT margin of 10.1% declined 40 basis points year-over-year, mainly due to under utilized capacity in Europe, while adding new capacity in growth markets. Our return on capital employed and return on equity remains strong at 23% and 14% respectively.

Turning the page, we generated an operating cash flow of $131 million in the third quarter. The cash flow was negatively impacted by $45 million higher working capital. This was mainly due to timing and in addition we had the payment of DoJ fine in July.

Capital expenditures of $98 million was approximately 5% of sales and the full year 2012 indication remains unchanged around 4.5%. This level of capital investment is required to support our strong order intake, deliver long-term growth rates above the industry and remain competitive. We also returned $45 million to our shareholders with a dividend and we announced an increase in the quarterly dividend to $0.50 per share to be paid in December.

Turning the page, we experienced a positive commodity effect of $4 million year-over-year in the third quarter. This was $2 million better than expected and assuming current commodity price levels prevail, we expect the positive effect of $7 million in the fourth quarter. We now expect the headwind of $6 million for commodities for the full year 2012 and that is $5 million better than we expected earlier in July.

Steel and oil based raw materials, including yarn remained the most significant raw materials. Combined they represent approximately two-third of our raw material stand. This concludes our formal comments around the third quarter and we are now moving to the underlying market conditions on the next page.

We have the light vehicle sales trend in the US and Europe based on the trailing 12 months. The European registrations continue to decline from the peak levels that resulted from the incentive programs during the financial crisis of 2009 and 2010. The weakness that we now have seen in the Southern Europe parts appears to be spreading to Northern Europe and therefore due to the underlying weak economic conditions, there is no real recovery expected in the near term for Europe.

If you turn to the next slide, we have the overall market situation in North America that continues with the steady recovery. The US SAAR continues to run in the range of $14 million to $15 million, with healthy inventory levels. In addition, consumer credit appears to be more widely available during a positive replacement cycle.

Looking ahead, we expect to see a step up in the frontal air bag demand in South America. For instance in Brazil the legislation calls for a 65% adoption rate on new vehicles in 2013 and then to 100% in 2014.

If we now turn into Asia on the next page, China will surpass Europe in light vehicle production during the fourth quarter. Both passenger car sales and light vehicle production in China continues to grow in the mid to upper single digits. In addition to the continued increased penetration of our safety products in China, we are well positioned with both domestic and foreign brands to benefit from shift in consumer preferences.

In Japan the light vehicle market appears to have returned to pre-tsunami levels, however we see a risk for further softening. The South Korean market is rebounding on the labor strikes in quarter three, however underlying demand seems to be slowing. And lastly, in the other Asian markets we continue to see a moderate light vehicle production growth in addition to the rebound effect of the flooding in Thailand.

Turning the page, here we have updated our launches in active safety. Our sales in active safety are expected to grow year-over-year between 40% to 50% in the fourth quarter. This is a step up in the growth rate from close to 30% in the first half of the year and that is despite a slightly lower take rate than we expected earlier in this year.

Even during these uncertain times we remain committed to our innovation of new products, not only in active safety, but in passive safety as well. We are monitoring the overall market and will adjust our priorities depending on how market conditions evolve.

When we look at the long-term light vehicle outlook as illustrated on the next page, the overall long-term market trend remains in tact. This industry trend is best illustrated by the fact that in 2007 China produced roughly 50% of the light vehicles produced in Western Europe.

Already this year during the fourth quarter we see China overtaking Western Europe and Eastern Europe combined in large vehicle production. Therefore even in uncertain market conditions, we must continue to make investments to take advantage of the growth market, while making capacity alignment to reduce fixed cost where production will not recover.

So far this year we have spent approximately $80 million in capacity to capital investments towards our growth market and active safety. This is in addition to the $150 million we spent in 2011.

Onto the next page, we have two examples here of our further investment in growth strategy. Last week we announced an expansion to our tech center in China, to improve our testing capabilities to support our customers and increase our competence in electronics and the active safety in Asia.

In addition we announced that we are making our largest capital investment ever to add propellant manufacturing capacity. This investment is required to support the increasing demand for airbags in Asia and in addition this will reduce our logistic costs.

Turing the page now to our outlook, we have our guidance for the fourth quarter. Based on our customer call-outs, we expect an organic sales growth in the range of 0% to 2%. This lower growth rate then implied in July is primarily due to the accelerated decline in Europe and lower growth in China, partially due to the political tension between Japan and China. However our launches in China remains intact.

