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Edited Transcript of ALV earnings conference call or presentation 28-Apr-17 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Autoliv Inc Earnings Call

Stockholm May 4, 2017 (Thomson StreetEvents) -- Edited Transcript of Autoliv Inc earnings conference call or presentation Friday, April 28, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anders Trapp

Autoliv, Inc. - VP Investor Relations

* Jan Carlson

Autoliv, Inc. - Chairman, CEO

* Mats Backman

Autoliv, Inc. - CFO and Group VP of Finance

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Conference Call Participants

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* Brett David Hoselton

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

* Christopher Patrick McNally

Evercore ISI, Research Division - MD and Fundamental Research Analyst

* Edoardo Spina

Exane BNP Paribas, Research Division - Analyst

* David Lim

Wells Fargo Securities, LLC, Research Division - Senior Equity Research Analyst

* Kai Alexander Mueller

BofA Merrill Lynch, Research Division - Associate and Analyst

* Matthew T. Stover

Susquehanna Financial Group, LLLP, Research Division - Analyst

* Richard J. Hilgert

Morningstar Inc., Research Division - Senior Equity Analyst and Securities Analyst

* Steven Michael Hempel

Barclays PLC, Research Division - Research Analyst

* Thomas Besson

Kepler Cheuvreux, Research Division - Head of Automobile Sector

* Victoria Anne Greer

Morgan Stanley, Research Division - VP

* Vijay Raghavan Rakesh

Mizuho Securities USA Inc., Research Division - MD and Senior Semiconductor Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Q1 2017 Autoliv Earnings Conference Call. Today's conference is being recorded, and will last max one hour.

At this time, I would like to turn the conference over to Mr. Anders Trapp. Please go ahead, sir.

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Anders Trapp, Autoliv, Inc. - VP Investor Relations [2]

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Thank you, Daniel. Welcome, everyone to our first quarter 2017 earnings presentation. Here in Stockholm, we have our Chairman, President and CEO, Jan Carlson; our Chief Financial Officer, Mats Backman; and myself, Anders Trapp, Vice President of Investor Relations. During today's earnings call, our CEO will provide a brief overview of our overall company performance and outlook as well as an update on general business condition, while our CFO will provide further details and commentary around the financial results and outlook. Then, at the end 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 homepage of our corporate website.

Turning to the next page, we have the safe harbor statement, which is an integrated part of this presentation and includes the Q&A that follows. During the presentation, we will reference to some non-U. S. GAAP measures. The reconciliations of historical U.S. GAAP to non-U. S GAAP measures are disclosed in our quarterly press release and the 10-Q that will be filed with the SEC. Lastly, I should mention that this call is intended to conclude at 3:00 p.m. CET, so please limit the questions to a maximum of 2 per person.

I will now turn it over to our CEO, Jan Carlson.

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [3]

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Thank you, Anders. Looking on the first quarter highlights by turning the page. And before we go into the presentation, I would firstly, like to sincerely thank the entire Autoliv team for delivering another quarter of solid financial performance and their relentless focus on quality first. Organic sales growth for the quarter of 4.4% was slightly lower than the global light vehicle production, primarily due to an unfavorable mix in China and North America. However, this organic growth was around one percentage point better than our guidance, mainly due to stronger-than-expected demand with Japanese OEMs in China, in North America and in Japan. This resulted in an adjusted operating margin of 8.4%, 40 basis points better than expected and an adjusted earnings per share of $1.65. During the quarter, we returned $51 million to shareholders through dividends, while we continue to deliver a strong adjusted return on capital employed of 20% and return on equity of around 14%. Our leverage ratio will be at the lower end of our range after making the annuity payment in second quarter. We will continue to monitor the situation as we recognize our long-term target is [one time].

As we prepare our company for the next wave of growth, I'm pleased with our progress in delivering improved net operating leverage during the quarter through better footprint utilization, while minimizing additional facilities or expansions to support this growth. This, in combination with improving RD&E leverage as new programs launch over the next several quarters, creates the potential to improve margins and returns in the future. And lastly, we are pleased to have announced last week, the start of another industry first, our newly formed 50-50 joint venture with Volvo Cars named Zenuity. This joint venture has been created to provide industry-leading automotive software solution as we move towards highly automated driving and eventually autonomous driving.

Looking more into the details of Zenuity on the next page. During the second quarter, [this day we] plan to hire 100 engineers from Autoliv and hire 100 engineers from Volvo Cars. In addition, approximately 400 engineers are planned to be hired through the end of 2018. During the second quarter, Autoliv made an equalization payment of $110 million in cash for our share of the 50-50 joint venture and we'll start to report 50% of the net result of Zenuity on the equity method investment line on the income statement. We estimate the net loss to be approximately $15 million per quarter after tax during 2017, however, this effect is partially offset by a benefit of $5 million on the RD&E side per quarter or a 15 basis point to the operating margin, which was included in our earlier margin full year 2017 indication. The development target for the joint venture are to introduce and upgrade to ADAS, the Level 1 to 3 algorithms for production in 2019. And 2 years later, in 2021 introduce autonomous driving, Level 4 and Level 5 algorithms to the market. Therefore, we expect Zenuity and Autoliv to generate revenues during 2019, and we are confident Zenuity will enable Autoliv to deliver world's leading robust solutions for highly automated and autonomous driving to our customers. The combined experience of Autoliv, the worldwide leader in automotive safety systems; and Volvo Cars, the premium carmaker highly regarded for its automotive safety will ensure solutions that meet society's needs in real life road conditions.

