Edited Transcript of ALV earnings conference call or presentation 28-Jan-20 1:00pm GMT

We continued to outperform against global light vehicle production, growing sales organically 6 percentage points more than global LVP. The strong performance is driven across all regions. This quarter marks the seventh consecutive quarter of significantly higher organic growth compared to the market, further strengthening our market share position. I am pleased to also report that 2019 became the fifth straight year that Autoliv achieved an order intake share of around 50%.

Our cash flows remained strong, enabling delivering towards our target to maintain a leverage ratio in range of 0.5 to 1.5. Our strong performance in the fourth quarter enabled us to meet or exceed all of the metrics in our guidance despite softening of market conditions.

Uncertainty remains high, and we do not see any turnaround in light vehicle production in the near term. Additionally, we continued to see high raw material costs. However, the year-over-year effect has slowed, and we should start to benefit from lower raw material costs in 2020.

We continued to actively manage the business cycle downturn. Compared to a year ago, head count is about 1,600 less despite unchanged sales.

Looking now on adjusted operating margin progression on the next slide. As illustrated by this chart, we have been able to gradually improve the margin versus last year from more than 200 basis points below in the first 2 quarters to 20 basis points above in the fourth quarter. This is despite continued headwinds from declining light vehicle production and raw material costs. The main reasons for the sequential improvements is our efficiency program, including business cycle management activities, improved launch cost efficiency as well as our strong focus on continuous improvements throughout the organization.

As implied by our full year 2020 indication, we expect the adjusted operating margin to improve. In addition to the positive contribution from our continuous improvement activities, we expect to see further effects from the structural efficiency program as well as lower raw material prices.

Although uncertainties continue to affect the industry volumes, we expect to outperform light vehicle production in 2020 in all major regions. However, we expect 2020 seasonability to be even more pronounced than what was in the 2019 in terms of quarterly profitability progression. The start of the year will be challenging, but we expect a significantly stronger second half year. This reflects the expectation variation in light vehicle production where IHS expects Q1 to decline by around 6%, while the second half year is expected to grow more than 2%.

Looking now at the recap of fourth quarter financial performance on the next slide. Our consolidated net sales were virtually flat compared to Q4 2018, impacted by weaker currencies. Organic sales increased by 0.5% despite the global light vehicle production falling by more than 5%. Adjusted operating income, excluding costs for capacity alignment, antitrust-related matters and separation costs, was also essentially unchanged year-over-year despite the impact of general market conditions and raw material pricing. Adjusted EPS increased by $0.42 compared to Q4 ’18, mainly due to lower income tax and higher adjusted operating income.

Looking now on the market development. The negative light vehicle production trend that started around mid-2018 has continued. Global light vehicle production is estimated to have fallen by 6% in 2019, the worst performance since the financial crisis in 2008-2009, and by more than 5% in the fourth quarter according to IHS.

China’s light vehicle production increased for the first time since early 2018. However, it was still 14% below the level achieved in Q4 ’17. In the near term, vehicle demand is expected to remain stagnant due to the weak consumer confidence as well as the reduction in new energy vehicle subsidiaries.

U.S. light vehicle sales finished the quarter down 2% compared to last year, while sales in Mexico fell by more than 9% and Canada by almost 3%. Light vehicle production in North America decreased by 9%. The main reason for the lower light vehicle production was a strike at GM’s U.S. facilities. Inventories declined by 180,000 units to a December 6-year low of around 3.5 million.

Europe’s light vehicle registrations were 11% higher than during the same period in 2018. The surge in car sales came as some countries announced changes to the bonus-malus component of CO2-based taxation for 2020. However, despite the increase in European light vehicle registrations, light vehicle production in Europe decreased by 5%. The West European production of vehicles with high safety content dropped by 6% in Q4 ’19 on top of the 9% decline in Q4 ’18.

Looking to our sales growth on the next slide. Our sales grew organically by 0.5%. As a result of new launches over the previous quarters, we were able to outgrow light vehicle production in all regions. Sales in China increased organically by 13%, outperforming light vehicle production, both with global and domestic OEMs. Combined, we outperformed light vehicle production by around 12 percentage points.

In North America, our sales declined by 3%, which is close to 6 percentage points better than the decline in light vehicle production, mainly due to product launches from previous quarters, particularly with FCA and Tesla. Our sales in South America increased by 40% organically despite declining light vehicle production. The third quarter underperformance versus light vehicle perform — production in Europe turned to outperformance in the fourth quarter, impacted by recent launches of high-volume models at PSA, Renault and BMW.

Sales in Japan decreased organically by 9% compared to the light vehicle production decline of 11%. The market weakness was a reaction to the sales tax increase in October.

