Thomas Jonsson - Group VP of Corporate Communications Jan Carlson - Chairman, CEO and President Mats Wallin - CFO and Group VP of Finance.

Itay Michaeli - Citigroup Joseph Spak - RBC Capital Markets Erik Golrang - Nordea Matthew Stover - SIG Anders Trapp - SEB Brett Hoselton - KeyBanc Capital Markets Hampus Engellau - Handelsbanken Kenneth Toll Johansson - Carnegie Fei Teng - Credit Suisse Sheila Weekes - Bank of America Merrill Lynch Richard Hilgert - Morningstar Inc.

Steven Hempel - Barclays Capital Adam Schmitz - Robert W. Baird & Co..

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

Thank you very much, Darren. So welcome, everyone, to our fourth 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, Group Vice President of Corporate Communications.

During today's earnings call, our CEO will provide a brief overview of the fourth quarter and full year 2014 performance and general business conditions 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.

And as usual, the slide deck is available through a link on the homepage of our corporate Web site. On the next page, we have our 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 the SEC in the upcoming weeks. I will now turn it over to our CEO, Jan Carlson. Jan, please..

Thank you so much. If we start by turning the page, we see the quarter four highlights. We ended 2014 with another quarter of solid financial performance. Our organic sales growth of 5.1% almost four times the global light vehicle production drove sales to $2.4 billion. This was despite the currency translation headwind of more than $100 million.

The organic growth resulted in a better than expected double-digit operating margin of 10.1% excluding costs for capacity alignment and antitrust matters. This was also despite 50 basis points of higher RD&E costs.

Return on capital employed of 26% and return on equity of 18% in combination with a 70% increase in our adjusted EPS are all evidence that our strategies for growth and capital structure are paying off. Also, our stable operating cash flow enabled our company to return over $230 million to shareholders during the quarter.

And lastly, our organic sales growth in Active Safety was almost 50%. As you have heard me say many times, quality is our first priority as our products never get a second chance and saving human life is front and center of what we do each and every day.

On the next page, we have highlighted some of the key models that contributed to our strong organic sales growth during the fourth quarter. When compared to the light vehicle production, this model mix contributed to our outperformance in North America, Europe and also in our Active Safety product area.

During the fourth quarter, these models contributed to the majority of our net organic sales growth and on an annualized basis represent approximately 7% of sales. If we now look on our full year 2014 performance on the next page, also the full year showed solid financial performance.

Organic sales growth of 6.2%, which Active Safety grew 45% and China grew 8% was almost two times the global light vehicle production. We achieved an adjusted operating margin of 9.1% despite increasing RD&E net around $45 million. During 2014, we returned more than $800 million to shareholders through record dividends and share repurchases.

This, in combination with other actions, resulted in the leverage ratio of 0.3 times. Looking ahead, we aim to reach 0.5 times leverage ratio during the first half of 2015. Our return on capital employed of 24% and return on equity of 14% continued to run above our historical levels.

One year ago, I outlined how in 2014 our company would continue its transition with intention to achieve a margin improvement beyond 2014. I’m pleased to say that we are overall executing according to plan and expect margins to improve in 2015, even after further increasing all D&E to a range of 6% to 6.5% of sales for the year of 2015.

Lastly, in 2014, we announced a new operating structure that will result in two reporting segments; Passive Safety, which includes seatbelts, airbags and steering wheels and electronics, which includes Passive and Active Safety electronics.

We plan to re-cost certain historical figures for 2013 and 2014 under this new segment reporting structure during the first quarter on March 30, 2015. With all this in mind, I would like to sincerely thank the entire Autoliv team for delivering another year of quality and operational excellence along with our solid financial performance.

If we turn the page, as we alluded to during the third quarter earnings call, we have been seeing some business coming our way related to the recalls of airbag inflators in our industry.

Last month, we announced an agreement to make the necessary investment to support Honda on their inflator replacement program and as we discussed at the Detroit Auto Show, we now have agreements with several different OEMs for new supply of capacity up to 25 million inflators for delivery during 2015 and '16.

We’re also in discussions for the supply of millions of additional units. We are now expanding our capacity and capabilities to meet this demand as quickly as possible. We believe these investments are also the right decision to further enhance our position in Passive Safety for the long term.

We see this as the vote of confidence from our customers for our proven track record of quality and our reliable technology, which could eventually become an industry standard. Looking now to our strategies for growth, on the next page, our sales in China exceeded $1.5 billion in 2014 and are now more than 16% of Autoliv consolidated sales.

During 2014, our organic sales growth performance in China versus LVP was not as good as expected due to an unfavorable mix with some of our Asian OEMs that started in the third quarter and continued into the fourth quarter.

Looking into 2015, we expect our organic sales growth in China to gradually improve throughout the year as new programs ramp up production. We remain optimistic about the long-term growth in China for mainly two reasons. First, the number of vehicles per 1,000 people in China is only about one-sixth of the developed markets.

Second, the safety content of vehicle is only about one-half of the developed markets like Western Europe and United States. Therefore, we will continue to invest in this market to support domestic demand but also vertical integration to support the region to remain competitive for the long term.

Looking now to our Active Safety business on the next page, I’m pleased to say that our Active Safety revenues reached $489 million in 2014. We essentially achieved our $0.5 billion target one year ahead of the plan we established back in 2011. 2015 will mark some new milestones for our company around Active Safety.

Later this year, we will launch our first mono and stereo vision cameras utilizing our internally developed algorithms. We will also launch our new 77 gigahertz radar and our next generation safety domain controller, which will host the sensor fusion data used for vehicle control.

These are further examples that we are making good progress with our RD&E investments for growth. In 2015, we see the need to add up to 300 hardware and software engineers. This, along with other activities, will increase our investments in RD&E for electronics by approximately 50 million in 2015.

Lastly, as I mentioned at the Detroit Auto Show earlier this month, we now target to reach $2 billion for 2019 for our Electronics business segment of which around 1 billion is expected to be related to Active Safety. Turning the page again, for decades our industry has relied on our safety products to save lives and reduce injuries.