Now looking to our business outlook on the next page. We continue to see a strong order intake above Autoliv's current market shares. To support this order intake, we have completed the hiring of close to 1,000 engineers, 1 quarter ahead of schedule, of which, a little more than half of the engineers were in Passive Safety. Within Passive Safety, we will start to launch new programs during the second half of 2017 related to business that was sourced in 2015. This should result in our Passive Safety segment outperforming the light vehicle production during the second half of 2017. However, during this upcoming heavy launch period, we will maintain flexibility and closely monitor the underlying market situation, while ensuring flawless execution on launches. Within electronics, we will continue to see lower organic growth for some future quarters, mainly due to various product mix and the timing of new program launches. However, the organic growth or our core vision, radar and ADAS ECU products continue to grow in the mid-teens.

Looking at customer programs, we have expanded our offering that we launched in 2015 on the Mercedes E-Class, now to the S-Class. Our content per vehicle on a fully equipped S-Class is more than $1,600, which includes night vision radar, ADAS ECU and mono or stereo vision with Autoliv algorithms. In addition, in February, this year, Volvo Cars awarded active safety business to Autoliv that is expected to launch during 2019. Our products include mono vision with Autoliv algorithms, radar and the ADAS ECU. These orders demonstrate the confidence OEMs recognized as leaders in safety and ADAS have in our technology and showcases our products with robust quality with short development cycles.

In active safety, we see a positive trend, where premium brand OEMs are focused on more on Autonomous Emergency Braking sensor fusion. This, along with the China NCAP will positively impact the future content per vehicle in active safety. Lastly, we anticipate expected changes in the NCAPs in China and India will positively impact the future content per vehicle in Passive Safety, where today, the estimate that Passive Safety market is around $20 billion in 2017, which implies 1% of market share. It represents around $200 million in annual savings.

Now looking to the next page. We have summarized our delivery quantities for the first quarter. Within Passive Safety, our seatbelt volumes had a favorable mix towards high value-added products such as active seatbelts and pretensioners. Our airbag products performed slightly below the global light vehicle production due to stronger light vehicle production growth coming from the growth markets, where airbags are not yet fully adopted, while we perform slightly better than the Triad, where airbags have a higher penetration.

Within Electronics, our active safety sensors declined due to the phase out of incumbent brake control business and certain GPS programs, while our radar vision and ADAS ECU grew faster than the global light vehicle production. Also, within electronics, our rates in restraint control volumes grew more in line with the global LVP. This is a positive sign since not all new vehicles produced have a restraint control unit. Looking now on our new model launches on the next slide. We have highlighted some of our key model launches planned during 2017.

These models are well equipped with our passive safety and electronic products and are expected to contribute to our overall organic sales growth during the full year of 2017. Of these models, only the Micra and the E-Class launched during the first quarter. This implies the remaining models are expected to drive our outperformance versus light vehicle production during the remainder of the year. And on an annual basis, we estimate that these 9 models represent around 6% of our group sales. However, 6 of these models have more than $300 of content per vehicle.

Looking into the underlying market conditions on the next page. During the first quarter, we have seen an increased uncertainty in the macro environment due to renewed autocycle concerns. During the first quarter, the inventories increased in China and the U.S. due to a softer demand than the underlying light vehicle production, while the inventory situation in Europe seems to be stable based on our internal estimates. For second quarter, the overall global light vehicle production is expected to increase by approximately 1% year-over-year according to the latest IHS figures. This assumes light vehicle production in Asia remains strong, where Japan, China and India are expected to increase 10%, 3% and 8%, respectively.

In North America, where the U.S. consumer confidence remains strong, the light vehicle production is expected to decline slightly for second quarter, while South America is expected to continue its recovery from the trough in quarter 1 last year, with an increase of 5%. In Europe, vehicle registration continued to show a steady improvement in the EU 27 for the first quarter. However, the light vehicle production is expected to decline 3% year-over-year in second quarter. This is driven by a decrease in Western Europe of 5%, which is partly offset by an increase of 1% in the Eastern Europe.

Looking at the latest full year 2017 global light vehicle production, IHS now estimates a 2% year-over-year increase versus a 1.6% back in January. This year-over-year improvement is mainly driven by increases in Asia and Europe of 3% and 2%, respectively, while North America is expected to decline approximately 2%. The light vehicle production figures indicate a 3% increase during the first half and a 1% increase during the second half of this year. As mentioned earlier, we will continue to monitor the market situation closely and are ready to take actions if and when necessary as we have done in the past.

I'll now turn it over to our CFO, Mats Backman, for the financials and our outlook. Please go ahead.

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Mats Backman, Autoliv, Inc. - CFO and Group VP of Finance [4]

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Thank you, Jan. Looking now on the next slide, where we have our key financial figures for the first quarter 2017. Our record sales of $2.6 billion for any first quarter was driven by strong sales growth in Europe, Japan and India along with the brake systems joint venture with Nissin Kogyo. The consolidated net sales increased by more than 7% despite the negative currency translation effect of around $50 million and lower inflator replacement sales of $7 million. Consequently, higher organic sales, acquisitions and improved operating leverage drove our record gross profit in the quarter.

Our adjusted EPS of $1.65, essentially in line with last year despite higher RD&E due to investing for growth in passive safety for the near term and electronics for the long term. Looking now at our operating margin on the next slide, where we have our EBIT bridges versus guidance and prior year. Going forward, we have slightly modified our approach to this analysis, where we now include other in the operating leverage figure, which is essentially residual after accounting for currencies, raw materials, acquisitions and RD&E.

