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Edited Transcript of ALV earnings conference call or presentation 26-Apr-19 12:00pm GMT

Q1 2019 Autoliv Inc Earnings Call

Stockholm Apr 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Autoliv Inc earnings conference call or presentation Friday, April 26, 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

* Erik Pettersson-Golrang

SEB, Research Division - Head of Research for Sweden

* Erik Paulsson

Pareto Securities, Research Division - Analyst

* Garrett Klumpar

RBC Capital Markets, LLC, Research Division - Associate

* Hampus Engellau

Handelsbanken Capital Markets AB, Research Division - Automotive Analyst

* James Albert Picariello

KeyBanc Capital Markets Inc., Research Division - Analyst

* Julian Radlinger

UBS Investment Bank, Research Division - Equity Research Analyst

* Steven Michael Hempel

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Autoliv First Quarter Financial Results 2019. (Operator Instructions) I must also advise you that this conference is being recorded today, Friday the 26th of April 2019.

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

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

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Thank you, Sarah. Welcome, everyone, to our first 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 first quarter results as well as provide an update on our general business and market conditions. Following Mikael, our interim CFO, Christian Hanke, will provide further details and commentary around the Q1 '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 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 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 will 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 the Q1 '19 highlights on the next slide. Overall, our results were in line with our expectations, despite the fact of the labor conflict in Mexico. Our people did a good job managing the largest quarterly light vehicle market decline in the past decade. The sharp decline in light vehicle production was more than offset by continued growth from recent launches. We were able to outpace global light vehicle production by almost 9 percentage points. However, we have experienced continued headwinds from raw material pricing, which together with a lower capacity utilization in some regions and launch-related costs significantly more than offset the operating leverage on the sales growth. We saw a clear improvement in launch-related costs compared to the fourth quarter of 2018. Although, we still expect it will take a few more quarters to get back at normal launch cost levels.

The market-driven decline in running production and the ramp-up of the many new launches created a challenging situation for the organization. It needs to accelerate and brake at the same time. Additionally, new launches, as is normal, have lower profitability until production is fully ramped up to the designed line capacity.

We have implemented a number of actions to mitigate the effect from the lower light vehicle production. We had a solid operating cash flow in the quarter enabling us to exceed last year's level for continuing operations. Also, although, I'm pleased with the social unrest in Mexico is closed, I'm never satisfied when we have disturbances and cost increases for us and the customers. The strike was not directed towards Autoliv as a company. It involved 59,000 people in the city of Matamoros. The strike started with workers in the factories of 45 different companies and eventually extended to 100 companies.

Our order intake share remains at a good level, while OEM order activity was relatively modest in the quarter.

Looking now at the recap of the first quarter financial performance on the next slide. Executing on the strong order book, this quarter marks the fourth consecutive quarter of substantially higher organic growth compared to the market. Our consolidated net sales declined by 3% compared to the same quarter of 2018, impacted by weaker currencies. With organic sales increases by close to 2% despite the global light vehicle production falling by close to 7%.

Adjusted operating income, excluding cost for capacity alignments and antitrust related matters decreased by around 32% from $245 million to $166 million, impacted by the strike in Matamoros, elevated launch-related costs, [underutilization] Of assets and raw material pricing. The adjusted operating margin decreased by 320 basis points to 7.7% compared to the same quarter of 2018. Excluding the temporary effects from the Matamoros conflict, we would have been 100 basis points higher or 1 percentage point higher.

EPS diluted decreased by $0.55 compared to the same quarter of 2018, almost entirely as a result of lowering operating income, partly offset by lower effects from tax items.

Looking now at the market development. The negative trend that started around 9 months ago has accelerated in the first 3 months of this year. In the first quarter 2019, global light vehicle production is estimated to have fallen by close to 7% according to IHS. The worst Q1 performance since the financial crisis in 2008, 2009. China's new light vehicle market continued to decline in March, but at a slower rate than recent months. Wholesale dropped 6.9% after slumping 17% in the first 2 months. However, the decrease in new vehicle sales at retail in the first quarter was much milder, indicating a destocking at dealers.

U.S. light vehicle sales surged in March to a SAAR of 17.5%, strongly rebounding from sluggish results in the 2 months of the year -- in the first 2 months of the year. Inventory increased by 260,000 units during the quarter of -- to 4.1 million. However, we believe that the inventory is not enough above the estimated optimum level that it should be considered a problem. As a result, light vehicle production in North America decreased by 2.6%, which was 3 percentage points lower than the original forecast at the beginning of the quarter.