For the fourth quarter we expect an underlying operating margin of 9%. This lower margin then implied in July is due to the lower organic sales growth. As compared to last years fourth quarter, the margin decline of approximately two percentage points is mainly due to higher RD&E spend and under utilized capacity.

Onto the next page, we have summarized our sales and margin outlook. All Figures related to our outlook assumed that mid October exchange rates prevail and excludes costs related to the anti-trust investigations and capacity alignments.

Our fourth quarter guidance calls for virtually flat consolidated sales and an EBIT margin of around 9%. This would yield flat consolidated sales for the full year, with organic sales growing around 4%, which is mostly offset by negative currency effects. As a result, our EBIT margin for full year 2012 is expected to be more than 9.5%. We expect our strong cash flow performance to continue and thereby generate an operating cash flow in the magnitude of $0.7 billion for the full year 2012.

So to summarize, we remain focused to mitigate the negative effects of a mixed and uncertain macro environment, while driving our long-term growth strategy initiatives.

If we now turn the page, this will conclude the formal comments of today’s earnings call and we would now like to open it up for questions and with that I’ll leave the word back to you Paula. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We’ll now take our first question from Rod Lache from Deutsche Bank.

Rod Lache - Deutsche Bank

Good morning. Can you hear me?

Jan Carlson

I can hear you well Rod.

Rod Lache - Deutsche Bank

Okay, thank you. It is a couple of questions about the guidance and the outlook. Just maybe first of all, your operating income in the fourth quarter of last year was $224 million and this year based on your guidance it looks like it would decline maybe $40 million to $184 million and you mentioned that raw materials are roughly a $7 million tailwind and this is on roughly flat revenue, an organic growth of low single digit 0% to 2%.

I was just hoping, you mentioned RD&E and some cost issues. Can you just help reconcile that ridge for us on what is causing the $47 million to $50 million drag on a year-over-year basis?

Jan Carlson

I’ll leave the question to Mats and he will walk you through the details.

Mats Wallin

Its basically two items during this. First of all that we have more cost for growth. As we talked about, we have to invest in new market; we have to invest in new technology. So growth related to production overheads, related to other overheads in order to grow in new markets had an impact of around close to a percentage point on your mind and a negative impact.

And then you have the investments in the RD&E. We also increased the RD&E around a half percentage point and the other half percentage point is on engineering income. So all in all, RD&E net close to a percentage point down and the manufacturing footprint another percentage point down.

Rod Lache - Deutsche Bank

Okay. And what are you expecting exactly? I know that in the release it’s said that there’s a lot of uncertainty around it, but what are you assuming at this point for European production? What is the decremental margin that your applying to that and if European production were to stay at roughly this level, can you give us a sense of the magnitude of mitigating actions that you can take? What kind of cost savings would you be anticipating from somebody’s restructurings that you’re taking?

Mats Wallin

If you look through the decremental margin we have talked about the contribution margin varying between 25% and 35%. So when it’s going up, it’s probably in the higher part, when it’s going down, it’s logged in the lower part. A good hint would be to talk about the 30%.

We can of course do more and we are doing more as we said. We are accelerating our capacity alignment program from what we communicated in July. We are taking this into the higher part of the range, up to $80 million. They are monitoring the market and as we indicated in the presentation, if there would be a further decline, we would probably do even more than $8 million in actions for the year.

Rod Lache - Deutsche Bank

What’s the payback on the $80 million? Is it one year, two years?

Mats Wallin

Before we said, I think we communicated in July, two to three years payback on this capacity line and program. As you recall, we did a quite significant restructuring program with a lower payback some years ago and as this is now further deteriorating, you would expect a longer payback.

Rod Lache - Deutsche Bank

Okay. And just lastly, just a quick data point, what is your revenue from the J3 (ph) in China at this point?

Mats Wallin

Revenue from (inaudible), after quarter two it was roughly $65 million, roughly.

Rod Lache - Deutsche Bank

Okay, thank you.

Jan Carlson

Thank you.

Operator

We’ll now take our next question from Erik Pettersson from ABG.

Jan Carlson

Erik, are you there?

Erik Pettersson - ABG

Yes, can you hear me?

Jan Carlson

Now we can hear you, go ahead.

Erik Pettersson – ABG

That’s good. Thank you. Most of my questions have been answered already actually, but one more. I think within the margin guidance you gave for Q4, is there an element there of the sector, sort of uneven production rates with your customers and if so, to what extent the way you look at it now would you expect that to lean there into 2013?

Mats Wallin

First of all, I mean again coming back that we see now the uneven utilization, we have invested a lot in the new markets and as you also know that, we see also some softening now in the Chinese market due to the Japanese wins and as you know we have all seen the best of that. So of course, we are not utilizing the new capital ascertations as we planned for. So there we have problems.