Looking now to the chart on the left. Our adjusted operating margin improvement versus guidance of 40 basis points was mainly due to higher-than-expected organic sales growth. Compared to prior year, as illustrated by the chart on the right-hand side, our adjusted operating margin was about 70 basis points lower. The net operating leverage of around 30% from the organic sales growth was more than offset by the planned higher investments in RD&E, raw materials, currencies and the impact from acquisitions.

Looking now to our cash flow on the next slide. Our operating cash flow of $149 million was lower than last year, primarily due to timing issues in working capital and this is despite operating working capital being at 6.5% of sales. CapEx, net of 4.7% of sales was below our range. Consequently, as a result of this low level in first quarter, we now anticipate CapEx net to be in the range of 5% to 6% of sales in full year '17, rather than the high end of the range that we mentioned earlier. We expect the full year operating cash flow to be more than $800 million.

Full year '17, our capacity alignment cost is expected to be around 20 basis points with a cash outlay of around $30 million. Commodity cost increases during Q1 by around $7 million and are now expected to be close to $40 million for the full year, rather than around $30 million that we expected, when we said our initial full year indication back on February 2.

Looking now to our segment reporting on the next slide. We have summarized our segments reporting for the first quarter. In passive safety, organic sales growth of close to 5% was primarily driven by strong growth in Europe, Japan and India, in particular, with airbags and high value-added seatbelts. The strong growth was negatively impacted by currency translation effect of about 2%. Consequently, consolidated net sales in passive safety increased with about 2.5% to more than $2 billion.

In passive safety, the 10% operating margin was a result of high organic sales and lower capacity alignment cost, which was partly offset by higher commodity and RD&E costs. In electronics, the organic sales growth of around 3% was primarily driven by new model launches and higher customer take rates in active safety and restraint controls in sensing, while acquisitions added around $120 million. This sales growth of about 28% resulted in a record consolidated net sales of close to $600 million for the segment, an increase of more than $125 million year-on-year. The 2.3 operating margin -- 2.3% operating margin for the electronics segment was affected by higher RD&E and the impact of acquisitions.

Looking now to our outlook on the next slide. We have a guidance, which is primarily based on our customer call offs. Our organic sales are expected to increase year-on-year around 2%, mainly due to strong growth in China, Japan, India and South America. Sequentially, our consolidated sales are expected to decline by about 2%, mainly due to a 5% decline in global LVP from the first quarter into the second quarter. As a result, we expect to achieve an adjusted operating margin of around 8.5% for the second quarter. Year-on-year, the benefit from high organic sales and currencies are roughly offset by higher commodity costs, planned higher RD&E and costs related to the ramp up of capacity and new technologies for growth. Sequentially, the adjusted operating margin is roughly in line with the first quarter, despite 2% lower consolidated sales.

Looking now upon our full year on the next slide. Our 2017 indication remains unchanged from February 2 organic sales growth and adjusted operating margin. Our strong organic sales growth of 4% and that's roughly 2x the latest global LVP according to IHS is primarily driven from Europe, Asia and active safety, which is partly offset by lower inflator replacements in North America. Our overall outlook for inflator replacement remains unchanged for 2017 and 2018 from what we have mentioned last quarter. As a result of strong organic sales growth, we anticipate an adjusted operating margin of around 8.5%. Year-on-year, the positive margin effect from organic sales and currencies are more than offset by higher commodity costs, planned higher RD&E costs and costs related to the ramp up of capacity and new technologies for growth and the impact from acquisitions.

Summarizing our outlook on the next slide. Our outlook excludes cost for capacity alignment and antitrust-related matters and assumes mid-April exchange rates. Our net consolidated sales for the second quarter are expected to decline by 1% due to a 3% negative currency translation headwind. For the full year '17 indication, our net consolidated sales are now expected to grow by around 3% rather than the 2% expected on February 2. This is due to lower negative currency translation effects, while the growth from organic sales and acquisitions remains relatively unchanged. Based on these sales assumptions, we expect an adjusted operating margin of around 8.5% for the second quarter and around 8.5% for the full year '17.

Despite our better-than-expected performance in first quarter, our full year operating margin remains unchanged due to the increased uncertainty in light vehicle production in North America and China as well as higher-than-expected commodity costs. For full year '17, excluding any discrete items, we now expect the tax rate of about 30%. In summary, these estimates indicate strong growth with an operating margin within our long-term target range, despite higher RD&E, high investment to support future growth and higher commodity costs and the impact from acquisitions.

Turning the page, I will now turn it back to Jan before we start the Q&A.

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [5]

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Thank you, Mats. In concluding today's call, our industry is in the middle of a rapid development and change. Technology companies are joining this development towards the autonomous car. Our passive safety market is undergoing a major structural change, while the geographical differences in light vehicle production growth are substantial. We believe that all these changes create tremendous growth opportunities for an operationally strong company like Autoliv. This concludes our formal comments for today's earnings call.

We would now like to open it up for questions, and I turn the call back to you, Daniel. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We can now take our first question today. It comes from Victoria Greer of Morgan Stanley.

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Victoria Anne Greer, Morgan Stanley, Research Division - VP [2]

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And just 2 questions for me, please. And firstly, on the Zenuity losses, that's very clear and the impact for 2017. And you've talked about revenue to come in 2019. Do you have a view on what we should be thinking about from modeling the equity contribution for 2018, 2019? And a view I guess, on the breakeven point for that business. The second thing is just on the other income expense line. I can see there's a $9.9 million positive in there for this quarter, and that's typically a negative other than in Q4, when sometimes you have some [chilling] changes coming in there. So what was the positive in there, because that really helps the EBIT number earn quite a bit in the quarter?

