Autoliv, Inc. (ALV) Q2 2008 Earnings Report, Transcript and Summary

Welcome everyone to this presentation of the second quarter results for Autoliv. Here on the call we have our acting CFO, our VP of Communications Mats Odman and me, Jan Carlson, Chief Executive Officer. We will start with a quick review of the quarter two results and we will present our outlook for the remainder of the year. The bulk of the discussion will include the action program we are launching to counteract the effects on our business due to the shift in global demand and the continued commodity inflation. After that we will remain available for questions. You will find the slide presentation through links on the front page of the Autoliv corporate website under Financial Reports. If you’ll now turn to the next page you will find the Safe Harbor statement. As you know this is an integrated part of the presentation. This presentation includes some non-U.S. GAAP measures. These reconciliation’s can be found as usual in the quarterly earnings release. Moving on to the next page we have a summary for our second quarter results. We are very satisfied with the quarter except for our stage development that was lower than expected. This was due to the decline in production demand and shift in the vehicle mix and despite this we were able to reach our EBIT guidance. We achieved record sales, operating income and earnings per share for any second quarter. Sales improved by 10%. Operating income by 12% and earnings per share by 27%. All figures are on a comparable basis. Lastly, our strong cash flow performance continued as we generated almost $90 million after investing activities. Virtually all of this cash was returned to the shareholders in the dividends and share buyback. We will now turn to the next page. I would like to make a few comments on the conditions affecting our automotive environment. Since our teleconference last quarter the light vehicle production has been cut another 700,000 units to 13.4 million vehicles for full year 2008. When looking ahead to 2009, we anticipate a further drop to less than 13 million vehicles. Furthermore since April the market prices for steel and magnesium have increased to record levels by 38% and 25% respectively. Somewhat compensating these challenges we continue to grow faster than the market in Japan and the emerging markets where we expect a major part of the future light vehicle production growth. We also continue to increase our market share in seatbelts while maintaining our strong share of the [dye] business. In addition, NHTSA and EU announced a new safety test requirement for the NCAP which could increase the safety content of vehicles in the future. On to the next page where it says last year for the second quarter, our sales increase of 10% or $180 million was highly driven by the translation effect to the U.S. dollar. It highlighted seatbelt and airbag safety increases essentially offset the declines we saw in the frontal airbag based on the electronic and seatbelt system business. Moving on to the next slide, we find our organic sales growth development for both global light vehicle production and the trials. As mentioned earlier, organic sales declined by 1% for the second quarter. The major reason for our decline is the sudden drop in the national light vehicle production which was down 15%. The reason for the deviation to our guidance is an unfavorable vehicle mix in Western Europe. Volvo, Renault and PSA which combined represent more than 20% of our sales dropped more than expected. In addition, key launches mentioned on earlier earnings calls have been delayed. For instance, the Ford F series. In Asia we continue to grow. Specifically, in China we were up 21%. We continue our strong market performance in Japan where we grew more than twice as fast as the market mainly due to the strong penetration of side systems. Turning the page we have the latest light vehicle production figures by region from CSM and JD Powers for the second quarter. Starting from the top, North America was a drop of 15%, 4% more than expected; the Detroit three dropped 600,000 units or almost 22% from prior year; Trucks and SUV’s also declined 22% or 500,000 units. In Europe there was also a shift to smaller vehicles. As mentioned earlier, larger platforms at our main customers were down more than expected. Eastern Europe continued to show strong growth, over 20% mainly thanks to the entry level vehicles such as [Logan]. In the rest of the world the largest driver is China where light vehicle production grew more than 14%. On to the next page we have the Autoliv production figures for the second quarter including the change from prior year. Strong volume increase continued in our seatbelt business, up 18% including the India application and in the head airbag where we were up 13%. Steering wheel volumes were down only slightly while frontal airbags were down 4% mainly due to lost contracts to Ford. Turning the page, we have our gross margin. Gross margin for quarter two has declined by 40 basis points from prior