Oct 25, 2007
Executives
Jan Carlson - President and Chief ExecutiveOfficer Magnus Lindquist – Vice President and ChiefFinancial Officer Mats Ödman - Vice President of CorporateCommunications Benoît Marsaud - Chief Operating Officer, VicePresident Manufacturing, President Autoliv Europe
Analysts
Himanshu Patel – J.P. Morgan Anders Trapp - SEB Enskilda Thomas Besson - Merrill Lynch Analyst for Rod Lache - Banc of America Securities Analyst for Jairam Nathan - Banc of America Securities Anders Bruzelius - Swedbank Markets
Presentation
Operator
Goodafternoon, ladies and gentlemen, and welcome to the Autoliv third quarter 2007 resultsconference call hosted by Mr. Jan Carlson, President and CEO.
(Operator Instructions) I will nowhand you over to your host, Jan Carlson, to begin today's conference call.
Jan Carlson
Welcome all ofyou to this presentation of the third quarter results for Autoliv. Here in Stockholm, we have our Chief Financial Officer, MagnusLindquist, our VP of Corporate Communications, Mats Ödman, and our ChiefOperating Officer, Benoît Marsaud, and me, Jan Carlson, Chief ExecutiveOfficer.
We intend torun this call as we normally do, starting with a presentation where we willprovide an overview of the quarter and outlook for the remainder of the year.After that, we will open up for questions, which we will try to do our verybest to answer. As usual, youcan find the slides for this presentation available through a link on the frontpage of our corporate website.
If we now turn to the next page, we will findthe Safe Harbor statement. And as you know, this is an integrated part of thepresentation, and we will not go through the details at this time.
Going throughthe next page, we have a summary for the quarter ending September 30th. We werepleased with the outcome for the quarter.
It seems we have a third quarterrecord for sales, EBIT and for the operating cash flow. The sales of$156 billion was an improvement of more than 10% over last year.
The EBIT of$110 million was 8% better than quarter 3 2006. This EBIT improvement ispartially a reflection of our margin recovery programs, as I have described before.In addition, we are happy to say that we had an increase in the earnings pershare of 19% to $0.81 a share on a comparable basis.
Our strong operating cashflow performance of $148 million represented an increase of 45%. And last, butnot least, we stepped up the pace of our share repurchase program during thequarter to 2.9 million shares, returning $160 million to the shareholders.
Allin all, we think this was a very good quarter for Autoliv. Moving now to slidefour, we find some of the key business highlights for the quarter.
All of theseinitiatives will help us maintain organic growth and improve the profitabilityin the future. If we startfrom the top of the slide, you find the NHTSA, which is the National HighwayTraffic Safety Administration in the U.S., have finally approved the long-awaited new sideimpact test regulation.
We have increased our presence in the local countriesby closing a seatbelt facility in the United States, and we have built our fifth plant in Mexico. Additionally, we have increased our presence tosupport the Japanese OEMs by expanding to a state-of-the-art tech center in Japan.
Furthermore, we have made a joint venture in China now, a wholly owned subsidiary. Moving to thenext page, we have our sales trend.
In quarter 3, our sales increased $140million, or 10%. 4% was related to a translation effect on U.S.
currencies, and the remaining 6%, or $83 million,was a result of strong organic sales. This organic growth was much better thanexpected and was mainly driven by the Western European vehicle production.
If we turn tothe products and look at airbag products, they increased organically by 4%, or$40 million. This is mostly driven by the increase in sales for our sidesystems and safety electronics.
If we look at theseatbelt products, they increased organically 9%, or $43 million, primarilydriven by an increase for pretensioners, and that is including the activeseatbelts. Geographically,all regions grew organically, but the fastest growth was in Japan and the Rest of the World.
As an example,seatbelts in Japan continued to show organic growth of 28% versusprior year. The sales forthe last 12 months is standing up now to $6.6 billion, and that is up 9% fromquarter 3 last year.
Looking to thenext page, we have the light vehicle production and these figures come as usualfrom CSM and J.D. Power.
