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Edited Transcript of ALV earnings conference call or presentation 19-Jul-19 12:00pm GMT

Q2 2019 Autoliv Inc Earnings Call

Stockholm Jul 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Autoliv Inc earnings conference call or presentation Friday, July 19, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anders Trapp

Autoliv, Inc. - VP of IR

* Christian Hanke

Autoliv, Inc. - Interim CFO, VP & Corporate Controller

* Mikael Bratt

Autoliv, Inc. - President, CEO & Director

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Conference Call Participants

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* Agnieszka Vilela

Nordea Markets, Research Division - Research Analyst

* Alexandre Raverdy

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Andrea Abouchacra

One Investments, LLC - Equity Analyst

* Christopher Patrick McNally

Evercore ISI Institutional Equities, Research Division - MD

* Daniel V. Galves

Wolfe Research, LLC - Director of Equity Research & Senior Analyst

* David Jon Leiker

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Erik Paulsson

Pareto Securities, Research Division - Analyst

* Hampus Engellau

Handelsbanken Capital Markets AB, Research Division - Automotive Analyst

* Jairam Nathan

Daiwa Securities Co. Ltd., Research Division - Research Analyst

* James Albert Picariello

KeyBanc Capital Markets Inc., Research Division - Analyst

* Jason Flynn Stuhldreher

Barclays Bank PLC, Research Division - Research Analyst

* Joseph Robert Spak

RBC Capital Markets, LLC, Research Division - Analyst

* Vijay Raghavan Rakesh

Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to today's Q2 2019 Autoliv, Inc. Earnings Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today on Friday, the 19th of July 2019.

And I would now like to hand the conference over to your first speaker today, Anders Trapp, Vice President, Investor Relations. Please go ahead, sir.

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Anders Trapp, Autoliv, Inc. - VP of IR [2]

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Thank you, Valerie. Welcome, everyone, to our second quarter 2019 earnings presentation. Here in Stockholm, we have our President and CEO, Mikael Bratt; our Interim Chief Financial Officer, Christian Hanke; and myself, Anders Trapp, Vice President of Investor Relations.

During today's earnings call, our CEO will provide a brief overview of our second quarter results as well as provide an update on our general business and market conditions. Following Mikael, Christian will provide further details and commentary around the second quarter '19 financial results and outlook for full year '19. At the end of our presentation, we will remain available to respond to your questions, and as usual, the slides are available through a link on the home page of our corporate website.

On the next page, we have the safe harbor statement, which is an integrated part of this presentation, and it includes the Q&A that follows. During the presentation, we will reference 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. All figures in this presentation refers to continuing operations, i.e., excluding discontinued operations. Lastly, I should mention that this call is intended to conclude at 3:00 p.m. Central European Time. (Operator Instructions)

I'll now turn it over to our CEO, Mikael Bratt.

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [3]

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Thank you, Anders. Looking now into Q2 2019 highlights on the next slide. The second quarter was another challenging quarter where we had to navigate through severe weaknesses in the global light vehicle market and high raw material cost with reduced profitability as a consequence. Considering the deterioration of market conditions, our operations reported solid results. This is a reflection of the team's commitment, discipline and actions launched to mitigate the effects from the lower light vehicle production as well as improving launch-related costs.

Sharp decline in light vehicle production was more than offset by continued growth from recent launches. This quarter marks the fifth consecutive quarter of substantially higher organic growth compared to the market. In this quarter, we outperformed light vehicle production by more than 9 percentage points.

Order intake remain on good level, securing a strong order book and supporting prolonged outperformance of light vehicle production into the future. We note though that the sourcing activities was relatively modest and the minority of expected industry sourcing for this year is planned to take place in the second half of the year.

Excluding EC antitrust payments in the quarter, we had a solid operating cash flow, enabling us to exceed last year's level for continuing operations for the first half of the year.

I'm generally pleased with how we managed the sharp decline in global LVP by the cost reduction actions well implemented and/or we are planning for. Furthermore, I see both room and need for additional improvement in certain areas.

So what are we doing to address the ongoing market weakness? On top of what we said after the first quarter, we initiated a number of additional cost improvement actions. We have sharpened the purchasing activities. We have reduced launch-related cost versus first quarter, direct workforce head count was reduced by 1,200 in the second quarter, and we will continue to adjust the direct workforce in line with market development, and we have begun accruing for reductions for indirect workforce. Finally, as we continue to evaluate our global operations, we have identified further structural cost improvement opportunities and this will likely result in additional restructurings in the future quarters.

So what are we doing to address our long-term opportunities? Rest assured that the deterioration of the market conditions have not changed our long-term improvement focus. On the contrary, we have accelerated efforts and investments to build the foundation for improving the entire value chain, such as flexible automation, digitalization, engineering efficiency and footprint optimization.