year. The main reason is the commodity inflation and increased energy and huge surcharges which had a combined negative effect of 125 basis points. We have been able to somewhat offset these negative effects with improvements in overhead, labor and material cost reduction. These improvements were roughly 100 basis points combined. On to the next slide, we have the operating margin. The operating margin of 7.8% for quarter two was in line with our guidance of at least 7.7%. The unfavorable gross margin effect mentioned earlier of 40 basis points was more than offset by continued improvement in our RD&E activities. These cost reductions and higher engineering income generated 70 basis points. Overall, despite the light vehicle production environment in NAFTA and in Western Europe we are satisfied we were able to slightly improve operating margins especially considering the negative effects of commodities and energy inflation on our business. On the next slide we have the EBIT bridge for the quarter versus prior year where we have separated the currency effect. The increase in EBIT was mainly due to improvements in our RD&E of $12 million and the cost reduction improvements of $30 million as well as an overall positive currency. This was partially offset by commodity inflation increases of $22 million. The commodity effect was worse than expected in our guidance by $12 million mainly due to fuel surcharges and energy related costs such as increased utilities for running our plants. Overall the EBIT increase was primarily driven by improved operating cost performance. On to the next slide again we find our cash flow. $87 million of free cash flow was in line with our internal expectations. We continue to focus on working capital management and maintaining capital expenditures and low depreciation and amortization. This initiative allowed free cash flow to essentially be in line with quarter two net income. Despite the current tough economic environment we remain committed to working capital less than 10% of sales and capital expenditures less than 5% of sales. Turning the page, we have our return to shareholders and for the last 12 months we have returned over $500 million in dividends and buybacks and this represents a 13% return of the average market cap. We increased the third quarter dividend by 5% to $0.41 per share. We also continued to buy back shares, albeit at a lower level. Given the current economic climate we continue to keep a close eye on our debt levels while maintaining an efficient balance sheet and strong investment rates. To conclude the quarter two portion of our presentation we have managed to withstand the headwinds from the market fairly well and deliver record sales, operating income and earnings per share along with a strong cash flow. We even managed to slightly improve operating margin there by meeting our margin guidance. We will now move on to our outlook for the remainder of the year. Turning the page, we have the light vehicle production change for North America and Western Europe. We focus on these markets since we derive nearly 70% of our sales from these two markets. Looking at the NAFTA region represented by the solid red line with circles we see the forecast for July. The decline from the eight previous forecast is mainly due to further erosion of the truck and SUV market. This represents a 5% deterioration for the full year and the light vehicle production is now expected to decline by 11.6% as shown in the legend. In Western Europe, however, the overall differences are smaller. From April to July there were significant changes by customer and for key Autoliv platforms. For instance, Renault Megane is down 35%. Volvo is down approximately 10% across most platforms and PSA is down 6% overall. At the same time we see more small cars like the Nissan [Avara] the Nissan small and mid truck which were up more than 10% and also this time their A and B class which were up 4%. For China which is our most important market in the rest of the world, the rate of growth is also declining in the second half of the year. The CSM forecast shows a decline of light vehicle production growth from 23% to 10% in quarter three and from 14% to 7% in quarter four when comparing the April light vehicle production through July. Onto the next slide, we see how our organic growth outlook has changed over the last 90 days. This is illustrated on this chart from the drop from the black line to the red line. The black triangle line to the red circle line which now represents our latest 2008 quarterly organic growth estimate. As mentioned earlier the quarter two shortfall of 3% was driven by NAFTA declines and unfavorable platform mix in Europe. For quarter three we now expect organic sales to decline 2-3% versus a 3% increase expected in April. Almost half of the decline is related to lower than expected volumes in Europe related to key platforms as mentioned on the previous slide. The remaining difference is due to slower growth in China and Korea than expected in April and the Ford F series launch delay. Due