In North America, domestic OEMsare down by almost 1% and therefore, not as good as originally expected. Thenew domestics continue to perform well, and we're up close to 13%.
Within Europe, as expected, we see a strong performance in Eastern Europe, around 20%. Western Europe was a pleasant surprise, coming in around 4%better than prior year and it was 4% better also than expected.
Looking to Japan, there is a decline of slightly more than 1%. Finally,we have the Rest of the World, where there is an increase of close to 16%, andthat is mainly driven by China, Korea and South America.China, itself, grew 23% for the quarter.
Moving to pageseven, we have the Autoliv production figures for the quarter, as compared toprior year. Seatbelt products continued to show strong growth on the Mercedes C-and E-class, as well as new platforms; here, we can mention Nanjing Auto andChery.
Pretensioners, in total, are up 9%. For front airbags, volume growthresumed for the first time in several quarters, and that is despite expirationof certain contracts.
The strong trend with side airbags continues, especiallyin North America due to increased penetration rates of side headcurtains. Steering wheels and safety electronic volumes continued to show anincrease year-over-year, and we believe that we are growing in line with themarket in all the product areas.
On the nextpage, we find our total organic growth versus light vehicle production. Ashighlighted last quarter, we now use global light vehicle production instead ofthe Triad, and that is due to data from rest of world becoming more reliable.
Starting withthe red line, which represents the change in global light vehicle productionquarter-over-quarter, there is an estimated increase of 7.8% compared to our organicgrowth of 5.9%. The difference here is primarily due to the faster growingregions, like Rest of the World and Eastern Europe,which have a significantly lower safety content per vehicle than the globalaverage of around $260.
For the first nine months of the year, the Autolivorganic growth is up 4%. Turning thepage, we conclude our sales analysis with a bridge versus prior year.
Here wesee a positive translation effect on the U.S. currency that added close to $63 million or 4%.Seatbelts, side curtain and chest airbags added close to $82 million combined,and that represented more than 50% of the sales improvement for the quarter.
In addition,safety electronics and steering wheels combined provided another $27 millionuplift in sales. Frontal airbags and other sales were down $16 million and $10million, respectively, and that is versus last year despite the positive volumeeffect.
Moving to thenext slide, we have an EBIT bridge for the quarter versus prior year. Here, wehave separated the currency effect, so that you can see an underlyingdifference.
During quarter 3, we have been able to improve EBIT by $23 milliondue to the strong sales and cost reduction efforts. In addition,we have R,D&E and currency translation effect that has improved theprofitability by $5 million and $3 million, respectively.
And this aggregateimprovement of $31 million was partially offset by a negative headwind effects,as we have talked about, from Asian startups. In addition to the startups, wehave commodity pricing, we have distressed suppliers and some other, which ismainly restructuring of close to $23 million combined.
Onto the nextslide, we have the main commodities that influence our products. As wecommented in July and also at the Capital Market Day, the negative commodityimpact for quarter 3 is close to $3 million, and that is primarily driven, asexpected, by zinc and steel.
For quarter 4, we expect the total incrementaleffect to be approximately $2 million, and bringing the full year effect to $20million. All in all, we can say the negative incremental effect seems to besubsiding gradually during 2007.
However, we are cautious when we look into 2008, in particular with steel. Going to thenext slide, we have our headcount performance.
At the end of quarter 3, totalheadcount for the group is down 360 people. This decrease is primarily drivenby reduction of 639 persons in high-cost countries.
Of our headcount, 49% arenow in low-cost countries versus 46% a year ago. For the first nine months ofthis year, we have already reduced headcount in high-cost countries by morethan 1,000 persons.
Looking at thenext page, we have combined gross and EBIT margins on to the same slide. Thegross margin for the quarter is down to 19.4% versus prior year of 19.7%, andthis slight decline is mainly due to higher material costs and distressedsuppliers, as we have discussed earlier and throughout the year.
The reportedEBIT margin of 7.1% was slightly ahead of the guidance of 7%, and this resultincludes other operating expenses of $10 million, which primarily relates tothe restructuring as equivalent to 0.7% of sales. This increase in otherexpenses is a reflection of a step up in restructuring activities in an ongoingeffort to improve the margins.