Looking now at the recap of our second quarter financial performance on the next slide. Our consolidated net sales declined around 3% compared to Q2 2018, impacted by weaker currency with organic sales increasing by close to 2% despite the global light vehicle production falling by more than 7%. Adjusted operating income, excluding cost for capacity alignment and antitrust-related matters, decreased by around 20% from $230 million to $183 million, impacted by lower light vehicle production, raw material pricing and product mix. The adjusted operating margin decreased by 190 basis points to 8.5% compared to the same quarter of 2018. Adjusted EPS decreased by $0.84 compared to Q2 2018, almost entirely due to lower operating income and higher income tax as the tax rate last year was positively affected by onetime valuation items.

Looking now on the market development. The negative trend that started around a year ago has continued into the first half of this year. In the second quarter of 2019, global light vehicle production is estimated to have fallen by more than 7% according to IHS, the worst quarterly performance since the financial crisis in 2008, 2009.

China's new light vehicle market contracted for the 12th straight month in June, despite dealerships in many provinces provided generous discounts to reduce inventories ahead of changes in emission rules. According to CAAM, light vehicle sales dropped 14% in the quarter, while LVP declined by 17%. These indicate a reduction in inventories during the quarter.

In June, U.S. light vehicle sales finished higher than expected for the second straight month. Light vehicle inventory bounced back to near year ago levels despite the strong May, June sales to 4 million. As a result, light vehicle production in North America decreased by 3%, which was 1 percentage point lower than originally forecasted at the beginning of the quarter.

Europe's light vehicle registration was 3% lower than the same period in 2018. Light vehicle production has slowed even more as many OEMs last year pre-built vehicles ahead of the WLTP introduction. The LVP decline was concentrated to the important West European market that dropped 10% while East Europe production was virtually flat. With the U.S. market starting to drop, we are in a situation today where the 3 of our 4 major markets are declining.

Looking to our sales growth on the next slide. Our sales continued to substantially outperform global light vehicle production, outgrowing light vehicle production in all regions except Japan, where we do expect outperformance to begin later in the year.

In the quarter, North America contributed with $72 million to the organic growth. The sales were driven by product launches from previous quarters, mainly with Honda, Nissan and GM. The organic growth of around 11% was 14 percentage points higher than the change in light vehicle production. Our sales in South America increased by 21% organically, substantially outperforming LVP. In Europe, we have been affected by weakened demand from a number of OEMs, including Daimler, Renault and BMW. Despite a negative mix with important Western European markets virtually accounting for all of the region's market decline, our sales decrease was in line with the region's light vehicle production.

Sales in China declined organically by 3%, outperforming light vehicle production by 14 percentage points. The lower sales were mainly as a result of our sales to domestic OEMs declining by more than 20% organically. This was partly offset by higher sales to global OEMs, which increased organically by 4%. The growth with global OEMs was largely due to strong performance with Honda, VW and Toyota. Sales in Rest of Asia outgrew LVP by 11 percentage points. Growth in Rest of Asia was mainly driven by Honda, Kia in South Korea, Suzuki in India and Toyota in Thailand.

Looking to our key model launches in Q2 2019 on the next slide. Here you see some of the key models launched during the second quarter. These models are well distributed across the globe and have Autoliv content per vehicle from USD 100 up to USD 500 per car. Particularly, it is interesting to see 2 new vehicles launched with dual frontal knee airbags. This shows that car manufacturers are more and more focusing on prevention of injuries to occupants' legs and knees.

Going into the second half of the year, we again have a high level of launch activities to support new vehicles to be introduced over the coming quarters and that will prolong outperformance of LVP.

I will now hand over to our Interim CFO, Christian Hanke, to speak to the financials.

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Christian Hanke, Autoliv, Inc. - Interim CFO, VP & Corporate Controller [4]

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Thank you, Mikael. Looking now to our financials on the next page, we have our key figures for the second quarter. Including negative currency translation effects of around $90 million and organic sales growth of $34 million, our consolidated net sales reached $2.2 billion. Our gross margin declined year-on-year. The net operating leverage on the higher sales was more than offset by higher commodity costs. Additionally, we experienced lower capacity utilization in most regions due to the sharp drop in light vehicle production and costs to support the long-term margin expansion. Adjusting for the impact of the social unrest in Mexico, gross margin improved slightly from the first quarter.

Our adjusted operating margin of 8.5% declined year-on-year, mainly due to the lower gross profit and a slightly higher RD&E and SG&A in relation to sales, although they were virtually unchanged in absolute dollar amounts. Our adjusted return on capital employed and return on equity were 20% and 24%, respectively. We maintained our quarterly dividend unchanged at $0.62.

Looking now on the next slide. Our adjusted operating margin of 8.5% was 190 bps lower year-on-year. As illustrated by this chart, the adjusted operating margin was negatively impacted by higher raw material costs of 90 bps, 30 bps from SG&A and RD&E and by 20 bps from FX effects. The costs related to the first quarter social unrest in Mexico amounted to USD 3 million in the second quarter.