to overall market conditions we now expect for quarter four organic sales growth of approximately 2% versus 5% in April. This assumes there will be no further launch delays. We expect to see 5% sequential improvement from quarter three minus 3% from quarter three to +2% in quarter four. It is expected due to a long list of program launches. The programs expected to have the most impact are the VW Golf and the Renault Megane launches we talked about before with gradual ramp up for some of the smaller passenger car vehicles Autoliv is over-represented on such as the GM Absalon and the [Lambda] platform. On to the next slide, as stated in our last earnings call the commodity environment continues to deteriorate. We now see further negative effects on our business. We now expect these effects to be around $60 million for the year versus the $32 million expected in April. As illustrated on the table the increases are mostly related to steel and magnesium. Of the $60 million incremental costs approximately $45 million is expected to come during the second half of the year. Moving on to the next slide, we have prepared a table showing our headwind development during 2008. In January we expected to generate an improvement of $45 million or 50 basis points over the 2007 EBIT margin of 7.9% excluding the legal costs. Hence the guidance of 8-8.5%. This was based on an expected organic stage growth of 2%. In April we did see some deterioration in the expected results for full-year 2008 albeit still a 20 basis point improvement after taking action to further reduce costs. Therefore we held on to our 8-8.5% guidance but at the low end of the range. In our current situation, raw materials, fuel surcharges and energy costs combined are expected to increase by almost $50 million more than in April. With an expected sales decline of 1% rather than an increase of 2% our margin could erode as much as 70 basis points versus 2007 despite further increases in cost reductions. However, this is before any compensation for commodity increases and any additional restructuring costs. Turning the page we have our action program. Considering the rapid deterioration in our environment we will now launch an action program. The aim is to preserve the long-term operating margin range of 8-9%. As mentioned in our press release earlier today we have three primary areas of focus. The first is to adjust and align our capacity to the global light vehicle production development and plan. The planned actions include downsizing our temporary and permanent workforce which will likely include further plant closures. It will include a number of tech centers yet to remain on line to support our customers and we will also reduce production overhead and SG&A. The second prime area of focus is to further accelerate the local country sourcing, supply consolidation and other sourcing initiatives. We also plan to reduce our product variation and streamline our product portfolio around the globe. The third primary area is to ramp up investments with new products that focus on smaller vehicles. This may include products that involve collections where it mitigates the severity of the crash and this could require some 200-300 people either reallocated or new hires but overall we expect a net RD&E decrease. Moving on to the next slide, we have the estimated cost and savings of the program. The action program including severance and restructuring is estimated to cost up to $75 million and it is estimated to generate $120 million in annual savings once fully implemented. The program is expected to start generating savings already in quarter four this year and gradually increase during 2009. The full effect is expected in 2010. The actuals could affect up to 3,000 people. Since many are temporary we expect to get the favorable effect [inaudible]. Turning the page we have our financial outlook for the remainder of the year. This guidance should be compared to our operating margins of 8.2% achieved in 2007 excluding restructuring costs and the legal provisions. For the full year 2008 we now expect sales to increase by around 8% including an organic decline of almost 1%. The India acquisition is expected to add almost 1% and currency is expected to add 8%. Our full year 2008 EBIT margin guidance has been lowered to 7-7.5% excluding severance and other restructuring costs. The low end of this range would imply an earnings per share of approximately $4.50 which is approximately 11% better than 2007 on a comparable basis. This assumes a 29% tax rate and excludes any additional share buyback in the second half. For the third quarter 2008 consolidated sales are expected to increase by 7% including a 3% decline in organic growth and a 1% increase related to acquisitions. A quarter three EBIT margin is expected to be approximately 5% mainly due to the increase in commodities, fuel and energy costs and organic sales decline of 3%. This now concludes the presentation of today’s call. We would very much like to open up for questions. We will do our absolute best to answer them.