We have similar also challenges with Europe of course, where we’ve seen our volumes going down and again we are sitting there and of course adjusting and managing it as good as possible, but of course the utilization shows impact within Europe.

And on this 2013, I don’t think it’s difficult to say something more about 2013. We have to come back about that I think later on in January when we see more of that here. I don’t know Jan if you have anything?

Jan Carlson

No, we’ll comment on that in January.

Erik Pettersson – ABG

Okay, thank you.

Jan Carlson

Thank you.

Operator

We’ll now take our next question from David Leiker from Baird.

David Leiker - R.W. Baird

Good afternoon.

Jan Carlson

Good morning David.

David Leiker - R.W. Baird

Two things in particular; as you look at the European market, what’s your sense of, there’s kind of pace of declines. You and I talked a few weeks ago, but as you look at what’s going in that market, it seems like we continue to see acceleration and things are like to get worse before they get better.

Jan Carlson

Yes, I can’t confirm, that how much worse its going to get, but it seems right now that it is on the further declining path and as we indicated, we can se also signs that its spreading north. Its not only the southern European OEMs, but also seeing signs of initiating weakening signals from Northern European, in Germany and in Sweden.

David Leiker - R.W. Baird

And then have you seen that carry over and so do you know anybody to take any extended (inaudible) at the end of the year as that might happen.

Jan Carlson

Well you have seen some OEMs that has announced, we have one OEM here in the Northern European part that initiated a weak plant shutdown here later on in October, just only three weeks ago. So there has been signs of plants shutdowns coming and this has increased we would say over the last four to eight weeks, these signs, and we don’t know to what extent its going to further deteriorate, but we do not see any signs of recovery or reasoning out.

David Leiker - R.W. Baird

Okay and then different items. We look at the margins; one of the long time conversations here have been that, your EBIT margin has been running above your long term target ranges and your back within that range you used to talk about. Is this the proper level of profitability that we should look at on a go forward basis or you think there’s opportunity to get back to where you were just a few quarters ago, longer term.

Jan Carlson

We have a situation now when we are investing for growth, as illustrated on one of the slides. We are setting ourselves up for a growth in new markets and this is of course taking cost. We are investing in active safety that will require cost on our DNE towards the target of $500 million in active safety in 2015 and in the midst of this setup and journey for growth, we are hit with an erosion of $180 million on second half, on top line, to what we thought and planned for as latest in July and is very difficult to in such a short period of time to adjust swiftly.

We are fast, we are early out and we are taking actions, but to compensate immediately for that magnitude of erosion is close to impossible.

David Leiker - R.W. Baird

What do you think the timing is for all those investments that generate organic growth that’s running well about the end markets? Is that a couple of quarters or is that later in 2013 or 2014.

Jan Carlson

I think it’s very difficult to have any good quantification of it. The launches that we have in China, that we communicated in July are running as expected. The launched and active safety are also running as expected. We are seeing somewhat lower tax rates than we have communicated, but that’s not so difficult to understand either when we see difficult times and people may not check all their option boxes on their expensive cars.

We believe that the growth we see through the launch, this will give us of course a positive boost. We should recall though that Europe is around a third of our company and when we see a sharp decline of the high value market like Europe, we take some time for that to compensate in volumes, in the lower constant market in Asia.

David Leiker - R.W. Baird

Okay great, thank you very much.

Jan Carlson

Thank you Dave.

Operator

We will now take our next question from Brett Hoselton from Key Banc.

Brett Hoselton - Key Banc

Good afternoon gentlemen.

Jan Carlson

Good afternoon Brett or good morning rather.

Brett Hoselton - Key Banc

Thank you. First with respect to Rod’s question earlier, I just want to make sure I was clear on that; is used bucket some of the major changes that have taken places from the fourth quarter of ’11 to fourth quarter ’12. What I’m hearing is four major items, one about a 40 basis points tailwind for commodities; two, about a 100 basis point headwind for growth; three, about a 50 basis point headwind for RD&E; and four, about a 100 basis point headwind for engineering income. Did I get that correct?

Jan Carlson

Not really. I think if you combine the RD&E, it’s close to one percentage point and if you take the growth part, its another percentage point.

Brett Hoselton - Key Banc

All right, okay. Can you explain the engineering income, what are we talking about there?

Jan Carlson

We are talking around the $10 million lower engineering income in Q4 compared to last year.

