Anders Trapp - Vice President, Investor Relations Jan Carlson - Chairman, President and Chief Executive Officer Mats Backman - Chief Financial Officer.

Brett Hoselton - KeyBanc Hampus Engellau - Handelsbanken Victoria Greer - Morgan Stanley Vijay Rakesh - Mizuho Brian Johnson - Barclays Emmanuel Rosner - Guggenheim Kai Mueller - Bank of America David Lim - Wells Fargo Securities Joseph Spak - RBC Capital Markets Richard Hilgert - Morningstar Shawn Kim - Gabelli.

Good day, ladies and gentlemen and welcome to the Autoliv, Inc. Third Quarter Results 2017 Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Anders Trapp, Vice President, Investor Relations. Please go ahead, sir..

Thank you, Mark. Welcome everyone to our third quarter 2017 earnings presentation. Here in Stockholm, we have our Chairman, President and CEO, Jan Carlson. We also have our Chief Financial Officer, Mats Backman and myself, Anders Trapp, Vice President of Investor Relations.

During today’s earnings call, our CEO will provide a brief overview of our overall company performance and outlook as well as an update on general business conditions, while our CFO will provide further details and commentary around the financial results and outlook.

Then at the end of our presentation, we will remain available to respond to your questions and as usual, the slides are available through a link on the homepage of our corporate website. Turning to the next page, we have the Safe Harbor statement which is an integrated part of this presentation and includes the Q&A that follows.

During the presentation, we will reference some non-U.S. GAAP measures. The reconciliations of historical U.S. GAAP to non-U.S. GAAP measures are disclosed in our quarterly press release and the 10-Q that will be filed with the SEC. Lastly, I should mention that this call is intended to conclude at 3:00 p.m. CET.

So please limit yourself and your questions to two per person. I will now turn it over to our CEO, Jan Carlson..

Thank you, Anders. Looking on the third quarter highlights on the next page, we are pleased that our investments for growth and execution are on track as we ramp up new program launches, which will result in a step up of our organic sales growth during the first quarter in 2018.

For the third quarter, our organic sales growth came in at 0.5% due to lower inflator replacement sales and lower volumes in North America, which overshadowed our better-than-expected growth in all other major regions.

This sales growth was lower than the light vehicle production of 2.1% mainly due to lower inflator replacement sales and model mix effects which had a combined effect of roughly 1.5 percentage points.

Our adjusted operating margin of 7.9% was in the high-end of our guidance range, while we had a solid operating cash flow of $218 million and an adjusted earnings per share of $1.47. During the quarter, we returned $52 million to shareholders through dividends and maintained a leverage ratio of 0.7 times.

Supporting our growth opportunities, our RD&E net has been in the range of 7% to 7.5% of sales so far this year. Consequently, we didn’t expect our RD&E net to be more than 7% of sales for full year 2017 despite the favorable seasonal effect in Q4.

Mitigating this RD&E effect on our operating margins, we continue to see an improving operating leverage in our gross margin despite higher commodity cost. And lastly, we continue to improve our market position for the long-term as we expanded our capabilities through several technology collaborations and pending acquisitions.

Looking into our growth on the next slide, we have highlighted some of our strong performing models during third quarter. These models contributed significantly to our organic sales growth during the quarter, where our electronic products are on two-thirds of these models.

On an annual basis, these models represent around 6% of our group sales, while our content on these models is in the range of $60 to $450 per vehicle. Looking now on our product volumes on the next page, we have summarized our delivery quantities for the third quarter.

In passive safety, our seatbelt volumes had a favorable mix towards high end value-added products such as active seatbelts and pretensioners.

Our airbag products overall performed slightly better than the global light vehicle production due to our strong growth in Japan, South Korea, South America and India, which was partly offset by a decline in North America.

Within electronics, our active safety volumes increased by 1% mainly due to radar and camera systems, while our restraint control and brake system unit volumes declined mainly due to the timing of customer program launches.

Looking into some of our strategic initiatives on the next slide, we are pleased to have recently entered into five new collaborations and signed an agreement for an acquisition. In the product area of LiDAR, we have signed an agreement to purchase the carve-out of the optics company, Fotonic.

This pending acquisition includes the transfer of certain intellectual property and assets, along with about 35 engineering experts in the field of LiDAR and Time of Flight cameras.

This acquisition is subject to customary closing conditions and complements our earlier collaboration with Velodyne, where we will develop and manufacturing next-generation LiDAR sensors for highly automated driving vehicles.

Related to driver monitoring, we signed a non-exclusive agreement with Seeing Machines to integrate their software into our driver monitoring system. Related to our software platform, Zenuity has agreed to collaborate with Ericsson to develop connected cloud solutions.

As you may recall earlier this year at CES, we launched LIV, learning intelligent vehicle, which is intended to understand and manage the state of the driver in order to create a safe and enjoyable experience in CME autonomous vehicles.