(Operator Instructions) Your first question comes from Adam Jonas – Morgan Stanley. Adam Jonas – Morgan Stanley: First what percentage of your sales and granted I understand it is a rapidly moving number perhaps but what is your best estimate for group revenues from Chrysler right now?

It is around 3% of consolidated sales. Adam Jonas – Morgan Stanley: Distressed suppliers, you have alluded to this many times, can you just give us an update on which types of suppliers are distressed, whether the severity of that distress has increased and just give us a bit more color on how bad that is getting? My final question is on surcharges on energy that seems to be the real delta that jumped out and got you this quarter. I suspect you certainly are not alone there. Do you expect, can you give us an idea of whether even though you are paying surcharges are you still in a position where you are below market on energy costs? Meaning even if energy spot prices remain where they are in spot terms is it reasonable to expect further surcharges from your energy suppliers?

We start with the supplier situation the type of suppliers is something where generally a different kind of tier one supplier to us or component suppliers where we can see a higher level of raw material content. It has deteriorated since our last earnings call. We estimate the full-year effect now to be $14 million instead of $12 million as we expected a quarter ago and all of this additional $2 million is falling into the second half of the year. It is obvious the deteriorating volumes in primarily North America and increased commodity prices are pushing tier two below that. The situation deteriorated as I said, primarily or mostly I would say in North America but even in Europe we have a couple of more issues than we have had in the past. So that is about the supplier situation. Adam Jonas – Morgan Stanley: Can I interject? You quantified the potential for the operating profit and EBIT impact but what about on the working capital? Do you find you are having to pay these suppliers earlier than you used to or to work on terms that may require a higher level of working capital outlay than you would see in the normal environment?

Yes that could happen and we could see that we have to change the payment terms in some cases but it depends from case to case. In some cases that has happened and we could even expect to foresee that happening also down the road. Having said all that we still will be within the guidance of working capital of less than 10% of sales. You will also see that in the level of inventories you are actually seeing an increase in the inventories which has to do with the higher raw material prices but also to some extent with distressed suppliers where we are actually taking in more components than we have need…we should have needed in a normal case. Coming back then to the energy levels I’m not sure I have any detailed information to claim that we are on a market spot or not. We have the feeling that we are solidly in the middle of the range when it comes to market environment. No worse, no better from an energy standpoint. Of course a lot of it comes from the increased oil prices and goes directly into the energy level and that is what is causing it. Adam Jonas – Morgan Stanley: What is the typical nature of an energy contract? Electricity, gas? What is the typical length of existing contracts?

I’m very sorry Adam but I don’t know what the length of it is actually. I would suspect we have no difference than any other in the environment in the market actually.

Your next question comes from Himanshu Patel – JP Morgan. Himanshu Patel – JP Morgan: What planning assumptions for industry volume for 2009 are you working in light of the new restructuring plan?

We are basing it on the CSM forecast actually primarily or almost all on the CSM forecast. Himanshu Patel – JP Morgan: For Western Europe and for North America? Can you give us a little bit of sensitivity there? If this forecast proves to be let’s say 5% too optimistic is the current restructuring plan sufficient to cover that or would you need to…

Depending on what type of platform mix we would have we would have a shift in the mix that would be unfavorable or not. But we assume the currently structured program should be at a certain level of sensitivity to the existing guidance. Himanshu Patel – JP Morgan: You mentioned mix degradation in Europe as customers buy smaller cars. Can you give a little bit of a sense of the content per vehicle difference let’s say between a B segment car in Europe on average and here a B segment in terms of safety CPV?

It varies in general between as you know between the different cars. If you take a small car like Peugeot for instance you have a fairly high content on the vehicle. Now it happens to be that the [inaudible] is actually down 14% for the quarter to come here and therefore we see that the level varies between OEM and OEM. I don’t have any general differences between the A and B segments at the moment. I can come back to you with that. Himanshu Patel – JP Morgan: I’m just curious why you guys highlighted that because I think we have seen downshifting in the European mix for awhile now from D segment to C and more recently from C to B. Have you seen something particularly accelerate in the last quarter?

Well in the last quarter it has been, as I said, picking up in some key platforms. I mentioned the 207. We have the 407 which is also down here. Also the Renault Megane that is on the phase out where we basically have everything in the Megane car. It is down 22% for the quarter. That is the phase out effect that is unfavorable to us right now. Himanshu Patel – JP Morgan: The $120 million anticipated savings from the restructuring plan, any way to give us a rough estimate how much of that will flow through in 2009?