European light vehicle production declined by 4.9% in the quarter, continuing the downward trend that started with introduction of WLTP in September. The decline was concentrated to the important West European market that dropped 7%, while East European production decreased by 0.6%.

Looking to our sales growth on the next slide. Despite the largest quarterly decline in LVP since the financial crisis, our growth momentum continued in the first quarter. The growth was mainly driven by the large number of product launches in North America, but also supported by positive development in the rest of Asia, especially India and Thailand.

Consolidated net sales in the first quarter declined year-over-year by 3% to $2.2 billion with an organic growth of 2% offset by negative currency translation effect of 5%. In the quarter, North America contributed with $79 million to the organic growth. The sales were driven by previous quarters' product launches, mainly with FCA, Honda and Nissan. The organic growth of close to 13% was 15 percentage points higher than the light vehicle production growth.

Our sales in South America increased by 16% organically despite a weak LVP. In Europe, we have been affected by weaker demand from a number of OEMs. Despite the negative mix with important West European market declining more than European -- East European market, our sales decline was in line with the region's LVP.

One of the key sales driver in the quarter was steering wheels to Daimler where we replaced another supplier on several running car models. Sales in China declined organically by 4%, outperforming light vehicle production by around 10 percentage points. The lower sales was mainly a result of domestic OEMs falling 16% organically, which is basically in line with their LVP. This was partly offset by higher sales to global OEMs, largely due to stronger performance with Honda and VW.

Sales in Rest of Asia outgrow light vehicle production by more than 6 percentage points. The growth was mainly driven by sales to Japanese OEM such as Toyota, Suzuki and Honda.

Looking to our key model launches in Q1 '19 on the next slide. Here you see some of the key models, which have been launched during the first quarter. We continue to have a high level of launch activities to support new vehicles to be introduced over the coming quarters. These models are well distributed across the globe. We are pleased to show new model, the Range Rover Evoque, with pedestrian-protection airbag.

I want also to especially mention that Toyota Corolla is truly global model, which will be built in North America, Europe, China and we have increased content in this generation.

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 first quarter, including negative currency translation effect of around $106 million and organic sales growth of $39 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 and costs related to the preparation for upcoming launches as well as ramp-up of recent launches. Additionally, we experienced lower capacity utilization in most regions due to the sharp drop in light vehicle production and temporary costs related to the strike in Matamoros.

Our adjusted operating margin of 7.7% 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 roughly unchanged in absolute dollar amounts. Our reported EPS decreased by $0.55 mainly as a result of lower operating income. Our adjusted return on capital employed and return on equity were 19% and 22%, respectively. Our dividend of $0.62 was $0.02 higher than a year earlier.

Looking now on the next slide. Our adjusted operating margin of 7.7% was 320 bps lower year-on-year. As illustrated by this chart, the adjusted operating margin was impacted by higher raw material costs of 80 bps, 30 bps from SG&A and RD&E, slightly offset by 25 bps from positive FX effects. In addition, we had temporary costs for the social unrest in Matamoros, Mexico. Excluding this cost, our adjusted operating margin would have been 100 bps higher than the 7.7%. The negative leverage on the higher sales was as a result of higher RD&E expenses, other launch-related costs and underutilized capacity of our supply chain production and logistic systems. The 10 bps higher RD&E was driven by the high number of product launches, especially in China. In the quarter, launches in China alone rose by more than 80%.

The profitability development of our products usually follow a typical generic product life cycle that's illustrated on the slide, that's on the right hand on the corner. And I will try to explain in generic terms the principles behind how profitability over a life cycle works out. So please bear with me here for a few moments.

During the development phase, costs will be expensed driving RD&E expenses without additional income. We also invest in new production equipment at this stage. In the introduction or launch phase, revenue is not enough to cover all of the addition of expenditure to launch products.

During the growth or ramp-up phase, volumes increase and productivity improves, results typically moves from loss to profit and we start to recover engineering and launch costs. In this phase, continuous improvement activities are implemented to improve productivity and profitability further.

So continuing with the quarter. The sharp drop in LVP has mainly affected our more mature products, which -- with their generally higher profitability, and therefore, there is a greater impact from products that are in the earlier phases of their product life cycle. This has subsequently resulted in period where -- with the product mix carrying a lower profitability. Despite this negative mix development, our Q1 performance was in line with our expectations, supporting our full year indication.