These products saved tens of thousands of lives every year and prevent more than 10 times their amount of severe injuries. Looking ahead, we expect AEB which stands for autonomous emergency braking that will play an important role in the automotive safety. This is evidence by the new Euro NCAP, which today is focused on city and interurban AEB.

In addition, last week, NHTSA announced that AEB will become part of the new five-star test rating system to be introduced some point in the future. Over the next several years, AEB will expand to protect vehicles, pedestrians and cyclists in all weather conditions.

For this, sensors will be required to be highly reliable under all conditions even during nighttime driving. This will put further requirements on sensor and algorithm development and also sensor fusion. As highlighted, this is an important focus area for our engineering efforts in Electronics.

If we now look upon the key launches during 2015 and thereby turning the page, we have some of our customer models, which should contribute to our strong organic sales growth in 2015.

Looking at the launches illustrated, we expect these platforms to each have an annual sales of between $40 million and $170 million for Autoliv while our content per vehicle ranges from $100 to more than $500 per vehicle.

We, therefore, expect to continue to have a very diversified platform mix and another good launch year in all regions for both Passive and Electronics. On the next page, we see the early indication from IHS for 2015 that shows that global large vehicle production will grow by approximately 2.4% or 2 million vehicles.

75% of this growth or approximately 1.5 million vehicles is expected to come from China. In Japan, light vehicle production is expected to decline by 4% or 400,000 vehicles for full year 2015 while rest of Asia is expected to increase year-over-year by 5% or around 600,000 vehicles. In Americas, the outlook remains mixed. The U.S.

SAAR remains stable in the range of 16 million to 17 million vehicles with inventories of approximately 61 days. In North America, the light vehicle production growth rate is expected to be 3% for full year 2015.

In South America, the weak economic conditions are expected to continue throughout 2015 and consequently the light vehicle production is expected to remain relatively flat. In the EU27, light vehicle registrations continue to improve showing a steady but slow recovery.

Overall, for Europe in 2015, the light vehicle production is expected to be flat while Western Europe is expected to increase by 2% and Eastern Europe showing a decrease by 5%. The decline in Eastern Europe is partially driven by weakening market conditions in Russia. To conclude, we believe the overall market conditions remain mixed for 2015.

I will now turn it over to our CFO, Mats Wallin, who will comment on our financial results and outlook. Please go ahead, Mats..

Thank you, Jan. Looking upon our financials on the next slide. We have our key figures for the fourth quarter. Our record sales of 2.4 billion was driven by strong organic sales growth in Active Safety, premium brands in Europe and Japanese OEMs in North America, and also include an unfavorable currency translation effect of more than 100 million.

This strong sales growth resulted in our best gross profit ever and a 60 bps gross margin improvement year-over-year. Despite higher CapEx this year and our return on capital employed remains at roughly the same level as last year and return on equity increased to 18% mainly as a result of our share repurchase program.

Looking now at our operating margin development on the next slide. Our adjusted operating margin of 10.1% was 60 bps better than our guidance. If we look to the chart on the left, the higher profit generated from the better than expected organic sales growth essentially drove the margin improvement versus our guidance.

In addition, lower than expected engineering expenses essentially offset unfavorable currency effects and others net. When compared to current year, as illustrated by the chart to the right, we estimate the benefit from organic sales and currencies was 100 bps and 60 bps, respectively, while raw materials improved 10 bps.

The favorable items were mostly offset by higher RD&E net, 80 bps, mainly related to Active Safety and others net 80 bps, which includes increased cost in our footprint. As we have noted previously, the increased cost in our footprint mainly includes our build up for growth, including vertical integration.

We continue to make progress in executing our plan to improve operating inefficiencies. However, the improvements in Brazil are slower than expected due to the poor market conditions and we now see increased challenges in Russia due to the deteriorating market conditions. Looking now to our full year 2014 results on the next slide.

Our strong organic sales growth of more than 6% or 550 million drove the sales to a new record of 9.2 billion, despite more than 100 million of unfavorable currency translation efforts. This is evidence that our investments for growth in China and Active Safety are paying off. Combined, this accounted for 50% of the organic sales growth.

As we noted throughout the year, the benefit from our organic sales growth, lower commodity costs, currencies were partially offset by increases in RD&E net and footprint cost mostly related to growth and vertical integration.

As a result, our adjusted operating profit increased by 4% to 842 million and we delivered a solid adjusted operating margin of 9.1% for full year '14, despite increasing RD&E net of around 45 million and 9 million unfavorable translation effect.

The higher adjusted operating profit along with a lower tax rate and share count increased the adjusted EPS to $5.93 including higher interest costs. The adjusted EPS excludes $0.87 per share for costs related to capacity alignment and antitrust matters.

Lastly, we had another year of solid returns with return on capital employed of 24% and return on equity of 14%. Looking now upon our cash flow on the next slide.

Our steady operating cash flow of 229 million for the quarter enabled us to deliver on our target of at least 0.7 billion for the full year '14, even after including discrete items related to antitrust matters. Our CapEx net for full year '14 also came in at 4.9% within the range of 4.5% and 5% of sales that we set at the beginning of the year.

Looking ahead to full year '15, we expect another strong year of operating cash flow and target around 0.8 billion excluding any discrete items. Our CapEx net is expected to increase and be in the range for 5% to 6% of sales for full year '15 including the additional capital required for the new inflator replacement business.

Excluding the investment for the new inflator replacement business, we would expect to be within our long-term target range of 4% to 5% of sales. Looking now at our capacity alignment on the next slide. During the fourth quarter, we expensed 19 million for future actions with a cash outlay of 21 million.

This resulted in a full year '14 capacity alignment cost of 45 million and a cash outlay of 44 million, while realizing 6 million in savings, which is in addition to the 12 million we had in 2013. As I mentioned on the last earnings call, we have been evaluating further actions based on the long-term production footprint for the future.

