Thomas Jonsson - Vice President Corporate Communications Jan Carlson - Chairman of the Board, President, Chief Executive Officer Mats Wallin - Chief Financial Officer, Vice President - Finance.

Brian Johnson - Barclays Brett Hoselton - KeyBanc Hampus Engellau - Handelsbanken Ravi Shanker - Morgan Stanley David Leiker - Baird Ryan Brinkman - JPMorgan Joe Spak - RBC Capital Markets Itay Michaeli - Citi Richard Hilgert - Morningstar Rod Lache - Deutsche Bank Johan Dahl - Erik Penser Bank Thomas Besson - Kepler Cheuvreux Brian Sponheimer - Gabelli & Company Björn Enarson - Danske Bank.

Good day, and welcome to the Q2 2014 Autoliv Incorporated Earnings Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Thomas Jonsson. Please go ahead, sir..

Thank you, Ann. Welcome, everyone, to our second quarter 2014 earnings presentation. Here in Stockholm, we have our Chairman, President and Chief Executive Officer, Jan Carlson; our Chief Financial Officer, Mats Wallin; and myself, Thomas Jonsson; Vice President of Corporate Communications.

During today's earnings call, our CEO will provide a brief overview of our second quarter performance, while our CFO will provide some further commentary around the financial results and outlook. Then at the conclusion of our presentation, we will remain available to respond to your questions.

As usual, the slide deck is available through a link on the home page of our corporate website. Turning the page, here we have the Safe Harbor statement, which, as you know, 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 to U.S.

GAAP are disclosed in our quarterly press release and the 10-Q that will be filed with SEC. I will now turn it over to our CEO, Jan Carlson..

Thank you, Thomas. Good morning and good afternoon, everyone. If we turn the page and we have a look on the highlights for the quarter. Record sales drove another quarter of solid financial performance.

Our organic sales growth of 7.4% and operating margin of 9.3% were both, better than guided, mainly due to a better than expected vehicle production in most regions and active safety.

Adjusted earnings per share of $1.45 was negatively impacted by $0.07 due to increased interest expense resulting from the USPP [adaptations] and $0.06 related to tax items. These effects more than offset the EPS improvement from increased sales.

Our return on capital employed and return on equity of 25% and 14%, respectively, continue to track above historical levels. During the quarter, we returned approximately $146 million to our shareholders by repurchasing close to 1 million shares and paying a dividend of $0.52 per share. We have settled subject to certain approvals the U.S.

class-action lawsuits for a net cost of approximately $70 million. Lastly, our active safety organic sales growth was close to 40% during the quarter. I would here like to extend a sincere thank you to the Autoliv team for the continued focus and commitment to quality while delivering these solid financial results.

Turning the page, we have some of the key models that contributed to our strong organic sales growth. During the second quarter, these platforms represented around 75% of our organic sales growth and roughly 7% of our total group sales.

This strong mix contributed to our outperformance in all major regions when comparing to the light vehicle production. Looking on the next page, we have our market position based on the delivery figures for the second quarter.

We continue to enhance our overall market position as we grew faster than the light vehicle production in almost all product areas. As we mentioned last quarter, the year-over-year change in seatbelts is a temporary changeover effect as we phase-out all programs now and ramp up new programs during the second half of this year.

In particular, strong growth rates with a newer product like advanced seatbelts and active safety is evidence that our investments in technology are paying off.

Looking now onto our market conditions on the next page, the overall light vehicle production growth outlook for this year remains relatively unchanged from the beginning of the year of approximately 3.5%. Within Asia, growth in China, this year is expected to be close to 10% while rest of Asia is now expected to be relatively flat.

The Japanese market continues to be a pleasant surprise and is now expected to be almost flat year-over-year versus a decline of 8% in the beginning of the year. In the Americas, the growth rate is slowing. However, the [USR] remained stable tracking above 16 million vehicles with relativity healthy inventories overall.

The poor economic conditions in South America resulted in a 17% light vehicle decline in the first half this year. The situation there is expected to stabilize and slightly improved sequentially during the second half despite a very uncertain environment. Vehicle registrations in the EU27 continue to improve and appear to be on a stable recovery.

However in the second half, light vehicle production is expected to be relatively flat year-over-year after a 5% increase in first half.

Overall the better than expected light vehicle production growth in Western Europe and Japan, from what we expected at the beginning of the year is contributing to our better than expected organic sales growth for full year 2014. Moving the page, as we mentioned last quarter, our industry remains under a heightened focus on quality.

Unfortunately through mid-July this year, for passive safety products, our industry has already announced more recalls than in 2012 and 2013 combined. To-date more than $17 million vehicles have been recalled globally for safety-related reasons. Autoliv has been involved in approximately 26,000 on these announced recalls.

This confirms that our overall strategic vision of zero defect and executional focus on quality is paying off and is the only way to go to provide long-term value to our customers and other stakeholders, therefore quality remains our first priority as saving human lives is front and center of what we do each and every day.

Now, I would like to turn it over to our CFO, Mats Wallin, who will comment on the financial results for the second quarter and our financial outlook..