In order to accelerate our development around this initiative, we signed a collaboration agreement with MIT AgeLab in the field of artificial intelligence. Within passive safety, we are pleased to have partnered with a global leader in seating technologies, Adient, to collaborate on the next generation vehicle seating configurations.

And lastly, we joined the consortium with Ericsson, Volvo, Zenuity and Volvo Cars to form Mobility Xlab, an incubator for startups to share new technologies, to develop safer and more efficient future transportation. Looking now on our business outlook on the next page, our strong momentum continues in both segments.

Within passive safety, we see the early ramp up during third and fourth quarter of business awarded in 2015 as illustrated by this chart on the right is developing according to plan.

This should result in a step up in organic growth early next year and strong performance versus our market and light vehicle production in subsequent quarters and upcoming years. In passive safety, we believe that RD&E net in percentage terms has peaked and therefore we expect to see operating leverage during quarter four.

And lastly, we continue to see strong order intake within passive safety. Within electronics, we continue to see lower organic growth in restraint controls and brake systems and certain areas of active safety due to the timing on new program launches.

Our growth in the core active safety product area of vision, radar and ADAS ECUs was almost 10% in third quarter. This lower level of growth in electronics is expected to continue in 2018.

During the third quarter in electronics, we continue to see strong RFQ activities in all product areas as evidenced by our increased level of customer qualifications that we showed at our Capital Markets Day last month. We believe this will result in targeted business wins in fourth quarter and perhaps into early next year.

Our software joint venture, Zenuity, continues to ramp up its hiring plan and it’s already up to about 480 employees and consultants, which is more than double the initial contribution of about 200 people. For the third quarter, quarterly share of net cost for the joint venture was better than expected at around $10 million.

We now expect that Autoliv net cost for full year 2017 to be in the range of $30 million to $35 million. And lastly, we continue to see strong customer RFQ interest in the Zenuity software offering and product demos begun at the current customer base.

We expect this will materialize into new customer contracts in the near future as our technical milestones remain according to plan. Now, looking into some key launches on the next slide, we have identified some of the models within our passive safety segments, which are currently ramping up now or will launch during 2018.

We estimate these models that will continue more than 2 percentage points towards passive safety organic sales growth during fourth quarter 2017 and anticipate these models will contribute about $500 million of organic sales growth in 2018.

On an annual basis, these models represent around 11% of our group sales while our content on these models is in the range of $65 to $475 per vehicle. As we mentioned at our Capital Markets Day last month, we target our passive safety organic sales growth from 2017 to 2020 to be 8% CAGR.

Looking now to our underlying market conditions on the next page, our overall market conditions remain mixed with some uncertainties in particular within the light vehicle markets of North America and China. During the third quarter, the inventory levels declined in both China and U.S.

due to lower underlying light vehicle production, while the inventory levels in Europe remained relatively stable based on our internal estimates. For fourth quarter, the overall global light vehicle production is expected to increase by 1% year-over-year according to the latest IHS figures.

This assumes light vehicle production year-over-year increase in Japan remains strong close to 5%, while the light vehicle production in China and rest of Asia is expected to decline 2% and 1% respectively.

In North America, the light vehicle production is expected to decline 3% in fourth quarter, while South America is expected to continue its recovery with a year-over-year change of 20%.

In Europe, light vehicle production is expected to increase roughly 7% year-over-year in the fourth quarter, which is comprised of increases in Western and Eastern Europe of 7% and 6% respectively. Looking in the latest full year 2017 global light vehicle production, IHS now estimated 2.3% year-over-year increase versus a 1.9% in July.

This improvement is mainly driven by increases in Europe, Japan and South America, while North America is lower and China remains relatively unchanged. I will now leave the word to our CFO, Mats Backman to present the financials and our outlook. Mats go ahead..

Thank you, Jan. Looking now to our key financial figures on the next slide. In the third quarter, we had a record sales and gross profit for any third quarter. Our sales of $2.5 billion were driven by strong organic sales growth, where all major regions contributed to this growth, except North America.

In addition, the consolidated net sales, was positively impacted by a currency translation effect of close to $28 million. Despite commodity headwinds and negative currency transaction effects, we are pleased to see gross margin improvements of 10 basis points year-over-year primarily due to our improved operating leverage and efficiencies.

Our adjusted EPS declined year-over-year to $1.47 mainly due to our cost of the Zenuity joint venture and higher effective tax rate, including discrete items. These had a combined negative effect of around $0.20 per share.

Our adjusted return on capital employed and our return on equity declined versus prior year mainly due to the equity method effect from Zenuity and higher effective tax rate. Looking now to our operating margin on the next slide. Our adjusted operating margin was in the high end of our guidance range of 7.5% to 8%.