I’ll have to get back on that for you. We are aiming to get this started as soon as we possibly can. We are aiming to strive to take as much as we can up front, hopefully the lion part of it will be this year to get the best most rapid effect out as soon as possible. But you know how it is. You cannot take it until you have the detailed plans worked out and you have it strategy to buy the plans and pie size. So we don’t have. What I can comment today in 2010 we will be seeing the full year effects. It will gradually kick in 2009. Himanshu Patel – JP Morgan: I wanted to go back to the energy fuel surcharge question. What is that exactly? Is that just the fuel surcharges related to transporting your components from your plant to your OEM customer’s plants?

The surcharge is primarily almost only the fuel related to transportation when it takes the energy and the utilities keeping our factories running that is also, which is an indirect effect of the oil price. Himanshu Patel – JP Morgan: But it sounds like most of the $25 million is the fuel surcharges?

It is almost half. Utilities and price, a little bit more on the price cost but almost half that. Himanshu Patel – JP Morgan: Did your extended supply chain exacerbate the problem having a lot of production in low cost countries? Does that sort of complicate this a little bit more than it would have otherwise?

I wouldn’t say it is complicating. As I have said before and have said in the past we need to get our supply base closer to where we manufacture to minimize the effects of it and so far we have not reached the wanted levels here so we are working on it.

Your next question comes from Thomas Besson – Merrill Lynch. Thomas Besson – Merrill Lynch: I wanted to ask you about cash reserves and acquisitions. Given the outlook you paint for H2 is it safe to assume you may actually reduce the pace of your buyback?

We will see that on Thursday actually when we come back to the buyback. Thomas Besson – Merrill Lynch: Given the move we have seen very recently on [inaudible] could you comment on your interest? Would you still be interested if any attractive assets were to come on the market to make selected acquisitions and to eventually go above the levels that were decided not to go through if the right asset was to come on the market?

I think that of course there are a couple of things. We are always interested in the right buy but the right buy also differs from time to time. I think in times like this we don’t want to take on a lot of debt actually and make huge acquisitions. We don’t want to take on more extra risk which could be involved in making a very big acquisition. We don’t want to do that. If we have the right acquisition in front of us it would be either an acquisition in emerging markets or an active safety technology anywhere in the world. We would be very interested in looking at it. In particular if it was something that would enable us to avoid accidents and make it something in the safety arena. Thomas Besson – Merrill Lynch: Can you comment on what you are working on in terms of the 2009 [inaudible] impact and I should ask you the question about the environment and production and what the sensitivity was. Can you comment as well on commodities and could you say anything about the relationship with auto makers? You mention pricing pressure as a negative and one of the reasons for your changing guidance. Do you think it is going to get worse in 2009 and could you put a figure on that and comment on where you are in the [inaudible].

Well we look at the pricing pressure with the customer I don’t think there has been any change in the pricing pressure. It is as bad or as good as it has always been. What we are looking now at is that we are in pensive negotiations with our customers on all fronts actually to recoup commodity price increases from our customers. In the environment where you see other suppliers being distressed, being close to bankruptcy or similar a company like Autoliv that is doing fairly well relatively speaking, we of course have an uphill battle to find commodity compensation that is out there with the customer. I can assure you we are doing a lot right now at every customer. If you look on the commodity impact if I understood you right you were seeking our opinion on commodity price increase for 2009…we have not seen the full effects of this current price environment yet. If you look on the current pricing level for commodities it could be around $100 million for full year 2009. We are now talking about $60 million. There could be an additional $40 million approximately if the current prices stay that way. It is an indication for you to help you with modeling but a lot can change. As you know we don’t know how the market outlook is there and if the commodity prices will even pull back. We don’t know but it is an indication. Thomas Besson – Merrill Lynch: To finish can I ask about the timing of the restructuring charge, the cash out, and make sure I understand correctly…your guidance looks very low if it is pre-restructuring even if in a context where you are organic growth is 3%. Can you just clarify the timing of restructuring and timing of cash out? Whether the 5% is pre or post any restructuring charge you may take in Q3?