Consequently, this year we plan to expense at least 60 million for additional capacity alignment actions while we estimate a cash outlay of at least 50 million with additional savings of 20 million for full year '15. Looking now at our outlook on the next slide. We have our guidance for the first quarter.

Year-over-year based mainly on customer call-offs, our organic sales are expected to increase by 3%, mainly due to strong growth in Europe and Active Safety as well as North America and China. Sequentially, our organic sales are expected to decline by roughly 5%, mainly due to China, South Korea and North America.

As a result, we expect to achieve an adjusted operating margin of around 8% in the first quarter. Year-over-year benefit from organic sales, commodity costs and currencies are more than offset by RD&E net, primarily in Electronics and the ramp-up of capacity for growth including inflator replacement business and vertical integration.

Sequentially, the adjusted operating margin decrease is mainly due to lower organic sales and higher RD&E net. On the next slide, we have our full year early indication. Based on our current outlook, we anticipate another strong year of organic sales growth and more than 6%, which is more than two times the global light vehicle production.

This strong growth is mainly due to Europe, North America, China and includes Active Safety and inflator replacement business. As a result of our continued execution, we estimate an adjusted operating margin of around 9.5% for the full year '15.

Year-over-year, the positive effects from organic sales, commodity costs and currencies are partially offset by RD&E net and the ramp-up of capacity for growth including the inflator replacement business and vertical integration.

As you can see on the first quarter guidance and the full year indication, these full year '15 estimates imply the step-up of organic sales growth and margin performance during the second half of this year.

On the next slide, we have summarized our outlook, which excludes cost for capacity alignments and antitrust matters and assumes mid-January exchange rates prevail.

Based on this currency assumptions, consolidated sales in Q1 are expected to decline close to 5% due to negative currency translation effect, which more than offsets there around 3% organic sales growth.

Our full year '15 indication for consolidated sales is to increase by less than 1% due to negative currency translation effect, which mostly offsets to more than 6% sales growth. Based on this sales assumption, we expect an adjusted operating margin of 8% for Q1 '15 and around 9.5% for full year '15 indication.

Other full year planning assumptions include RD&E net in the range of 6% to 6.5% of sales while commodities and currency translation effects are expected to be a tailwind of 30 bps and 50 bps, respectively. Regarding currency effects, a stronger U.S. dollar is unfavorable for translation.

However, translation effect is presently favorable based on our current positive currency mix. Assuming mid-January exchange rates and the present currency mix, the negative translation effect on EPS is expected to be offset by a positive translation effect.

Excluding any discrete or nonrecurring items, we expect an underlying tax rate of 31%, operating cash flow around 0.8 billion and CapEx within the range of 5% to 6% of sales.

In conclusion, we are pleased with our execution in 2014, which provides a sound basis for continued strong organic sales growth combined with margin improvement in 2015, despite making record investments in RD&E and CapEx for future growth. Turning the page, I will now turn it back to you, Thomas..

Thank you very much, Mats and Jan, as well. This concludes the formal comments for today’s earnings call. We would now like to open up the call for questions. So, with that, I leave the word back to you, Darren..

Thank you. [Operator Instructions]. We will now take our first question from Itay Michaeli from Citi. Please go ahead. Your line is open..

Great. Thanks. Good morning, everyone, and congratulations..

Thank you..

Just two questions; one on margins and the other on Active Safety.

Just given the guidance for 9.5% margins with some of your end markets still being below peak, just any thoughts on the updated long-term margin capability of the company versus the prior 8% to 9% range?.

No, we are not elaborating on that right now. We have for quite a long time showed a target of 8% to 9% of the cycles. That would also indicate indirectly that in bad times, we would go below 8% and in good times we would go above 9%. So, no change to the long-term target..

Okay, great.

And then just on Active Safety, just want to get a little bit more detail on the $1 billion outlook in 2019, maybe talk about the mix of vision versus radars as one outperforming the other? And then the second question to that is, are you launching any camera-only AEB applications over the next few years? I saw the collision warning on one of your slides, but just curious if you’re actually doing any AEB on a camera-only or are those just still mostly a fusion product at this point?.

If you look through the mix for 2019, we haven’t elaborated on that at this stage. We might come back and elaborate more on the future outlook at the Capital Market Day in June. We, as you know, have majority of our sales coming from our radar products that we are currently ramping up the vision business.

When it comes to our own developed camera systems, stereo and mono vision, they will go into production in second half of this year. And as I said, that will be with our own algorithm developed that will be also launching with our new 77 gigahertz radar and also our safety domain controller, which is also including data for vehicle control.

We haven’t elaborated more on specifics on being camera-only type of equipment as of right now..

Okay, great. That’s very helpful. Thanks so much guys..

Thank you..

Thank you. We will now take our next question from Joe Spak from RBC Capital Markets. Please go ahead. Your line is open..

Good morning, everyone. Thanks for taking the question.

First one is, I was wondering if you could comment if you’ve seen any change in how the OEs are approaching price downs given the increased focus on quality?.

We haven’t seen any differences in regarding prices. As of now there is no changes to say. And how this could develop into the future is just a speculative matter, so we stay out of that. But so far, no change. We have communicated the price downs in general for us between 2% and 4% and we are within the range also for the fourth quarter..

Okay.

And that’s also baked into your '15 guidance?.

As we said, we don’t guide on any price downs. Historically, we have seen price downs for 2% to 4% for quite some years and we saw that also for quarter four 2014..

Okay. And then if I look at Page 8, I know you have some charts there on R&D and with Active Safety component broken out and Active Safety sales. If I go back to your slides from your last Capital Markets day, I believe you had indicated that Active Safety R&D as a percent of Active Safety sales would sort of trend down to the mid-teens by 2015.

Can you just comment on that? Is that still the right trajectory or is it maybe a little bit – or is it actually higher given some of the comments you made earlier in the call?.