As we explained in the previous earnings call, mature products have higher profitability than recently launched products. So the sharp decline in LVP brings down sales of the higher-margin mature products, which from the profitability point of view is not fully offset by the growth of the lower margin recently launched products that are in the early phase of the product life cycle. This has resulted in a period with the product mix carrying a lower profitability.

Looking onto the next slide. Excluding the $203 million EC antitrust fine that was paid in the quarter, operating cash flow was strong and amounted to $182 million, $19 million lower than for continuing operations in 2018. Year-to-date, operating cash flow has increased by $54 million compared to last year on a comparable basis. Capital expenditures amounted to $128 million in the second quarter, which is about 5.9% in relation to sales. In the second quarter of 2018, capital expenditures for continuing operations were $125 million or 5.7% of sales. However, the full year '19, we expect capital expenditures to decline in relation to sales as the ratio begins to normalize.

Excluding the EC antitrust fine, free cash flow for the last 12 months of $375 million indicate an 83% cash conversion on net income. For full year '19, excluding any discrete items, we expect our operating cash flow for continuing operations to be around $700 million to $800 million.

Looking now to our earnings per share on the next slide. We have the EPS development. Reported earnings per share declined by $0.95 to $1.25. The main drivers behind the decrease are around $0.11 from higher cost for capacity alignments, approximately $0.39 from operating profit and $0.44 from unusual tax items last year, while the tax rate in Q2 '19 was in line with our projected full year tax rate of around 28%. In Q2 '19, the adjusted earnings per share decreased by $0.84 to $1.38 from $2.22 for the same period 1 year ago.

Looking now to our financial position on the next slide. We have, as you know, a long history of a prudent financial policy. Our balance sheet focus and the shareholder-friendly capital allocation policy remains unchanged despite the market conditions. Autoliv's policy is to maintain a leverage ratio of around 1x net debt to EBITDA within a range of 0.5x to 1.5x. As of June 30, 2019, the company had a leverage ratio of 1.8x, which is 0.2 higher compared to the 1.6 we reported from March 31. The main reason for the increase is the payment of the fine for the remaining portion of the EC investigation as we communicated in our prior call.

Our strong free cash flow generation should allow deleveraging and should allow continued returns to shareholders while providing flexibility. We aim to be within the range -- target range by year-end despite the fine from the EC investigation and other market challenges. This excludes any other discrete items and other non-foreseeable changes to our business.

Looking at market development for the rest of the year on the next slide. The outlook for major light vehicle markets has become increasingly more uncertain due to weaker consumer confidence, trade tariffs and regulatory changes. According to IHS, the North American light vehicle production is seen as slightly down in the second half of the year, while LVP in China are expected to continue to decline but at a more modest rate than what we have seen in the first half of the year. Since January, IHS has reduced their full year '19 expectations of global light vehicle production by close to 5 million units or by 5 percentage points to below 88 million.

The current U.S. light vehicle inventory remains at levels suited for a $17 million plus SAAR. This adds additional risk to the LVP outlook in North America. End of June, the European Automobile Manufacturers Association revised its forecast for the 2019 European passenger car registrations downwards by 2 percentage points to minus 1, citing uncertainty due to Brexit and changing macroeconomic conditions. This indicates an even weaker second half of the year putting further downward pressure on LVP plans. In China, inventory levels have come down, bringing a glimmer of hope. However, we have not seen any change in the recent downward trend in light vehicle sales despite steep discounts at dealerships.

Reflecting the increasing uncertainty in the market, our base scenario for global light vehicle production in 2019 is a decline of 4 to 6 percentage points. However, we expect to outgrow light vehicle production with 6 to 7 percentage points for the year.

Turning the page. We have summarized our full year '19 indications. The uncertainty remains high in the following markets, and we currently do not see any signs of a turnaround in light vehicle demand and therefore, we now indicate lower full year 2019 sales and profitability. Full year indications assumes mid-July exchange rates prevail and excludes cost for capacity alignment and antitrust-related matters.

Our financial outlook assumes a 4% to 6% decline of global light vehicle production, the range reflects the continuing high level of uncertainty in the automotive markets. We expect our organic growth to be 6% to 7% higher the global LVP. Consequently, our full year '19 indication is for an organic sales growth of 1 to 3 percentage points and a negative currency translation effect of around 2%, resulting in a change of consolidated net sale between minus 1% to plus 1% for 2019. Our indication for the adjusted operating margin is 9% to 9.5% for the full year '19, reflecting the sales growth range. We expect 2019 raw material cost to increase by approximately 70 bps. We anticipate the currency effects on the operating margin for the full year '19 to be neutral. The projected operating cash flow, excluding EC antitrust payment and any unforeseen events, is expected to be in the range of $700 million to $800 million.

I will now hand back to Mikael.