Thank you, Jan. A look upon our financials on the next slide, we have our key figures for the second quarter. Our sales of almost $2.4 billion was the best ever for the company due to our strong organic sales growth in all major regions, with China and active safety accounted for roughly half of the growth.

This strong sales growth drove our second best gross profit ever, which was an 8% year-over-year improvement and our better than expected operating margin result.

Looking out at our margin development on the next slide, our adjusted operating income increased 10% year-over-year and 9.3%, adjusted operating margin was 30 bips better than our guidance and 20 bips better than the same quarter last year.

As shown by the chart on the left the improvement versus guidance was mostly due to our strong execution on higher organic sales, which was partially offset by 30 bips, our warranty and probable field action costs.

When comparing to the prior year, as illustrated by the chart to the right, the benefit from organic sales and currencies was 140 bips to and 50 bips, respectively, these favorable items were partially offset by other net 180 bips which includes the increased cost in our footprint of 140 bips and 40 bips related to the warranty and probable field action costs.

As we have noted previously, the increased cost in our footprint mainly includes our buildup for growth, including vertical integration and operating efficiencies. Moving to the next slide, our operating cash flow of 86 million was impacted by the $65 million payment for the U.S. class action lawsuits and timing effects in our working capital.

We target full year 2014 operating cash flow of at least $700 million excluding discrete items. We now expect D&A to be 20 bips higher than 2013 levels and CapEx net to remain in the range of 4.5% to 5% of sales for full year '14. Lastly, during the quarter, we returned $146 million to shareholders through dividends and share repurchases.

Looking now at our financial outlook on the next slide, we have our guidance for the third quarter based on our customer call-offs organic sales are expected to increase 6% year-over-year, mainly due to the strong growth with Japanese OEMs in North America as well as China and active safety.

Sequentially, organic sales are expected to decline roughly 5%, mainly due to the seasonality effect of summer shutdowns during Q3 in Europe and North America. As a result, we expect to achieve an adjusted operating margin of around 8.5% in the third quarter.

Year-over-year, higher cost for RD&E net mainly the ramp up capacity for growth vertical integration are expected to essentially offset the benefit from organic sales, commodity costs and currencies. Sequentially, the adjusted operating margin decline is mainly due to the lower organic sales net effect.

On the next slide, we have our outlook which excludes cost for capacity alignments and antitrust matters and assumes mid-July exchange rates prevail. Based on stronger than expected first half sales, our full year '14 organic sales growth indication is now more than 6%.

Our operating margin remains unchanged at 9%, due to increasing engineering cost in active safety. We estimate RD&E net to be less than 6% of sales and commodities to be tailwind of $16 million in full year '14.

Excluding any discrete items or non-recurring items, we now expect an underlying tax rate of 29% and target an operating cash flow of at least $700 million in '14. Regarding our capital structure, we still aim to reach 0.5 times leverage ratio.

However, we are unlikely to reach this target by the end of this year without something else, as such an acquisition. We are executing our plan however the results in Brazil are not as anticipated due to the unexpected drop in LVP.

In conclusion, we continue to see 2014 as a transition year, where we are addressing margin challenges and adjusting our footprint to meet evolving market trends while implementing our strategies towards our long-term targets. Turning the page, I will now turn it back to you, Thomas..

Thank you, Mats. This concludes the formal comments for today's earnings call and we would now like to open the call up for questions. With that, I leave the word back to you, Ann..

Thank you, Mr. Jonsson. (Operator Instructions) We will now take our first question from Brian Johnson from Barclays. Please go ahead, sir..

Yes. Good morning. A couple of questions around the sort of implications for third quarter, I guess, if you look at your operating guidance, I had three questions. One, two what extent is active safety investments part of the R&D expense. Is that primarily the R&D expense that you are investing in there? Second, the capacity alignment cost.

Your expenses are ahead of the cash outlay, so obviously the cash comes in the future. Do you expect that level of expenses to continue in the next year or does this year wrap it up? Thirdly, I guess more strategic question.

Just where do you think you are on your camera-based active safety development efforts and where you see the potential stereo versus mono systems, so really two sets of questions.

One around kind of expenses and capacity costs in the next quarter couple of quarters in the second realm your strategic position in cameras?.

Okay.

If we start with the expense in the third quarter and the margin effect, we are aiming to invest or spend more money into engineering and active safety, so for second half of this year we are intended to increase the engineering spend with $15 million, and that is of course one of the reasons the guidance that you see for second half of the year, so $15 million more in engineering related to active safety.

When it comes to capacity alignment, we are increasing the range from 20 to 40 to above 40, because we see that the development of light vehicle production in Europe and we need to take action based on the levels we see.

There is an improvement, but this improvement isn't enough for coming back to old levels, at least not for quite some time, so therefore we have seen the need and we are increasing the spend. Whether this is going to sustaining into 2015, is too early to say. We will come back with that in our January quarter, after quarter four.

When it comes to the camera and technology, we are doing development of algorithms for Mono Vision. We are doing development of algorithms for Stereo Vision and we are launching our product here in next year.