Rest of Asia organic sales declined by 2%, which was almost 8 percentage points better than light vehicle production.

Looking at sales performance for full year 2019 on the next slide. In full year 2019, our sales outperformed global light vehicle production by over 7 percentage points. At the beginning of the year, the outperformance was expected to be 5% to 6%. The better-than-expected outperformance was partly due to the positive development in the market mix as low content per vehicle segment declined more than the high content per vehicle segment.

2019 marks the second year with 6% to 7% outperformance versus light vehicle production. This trend is expected to continue into 2020.

We outperformed light vehicle production in China, Americas and Rest of Asia by between 8 and 13 percentage points. The underperformance in Europe and Japan reversed in the fourth quarter, and we believe that this trend will be maintained in 2020. We estimate that our market share of passive safety in 2019 increased by almost 2 percentage points to more than 41%. The largest increase came from passenger airbags and steering wheels.

Looking to our key model launches in Q4 ’19 on the next slide. These models are well distributed across the globe and have an Autoliv content per vehicle of around $100 to $300 per car. Particularly interesting are 2 new Japanese models with front center airbags, the Honda Fit and the Isuzu D-Max. The new front center airbag helps avoid driver-to-interior and driver-to-passenger impact. We expect to see strong growth coming from front center airbag as Euro NCAP has introduced a far-side load case in the 2020 rating program.

Going into 2020, we again have a high level of launch activities to support new vehicles to be introduced over the coming quarters, and we believe that it will prolong outperformance of light vehicle production.

I will now hand over to our interim CFO, Christian Hanke, to speak through the financials.

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Christian Hanke, Autoliv, Inc. – Interim CFO, VP & Corporate Controller [4]

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Thank you, Mikael. Looking now to our financials on the next slide. This slide highlights our key figures for the fourth quarter. Our net sales were unchanged at $2.2 billion. Our gross profit and margin increased slightly year-on-year, supported by lower launch-related costs and our structural efficiency program. In addition, the net operating leverage on the organic sales growth from the ramp-up of new vehicle programs was more than offset by lower capacity utilization due to the sharp drop in light vehicle production. Reported earnings per share improved by $2.84 to $1.78. The main drivers behind the increase were $2.42 from lower cost for capacity alignments and antitrust matters, $0.43 from lower tax and $0.02 from higher adjusted operating income. Our adjusted return on capital employed was 26%, and return on equity was 31%. We have maintained our quarterly dividend at $0.62.

Looking now on the next slide. Our adjusted operating margin of 11.1% was 20 basis points higher than the fourth quarter of 2018. As illustrated by this chart, the adjusted operating margin was negatively impacted by higher raw material costs of 10 bps, which was more than offset by 20 basis points from SG&A and RD&E and 10 basis points from FX effects. We managed to offset the negative operating leverage effects of the 5% LVP decline by a number of activities, such as business cycle management and operating leverage on sales growth from new product launches. Additional support came from normalized launch-related costs and the structural efficiency program.

Looking on the next slide. Operating cash flow was strong in the fourth quarter of ’19 and amounted to $312 million, which was about $25 million higher than for continuing operations in 2018, mainly explained by improved operating working capital. Capital expenditures amounted to $118 million in the fourth quarter, which is about 5.4% in relation to sales, an improvement from the 6.1% a year earlier.

For the full year ’19, operating cash flow, excluding the EC antitrust fine, amounted to $844 million. This was $36 million higher than for continuing operations in 2018. CapEx in relation to sales amounted to 5.6%.

Moving on to the next slide. We have, as you know, a long history of a prudent financial policy. Our balance sheet focus and the shareholder-friendly capital allocation policy remains unchanged despite the current market conditions. As of December 31, 2019, the company had a leverage ratio of 1.7, which is slightly lower compared to what we reported as of September 30.

Our strong free cash flow generation should allow deleveraging and should allow continued returns to shareholders while providing flexibility. We expect to be within our target leverage ratio range by the end of 2020. This excludes any other discrete items and other nonforeseeable changes to our business.

I will now hand back to Mikael.

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

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Thank you, Christian. Looking at the recap of the full year ’19 on the next slide. The year 2019 was one of the most challenging years for the automotive industry, with close to 6% decline in global light vehicle production, a sharp contrast to the 1% growth that was expected when the year started. Combined with higher raw material costs, a large number of product launches and improvement initiatives, 2019 was a challenging year indeed. However, 2019 was also a year where we built on the foundation for the sustainable profitability improvement for the coming years.

Our performance progressed throughout the year, and in the fourth quarter, we showed the first year-on-year improvement in adjusted operating margin since the spin-off of Veoneer. I’m also pleased that we, for the fifth straight year, maintained around 50% order intake share, supporting our growth for the longer term.