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [5]

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Thank you, Christian. Turning the page. To summarize, I would like to share with you what we are doing to address both the near-term market challenges and the long-term opportunities we see. But first, I want to remind you what we did during the financial crisis in 2008 and 2009 when we accelerated our investments in product development. The result of these investments gave Autoliv a clear competitive advantage when the market rebounded again and was a key factor behind our market share gains after the financial crisis.

Now despite uncertain market development, we are accelerating investments in a similar way, building the foundation for top line and margin expansion short to long term with many focus on efficiency step changes across the whole value chain. We will continue to adjust the direct workforce to the market situation and support our ordinary course of business.

While sales remained on similar levels as in the first quarter, we reduced direct head count by 1,200 in the second quarter. The reduction is expected to support margin improvement in the second half of 2019. We have initiated actions to reduce indirect head count by approximately 5%. We are closely managing tariffs in place today such as 232 and 301, while monitoring potential new tariffs by implementing a number of actions we expect to be able to mitigate the vast majority of the potential $30 million cost that the new tariffs otherwise would amount to in North America alone.

As launch-related issues continue to decline, we can now refocus some of our resources on productivity improvements instead. There is both need and room for improvement in certain areas. One example is in Europe, where the severe decline in the market driven at least partly by new emission legislation and some consumer uncertainty regarding drivetrains. Brexit, combined with our footprint, have created challenges that we have to address.

To offset high raw material costs and continued price pressure, we have launched a new competitive sourcing process covering 75% of current purchasing spend. For medium- to long-term gradual improvements, we have a number of initiatives, such as automation and digitalization for increased efficiency and productivity. We expect to start our first pilot factory of the future in the second half of 2019 with plans for a gradual rollout from 2020, streamline product design and engineering to speed up new launches and improve engineering efficiency, review our footprint to meet future demand.

We will provide more details on continuous improvement agenda in our upcoming Capital Markets Day, which brings us to the next slide. Our Capital Markets Day will be on November 19 in Salt Lake City area in Utah, U.S.A. The event will showcase our full potential and provide an update on our 2023 strategy and development of the Autoliv Group. Additionally, we will show future products, give an update on opportunities in core and adjacent product areas, outline potentials that we see in flexible automation and digitalization and much more. I hope to see you all there, and I will now hand back to Anders.

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Anders Trapp, Autoliv, Inc. - VP of IR [6]

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Thank you, Mikael. Looking at the next page, we -- this concludes our formal comments for today's earnings call, and we would like to now open up the line for questions. So I'll now turn it back to Valerie.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of James Picariello of KB Capital Markets.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [2]

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So just touching on your full year light vehicle production forecast now, it's now down 4% to 6%. Looks like you're straying away a bit from IHS, which I believe is down -- they're forecasting down 3.7%. See, just what's driving that? And what are your -- can you just talk about your expectations for the second half by region?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [3]

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Yes. We -- I think first of all, you should see that the range indicates it's the high uncertainty in the marketplace, and it's correct that IHS came down here now with the last revision they did earlier in the week, and we feel that on top of what they indicated here that there is still a very high degree of uncertainty when we listened to our own organization here and how they are being updated by our customers here. So -- of course, China to start with is where we see the biggest downward pressure, and that's what you have seen throughout the year. Europe, likewise, for the same reasons here, and we have now started to see somewhat weaker U.S.

So when you look at the totality for the remaining of the year, I think you should see the same type of relation between the different regions here. So it's not that we're indicating that we see a bigger drop in one of -- let's say, Europe or U.S. here than what we have seen. So in relative terms, it's the same pattern that we have seen in the beginning of this year, but it still continued to weaken. I think that's the message from our side here.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [4]

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Okay. And then just within your revised guidance here for the second half from a margin perspective, can you just help walk through what drives the second half improvement? Do launch costs go completely away? The Mexico labor issue, 15 basis points in the quarter, maybe that goes away. But yes, maybe just sequentially how you're thinking about the margin trajectory in the back half and what drives that.

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [5]

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I think, first of all, it's the cost measures that we are implementing and have implemented. You may recall already in the last earnings call, we indicated a number of actions that we were working with. And you can see, for example, now that the adjustments to the lower volumes in certain plants here resulting in reduction of 1,200 people and we will continue to focus and secure that adjustment continues as we move forward here. And on top of that, we have also added now the target of reducing and adjusting our indirect labor force here was around 5%. So we are stepping up, you could say, our cost-reduction initiatives in the short term here.

We also believe that we will see improved raw material situation here, as we move forward in the coming quarters. And of course, we also have the seasonality where we have a stronger second half and I would say especially a stronger Q4 as a part of our normal pattern here. And then you have to confirm what you stated yourself here around Matamoros that, that is not with us in the second half, and we have also launch cost following the plan where they are gradually being reduced throughout the year. So we are following that plan. So I would say that's probably the main 5 factors to see an improved second half.