Turning thepage, we find the key figures. Looking first at the earnings per share, the 19%improvement, or $0.13 on a comparable basis, is partially due to a sharerepurchase of $0.06 and a translation effect of $0.05 a share.
We have alreadyapproved the dividend for quarter 4 of $0.39 a share. Going furtherdown, we have return on equity that improved 1% to 10.6% on a comparable basis,and represents the second highest level for a third quarter.
Further on toworking capital, we are pleased to be back close to our goal of less than 10%of sales. Both receivables and inventories contributed to this improvement.
Ournet debt to capitalization increased to 32% from 28% a year ago, mainly as aresult of the accelerated pace in our repurchase program. Turning thepage again, we have cash flow.
And the cash flow statement here, we can see ourstrong free cash flow performance continues. This is best illustrated lookinginto the last 12 months cash flow of $398 million after CapEx; that is a recordfor any 12 months period.
This also represents close to a 6% return on the last12 months sales. Turning thepage again, we find the share buybacks.
In quarter 3, we bought back almost 2.9million shares and returned $160 million to our shareholders, as we saidbefore. This brings year-to-date buyback to $257 million, or 4.5 millionshares.
The cost of that 28.5 million share repurchase, to date, is close to$1.2 billion, while the market price today exceeds $1.8 billion at the currentstock price. There is roughly 1.5 million shares outstanding in the remainingauthorization.
Onto the nextpage, we have return to shareholders, and this combines dividends and sharebuybacks. For the last 12 months, we have reached close to 9.5% in relation toAutoliv's market capitalization.
Included in the last 12 months, $121 millionwas related to dividends while the share repurchase were $323 million, or intotal, $444 million. Turning thepage again.
We first have the global light vehicle production, as forecasted byCSM and J.D. Power.
Looking specifically at quarter 4 2007, it is expected thatglobal light vehicle production will increase 5.6% from 2006, whereas the Triadis expected to increase to 2.8%. Moving intosome further detail for quarter 4 on the next page.
We can see that thisincrease is mainly being driven by the increases in Rest of the World of 12%,and Eastern Europe 20%, while North America and Western Europe,where Autoliv has most of its sales, are expected to be down and flatrespectively, or 1% combined. Both North America and Western Europeare worse than anticipated back in July.
Compared to the current outlook, thereis a negative swing of close to 2%. This trend also carries into 2008, where wehave a negative swing of more than 1%.
To conclude here, we see signs of aweaker market as compared to July, in particular in North America. On the nextslide, we have the Autoliv outlook.
And for quarter 4, we expect to increaseour organic sales by more than 2% and given the current exchange rate,consolidated sales increase of approximately 8%. This more than 2% in organicsales may seem low, but light vehicle production in North America and inWestern Europe, where we generate more than 70% of our sales, is expected todecline close to 1% combined, as we said before.
Consequently, we are almost 3%better with this guidance than our most important markets. For EBITmargin, we expect quarter 4 to exceed 9%.
For the full year, we now estimateorganic sales to grow by close to 4%, while full year EBIT margins is expectedto be close to 8% underlying, and GAAP reported to be close to 7.5%, includingthe legal provision. To sum up,during quarter 3, we have reported record sales, EBIT and operating cash flow.We have accelerated our returns to shareholders, while the financial outlookremains positive.
Moving on tothe next slide and we conclude our presentation. We thank you all for listeningand we are ready to take your questions.
As said, we will try to do our verybest to answer them.
Operator
(OperatorInstructions) The first question coming through from Himanshu Patel - J.P. Morgan.
HimanshuPatel - J.P. Morgan
The pace ofrestructuring activity seems to have stepped up and it looks like R&Dspending levels have come back a little bit as a percentage of sales. Should wethink of this trend in both of those buckets continuing into 2008?
Jan Carlson
If I startwith the restructuring a little bit, Magnus can take it further on on theR&D. We are seeing restructuring activities as a tool for improving ouroperating margin.