You know quarter three isolated, quarter three is seasonally a lower quarter. We still have a seasonal effect compared to other quarters. You can say that you have between 50-100 basis points as a seasonal effect to start with. Then you can say the raw material effect that we are seeing plus the strengthening utility costs has a negative impact of close to $30 million or 180 basis points. We then look into the organic decline we see here of 3%. We are then not that far away from the 5% guidance. You are very close to the guidance. So that is how we are coming to the 5% guidance for the fourth quarter. Thomas Besson – Merrill Lynch: Can you comment on the timing of the restructuring and the cash out?

We are trying to do that. As I said, we want to get started as fast as we can with the restructuring and therefore we are really working hard right now with the planning mode of the restructuring program. If we can we will try to take as much as we can on a cost base already this year but that requires as you know deep planning plant by plant and side by side. On a cash point of view it will be a delay maybe up to 6 months delay from a cash out point of view but from a bookkeeping point of view we are trying to get as much as we can on this year.

Your next question comes from Patrik Sjoblom – Deutsche Bank. Patrik Sjoblom – Deutsche Bank: On the commodities what type of recovery is factored in to the $60 million headwind you have for the balance of the full year?

As we said in the presentation almost no compensation is factored in here. Patrik Sjoblom – Deutsche Bank: In the restructuring plan you talked about developing products for smaller vehicles. I guess I’m kind of confused. Isn’t a lot of what you produce pretty much interchangeable between a larger vehicle and a bigger vehicle? What type of new products would we be talking about here?

We believe that the vehicles are in general getting smaller. There will be an even higher focus on performance for smaller cars. There could be a focus on cost level. I think everybody that is close to us, we are as you know having seatbelts on the nano vehicles. Everybody that has been trying to get into the nano vehicles. If you take a high specified product and try to be contented you will be unsuccessful. When the world is going toward smaller vehicles you have to have a specially designed road map for the smaller cars. That is what we are intensifying our efforts in right now. We have products…we are producing for smaller vehicles already today but we will see that we will have a larger portion of our sales in the future. Patrik Sjoblom – Deutsche Bank: I know this next question might be difficult to quantify but of the $120 million a large portion of that is acceleration. Is there any way to give us an idea of just how much of this is incremental beyond the plans you already had in place?

It is very hard to comment. You are absolutely right actually. There are some parts of it where we are included as you have seen on one of the slides at the end of the presentation. We have force reduction programs and we have already took that into account already at the previous earnings call and we had it already in the plans. The lion part is now new.

Your next question comes from Patric Lindquis – HQ Bank. Patric Lindquis – HQ Bank: On the distressed suppliers you mentioned the cost is going up slightly in the second half against the first half whereas if you look at the raw material guidance you have for yourselves there is a significant increase, a near doubling impact if you compare first to second half. Since you are saying that suppliers are basically very much raw material impacted that is sort of a disconnect for me and I would just like to understand how you reason and say that your suppliers have been working hard on for many years will do better.

Of course there is a point there. We have been working with the suppliers and we are working with the suppliers already but this is our best estimation we are having today. It is increasing the stress level on the suppliers but we are working hard with them to have them take the lion’s part of the increase on their side. Patric Lindquis – HQ Bank: But there is no specific reason why you are saying the increase are being less…the impacts would be less on that side than from your direct raw materials?

No it is not actually. In some cases there is also how it works in practice is that we in some cases also buy the raw material and provide them to the distressed suppliers. Maybe it is also here in the figures that we are buying raw materials and taking that burden and then providing it to the distressed suppliers. In that case the supplier is distressed and can’t even buy or doesn’t have the cash available to buy the raw materials. Therefore you partly see that factored in to the raw materials. Patric Lindquis – HQ Bank: On the benefit of the restructuring that you are talking about you said that you were aiming to get some impact already in the fourth quarter of this year. So I assume that this is part of what you are including in the guidance and can say something about the magnitude you are expecting since that is basically not very far out in the future.