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Operator [6]

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And your next question comes from the line of Vijay Rakesh of Mizuho.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst [7]

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Just on China. Obviously, you talked about second half looks like maybe flat year-on-year, but any thoughts -- as you look out into next year, do you think some of these emission headwinds start to go in the rearview mirror and you start to see some growth or there are some fundamental headwinds in China?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [8]

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Yes. I think to be too certain about the development in China for 2020, it's certainly too early. But I mean if you look into the second quarter, the emission change that took place basically as now of July 1 here will go away here. So that challenging factor is not a part of 2020. And I think we -- you should remember here also that, that change that now took place was not known while we're sitting here in April. That was something that were decided by the Chinese authority as late as in May here. So that, of course, made the second quarter even more complicated here.

But I think the underlying factors that we have described earlier here around the driveline, meaning traditional versus electrical vehicles, is still there, the overall mobility development in China, especially the megacities there. But also the underlying economic development that is right now affected by the trade wars and all uncertainty connected to that. So I think there is many factors driving the development in China right now and in what way they will gradually be solved, I think it is very, very difficult to say.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Semiconductor Analyst [9]

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Got it. And just one last question here on Europe. Any thoughts how -- if you see any -- into the back half, any headwinds with [RDE 6] or Brexit? How do you think that plays out because there's been some manufacturing relocations there?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [10]

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I think it's the same. I mean Brexit, we, of course, take all the measures we can to have different -- working according to different scenarios here and you could say we had a practice on that earlier this spring and now it was moved forward. So it's continuing with that work. And here, I think, also, it's very hard to say where we will end up here, but we definitely see a weakening market here as well.

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Christian Hanke, Autoliv, Inc. - Interim CFO, VP & Corporate Controller [11]

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But I think, Mikael, on the RD&E, we don't believe that, that will have a big impact like -- similar to WLTP. So I think we probably can say that based on what we know.

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [12]

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That's correct. No. And I think that was a question also on the previous quarter here potentially impact there, but so far so good, I would say.

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Operator [13]

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And your next question comes from the line of Hampus Engellau of Handelsbanken.

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division - Automotive Analyst [14]

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Regarding these 1,200 people that you've already ended working contracts for, how much is that due to that you are facing out launch process and the ramp-up? And how much is, like, capacity adjustments? And second question is related to this 5% on the head count further on. Is it equally spread between U.S., Europe and China? And there -- is there an element of temporary contracts? Or should we expect one-off charges for this?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [15]

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Yes. I think -- thank you, Hampus. On the first question around the 1,200 people, I'll say majority of that is connected to capacity adjustments here, but to your point here as launch costs start to come down as a result of the improvement activities we are doing can also steer resources towards traditional productivity work even harder and that is being done. But I will say that kind of resource allocation done is more on the indirect side. And then the 5% that we are targeting here is, I will say, a global number, of course, and we are addressing all indirect areas here. Exactly how that will be played out in terms of number per country or region and functions, we can't state here. Now we are working with all the tools in the toolbox here to realize this number here, and we will, of course, also have some onetime charges here, and you have seen some of these charges already being booked now in the second quarter here.

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division - Automotive Analyst [16]

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Okay. But will it be part of the big program? What should we expect like each quarter specific amount or...

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [17]

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I wouldn't like to call it as a program because these activities we need to address as we move forward and drive the productivity in combination, of course, with adjustments to the market development here. And there will be charges depending on which way, so to speak, that we are realizing these targets here. I don't know, Christian, if you have anything to add to that?

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Christian Hanke, Autoliv, Inc. - Interim CFO, VP & Corporate Controller [18]

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No. No. I mean, I think, you're absolutely right. I mean we are monitoring the way the market is moving. In terms of the indirect labor, we have these local rules and regulations to deal with. So I mean, I think, we have recorded as much we can in the second quarter, and we will probably see some more spillover in the second half of the year.

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [19]

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But it all depends on -- which means that we at the end of the day ends up with. And of course, on the direct workforce there we have high degree of temporaries as we have indicated before also. So we have a fairly -- I mean we have a good flexibility in that area.

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Operator [20]

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Your next question comes from the line of David Leiker of Baird.

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David Jon Leiker, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [21]

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Two questions here. If you look at the slide of quarter 2 key model launches, it's a great -- that's a great list and it's helpful. Can you -- just wondering if you could add some color to that and give a couple of examples of how your content might have changed on one of these vehicles versus the previous version of those?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [22]

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I think when it comes to the content here, as we pointed out in the presentation here, I think the interesting part is how we see more knee airbags being implemented to the vehicles indicating that -- and I mean support being what we have described here before as content continue to increase also in the mature markets.