Looking more into our cash flow on the next slide. Operating cash flow was strong in the quarter and amounted to $154 million, almost twice the level achieved for continuing operations in the same quarter of 2018. Capital expenditures amounted to $108 million in the first quarter, which is about 5% in relation to sales. In the first quarter of 2018, capital expenditures for continuing operations were $110 million or 4.9% of sales. For the full year '19, we expect capital expenditures to decline in relation to sales as the ratio begins to normalize towards the historical range of 4% to 5%.

Looking at our full year '19, excluding any discrete items, we expect our operating cash flow for continuing operations to improve year-on-year.

Looking now to our earnings per share. On the next slide, we have the EPS development. Reported earnings per share declined by $0.55 to $1.27. The main drivers behind the decrease are $0.65 from lower operating income and $0.05 from higher financial net, partially offset by lower tax and lower cost for capacity alignments and antitrust related matters. In Q1 '19, the adjusted earnings per share decreased by $0.63 to $1.20 compared to $1.83 for the same period 1 year ago.

Moving on to the balance sheet on the next slide. And as you know, we have a long history of prudent financial policy. Our balance sheet focus and shareholder-friendly capital allocation policy remains unchanged. Autoliv's policy is to maintain a leverage ratio of around 1x net debt-to-EBITDA within the range of 0.5x to 1.5x. As of March 31, 2019, the company had a leverage ratio of 1.6x, which is 0.1x higher compared to December 31, 2018. The main reason for the increase is the lower EBITDA in the quarter.

Our strong free cash flow generation should allow deleveraging and should allow continued returns to shareholders, while providing flexibility. We are aiming to be well within the target range by the end of the year 2019, despite the fine for the remaining portion of the EC investigation that will be paid in the second quarter. This excludes any other discrete items and other non-foreseeable changes to our business.

Looking at our 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 U.S. market is seen as slightly down, while Europe and China are expected to stabilize from the recent volatility. Since January, IHS has reduced their full year 2019 expectations of global light vehicle production by 1.9 million units to 90.4 million or by 2 -- or a reduction by 2 percentage points.

The WLTP impact in Europe has faded. However, we see an increasing risk for uncertainty among end consumers on what drivetrain technology to choose. Corporate and fleet sales seem to be less effective. Other factors to watch are effects from Brexit and the new real driving emission testing, RD&E, that will be mandatory from September 1. In China, IHS expects the softness to continue in the second quarter, forecasting a decline about 3% in light vehicle production year-over-year. As inventory levels are relatively high and the recent trend in sales have not substantially improved, we believe there is some down side risk to this estimate. However, we have heard encouraging positive signals from a number of OEMs in China pointing to a better second half of 2019. Additionally, policymakers have outlined plans to implement more stimulus measures to boost the economy.

Our base scenario for global light vehicle production in 2019 is in line with IHS estimate of the decline of 1%. We expect to outgrow light vehicle production at the similar level as we did in 2018, which was almost 6 percentage points.

Turning the page. We have summarized our full year '19 and indications. Despite the weaker than expected market development, higher cost for raw material and cost related to the Matamoros strike, our full year 2019 indication, excluding currency translation effects remains unchanged since we last reported in January. Full year indications assumes mid-April exchange rates prevail and excludes costs for capacity alignments and antitrust related matters. Our full year '19 indication is for an organic sales growth of around 5% and a negative currency translation effect of around 2%, resulting in consolidated net sales growth of 3% for 2019.

Our indication for the adjusted operating margin is around 10.5% for the full year. We expect the 2019 raw material cost increase to be at least as much as it was in 2018. We anticipate the currency effects on the operating margin for '19 to be neutral. The projected tax rate, excluding unusual items is expected to be around 28% for the year. The projected operating cash flow, excluding any discrete items is expected to improve compared to '19. The projected capital expenditures in relation to sales full year 2019 is expected to decline compared to the 5.6% for continuing operations in 2018. The projected RD&E in relation to sales full year 2019 is expected to decline compared to the 4.8% for continuing operations in 2018. We expect the leverage ratio to be well within our target range of 0.5x to 1.5x by the year-end 2019, excluding any unforeseen discrete items.

I will now hand it back to Mikael for some closing remarks.

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

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Thank you, Christian. Turning the page. We have the important 2019 focus areas on the slide here. And as you know, we always strive for improved products, services, processes and costs. These continuous improvements have been and remain key for Autoliv in improving profitability and winning new contracts. Geopolitical uncertainty has been increasing. Volatile raw material prices, trade tariffs, Brexit, new emission regulations as well as more local issues such as increasing difficulties to pass the border between Mexico and U.S. These developments lead to increased uncertainty. As a company, we are taking a proactive approach towards these geopolitical changes -- challenges. We aim to address volume and cost challenges with cost-reduction activities, including hiring freeze, reduction of temporary personnel and other cost measures. We have implemented actions to improve effectiveness of the product launches, which already have led to significant improvement, which over the course of 2019 we expect will improve our product launch cost effectiveness further.