Well, I think based on what you have seen us stepping up the R&D to 2014 that is higher than what we communicated in our Capital Markets Day in 2013.

We increased R&D in the first quarter, second quarter and also in the earnings call in July last year and now we also communicated we will increase R&D again mainly related to Active Safety going forward. So that is on a higher range than we thought in 2013. We will elaborate more on the levels and the outlook again here at the CMD coming up in June..

Okay, we’ll wait for that. Thanks..

Thanks..

Thank you. We will now take our next question from Erik Golrang from Nordea. Please go ahead. Your line is open..

Thank you. I have three questions. The first one is if you could say anything about the contribution from replacing bad inflators in that organic growth guidance for '15.

The 25 million units you talked about, what’s the contribution from that this year?.

We are ramping up the production in second half of the year and we have said that this would be 25 million units being produced. A rough calculation would be one-third and two-thirds for '15 and the rest for '16..

Okay. Thank you. Then the second question is on the raw material tailwind. I think if I heard it correctly around 30 million in '15.

How does that develop over the quarters? Is it more backend loaded this tailwind from raw materials?.

We are, as of today, seeing a tailwind this year of almost 5 million for the first quarter and for the full year around 30 million. We haven’t set any guidance more towards our spread of quarter two to quarter four..

Any comment on what the major contributors are there within that 30 million, which specific material?.

Mainly related to oil-based components, which is like covers or yarn for fabrics, et cetera, mainly related to this..

Okay. Thank you. And then the final question on the 1 billion 2019 sales target for Active Safety.

What are the sort of major assumptions you’ve done to reach that number? What kind of penetration rates on products have you estimated, and how good is your visibility for this period? I’m trying to find out what the major uncertainties are in that number both on the upside and downside?.

No, we haven’t elaborated on the details on this one. We are seeing the order book that we have and the business how it would develop. And as you said, it’s still uncertain of the mix between the different type of components and how it will be developing during the year. So, I unfortunately at this time, I have no more details to give you..

And the market share on the products that you currently supply, you assume that that stays flat over the period or change in any meaningful way?.

We said at the Detroit Auto Show that we believe we have a market share in the products where we are over 20% plus. It’s also very difficult from time to time to do a very good and accurate estimation as you have take rates that can vary from time to time. So, therefore, we say that we have 20% plus in the market share..

Okay. Thank you..

Thank you. We will now take our next question from Matthew Stover from SIG. Please go ahead. Your line is open..

Thank you very much. Just a follow-on to the last questions related to the inflators for the Takata recall.

Are you going to be able to book an engineering recovery on that or – and if so, do you book any this year or should you be booking those next year as the business begins to ramp?.

What do you mean with engineering recovery?.

In terms of your agreement with the OEM to capitalize for this new capacity, which in and of itself might not necessarily be durable capacity?.

Right. We have said and indicated before that most of the CapEx and some build ups would be paid by the customers, but how this will be paid and the type of arrangements we have in the contract, we are not elaborating on. But most of that is going to be one way or the other paid by the customers..

Would you account for that on a piece cost basis?.

As I said, we won’t elaborate on the details of how this is going to happen and it also varies between customers, but most of it would be paid by the customers..

Okay. Thank you..

Thank you. We will now take our next question from Anders Trapp from SEB. Please go ahead. Your line is open..

Hi. I think you have touched upon what I was going to ask you about, but I will ask anyway. Your target on Active Safety basically means 15% and your CAGR for five years, if I understand IHS forecast for basically your type of products is 17% annual growth rate up until 2020.

And you are saying that you are intending to become a leading integrator also within Active Safety, you’re launching some new exciting products this year with your own proprietary cameras, et cetera. So, I don’t really get that.

It sounds to me that you should grow faster than the market and not actually slightly slower or do you have different estimates of the market development long term than IHS?.

As I don’t know what really the basis at least I have not read it, maybe I could get the hands on it what they mean with their market and so forth. If you look to the overall growth between 2012 and 2019, we are growing slightly below 25% and we had a growth rate almost of 50% between '12 and 2014.

As you know and as we have said, it’s difficult to over such a long period of time show those levels, at least we believe that has been difficult. And therefore, over time, it comes and goes also with the programs. We’ll have to see how this is developing.

We have our best estimate today of having 20% plus market share and how this will develop in the future outlook, we will elaborate a little bit more in the Capital Markets day..

All right. I think you said also before earlier, a year or so ago, that you expect that your Active Safety business will reach group rich margins or possibly group targeted margins by '15 or '16 at the latest.

Is that still valid or will we have to wait longer for that to happen since we are seeing the currency movements as they are and also the increased investments, I mean 300 electrical engineers aren’t cheap?.

We have our new reporting segment coming up from January 1 being divided into Passive Safety and Electronics where we combine Active Safety and our Passive Safety/Electronics.

And therefore, we don’t reiterate as of now any targets related to our margin for a certain group area, so that we are not reporting margins for airbags or seatbelts as a product group area inside Passive Safety, and therefore there is no reiteration to this.

We look into the Electronics business as a whole from here and onwards and potentially we will also elaborate on that on the Capital Markets Day coming up..

Okay, very good. Thank you..

Thank you..

Thank you. We will now take our next question from Thomas Besson from Kepler Cheuvreux. Please go ahead. Your line is open..

Thank you very much. Good afternoon. A couple of questions as well from me, please.

Can I come back on the Q1 versus full year guidance, please, and I am a bit surprised you’re guiding for a decline in profitability on a like-for-like basis for the quarter, which implies double-digit margins or profitability for a number of quarters in H2 that you have not reached for a while.

Can you elaborate a bit more on the timeline of the gains on raw materials, or Forex that you assumed? What explains this big dichotomy between the quarters, please?.

Thank you. If you look into the first quarter, the main reason that we see lower first quarter is, you can see it from two perspectives basically. First of all going from Q4 into Q1, I mean you see lower sales but you also see higher RD&E net. And one factor for the higher RD&E net in Q1 compared to Q4 is less engineering.