Brett Hoselton - Key Banc

And is that it just happens to be how it happens to fall this year versus the last year or is there something that’s changing there at some significant point.

Jan Carlson

It’s a timing issue. So what we are seeing is, we have been more successful in Q3 now the get the engineering income in, all around the same magnitude, but that it’s coming back in Q4 this year being lower. So all in all for this year, I think there is not so much difference in the engineering income, but the timing of it is different and that’s why when you look into Q4 year-over-year, its around $10 milling lower.

And engineering income is coming when you complete and finish the product you are working with towards customers and getting products into launch and getting product ready for production and we have been successful in completing some of these earlier than expected and therefore we have seen a higher level of engineering income in quarter three.

Brett Hoselton - Key Banc

And the tax rate was a little bit higher than we would have anticipated in the third quarter. Was there anything unusual in the tax rate?

Jan Carlson

Yes, it was and as you know we guidance a tax rate of 28% for 2012 and that was excluding discreet items. So now in Q3 we got the discreet t item and that was related to a new law in France; a new law which principally put 3% tax on dividend. So when we take out dividend out to France, we are hit by a 3% tax and that is impacting our retained earnings. So what’s available for dividend is now impacted in the P&L for the third quarter. The impact is around $7 million and has increased the rate temporary for 4%, thus 4%.

Brett Hoselton - Key Banc

And as we look at the fourth quarter and as we look at 2013, what are your expectations for the tax rate?

Jan Carlson

For the full year 2012, excluding this kind of discreet items, we are still around 28%. If we look into the near term, it should be around 28%, but longer term we will see tax holidays fading out. So longer term we will see tax rate in the low 30.

Brett Hoselton - Key Banc

And then as we look into 2013, and thinking about on the percentage of sales basis, how do you anticipate RD&E spending to impact your 2013 margins. Do you anticipate another setup in RD&E spending, impacting your margins by another 50 or 100 basis points or do you see it leveling off as you move into 2013.

Jan Carlson

We have said before that we would keep R&D lower than 6% of sales and that is as much as we have guided on the RD&E and it all depends on the growth gate and how much you are investing for growth. But we have communicated to you here in earlier calls that it should stay south with 6%.

Brett Hoselton - Key Banc

All right. Okay, well thank you very much gentlemen.

Jan Carlson

Thank you.

Operator

(Operator Instructions). We will now take our next question from Stephan Puetter from Goldman Sachs.

Stephan Puetter - Goldman Sachs

Good afternoon everyone and thank you very much for taking my questions. The first one is just something I didn’t catch earlier when you mention it and what was the growth rate you’re expecting and act of safety in the fourth quarter.

And then secondly, I want to come back to may be one of the positives right now, which is your very strong cash flow and your strong balance sheet. In the past you have mentioned several times that you are looking for acquisition opportunities to accelerate growth and particularly in the area of act of safety.

Do you think given the current turmoil in the markets, there maybe best opportunities or lets say a more realistic valuations in the markets, so the opportunity for you to become active may improve or asking the other way around, do you feel that having an extremely strong balance sheet as you do makes you very, very comfortable in the current environment and you’d rather say we want to put acquisition for hold for now and wait unit we’ve got more clarity on what’s happening.

And then maybe just a third one and I think you answered this in the past, but may be just to remind me, we’ve had a quite a lot of plant closure which have been announced in Europe. Do you see any direct impact from those plant closures to you or is there nothing specific related to this. Thank you.

Jan Carlson

If we start with the growth and active safety, we said here in the slide presentation that we estimate the fourth quarter growth to be between 40% and 50% and so that is year-over-year, quarter for growth compared in active safety. So that’s organic growth in fourth quarter for active safety.

And this is the step-up compared to the first half of this year, which shows in combination a 30% of organic growth. So we are seeing a step-up and that is consistent with the methods of our launches.

When you look to plant closures or you look, before we take the plant closures we take the plant closure to one of our OEMs or growth rather; the growth rate and their opportunity to invest in assets. The strategy we have is to build a strong balance sheet and to take the opportunities to buy companies when it comes. Therefore many owners of these assets, they see this as a strategic asset and they see it as something they want to hold on to and we believe that that could change in difficult times.

So it was after the crisis when we acquired passive safety from Delpi, so it was when we acquired the Tyco Electronics in the fall 2008, only a few weeks away from the Lehman Brothers crash and we would not be surprised if that would come again. If times are difficult, we would like to have the capacity to make a good acquisition if the right occasion comes. We don’t think that if we are on the opposite side, so that we would not buy in bad times, we think it’s a good opportunity for us.