Compared to prior year as illustrated by the chart, our adjusted operating margin was 20 basis points lower.

The net operating leverage from the organic sales growth and improved operating efficiencies and vertical integration was more than offset by unfavorable currency effects, higher raw material costs and by the planned higher investments in RD&E to support our future growth. Looking out our cash flow on the next slide.

Our operating cash flow of $218 million declined from last year due to lower net income. We still expect our full year ‘17 operating cash flow, excluding discrete items to be more than $800 million. Our capital expenditures of 5.8% for the third quarter and 5.4% of sales year-to-date are both within our expected range of 5% to 6% of sales.

Despite an expected slightly higher level of capital expenditures in the fourth quarter, we are confidant full year ‘17 CapEx will remain within this range.

The year-over-year commodity cost increase was about $9 million for the third quarter and year-to-date ‘17 is about $23 million, while the full year ‘17 impact is expected to be about $30 million unchanged from our communication last quarter.

For the full year ‘17, our capacity alignment cost is expected to be near the high-end of our expected range of 20 to 30 basis points with a cash outlay of around $30 million. Lastly, we still expect the tax rate of about 30%, excluding any discrete items for the full year ‘17. Looking out to our segments on the next slide.

We have summarized our reporting for the third quarter. In passive safety, organic sales growth of slightly more than 1% was primarily driven by strong growth in all major regions, except North America, in particular with high-value added steering wheels and seatbelts. This growth was positively impacted by currency translation of about 1.5%.

Consequently, consolidated net sales in passive safety increased by about $54 million. In passive safety, the 8.3% operating margin was lower than the last year mainly due to higher capacity alignment cost and antitrust related matters.

In electronics, the organic sales decline of close to 2% was primarily driven by timing of new model launches in restraint controls and brake systems, which more than offsets the positive active safety organic growth.

This resulted in a net consolidated sales decline of about $10 million for electronics since the currency translation impact was minimal. The 1.5% operating margin for electronics was affected by higher RD&E mainly due to headcount increases and the impact from low organic sales.

Looking out our outlook on the next slide, where we have our fourth quarter guidance, which is primarily based on our customer call-ups.

Our organic sales are expected to be flat year-over-year mainly due to strong growth in Europe, Japan and South America, which is essentially offset by lower inflator replacement sales and declines in South Korea, China and North America, where we see temporary negative model mix effects.

Sequentially, our consolidated sales are expected to increase by about 8% mainly due to the increase in global LVP and seasonality effects from third quarter into the fourth quarter. As a result, we expect to achieve an adjusted operating margin of more than 9% for the fourth quarter.

Year-over-year, the benefit from higher operating efficiencies is offset by the negative impact of higher planned RD&E to support future growth and also the commodity costs. Sequentially, fourth quarter from the third quarter, the adjusted operating margin improvement is essentially in line with the operating leverage effect on organic sales.

Looking now upon our full year on the next slide. Our full year ‘17 organic sales growth is now expected to be more than 1%. This is lower than our previous full year ‘17 indication of about 2% due to lower demand in North America and inflator replacement sales during the third quarter and the fourth quarter.

These negative effects have been somewhat mitigated by strong organic sales in Asia, Europe and South America. Our full year ‘17 adjusted operating margin of around April 8.5% remains unchanged from the beginning of the year, mainly a result of improved operating efficiencies which offset higher than originally planned RD&E.

Year-over-year, the positive margin effect from organic sales and increasing operating leverage and efficiencies is more than offset by higher RD&E to support future growth and also higher commodity costs. Summarizing our outlook on the next slide.

Our guidance assumes mid-October exchange rates prevail and excludes cost for capacity alignment and antitrust-related metrics. Our net consolidated sales for fourth quarter are expected to increase by about 4% due to favorable currency translation effects.

Our full year ‘17 guidance from net consolidated sales is expected to increase about 3%, which remains unchanged from April 28. Slightly lower organic sales growth and more than 1% versus the earlier indication of about 2% is offset by a positive currency translation effect of around 1 percentage point.

Based on these sales assumptions, we expect an adjusted operating margin in the range of more than 9% for the fourth quarter and around 8.5% for the full year ‘17. In summary, these estimates indicate an adjusted operating margin in line with what we outlined in the beginning of the year despite higher RD&E investment for future growth.

And with that, I will turn back to Jan..

Thank you, Mats. Turning to page again here, I would like to provide some additional comments before we open up for Q&A. As many of you have heard last month at our Capital Markets Day, we announced that we have initiated a strategic review process with intent to create two publicly traded companies.

This review process is continuing according to plan and we expect to be able to provide an update before year end. The target remains unchanged that by this time next year passive safety and electronics are listed as two independent companies.