And of course, secondly here, we see also new type of cars, new cars and new cars for us. So if you take the Mazda CX-30, it's a new car for us, the Cadillac XT6 is a new car and the Nissan Symphony (sic) [Sylphy] is a new car for us. So there we have taken a bigger portion of that business. Also, I will say that the Jeep Gladiator is a completely new car. So in short, you see a lot of new car models coming through here, where we have a high participation in, and content per vehicle is at a very good level and with, I would say, new types of airbags with example of the knee bags.

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David Jon Leiker, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [23]

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Okay. Great. And then Autoliv has a track record history here of engineering recoveries that tend to be more heavily weighted to Q4 than others. Is there any insight you can give us in terms of how we should be looking at that as it relates to the fourth quarter of this year?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [24]

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No. I think I can only confirm what I said before here that its seasonality is supporting a stronger second half and especially Q4 and what you are alluding to here around engineering income is one of those, so that's correct.

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David Jon Leiker, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [25]

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And you would expect it to be not -- that pattern to be not any different than last year in terms of magnitude?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [26]

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No. You would see the same pattern, yes.

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Operator [27]

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And your next question comes from the line of Joseph Spak of RBC Capital Markets.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [28]

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First question is, I was wondering can you provide an update on the order intrinsic win rate. I know it had been running about 50%. And then I guess just as you look to the second half and you mentioned you expect more sourcing there, as you start to look at some of those programs, are you seeing any pricing change on some of those new potential programs or more productivity requirements on existing biz in order to secure that business, especially given Joyson's regrowing presence?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [29]

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When it comes to the share of new orders, we don't give the numbers quarterly here. We only do that on a yearly basis. But we continue to see good order intake even though the activity has been relatively low, but good order intake supporting strong order book here. So I think that's what I can say in regards to that.

Do we see increased price pressure on the tougher market? I would say that, as always, the automotive industry and the supplier business here is a very competitive industry and has always been. And of course, when you look through the industry here, you have seen some more challenging requests from some of the OEMs. But I would say all in all, we are on a stable situation here. So I wouldn't say that it's dramatically changed in that direction, but of course, if you take anecdotally some OEMs there, of course, you can see some pressure. But all in all, I would say, stable, but as always challenging industry.

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [30]

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Sure. That's helpful. And then just on the margins. I know you sort of addressed the second half ramp a little bit. I guess it would be helpful if maybe you could either quantify the launch cost benefit or the head count reduction benefit. But the other thing, in particular, that I was wondering about, like, you say on Slide 9 that launch costs already improved in this quarter from the first quarter. And if we back out sort of the Mexico headwinds from both quarters, it looks like both quarters were around 8.7% operating margin, so pretty flat on the similar level sales. So if launch costs really did improve from 2Q to -- or from 1Q to 2Q, what was sort of the offset that kept the margins flat?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [31]

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No. I think, first of all, you saw the raw material higher than what was in the first quarter, and I think also currency is one that you can consider on the short. So I think we feel very comfortable that the launch costs and the activities that we're doing to reduce the headwind here is offsetting some of these things. So...

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Joseph Robert Spak, RBC Capital Markets, LLC, Research Division - Analyst [32]

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So like how much of the back half improvement is due to the lower launch costs?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [33]

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We are not quantifying that and we have never really quantified the launch cost altogether here. But as we have indicated, it has the gradual improvement throughout the year. So I mean now we are half through the year, so I think it feels comfortable that we're expecting to be completely out of that this year.

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Operator [34]

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And your next question comes from the line of Brian Johnson of Barclays.

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Jason Flynn Stuhldreher, Barclays Bank PLC, Research Division - Research Analyst [35]

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This is Jason Stuhldreher on for Brian. I just want to come back to the guidance because -- and I know it's been asked a lot. But if I look at the step-up when you back out sort of the incremental margins from revenue, it still implies about $90 million improvement in performance from 1H to 2H, which is roughly 2% to sales or so. And so I know you want to stay away from quantifying, but I think it would be helpful to understand of that $90 million and that's a rough number, is that -- I mean is it pretty proportional that we're going to see that between head count savings and then raw material savings? The reason I ask is, if we look at SG&A plus RD&E, that's about 11% of sales, so I think 2% out of that would be fairly aggressive. So if we could just get sort of 50-50 or 1/3, 2/3 between material savings and head count, is there any color you could provide there at all?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [36]

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I'm sorry about that. I think I have to refer to my comments before here about, let's say, the 5 main levers here to driving performance improvement or the EBIT improvement here for the second half. And I mean -- of course, the Matamoros effect you have seen in the first quarter here -- first quarter and the second quarter raw material you have there also, but we are saying it's improving, we're not saying that it will be eliminated here. So we will not go into -- quantify these levers here but we believe...