And we will come back to this for 2008, in the next earnings call, on the level of it. I think for quarter4 you should expect around $5 million in restructuring costs and that is as faras we can talk about it today.
But there are restructuring activities that wewill see going forward, but the level, we will come back to.
MagnusLindquist
And comingback to research, development and engineering experiences, as you saw in lastyear close to 6.4% of sales and partly due to we had a lot of productinnovations in our safety electronics business and a number of launches. As weare now partly through that and we also stepped up the sales, we can see thatthe ordinary relations to sales will gradually to go down.
For this year, itwill be slightly below the 6.4% as we were at last year.
HimanshuPatel - J.P. Morgan
Magnus, do youthink that because many of the new product launches are behind you, the rate ofR&D spending should moderate even beyond the fourth quarter?
MagnusLindquist
I would saythat, we can talk maybe in the range of 6% to 6.5%. We have previously beentalking about 6.5% and it could potentially be a little bit below that.
HimanshuPatel - J.P. Morgan
Okay, that'shelpful. And then, if I go to slide 10, thank you for that bridge on EBIT.
Isthere any way to break down the $22 million contribution between sales and costreduction? How much was each of those components?
MagnusLindquist
Yes, it is.But we don't disclose it. It's actually a combination, I would say, a lot ofcost reduction, both when it comes to as you see that the research, developmentand engineering is down.
But also, in the operating expenses, we have improvedefficiency. And as Jansaid, we have laid off a number of people during the third quarter, and that, ofcourse, has some positive impact on the cost side.
Jan Carlson
You could say,all in all, we have talked about starting action programs on the margin andefficiency and different type of activities. You see the results, always,partly here.
You see it also, a part of this, in the R&D programs, where weare focusing our projects and our efforts to the most important things thatwill have effect on our company.
HimanshuPatel - J.P. Morgan
My broaderquestion on this chart was, you saw $22 million profit contribution from salesand cost reduction combined and it looks like your organic revenue growth wasabout $84 or $85 million in the quarter. That sort ofimplies 26% contribution margin for every dollar of revenue, and that's apretty impressive level.
Is that a rate we should think about going forward orwas there something in the rate of cost cutting this quarter that inflated thatratio for Q3?
MagnusLindquist
It's nothingparticular that inflates the ratio in the third quarter. But, of course, as youhave seen in previous quarters, it could go up and down, depending on what kindof activities we have ongoing, and also how they are executed.
But, what youalso will see, as Jan said earlier, that these cost improvements will continueto generate profit increases also in the fourth quarter.
HimanshuPatel - J.P. Morgan
Okay, and thenone last question, Magnus. As more and more of the footprint moves to low-costcountries, do you see the working capital lines becoming more and morestretched, just in terms of your shipping goods all across the world now?
Shouldwe think of very low levels of further working capital improvement potentialover the next year or so?
MagnusLindquist
As Jan alsosaid before here, that we are pretty proud with the level of the workingcapital in relation to sales because, if you remember some quarters ago, wewere actually much above, and we said that we are striving to take it down tobelow 10%. But, duringthese pretty tough days with some customers having financial problems and alsosuppliers that have been distressed during a number of quarters, we don'tforesee any significant improvements.
But, we are very happy with the level weare at.
Operator
Our nextquestion comes from the line Anders Trapp - SEB Enskilda.
AndersTrapp - SEB Enskilda
I have twoquestions. First of all, if you could elaborate a little bit more about whatyou said in your comment about raw materials going into 2008, and you're nowcautious at least for steel, what you see there and why you say that?
And I seem toremember from the Capital Market Day that you were sort of optimistic on 2008,overall, with the margin potential, partially because you saw raw materialsbeing less of an issue next year. There were, of course, other reasons, aswell.
But, if you could comment upon if this has changed in any way? Also, you areforecasting a pretty impressive EBIT margin improvement in the fourth quarter,sort of like a trend shift, I would say.
I guess, it's very much because of thecost saving part of your EBIT which will maybe improve in that quarter, or isit something else really that's behind this impressive margin expansion thatyou're expecting? And also, whatare the reasons why that should continue or not continue into 2008?