As you know, we have more engineering income in the fourth quarter typically and you don’t see that typically in Q1. That’s one way to say that the whole Q1 sort of moves.

And the other area to think about is also that we also take quite a lot of cost in our footprint now to prepare also for the second half of the year, because if this is really in the second half of the year we also will have also inflator replacement business to come in. And also going along the year also vertical integration will also ramp up.

So there is lot of ramp-ups throughout the year..

Okay, it’s clear. Thank you.

On the raw materials benefit that you expect to move up from 10 bps in Q4 to 30 bps in 2015, did you get any request from automakers to share that with them or is that something which is non-indexed and you think it’s not at risk?.

You know how it is, for many of us in the industry, they don’t want to pay when their raw material prices increases and therefore we have a good argument there for not returning it back when the raw material prices decreases. Having said all of that, it varies between region to region.

With some customers in some regions, we have raw material clauses but it many others we don’t. So there is no general answer to it..

Okay, great.

May I ask you to just elaborate a bit more on what allows you to assume 50 bps tailwind from Forex on the margin side? I’m not sure I understood what you said about – I understand the translation effect, but what effectively makes it a positive driver for your margins in 2015? And is it effectively 50 bps?.

Yes. 50 bps relates to the transaction effect. We have around $2 billion net exposure coming out of our strategy to do natural hedging. And that net exposure consists of more than 40 different currencies pairs.

When we look into the mid-January exchange rates and by that try to estimate the impact of that year-over-year with '14 to '15, then we see that – given that mix, we will have a benefit of 50 bps after the transactions..

Okay. Thank you very much..

Thank you. We will now take our next question from Brett Hoselton from KeyBanc. Please go ahead. Your line is open..

Good afternoon, Jan and Mats..

Good morning, Brett..

Good morning..

The inflator issue, so you currently have agreements of up to 25 million inflators, but you’re in discussions with others.

What could conceptually be the potential upside relative to your current agreements for up to 25 million inflators?.

That remains to be seen. This agreements we have is on the replacement business and remains to be seen what use customers will take, could take out of the capacity that is built up. As we have said, we have a technology that is different that we believe is less sensitive to moisture, less sensitive to temperature, et cetera.

And we have the robust technology there. And for that sake, to what extent customers will use that and go forward with it, it remains to be seen. We have taken the approach that we will serve and help our customers and the industry to the highest extent we can at this point..

I guess what I’m asking is I’m not asking for you to speculate on what you think that you’re going to capture.

I guess what I’m asking is what do you think the market potential is? In other words, as you kind of evaluate the inflators that are potentially impacted this and kind of conceptually think about what could be recalled and so forth, I mean could this be a 40 million unit opportunity at some point in time or 50 million unit opportunity at some point? These are some of the numbers that I have kind of seen speculated, but is that in the ballpark at all?.

I think you have said it, it’s speculations and I think at this point we need to execute on the commitments we have. Stay tuned and put quality first in front of everything and I won’t speculate in what this could potentially happen and means to it for the industry. That remains to be seen..

Okay.

And then from an Active Safety, as you think about the additional $0.5 billion, if the majority of what you currently have is radar, should we just assume that the majority of what you’re adding, the $0.5 billion, is that simply radar night vision or do you think a material portion of that could actually be camera?.

You mean for the additional business up to 1 billion that we have said..

Yes, correct..

Okay. We are staying out of that speculation. We believe that we have good products coming up here with launch of our sophisticated stereo and mono vision technologies with our own development and we believe that we have a very competitive and very high performing product there and that could do well.

But to what extent it will take shares or so, we will have to remain to see, so I stay out of that. But we believe this is a very good product coming out..

Okay. And then as we think about your leverage target relative to your capital deployment strategy, you stated that you’re going to reach that 0.5 leverage sometime in the first half of 2015. I think in the past you’ve kind of talked about 0.5 turn to 1.5 turn as being a rough range.

As you reach that lower end of that range, what is your expectation of your deployment of that incremental cash flow that you generate? Do you anticipate threading water or maintaining 0.5 turn leverage ratio, or do you continue to see yourself moving up into that, let’s say, one times net leverage ratio? What are your expectations there?.

I mean longer, longer term of course we are heading for one but I think we will have to come back more about this on the Capital Markets day..

Okay, excellent..

We’re executing on our strategy. We have said for quite some time that we are looking for acquisitions. We would like to take advantage of opportunities that may arise. We also have as you know some other uncertainties out there that at some point in time will come to some resolution. So, we will elaborate, as Mats said, later on.

I think it is important that we have committed ourselves to come within the range that we do that here now, we should do it within the first half..

I agree. Thank you very much, Jan and Mats..

Thank you, Brett..

Thanks..

Thanks for your questions..

Thank you. We will now take our next question from Hampus Engellau from Handelsbanken. Please go ahead. Your line is open..

Thank you very much. First, congratulations on very good results. I have three questions, if I may. First, just starting off with the extended capacity alignment program of $60 million for this year. Is this going to be equally spread over the year? And also what are we talking about, it is fixed capacity on headcounts? That’s my first second.

The second question is on the new products that you’re going to launch this year. When I listened to, Jan, you were talking about also having fusion systems and also being able to function during dark hours, et cetera.

And I’m curious to know if you’re also looking at integrating the night vision system in an AEB solution together with the stereo vision system and the radar? Last question is on China.

It would be interesting to hear what you guys are hearing from the local OEMs regarding new car assessment program, what are their ambitions in terms of star ratings, et cetera? Thanks..

Okay. To talk first about the capacity alignment, the main categories of cost is severance related. Though it is a little bit difficult to talk about the timing of those cost because they will of course depend on how we can agree upon with the unions and our people..

Okay. On the second part, we have not the night vision integrated in this. We shouldn’t rule out that that could come at some other programs. And as you have seen, we have launched a sophisticated night vision system in the S-class. We have it combining near infrared and far infrared.

But at this point, it’s not including the night vision for the fusion controller..