We believe its good to have a strong balance sheet, because we don’t know in the future when an opportunity comes, how available financing will look like. Of course financing is available today, but we don’t know if it will be available and we saw that a couple of years ago, that financing wasn’t available in the same path as earlier. So our strategy there is to grow through acquisitions and that’s why we have the balance sheet.

The third part of your question, the plant closure; yes, of course we see a direct link in the lower light vehicle production and in the lower call-outs to customer plant. There is a link in between that and the increasing idling of customer plans is of course one reflection in also the lower organic phase for us in the fourth quarter.

Stephan Puetter - Goldman Sachs

Okay, thank you very much.

Jan Carlson

Thank you.

Operator

We will now take our next question from Björn Enarson from Danske.

Björn Enarson - Danske

Yes. Hi Björn Enarson with Danske. A question on the European market. There is some discussions or what is your view on the current numbers of OEMs in the market and how are you preparing yourself for potentially a consolidation or potential core protection in the regions. If this is an opportunity or how you looked upon that or this is something that you are doing to prepare yourselves.

Jan Carlson

It’s very difficult to comment on consolidates. We are monitoring it every day, every week in everything we do to what’s happening with combinations of OEMs or states that were owned by some OEMs and others or so forth. We are taking actions in our capacity alignment program and preparing ourselves as much as we can and of course, this is one part of the factor.

The fact is that there are figures our there saying that 70% of all the factories have less than two third of load. So there are some dramatic rumors out about factory loads among OEMs and when we read this, we can only do one thing and that is to increase our capacity alignment and be more prepared.

Björn Enarson – Danske

Okay, thank you and the second question is, what’s the recent trends in terms of the market rates in Europe when it comes to what type of cost if you take lesser cost or more to cost, etcetera; if you can give your comments upon that?

Jan Carlson

So far it has been the volume makers, more of small and medium sized cars that have been affected. The premium brands, the premium automakers have held up production very well and they are still holding up well as far as we can judge.

We see those signs, early signs of even the weakening trend it eating into premium brands. So they are all early signs of even there that it’s eating into it and also that it’s coming maybe to northern European volume makers.

Björn Enarson – Danske

Thank you.

Jan Carlson

Thank you.

Operator

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

Hampus Engelieu – Handelsbanken

Thank you very much. I have two questions coming back to this capacity adjustment program. Do you think it will be possible for you to quantify how much you are reducing capacity by increasing this to $80 million new store burn and also, what that would suggest for car production in Europe and maybe the last part of that question is, do you expect to be in par with capacity in the beginning of next year?

Jan Carlson

We don’t have a good figure on how much it will sort of increase utilization or reduce over capacity in our plants. This varies between plant to pant and country to country as we go from Northern Europe to Southern Europe, from east to west and from some plants being loaded with others. So you can go below 30% utilization in some parts of the plants into other plants that are much higher utilization. So it varies from plant to plant and this reduction will improve our order on footprint.

If we will be on par with product, it all depends on if we see further deterioration. As we said, we could not exclude that we will have to do more and if the market is future declining, we will have to do more and we will not wait to take action. It’s difficult to say. For what we see now, we believe we will be in line, but its all depending on the developments of core production.

Hampus Engelieu – Handelsbanken

All right, thanks.

Jan Carlson

Thank you.

Operator

We will now take our next question from Anders Trapp from SEB.

Anders Trapp - SEB

Yes, hi there. I have a couple of follow-up questions I guess. First, you have to try and understand you talked about 100 basis points negative impact in Q4 versus from investment for growth and some other place you talk about high start up cost. Is that sort of the same thing?

Mats Wallin

Yes, it is connected of course. I mean we have start-ups. We are expanding plants in some cases. Other cases we are building entirely new plants and of course you get more cost and you have to wait for the revenue cost, because you are in the ramp-up phase. So you have cost before you get the sites and that is a little bit the case we see here.

Anders Trapp – SEB

With what you can see now in terms of production plants with your customers, how long will you have this kind of quite substantial headwind from investment for growth.

Mats Wallin

Its very much about how the vehicle production will develop now here and if you now look into the fourth quarter and we see now the seven percentage points decline in organic space for the fourth quarter compared to the previous guidance, that means that you will have to wait longer and to say when and how, that’s difficult.

Anders Trapp – SEB

Yes, but what you are saying is you will need core production to turn up again before you will see an elimination of this, call it headwind.

Mats Wallin

Of course; I mean it is again about to get a return on the investment and so of course and I see production is a factor and you can now see for example softening in China where we have invested a lot, then you have to wait longer.