We are also cooperating with MobilEye, so we have quite to breadth or quite a width of the development in our camera activities, but we are available both, in Mono and Stereo Vision. I think it's too early to say which technology that we will prevail down the road, we will have to see that later on..

Any reaction to the press accounts ZF's interest in TRW.

What could it mean for potential? Have you been approached as well or is that just a unique transaction is out there?.

We are of course aware of this and we have also discussed internally inside Autoliv. I think, we have said before that TRW combination known to us with TRW would have significant antitrust implications, but we are continuing to monitor to see whether this transaction will happen and what will be the follow-on to this..

Okay. Thanks..

Thank you..

We will now take our next question from Mr. Brett Hoselton from KeyBanc. Please go ahead, sir..

Good afternoon, gentlemen..

Good morning, Brett..

It's here.

First, on the capital deployment front, can you help us understand how you are thinking about achieving your targets? Not necessarily in terms of what mechanisms you are looking towards and I understand that's your M&A or share repurchase, but in terms of how you perceive the actual timing of the targets, I think there is general impression in the investment community that you are going to get to the 0.5 leverage ratio by the end of this year and by hook or by crook you are going to get there, but sounds kind of like you are saying, you know what? We may not get there..

Yes. I think, as we have said regarding the timing this requires something else than what we have done today like an acquisition in order to get there by the end of the year..

Okay.

I guess, what I am trying ask is, do you expect to get there by the end of the year?.

It will of course all depend on what kind of events which will take place in the second half and that is something we have to wait and see..

We are aiming to get there and we haven't given up on getting 2.5, but as Mats is saying here with the tools we have used and that we have as a tradition to use you would not be able to get there unless you do an acquisition or something else would happen..

Okay, when I think of your gap, you guys have referred to as the gap to get to the 0.5.

I am guessing it's like around what $700 million or something like that now? Do you have a number?.

We are in the ballpark of close to a net cash position or close to $300 million and that is a quite Padé-approximation, I think what you are saying..

I guess, what the investment community is kind of struggling with here is, assuming you aren't able to make an acquisition, which you may, but assuming you aren't, there is a general impression that you are probably going to pedal to the metal on the share repurchase and just make it happen via share repurchase by the end of the year, but it sounds like what you are saying is that may not necessarily be the case.

Is that correct?.

It's not about putting the foot on the pedal here. I think we are bounded with restrictions. You cannot buy up to a certain levels as we are listed in Stockholm and listed in New York. We had restrictions on the amount we are buying to.

If you look into the volumes that we have at hand and that we can buy too, we are not buying far away from what is possible for us to buy..

Okay. Fair enough. Switching gears on the M&A front, can you kind of describe what has changed if anything since last quarter? I mean, last quarter defined for us fairly clearly what your targets start, kind of valuations and potential opportunities and so forth.

Have you seen any material shifts or changes in that M&A front in terms of whether it be valuations or opportunities or companies for sale or anything on those lines?.

There has been. There are rumors out there about MobilEye and valuations related to do that thing and there are also said as an initiative to TRW that is out there, so there are things happening in the space.

We cannot see anything for us that right now is eminent of that kind to us, so if you refer to if we have anything right now that is changing, I don't think we can say that.

We are still looking for acquisitions and we are using equally interested in doing this as we have been communicating about and maybe what is happening is that the moment, there is trying to be more movement out there, but you know that is only speculation..

Okay. Thank you very much Jan. I do appreciate it..

Thank you, Brett..

We will not take our next question from Hampus Engellau from Handelsbanken. Please go ahead..

Thank you very much. I have two questions if I may. First question is regarding your active safety business, which seems to be growing faster than both, I and you had expected and then you have your target for next year, which maybe is not impossible to achieve this year.

I was wondering a bit if you could talk about what is doing better than the expected when you initially announced your target for next year and if you are contemplating updating your target for the $500 million in terms, say, for next year. That's my first question.

Second question is more related on a more broad-based and that is if you are seeing more business opportunities from the back of recalls et cetera and problems that some of the competitors have had. Thanks..

We take the first one regarding active safety. We are seeing some higher take rates out there, so that is one of the reasons that has also increased the numbers. We haven't changed anything with respect to our target and we haven't given any targets for this year either. We will see how that plays out later on this year.

We are staying with the target of aiming for $0.5 billion in 2015. What we found beyond 2015, we will discuss at the later stage, maybe in our earnings call in January or at later stage in the beginning of 2015.

When it comes to business opportunities as a result of the recall, so far we have not seen anything that is affecting us or that is improving our situation. It has not been the case so far. It remains to be seen, how this is playing out.

It has been quite substantial recall during second quarter and probably that take some time if there will be a change of pattern..

Thank you very much..

Thank you..

We will now take our next question from Ravi Shanker from Morgan Stanley. Please go ahead, sir..

Thanks. Good morning, everyone. I have a couple of housekeeping-type questions and one more strategic question. On the active safety business, your revenues are growing at a very fast clip, but your content per vehicle has been coming down.

Is that more to do with mix or is it pricing that's coming down as the product gets a little more mature?.

Do you mean content per vehicle coming down?.

Yes..

Our content per vehicle you mean, or what? I am not sure..