And on the China NCAP, I mean we do see sharpening or a more stringent NCAP now in '15 and '16 in China and I think the Chinese OEMs as well as the international OEMs are prepared for that. That’s clearly what we hear in the discussions now to a different extent depending on which OEM we’re talking to, of course..

All right. And maybe just a follow-up question on the capacity alignment program. Have you said – I guess it’s still Europe and have you said region in Europe, which country we’re talking about? It’s still Germany..

We haven’t said really where it is. That we will have to come back later on..

All right. Thanks very much..

Thank you..

Thank you. We will now take our next question from Kenneth Toll from Carnegie. Please go ahead. Your line is open..

Thank you. Just a question going back to the inflator business again.

We have talked a lot about the spare part business but have you noticed anything in the sort of ongoing discussions with the business for new orders, I mean the kind of orders you take now and start delivering in two, three years, have you noticed any change there in pricing behavior or is it easier to get larger contracts for any moves in market shares there?.

At this point as we alluded to a little bit earlier, we haven’t seen any major changes. Of course, as this is such an industry-wide thing, it’s discussed in orders, it’s discussed in relation to customers and customers have discussed as they know who we are and what technology we have. So it’s always sort of a topic.

But it hasn’t really affect them pricing or any kind of sourcing behaviors that it’s something we should mention here. Will we do it in the future, I think that is too early to say. We’ll have to see.

I think now for the time being, many OEMs are focusing on the replacement part as that is critical and they are looking to their own situation and evaluating this and to what extent they need replacement business or not. That has taken precedent. And the later part may come sometime in the future now..

Okay.

And it hasn’t affected their behavior in buying sort of complete systems rather than share repeat component by component either?.

As I said, to what extent this will lead to different behavior, I think it’s too early to say.

You can imagine if we have commitments now to some customers here – already 25 million we are discussing with millions or more, you can imagine that those customers are very focused into get the capacity up and running and to have secured production volumes in this situation. So that is occupying customers.

When this is coming into different stage, whether that will lead to something different, we will see. We think that our position and our way of dealing with this, the best we can do is to serve our customers with high quality products..

Okay. Thank you..

Thank you. We will now take our next question from Fei Teng from Credit Suisse. Please go ahead. Your line is open..

Hi. Good afternoon. Thanks for taking my question. Just want to come back to currency.

Could you give us a breakdown of what are the main driving currencies for that 60 basis point impact on EBIT in Q4, and whether this will remain the case going forward?.

Right. If you take the 60 points impact for the fourth quarter, it’s basically the blend of the margin impact coming out of transaction and the translation. So we estimate that the transaction part is around 40 bps and the translation part is around 20 bps..

And can you give an indication of what are the main currencies driving that change?.

Yes. You can say that if you take the translation part, I mean when we are consolidating our financial statements, around 75% of that is non-dollars. And if you look into the non-dollars part, the main currencies we are talking about is China’s renminbi, it’s euro, it’s Japanese yen, Korean won and Mexican pesos.

Those are the main ones on the translation part. And then you have the transaction part, as I said, we have a net exposure from our natural hedging strategy of around $2 billion and the main part there is dollar, Mexican pesos, euro SEK and euro renminbi..

Okay. Thanks very much. And just another question on content growth in China. I think in the past, safety content growth in China has been somewhat disappointing. Can you tell us if this has changed in the last year and whether you expect the NCAP provisions to actually make a difference in 2015 as opposed to what’s happened in the past? Thank you..

Okay. So, on the content per vehicle, I think you’ve seen us say from 2013 to 2014, we think it went from $210 to $220. But over a three, four-year period we talked about a slower trajectory than that and I don’t think we see any major changes to that. It is a slow development but slowly moving upwards.

Sorry, there was a second part of the question as well..

I think to add to this is also there are different mix in China. You have everything from very well equipped cars with a very high content and then you have the inflow and the increase of medium or even low specified vehicles. And when you do the average, you take the safety market divided by the total market.

Then that is giving a lower average because of the inflow of low specified cars. So here it is more – I would say more important to look to the safety market growth and the content growth overall than just the average per vehicle.

In Europe or in North America where it’s either legislated or very highly related to the store rating in the sort of average acceptance of safety is a need. You need to have a certain level. That isn’t yet seen in China all over. That’s why we see also this average per vehicle level being low..

And you don’t see this changing going forward?.

Well, we do actually and Thomas may elaborate to that too. We are seeing new initiatives for China NCAP being launched in the very near future where they are going to tightened their level for achieving star ratings. That is actually we believe going to happen in the very near future and that’s going to be, we believe, positive impact to this.

But we have also to remember that the view of this on the market all over China, which is more part of the world rather than a country is also very different from urban areas to rural areas, et cetera. So, it will probably take some time before we see any movement overall..

Okay. Thank you very much..

Thank you..

Thank you. [Operator Instructions]. We will now take our next question from Sheila Weekes from Bank of America. Please go ahead. Your line is open..

Good afternoon. Thank you for taking my questions. Just to return to the capacity alignment program and the higher spending level that you have again in 2015.

When should we expect these costs to begin to follow off and how should we think about the savings generated from that program and when those will start to follow through? And also could you comment on how the progress is going in both Europe and Brazil?.

To start off with the savings, we are calculating the payback as from the time of the cash out. And from the cash out, we believe that the average time for payback is around three years.

When it comes to the next question on capacity alignment, how will it develop later on, we believe that it will come down to a more normal level in the years thereafter. But how the normal will be like, I don’t know if it’s somewhere around maybe $20 million to $30 million per year. But it will of course depend on what to see..

We will elaborate more on this in the Capital Markets Day here in June and what we think could be the longer-term view in the capital alignment. When you asked about the progress in Europe and Brazil, I assume you referred to what we said a year ago about our steering wheel issues in Europe and also our issues in Brazil.

The steering wheel is progressing according to plan. I think we are doing the activities that we have assumed to do, so that is on the plan. Brazil is really not on the plan that we thought we would do back in January 2013. One contributor to that fact is the steep decline in light vehicle production.