Our segments today operate as two different businesses where the pace of technology advancements and RD&E investments for growth and innovation are much greater in electronics. Consequently, this drives significantly different skill sets and talent in our people between the two organizations.

This also results in two businesses, where the sales growth rates over the near and longer term are quite different and we see limited customer or operational synergies other than common quality focus throughout the D&A of Autoliv.

And lastly, the two companies likely attract different shareholder types who potentially have different time horizons or returns on their investments. In line with this strategic direction, we can see by turning the page our updated targets for our two businesses and segments at our Capital Markets Day.

In Autoliv passive safety, we target sales of more than $10 billion in 2020, with an adjusted operating margin target of around 13%. The sales target represents an 8% CAGR from 2017 to 2020 and a market share of 45% approximately.

Looking out two years further to 2022 in passive safety, we target to at least hold our market share and grow sales 1% faster than the underlying light vehicle production both from 2020. We also target to at least maintain the adjusted operating margin from 2020 levels in passive safety.

In Autoliv electronics, we target sales of roughly $3 billion, which more than $1 billion is in active safety and unadjusted operating margin targets for electronics within the range of 0% to 5%.

Also looking 2 years further out to 2022 in electronics, we target sales of around $4 billion, which around $2 billion is in active safety and we target to improve in adjusted operating margin from 2020 levels. Turning the page then, we conclude our formal comments from today’s earnings call and we will now stay available for taking questions.

So, we open up the line and I turn the word back to you, Mark..

Thank you, sir. [Operator Instructions] We can now take our first question from Brett Hoselton, KeyBanc. Please go ahead, sir..

Good afternoon..

Good morning, Brett..

So for 20 years on the sell side, I have been told by one of your competitors that there are tremendous synergies between the active safety and the passive safety and then ultimately the two are going to converge and allow them to succeed to a much greater degree than they had already and they have been a successful company.

What you are doing kind of flies in the phase of that, you never really expounded that view that active and passive were necessary there is some merger there, but not necessarily.

I guess, what I am wondering is it sounds like you are saying there is really just a minimal amount of synergies between the two and what outweighs that is the different types of shareholders and your goal is to add value.

Am I kind of thinking about this correctly?.

I think your thinking is very much in line with what we communicated. There are very few synergies in the operations from technology that we can see. Also, the skill set of people and highly skilled pyrotechnical engineering, mechanical engineering is different, has a different background than artificial intelligence and software development.

So, there are differences in many areas. Also from a customer side, when this is sourced and built into the car, there are different departments at our customers also dealing with this..

As you are reviewing this and evaluating this, have you come to any conclusions as to maybe some multiple differences that you see possibly assigned to the different entities, I mean we have obviously an auto part supplier typically trades at 11x, 12x next year’s earnings.

Any sense of what the spin-off might trade at?.

I think there will be multiple difference, but I am afraid at this stage I cannot give you any of those numbers yet. We will have to work on that and see where that is and ultimately, it will be reflected of course when the company are listed and started to trade..

Okay. And then finally and actually I have asked two questions already. So, thank you very much. I appreciate your time, Jan..

Okay. Thank you..

Thank you, caller. We can now take our next question from Hampus Engellau, Handelsbanken. Please go ahead..

This is Hampus Engellau, Handelsbanken, I have my two questions.

On the 340 product launches, would it be interesting to if you could quantify what you would define as market share gains, i.e., new models, new contracts and how much is replacement of existing models and existing contracts? Second question is more on curiosity on Seeing Machines and is this – the only collaboration you will have on driving monitoring system or are you also collaborating with Smart Eye on this and how are you looking on these two competitors on the products? Thanks..

If we start with, we can start with the first one.

You can see the number in the release where we compared the product launches together with or together with the same launch numbers last year and you may draw some of the conclusions of the game we have seen here in the first detection, the ramp up in the other – in the business we have taken from maybe Takata and the redistribution of shares.

When it comes to the Seeing Machines, it’s a nonexclusive thing and we of course don’t comment today on other potential partners around it, but I guess the important part is that this is an important collaboration that we are working with and that we hope will get a lot out of, but it’s nonexclusive..

And will the software be included in your future systems or it will be sold also separate from your perspective?.

If the software could be sold separate, we of course take that opportunity, but otherwise it’s a part of the system..

Thanks very much..

Thank you..

Thank you, caller. We can now take our question from Victoria Greer, Morgan Stanley. Please go ahead..

Hi, there. Yes, two for me please.

Firstly, when you are talking about the new product launches having to buy $500 million for 2018, is that including all of the incremental business that you expect to get from Takata and presumably we need to offset that somewhat against negatives of contracts rolling off, because the $500 million is a pretty material number for next year sort of nearly 5% of organic growth? The second question just on the Zenuity share of losses and that’s obviously come in a little bit below your expectations for 2017, do you have a view of where that might be for 2018, should we still be thinking about the $15 million per quarter that you had originally talked about or could that come done as well? Thanks..