Looking at the details of our structural efficiency program on the next slide. We have already started to see the positive effects of the program, although limited in the quarter. For full year 2019, the savings amounted to almost $10 million, and the program should reach its full effect by mid-2020. Most operations will be impacted, and we expect a head count reduction of around 800. The cost for the program is now estimated to be around USD 52 million and a cash out to be spread from Q2 ’19 to Q2 2020. The sequential savings in 2020 is estimated to be around USD 30 million to USD 40 million on top of the savings already achieved in 2019. We continue to evaluate our global operations and to optimize our footprint. This may result in additional restructurings in the future quarters as needed.

On the next slide, you can see that our order intake share for the full year continued on the same high level as in 2018, supporting our growth opportunities also beyond 2020. This is strong evidence that our company is the leading company in the passive safety automotive industry and shows that we have successfully managed operations of ramping up of previous year’s high level of order intake.

One of our key performance indicators, customer satisfaction, has improved substantially and is at a high level, the best we have had for several years. However, this does not mean that we can relax. We always strive for improving products, services, processes and costs. We estimate that we booked about 50% of available order value in 2019, making 2019 the fifth consecutive year of booking around of — or more than 50% of available order value. The order intake is broad-based. We have improved our market position in 3 dimensions: regional, customer and product category.

On the next slide, we have the outlook for major light vehicle market, which has become increasingly more uncertain due to weaker consumer confidence and regulatory changes. Reflecting the increasing uncertainty in the market, our base scenario for global light vehicle production in 2020 is a contraction of 2% to 3%, which is lower than IHS outlook of a decline of 0.7%. This would be the third year in a row with declining light vehicle production.

Looking further ahead, as we have outlined at the Capital Markets Day in November last year, we do not expect the market to return to historic growth rates in medium term. Our base assumption is that it will take 5 years from now until we reach the 2017 global light vehicle production level. The reason for our more negative view on global light vehicle production compared to IHS is the impact from the strict CO2 emissions limit in Europe. We note that many OEMs’ 2020 launch schedules for electric and plug-in vehicles are back-end loaded, potentially bringing production volatility. Additionally, we do not see a rebound in China in the current weak consumer confidence environment, and we are closely monitoring the tragic development of the coronavirus in China, engaging its potential impact on the automotive industry.

In the U.S., we expect a modest contraction, still with a stable consumer environment. As a result of the past year’s strong order intake, we expect to outgrow light vehicle production by around 6 percentage points.

Looking at how we will outperform the light vehicle production in 2020 on the next slide. Here, you see some of the key models supporting our outperformance in 2020. These models are expected to account for a large share of our organic sales growth during 2020. 7 of these models were launched recently, 5 are yet to be launched. Annually, these 12 models represents close to 9% of sales, and our content per vehicle is in the range of $130 to almost $500.

Looking to our margin development for 2020 on the next slide. As we communicated at our Capital Markets Day in November, we see some tailwinds and some headwinds for 2020. We believe the net effects of tailwinds and headwinds should result in a year-over-year improvement in adjusted operating margin. To be able to indicate an improvement by at least 40 basis points in a historical weak market environment gives us confidence that we are on track to the 12% medium-term target. You can see the main tailwinds include growth from executing on the strong order book and the structural efficiency program. The main headwinds include lower inflator replacement sales and continued decline in light vehicle production.

Now looking on to full year 2020 outlook on the next slide. We have summarized our full year 2020 indications, and we do not see any signs of turnaround in the light vehicle demand. Our financial outlook assumes a 2% to 3% decline of global light vehicle production. These indications exclude cost for capacity alignments and antitrust-related matters. We expect our organic growth to be around 6 percentage points higher than the global light vehicle production. Consequently, our full year 2020 indication is for a 3% to 4% organic sales growth, with no expected currency translation effects, or net sales growth is assumed to be in line with organic growth.

Reflecting the low light vehicle production assumptions, our indications for the adjusted operating margin is at least 9.5% for the full year 2020. We anticipate the currency effects on the operating margin for full year 2020 to be relatively neutral. Operating cash flow, excluding any unforeseen events, excluding unusual items, is expected to be above the 2019 level.

Turning the page. To drive towards our financial targets, our 2020 focus is directed to efficiency and productivity. The number of product launches have now stabilized at the new higher level, enabling an increased focus on productivity improvements in 2020. With more than 100 improvement products being evaluated, we have set a high pace towards factory of the future. These products are key drivers to our medium-term targets and for shareholder value creation. We will also continue to — our effort to flawless execution of our new launches, improving customer satisfaction further, and thereby, supporting our new and stronger market position. Unfortunately, there will be millions of traffic accidents in 2020, some fatal, some where people will get injured. Therefore, we will relentlessly continue to innovate and to deliver best quality products that will save more lives.