In addition, as the number of launches are stabilizing at the new hire level, we believe we can gradually increase focus on productivity improvements through operational excellence, while our launch-related costs gradually decline. In parallel, we are streamlining product design and engineering to speed up new launches and improve engineering efficiency. We are managing raw material cost increases by seeking various forms of compensation, reengineering our products and by other measures. As light vehicle market may remain volatile, we will monitor and manage accordingly, while we never lose focus on saving more lives.

Turning the page. Autoliv will host its next Capital Markets Day for investors, analysts and financial journalists on November 19, 2019. The purpose of the event is to give an update on the strategy and development of the Autoliv Group and its worldwide operation. We are happy to invite you to our launch hub in Salt Lake area, Utah, U.S.A. where we have the world's largest inflator manufacturing facility as well as the complete chain of production from propellants to initiator -- inflator and final assembly on airbag system as well as the seatbelt system.

Going forward, after our spin-off of Veoneer, we have a solid foundation for continued growth and an even stronger focus on creating shareholder value and saving more lives. That day, we'll give participants a more in-depth understanding of the -- our continuous improvement activities and our journey towards Industry 4.0. We will also demonstrate innovation in automotive safety as well as in adjacent product areas and discuss the road ahead beyond 2020. I hope to see all of you at our 2019 Capital Markets Day.

And by that, 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. Turning the page. This concludes our formal comments for today's earnings call, and we would like to now open up the line for questions. So I now hand it back to you, Sarah.

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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 from KeyBanc Capital.

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

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Just trying to dig into the launch-related costs in the quarter. Trying to get a sense for, if you could quantify maybe what that looks like in the quarter and what your expectations are for the remainder of the year? It sounds like there's going to be some spillover for the next quarter or so. Just trying to get a bridge to the -- your full year framework and really digging in on that launch related stuff.

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

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So as we have described earlier here, I mean, we saw elevated launch costs during 2018 here, and we have then indicated that it will take several quarters for us to get that back into the levels it should be. And we also talked about the number of measurements that we took to make that happen and that we would see a gradual improvement during 2019. And what we're saying is that, those measurements are [biting] and getting effects -- and seeing the effects to our bottom line. So we are tracking towards the expectation to see that gradually improve during 2019. We haven't quantified it before and of course, we can't quantify it in the -- we won't quantify it here now in the quarter either, but the message here is really that we are following our plans to resolve that situation.

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

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Understood. I guess, maybe asked another way. I know you don't -- you're not providing quarterly guidance, but can you just give us a sense maybe of the first half or second half cadence to -- that gives you the confidence in the full year framework?

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

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No. As we stated when we gave the guidance for the full year, we said that the first half of '19 will be, let's call it, a tougher part of the year and then more improving part during the second half here. So in that sense, it is the back end of the year here where the gradient of the improvements here will be seen. So, I mean, we have said that around connected [end] to the light vehicle production development and, of course, our own launch cost situation here, that's also is gradually improving during the year.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [6]

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Okay. And then just one on the recent announcement by the U.S. on expanding their probe for the ZF's airbag control unit. I believe it sounded like 12.3 million units. Would this potentially require the replacement of the airbag itself or just the ECU? Just trying to get a sense for whether this could be an additional point of replacement opportunity for you?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [7]

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We do not have any information about this. This is a specific question related to ZF and its ECU component there that it's related to. So it's the ZF's specific question.

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Operator [8]

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

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [9]

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I have a question on your statement that Q1 result was in line with expectations. Do you mean that your sales performance in the quarter or do you also mean the underlying EBIT result?

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

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We also mean the underlying result here. So as we stated here, I mean, we saw a year here where the first part of the year is more challenging. And with that forecast we had leading up to the 10.5% EBIT margin -- adjusted EBIT margin, we are following that. And as we indicated here, we are in line or slightly better even if you -- considering the initial headwind here.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [11]

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Okay. And the Mexico issue was known when you guided for the full year already? And also what do you think about the kind of inflationary pressures for the labor in Mexico going forward?

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

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The Mexico was not known for us at the time when we guided for the full year. So that was not including in our original plans here. This was an isolated situation with the social arrest in the Matamoros area and we have no indications of seeing those or thinking around that it should mean inflationary pressure on Mexico in launch. So this is an isolated question.