Yes. On the first question, I am afraid to have to repeat the two questions, because I didn’t take notes on it. So, on the first question, this is limited to the numbers or to the launches that we have here, this is not all of it. So, there are other contributions to this as well.

And what was the second question?.

So, just on those launches that includes some from Takata presumably?.

Yes, it does. It includes some of it, but how to define what is coming from where is not that easy actually, because it has been redistribution of shares in this very turbulent situation.

So, it has been redistribution, but we have picked up as we have communicated on the Capital Markets Day more than 50%, but so Takata is a contributing factor to it, but not all of it..

Okay, but once we include launches that are not shown in the slides it’s over that $500 million number in total for ‘18?.

Yes, it is..

Thanks. And the second question was just on the Zenuity share of losses and it’s come in a little bit below your expectations in 2017.

Do you have a view of whether we should still be thinking about the $15 million per quarter share in 2018 or is there an update of where that might be?.

No, I think you should assume the $15 million that we have been talking about. And as you can see looking on the number of employees and the total numbers that Jan talked about the 470, we are kind of approaching the number of engineers that we have been talking about originally.

So, we are ramping up to a run-rate of $15 million, so that is what should be used..

Thanks..

Thank you, caller. We can now take our next question from Vijay Rakesh, Mizuho. Please go ahead..

Yes, hi, Jan and Mats.

Just a quick question on the ADAS side, can you talk about how you see your design wins ramping there and there are some topics there peak somewhere around 1Q ‘18 on the active electronics side?.

You had a bad line there.

Could you repeat the question please?.

Yes.

Just wondering if you could give some more color on the ADAS ramps design wins that you are seeing and does the OpEx on the active safety side peak in 1Q ‘18?.

The ADAS ramp as we have communicated, we have a good customer interest. We talked about it quite a bit at the Capital Markets Day from our sensor program from the RFQs and we are seeing the organic growth rates coming down here in second half of 2017 and that lower level in electronics overall will continue into 2018. So, that’s for the near-term.

For the longer term, we communicated the targets here is more than $1 billion by 2020 and that’s more or less all of it in the order book for the 2020 – for the 2022 part, it’s more to be taken..

Got it. And on the spin-off, obviously many of your peers have seen significant value, shareholder value being unlocked, especially with Delphi and FCA were doing that and obviously that is in line with what’s the shift in the big automotive landscape there.

But I was wondering as you look at that spin-off, do you see yourself similar to the passive safety side giving us some color on the order intake on the active safety side too? You mentioned 2014 was kind of soft spot, where there was not much in order take, but could you give us some color on the order intake that you are seeing on the active safety side as well? Thanks..

Yes. We gave you some information on that on the Capital Market Day, where you could see that we talked also about a 20%, 25% order intake level for 2015 on the active – ‘16 on the active safety side, where we also showed on that slide that we were on the lower side here last 12 months so far into 2017.

We have communicated that the order intake situation on active safety is back-end loaded and that we hold on to we have no change in communication since our Capital Market Day..

Thanks..

Thank you, caller. We can now take our next question from Brian Johnson from Barclays. Please go ahead..

Brian Johnson, Barclays..

Hello..

Yes, Brian Johnson, Barclays. I have a couple of questions really about the longer term and sort of following up some of spend questions.

I guess first on Page 6, these new technology collaborations and alliances, it seems like some of them could go into Zenuity, some of them like a seating, our collaboration could be both in the new co as well as in the old co.

I mean, how do we think about the ability of the passive safety company to access kind of leading technology like designer, driver monitoring or perhaps seats that monitor driver states as well?.

I think fairly, it’s a good question and of course, very possible.

These companies will be two independent companies if we are executing here now according to the plan we have and the Adient collaboration is of course more towards the passive safety side and see how we can design seating solutions here for occupant protection in a compartment that is looking different, where seating positions are not as they are today, but you have much more freedom to adjust the seats in different angles and different directions.

And when it comes to the other collaborations, if you look to the Ericsson cloud solutions that was a collaboration between Ericsson and Zenuity and of course the Seeing Machines is geared more towards aimed for us more on the electronics side as a part of driver monitoring towards autonomous drive, but could of course will be integrated in the seat, in the compartment from the passive safety side.

This also means that we will see collaborations between those two companies also after a separation of them and potentially good collaborations as they come from the same background..

Okay. And second question is over on Zenuity which is definitely new co.

In addition to just the staffing levels, can you give us a couple of things, one, any update on miles or – excuse me kilometers driven disengagements types of operating conditions, certainly West Sweden started noted for its clear sunny warm weather all year? And then secondly, any plans of either Zenuity itself or Volvo to not just put cars on the road, but operate a shared autonomous vehicle rideshare service around them?.