I will now hand back to Anders.

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Anders Trapp, Autoliv, Inc. – VP of IR [6]

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Thank you, Mikael. Turning the page. This concludes our formal comments for today’s earnings call, and we would like to — now to open up the line for questions. I will now turn it back to Tracy.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from the line of Emmanuel Rosner from Deutsche Bank.

We’ll take the next question and that comes from Hampus Engellau from Handelsbanken.

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division – Automotive Analyst [2]

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3 questions from me. Starting off on the underlying car production. You were talking about 2% to 3%. Is this based on your call-offs? Or is it — how do you come to that compared to IHS given that there is a sharp first half in IHS, and then the recovery in second half? Is — are you seeing a sharper first half or how should we think about that? Second question is…

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

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Yes. I think…

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division – Automotive Analyst [4]

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Okay, take one at a time, sorry.

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

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Okay. No problem. Go ahead, and we can take them all for you.

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division – Automotive Analyst [6]

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Okay. If I — on the order intake, you continue to trend at 50% and I think also you highlighted that this is more broad-based. Does this mean that you’re also breaking into other products? I mean, firstly, it was more frontal airbags and steering wheels that was the result of the collapse of Takata. And I was wondering if this — is it becoming more tough to keep these market shares, i.e., do you feel that you need to do more on pricing? And how should we think of the stickiness? If your assumption for this year is correct, where would you end in terms of market shares, if we had 41% in Q4? Last question is more on the efficiency program, if we should expect them to be more front-end loaded in terms of savings?

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

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Okay. Thank you, Hampus. Starting with the light vehicle production outlook here. I think we do as we always do. I think we’re looking at the external underlying guidance that companies like IHS is giving, of course. Then we build in what we see in terms of our collapse. So you’re correct there. When it comes to the Q1 horizon and the beginning of the year, we have higher level of visibility. So that is being baked into our total outlook. But also, of course, in dialogues with our customers, et cetera, gives more complete picture that builds our own view here for the full year. And with what we see there, in the beginning of the year, we see, as I said, a sharp decline in Q1 here and the challenging first half of the year and then gradually improvement. And I think, of course, you further out you get, the visibility is lower and it’s more of assumptions when you get there done data points. But that’s where we are right now. And I think I would like to stress that with everything that is happening globally here now in terms of geopolitical, and I would say, also the overall business cycle here and adds to the uncertainty here and the potential impact on light vehicle production. So we are 2% to 3% down, but with a high level of uncertainty. And of course, our job here is to follow the development and making sure that we take countermeasures when necessary here.

On the second question here on the order intake, I think we see the same thing as we have seen and see. I mean we are in a very competitive and challenging industry here as Tier 1 supplier into the automotive, and there’s no changes to that. I think in terms of the wins we have here, it is broad-based across the different products, but also across the different customers, main customers we have and medians. So the connection to where Takata-related situation, that is beyond us now, and it’s beyond us since some time back, I would say, and this is — really wins on our own merits across the industry here. How sticky is this? We will see. But I just would like to stress again here that 50% in terms of new order intake share is not a target that we have per se. Our focus here is to protect the market share that we are growing into, and the market share we expect to grow into is the mid-40s, and that is what we are focusing on here.

When it comes to the efficiency programs, I think, of course, when we go into 2020, we have with us what was done in ’19 and the foundation that was done in ’19. But of course, we are continuing on our strategic road map towards our midterm targets. And in that context, it’s still early days. This is year 1, so to speak, in the 3- to 5-year journey towards the around 12% adjusted EBITDA that we have as an — a target in the midterm. So of course, as we get more and more traction on this road map, we will see it also gradually hitting the bottom line here. So in that sense, of course, you will see more you further in we get to the year. And I think also reflects the indication we have given on the quarterly progression here.

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division – Automotive Analyst [8]

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Is it possible also for you to say how big the passive safety market was last year? And how it grew?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [9]

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No, I can’t give you a number on that now. But as you know, we have said that in average, it grows with 1% year-over-year, roughly. And I think without having any confirmation on it, we should expect that to be the case also for ’19.

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Operator [10]

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The next question comes from the line of Mattias Holmberg.

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Mattias Holmberg, DNB Markets, Research Division – Analyst [11]

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Mattias Holmberg at DNB Markets here. At your CMD in November, you guided for 3% to 4% outperformance versus light vehicle production in the medium term. Now with this guidance for 6% outperformance in 2020, just to understand what goes beyond the 2020 then, is this an indication that there should be a drop in your outperformance versus LVP beyond 2020? Or is it rather that the 3% to 4% stated at the CMD were too conservative?