Anders Trapp – SEB

Are we seeing a softening in China overall or is it sort of only the Japanese OEMs in China that are suffering?

Mats Wallin

It’s a combination of slight softening overall in China and also in addition to this, the hit on the Japanese OEMs coming from the issues between China and Japan, so its two things. That Japanese OEMs is one thing, but there is also slight softening right now in China.

We believe that is temporary. We believe that overall the long term, the China development is a steady growth. But as we have expected, there is always some down trending in the curve, and now it seems to be a softening.

Anders Trapp – SEB

Right. Do you on the inventory levels in Europe and China, is there any particular issues there that means that we might be having production lower than sales ahead of us.

Jan Carlson

Thinking about our own inventory.

Anders Trapp – SEB

I mean car inventories, sorry.

Jan Carlson

Car inventories; well, if you look there are no good data. There are new data coming out of China and their inventory is fairy much as it was a couple of months ago, so really no change.

If you look to the inventory situation in Europe, there is not a good reliable data, but if you dare yourself to look on the production volumes and the exports and the rest of it, it appears that its an inventory increase in Europe, but that is based on our own estimates, it appears that the inventory increasing. There are no other data that is out there as far as we know.

Anders Trapp – SEB

Okay. Just finally, also about this headwinds that we are talking about in Q4, almost a 100 basis points in RD&E, with $10 million of that being low engineering income. I guess that one will not be an issue for next year as a whole of course, it’s a timing issue. But would it be a headwind for R&D next year basically on margin or not?

Jan Carlson

As we have said, R&D should stay within the 6% range in those sales and we will of course monitor the situation and also the development in the markets and adjust accordingly. We are committed to invest in technology and that has been one of our success factory and we will continue to do so and as long as we will keep our commitment of 6% of sales, we will continue to invest in technology.

Anders Trapp – SEB

Also (inaudible) is improving I guess. Do you have any estimate of that; if you have the current prices basically or whatever you have calculated for the fourth quarter, what the impact will be for the full year 2013 if the same prices prevail next year.

Jan Carlson

We haven’t done any calculations for ’13, more than if the current prices will prevail, we will have a tailwind for 2013, but we will have to come back in January more exact with concrete figures to you.

Anders Trapp – SEB

All right, very good. Thank you very much.

Jan Carlson

Thank you Anders.

Operator

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

Richard Hilgert – Morningstar

Good afternoon.

Jan Carlson

Good morning, good afternoon.

Richard Hilgert – Morningstar

I was curious if you could talk a little bit about -- I have recognized that a lot of the investment is going into the act of safety portion for growth to reach your $500 million sales mark. But I was curious to know where it is geographically that that $500 million winds up at? Is that North America, is it Europe or is it more spread across all of your geographic regions?

Jan Carlson

Active safety is so far in the vehicle is predominantly in North America and in Europe. The new technology are so far coming along mostly on the premier vehicles in these countries, in the larger volumes.

Then of course if you take Mercedes A Class or BMW seven series or other cars in, for instance China, there is a tendency to be very highly equipped with a lot of equipment, including active safety. But if you take the higher volumes and the higher take rates of for instance laying the departure warning or blind spot detections etcetera in smaller vehicles, it is still Europe and North America.

Richard Hilgert – Morningstar

Okay. On the developing markets, where the adverts safety content per vehicle still lags the developed markets, do you have a general rule of thumb or growth number on penetration into those markets for additional safety equipment, say over the next five years. What I am looking for hear is obviously what your take on the general production levels are going to be, but more so what are the programs that are coming done the pipe that we are going to see where they are staring to catch up with the safety content in more developed markets.

Jan Carlson

Well, we don’t have a rule of thumb. We will see that if you look to China for instance, there is penetration increase of the side systems and already today if you take frontal airbag passenger and driver, you are above 70% penetration rate for both of those products and they will increase with a 1% or 2% per year, that is our best estimate.

But then you come to other markets like Brazil for instance, where they legislate the frontal airbag we talked about in the formal presentation, you will have a much higher adoption rate going through. If you then take other markets, like India so far have not reached a lot when it comes to safety equipment in the vehicle for the cars produced for the India market.

So it varies between market to market and what is important for us is to be close to each market, to see the development and to be there with the right product as we have been in China where we have increased our market share significantly.

Richard Hilgert – Morningstar

Okay. On Europe, I was curious to know, we hear a lot of price war escalating in Europe with the OEs. Have you factored in a draw forward in the week demand that we see, such that we would see a contracted trough in demand over there or how do you look at that when you are looking at your volumes going forward?