No. I am just saying that your revenue per unit in the active safety business has been declining over the last couple of years..

Okay.

Revenue per unit?.

Yes..

That is a shift of product. We have been selling in the past more expensive night vision cameras and radar heads and we are ramping up vision systems, which per unit is a cheaper product.

We are also seeing generation shifts within our radar technologies that is going from an older and more expansive into a newer and less expensive, so thereby you are seeing more units per se dollar..

So, it's a mix thing and not a pricing issue?.

It's predominantly a mix thing..

Got it. The other question is you held your full year tax rate at 29%, but you had a slightly higher tax rate in the second quarter.

Does that mean your tax rate for the second half of the year is going to be below 29%?.

I think, first of all the tax rate we had now for the second quarter was mainly related to some discrete tax items, but we believe that for the full-year still to 29% tax rate is our best indication, excluding any potential new discrete items, which can arise..

Okay.

Just to go back to the M&A question, does this potential transaction kind of get you or some other people in the industry kind of off the fence about doing some deals that maybe you were little hesitant to do before either because of valuation of other reasons, but maybe jumpstarts even bolt-on type M&A in the industry or do you think, again, this is more of a one-off and the industry is going to see where this goes before anything changes..

I think this is one case that we see right now. We will have to see what will happen throughout the industry if there will be more movement or not. This is one case and you can say that it is something starting just because you have one case. We will have to see.

When it comes to our appetite for acquisitions, I think it's very key to point out we are very focused.

When we look for acquisitions, we are looking to the right acquisition in the area of active safety and there are several factors we are factoring in the product type there sort of the integration into Autoliv et cetera, so I don't think our risk level has increased or anything because this is happening right now..

Very good. Thank you..

Thank you..

We will now take our next question from David Leiker from Baird. Please go ahead, sir..

Hi. Good afternoon, everyone..

Very good morning, Dave..

Hi. A couple of things, first, a clarification on the R&D spend. You said, you are going to spend $15 million more in the second half.

Is that versus last year or versus the first half of this year?.

Versus last year..

Versus last year, so that R&D spend is coming down from where you were in the first quarter, is that just timing of when programs launched or do you have your technology in place and your spending can come down and you leverage - revenue, how should we look at that?.

You should look at this. I think it's a combination of two things. It is product development that we are seeing needs an opportunity to spend more money into product development. We are also seeing a possibility to spend more when we are executing our order book, so it's two things that we are going to use this money for right now..

The $15 million was an increase from last guidance..

Can you remind me what your last guidance was?.

We had around $90 million in spend in active safety. You're right..

Absolutely..

Around $90 million..

Okay. Then could you break out, I don't believe I saw in your release the revenue growth in North America and South America. You have them together as Americas. Unless I missed it..

What did you say? Could you repeat the question again, Dave?.

Yes. I think in your release, you had revenue for Americas. I was wondering if you could break out what the revenue growth was in North America and South America separately..

We have not broken out that, but it is around zero or slightly negative actually for the quarter that went by and that it due to the significant drop in light vehicle production in Brazil..

Okay. Then the last comment here, your alignment cost have gone up.

I presume that's moving west to east, is that because of the cost of making the transition or are you moving more than what you thought you were going to do?.

When you talk about the capacity alignment, we are seeing needs to do more and it's also somewhat of a timing effect.

We see maybe the possibility to do things earlier than we might have been seeing before, so it's a combination of taking actions a little bit earlier that could have come later and also to do something more and that is the reason why we are increasing from 20 to 40 to above 40..

Are these capacity reductions or is that the moving of the footprint from west to east? It's a combination of it. It's moving capacity production, but it is also an adjustment to the light vehicle production long-term that we will see even though Europe is recovering and it's recovering maybe car sales is up now 6.5% for first half of this year..

We are seeing the levels are low and we will most probably stay at a low level for quite long future..

Okay. Then one last question here kind of related. Your capital spending is up above 30% year-over-year.

What are the primary uses of that capital spending? Where are you putting assets in place?.

I think there are two areas which we should think about. China is doing approximately 25% of our CapEx this year, but we also spend quite some in active safety also..

Okay. Great. Thank you very much..

Thank you..

We will now take our next question from Ryan Brinkman from JPMorgan. Please go ahead, sir..

Hi. Thanks a lot. Congrats on the quarter.

I think that you maintained your margin outlook for the full year of about 9% and I think you have been guiding to this level since I think the 4Q '13 earnings call, yet you beat your 1Q margin guidance by 60 bips, and now you beating 2Q by 30 bips, so can you kind of talk about the decision on your part sort of same path there on the full year outlook.

Is it maybe because you see some sort of incremental headwind in the back half of the year that you didn't at the time of the 4Q call or is it maybe that you are just being conservative?.

I think the main driver for keeping the margin here is the spend in active safety and as you have seen now where we are today, we are spending another $50 million in active safety.

In the last call, when we talked about the full year margin, we wanted to spend another $10 million, so it's basically that those are the main drivers that the margins remains the same despite higher sales..

Okay. That's fair.