Jan Carlson
If we startwith the raw material prices, as I said, we are cautious for steel. I think ifyou look onto the non-ferrous metal--zinc and aluminum--we believe based on ourinformation that they should be basically on the same level, as we are today,not dramatically improved or decreased, so, basically on the same level.
You shouldremember it's still a fairly high level, though, but there's not any majorchanges we see going forward. So, this statement remains from the CapitalMarket Day.
We have started to see signs that steel is going to increase, orcould increase during 2008. So, I thinkthere is the difference and therefore, we say that we are more cautious aboutthe steel thing.
And that is probably something that we see now coming on theraw material side.
AndersTrapp - SEB Enskilda
Could youremind us about your relative exposure to steel versus the non-ferrous metals?
Jan Carlson
We are buyingsteel for about $400 million, a little bit more than $400 million in steel. AndMats, you have the non-ferrous metals, probably?
Mats Ödman
I don't recallit.
Jan Carlson
I don't recallit, actually. We have to come to you with that one.
But, definitely the highestexposure we have is on the steel price. So, we are seeing that might go up herein 2008.
Coming back toyour second part of the question, the margin improvement in the fourth quarterand we are guiding for exceeding 9%, I think, it's a couple of things there wehave seasonal effect that is taking place; we have engineering income that iscoming down due to that many of the products we have with our customers arecompleted by the end of the year and, therefore, the payment and the results iscoming in on the fourth quarter. So theseasonal effect that is coming there, we are seeing actions from ourinitiatives in cost cutting that is giving the margin improvement.
I think thatare the main things that is generating results. We have also taking out, as wehave mentioned, 600 people in high cost countries, which, of course, is alsogenerating effects.
We have closed a plant in the United States, and we are moving to low cost countries, whichis also generating effect. Looking into2008, there if that's what you want to a have a hint of, the same hint you willhave that you had before, we are striving for the 8% to 9% operating margin.And I will tell you more in the next conference call how 2008 will look like.
AndersTrapp- SEB Enskilda
All right, verygood. On the cost cutting, on the 600 people taken off in Q3, I assume that theimpact in Q4 will be greater than it was in Q3 from that action.
Jan Carlson
Yes,absolutely.
Operator
Our nextquestion comes from the line of Thomas Besson - Merrill Lynch.
ThomasBesson - Merrill Lynch
I have a fewquestions. Could you give us an indication of what your trend in gross marginin the fourth quarter?
Because you've just been through four positive quartersin terms of organic growth but, curiously, four quarters where gross margin hasdropped quite strongly. And can youelaborate on why your gross margin dropped so much in the third quarter despitesignificantly positive product mix improvement on the labor cost side, and notsuch a strong impact of raw materials and supplier disruption?
The secondquestion, is could you update us on cash returns versus acquisitions? I mean,you've clearly expressed, I think, in Frankfurt andbefore that you were a bit more open to possibly acquire a business toreinforce growth after the year.
Where shouldwe see you in the next 6 to 12 months? Basically, should we expect you toremain at some kind of buyback or dividend increased pace, or should we expectyou rather to refocus more on external growth?
Thank you.
Jan Carlson
If we startwith the first question, gross margin and elaboration on the fourth quarter, wedon't comment really on the fair gross margin as such. So, I'm afraid that youhave to bear with us until we come to the next earnings call to know more aboutthe fourth quarter gross margin.
And I'm very sorry, but that's how we dealwith it. If you lookon, as you commented about, the significant drop.
I'm not sure it's such asignificant drop. It is, of course, a drop from 19.7 to 19.4.
And of course,the main reason here is the material costs, and it is the distressed suppliers.And all in all, in total, we have around $6 million related to the raw materialand related to the distressed suppliers. And goingfurther into your second question about growth and the handling of cash, wehave communicated and we are looking for acquisitions to expand and to targetfurther expansion in the emerging markets, primarily, also somewhat, if wecould, in Japan as we have a lot of fast growing OEMs.