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Mats Backman, Autoliv, Inc. - CFO and Group VP of Finance [3]

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I can start with the second one. This is Mats Backman. That is related to the MACOM business because I mean, we -- as we said in the press release, we have an impairment in the quarter related to the GPS modules that we have been talking about previously as well. But that is -- that's a negative. But on the positive side, we have actually released some of the provision that is related to an earnout for that acquisition. So that goes against the impairment we took in the quarter. So the net effect of those 2 items is basically close to 0 there. With the reduction of the provision related to the future earnout in the MACOM investment.

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Victoria Anne Greer, Morgan Stanley, Research Division - VP [4]

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Okay. But there's a separate impairment?

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Mats Backman, Autoliv, Inc. - CFO and Group VP of Finance [5]

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Yes.

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Victoria Anne Greer, Morgan Stanley, Research Division - VP [6]

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Elsewhere in the bridge?

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Mats Backman, Autoliv, Inc. - CFO and Group VP of Finance [7]

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It is. And on the first one, looking on Zenuity. What we are guiding here and giving information, that's valid for 2017. We are talking about $15 million on quarterly basis that is related to what we will show in the income from equity method investment in the P&L then. So all in all, if you're looking on the full year 2017, that's an effect of $45 million then, and that represents 50% of the Zenuity result so to speak. And that is the run rate we see kind of currently. And in terms of modeling, I guess, it's fair to assume a little bit of an increase on that number as we will continue -- Zenuity will continue to recruit engineers going forward.

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Victoria Anne Greer, Morgan Stanley, Research Division - VP [8]

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So into 2018, the growth of $15 million could be a little bit higher?

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Mats Backman, Autoliv, Inc. - CFO and Group VP of Finance [9]

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Yes. That's right.

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Operator [10]

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We can now move along to our next question, and it comes from Chris McNally of Evercore ISI.

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Christopher Patrick McNally, Evercore ISI, Research Division - MD and Fundamental Research Analyst [11]

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I think you've been pretty clear on the Zenuity expenses. I just wanted to triple check the net effect. So the R&D savings of $5 million per quarter, is that included in the current 8.5% guide? So essentially, when we just incorporate the new information, it's that Zenuity will now be $15 million per quarter below the line in the equity line. Is that the correct understanding?

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Mats Backman, Autoliv, Inc. - CFO and Group VP of Finance [12]

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Yes. Yes, that's correct. I don't -- if you're looking on the full picture of Zenuity, you'll have a net effect on quarterly basis of about [10 though].

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Christopher Patrick McNally, Evercore ISI, Research Division - MD and Fundamental Research Analyst [13]

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Okay. Perfect. The second -- because that's an after-tax number and obviously, you're 50% share. If I just run the math roughly back up to an expense line, it's about $160 million per year and you're saying that will grow. I mean, given this is mostly engineers, I mean, that's a staggering number. That's sort of Intel level spend. Can you just describe what the money is being spent on over the next 2 years?

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Mats Backman, Autoliv, Inc. - CFO and Group VP of Finance [14]

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No, I think, it's one thing in the calculation that you need to remember. Basically, looking -- if you're looking on U.S. GAAP and for that IFRS as well, when you have a business like this, you can't talk deferred tax assets on that loss. Because I mean, as it will take a couple of years before we are getting in the positive territory. We will not be able to book any kind of tax assets on that one, meaning that this tax consideration is not included in the 15% -- in the $15 million, excuse me.

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Christopher Patrick McNally, Evercore ISI, Research Division - MD and Fundamental Research Analyst [15]

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Okay. But, I mean, it's still something like 1,500 engineers at roughly 70,000 per year. I mean, should we think of this is as the 2 companies are making a big push into Level 4 and Level 5 algorithms?

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [16]

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You mentioned the number $160 million. Where did you get that number from?

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Christopher Patrick McNally, Evercore ISI, Research Division - MD and Fundamental Research Analyst [17]

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I'm just taking the $15 million x 4, $60 million x 2, so $120 million spent, and then, I'm just dividing by 70,000 per engineer to come up with a rough number of engineers that, that expense would back into.

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [18]

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Okay.

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Christopher Patrick McNally, Evercore ISI, Research Division - MD and Fundamental Research Analyst [19]

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And so is that the fair way to think about it? Is just both companies that are sort of front loading the expense to make a big push into Level 4 and Level 5. It just seems like a large -- a large investment.

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [20]

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Well, the number of engineers we are talking about here is to start with the 100 -- plus 100 coming from Autoliv to -- and Volvo into Zenuity essentially here in second quarter. And then up and including 2018, we aim to hire another 400. So we are looking to end up towards the year -- next year's end around 600 people, big engineering workforce inside Zenuity. And the total load here for Autoliv and the -- to 50% here and the rest, the remaining 50% is the Volvo is for the entire Zenuity operation and that includes everything and their effort in building up the company, of course.

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Operator [21]

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We can now move along to our next question. It comes from Brett Hoselton of KeyBanc.

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Brett David Hoselton, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [22]

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Okay, you've answered this question in a couple of different ways. I just want to make sure I'm clear on the Zenuity. We're going to end up taking $5 million out of Autoliv's consolidated SG&A that will be the R&D benefit, and then we are going to see $10 million loss in your equity income line. Is that the idea? I'm wondering if -- really I'm wondering if that $10 million is you're going to get 50% of that, or is that accounts for the 50%.

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Mats Backman, Autoliv, Inc. - CFO and Group VP of Finance [23]

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No. It's $15 million on the equity method investment in the P&L. It's $15 million.

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Brett David Hoselton, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [24]

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I apologize. $15 million. Is that already -- is that your 50%? Or is that 100%? And it sounds like you're at 50%. Is that correct?