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

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No. I think you should see it really as a continuation on the development that we — I mean we talked in Capital Markets Day in ’17 that we should expect or we should see around 6% outperformance year-over-year up to 2020. And what we have seen here in the past years, I mean ’18, ’19 and now with what we are saying for 2020 is exactly that it’s around 6% in average throughout these 3 years. Then what we said in the Capital Markets Day was, from 2020 to the midterm down 3 to 5 years out. Of course, for us, knowing that — or assuming that the 6% that we’re now talking for 2020 baked in. So it ties together, and there is no change to what we have communicated for a different time period. So the first, what we said, first 3 years from ’17 to ’20, that we are now confirming with the last year in that period, and for the next period, we maintain the 3% to 4% knowing what we have in 2020. So no changes basically.

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Mattias Holmberg, DNB Markets, Research Division – Analyst [13]

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All right. A follow-up on that regarding the market share in the order intake compared to the market share on sales, where there still is a rather large discrepancy. Do you expect these to converge over time? And in that case, how long would that take approximately?

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

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Yes. I think it’s important to see this conversion over a longer time period than just between single years here as there is everything, 18 to 36 months in average from when you take an order, so it goes into production. And of course, if you take a single year, the distribution may look different. You may have some that is more back-end loaded and so on. So that’s why you can’t compare really one year to another. But what we have said here is that our estimation is that we expect within this time frame that we are talking about midterm here to grow — gradually growing into the mid-40s. So we need to see it over a longer period. But this year ’19, we grow with roughly at around 2 percentage points.

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Operator [15]

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Your next question comes from the line of Vijay Rakesh.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division – MD of Americas Research & Senior Semiconductor Analyst [16]

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Just looking at 2020, you mentioned high launch — high number of launches here. Just wondering what the number of launches you are expecting in 2020 versus 2019 and if you could give us some more detail on the launch costs that you expect — the puts and takes in 2020 launch costs versus ’19.

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

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I think when it comes to the number of launches, we have no number to give to you here. But what we have said here is that — and I mean we talked more about the actual number of launches when we did this step change. And the step change is now beyond us — well behind us, and we are now seeing launches on the new higher level, which we then call the new normal, so to speak. And — so we continue to run launches with an — high activity level that we have seen now for the last year. And when it comes to the elevated launch costs that we talked about in 2018, that should gradually go away during 2019 is done. So with the development that we have seen quarter-over-quarter sequentially in ’19, we have delivered on that. So when we go into 2020, we have a normal launch cost level of the launches we are doing. So of course, it’s more launches than it has been historically. But the average cost for a launch is at the historic level. So we are back to where we should be. And we know how to do launches, and that’s where we are at now, where we have adjusted and trimmed the system to the new level of launches.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division – MD of Americas Research & Senior Semiconductor Analyst [18]

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Got it. And on the raw material side, I know you mentioned costs going up. How much — what’s the expectation for 2020 material costs and how much was in 2019?

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

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Yes. In 2019, we saw an headwind of roughly 60 basis points between ’18 and ’19. And the headwind was gradually coming down towards the end of the year. For 2020, we see — I would say, yes, you can say tailwind, but marginal tailwind. So more of a flattish positive development here. So no significant tailwind from raw materials in 2020 according to our expectations here. And as you know, there is delays in how it comes through also. So therefore, we don’t see any major tailwind from raw materials in 2020.

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Operator [20]

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The next question comes from the line of Brian Johnson.

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Jason Flynn Stuhldreher, Barclays Bank PLC, Research Division – Research Analyst [21]

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This is Jason Stuhldreher on for Brian. First question, just on the margin guidance, the at least 9.5%. Question is, what factors could allow your full year margin to be higher than that? Asked differently, why not just guide to around 9.5%, why say at least 9.5%?

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

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Yes. I mean, as always, when you do guidance like this, it is based on the — to our best knowledge, how to deliver, and this is what we see in our projections here under the set of parameters that we have talked about here. So that is to — the best of our knowledge guidance. And yes, so I think that’s where we are.

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Jason Flynn Stuhldreher, Barclays Bank PLC, Research Division – Research Analyst [23]

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Okay. But we shouldn’t assume that 9.5% assumes the bottom half — or the bottom part of the growth range?

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

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Maybe you can clarify, growth range. You mean the margin expansion or…

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Jason Flynn Stuhldreher, Barclays Bank PLC, Research Division – Research Analyst [25]

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Within the 3% to 4%. I guess I can follow up on that after, but that’s helpful color. Just — and then final question. I was wondering if you could — as it related to your order win rates, I was wondering if you could remind us of where your market share is by region right now and where maybe the highest delta is between where your order rates are per region versus where your current market share is per region.