We aretargeting and looking for acquisitions in the area of technology and in thearea of active safety. However, these assets are not always easy to find.
Iwould rather say they are quite difficult to find, actually to find the rightassets. And in absenceof that, we are returning money to our shareholders through our repurchaseprogram.
And looking more into what that would mean for fourth quarter, we willhave to wait until Monday. Generally, you could say that Autoliv is and will bea very shareholder friendly company and will return money to shareholders if weare not investing in other areas.
ThomasBesson - Merrill Lynch
Can I followup just on the gross margin question because you don't really reply to myquestions? You say effectively that such a deep margin decline is not muchgiven the given the $6 million raw materials and distressed suppliers, but youdon't speak about operating leverage.
And 6% organic growth, obviously, shouldbring you something. And you've laid off 600 people in high cost countries, sothat comes in the same basket.
So, what else is there to explain the margindecline at the gross margin level?
MagnusLindquist
As Jan said,that more of the explanation is due to the raw materials and distressedsuppliers. That's 40 basis points, or 0.4%.
But, then, on top of that, as alsostated in the earnings release, is that we have a higher growth on softerproducts that have a higher material content, like seatbelt products, activeseatbelts, and safety electronics. And of course, that has some impact on thegross margin and such.
But, it has not a negative impact on the EBIT margin bythe same percent. It's still a profitable business.
ThomasBesson - Merrill Lynch
I still have amuch difficult to still understand why you had the rising gross margins whenyour organic growth was negative and when it's been declining since you havepositive organic growth. But, maybe I'm missing something.
Thank you very much.
Operator
Rod Lache -Deutsche Bank
Analyst forRod Lache - Banc of America Securities
I have twoquick ones. With respect to SG&A expense as a percentage of sales, giventhat the levels have been helped by your move of certain operations to low-costcountries, can these SG&A levels be sustained further for the long-term?
MagnusLindquist
Yes. Well,what we have said that we have increasing SG&A levels in relation to salesdue to, as you indicated, the expansions into low-cost countries, but alsoexpansion into safety electronics.
And we expect that as we have had thestartups in China, India and so on, we expect that the SG&A relationto sales should gradually go down.
Analyst forRod Lache - Banc of America Securities
The secondquestion is can you give us an idea of what costs incurred in 2007 will benon-recurring to 2008?
MagnusLindquist
Yes. First ofall, I don't know what you mean.
We don't have a non-recurring cost. We, haverestructuring charges mainly then severance as we have as other expense.
Andthen, we have, of course, the legal provision as another expense. And I wouldsay that the legal provision, for sure, will not come at one time.
Restructuringcharges, that will, of course, vary from quarter-to-quarter and fromyear-to-year. But, normally, when we make this kind of restructurings, we havea very quick payback on those.
Operator
JairamNathan
Analyst forJairam Nathan - Banc of America Securities
I just had acouple of questions. One, CapEx for the quarter was lower sequentially onyear-over-year.
MagnusLindquist
Yes.
Analyst forJairam Nathan - Banc of America Securities
Should weexpect a pickup in the fourth quarter?
MagnusLindquist
We have saidthat we believe that the capital expenditures for the full year will be around$325 million U.S. Initially, in the beginning of the year, we guided between $325million to $350 million.
And when we were at the Capital Market Day, we said itwill be on the lower part of that range.
Analyst forJairam Nathan - Banc of America Securities
Okay. And thenyou said earlier in the year that the China startup cost would be about $25 million, if I amadding right.
MagnusLindquist
Yes, right.
Analyst forJairam Nathan - Banc of America Securities
It sounds likethere’s about maybe $9 million left. So, it looks that will bleed into 2008 atthis point, at your current rate?
Jan Carlson
We believethat startup cost will reach almost $25 million, somewhat lower maybe than $25million. So, maybe more in the range of $22 to $23 million.
Analyst forJairam Nathan - Banc of America Securities
And will it bedone this year?
Jan Carlson
Well, thispart of the startup cost will be done this year. We will see startup costsgoing forward.