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Mats Backman, Autoliv, Inc. - CFO and Group VP of Finance [25]

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It's all 50%.

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Brett David Hoselton, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [26]

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Okay. That makes sense. And switching gears kind of from a 30,000 foot perspective active safety, you mentioned that you've got some new orders. Got 3 orders from 3 OEMs and you got 8 orders from 5 OEMs. Can you just remind us how do you see Mercedes-Benz, Volvo or 2, can you just remind us who have you announced thus far as your OEMs? Can you give us an idea of what -- on what basis are you winning these awards? And then finally, as you kind of look out over the next year, what would you consider to be a reasonable number of awards over the next year. I mean, I know you can't guarantee awards, but what would be -- you think will be reasonable, better, worse than expected?

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [27]

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The basis for the award wins is, of course, a number of things. It's a high-performing product portfolio, where we have, in vision systems, stereo vision, which is probably world's leading technology as of today. And that, we can offer in combination with a radar portfolio that is also an upgraded version from the E-Class now going for you to launch on the S-Class together with ADAS controller. So then that together with also the future opportunity of Zenuity to be able to offer the world's leading decision-making software for automated or autonomous driving is of course, one area. The competitiveness, we should not forget about the fuel tax or competitiveness of our product and this is an automotive industry. So there are several reasons why we are winning this. And as you know, we are in production to several OEMs. We are in production to major OEMs in Europe, in Japan, in North America in current production. And we are continuing to take business from these guys. And they're also -- we're taking business from Chinese OEMs.

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Operator [28]

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We can now move along to our next question. It comes from Thomas Besson of Kepler Cheuvreux.

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Thomas Besson, Kepler Cheuvreux, Research Division - Head of Automobile Sector [29]

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I have 2 questions, please. Firstly, I'd like to come back to the prior question on the other income. Is it fair to us to believe that the other nonoperating items of minus $9.5 million is the offset you are mentioning. So from the MACOM business, all the $9.9 million positive? Or is it somewhere else? Just looking...

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Mats Backman, Autoliv, Inc. - CFO and Group VP of Finance [30]

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I mean, we're talking about the amortization. I mean, where we are taking the impairment. So that's the negative. And then you have a positive on other nonoperating.

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Thomas Besson, Kepler Cheuvreux, Research Division - Head of Automobile Sector [31]

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Okay. But is it correct to view this write-down on the line, other nonoperating items, which is minus $9.5 million, which is unusually high versus the plus $9.9 million, which is also unusually high and unusually positive or not?

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Mats Backman, Autoliv, Inc. - CFO and Group VP of Finance [32]

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No, I'll say no.

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Thomas Besson, Kepler Cheuvreux, Research Division - Head of Automobile Sector [33]

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Okay. The second question, I'd like to come back to the organic growth and the order intakes in active safety. You're mentioning a number of new contracts, but no absolute amounts of order intake. Can you help us understand what's going to be the evolution of organic growth in active safety in the coming quarters because it was running very high. It slowed. It's reaccelerating now. So should we think that we are going to get better in the coming quarters, much better ahead or anything you can say to help us here?

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [34]

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On the total active safety growth number, you should see a continued low level due to the same reason we have been talking about. We have the phase out of our internally developed brake control, and we have the ramp down of the GPS module. This will offset the higher growth of the core product. As we mentioned here, we are in the mid-teens for the radar and emission product. But we will see for some more quarters to come, the ramp down effect of these 2 other products that is on its way out. So that's what will happen. Into '18, the comparable from that point will be better. But into '18, and we will speak more about this in through the Capital Market Day. And we might continue to see lower growth levels in active safety core products than what we were used to some years ago. We had numbers 30% or above. And that will take some time before we return that. Because the order intake that we took last year of around 25% of the available market, will only start to kick in, in 2019. So that's basically the situation. But as I said, we will elaborate more on it in the Capital Markets Day.

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Operator [35]

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We can now move along to our next question. It comes from Kai Mueller of Bank of America Merrill Lynch.

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Kai Alexander Mueller, BofA Merrill Lynch, Research Division - Associate and Analyst [36]

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Just coming back actually on that active safety growth aspect, it's still very low and you have those targets out there. You just mentioned on the ramp up getting towards your $1 billion target. But how do you actually judge the excess in this business. Is it organic growth? Is it how much margin you can make on those products? And can you just clarify, you mentioned the number of $1,600 fully spec'd for the S-Class. Is that sort of really the maximum content you can currently deliver into vehicle? Should people take it up? Or what do we need to see as sort of really upper limit and possibly an average overall? And on the second point is, you mentioned in Q3 that you missed out on some deals in this active safety part. Has that turned around recently? Do you see that projection better? And coming to that Zenuity and active safety, basically, given, we've seen the recent takeover of Mobileye by Intel and Chris made the point how much money are you actually spending if you're competing against those players. How do you see that playing out in the long term, especially in light of the cash injections you made now of USD 100 million? Would we have to see possibly more of those coming in the outer years as Zenuity still runs at a loss?