While there were many questions in that, I can give you a little bit of an update on the Zenuity side. Zenuity has been in fact in operation if you exclude vacation around 100 days. We have 480 employers where of 340 of those or people in the company, 340 of those are employed and 140 about are consultants into the company.

We are working with them little bit more than 5 potential customers here at this point in Zenuity and we have installed software and we are working with demos in majority of those in their own cars. So, we are demonstrating our capabilities already into several of these potential customers into these vehicles.

We have established a very strong artificial intelligence team in Zenuity close to 40 people, which is a respectable amount of talent in such a short period of time. And as I said, we have a good feedback from the developments here and I think this is something that is important and it’s a good progress and a good start of this company..

Okay, thank you..

Thank you..

Thank you, caller. We can now take our next question from Emmanuel Rosner, Guggenheim. Please go ahead..

Hi, everybody. I have couple of questions on active safety.

First, I wanted to clarify some of the prepared remarks in your press release basically you said active safety was positively impacted by almost 10% sales growth of core active safety products in the radar, cameras, system etcetera, especially with models from Honda, Mercedes and FCA, this was partly offset by declines for camera systems with Mercedes and BMW.

And so I am a little bit confused, camera system is clearly part of what you call the core active safety product.

And so – and then you also mentioned Mercedes both on the positive and on the decline, can you just please a little bit elaborate what happened in the quarter?.

And I think there are certain models – certain models are ramping up and certain models are ramping down. So, that’s why you are seeing both on the positive and on the negative side. On the BMW side, it’s all the technology that we have launched on the five areas that is on its way down and that’s why you see that coming down on the camera side.

You will recall that we launched the first AEB together with Mobileye back in 2013 to BMW, which is a technology that we are not pursuing any longer and that declined despite it’s the camera business..

Okay, understood. And then I guess more strategically as you are going in the review of the two businesses, any initial thinking on how research and development cost will be funded in an independent electronics company.

I guess, you have benefited so far from having a very cash generative passive safety side to fund it what are sort of like initial thoughts on how that would happen if these are two separate companies?.

I know, this is Mats, I guess we are then getting a little bit to the capital structure and the funding of the standalone yearly business.

And that’s what we are kind of working with currently within the strategic review, but I mean just maybe to repeat what we said at the Capital Markets Day that we are looking on kind of a capital structure, where we are putting enough cash into yearly in order to kind of fulfill their organic growth targets that we talked about at the Capital Markets Day meaning that it’s a cash injection in yearly in terms of funding in that respect and in the same time kind of maintaining the target looking on RemainCo then for a strong investment grade..

Understood. Thank you..

Thank you, caller. We can now take our next question from Kai Mueller, Bank of America. Please go ahead..

Hi, thank you very much for taking my question. Two if I may. The first one really about the phasing in Q4, so we understand now you are looking for flat organic growth in the quarter, yet the same time your passive safety contracts are ramping up. So, we are seeing the first 2 percentage points contribution from there.

Can you just explain a little bit what the offsetting factors are? I understand it’s some sort of ramp downs in certain products, you said the U.S.

market model mix isn’t very helpful? And to put that into context especially in light of the number you were mentioning earlier the $500 million in new model launches, how much in terms of model ramp-downs do you see offsetting that into next year?.

Into next year, with the effect we see here in the fourth quarter is a temporary effect, you may see some remains obviously also going forward, but it is a temporary effect that we see on the model mix change order situation.

It’s specifically, General Motors, you have also some models with Chrysler that are affecting this and we also see a decline in the inflator replacement program in addition to this effecting the lower organic sales growth in fourth quarter.

So, that is offset by the ramp up of the new order intake or the stronger order intake corresponding to around 2%. As you could see that we have a declining effect of the low light vehicle production in North America as this is a high content market. North America is the highest content market.

So, it has an effect not only from the number of cars, but also from a content point of view that it’s higher and the negative effect here is offset, negative effect of 2% roughly than its offset up to zero..

Okay, thank you. And on the second question on the restructuring charges that came in quite a bit ahead of, I think what the Street and our sales were also expecting.

Can you give us some clarification what exactly they were used for and maybe also some sort of level in terms of extraordinary cost that we should be expecting during the transformation process and split of the group?.

It is related to a change of our footprint in Germany and that’s mainly the accrual that we are taking here in the capacity alignment coming in from that.

When you look into the future and we have said that the capacity alignment will have an effect of roughly 30 basis points on a yearly basis and that will – we will speak to that number as the best estimate that we have also into the future. We expect full year number to be around 30 basis points.

So, it will be that for the year and also you should use that for into the future..

Okay. Thank you very much..

Thank you..

Thank you, caller. We can now take our next question from David Lim, Wells Fargo Securities. Please go ahead, sir..