We've also talked a little bit about that before; we will seethem going forward in 2008. We have said half or less than a half of the amountthat we have seen in this year we will see in 2008.
Analyst forJairam Nathan - Banc of America Securities
Okay. And thenjust one more quick one, and then just maybe just a longer-term question.
Wasthere any additional legal costs in that $10 million expense for the quarter,or was that all taken care of earlier?
MagnusLindquist
It was alltaken care of earlier, so no extra legal expense in the third quarter.
Analyst forJairam Nathan - Banc of America Securities
Okay. Andthen, just I guess longer-term, when we think about organic growth, is thebigger opportunity in continued penetration of side curtains due to the mandatein the U.S.
or just generally in Europe, or do you think emerging market safetyis the bigger opportunity? And maybe also if you could just remind us whatcurrent penetration levels are in the U.S.
on side curtains.
Mats Ödman
Well, weestimate the penetration rate this year to be, say, 45% in North America. In Europe, say,55%, in that range, Japan 40%.
And Rest of the World, it varies very much,so I don't know if it's relevant to talk about an average. But, let's say,typically, it's roughly 10%.
Analyst forJairam Nathan - Banc of America Securities
And is thebigger growth from seatbelts in emerging markets, or continued penetration ofside curtain?
Mats Ödman
A
Jan Carlson
When Mats said$1 billion, he meant the potential for the industry.
Mats Ödman
Yes.
Analyst forJairam Nathan - Banc of America Securities
Right.
Jan Carlson
I have someadditional information to the prior question here, in the meantime. I have gotsome good team members providing me with information about the non-ferrousmaterial and exposure here.
We are buying magnesium, zinc and aluminum forroughly around $100 million U.S.
Operator
Our nextquestion comes from the line of Anders Bruzelius - Swedbank Markets.
AndersBruzelius - Swedbank Markets
Thank you,good afternoon. We have talked about the startup costs for China expansion and looking at your charts on one couldexpect to see very strong growth there in the coming years, I mean, including10 million cars in the not-too-distance future.
Do you believethat the factory or the plants that you've built is enough, or how long will itbe enough to supply the market? Or will there be a sooner new step-up programto meet the demand?
Jan Carlson
What we havesaid here is that the plants and investments that we have for now should beenough for the foreseeable future. We don't foresee any new sites.
Mainly, wesee expansion to the existing sites. Benoit has more details on this one.
BenoîtMarsaud
We foreseesome expansion in Europe. It could maybe some new investment coming.
But,that, we can tell you more in the coming year.
AndersBruzelius - Swedbank Markets
Okay. So, it'ssmaller investments, then, we're talking about in China to increase the capacity.
Jan Carlson
Yes, no newsites, but expansion of the current sites.
AndersBruzelius - Swedbank Markets
Okay. Andsecondly, where's the level of safety per car now in China compared to Europe and the rest of the world?
Is it moving fast or is it stable or doyou see any new trends there, the average content?
Mats Ödman
We only makethat calculation on land basis. But it's not so relevant to look at the averagebecause it's the added lot of low-end vehicles with only seatbelts.
The averagewon't grow. But, the totalmarket could grow, nevertheless, because you have a lot of vehicles that arecoming on the market and some of them will definitely have driver airbags, andthe driver airbag penetration in China is actually quite impressive.
Jan Carlson
I think, wehave said that we believe it's all 80% already in China, on the driver's side.
AndersBruzelius - Swedbank Markets
Okay. Andthat's the ones that is sold also in China or is it the ones for export?
Jan Carlson
We always lookat the production. But, currently, they don't export so many vehicles, becausethey have such a strong demand domestically.
Operator
There are nofurther questions coming through, so I will hand you back to your host toconclude today's conference call. Thank you.
Jan Carlson
Thank you,Wendy. Well, here in Stockholm, we thank you all for your participation and verygood questions.
And we look forward to see you or hear you all again in January 31st, 2008, and that concludesour call. And in themeantime, we wish you all a safe and relaxing holiday season when it arrives.Thank you.
Operator
Ladies andgentlemen, thank you for joining today's conference.