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [37]

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Was -- several questions there. Let's see if I captured them all, and we can take them one by one. If we start with content of the $1,600, maximum we have seen cars with even higher content, maybe even up to maximum $2,000. But ballpark between a $1,500 or a $2,000 per vehicle is a maximum with the product portfolio that we represent today. And -- but you should have in mind that, that is not the average content. The average content for an S-Class is maybe around $600 and because of the take rate. Then that is making it also somewhat difficult for us to estimate growth. The take rate may vary over time or different take rates may apply to different model. If you take the $1,600 you have to shed some light on what is passive and what is active. You can say ballpark around $400 of the $1,600 is passive safety and $1,200 is active safety in the maximum version of it. So there you have some indications of how the content is on that car. But as I said, it's all very much depending on the take rate. On the quarter 3, we said we missed out on some quarter -- on some orders. And some of the orders we expected in the beginning of last year didn't come our way. Despite all of that, we took what we think is around 25% of all the orders in the active safety market. Overall, we believe, we took around 30% of all the orders available for 2016 in the entire Electronics segment. And we have been taking -- continue to take orders here. As I mentioned some of the car companies we are supplying to here today. And we are continuing to take orders in the third -- in the -- in first quarter here, we had 3 new projects coming onboard here for us. And we are optimistic because the product portfolio we have here is very competitive. It's very appealing to OEM. But also, as mentioned, it will take until 2019 or so you will see this coming through in fact. Zenuity, the play out on Zenuity, it will take some time before Zenuity will generate its revenue. As mentioned here earlier, you will probably not see any revenue generation of some kind into Zenuity until 2019 and so forth. And in the meantime, you will have to see contributions coming from the owners into Zenuity. And how much and to what extent we will have to come back to it. No numbers that I have today that I can give you. But the revenue will start to come during 2017, is our estimate. 2017 -- 2019, sorry, 2019, into Zenuity.

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Kai Alexander Mueller, BofA Merrill Lynch, Research Division - Associate and Analyst [38]

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That's great. Sorry, maybe the Mobileye?

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [39]

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Well, as I said, I didn't catch all the question. What was the question on the Mobileye?

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Kai Alexander Mueller, BofA Merrill Lynch, Research Division - Associate and Analyst [40]

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Just given you've got now Intel and Mobileye joining, how does that change the view on your Zenuity path going forward?

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [41]

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Not generally -- generally, I don't think it changes. It really points out to that we are in the game. We have already 4 of the jointly owned companies gives us an opportunity to develop decision-making software. And this is something that is unique. This is not, as far as we understand, within the scope of Intel and Mobileye as of today. So we are having something here that is giving us a unique thing that we are very much excited about, actually. And if you look to the Intel-Mobileye consequence for our short-term business, I don't think that has any impact either. We are in a good place with our product portfolio with our technology, good customer interest as we mentioned here on the call and in the presentation. So shorter term, I don't think that's having any impact either.

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Operator [42]

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We can now move along to our next question. It comes from Richard Hilgert of Morningstar.

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Richard J. Hilgert, Morningstar Inc., Research Division - Senior Equity Analyst and Securities Analyst [43]

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Just -- sorry, for beating a dead horse here, but just to further understand a little bit more about Zenuity. Is -- having partnered with an automotive manufacturer and then opening up the joint venture to have sales to other auto manufacturers, has there been any concerns raised by any prospective customers about those relationships? And if so, how do you address them?

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [44]

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No, we have not seen any concerns. We were a bit cautious around this before. We formed the joint venture before we signed the agreement, and we looked into this. But we have not seen any concerns from other OEMs. Some OEMs that are out there will do a lot of this what Zenuity can represent, that may be in-house or themselves. But most of them will see Zenuity as a very interesting opportunity to use the outcome and to use the combination of Autoliv technologies together with a decision-making software. So it's rather the contrary, I would say, positively received from essentially all OEMs or neutral or positive from all OEMs.

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Richard J. Hilgert, Morningstar Inc., Research Division - Senior Equity Analyst and Securities Analyst [45]

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Okay. And you talked about decision-making software. Is the idea of having the ability -- it sounds like artificial intelligence to me. But I'm curious to know is there investment in computing power that the joint venture is going to need to have in order to be able to process the decision-making capabilities. And is there communication between these vehicles and some kind of server technology that this joint venture will have in a centralized location somewhere? Is that how it's going to work, or is this all going to be just onboard technology for vehicle?

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [46]

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Well, as we said, it's the engineers. We're hiring up to 600 engineers towards the end of the year. They will need infrastructure to do their job in terms of simulation and in terms of software coding and et cetera. So that will be a hardware necessary for Zenuity to carry on and to do their job. That's obviously the case. But if you look to the platform, the hardware in the vehicle, that is not a Zenuity question. That is the question for Autoliv or any other hardware suppliers that Zenuity would choose to use. The beauty with Zenuity is that Autoliv can sell Zenuity software to any OEM beside Volvo. Volvo has the direct link to Zenuity, and all other OEMs goes via Autoliv. But Zenuity can also pick and choose the most competitive hardware supplier for -- as a platform, for its software, which means that it's Autoliv that is going to develop the hardware architecture for running the Zenuity software or any other hardware supplier that Zenuity choose to use. And this gives actually Zenuity the opportunity to work with the best supply based on hardware. It gives also the opportunity for Autoliv to use software from Zenuity, even ahead of Volvo using it. So if they come up with something that is world's first leading software, and we have -- Autoliv have a customer that is ahead of Volvo, that is possible to do. Even Volvo is an owner of Zenuity. And this gives credibility to this company that it's really going to be the world's leading supplier in this space.

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Operator [47]

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We can now move along to our next question. It comes from David Lim of Wells Fargo.

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David Lim, Wells Fargo Securities, LLC, Research Division - Senior Equity Research Analyst [48]

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Jan and Mats, just wanted to dive into this a little bit more on the 3 OEM wins in the quarter. Any of those 3 additional vision algorithm wins?

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [49]

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Yes.

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David Lim, Wells Fargo Securities, LLC, Research Division - Senior Equity Research Analyst [50]

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Oh, they are. So can you give us an update on how many vision algo wins you have thus far. I mean, I think you've mentioned obviously, Mercedes, Volvo and then there was one other that was undisclosed. Is the number like 4 or 5 now?