Hi, gentlemen. Good afternoon. Just quickly obviously there is a competitor of yours or maybe a soon to be competitor who wants to get into the radar business.

And understanding that you guys have a deep history in radar, can you sort of explain to us maybe the moat that you guys have or maybe I mean is it difficult to get into the radar business, is it not so difficult, if you could sort of catch that for us? That would be very helpful. Then I do have one follow-up..

Well, I think it’s not that easy as the radar is in the other technologies have a continued development and the technology of radar including the hardware setup and the software and the capabilities of a radar had in a vehicle is quite different today and tomorrow than it used to be 5 year ago.

This technology is going through a change all the time and we are having very confident and very good customer collaborations driving this change where we can capitalize on developing good products to a very demanding specification. So, I don’t think it’s that easy to get in there.

It’s easy to get into producing a radar but to produce radar good enough for autonomous driving, good enough for Level 4 with the demand you have there isn’t that easy..

Great. Thank you. And my follow-up is on the notion of the two businesses becoming separated, what is the deployment of free cash flow on the passive side, given I think the guidance was maybe 1% or 2% above market growth, it’s a solid free cash flow generator.

Would you guys be more on the return of capital to shareholders with the passive business assuming that the split does happen? Thank you..

Yes, I think it’s a fair assumption giving the kind of the stability on the cash flow you can see in the passive safety business..

And also the need for acquisitions and the need and the appetite for acquisitions is different than collaborations is different on the passive side for many reasons, market share, size etcetera, etcetera, type of technologies, so thereby cash generation could be used differently there or preferably used different there than in electronics side..

Great. Thank you, gentlemen..

Thank you, caller. We can now take our next question from Joseph Spak, RBC Capital Markets. Please go ahead..

Thanks. Thanks, everyone.

The first question is just on the lower replacement units are calling on the fourth quarter, it was unclear to me did something changed there or was that always considered and the real change for organic growth in the quarter is more due towards just North America volume?.

It was expected to be lower than last year all along or since July to express it correct. We expected it to be lower, but it turned. We see now it’s going to even lower. And the reason for that is really no change or anything, it’s more difficult. Customer doesn’t get cars back for replacement simply and that’s difficult to forecast.

Cars are not coming in for changing the inflators in the scheme that customer thoughts that’s our experience and that’s what we can see in here and that’s why you see that lower demand..

Should that change your ultimate replacement opportunity set or do you think these eventually come in just at a later period in time?.

We don’t think this will change the opportunity. We see this may drag out longer in time. We may even see that it could become bigger potentially than what we have previously expected. So, it could be even bigger and it takes longer time..

Okay.

And then just on the proposed split, I appreciate the comments earlier to Brett’s question about not a lot of synergies between the businesses, which I think makes sense right, there is different capabilities, but one of the things that I think clearly did occur in the past is when you want to talk to these customers, right, even about passive safety, they knew you were also a provider and continuing to work on more active safety products.

So, I guess the question is like do you get the sense at all that customers were willing to fund your ambitions in active safety, a little bit through the passive business and does that become a little bit of a headwind I guess to both sides really if the split goes through?.

I don’t think there have been any signs of funding from customers or appreciation for that sake. It has almost sometimes been the opposite and in particular, in light of the recent development where we have gained share in order intake, we have communicated strong order intake. They have given us a lot of business.

We have sometimes gotten the question your active safety as we are having so much to do in your bigger area or you are really going to continue your active effort here when there is so much for you to deal with on the passive side. It has been rather in that direction and customers have reacted very positively to this.

They have said to me in person that we are used to this. This is happening not only with you, it’s happening with even some of our colleagues even in the OEM industry we are seeing split ups or potential split ups. You see that with others. So, customers have reacted I would generally very favorable to this..

Last quick one I guess just in the prepared remarks on the first page of the release where you talk about more back-end loaded order intake for electronics.

Is that just a reiteration of what you have indicated prior or is there even further push-out on some of those orders?.

No, it is basically the exact same message we gave at the Capital Market Day. It’s back-end loaded. We said I think also there in the – at the CMD that you never know whether it’s going to be pushed over the year or the year end.

Orders can be pushed over a quarter cutoffs and year cutoffs, so you never know, but there are no changes in our perception of when these orders are coming from September 14..

Thank you very much..

Thank you, caller. Ladies and gentlemen, we have about 4 minutes left in today’s call. We can now take another question from Richard Hilgert, Morningstar. Please go ahead..

Good afternoon..

Good morning or good afternoon..

Yes, good morning, it’s Chicago. Thanks for taking my question.

I was curious about the strategic landscape, the competitive landscape now for you on the passive safety side, we have seen many different developments on that side with some of your larger competitors, one being taken over by a German company that didn’t have anything to do with passive safety, another being broken up and going to some of that business going to yourselves to your other larger competitor and to a smaller competitor in North America.