I cannot comment on it actually. We are right in the middle of the planning for it. As I have alluded to here the fourth quarter part of it will be primarily related to the take out of the temporary work force. That is something you can do relatively fast actually and that is what you should expect in the fourth quarter. Patric Lindquis – HQ Bank: It is included in what you are expecting for the full year at 7-7.5%? My final question is I’m trying to…it seems the historical cost if you will is continuing which is in a way a simple way to say that volumes will be lower but the question is in a way you can say that it seems as if you have built up too much capacity now in China and by when do you think you will fill those new plants and run at a sort of break even situation there?

Well I think that we are still seeing a significant growth in China. If you look at the latest forecast, 14% this quarter and 43% year end and 7% in quarter four. Even if the growth has come down a bit. It may be sort of a one year delay compared to our previous indications. We don’t think we have too much capacity in China on the longer run by any means. We may have sort of too early in the capacity given what we are seeing right now. That is what has impacted the start up costs but we believe in the long run it is not too much.

Your next question comes from [Jay Amateray – Boston Research]. [Jay Amateray – Boston Research]: First, your third quarter EBIT margin guidance of 5% suggests to me that you are going to see quite a rebound in that EBIT margin come the fourth quarter. Is that a fair way of looking at that?

Yes, you can say it is going to be better in quarter four than in quarter three. [Jay Amateray – Boston Research]: Do you think the fourth quarter average is above the full-year guidance?

If you do the math back in population and do the reverse engineering and you come to above the full year guidance. [Jay Amateray – Boston Research]: With respect to the share repurchase will you be moderating share repurchases and return of capital to shareholders for the restructuring action spending you are planning?

Earlier on the question we will see later on in the week how we will handle it. [Jay Amateray – Boston Research]: With respect to working capital there was quite a noticeable difference in working capital with it being unfavorable this quarter versus quite favorable last quarter on the cash flow statement. Could you just tell us what really drove that and what the expectation is for any potential reversal?

You are referring to that we had a negative impact on the cash flow in Q2 and that is mainly due to we have listed high inventory levels now in Q2. [Jay Amateray – Boston Research]: So that should reverse out in the third quarter?

We don’t know yet but we could say the high inventory levels are mainly referring to the higher raw materials prices and of course distressed suppliers. That may show up later on but we don’t know yet.

Your next question comes from Thomas Besson – Merrill Lynch. Thomas Besson – Merrill Lynch: I just would like to clarify two quick points please. $120 million restructuring charge where are you going to take that? Is it going to be in other income and expense? Is it going to be in the gross margin? Could we or should we expect on top of that some possible asset write offs?

It is $75 million cost. I think you said $120 million. Thomas Besson – Merrill Lynch: Sorry, $120 million is the payback.

Regarding the classification of it we talked about severance payments which normally shows on other income expense. Thomas Besson – Merrill Lynch: The $75 million does that include possible write offs? Or would a write off come on top?

It could. It could. It is included. The $75 million includes the severance package and potential write offs so that is all included.

Your next question comes from David Leiker – Robert Baird & Co. David Leiker – Robert Baird & Co.: I just want to confirm something. I think I heard a couple of different things on this guidance. Your slide 20 I think it says it excludes restructuring program. Is that correct?

That is correct. David Leiker – Robert Baird & Co.: That is both the positive in the cost and the benefits?

Right. David Leiker – Robert Baird & Co.: If we look at Eastern Europe which is where the incremental growth is coming in Europe, how do you participate in this?

In Eastern Europe we are participating of course. But as you know there are significantly lower contents per vehicle in Eastern Europe than we have in Western Europe and therefore every car by far shows up in the light vehicle production. You have over 20% growth but from a value point of view it is not the same. We are participating in it. David Leiker – Robert Baird & Co.: Is that magnitude of difference comparable to what you would see in China and other emerging markets?

Approximately yes. David Leiker – Robert Baird & Co.: Are there standards in place to take the safety contents higher in areas than other places or is that not in place yet?