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [51]

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We don't have quantified. We said, last year, we took around 20% of all the vision wins that we saw in the market. And we continue to take vision wins also, this year among the 3 that we are talking about. We haven't mentioned what is what here, but these orders include night vision. It includes vision, it includes also radar.

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David Lim, Wells Fargo Securities, LLC, Research Division - Senior Equity Research Analyst [52]

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Okay. Okay. So relative to last quarter, there is an incremental vision algorithm win, but you're not quantifying the number though?

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [53]

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Right.

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David Lim, Wells Fargo Securities, LLC, Research Division - Senior Equity Research Analyst [54]

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Okay. Excellent. The other question I have is regarding -- the second question is regarding China. It looks like you guys performed a little bit -- well, you guys performed less than LVP growth in the quarter. And I think some of that had to do with your brake control. But if you strip out brake control, what would have been the growth rate?

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [55]

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Well, I don't have the numbers. We are looking at each other here to answer your question. It would probably have been still below the light vehicle production. If you look to the outperformance, if you're asking the outperformance, but I don't have that exact number to give you.

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Operator [56]

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We can now move along to our next question. It comes from Edoardo Spina of Exane.

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Edoardo Spina, Exane BNP Paribas, Research Division - Analyst [57]

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Two questions. The first one is on the use of cash because you generate quite good cash here even after the current level of investment and dividend, so I was interested to understand your plans there, considering the starting point of that I think you would agree it's not high either. The second question is on China. If I can ask a bit more about what you mean by negative mix? And if you can tell us how you expect this to develop for you also in the longer run, considering the changes in the competitive environment that I think are now expected from Takata?

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Mats Backman, Autoliv, Inc. - CFO and Group VP of Finance [58]

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Starting with the balance sheet and the cash equation, I mean, looking on the closing of the first quarter, we have a leverage ratio of 0.4. We are actually below our communicated range of between 0.5 to 1.5 with a target of 1. But what we also need to realize is that I mean, with a cash contribution, we will -- through Zenuity, we will be on approx 0.5, so we will be on the lower end of the range. And we are recognizing that we are in the lower end of the range, and we have the target of 1. So we are monitoring this going forward as well. I guess that's what I can say.

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [59]

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If we continue with China, you saw us underperforming in both domestic OEMs and in global OEMs. And we are looking here in, for the rest of the quarter, to have a good launch outcome for second quarter and also for the second half. So we continue to believe that we will change this situation. We had an outperformance for full year 2016 in China, and we are believing that we will at least do the same here for 2017.

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Operator [60]

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We can now move along to our next question. It comes from Vijay Rakesh of Mizuho.

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Vijay Raghavan Rakesh, Mizuho Securities USA Inc., Research Division - MD and Senior Semiconductor Analyst [61]

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That's a good quarter and guide year despite some of the slowdown. I was wondering on the vision system wins that you had, obviously, you have good visibility there. How does that pipeline look if you look at 2017, 2018? Could you give us some more color, obviously, you announced 3 OEMs here?

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [62]

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Yes. We don't give any guidance on order intake, et cetera more than we say, has continued well in the first quarter here. We have a competitive product portfolio. We have a lot of customer interest for it. So we will come back and report order intake then, as we do it here in the quarter, more qualitatively also for the next quarter, but then elaborated on the Capital Markets and then we give you the quantities by year-end.

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Vijay Raghavan Rakesh, Mizuho Securities USA Inc., Research Division - MD and Senior Semiconductor Analyst [63]

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Got it. And as you look at this active safety segment that you have. How should we look at the growth there? Obviously, some of these wins should help accelerate that. Any thoughts on how you see that growth in 2017, '18 for that active safety segment? And obviously, it includes lot more than just vision. And also, the margins in that segment?

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [64]

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Yes. And the growth rate in active safety, as we commented a little earlier here, it will be hampered by the phase out of the GPS modules and on the internally developed brake control. And that will continue in '17 here though that offset -- that negative offset. And the core product here has been showing a mid-teen growth rate in the first quarter. And we will come back and see the growth rates on that later on. But into '17 and -- into '18, sorry, the comparables on the GPS modules than on the internally developed brake control will be better. But again, here, as I commented, the orders that we have taken in '16, et cetera, will only start to generate revenue in 2019.

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Operator [65]

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We can now move along to our next question, is coming from Matt Stover of SIG.

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Matthew T. Stover, Susquehanna Financial Group, LLLP, Research Division - Analyst [66]

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Most of the questions have been addressed, but I do have just 2. The first one is, again, I was wondering if you could just kind of give some color about the comment that you make about order wins in 2016, 25%, 30% number. And I'm wondering if that's sort of equally distributed across all products, or somewhat equally distributed across most products, or were there different levels of win rates by product category, meaningfully different?

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [67]

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It was to mainly related -- if you take on night vision, vision and radar, it's mainly related to the core products of vision and radar that is coming on so it was a little bit skewed on that one. But as you know, the night vision part is a smaller piece and has different developments than the vision and radar, so it's not so great. That's the case.

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Matthew T. Stover, Susquehanna Financial Group, LLLP, Research Division - Analyst [68]

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Okay. And so -- then that sort of the slope on that ramp curve and the pipeline will develop because '16 would have a bidding view of '19, sort of from '19 on out?

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [69]

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Yes. You can say that. Yes, you can say that. It's for passive safety order intake, we give general guideline of maybe 24 months lead time from order to start of production. And then when you start production, it take some time until it ramps up to its peak. But active safety is a slightly longer development time. So '16, '19 that is 3 years out and I think that's essentially right.