Jan Carlson

Well historically our pricing pressure has leaned between 2% and 4%, so that has been over the cycle for a long period of time and we didn’t see even during the worst crisis in 2008 and ’09, pricing pressure to go outside of that range; it was in the low end of the range. And then when times are good and competition is worse and volumes are up and then pricing pressure can go higher.

So we are monitoring this. We are seeing what’s happening, we are following the consolidation also of domestic players in China to see whether that growth would have an effect. We are of course seeing the situation where we take market share in China and we are growing to close to 40% market share, whether that would have an effect on pricing.

So far we haven’t seen that, I can say, but you should never say never of course and this is the best 2% to 4%. It’s the best expectation we will have for the time being.

Richard Hilgert – Morningstar

That’s good information and I appreciate that. I was referring to pricing at the OE level in the market in Europe. What I am referring to is cutting their prices to their customers and potentially pulling forward any demand that still remains in the market, even though the market is very low and I was referring to how you are looking at how you are doing your production forecast in Europe. Are you factoring in these price wars that are going on that could be potentially pulling forward some demand, what’s left of it anyway.

Mats Wallin

Basically we are taking the customer call-ups that we have in our production system and based on the production call-outs that we have, we are making our own judgment from these call-outs.

We learned in 2008 as we have learned from time to time, call-outs can change very fast, and if times are bad, they can be cut rapidly, if times are good, they can be increased. We are trying to do our best estimates factoring in what you talked about and that is the basis for our guidance. That we have taken every effect or every price wars and every angle of it into our basis, I am not sure I can confirm that. But we are trying to do our best estimate as a basis for our guidance based on the call-out.

Richard Hilgert – Morningstar

Okay. Can you tell me from our perspective, when you are looking at the demand coming from your customers and your customers are looking at their market, how does this 50% fleet of the European market factor in? What are businesses doing in terms of ordering vehicles? Is it about the same as the retail level of demand or do they swing more so than the retail?

Jan Carlson

You know we don’t see any different. We see the light vehicle production call-outs from our customers then they were at retail or not or fleet, we don’t really see the difference in there. I think that as it is, that’s more a question I would think for an OEM. We see the call-outs from Volkswagen, Volvo, (inaudible), whoever it might be and we don’t see whether its going to whatever end customer.

Richard Hilgert – Morningstar

Okay. All right, thank you very much.

Jan Carlson

Thank you.

Operator

(Operator Instructions). We’ll now take our next question from Agnieszka Vilela from Carnegie.

Agnieszka Vilela – Carnegie

Hi. Could you please provide us any update on the anti-trust investigations and how is it progressing and when do you expect any decision?

Jan Carlson

On the European, if I assume it is the European investigation you are interested in, I am afraid I have no update on this investigation as of now and the investigation is ongoing and has been so for a while as you know.

We have no update on timing either to what we could see any as far as conclusion or anything on it. So nothing further I can disclose to you here and I can talk about here and we don’t have any update.

And we have also the class action lawsuits that you are aware of and that has to come and that is also a continued discussion between those parties and that is also in progress. In addition to this, we also have some very early discussions with authorities in Canada and authorities in Japan, but that is in a very early state. So nothing really new that we can communicate here today, unfortunately.

Agnieszka Vilela – Carnegie

Okay, thank you and one more question on the balance sheet again, you are talking about that you want to acquire. Could you please specify what product do you lack right now in the active safety, because I recon that you have quite a full product portfolio already or do you just want to consolidate the market. What’s your ambition behind it?

Jan Carlson

Autoliv is very well know as the leading OEM in our business or active safety. We have made substance in break into electronics and into active safety. We would benefit from an even stronger trademark in the area of active safety and in this area an addition of an order book and addition of a presence with resources, it would be beneficial from Autoliv. And of course, if we can consolidate the market, we believe that is also good for market and good for Autoliv.

Agnieszka Vilela – Carnegie

And with regards to the passive safety, are you looking for any acquisitions there?

Jan Carlson

We have stated that it will be possible for us to have an acquisition in Japan, because we are below our corporate average. We are slightly above 20% market in share in Japan, that’s new too that this market in Japan looks different due to the heavy (inaudible) who supply to the Japanese industry.

We would be happy if we could grow this in an acquisition to our cooperate average, 30% or something in that ballpark. That is not easy and that will probably take time, but that’s what we have talked about in passive safety.

Agnieszka Vilela – Carnegie

Thank you. And just one more question; with regards to the balance sheet, can you consider any share buybacks. I know that your competitor has recently announced a new buyback program and then I assume that you still pass the mandates to buyback shares.