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

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Yes. We don’t disclose it per region or in that granularity here. But what we have said here is that we see that we are gaining market shares in the 3 dimensions that we talked about here. And I think we have said — showed you before relative progression in the different regions and so on, but not in exact numbers. So what you saw on the Capital Markets Day is basically what is coming through here in the numbers we have talked about here. So you can look at that progression there.

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Operator [27]

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Next question comes from the line of Erik Golrang.

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Erik Pettersson-Golrang, SEB, Research Division – Head of Research for Sweden [28]

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2 questions from me. The — you have a slide, I think, it’s Slide 19 where you showed that — the 2020 tailwinds, I guess, on the margin side. And I’m just wondering if that is some kind of order of relevance? And also wondering why the absence of the Mexico and rest isn’t on that list? And if you could perhaps also on the other side of that, perhaps quantify a few of the major headwinds, perhaps particularly the drag from inflator replacement sales coming down and the increase in depreciation and amortization? And then the second question, just looking at your overall volume development, both for the full year 2019 and the fourth quarter, it’s quite close to the organic growth you reported, implying that price mix is more or less 0. Is that a result of pricing being better or positive mix primarily?

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

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I think in terms of tailwinds and headwinds, I think you see on the slide, there is the bigger tickets here. And as always, when you have the year-over-year improvement, there is a large number of contributing factors to the development here. And of course, Matamoros is one that we expect not to have this year, but is probably then being met by other headwinds that we see in other areas. So this is more of a net effect picture here. But what you can say here is, of course, that — I mean we have done, and we are doing then the structural efficiency program that is contributing to the overall operational challenges. With the light vehicle production, we will see the same portfolio mix headwind we have. So that’s an important component into this. We have also highlighted here the inflator replacement sales. And what we see then as tailwind is very much of all the efforts that we are doing to manage the business cycle, together with the strategic road maps here. So without going into any specific details here, I already alluded to the raw materials here that we see small positive effects from. But other than that, I would say that it’s many different components adding up to the totality here.

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Erik Pettersson-Golrang, SEB, Research Division – Head of Research for Sweden [30]

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Okay. And on the organic growth in Q4 ’19 versus the volume development, the delta, they are quite limited. What — is that priced or pricing better or mix sets offsetting continued negative pricing?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [31]

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No. I think — I mean we are not seeing any — what we are talking about here is, I mean, of course, the mix comes into it as — when we look at our forecast for the year, we’re looking at the underlying LVP development in different countries together with our own outperformance in respective regions. But you shouldn’t read anything into it when it comes to price development or anything like that.

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Erik Pettersson-Golrang, SEB, Research Division – Head of Research for Sweden [32]

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Okay. And then just 1 final question. If I really look at the sort of absolute levels of order intake, to what an extent was 2018 really an extreme year for in terms of industry awards for the market? And to what extent do you feel that 2019 was perhaps a bit of a hangover from that and perhaps a bit lower relative to the sort of the long-term trend?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [33]

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I think, in general, in — the business dynamics between the different years varies depending on how the customers’ renewal or updates of their product — car models looks like. So that is not evenly spread, of course. Then another factor that you have when you look at the lifetime here also is the light vehicle production volumes assumptions that is at the respective year. So of course, if you are in a year where you are at the high level and you don’t expect to see any dramatic drops or dramatic increases, you have a certain level and then you move forward and then, of course, the market development comes into play, which also affects the numbers. So there is assumptions built into it based on the light vehicle production outlook, which affects the numbers also. And then, of course, the expected lifetime of the particular model. So there is many factors going into it. But I think — but the key is that — the key is, of course, that when we look at this, the 50% is 50% of available RFQs.

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Operator [34]

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The next question comes from the line of Sascha Gommel.

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Sascha Sebastian Gommel, Jefferies LLC, Research Division – Equity Analyst [35]

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The first one would actually be on your working capital, if there was anything particularly in Q4 that you want to highlight? And then more specifically around receivables, we heard other suppliers indicating that OEMs are paying late at the end of ’19. Do you see similar development? And then maybe you can also just remind us on your level of factoring at the end of 2019? And then my second question. On your leverage ratio, you say you’re within range by the end of 2020. So I was wondering if that implies we could expect share buybacks to start in ’21.

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Christian Hanke, Autoliv, Inc. – Interim CFO, VP & Corporate Controller [36]

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Sascha, it’s Christian here. Yes. So in terms of working capital, I mean I don’t think there’s anything in particular in the quarter per se. But I think if you have followed our operating working capital and the ratio to sales, it has improved quite a bit since last year. So I think it’s a continuous improvement and focus that we have in that area. We don’t really see anything on the DSO side, day sales outstanding. I think it’s slightly improved in the fourth quarter compared to where we were before. And in terms of factoring, it’s on the same level as we closed the year last year. So that’s on the factoring side.