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Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [13]

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But -- sorry, but the minimum salaries in Mexico are rising and you have 20% of your headcount in Mexico. Isn't it affecting you?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [14]

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No. I think, when it comes to the minimum wages, we were on the right side of that from the beginning. So that had a very limited impact to us, as we were on the right side to speak on that. Then this was then on top of that. And it was, as I said, there was social arrest in that particular area. So I would say that what you're referring to here as the minimum wage increases, that's already managed and taken care of in our own books here to speak.

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Operator [15]

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

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Garrett Klumpar, RBC Capital Markets, LLC, Research Division - Associate [16]

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This is actually Garrett on for Joe. Can you just -- looking at your guidance, can you just walk through the factors that give you confidence in hitting the 10.5% margin target for the year after the 7.7% in 1Q? I mean, it seems like you need to average kind of in the mid 11% range for the rest of the year, which should all seem like record quarter. So just walk us through the confidence of hitting that, and then what's driving the implied improvement?

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

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No. I think, I mean, first of all, as I said here, I mean, we see that -- with the plan we had under -- financial plan we had for the full year, we are starting the first quarter in a good way with the underlying performance here and we are in line or slightly better than what we saw there, and even considering the additional headwinds we saw in the first quarter. So I think, we -- the organization here managed the sharp decline in a very good way and I would say also the recovery work around the Matamoros situation even as we see here, came at the cost. So that give us confidence around their underlying performance. Then as we said here, I mean, it is built on improving second half here from the beginning and it's also related to the light vehicle production. We are not changing our projection there. I mean, we had minus 1% light vehicle production already when we guided for the full year, and it still stands. And we also now see that IHS have come in and show also minus 1%. So that is also according to plan. Then our -- also improvement, as I said, in the elevated launch cost is giving results and also there, we can see that is biting and giving confidence for the rest of the year based on what we saw in the first quarter. But, of course, I mean, the bar has raised with this additional headwind, but really with the actions that we are taking now on a group level here on everything from hiring freeze to reviewing all types of costs and spending and projects here to mitigate that, let's call it additional headwind here. So we are working on it and according to our plan.

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Garrett Klumpar, RBC Capital Markets, LLC, Research Division - Associate [18]

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Okay. That's helpful. And then, just on the light vehicle production declines, kind of having disproportionately negative impact on the mature platforms. I mean, the outlook for 2Q light vehicle production is also challenging. So won't that kind of margin impact repeat in 2Q?

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

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Yes. I think, of course, the mix of that is difficult for us to see exactly at this point. But as I said, we indicated already in our regional plan here and the guidance that Q1 and Q2 would be challenging and that we see now also in -- especially in China. But when it comes to the overall light vehicle production on an aggregate at a global level, I think we have no reason to believe that it should be worse than what we have said here at this point in time. And also the positive signals we get from some of our local OEMs in China indicating also a better second half of '19 there.

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Operator [20]

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

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Andrea Abouchacra, One Investments, LLC - Equity Analyst [21]

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I have a couple. First, when looking at your moving parts on margins and the current mix, do you need car production to return positive growth to see the sort of net benefit in profitability, given the unfavorable mix that you have between the established business and the new launches? This is the first one.

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

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Our guidance is based on the light vehicle production I referred to here and which we have set to minus 1 for the full year. So that is the baseline for our assumptions here. So no, this not needs to be improved from '18.

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Andrea Abouchacra, One Investments, LLC - Equity Analyst [23]

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Okay. Okay. Then, thanks for the Slides 9, very useful understand the path for the new product cycle. So just wondering what is the timing for the introduction, sort of lead time for the new launches to which at least group profitability if you can give us a sense, what is the -- how long is the introduction phase on average?

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

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I think, I mean, as the generic description of how long it takes to get the program up to the expected performance level, I would say it's 2, 3 years' time lag until you get to, let's call it, the peak level or the expected levels. That you have a ramp-up period that is relatively long. And then challenge for us now, of course, is this situation where we have a sharp decline of the running portfolio as the consequence of the light vehicle production, at the same time, we have exceptionally high launch activities here. So the portion of the portfolio there and the mix effect of that is of course impacting us here. So it's not between the quarters here. It's that the ramp-up of the program takes longer time.

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Andrea Abouchacra, One Investments, LLC - Equity Analyst [25]

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Right. If I may, just last one. If you can give us an indication of what was the capacity utilization in Q1 or at least how much lower was the year-over-year?