Then your organic growth rate was, what, 7.4%, I think in 2Q, so that's five points better than what I addressed as that the industry rose, I think, 2.4% globally in 2Q, so I address the same that the global industry is going to rise five percentage points in 3Q, but your guidance is for 6% or that suggest a slowdown from like five point of outperformance is something like as little as 1.12 performance.

Is there something you are seeing there, harder active safety comps or some adverse customer, geographical mix that would suggest less outperformance in 3Q or again, do you think maybe you are being conservative..

Our guidance for the quarter is based on our call-off, so I don't think you should read too much in to digest figures for the quarter three now in terms outperformance..

Okay. Then just last question regarding M&A, can you share how large of an acquisition are you comfortable with? I mean, should we just looking at your leverage ratio where you are comfortable taking that or could you under the right circumstance spend even more? Then maybe it's related questions.

If the value of a Tier 2 active safety supplier that supplies both, you and your competitors, is partly driven by that company supplying your competitors. Then you purchased that company.

Is there a risk that you are overpaying if you no longer wish to supply your competitors or would you be comfortable maybe supplying your competitors as a Tier 2 active safety? How to kind of think about those issues?.

If you look to the amount of money we have been had for an acquisition, we have talked about an amount of $1 billion or so.

I would like to add to this it is very much depending on what type of transaction it is and what type of asset we are looking to and how the combination all that into Autoliv would look like, but we have mentioned the figure before of $1 billion and we stick to that number for now but with a caveat it is very much depending on the type of transaction.

When it comes to Tier 2, and buying a Tier 2, you know that you have to look to from a case-by-case if that would be something if you are referring to the MobilEye, and that they have us a business idea of supplying Tier 1s and that is now a situation where they are going public probably according to the rumor, so that's probably what is going to happen with them if you read the papers right..

Okay.

Does it make sense to buy MobilEye or are they just too expensive?.

While there has been valuations of around I don't think corresponding to between $3 billion and $5 billion or so and I don't think that is something that we are looking at..

Yes. That's super high. Okay. Thanks a lot. Congrats on the quarter again..

Thank you..

We will now take our next question from Joe Spak from RBC Capital Markets. Please go ahead, sir..

Thanks. Good afternoon. I guess just quickly on the housekeeping side. I mean, if you look at what are saying for the year and the third quarter you can get sort of the implied fourth-quarter margin obviously still some pressure.

Besides the additional capacity alignment costs and the higher RD&E spend is there any other factor we should consider?.

One thing is the seasonality effect in the fourth quarter that it is typically higher engineering income coming in the fourth quarter..

As a benefit for you, you are saying?.

As a benefit for us. Yes..

Right.

I guess, if I take your guidance that you would it's still sort of implies pressure year-over-year, so is it mainly just driven by those two factors, the capacity costs and the higher RD&E spend?.

If you looking into year-over-year for the full year, there are sort of two main items which are impacting the margins, you get higher sales, but you also need to support for further growth, so we spend quite a lot more money in our footprint to support growth, but also vertical integration that is one piece of it.

The other piece is our spend in investments in RD&E where the bigger part is, active safety..

Okay. That's helpful. Then just as active safety ramps year and you continue to sort of bid for new active safety and you get more ingrained with the automakers.

Has that changed your view at all on where you think you need to, what types of products you need to going forward in terms of whether - and a decision as to whether you build organically or go out and buy it? I mean, I guess, has any of your further work with the automakers changed your thinking on how quickly you need to get from where you are to where you want to be?.

I think you have to monitor the situation constantly and see how the technology is evolving and all the possibilities are evolving and we are talking now about autonomous-driven vehicles that wasn't even on the map five years ago, so it is something that is happening quite fast and I think we are monitoring this very intensively, but the base we have today with our sensing product and also our electronics product in general is giving us a good base for developing into new and other areas..

Okay. Then last one for me just on the brake control unit business that you started. I think you previously indicated that maybe it was a little bit tougher to sort of win some business there than you thought.

Has there been any progress on that front and if there hasn't been any progress, does that change your thinking on your potential in that market all?.

So far it hasn't changed our thinking, but it hasn't been that easy. It is a quite big change for customers to think in a combination of stability control and airbag controllers and integrating that, so it has been that more difficult than what we had hoped for, but the so far we are sort of not changing the strategy of it..

Is the recent increase focused on recalls and qualities? Does that help or hurt you now that it's integrated?.

I think everybody here realizes that quality is extremely important than that your priority has to be quality all over. In that sense, I think our theme of our initiatives and focus on quality is helping us. It hasn't helped us in terms of new business yet.

That is I would say a little bit too early to say what is going to be the result out of what's happening out there, but so far we haven't seen any effect in terms of new business..

Okay. Thanks a lot guys..

We will now take our next question from Itay Michaeli from Citi. Please go ahead..

Great. Thank you. Good afternoon..

Good morning..

Just two questions from me.

One just to clarify on active safety, so is the goal for 2016 margins are still intact or is that perhaps off the table now with the incremental investments you are making?.

We are still aiming to reach 8% to 9% during 2016..

Okay. Great. Then just on the quarter you mentioned the organic sales was a positive contributor to your margins versus original expectation.