The issues we had there was more related to supply chain and localization and it has been a tougher journey when production volumes have been decreasing rather than increasing to find the right supply base to our materials. So that is probably one thing that hasn’t gone our way during 2014..

Thanks.

And just on the organic sales growth forecast that you have for the coming year, what sort of assumptions do you have for China and what’s your outlook there in particular?.

We base our guidance for the first quarter and we based our guidance in the different regions on the customer call-offs and what we have in our production systems.

And for the longer term, we again really don’t have a good visibility or better visibility than that what is out there and therefore we trust the IHS figures for the indication for the full year. But in China as well as elsewhere, we’ll look to our call-offs for the short term..

Thank you..

Thank you..

Thank you. We will now take our next question from Richard Hilgert from Morningstar. Please go ahead. Your line is open..

Good morning and thanks for taking my questions..

Of course. Good morning..

On your objectives to reach your revenue levels on the Active Safety program, what are some of the various things that have to happen in the various regions around the world for this to occur? Are you anticipating that you’re going to see various safety features that become part of government star rating programs? Are you expecting vehicle to vehicle, vehicle to infrastructure type technologies to be implemented? I was wondering if you could talk a little bit more about that with respect to the Active Safety.

And then the second question is regarding the drop-off in revenues in Japan? I apologize if this was asked earlier, but I had to step away from my desk for a few minutes.

Is the drop-off there in the fourth quarter related to just the market conditions in Japan being down so much or was there a particular program lost in that region? Can you talk a little bit about the revenues there and what we can expect going forward?.

We’ll start with the Active Safety and the Electronics target. We base actually our assumptions mainly related to Euro NCAP and to NHTSA requirements and to the development we see from rating agencies and from potential upcoming legislations.

Of course, we do also our own type of estimates coming from that, but generally speaking we follow what is happening in the market and then we look to that as a basis for it. If you recall, we came out with a 0.5 billion target in 2011 for achieving 0.5 billion in '15 and we do it at one year.

So, it is difficult to estimate and this time we were good and we will see how it develops. But that is the basis for is. I don’t know Thomas if you have anything else that you want to elaborate on..

No. Just on the Active Safety, as Jan said, Euro NCAP is a strong driver and for '16 we will see AEB being introduced generally and then the shortening of that in '18.

And also from '16 there will be a dual rating where Passive and Active will be separately rated and I think those three things will be key drivers within the Euro NCAP area in the period '16 to '18..

Okay..

Related to your question around Japan, it’s mainly related to currency. It’s a currency effect in Japan. In fact, if you look to the light vehicle production in Japan, we outperformed light vehicle production for the fourth quarter and we did that due to new launches and new supplies to several of the Japanese OEMs during the quarter.

So, we had a better than light vehicle production and outperformance in Japan but currency were a headwind..

Okay, very good. And one follow-on, if I could please, on the Active Safety front.

We hear from different manufacturers about different technologies that are going to need to provide this cocoon of safety around the vehicle where you’ve got various types of different sensors, various types of different systems that detect what’s going on in the vehicle in the environment.

What are you hearing from your customers as far as, is there one particular technology that they all want to keep cost to a minimum but of course meet safety standards at the same time? Is there one particular system that in terms of sensors that they want to go with, or are they still looking for a variety of different types of sensors that the vehicle can use as inputs for the Active Safety controls?.

We can answer this question is a very long form or short form. I think the short form for it is that they always want the competition. I think also that some competitors or some suppliers maybe earlier out with a lot of testing data but testing data is just a matter of timing difference.

Everybody will sooner or later get up to the same level when it comes to testing data and thereby having as a validated product as anybody else. I think long term what is important, which we see in all of these aspects when it comes to safety is that you have a high performing product. You have to have the right reliability for the purpose.

And if you are aiming for driving safety into autonomous drive, you have a real life situation, which sometimes it’s different than the testing requirements in Euro NCAP or in NHTSA. That is a very difficult and delicate car to simulate real live every possible occasion in a test environment.

And therefore you need to have a very, very robust sensor suite if you’re aiming for the long term, which is to go for autonomous drive. I think that is our view. That is why we are launching now stereo vision, mono vision, sophisticated algorithms, integrated safety domain controllers together with long-range radars.

This gives us a very high performing sensor suite for the future..

Okay, very good. Thanks for taking my questions, again..

Thank you..

Thank you. We will now take our next question from Brian Johnson from Barclays. Please go ahead. Your line is open..

Hi. Good afternoon, gentlemen. This is actually Steven Hempel on for Brian Johnson..

Very good morning..

I actually had a follow-up question on actually Richard’s question around OEMs thinking around active safety, especially around the spending on that front. Obviously, they want to look to achieve four or five-star ratings for competitive reasons.

But I guess as it relates to OEMs budgets around kind of active safety versus passive safety, are those two functions within these OEMs largely more silo whether they’re looking to spend on Passive Safety as well as Active Safety, or is it potentially a situation where they’re looking to achieve these four, five stars thereby through Active Safety spending and potentially have to basically under one budget have to cut in other areas, potentially in Passive Safety?.

I think it’s very much related to the rating systems and the legal system and the legislations. Even if it would be one budget, then you’re legislated for frontal airbags or side airbags or seatbelts or whatnot, you can’t be without it.

So the system and the rating systems and the legislations stipulate that you need a certain level of equipment in the cars in some countries. And in most of the countries to achieve the star rating, you need a certain type of occupant protection not only accident prevention as it looks today.

I think for the future if you look to the future, it will take a very, very long time before you see any type of substantial cannibalization of Passive Safety for Active Safety. Could that eventually happen? Yes.

I don’t even want to speculate on that, but of course if the car is driving by itself and avoiding each and every accident, at some point in time, you may have a different situation. But I don’t see that situation as of now. I cannot see it right now coming up..