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Jason Flynn Stuhldreher, Barclays Bank PLC, Research Division - Research Analyst [37]

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Okay. That's fine. Okay. And then second question. I -- just to talk about the product mix. I understand there is an element of product mix where your more mature programs were rolling off the higher margin than the new programs. And I just want to touch on this because it's something we've heard from a lot of suppliers. So I do understand that new programs tend to come on a lower margin and then improve over the life of the program. But that does imply that last year's business should be coming on more profitable this year and that this year we should be seeing an element of performance in that year-over-year walk? So my question is, do we see that incremental performance this year or this quarter from last year's business becoming incrementally more profitable? Or conversely or are new programs just generally coming on at lower margins? And I guess to put that more bluntly, in the period of growth over the last 3 to 4 years, was the industry or you simply overearning on certain programs and that now on a flat to declining production environment we shouldn't expect that?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [38]

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Yes. I think you have the wrong assumption therein in your reasoning around the different programs here. It's not so that old are better than the new ones. It's that -- what we are talking about here is in the ramp-up phase of new program, it has a lower profitability or earning as they are maturing through the launch process here. So as we have come into the -- what we -- what caller referred to that, the wave here, meaning the step-up in our market share, we have higher proportion of launch of our total portfolio, which has a short-term negative effect.

So it's not the question about the new program has low profitability altogether. It's a pure timing of -- this is -- the timing of the new programs are indicated here, and that has been true for support of our industry. So it's nothing new. It's just that we have a higher portion of launch programs versus the mature programs that now is breaking at 7% in the quarter. That's -- it's part of light vehicle production. So that's the difference.

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Operator [39]

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And your next question comes from the line of Chris McNally of Evercore.

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Christopher Patrick McNally, Evercore ISI Institutional Equities, Research Division - MD [40]

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Maybe just a follow-up. I appreciate the detail on the type of the head count reductions. Just maybe it is a simple question. Were they taken during the quarter? Meaning do we get some of the benefit in Q2? I imagine it would take some time for it actually to flow through, so the majority would be in second half. But did we receive any benefit from the head count specifically in Q2?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [41]

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Yes. I think, I mean, the 1,200 have gradually been taken -- being reduced throughout the quarter. So of course, it's not full effect of 1,200 people in the quarter so that there has been a timing question of that. And then when we go forward here, the 5% as we're talking about on the indirect, it will also have a gradual effect. And it depends on which region and so forth that have a longer lead time to execute on those things. So it will have a gradual implementation. And of course, as we adjust on the direct workforce, it's the same as we have talked about here in the second quarter. So that is a timing question.

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Christopher Patrick McNally, Evercore ISI Institutional Equities, Research Division - MD [42]

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That makes perfect sense. And then just a broader question. I mean, I think, we've all seen the revisions that continually happen for sort of all suppliers versus IHS, and everyone seems to realize it might be a lagging indicator, so they are a little bit more cautious. I mean as you sit here today, what -- maybe if you could talk by a region or a segment or a mix. I mean where do you think the incremental upside or downside is? I mean what sort of keeps you up at night in terms of now that we sort of have the updated call in sort of -- the call out sort of back half of the year? What are you watching for the second half for things to get better or worse?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [43]

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No. I think, I mean, for us, the focus is to be flexible and agile whatever we see coming through from the underlying development here over the market. I think as I said before here, I mean, the uncertainty is so high, hence then that we are giving a range rather than a round number here. So we just need to make sure that we are staying alert and make the adjustment as needed.

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Operator [44]

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And your next question comes from the line of Alexandre Raverdy of Kepler.

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Alexandre Raverdy, Kepler Cheuvreux, Research Division - Equity Research Analyst [45]

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I have 2 questions, please. The first one is on the EBIT bridge for the full year. I remember in Q1 you quantified the raw mat headwind at 60 bps. Is it still what you expect?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [46]

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On the raw material, we have upped that to 70 bps as a consequence of the raw material increase we had seen here in the second quarter that was slightly higher and also what we expect for the rest of year. So net-net of that is 70 bps now.

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Alexandre Raverdy, Kepler Cheuvreux, Research Division - Equity Research Analyst [47]

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Okay. And second question is on the cycle. So I know visibility remains extremely limited, but -- I mean what are your expectation for global production for next year? I know that one of your competitors expect a flat environment between '19 and '21. So at this stage, what's your view? Do you expect a rebound next year? Or will you stay quite cautious?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [48]

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I think it's too early to call on that now. I think, first of all, we need to see how the second half develops here, and we need to have more visibility in order to judge that. There is so much moving parts out there that we need to have a resolution on, I think, so too early to say.

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Operator [49]

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And your next question comes from the line of Jairam Nathan of Daiwa Securities.

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Jairam Nathan, Daiwa Securities Co. Ltd., Research Division - Research Analyst [50]

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So I had a question regarding your longer-term efforts on digitalization and automation. So just peeling back the onion here behind the financial statements, can you talk about some operational metrics you're targeting and -- that you should -- you think that can improve with these?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [51]

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No. I think we will see if we come back to some KPIs or metrics around that later on. But what we really want to say here is that we see great opportunities throughout the value chain as we move forward, and we don't see any reason why we should slow down those efforts. It's rather the opposite here, and the message here is that we're trying to speed them up and gain the benefits earlier here than maybe originally anticipated here. So we have highly focused agenda on driving productivity going forward here. And this is an area where we see good opportunities, and that's why we wanted to point it out. But it's all that to drive the productivity. So that's the ultimate metric, of course.