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

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Yes. We don't have -- as you know, our production is an assembly line, it is very much dedicated line to respective programs. So in order to give a meaningful number there, we don't really -- you need to look at each line to get that. So it's not on an aggregate level we looked at that. We're of course, measuring OE and et cetera, et cetera per line and in the respective plants depending on what they're doing. There was a big difference in our different processes here. So unfortunately, I can't give you a total number for the company in that respect. It needs to be more on a lower level, so to speak. But of course (inaudible) it has an impact.

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Operator [27]

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

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Erik Paulsson, Pareto Securities, Research Division - Analyst [28]

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This is Erik. I was wondering about the pedestrian- protection airbag that you now launched for the Range Rover Evoque here. What is your market expectations going forward this type of product? And do you think it will be a standard? And if it will be a standard, how long will this take in the different geographic markets I would say?

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

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The pedestrian airbag is something that we have had and worked with for quite some time. And of course, we see a gradual increase, not a strong increase at this point in time, but the interest is increasing. I mean, the majority of -- not the majority but half of the fatalities on the roads is linked to what we call then the vulnerable road users where the pedestrian airbags comes into play. And we also see that with electrical vehicles, where it's not easy to [cover] them as they are very silent, there could be incident -- there is incidents also where the vulnerable road users are exposed. And there we see also increasing interest on those types of vehicles. So gradually, we see the increase of the interest here. I wouldn't like to say that it's a meaningful ramp up here in the short term, but in the medium term, we'll see good opportunities here.

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Operator [30]

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(Operator Instructions) We will now take our next question. It comes from the line of (inaudible) from Bernstein.

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Unidentified Analyst, [31]

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I had a couple with regards to your discussion with your customers. Firstly, on pricing.

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [32]

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You are breaking up.

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Unidentified Analyst, [33]

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Can you hear me?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [34]

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Yes. I hear you.

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Unidentified Analyst, [35]

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Sorry. I've got a couple of questions with regards to discussions with your customers, and the first one on pricing. Are you seeing any higher price pressure than normal or any higher-than-normal price reduction requests, or are you still in that 2% to 3% range that you give?

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

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No. I can't say that I see higher pressure. I would say there is -- it's always a very competitive business and has been. So -- but we are still within that range you're mentioning in 2% to 4%, so no changes there.

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Unidentified Analyst, [37]

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Okay. And then second one on raw materials. You said you're negotiating reimbursement with your customers. What level of reimbursement are you assuming in your full year guidance for the raw material headwinds?

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

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We -- I mean, first of all, we don't have any [arithmetic] pass-through on raw materials here. It's always a commercial discussion. And we can't, I mean, have a figure for you here to say how successful or unsuccessful we'll be in that dialogue. So that's of course a part of activities we have here when it comes to managing the raw material as such. I mean, it's everything working with our suppliers to see how we can control it and then also working with our customers to see how we can offset it. And it depends, of course, also how the raw material increase looks like, if it's ordinary fluctuations or if there's a specific situation that calls for a compensation through the whole value chain here. So that's a constant work ongoing here. But what we have said here is that, I mean, that the 0.4 -- I mean, the 40 basis points raw material increases we have indicated for 2019 year-over-year is as a result of this most likely to increase with another 20 basis points here. So we're talking 60 basis points for the full year here. And that's the net effect that we are seeing there.

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Operator [39]

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Your next question comes from the line of Julian Radlinger from UBS.

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Julian Radlinger, UBS Investment Bank, Research Division - Equity Research Analyst [40]

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Two from my side. So the first one. Just a clarification, whether you're including the Mexican labor issues that you've experienced in Q1 in your full year guidance? And if you are including them, is it right to say that you just lost around $20 million of EBIT for the full year in Q1 that you think you can get back in the remainder of the year and because of that, you're maintaining the 10.5% margin guidance? Or how should we understand it?

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Christian Hanke, Autoliv, Inc. - Interim CFO, VP & Corporate Controller [41]

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Well, it was not included in the regional guidance, while we gave it in connection with Q4. But it is included in the guidance -- confirmation of the guidance of the 10.5% now. So we expect to be able to and offset that through our work here that we're doing for the remainder of the year. So that's where we are.

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Julian Radlinger, UBS Investment Bank, Research Division - Equity Research Analyst [42]

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Okay. So could I say that you've implicitly gotten more optimistic about the cost reduction or efficiency improvement and so forth you think you can achieve in the remainder of the year versus 2 months ago or 3 months ago?