Was that mostly just a regional driver meaning, the strong sales in China and Japan or was it more on a product or execution related?.

We had during the quarter strong sales growth and it was contributing to outperformance of our guidance. It came from many parts around. It was North America, it was Europe. We had strong sales in Japan and also in South Korea, so that was the regions that did better in the quarter that helped us..

Terrific.

Just the last quick housekeeping, any guidance on interest expense, does the $18 million go up a little bit more in the second half of the year and sustain there, or is $18 million roughly you think you will be in the next couple of quarters?.

In this quarter as you know, we started off with a new U.S. VP new [BP] funding and, but that was not the full quarter, so the new U.S. BP $1.25 billion. Interest expense before tax was $9 million in this quarter, but when we come into the full quarter like Q3, it will be $12 million before tax..

Perfect. Okay. Great. Thank you very much..

Thank you..

We will now take our next question from Richard Hilgert from Morningstar. Please go ahead, sir..

Thanks. Good afternoon, everyone..

Good morning..

Just wanted to follow-up little bit on the recalls going on. There seems to be one of your competitors in particular that gets mentioned in articles. We saw BMW announced additional recalls yesterday because of the inflator issue from that competitor.

I am just curious, you said that there hasn't been any new business that has come on board yet, but how have the auto manufacturers been taking this? Have they been out actually shopping around at this point looking for other inflator volume?.

We have not seeing anything so far, but I won't speculate. I would stay out of speculation all of them, what would be the sort of end result out of this and when everything is sort of come a little bit further into this. I don't know what's going to be the case actually to be honest with you..

Okay. Then the other question I had the issues that you talked about with respect to where you are on margin guidance for this year.

You mentioned the payments for antitrust, some of the capital spending that's going, but I was curious what about South America? Is that also an issue for your margins? If so, what kind of an impact is South America having at this point?.

We haven't quantified the impact of South America. Our sales is around $150 million or slightly below in South America, but there is a negative impact on the margins due to South America. We have communicated that for a couple quarters now. The situation there with respect to light vehicle production is of course not good.

We are executing programs to recover and we talked about to supply chain and putting in place, but as the volumes aren't coming as expected this is making it more difficult for us. We will continue to see how we can adjust and see what will be our next step..

Is there also a currency issue with the margin for South America, where you're getting a higher cost of your material or your work in process versus what you're collecting in revenue in South America?.

That's been of course very volatile currency over the last year, and when you are importing goods and haven't developed a supply chain inside South America, then of course that is part of the exposure..

Okay, so that's also adding to it besides the volume. Okay. Thank you..

Thank you. We will now take our next question from Rod Lache from Deutsche Bank. Please go ahead, sir..

Hi.

Can you hear me?.

Yes. We can hear you well..

I had just two follow-up questions on active safety.

First, regarding acquisitions, could you remind us what capability within active safety you would be looking to augment? In other words, where do you think you are stronger and what would be helpful to have improved capabilities in?.

We are looking to actually increase our valuable, our size and to get an even better economy of scale of our engineering efforts and our development that we have. We are also increasing to get an even better footprint when it comes to customer contact and customer relations in the area of active safety.

We do products today night vision and vision and radars and we continue to aim to be there. Could it also included chassis systems that would also be a positive effect to it..

Okay, so it is not necessarily increasing capability.

It may be if it's chassis systems, but it's more size and footprint that your are focusing on?.

It's size and footprint and it would help of course also the product development as we commented earlier here. We are investing now $15 million more in to the area of active safety and acquisitions could also improve and speed up the product development that we see is necessarily going forward..

Okay. Clearly the revenue trends that you've got here in active safety are very strong and presumably some of that is the success you are having with this Mercedes contract that you won a few years ago and you have mentioned before.

Can you talk about just kind of looking forward this market for autonomous emergency braking, you have highlighted it before. It looks like it could be a big driver of growth in Europe and North America.

Have you won business with your radars and cameras beyond the Mercedes or BMW wins that have been mentioned? If you won business that sort of extends into some of the higher volume mass-market names..

Yes. We have business with GM for instance, we have business with others, so that we are present into other areas as well. With our radar products, we have also in the area of sensing and blind spot detection also doing business with Chrysler and others, so we are already present there besides Mercedes part.

When would you tie it into autonomous drive, I think this is a stepping stone with a first step for car manufacturers to take these products on board and work with it and then from there to go into the other areas.

Mercedes is one of those carmakers that are very much in the lead of this and we are working intensively with Mercedes for new programs as well..

Okay, so there are new radar contracts and things along those lines that will be launching over the next few years, more in the mass-market that you've already got in your backlog.

Is that right?.

We have more programs. Yes, of course, that is coming..

Okay.

How would you gauge your market share when you think about the wins that you are seeing compared with others in this area?.

We are somewhere between 20% and 25% market share as of today and it's difficult to speculate that this point about our development and market share. It's fast evolving market and we are not doing that sort of mid-year term and we will come back to that and see how that is evolving when we also how the market is growing.

Our best estimated is that the total market here is growing around to 30% or 29% for the entire active safety market, but that is a combination of vision radar and night vision..