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Operator [52]

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And your next question comes from the line of Rod Lache of Wolfe Research.

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Daniel V. Galves, Wolfe Research, LLC - Director of Equity Research & Senior Analyst [53]

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This is Dan Galves in for Rod. Our question is around kind of the general financial health of the industry after 4 quarters of lower global production in a row. There's been some news on financial stress of some local Chinese OEMs. Some of your peers have talked about balance sheet weakness in the Tier 2 base. How do you guys monitor this? Are you seeing any warning signs? And is it impacting your ability to generate productivity improvements through the course of 2019?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [54]

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I feel that we have a robust purchasing organization -- supply chain management organization into monitoring any risk we may see from our supplier base. I can't say that -- I mean, of course, I understand what you're referring to and what you see. But in our case, I would say, it's not any troublesome situation there. It's something we are keeping a close eye on, but we haven't seen any really changed situation there. So I don't feel very concerned about that from our side, our perspective. But of course, that's something that we are closely monitoring, for sure.

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Daniel V. Galves, Wolfe Research, LLC - Director of Equity Research & Senior Analyst [55]

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Okay. And just one quick one on first half to second half raw materials. Are you expecting improvement in raw material cost versus the first half or just a reduction in the headwind?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [56]

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It's basically a reduction in headwinds. That's the way you should see it.

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Operator [57]

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And your next question comes from the line of Andrea Abouchacra of One Investments.

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Andrea Abouchacra, One Investments, LLC - Equity Analyst [58]

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I have a quick one regarding model launches. How many launches you had so far in H1? Or at least how -- what was the year-over-year increase versus last year? I remember last year Q2 was over 70% growth of number of launches year-over-year. And the second part of the question, how should we think about H2 launches versus H1 in terms of proportion over the total portfolio for Autoliv?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [59]

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No. We have in sequence here a much more stable situation when it comes to the number of launches. But as you can see, we continued to outperform the market as a result of the launches we have and the market shares that we're taking in the different programs here. So -- and, of course, that's the perspective. And I think also when you look at the year-over-year improvement -- increase of launches, we had a step-up of 20% from 17% to 18%, and this year it's much, much lower step-up. It's more -- I would call it flat plus, so to speak, in number of launches.

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Andrea Abouchacra, One Investments, LLC - Equity Analyst [60]

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Right. Would it be the case for H2 as well?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [61]

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Yes. So a stable situation.

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Operator [62]

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And your next question comes from the line of Erik Paulsson of Pareto Securities.

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Erik Paulsson, Pareto Securities, Research Division - Analyst [63]

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You touched upon it a bit already, but is it possible to quantify the number for the cost savings for the reduction of the indirect workforce of roughly 5%? Is it possible to do that?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [64]

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We are not giving any details on the respective cost-saving activities that we outlined out here. So I cannot quantify it for you. Sorry.

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Operator [65]

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And your next question comes from the line of Agnieszka Vilela of Nordea.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [66]

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I have a question on your organic growth performance against the market, and then maybe you could zoom in into some regions specifically. If I look at Americas, for example, you have been outperforming the market by double digits for the next 5 quarters. Do you think that this outperformance will now diminish in H2? And then also a similar question on Japan where you have been underperforming the market. What makes you believe that you will turn into outperformance in H2?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [67]

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Thank you. Of course, the outperformance prediction that we are giving is based on the order book market share that we -- the order intake market share that has built our order book over the last couple of years. And according to our predictions here is that we should start to see that outperformance starting in Japan towards the end of the year, all in line with how we actually also got the market share gains in the new order intake. So it follows basically that, but with the 18 to 36 months delay in the implementation time there, as we said. And in Americas, we expected to continue to outperform, but of course, at significantly lower numbers as we now, you could say, have come through a full year here from when the step-up of launches start. So you will see lower numbers in, let's call it, the early launch regions in the second half of the year.

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Operator [68]

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There are no further questions at this time. Please continue.

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [69]

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Thank you very much, Valerie. This ends today's call. But before we hang up, I would like to say that we will continue to execute on our growing business volumes and our new opportunities. We will never -- we will have a never-ending focus on quality and operational excellence. Also, I would like to mention that our third quarter earnings call is scheduled for Friday, October 25, 2019. And thank you, everyone, for participating in today's call. We sincerely appreciate your continued interest in Autoliv and hope to have you on the next call. Goodbye for this time.

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Operator [70]

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Thank you, sir. Ladies and gentlemen, that does conclude your conference for today. Thank you for participating. And you may now disconnect.