Now in terms of buybacks, I mean that’s obviously not anything that we forecast or indicate to the market when we would do. So I mean it’s more in terms of — the focus is on the leverage ratio to get within the range. And then we will make any decisions based on where we are at that point in time considering our cash flow performance, future cash flow performance and the market. So it’s not so much more that I can say to that, Sascha.

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Operator [37]

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The next question comes from the line of Erik Paulsson.

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Erik Paulsson, Pareto Securities, Research Division – Analyst [38]

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I have — first one is on quarterly seasonality. You talked about that you expect the seasonality in 2020 to be more pronounced than in 2019. Is this due to your own call-offs or is it more of the underlying market, hence, is your own call-offs and your own organic growth in that sense more extreme?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [39]

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No. I think you could contribute it to actually both factors. What we see in terms of call-offs is indicating clearly a very challenging Q1 and the beginning of the year. Then, of course, you have natural seasonal — I mean, seasonality. You know that in the end of the year, we also have the engineering income more pronounced in the fourth quarter and so forth. So — and maybe I should add also the outperformance there actually as well because we see that also coming much more towards the end of the year here in terms of our own launches, as you said.

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Erik Paulsson, Pareto Securities, Research Division – Analyst [40]

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And my final one is on the coronavirus. You mentioned it here earlier. But if this actually accelerates, what can actual impact be for you? What do you take in precautious like necessary — what you do here to prevent things happening?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [41]

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As I think, it’s, first of all, too early to draw any conclusions of where that may end up from a business perspective at this point in time. I mean we are currently actually in the Chinese New Year break still. Then we know that many regions or cities have talked about prolonging their time off in terms of quarantine time. But first of all, we are following this by the hour, basically, first of all, by our local Chinese management team, but also on a global level to make sure that we are following all recommendations and suggestions from authorities and likewise, first and foremost, to make sure that we protect our employees here. So the traveling banned and restrictions on that both in the regions affected, but also in a more broader Chinese context looking after that. We do not have our own facilities within the area that is in the focus right now. But of course, we have customers and some suppliers here. And we are following it very, very closely to make sure that we manage it in the best possible way here and do some scenario planning, et cetera, et cetera, here. So of course, if it continues, we will definitely add to the uncertainty and the challenges here. But as of today, too early to draw any conclusions on it.

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Operator [42]

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The next question comes from the line of Sabrina Reeh.

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Sabrina Reeh, UBS Investment Bank, Research Division – Analyst [43]

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I have 2. So the first question is actually going back to another question a colleague asked. So just on your 2020 EBIT margin guidance. Would it be correct to assume that the 9.5% can be achieved at a 3% organic growth that you guide for and a light vehicle production of minus 3%? Or is the 9.5% margin achieved if light vehicle production ends up being even below minus 3%? That would be my first. And the second one would be on, you mentioned in your presentation, CO2 impact and — specifically in Europe. Do you see an increased risk that OEMs will put more pricing pressure on suppliers depending on the market acceptance for EVs? And how much of that risk, if at all, is baked into your guidance?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [44]

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I think first question there is that the guidance we have put out here of at least 9.5% is with the indication of the light vehicle production going down with 2% to 3%. Will it be more than — more pronounced decline? Then it’s a different scenario. Will it be much better? It’s at least as we said here. So that’s really the foundation for our guidance in totality. So you should see each of the lines together there in the guidance we have given there.

And when it comes then to the pricing pressure, I think there is always pricing pressure from our customers with high expectations on year-over-year productivity. And we don’t see any difference now. And of course, I can’t say that I see something directed towards us specifically related to electrical vehicle. It’s more dependent on how the different OEMs are acting and having the challenges all together. So it needs to be seen more case by case and in a broader business context in our relationship with the customer, but for sure, a challenging discussion all the time around pricing for sure.

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Operator [45]

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The next question comes from the line of Agnieszka Vilela.

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Agnieszka Vilela, Nordea Markets, Research Division – Research Analyst [46]

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My first question is about your guidance for a 6 percentage point outperformance against the car market in 2020 and that’s despite the headwind that you have from the inflator replacement business. Can you tell us about the kind of profile through the year? You mentioned that you expect higher outperformance towards the end of the year. And also what are the main driving regions? And then additionally, on the inflator replacement business, what is your view on the most recent recall of the inflators made by Takata?