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

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I would refrain from saying more optimistic or less optimistic. I also can conclude that we are tracking according to our own plans here towards the 10.5% and with the Matamoros situation we're saying that we believe that we will be able to -- we should be able to manage that as a part of the work that we're doing in the remainder of the year here and, hopefully, that -- the bar has increased, but we believe it's doable.

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Julian Radlinger, UBS Investment Bank, Research Division - Equity Research Analyst [44]

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Okay. And then, my second question is regarding the 135 bps operational headwinds that you show in your operating margin bridge. I'm a little bit surprised about that because in Q3 and Q4, mature markets like Western Europe were also down quite substantially and yet, the operating headwind part of your EBIT bridge wasn't as negative, not even close to as negative as it was now. And on top of that, now you're saying that launch costs were actually less of a headwind in the bridge versus Q2, for instance. So can you just explain what was different about Q1 now, the headwind from these mature platforms or in these mature markets compared to Q3 and Q4?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [45]

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Yes. I think, I mean, if you look at the sequential development here from Q4 to Q1, what is happening here also is that, I mean, you have the seasonality effect here. I mean, Q4 is a strong quarter when it comes to engineering income, so you get some positive effects from that. And also in the numbers, you see here for Q1, we have the Matamoros, which is 1 percentage unit included there. So engineering, Matamoros alone is 200 basis points. And then you have the ordinary seasonality between the quarters here where Q1 is a weaker quarter. You have to consider those factors also when you look at the different quarters in the year.

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Julian Radlinger, UBS Investment Bank, Research Division - Equity Research Analyst [46]

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Okay. I'm honestly a little confused about that because the bridges are year-on-year bridge, not a quarter-on-quarter bridge.

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [47]

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No, but the -- yes, but your question was in relation to Q3 and Q4, so that's why I thought you were talking about that reference. Because if you look at year-over-year, then I think it is [the effect] that we have described here, the different components here. We have the raw material 80 basis points. We have the Matamoros, 100 basis points, you have then the operational headwinds with 140 basis points where, of course, the [lower] ramp-up portion of the portfolio is even higher this year than last year. So the portfolio mix impact becomes stronger, the more we ramp up new programs at the same time the light vehicle production of the running portfolio is coming down.

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Operator [48]

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And your next question comes from the line of Erik Golrang from SEB.

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [49]

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I have 2 questions. The first one is on the organic growth guidance for the full year. And should we read it as, I guess, for the second half, it's primarily based on IHS on the underlying market, but for the second quarter, it's sort of a blend of your own call offs and the IHS number. Given that you say that there is downside pressure due to IHS. So is it a mix more or less?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [50]

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Yes, you could say that. And as we've said before here, I mean, when we launched the first half of the year, we saw little bit weaker market than what IHS had at the time and what has happened since the Q4 earnings call is that IHS has now come to where we were, meaning minus 1% for the full year. So we've started to correlate there.

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [51]

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But your own sort of input limits itself, I guess, to the near term. So for the second half (inaudible)

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [52]

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So the second half is fully IHS. Yes.

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [53]

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And then the second question is on the raw material side. 80 bps headwind in Q1. Did I hear correct that you expected 60 bps headwind for the full year?

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Christian Hanke, Autoliv, Inc. - Interim CFO, VP & Corporate Controller [54]

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Yes. That's correct.

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [55]

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And that's up from previous year, right? Was that the case previous year?

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Christian Hanke, Autoliv, Inc. - Interim CFO, VP & Corporate Controller [56]

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Yes, yes. Before we expected 40 basis points from '18 to '19. Now we're saying those 40 to 60.

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Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [57]

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Okay. So that really [counts.] You've had the headwind both from the Mexico issues and additional raw mat pressure, but you're still sticking to that full year guidance, so there is -- I guess, this is a repeat to the previously asked question, but there's quite significant room for improvement there that you now have been able to identify.

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Christian Hanke, Autoliv, Inc. - Interim CFO, VP & Corporate Controller [58]

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Yes. So I mean, the bar has increased for sure. But as I said, I mean, what we see in the first quarter here in terms of our underlying performance, we -- and in relation to our own forecast there, I mean, we have [stopped] within the first quarter.

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Operator [59]

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And your last question at the moment comes from the line of Brian Johnson from Barclays.

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Steven Michael Hempel, Barclays Bank PLC, Research Division - Research Analyst [60]

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This is Steven Hempel on for Brian. Just a quick question around the temporary personnel cuts that you called out. It sounds like that could be one of the key drivers around the operational improvement or margin improvement to offset the nice headwind that have been discussed. Just wondering if you can give us some color as to...

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

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Sorry, I hear you very badly. Could you -- excuse me, I hear you very badly. Could you repeat?

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Steven Michael Hempel, Barclays Bank PLC, Research Division - Research Analyst [62]

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Yes. Just looking at the temporary personnel cuts that you've called out, just wondering if you can give us some color as to the regions and product areas that -- where you're making the specific cuts. It sounds like this is one of the key areas that is helping offset some of the operational headwinds you saw in Mexico in 1Q, along with the raw material headwinds?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [63]

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No. I think, I mean, we are assessing that plant by plant, function by function where we need to do adjustments wherever we can, take out temporary personnel, et cetera. So I would say it's not cheese slicer here. It's really surgical where we have the opportunities in different areas. What we have done though compared to, I would say, ordinary course of business here is that we are taking a more group view on activities there and tracking the progression on the activities connected to that.

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Steven Michael Hempel, Barclays Bank PLC, Research Division - Research Analyst [64]

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Okay. Would you -- I mean, would you say that's the key driver of the kind of margin offset from the headwinds related to higher raw mats in 1Q and the Mexico issue? Or is there other key drivers outside of this cut.

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [65]

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Yes. There is, of course, other activities also. I mean, I think it's a range of activities you need to do this. I mean, first of all, it is to do what we have described here, to make sure that the launch cost is completely gone and that get productivities where it should be and we are looking at discretionary spending. We're reviewing our different CapEx projects. We are looking at the staffing situation as Veoneer has mentioned, et cetera, et cetera. So it's an array of different initiatives and activities.

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Operator [66]

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

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division - Automotive Analyst [67]

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Two quick questions from me. First, if you could comment on the market share in order intake during the quarter? And in that, if it's new OEMs or if it's already won OEMs that are adding more models to your order that is driving market share currently? Second question is if you could maybe update us on this electronics mechatronics business that you're setting up and what that is targeting? Those are my 2 questions.

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [68]

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Yes. Thank you, Hampus. On the new order intake side, we don't give number percentage more than for the full year and once a year. But at this stage in the report is that, it continue on a good level also in the first quarter here. And it is several OEMs making up the total order intake here. And I would say we have also on a global perspective, a good distribution there. So it's not only in 1 region either here. So I would say in terms of distribution of orders, it's the normal pattern, so nothing particular there. When it comes to the electrical and mechatronic activities, it's a part of, you could say, our tech centers and our RD&E capabilities here to meet the customer demands when it comes to, let's call it, the electrification or power type of products. So if you look at the steering wheels with HMI features, that needs to be there. It is also in seatbelts and airbags communication with the rest of the vehicle, et cetera. There's a lot of opportunities for us to have, I will say, more sophisticated and involved product also as the vehicle in itself allows those possibilities here. So that buildup is also going on according to plan here. Certain parts of the world where we have the focus for this.

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division - Automotive Analyst [69]

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Is there any overlap with what Veoneer is doing in the business you're setting up?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [70]

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No. This is absolutely not overlapping and it's not the type of either products or communication that they are working with. So it's -- I will say, our portion here is what you see in many other types of areas where the products have the capabilities of communicating with, I mean, through the new technology that is coming. So it's more to create the interfaces here.

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Operator [71]

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

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Alexandre Raverdy, Kepler Cheuvreux, Research Division - Equity Research Analyst [72]

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I just had one last please, on RD&E testing. What do you hear from your customers? Do you feel that there will be some sort of disruption in the production or do you feel that they are much better prepared than last year?

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [73]

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I think, I mean, this is difficult for us to have an insight in it more than what the customers are telling us and from their side. We don't see any disruption here. But, of course, why that we're relisting here is because that's something, of course, that we need to keep an eye on. So we follow the development. It's less of a rigid process than WLTP was. So I think there is a better chance to have a smaller introduction of this new testing unit. So -- but we need to keep it under radar screen here. That's the deal.

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Operator [74]

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And you can continue. There are no further questions.

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Mikael Bratt, Autoliv, Inc. - President, CEO & Director [75]

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Okay. Thank you very much, Sarah. And before we then end today's call, I would like to say that we will continue to execute on our growing business volumes and new opportunities with the never-ending focus on quality and operational excellence. Also, I should mention that our second quarter earnings call is scheduled for Friday, July 19, 2019. And once again, thank you to everyone for participating at today's call. We sincerely appreciate your continued interest in Autoliv and I hope to have you on the next call. Goodbye, and wish you all a nice weekend.

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Operator [76]

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That does conclude our conference for today. Thank you, everyone, for participating. You may now disconnect.