But in terms of your specific negotiations with OEMs in offering various Active Safety solutions, do you provide those solutions while potentially trying to gain business on the Active Safety front, while potentially offering price concessions on the Passive Safety given constrained budgets for the OEMs, or are you saying basically it’s fairly constrained and they basically have to payout for both Passive Safety and Active Safety for legislation/regulatory and NCAP reasons?.

I think it’s well known that the customers try to use every tool they have at hand to negotiate and leverage businesses and leverage volumes. I think it’s also very obvious that suppliers try to do the same, take advantage of what we have in terms of technology.

I think the best that we can offer is a robust product, a high technology, high performing product and having unique selling points for customers to come up with. Therefore, innovation and R&D spend is so essential in this business that you have something new to offer when you go to the customer.

That is what we try and do also with our increase in R&D investments and be a leading supplier..

Great. Thanks for taking our questions..

Thank you..

Thank you. We will now take our next question from David Leiker from Baird. Please go ahead. Your line is open..

Hi, guys. This is Adam on the line for David..

Hello. Good morning..

Can you guys quantify the amount of headwind you saw from vehicle mix in China and kind of how you see this playing out over 2015?.

We haven’t given any quantify, which I think if you want to have some kind of quantification of it or relation, you should look to the reported LVP numbers and look to our organic sales. Have in mind though that we are not guiding based on IHS numbers. We guide for the quarter based on our call-offs.

But it is an underperformance related to the light vehicle production in China for the quarter..

Okay.

And then kind of switching gears, what was the amount of engineering income you saw in the quarter and then how is that compared to last year?.

For the group, it was ballpark the same as last year in engineering income..

Okay. Thanks. That’s helpful. And then lastly, it seems like South America demand is starting to improve.

Can you talk about more what you’re seeing in this market? I know you have kind of flat expectation for production, but kind of just talk about more of what you’re seeing?.

We don’t see any more than really what you see in South America. I wouldn’t see at least strong signs for a definite recovery of the market. It’s more of modeling along for the time being and we try to cope with the situation. We have talked about this for quite some time.

We’re working the issue diligently, but for now we don’t see any recovery signs for 2015. We don’t expect as of today any steep declines either, but we will have to see how that develops..

All right. Thanks, guys..

Thank you. We will now take our next question from Rod Lache from Deutsche Bank. Please go ahead. Your line is open..

Hi. This is Carel Labika [ph] for Rod Lache. Could you just talk a little bit about the currency sensitivity? You have euros assumed at 1.18 and it’s at 1.13 today.

Just wondering what the sensitivity is like and do you have any assets to a weakening euro?.

If we look today, I mean euro is a part of – if we talk about transactions first of all, I guess that’s maybe your question. And looking into the transaction exposure today, we have more than 40 different currency pairs and the euro is sort of only part of the exposure. We have many other big exposures today in our basket.

So it’s sort of – it’s difficult to give you sort of a leading point here because even if I say something about the size of the euro, you might have other currency pairs going in the other direction.

So, I think it’s complicated to say today how things will fall out in the basket today, because we also have for example Mexican pesos versus dollars being a big part of our basket..

Okay, got it. Thank you..

Thank you. [Operator Instructions]. We will now take our next question from Anders Trapp from SEB. Please go ahead. Your line is open..

Hi. Thanks for taking a follow-up question. I have three questions, actually. First, how do you intend to reach the leverage target that you have already in the first half year? That’s one. Secondly, also maybe more important, I wonder about the visibility in the active safety sales that you sort of see ahead of you.

I know that on passive side, you could fairly well say what you expect to sell at least on a given model for the coming few years, but on Active Safety, I’m not sure if the development time is about the same.

If so, how sort of sure are you about your sales three, four and five years from now? I’m trying to gauge the level of uncertainty in the target that you have for Active Safety by '19.

And final also, when you launch your own proprietary camera systems and algorithms, how does that work when you sell that to your customers? Do you say, okay, let’s just replace the old camera system which you have sourced from someone else or do you – is it a completely different selling process?.

Okay. If we take the leverage ratio to start with, you know our normal tools for returning money to shareholders and for a formal share repurchase and dividend, and we have done that over many, many years. So that has been the tools that we have used.

Of course, to reach a higher leverage could also be finding a good acquisition and execute on that one which is in our strategy or a third one would be of course also to – if that would happen to sort of deal with the antitrust matters that we’re having. So there are several ways of leading to a higher leverage.

If you look to the visibility of Active Safety, there is a component here which is take rates that is different from Passive Safety and the increase is the difficulty of it. It increases the difficulty of estimating the right target and estimating the right speed of reaching the targets, which also saw here from our previous target of 0.5 billion.

That now ended up in a positive area. We are following back to the previous question, the Euro NCAP, the NHTSA, the store rating in general but also legislations coming out and do our own estimate of how fast this can begin, this is the basis leading up to the $2 billion for Electronics overall.

But I agree with you that the visibility due to this non-mandatory situation is more difficult in the Active Safety area. I’m not – necessarily, it’s difficult leading to more negative, it could also go faster than assumptions made.

On the third part, the camera, it is a launch of our own product, which means that it replaces – it goes into models and it replaces the current cameras or current equipment or it just is a new feature in the vehicle. So it isn’t so that we take anything and modify it or improve it or so.

This is just a new equipment coming from us whether it’s replacing or whether it’s a new feature in the vehicle remains to be seen. We will see that when it launches. So it has nothing to do with the previous products..

Okay. Thank you..

Thank you..

Thank you. There are no further questions in the phone queue at this time, so I will hand the call back to Mr. Jan Carlson for any additional or closing remarks..

Thank you, Darren. I’d like to thank everyone for very interesting questions and their continued interest in Autoliv. We look forward to speaking with you again during our first quarter 2015 earnings call on Wednesday, April 22, 2015.

Of course, as well, we look forward to seeing as many of you as possible in our Capital Markets Day on June 2 and 3, 2015. In the meantime, I wish you a very good time and goodbye for now..

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