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

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I think in terms of the — I mean we don’t give exact — I mean we don’t give a guidance here by quarter. But as we said here is that, I mean, it’s really a question of gradually increasing the outperformance and the challenging first quarter all together, both when it comes to LVP and our own outperformance. So I think that is for us I can say when it comes to the quarterly progression there.

When it comes to the recalls that has been announced around Takata, I’ve actually nothing more to add than what is already out there. And I don’t see that any of these — or expect any of these recalls to have any significant impact on us. So it’s more outside our areas of speak and scope.

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Agnieszka Vilela, Nordea Markets, Research Division – Research Analyst [48]

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Okay. And any color on the regions?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [49]

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In terms of…

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Agnieszka Vilela, Nordea Markets, Research Division – Research Analyst [50]

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In terms of outperformance in 2020? What will be the main driver?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [51]

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Yes. I think, as I said before, we don’t go into regional details there. But what we’re saying is that it’s maybe less of an outperformance in Americas this year as they are through their step change that we saw last year at least for now. So in terms of outperformance, it’s really a question of Asia. And there, we have talked before about Japan being late in the outperformance and has started to come through now in the fourth quarter, and that is what you will see going into 2020. So Japan catching up with the rest of the regions here. Then we will see China also being on very healthy levels in terms of outperformance. And then also Europe, but not as strong as Asia and China, but still above Americas.

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Agnieszka Vilela, Nordea Markets, Research Division – Research Analyst [52]

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Perfect. And then my last question is on CapEx. Why are you guiding for lower CapEx in 2020 despite the investments that you mentioned in your factories? And also kind of how significant this decrease year-on-year could be in CapEx?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [53]

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No. First of all, I mean, we support our overall efficiency improvements here to make sure that we scrutinize all our activities, including the CapEx. And what we have said here is that the investments in factory of futures should be done to a very large extent within the frame of the regular CapEx here. And as you’ve seen here, with more flexible tools, et cetera, we also have longer periods of usage for this machine and that can cover broader range of programs as well. So we should see some efficiencies coming through in the CapEx as well here. So that’s clearly our ambition here and also as a part, of course, of our cash flow focus here.

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Operator [54]

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And your final question today comes from the line of Ashik Kurian.

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Ashik Kurian, Exane BNP Paribas, Research Division – Analyst [55]

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Just have 1 question left as to why you’re still winning 50% of the market share on orders? And I don’t mean to be cynical, but at least on the seatbelt side, you would have thought that at some point, cases should start to get some of the orders back given that it’s slightly less controversial than awarding maybe contracts for airbags. So — yes, maybe just keen to get your thoughts as to why you’re saying in the industry landscape that you’re still winning more than 50% of the order intake?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [56]

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Yes. I think — I mean, first of all, we are very focused on making sure that we deliver superior quality. That is on top of our agenda in terms of our customer commitment. Together with making sure that we are a supplier that is — have high or flawless delivery, both in the daily production, but also very importantly, in the development projects, because all of these programs is, at least, requiring very close collaboration with the OEMs when it comes to tuning our products into the respective car model and, of course, making sure that we have the top competence and commitment in delivering that, and last but not least, being price competitive. So it’s really making sure that we are the best choice from these 3 categories, and that is our focus on securing customer expectations on us.

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Ashik Kurian, Exane BNP Paribas, Research Division – Analyst [57]

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So if I can follow, I mean, the reason I’m asking is, you still stick with your view that you continue to defend the 42% to 45% market share. That’s your eventual target in terms of what your order market share is. So at some point, you do expect orders — or the market share and orders to go back to maybe mid-40s. I’m just wondering, in your view, when and how does this flip happen? When does the order momentum and what causes it to go towards the 45%?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [58]

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Yes. I think, I mean I can only reemphasize our focus on customer commitment here. And we, of course, think that it’s important to be a very strong supplier to our OEMs. And when we say that our focus is to defend our market share is that we think that there is no reason why we shouldn’t have any other ambition. If it becomes more, it’s great. But I think growth in that sense is not a top priority. We will get the market share that we earned by being the strongest supplier, and we’ll see what it is.

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Operator [59]

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That was our final question, sir. I’d like to hand back to yourself.

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [60]

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Thank you, Tracy. Before we end today’s call, I would like to say that we will continue to execute on our growing business volumes and new opportunities with a never-ending focus on quality and operational excellence. I would also like to take this opportunity to thank Christian for his great contribution during his time at Autoliv and wish him well on his next adventure. Our first quarter earnings call is scheduled for Friday, April 24, 2020. Thank you, everyone, for participating on today’s call. We sincerely appreciate your continued interest in Autoliv. Until next time, goodbye for now.

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Operator [61]

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Thank you. Ladies and gentlemen, that does conclude your call for today. Thank you all for participating, and you may now disconnect.