I am curious about the competitive landscape at this point given all of those different moving parts.

How have things changed, how have things developed and where do you see things going, did some of that flow back to some of the business that’s been accumulated at – they have taken over company and yourselves, did some of that go back into the North American company that’s taken over the Japanese company or how does all this play out now?.

I think the customer processes are very much the same, there are really not a bigger difference from how business are being awarded. We are seeing more business coming our way. I think customer pays even more attention to quality and stability and being here for long period of time.

The advantage of Autoliv and what we stand for in terms of our quality records and execution power and technology excellence, it’s playing a bigger role. At the end of the day, this distribution for us on business coming our way will stay with us if we continue to execute. I am confident that we will keep our share.

We will continue to be a big supplier here an important partner to our customers if we execute. This is the pure reason why we are investing for growth, while we take cost upfront to secure launches to get a good start of this order intake that we have behind us. And if we do that, we will continue to drive according to the CMD targets..

Okay very good. One longer term competitive landscape kind of question on the active safety side something that you have talked about in the past, Jan, in some of your public speaking engagements.

You have talked about how you could see at some point where the physical equipment side to gain more economies of scale might eventually see some consolidation whereas some of the main competitors today would retain software development.

Is that still in the longer term cards or have things changed a little bit now with the way that we see things developing with yourselves and your competitors and splitting off these businesses like this?.

No, I don’t think so. I don’t think that there has been any dramatic changes of this. I think still the economy of scale and the capabilities or collaborations and clusters we have talked many times about keeping your core competency very clear of what is your core competence in your contribution in when you go into collaborations.

I think this is very key for us and also clear for us. We are focusing on our development in camera systems, radar systems and they are also entering into other important sensor technologies. And we can be the more important partner we can be in future collaborations and clusters..

Okay, very good. Thank you very much..

Thank you..

We have further questions at this time, speakers, if you would like to take them or if you would like to conclude the call?.

Sure. We can continue for a few minutes more..

Yes, okay indeed. So, we can have now Shawn Kim from Gabelli. Please go ahead..

Good afternoon, guys. Thank you for taking my question. Just a follow-up to a couple of the comments earlier. Specifically, on the active safety side and autonomous driving technology seems to progress at a pretty rapid rate right now.

Every automaker has come out with public announcements on their intentions for both electric vehicles and autonomous vehicles.

Can you give us an update on kind of where you think the industry is in terms of Level 4, Level 5 you think everybody is currently at that Level 3 stage, when do you think Level 4, Level 5 could actually be rolled out on a math scale? And I guess follow-up to that is do you think automakers and companies such as skip Level 4 and just go straight to 5?.

I am not sure on a bigger scale you will skip Level 4 and go straight into Level 5. I think Level 5 it will take quite a long time before you have that in an environment – in a normal city or in the normal – today’s normal environment where you drive the car that it should be self-driving Level 5.

I think you will see demonstrations around Level 4, Level 5 fairly soon, but before it will be the normal pattern, it will take a quite long time..

Okay. And then just one more question, you may have mentioned this previously, but on the electronics side, you guys are obviously ramping up and there is a lot of good information there that the backlog seems very promising.

Can you maybe give some more detail and color into what potentially needs to happen to get that profitability to where maybe the where the passive safety business is? And then also is this a business that can be kind of in that high-teens, low 20s of operating margin?.

We haven’t said that. We have said that we don’t see any reason why the electronics business will not be at the same range as passive safety business going on the longer term. We have indicated here in the Capital Market Day we will do better than the range in 2022, we will do better than the range we indicated for 2020 of 0 to 5.

But when the business is ramping up and economies of scale will kick in, at some point we have not seen any indications why it could not be on a longer term basis on the same level as passive safety. Beyond that, we haven’t given any other indications or any margin guidance..

Okay, great. Thank you, guys..

I think this is basically done, the last question for today’s call. And I would like to take this opportunity to sincerely thank everybody here for interesting questions.

And also I would like to send a sincere thank you to the entire Autoliv team for delivering another solid quarter of financial performance and execution, along with our relentless focus on quality. And I should also mention that our fourth quarter earnings call is scheduled for Tuesday, January 30 in 2018.

And then before this, we will be hosting investor meeting at CES in Las Vegas during early January and also the following week in January in the North American International Auto Show in Detroit, along with several investor conferences and trips during this fourth quarter.

Please everybody follow-up on our corporate website for more information and further details along with this.

I would like to end here now and thank everyone for your participation in today’s call and we sincerely appreciate your interest in our company in Autoliv and hope that you will have a safe and relaxing upcoming holiday season when it arrives. Goodbye for now everybody. Thank you..

Ladies and gentlemen, that will conclude the Autoliv Inc. third quarter financial results 2017. Thank you very much for your participation. You may now disconnect..