Jan Carlson

We have an outstanding mandate to management for over three million shares. For the time being we are focused on execution of our strategy and we have been so for sometime.

In addition, right now we see also a weakening market out there and more difficult macro environment and in weakening macro environment, weakening times a strong balance sheet is always good to have, not only for that we are having potentially more opportunities, but also for a safer environment, to be safe in the rougher environment.

In absence of all of this, this is of course shareholder money. We have been a shareholder friendly company; we are a shareholder friendly company. So if we would at some point for some reason conclude we have failed in our strategy, we would of course discuss how to return the money to our shareholders, but that is a discussion for the board.

Agnieszka Vilela – Carnegie

Thank you.

Jan Carlson

Thank you.

Operator

(Operator Instructions). We will now take our next question from Ryan Brinkman from J P Morgan.

Ryan Brinkman - J P Morgan

Hi, thanks for taking my question.

Jan Carlson

Of course.

Ryan Brinkman - J P Morgan

Could you please comment a little more on the nature of these temporary plant closures in Europe? What sort of lead-time do you get on the closures and I’m curious to what extent your lower margin guidance relates to just typical decremental margins on the lower productions or instead, the extent to which it relates to the steadiness of the temporary closures and related inability to flex cost on near term.

Jan Carlson

I would say in these times, when you see the plant closures we are talking about here, I would say typically between a couple of days up to four weeks in advance. That’s typically what you could see in plant closures and if you go beyond that it’s more like lowering of the bill schedules and lowering of the leases, the bill plans that we have in our production system.

Otherwise it can vary depending on the situation of the OEM from a couple of days up to three, four weeks. We had one OEM here closing down, we got one week and we got this about three weeks in advance. So that’s sort of the range.

Ryan Brinkman - J P Morgan

Okay and then you stated that the pace of your decline in Europe likely for production seems to be accelerating. I think there was mostly a 4Q comment. Are you able to share with us at all your initial thoughts on Europe as we head into 2013?

Jan Carlson

No, we are not. Really actually it’s a rapidly changing environment and that would be premature for me at this point, when we are seeing a so recent rapid change into quarter four to now speculate in the quarter one and we will have to come back to that in our earnings call in January and if there is anything we can share with you, we will do it earlier, but in the earnings call for January.

Ryan Brinkman - J P Morgan

Sure, that’s understandable. Last question and you mentioned that the softness in Europe production volume was spreading north and are you seeing any spreading in terms of segments. For example, it seemed earlier that luxury production was much better off relative to mainstream vehicles. Are you seeing any change in that at the margin?

Jan Carlson

And it is better off than the mainstream vehicle, it still is the situation. But as we indicated, we are seeing some very early signs, also that premium brands that might be effective by this and it is not so difficult to expect that to see happening and we are seeing some early signs. But we should also be clear on the premium brands are holding up better still than the volume bankers.

Ryan Brinkman - J P Morgan

Okay, thanks for the color. I appreciate it.

Operator

We will now take a follow up question from Anders Trapp from SEB.

Anders Trapp – SEB

Yes, hi. I just wondered actually about this class action suits, what it’s really about and basically who is suing you and on what grounds?

Jan Carlson

Well, of course that is if I correct it and sum it up very fast, it is a claim that people out there may have lost money or paid too much for product in various stages due to an anti-trust behaviors or unlawful behavior. That price collaboration or price fixing would lead into at the end of the day a more expensive product for end customers and also higher up in the value chain. And what people then are doing is that they are coming together and collectively suing companies that have made unlawful behaviors.

Anders Trapp – SEB

But it is not the OMs like your big customers like GM or so. It is private persons?

Jan Carlson

I think that customers, if legal people coming, trying to assemble a number of stakeholders and they are trying to get stakeholders into this class action lawsuits and that can be single customers like you and I, that can be other stakeholders and could also be OEMs. And I think that they are tying to get as many into their class in as possible and then make in the case as strong as passable.

Anders Trapp – SEB

Fascinating, all right. Thank you.

Jan Carlson

Good work. Thank you.

Operator

(Operator Instructions).

Jan Carlson

It seems we have no more questions. If we have no more questions, I would like to thank everyone for your attention and continued interest in our company and we look forward to talking to you again during our fourth quarter earnings call on Thursday, January 31 2013, and in the meantime until then I wish you a safe and relaxing holiday season and good bye for now. Thank you very much all of you.

Operator

Ladies and gentlemen, that will conclude today’s conference call. Thank you for your participation. You may now disconnect.

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