Okay. Great. Okay. Thank you..

We will now take our next question from Johan Dahl from Erik Penser Bank. Please go ahead, sir..

Thank you.

Some quick questions, firstly as your plans and activities develop with regards to the capacity alignment program, can you be in any way more specific with regards to how those savings will come in, in the coming years with still just a three-year payback period? Secondly I wonder what's the logic behind growth debt position and the company $1.8 billion in gross debt.

Are maturities coming that are making up or where do you want to be in this perspective. Finally, is a share redemption program, has that been an option on the table for the fall or do you see any special drawbacks with such a method? Thanks..

When it comes to the savings on them, we have no more specifics to give you than the payback of the capacity alignment is between two and three years after the cash out and that is sort of what we are communicating and we no more details to give you..

Regarding the debt situation and you have to remember that we have also issued target last year of - the new sort of defined leverage target, where we are heading for one. We believe that this new debt will support that target very well. We saw also of course when we did this funding a good opportunity to do this funding.

It was with good terms and it was sort of without financial covenants.

We know that we have also maturities to come this year, we had one already in April regarding our mandatory convert of $107 million and there will be more maturities to come in the fourth quarter on the old USPP debt around $125 million, so it's sort of supports both, the majority profile as well as the leverage profile..

It support the ongoing operation such as they are today, that's how we should interpret it, and also the question on the redemption program..

We have not discussed if this a question we probably discuss with the board. I wouldn't speculate on that. We have no such activities at least at this point in time and whether that is going to happen or not, we will have to come back to a such case..

Thanks..

Thank you..

We will now take our next question from Thomas Besson from Kepler Cheuvreux. Please go ahead, sir..

Yes. Thank you very much. Just some follow-up questions please. Can we come back on the year 180 bips of negatively affect your gross margin and actually led to a decline in gross margin despite the solid organic growth.

Can you try to help us understanding what's exactly involved in these warranty and field action whether this was the things few (Inaudible) were recalled and how long we should expect the ramp up cost for capacity to last and affect your gross margins, that's the first question..

If you started with 180 bips, they are basically in two.

The first part is the increased cost in our footprint of 140 bips and that is mainly to support our growth for the future, but it's also to support the vertical integration and we will see now during the year that RD&E will also go up it's related to the footprint, so we will see an increase for RD&E around 20 bips for the full year, so that is what we basically are having in the footprint part.

The other part, we have the warranties and the probable field action costs, which is around 40 bips.

What was the next question?.

My question was how long should we expect these to affect negatively your margin. I understand the breakout between 140 bips and 40 bips..

Yes. I think you will see this also throughout this year. There will be increased cost in our footprint and it will be. It's also part of our now guidance for the third quarter, but it's also part of course of our indication for the full-year..

As you know we are investing for growth in vertical integration in particular in China and as long as these investments are not fully utilized, you could see a margin effect on it and we expect this to start getting into utilization very late this year and during 2015..

Okay. Thanks. Thank you. Second question on the raw materials tailwind, do you mind repeating the figure you have given as your guidance for the full year. I am not sure I got it correctly..

Raw material tailwind for the year is $16 million?.

$60 million?.

No. $16 million..

$16 million, okay, that's what I wanted to clear with you. Thank you very much. Last one on M&A.

Maybe it's a difficult question, but I wanted to have your view - interest rates at the low levels and your view about size versus focus on acquisitions, so you are still willing to stay within your extended area of safety or you would be eventually willing to expand into something like a bigger.

What's your view about the attraction of sizing of the returns?.

I think size is important when it mattered for economy of scale and you can use this to take better benefit of your engineering efforts and your investments. You can have a better contact your customer potentially, so I think that from the size aspect, what is important for us is that it's related to our business.

We are all about saving lives and there is a lot we can do in this industry going forward. Also, with new technology areas and the new activities in active safety or even down the road towards autonomous drive, we do not intend as of today to go away from that..

Great. Thank you very much..

Thank you..

We'll take our next question from Brian Sponheimer from Gabelli & Company. Please go ahead, sir..

Hi. Good afternoon. Thank you for fitting me in here. If I were to go back a few years ago, there was about six-month period where you weren't able to bid on GM vehicle contracts.

Are you feeling effects of that at all right now and could that be a net positive as we kind of go forward here looking into 2015, 2016?.

If you look to the new business hold, we had some years ago, we are since long out of that new business with General Motors, and the effects out of this will still remain quite some time before that we kick in, or having any meaningful effect.

We said already then that it would take several years before that new business hold will have any significant effect for the GM business. To what extent we have from a company point of view an effect, you can only debate we have been able to take other business compensating for the new business hold at least to some extent..

Okay. Did you discuss a little bit about your restrictions regarding share repurchase? I am trying to reconcile the $1.25 billion raised versus just the $100 million repurchased in the quarter. I think you would probably agree the one thing you didn't need was more cash.

Could you explain your restrictions regarding a repurchase and maybe that would help us figure out that the timeframe in which you could reach that half turn of leverage?.

According to our sort of internal rules here, we can do repurchases the month of after we have released the numbers so you could say that the month before the quarter ends, we can't to do repurchases..