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Matthew T. Stover, Susquehanna Financial Group, LLLP, Research Division - Analyst [70]

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Okay. And then just in terms of aggregate number of contracts that are being approached. I would assume that there's a structurally larger number in 2017 than we saw in 2016 and then 2018 with similar progression, right?

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [71]

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Yes, this comes as always with a wave of sourcing. So it's a little bit too early to have any difference of opinion here, whether that is compared in the first quarter now, a larger number. It comes a little bit also in wave how the OEMs are sourcing and the classic contracts that are up for bidding comes a little bit because of the cycle.

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Matthew T. Stover, Susquehanna Financial Group, LLLP, Research Division - Analyst [72]

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Okay. And then I guess, the last question, then was on just the protection of the IP in Zenuity. Where are you going to -- is that going to be headquartered in Sweden? And how -- what's the arrangement in terms of IP between the 2 partners?

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [73]

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While the headquarter obviously, is going to be in Gothenburg. As you know, we have a research facility not far away from there in Autoliv, and we have also, a newly setup active safety plant right outside Gothenburg. So we are there and Volvo is there, and therefore, we also choose to set up the headquarter in Gothenburg.

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Matthew T. Stover, Susquehanna Financial Group, LLLP, Research Division - Analyst [74]

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Okay. And then just the arrangement in terms of the IP between the partners?

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [75]

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Well, we contribute with the IPs and Volvo contribute with IPs and right through the IP into the Zenuity, the right to use the IP for further development. So that has been a contribution of knowledge and the IP from Volvo regarding their part. And when it comes to our part, more on the component side. And it has been transferred into Zenuity for use.

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Operator [76]

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We have one very last question left today. It comes from Brian Johnson of Barclays.

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Steven Michael Hempel, Barclays PLC, Research Division - Research Analyst [77]

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This is Steven Hempel on for Brian Johnson. Just had -- wanted to drill down a little more on Zenuity. I know it's still early days here in 2019, 2020 is ways off here, but any initial expectations for sales in 2019, 2020? And then also related to that how should we be thinking about the potential cannibalization of the software sales that Autoliv's core active safety business may have generated in that time frame because I assume back at the Capital Markets Day, back in October '15 that you were assuming some additional software sales related to vision algorithms and cameras in that time frame. So just an update there would be helpful?

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [78]

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We'll start with the last one. This is only an addition. It is -- this Zenuity company is filling some of the boxes that wasn't filled. If you remember our pyramid of the technologies and functionalities that we showed in the Capital Market Day that we didn't have access to, we are now having access to. So Zenuity is only an addition. And when we sell that software together with our algos and our sensors, vision or radars, it's no cannibalization, you can say. This is pure in addition to it. When it comes to the sales number for Zenuity in 2019, it's too early. I don't have any figures to tell you on that one for the time being. But we said that it's not until '19, you will see revenue coming in Zenuity. And that's the information we have today.

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Steven Michael Hempel, Barclays PLC, Research Division - Research Analyst [79]

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Got you. And then just in terms of Zenuity, staying on that theme here. From a real-time mapping and Lidar perspective, I think that's obviously, something that's known to be kind of the standards you're moving forward for Level 4, Level 5. I guess, what is kind of Autoliv's strategy around mapping? And whether or not you're looking to partner with someone, or kind of do that in-house?

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [80]

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Well, there are several options for us. You will remember that one of the assets we had in the MACOM acquisition was our Electronic Horizon technology. And we are evaluating and using that and building that into the software development together with Zenuity and also, inside Autoliv. And how we will partner up and how Zenuity and also, in this case we'll partner up with map providers and how we can also use our vision system for real-time map updates, we are right now looking into. The same type of concept that a competitor of ours have launched here some time ago, can of course, be used with technologies that we are sitting on and to a large extent. So this is a very interesting and very dynamic market that we'll have -- offer a lot of opportunities for many suppliers.

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Steven Michael Hempel, Barclays PLC, Research Division - Research Analyst [81]

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Got it. And then just one quick last one. I know your work with Mobileye for 2020, your uncapped program, and with Zenuity now in the picture -- I guess, moving forward, do you see any potential for kind of the Tier 1s and Tier 2s from a crowd-sourced real-time mapping perspective to be sharing data, that's generating from vehicle to vehicle outside of just normal course relationships just for the better of the industry or pushing this technology to market quicker? Or do you not see that as a potential item?

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [82]

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I think there are -- I mean, the only thing we can say with everything that is happening here from the latest bigger acquisition or takeovers that was happening here some weeks and months ago. And everything else at Zenuity, there's another earlier example of combinations and sharing and finding new clusters, I think, it's actually happening as we speak. And I also -- I'm also of the opinion that we will see more constellations being formed later on down the road. There will be more opportunities for other type of combinations and clusters that will be formed later on. And also with that share of data and share of resources.

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Operator [83]

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We have no further questions. So at this point, I'll hand the call back to Jan Carlson for any concluding remarks.

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Jan Carlson, Autoliv, Inc. - Chairman, CEO [84]

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Thank you. Well, before we end today's call, I would like to mention that our Second Quarter Earnings Call is scheduled for Friday, July 21, this year. And in addition, during the upcoming quarters, will we -- we will be participating in several conferences and road shows, and of course, I would also like to mention our Capital Market Day, which is planned for September around the Frankfurt Auto Show. Please follow our corporate website for more information and details for participation. And then finally, I would like to thank everyone for participating in today's call. We sincerely appreciate your continued interest in Autoliv. Goodbye for now.

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Operator [85]

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