You have in China for instance you have the China NCAP that is driving safety content in China higher and they are sorting it out and focusing quite a bit on safety content in China for various reasons. As we mentioned we have the export vehicles that are offered a different content in China than the Chinese OEM’s that domestically build cars in China. Of course as it does with regulations it does drive it. David Leiker – Robert Baird & Co.: Have we seen anything with the new FAS standards in North America and in Europe where you are seeing content go up when you look out two or three or four years on the program?

You mean the new site regulation? David Leiker – Robert Baird & Co.: The kind of collapsing of the different standards into one safety measure.

We have not seen that really yet. There is no news and we haven’t seen that yet. It remains to be seen how the different OEM’s take on board this. The classification is going to be different so instituting the stars in a different order. That has not been seen any effect of it yet. David Leiker – Robert Baird & Co.: If we look at this commodity costs at $60 million now and I think you said at a regular run rate that is closer to $100 million. Is that correct?

Yes. On the calendar for the full year we expect at current prices would be on a full-year basis on a run rate of approximately $100 million. David Leiker – Robert Baird & Co.: Is that just commodities or commodities and fuel and energy?

Just commodities. David Leiker – Robert Baird & Co.: What kind of recoveries are you able to get off of that which is implied in that number going forward?

In the numbers that we have presented here we have virtually no recovery but as I alluded to before we are driving this pretty hard. I will not be able to fully tell you that in our next earnings call either because I’m sure the negotiations will continue. I’m not even sure we will be ready to be able to tell you fully in the fourth quarter earnings call if they try to postpone all this kind of negotiations. We are running it very hard and I have no exact data to give you at this time. David Leiker – Robert Baird & Co.: The last question when you look at your action plan here with a cost of $75 million and savings of $120 million. When do you think timing wise the savings offset the cost incrementally by quarter? Will we see that early in 2009 or is it later than that?

I will have to come back to that. We haven’t made that exact determination yet.

Your next question comes from [Andrew Chapman – SEB]. [Andrew Chapman – SEB]: On the R&D spending you have you mentioned some changes there including some net reductions. Are you aiming for a certain state in R&D? You have been sort of big fish for awhile. I also have a second question connected to that. Basically how much of that will be redirected to the nano car products and how fast can you have your product out for these vehicles?

We are looking to approaching [inaudible] that is our target for the R&D and we remain on that. Approaching 6 from the 5.5. We are looking towards 200-300 people additionally in product development but that means that as we have a net reduction and we reduce more in application and engineering. Looking into the product and timing point of view perhaps something will start to sell and we will hopefully have something during 2009 to have an introduction will take several years.

Your next question comes from [Eric Sampson – ACC]. [Eric Sampson – ACC]: How deep is your exposure to SUV’s and light trucks as a group?

That is roughly part of consolidated sales in North America.

Your next question comes from David Leiker – Robert Baird & Co. David Leiker – Robert Baird & Co.: What are you assuming for steel prices?

For the full year? David Leiker – Robert Baird & Co.: For the full year and as you go into next year.

For this year we are assuming $40 million for the full year in price increase compared to last year. David Leiker – Robert Baird & Co.: So that 60/40 is steel?

Yes. You can have the split here to make it easy for you. We are expecting a decrease of the sink level that is basically offsetting the cost of other materials like oil based materials and then you have the magnesium price increase of roughly in the ballpark of $15 million and then you have aluminum that is sort of up closer to about $5 million. The lion’s part of it is steel. David Leiker – Robert Baird & Co.: Where are you on your contracts for steel? Are you locked in now until the end of the year? Are those contracts going up?

It varies from region to region believe it or not with a tendency to have a shorter term in the Asian regions than in the European regions. David Leiker – Robert Baird & Co.: So how much of your steel price is a go-to-market price?

I can’t comment on that really today. As we said the run rate for the year now is about $100 million and we are experiencing $60 million for this year.

There are currently no more questions.

Thank you very much all of you for participating in today’s call. Thank you very much for interesting questions. We will be back to you next time on the 21st of October.