Okay, so should we take that as a signal that share repurchases should ramp pretty significantly in the fourth quarter?.

I don't think that's the..

After today rather?.

Yes. I mean from the timing perspective, we basically have the mid-month and one-month basically open for repurchases every quarter..

You can see the track record pretty clearly on our on a webpage since we restarted back in the fall of last year to get a pretty good record of what has happened since by looking there..

Would you ever consider some sort of accelerated share repurchase some of your peers have used?.

Well, that is a discussion we should having in the board during the fall here with the situation.

As we have talked to, we are aiming 4.5, but we also said today that it has to be something else to happen in addition if we should continue this way of repurchasing shares through buybacks and the normal dividend that we have, so we would have to discuss that in the board. It's nothing I would like to comment on today..

Okay. Thank you very much..

Thank you..

We will now take our next question from Björn Enarson from Danske Bank. Please go ahead, sir..

Thank you. You are mentioning again that you are taking some more efforts in investing in active safety and then hurting short-term profitability. Our U.S.

positive on the margin development beyond 2014 as you have been previously that your expect to see some leverage on the investments in the period beyond 2014 and thus seeing a better EBIT margins looking a little bit ahead..

We said that we could potentially see margin expansion as we commented on that already in January, when we see them steering wheel problems in Europe as we talked about and we talked about Brazil, and is that we talked about the vertical integration drag, all of these three things then sort of either being utilized in terms of vertical integration and the issues going away.

The steering wheel part in Europe is following our plan and the Brazilian part is not following the plan as for the reason we commented on before due to the lower light vehicle production and then macro situation in Brazil, so we still have opportunities that would affect our margins positively from vertical integration, from the problems in Europe, steering wheel going away.

Then also we have now for '14 decided upon an increased investment in active safety area. It remains to be seen if we will continue this increased level of investments also in active safety in 2015, so let us come back to that in that January when we discuss the outlook for '15, but there are these opportunities still remaining there..

Yes. That was basically the question. Then if such investments could continue and then putting some of the pressure on the EBIT margin, but if I understanding steering wheel under vertical integration are at least proceeding according to plan. Thank you..

That's right. Thank you..

We will now take our next question from (Inaudible) Capital. Please go ahead, sir..

Hi, there.

Can you hear me?.

Yes. We can hear you well..

All right. Great. Thanks for fitting me in as well. I had a question on active safety visibility, so two parts of that. One is, you have raised your engineering for an active safety twice this year. Is it fair to assume that that's connected to corresponding increases in your backlog? That's question one.

The second question is, what kind of visibility do you have on take rates for active safety? Many of these products are optional for a lot of the OEMs, so when they do you call outs, I mean, does that change. It clearly has I guess over the last first two quarters, but what kind of visibility do you have on that.

Related to that, how quickly do they change the take rate? I mean, this is something that can be done pretty quickly then they suddenly decided to increase the sort of rate of production on the call out from, for an example 10% to 20%.

That's something they can do pretty quickly or does that require a little bit more lead time for you to sort of ramp-up?.

First part, the increase - it's a combination as we said of execution, executing the programs we have and product development, so it's a combination of both.

When it comes to the take rate, we have indications from our customers when we take and we quote a program of a certain level of take rate as the base line before you tender, it happens that it's not the same that it's higher, it's also happens that it's lower and that connects to your third question how fast. This can happen relatively fast.

One can decide that from quite fast, we are going to go from the auctional rate into even standard rate, so that can happen and that was also one of the contributors here in second quarter why our organic sales were up. That just take rates were higher for activate safety..

Sorry.

If I can follow-up, is that specific to the premium OEM for the most part? I mean, is there some sort of trend that you can identify or is it a bit harder to predict?.

No. I don't think this changes here you are talking about all these patterns about take rate visibility or changes isn't really any different from an OEM to an OEM or premium to the more volume makers, so that I don't think is a difference between them..

Okay. I mean, related to the last question earlier about warranty costs.

I mean, I guess, I am a little puzzled as to the - I mean, you highlighted pretty low level of recalls relative to the industry and yet you took the warranty costs up and I think you suggested that that's going to linger at that rate for the second half, so is this caution on your behalf or can you just sort of help me understand that?.

What do you mean with taking the warranty cost up?.

The 30 basis points that was a headwind for you relative to your guidance on operating margin. My understanding was that that's going to linger through the second half of the year. Correct me if I am wrong..

No. That's not correct. That was the impact for the quarter. It's sort of an one-time impact you could call it..

Got it. Understood. Thank you for your time..

Of course. Thank you..

We will now take our next question from (Inaudible) from Sterne,Agee. Please go ahead, sir..

Sorry. My question have been answered. Thank you..

There are no further questions in the queue at this time. (Operator Instructions) I will now hand the call back to the speaker.

Thank you, Ann. I would like to thank everyone for your attention and continued interest in our company and the interesting questions today in the call. We look forward to speaking with you again during that quarter three earnings call on Thursday, October 23, 2014. Until then, have a safe and relaxing summer and goodbye for now..

That will continue today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect..