Jan 31, 2008
Executives
Jan Carlson - President and CEO Magnus Lindquist - CFO Benoit Marsaud - COO Mats Odman - VP of Corporate Communications
Analysts
Himanshu Patel - JP Morgan Adam Jonas - Morgan Stanley Erik Karlsson - AKO Kenneth Toll - Kaupthing Patrick Nolan - Deutsche Bank Patric Lindqvist - HQ Bank David Leiker - Robert W. Baird Richard Howe - Polaris Capital Management
Operator
Good afternoon, ladies and gentlemen, and welcome to the Autoliv fourth quarter 2007 results conference, call hosted by Jan Carlson, President and CEO. (Operator Instructions) I will now hand you over to Mr.
Jan Carlson, to begin the conference. Thank you.
Jan Carlson
Thank you, Wendy, and welcome all of you to this presentation of the fourth quarter results for Autoliv. Here in Stockholm, we have our Chief Operating Officer, Benoit Marsaud; our Chief Financial Officer, Magnus Lindquist; our VP of Corporate Communications, Mats Odman; and me, Jan Carlson, Chief Executive Officer.
We intend to run this teleconference as we normally do. However, this time we will also discuss a little bit more of the outlook for 2008.
After that, we will open up for questions. As usual, you can find the slides for this presentation available through a link on the front page of our corporate website.
If we now turn the page, you will find a Safe Harbor statement. And as you know, it's an integrated part of the presentation and we will not go through the details at this time.
So instead, we move on to the next page, and we find a summary for quarter ending December 31. In quarter four, we achieved a record sales and operating income for any quarter, and quarter four was the second-best quarter ever for operating cash flow.
Our sales of close to $1.8 billion was an improvement of more than 11%, while the EBIT of $164 million was a 20% increase, and the earnings per share, excluding discrete tax items, of $1.36 was 40% better. The EBIT improvement is a reflection of our margin recovery programs and our organic growth.
Our strong operating cash flow of $232 million represented an increase of 47%. And last, but not least, we continued the share repurchase program and purchased 2.1 million shares, thereby returning $152 million to our shareholders.
So overall, we think this was a very good quarter for Autoliv, which came in also a little bit better than our guidance. If we move on to the next slide, we find some of the key business highlights for the quarter.
We continued to increase our presence in low-cost countries and we acquired 100% of our seatbelt joint venture in India. During 2007, we made three acquisitions totaling $121 million.
Even if these are not seen as major acquisitions, they are of strategic importance since they are all have been within the fast-growing Korean, Chinese and Indian markets. We also successful refined some of our short-term debt into longer term by issuing $400 million of guaranteed senior notes.
And furthermore, we continue to reduce our cost of application engineering for standard product, without compromising our core engineering innovation for future technology initiatives. On the negative side for Autoliv, we show signs of a turbulent NAFTA light vehicle production environment heading into 2008.
Chrysler, for instance, they're now at the last minute platform cost in their volume adjustment. So if we go to next slide, we find our sales trend.
And in quarter four, our sales increased $182 million or 11%. 7% was related to currency effect, $58 million resulted from an organic growth and close to $8 million from the India seatbelt acquisition.
This organic growth was better than expected and was mostly driven by the Western European vehicle production. Geographically, Japan and rest of the world continue to grow the fastest.
For example, Japan organic growth was 19%, which was three times the Japanese light vehicle production. And in rest of the world, specifically China, our organic growth was 25%, which was 6% more than the light vehicle production growth.
So our organic sales of close to $6.8 billion is a record and is up 9% versus 2006, in line with the long-term trend of 8.5% per year since quarter four 2002. This should be compared to the EBIT trend on the next slide where you can see that our operating income has improved at a rate of 13%, 50% more than the sales growth for the same timeframe.
We should also note that some figures have been restated for comparability due to the one-time items as indicated on the slide. In the quarter four, EBIT improved by 20%, which is almost twice as fast as the strong sales growth, and it is a reflection of our continued improvement in cost control.
Turning the page, we have our earnings per share trend, which represents 23% cumulated average growth rate since quarter four 2002. This is more than twice as fast as our sales trend of 9%, as you saw in an earlier slide, and is 10 basis points faster than our EBIT growth of 13% over the last five years.
This superior EPS is above all reflection of our share repurchase program. Looking specifically at quarter four 2007, earnings per share improved by $0.39 on a comparable basis, mainly due to share repurchase that added $0.07, a currency effect of $0.08 and an operation performance of $0.22.
Moving on to the next slide, we have as usual the light vehicle production figures. These figures, as you know, come from CSM and JD Power.
And the trend continues as we have seen for several years now. The major light vehicle production growth is occurring with the domestic OEMs in North America, in Eastern Europe and in the rest of the world, and that is then predominantly Asia and South America.
Overall, the 7% global light vehicle production improvement was better than the 5.6% that was estimated at the beginning of the quarter. On to the next slide, we find our organic growth versus light vehicle production, starting with the black line, which represents the light vehicle production in the triad.
Our organic growth of close to 4% is inline with the triad light vehicle production. The difference compared to the globalized vehicle production of 7.6% is primarily due to the fast growing regions like rest of the world and Eastern Europe, which have significantly lower safety content per vehicle than the global average, which is $270 and the rest of the world is approximately $160 per vehicle.
For the full year, the Autoliv organic growth of 4% was ahead of the triad of 2.6%, and slightly behind the globalized vehicle production of 5.4%, due to the reasons I mentioned I earlier. Turning the page, we have the Autoliv production figures for the quarter as compared to the prior year, and seatbelt continues to show a strong growth.
The most important reason is increased market share, since we have grown our sales of seatbelt units, including pretensioners by 18% and this is more than twice as fast as the globalized vehicle production of the 7.6%. Overall, we think that our market share is improving mainly due to strong increases in seatbelts and safety electronics.
And we believe we continue to grow in line with the market for safe system. The next page will conclude our sales analysis with a bridge and versus prior year.
We have a positive translation effect on the non-US currency that added $116 million or 7%. As illustrated, we also see that seatbelts, side airbags and safety electronics added close to $100 million combined and that represents more than 50% of the sales improvement for the quarter.
Frontal airbags and other sales were down close to $30 million combined. Now, moving on to the next slide, we have the gross margin and the EBIT margin.
The gross margin for quarter four is virtually unchanged. The small decline that we had is mainly due to a continued customer pricing pressure and some headwinds that we will come back to in a minute.
The reported EBIT margin of 9.2% was inline with our guidance of more than 9%. Improvement of the 0.7% is mainly due to savings in RD&E and SG&A and that improvement compared to quarter fourth last year.
The improvement is more than offset than with a minor decline in gross margin or offset a bit with a minor decline in gross margin. The EBIT results also includes restructuring costs that were $9 million higher than quarter four 2006 and this is equivalent to 0.5% of sales, which was essentially offset by a one time royalty settlement.
Now moving on to the next slide, we have highlighted the major headwinds that we have experienced due in 2007 and you know many of them since our earlier earnings calls. We have estimated that the commodity surcharges, distressed suppliers and the Asian startup costs have had a negative effect of $13 million in the quarter and $55 million for the full year.
And this equates to approximately 72 and 81 basis points respectively. Moving on to the next slide, we see that EBIT Bridge for the quarter versus prior year, where we have separated the currency effect so you can see the underlying differences.
We have enabled to improve the EBIT $27 million due to the strong organic sales and direct cost reductions. In addition, RD&E and currency effect improved profitability by $15 million and $7 million respectively.
And this aggregate improvement of $47 million was partially offset by the negative headwind we just mentioned on the previous slide. On to the next slide, we have the headcount development, as illustrated on the slide; we continue to increase our presence in low cost countries, where we now have achieved an all time high of 53% of our work force.
Excluding the acquisition that added 600 associates, our headcount declined on comparable basis by 1%. And this compares with organic sales increase of 4% for the year and this is an indication of a strong productivity improvement of more than 7% during 2007.
Moving on to our next slide, we have the key figures on comparable basis. If we thought we'd return on equity of 17% adjusted for these three tax items in both years, it is approx 4 percentage points better than prior year and return on capital employed of 18.9% is also better than prior year of 16.2%, primarily due to a lower working capital and capital expenditures along with an improved EBIT.
We're pleased that our working capital of 9.1% is less than our goal of 10% of sales. Receivables and inventories contributed to the majority of the improvements.
Factoring program of close to $120 million now represent close to 1.8% of annual sales and has helped to reduce our overall cost of capital. Lastly, our net debt-to-capitalization increased to 33% from 29% a year ago due to accelerated share buyback, the dividend and three acquisitions.
Turning the page, we have the cash flow which was a record high for our company. A positive swing in the working capital contributed $160 million of the $467 million.
When looking over the last years, this temporary working capital swings has neutralized and therefore, resulting in a four-year average cash flow of approximately $316 million. Both CapEx and depreciation and amortization continue to track closely and were less than 5% of the sales for the year.
This is the lowest level in relation to sales over the last several years and is partially a reflection of the fact that we expand primarily in low cost countries. Turning the page, our share returns to shareholders where we combined dividend and share buybacks.
For the year 2007, we have returned more than 11% of average market capitalization to shareholders throughout the year. Included in the $500 million return close to $120 million was related to dividends, while the share repurchase was around $380 million.
Moving on to the outlook for 2008. We have the light vehicle production change on the next slide for the major regions by quarter as compared to Autoliv's expected organic growth in 2008.
If we start from the top in this slide, you find the annual change, the full year change for light vehicle production in the regions, Western Europe, NAFTA, and also for Triad and the global number. You also find the full year Autoliv organic growth which we estimate to be 2% for 2008.
Going then into the graph, you find we start from the lower part of the graph, you find that the red bar representing the change quarter-to-quarter in 2007-2008, represents the Western European region. In the similar way, we find that the black line representing the NAFTA region.
Both of these regions have significantly below 5% in change for the first quarter. NAFTA improves gradually over quarter three and quarter four and Western Europe remains a negative change of more than 5% in quarter three, then coming back to approximately a flat level in quarter four.
In the same way, you find the green line representing the change for the Triad and the purple line representing the change in the global light vehicle production. Overlaid here, you also find then in the blue line the Autoliv organic sales for fourth quarter 2008.
This starts with a decline of 3% in quarter one and gradually improves over the year up to approximately 5% in the quarter four. Despite the significant headwind of lower production volumes, Autoliv expects for the full year to outperform not only the NAFTA and Western Europe market, but also the Triad of almost 3% and by 4% if we include the recent acquisition of the Indian seatbelt company.
Lastly, we expect our organic growth to improve sequentially throughout the year as we have said, and as we've said earlier we will reach approximately a 5% level in quarter four. One reason for this improvement is partially illustrated on the next slide where we have identified the top six launches for our company in 2008.
Although we, again, really have not announced the specific content, these platform launches represent an excellent mix of incumbent replacement business along with new Conquest Business. You can see that Autoliv had significant content on the two largest vehicle volume platforms in Europe, they have Volkswagen's Golf and they have Renault-Megane, as well as the second highest selling platform in North America, the Ford F series trucks.
It is expected that these along with other launches during 2008 will contribute significantly to the sequential improvement during the year in organic sales. Moving on to the next slide, we have updated our side curtain penetration rates by region, and we expect the NAFTA region to increase the fastest, from a little over 50% in 2007 to almost 65% in 2008.
This trend reflects the fact that all new vehicles will have side curtains by 2013 according to the new law. Europe and Japan are expected to increase penetration rate to above 60% and 40% respectively in 2008, while the average penetration in rest of the world largely depends on the vehicle mix.
Moving on then to raw material, we have summarized the annual effect of commodity inflations since 2003. As we mentioned earlier, the 2007 effect of commodities was approximately $20 million and distressed suppliers was an additional $12 million.
As we look ahead to 2008, the risk for further increased cost appears to be with the steel and magnesium, which is expected to be somewhat offset by an improvement with zinc. We expect the net commodity increase to be $12 million for the year and $2 million in quarter one.
In addition, we believe that higher fuel prices will increase our logistic cost by $5 million during 2008. Lastly, related to the distressed suppliers, we do not foresee any further incremental cost in 2008.
And therefore, we expect this cost to remain at the same level at 2007, which is $12 million. All of these assumptions have been built into our 2008 guidance.
On to the next slide, we have our net debt to capitalization. During 2007, we increased our gross debt by $170 million, and this caused our net debt to cap to increase from 29% to 33% at the yearend 2007.
Given the current economic climate and turbulent financial markets and light vehicle production uncertainty in our key markets, we continue to keep a close eye on our debt level. And we think it's very important to have a capital structure which is optimal for our shareholders, and at the same time, it's equally important for the company to maintain a relatively conservative financial leverage.
And therefore, we continue to keep to our policy that Autoliv should maintain a strong investment grade rating, obviously, BBB+. On to our last slide, we have the Autoliv financial outlook.
For the full year 2008, we expect to increase organic sales by around 2%, as you saw in an earlier slide. Assuming the current exchange rates prevail, our consolidated sales are expected to increase by approximately 7%.
Despite the weak vehicle production environment, we expect operating margin to improve and reach a level of 8% to 8.5%, which is in line with the earlier target we have communicated of 8% to 9%. This EBIT range includes restructuring activities which are currently under review with the company.
For the first quarter 2008 specifically, our organic growth, as we already mentioned, is expected to be minus 3%. This is due then to the drop in light vehicle production as we talked about primarily coming from Western Europe 7% and North America 6%.
Consolidated sales are expected to increase 5% and that is assuming those current exchange rates prevail. Operating margin in the first quarter is expected to be close to 7%.
The fact that the Easter holidays falls into quarter one this year is expected have a negative impact for the quarter of 70 basis points. Moving now on to the next slide, we conclude the formal presentation.
We thank you all for listening and we are ready to take your questions. As usual, we will do our best to answer them in the best possible way.
Operator
(Operator Instructions) The first question comes from the line of Himanshu Patel from JP Morgan. Please go ahead.
Himanshu Patel - JP Morgan
Hi. I had a couple of questions.
Can you help us understand how much of the 2% organic growth outlook for 2008 is due to revisions with CSM's, or Global Insight's production schedule versus, I think Chrysler had some model discontinuations as well, how much could that have contributed to what seems like slightly slower growth than maybe we talked before?
Jan Carlson
Yeah, we have talked before. You remember that we talked in our Capital Market Day of a growth in total 4% to 5%.
If you look on the North American markets and such, the Chrysler production cut approximates a 1 percentage point for the company. Then we see approximately another percentage point coming from the general down trending light vehicle production in North America.
And then, you have approximately 0.5% coming from a different vehicle mix primarily in Western Europe actually. That's how it builds up together.
Himanshu Patel - JP Morgan
Okay. And then, Jan, the restructuring cost, it sounds like they've started to accelerate last quarter, and we had another elevated quarter of that.
What's your outlook on that for 2008? Do we sort of assume this $10 million per quarter level for all of 2008, or does that taper off in the back half of the year?
Jan Carlson
You should assume the same overall level for the year. We have built-in, we had last year a restructuring cost of $23 million, and you should assume the same level for full year 2008.
We are currently under review of the restructuring program for the company and if you look specifically into quarter one you should expect the minimal level for restructuring cost and for the other three quarters we will come back to that it's just under planning.
Himanshu Patel - JP Morgan
Okay. And lastly, I wanted to go back to the comment you made on slide 22.
It sounds like you guys are suggesting that the cost of assisting distressed suppliers, will be comparable to '07. I'm a little bit curious at that, because some of these commodity costs are going up, steel in particular.
North American production in the first half is expected to be considerably weaker than what the expectations were just six months ago. Are you thinking that there is elevated cost for distressed suppliers in the first half, but by the second half you think things will become easier, or you don't see any incremental deterioration in the last quarter or so of the health of the tier 2 supply base?
Jan Carlson
We have not seen any significant differences in the quarter; it's evenly spread throughout the quarter. You remember we talked earlier last year, that we would see the distressed supplier's sort of fading away we would hope it would fade away by end of '07 or at least in beginning of '08.
We see that is not the case, it is on the same level. One reason is that the North American supply base is experiencing one tough time period right now.
Lower light vehicle production, lower volumes, still high raw material price level and also of course the financial term oil that is happening. That is causing the supply base in North America to have some difficulties.
So evenly spread 3 million per quarter is what we would expect it to be.
Himanshu Patel - JP Morgan
Okay, one small last one, I'll sneak in on that same question. I understand the earnings impact from distressed suppliers, you're expecting that to be the same, but is there extra capital support or anything like that that you guys are starting to provide them in the last, let's say three to six months or you'd say that hasn't change at all?
Jan Carlson
No, it's no extra such charges, no.
Himanshu Patel - JP Morgan
Okay, thank you.
Jan Carlson
Thanks.
Operator
Thank you. Our next question comes through from Adam Jonas from Morgan Stanley.
Please go ahead.
Adam Jonas - Morgan Stanley
Hi, good evening. Just a couple of questions, first on the working capital, you mentioned that over time these things tend to even out, you did just mention to Himanshu, that as far the distressed suppliers are concerned, that shouldn't represent an extra helping hand, but given that at the end of the year on such a strong swing back with the $100 million or so working capital swing year-on-year.
Is it fair to assume then, a back to a normal or maybe a re-versioned mean for the year ahead that we should have another build up, or should I say a use of working capital for '08 and if you could elaborate a bit on that. I know it's kind of tricky?
And just, the second question on credit. Of course it's natural in this environment of uncertainty to give a bit more of a priority to the balance sheet vis-à-vis maybe cash return, am I reading too much into that?
I guess what I'm saying is that in the past, I think from the language of your predecessors in your position was that, you didn't want to be a single A credit, your credit rating was too good, nice quality problem to have I guess, but now you're saying you want to be triple B at least. It seems like you are giving a bit more emphasis on keeping a bit more dry powder or bit of a little more cushion with the credit rating agency.
How does that compete with your return of cash strategy going forward?
Jan
Well, starting with the working capital, I think we are very positive, and we are very happy to be able to reach the low level 9.1%. We have the target of 10% of sales and we are striving to keep that level.
So that is what I can say about capital you Magnus can tell main more and then afterwards. Coming back to the balance sheet structure, I think that from a financial point of view, from a company point of view we are a shareholder return friendly company.
We have been that and we still are, but also on the other hand, you have to watch out for the financial market, and if at some point you would like to have a strong investment grade, it is during these days clearly. So generally, we are shareholder friendly and we will continue to be that also moving forward.
But a cautious view on the balance sheet is of course, something that we are taking these days. I don't know if that is helping you so much.
You will get more help on Monday or Tuesday when we start again.
Carlson
Well, starting with the working capital, I think we are very positive, and we are very happy to be able to reach the low level 9.1%. We have the target of 10% of sales and we are striving to keep that level.
So that is what I can say about capital you Magnus can tell main more and then afterwards. Coming back to the balance sheet structure, I think that from a financial point of view, from a company point of view we are a shareholder return friendly company.
We have been that and we still are, but also on the other hand, you have to watch out for the financial market, and if at some point you would like to have a strong investment grade, it is during these days clearly. So generally, we are shareholder friendly and we will continue to be that also moving forward.
But a cautious view on the balance sheet is of course, something that we are taking these days. I don't know if that is helping you so much.
You will get more help on Monday or Tuesday when we start again.
Adam Jonas - Morgan Stanley
Okay. So that will help answer the question, but I guess I am taking from it is that you are taking a bit more cautious view with the terms of the balance sheet condition.
Jan
Well, I think that of course it is a different market situation.
Carlson
Well, I think that of course it is a different market situation.
Adam Jonas - Morgan Stanley
Right.
Jan
It is uncertain regarding what will happen going forward.
Carlson
It is uncertain regarding what will happen going forward.
Adam Jonas - Morgan Stanley
Right.
Jan
That's by nature like that, but having said all that, we are very committed to return the money to our shareholders.
Carlson
That's by nature like that, but having said all that, we are very committed to return the money to our shareholders.
Adam Jonas - Morgan Stanley
Understood.
Jan
That still remains. Magnus, do you want to have another comment on the working capital or?
Carlson
That still remains. Magnus, do you want to have another comment on the working capital or?
Magnus Lindquist
Yes, to emphasize what you already said Jan, is that, we are committed to strive for the 10% and of course 9.1% is extremely good. So, likely we see some swings over the quarter, so normally the first quarter is a little bit weaker if we have had a very strong fourth quarter, so yes you can presume that it will continue to be a little bit volatile.
And coming back to the credit rating, you emphasize that we are committed to a strong investment grade rating triple B+ in your presentation. There is really no change in commitment there.
Adam Jonas - Morgan Stanley
So the difference to getting a single A rating if it doesn't really do that much for you in other words?
Magnus Lindquist
As Jan said, we are still committed to a strong investment grade rating tripe B+, but also if there are times where you should really have a strong balance sheet, the care of your cash flow is when the times are a little bit more uncertain, and the economic situation is more risky, and that's what we're seeing right now.
Adam Jonas - Morgan Stanley
Okay. Very prudent.
I am sure your shareholders will thank you later. Thank you.
Operator
Thank you. Our next question comes through from Erik Karlsson from AKO.
Please go ahead.
Erik Karlsson - AKO
Hi. I've like to know if there has been any change in the price declines, or either deceleration or acceleration on price declines for both airbags and seatbelt?
Jan Carlson
There had been no change. We have seen a price decline of roughly around 4% and there is no change.
Erik Karlsson - AKO
And that's what we should expect for the medium term as well?
Jan Carlson
That is what you should expect also for the medium term.
Erik Karlsson - AKO
Thank you very much.
Operator
Thank you. Our next question comes through from Kenneth Toll from Kaupthing.
Please go ahead.
Kenneth Toll - Kaupthing
Yeah. A quick question regarding the balance sheet, Jan.
You talked a little this fall about reviewing your strategy, and maybe becoming a bit more focused on acquisitions, might that lead to less share buybacks going forward?
Jan Carlson
We are just in the midst of reviewing, as you have seen in some articles in the press. We are reviewing our strategy when it comes to acquisitions, and when it comes to strategy in general going forward.
This is something we have started late last summer. We have intensified it during last quarter, and we will continue this quarter.
I will present an update to the board later on, regarding where we are on this one. Of course, it would affect the level of share repurchase, but we have always been looking for acquisitions.
So this is nothing really new, even when we bought back shares from quarter four, quarter three, etcetera. We must be looking for acquisitions, so not really.
I would say not for the time being.
Kenneth Toll - Kaupthing
Okay. Thanks.
Operator
Thank you. Our next question comes through from Patrick Nolan from Deutsche Bank.
Please go ahead.
Patrick Nolan - Deutsche Bank
Hi everybody.
Jan Carlson
Hi.
Magnus Lindquist
Hi.
Patrick Nolan - Deutsche Bank
Just a couple of questions, when you look at the first quarter you call that the Western European mix for the full year, how negative is that going to be in the first quarter?
Jan Carlson
What do you mean mix of?
Patrick Nolan - Deutsche Bank
You call that the Western European product mix for the full year about 0.5%. How negative is that going to be in the first quarter?
Jan Carlson
It's hard to say. I don't have any good answer as to how that is implementing over the year, and how it's affecting.
If I would say something, it would have a more negative effect on the first of the year, and that's primarily due to the fact that while some of the launches have faced a slower ramp up, we expect them to catch up during second half of the year. Some of the launches that took place in second half of '07, might have faced a little bit of a slower ramp up.
So that's what we can say.
Patrick Nolan - Deutsche Bank
And on the R&D budget, R&D was very low this quarter, 4.6% of sales. What do you think the normalized level is for R&D going forward, and are you instituting savings this quarter?
But what should we think about going forward as a normalized level?
Jan Carlson
Well, I guess that we would be see approximately 6% or slightly below.
Patrick Nolan - Deutsche Bank
And then lastly on gross margins, they came in at little bit below what I think I and few others were looking for in the quarter. Some of that is probably product mix, and of course there is the raw material headwind.
But as seatbelts continue to grow, are we going to see the gross margins continue to go down slightly, or come in tandem at the current levels? Or how should we thinking about that longer term?
Jan Carlson
Well, I think for the quarter here you saw a 0.1 percentage points fall on the gross margin. I think you know generally speaking, we are striving to go back to a gross margin of around 20%, and that's where we have been for the last year.
And this is including the move to low cost countries, it's including restructuring, it's including redesigning products, it's including move of purchase to low cost countries, etcetera. And of course, the contribution resulting from the increased sales, and the higher utilization of the Chinese plants.
So we are working on that plan, and the target is to be at least around 20%.
Patrick Nolan - Deutsche Bank
I would like to sneak in one more. You call out the startup cost for this year, I know they will come down next year, but how much are the startup costs coming down next year?
Jan Carlson
We expect the startup cost for this year, I assume. I mean this year's startup cost is going to be $16 million, we expect them to be, and that is compared to last year's of $23 million.
Patrick Nolan - Deutsche Bank
Thank you very much.
Jan Carlson
For those of you that remember, we said before that we would cut them in half. We said startup costs would be about $25 million, and then cut in half.
Some of the startup costs have been pushed into 2008. So that's why they are a couple of million higher than we previously have talked about.
Patrick Nolan - Deutsche Bank
Thank you very much, guys.
Operator
Thank you. Our next question comes from Patric Lindqvist from HQ Bank.
Please go ahead.
Patric Lindqvist - HQ Bank
Hi, there.
Jan Carlson
Hi.
Patric Lindqvist - HQ Bank
I had a question. In October when you were, I think, talking about the fourth quarter, you were slightly less optimistic on the volumes.
So basically volumes turned out better than you expected, whereas margins were, at least, in my interpretation, you said exceed 9% and you did that. So better volumes, but you're still not able to sort of do better on the margin side.
Is there any specific factor which is behind that? This is my first question.
Jan Carlson
Magnus, why don't you.
Magnus
Yeah. To answer, Patric, I think we really don't understand the question, because we said if we should exceed 9%, and if you then add the 2% from our sales, we have actually got a positive impact on the EBIT and [cost of the] higher sales.
Lindquist
Yeah. To answer, Patric, I think we really don't understand the question, because we said if we should exceed 9%, and if you then add the 2% from our sales, we have actually got a positive impact on the EBIT and [cost of the] higher sales.
Patric Lindqvist - HQ Bank
Sure. But you did not get any leverage on it.
I'm saying that you get additional volumes where you normally should be able to get somewhat of a leverage on that, given your fixed cost base, but you still delivered, what I would say, really the same kind of margins.
Magnus
Okay. We got some leverage on it.
Lindquist
Okay. We got some leverage on it.
Patric Lindqvist - HQ Bank
Okay. Second question on the R&D side.
I mean you've been talking over a few years now, that you would see a reduced amount of invoicing of R&D. And I presume that there was a large chunk of that coming into the fourth quarter, while you had such extremely low R&D costs.
I just wanted to check whether that's correct.
Jan Carlson
That is correct.
Patric Lindqvist - HQ Bank
And then, going forward, since you're saying that you'll windup around about 6% as a percent of sales, which is a pretty decent figure if you look at the last few years, will the invoicing stay a bit more than you previously expected, or is it that the underlying R&D expenses are going down?
Magnus
If you start with the engineering income, it continued to go down and to decrease. It's always difficult to say, how much it's going to decrease so early in the year.
If we look on the R&D cost as such, it is primarily an efficiency matter. We have worked on it a lot.
We have taken our 300 heads in high cost countries, and we have replaced them with 270 heads in low cost countries. So we are increasing the efficiency as we said on the application engineering side.
And that is primarily what is driving the R&D cost down. Added to this, we also are now coming out much better than before on the electronic side.
We have over the last couple of years had earned a lot of growth in the electronic side that has boosted the R&D cost quite a bit. Now these programs are launching and then contributing to the growth therefore the R&D on engineering is coming down.
Lindquist
If you start with the engineering income, it continued to go down and to decrease. It's always difficult to say, how much it's going to decrease so early in the year.
If we look on the R&D cost as such, it is primarily an efficiency matter. We have worked on it a lot.
We have taken our 300 heads in high cost countries, and we have replaced them with 270 heads in low cost countries. So we are increasing the efficiency as we said on the application engineering side.
And that is primarily what is driving the R&D cost down. Added to this, we also are now coming out much better than before on the electronic side.
We have over the last couple of years had earned a lot of growth in the electronic side that has boosted the R&D cost quite a bit. Now these programs are launching and then contributing to the growth therefore the R&D on engineering is coming down.
Patric Lindqvist - HQ Bank
Okay. Thanks.
Operator
Thank you. Our next question comes through from David Leiker from Robert W.
Baird. Please go ahead.
David Leiker - Robert W. Baird
Congratulations, good morning.
Jan Carlson
Good morning David.
Magnus Lindquist
Good morning David.
David Leiker - Robert W. Baird
On slide 22, on the commodity cost. Are you only using current market prices, where they are, or are you assuming some change in those costs of those materials over the course of the year?
Jan Carlson
I guess we are using the current commodity, I mean current market prices.
David Leiker - Robert W. Baird
Okay.
Jan Carlson
If I understood your question, right.
David Leiker - Robert W. Baird
Right, that's exactly what I asked.
Jan Carlson
Yeah, let it be up. that's what we are using, so, yes.
David Leiker - Robert W. Baird
And then on slide 13 with, the slide on headwinds. I don't think I heard you, you kind of talked about it, but I don't think I heard you make a comment as it relates to the distressed supplier cost and the Asia start-up cost.
How long you think those are going to continue to be issues?
Jan Carlson
It's hard, to say actually. As I said a little bit before, we expected before that the distressed suppliers would fade out towards the end of last year or at the beginning of this year.
We see it remaining, but it's not getting worse on a dollar value level, it's the same amount actually. So it is hard to say, it depends also what's happening in the world I guess with the financial prices etcetera, and if our suppliers are going to be impacted by the crisis, and the cost of raw materials is also very high.
So I have no better outlook than to say that for the year '08, we will have the same level as last year. If you talk about the commodity pressure etcetera, it's also hard to speculate, this is our best opinion what it is today.
We can speculate that steel is going up even more and it might do so. We don't know really, but for the year and for what we can foresee right now these are the best estimates.
David Leiker - Robert W. Baird
And what about the Asia start-up costs, I mean where are you in leveraging that?
Jan Carlson
If you take the Asian start-up cost, it will fade out as we have communicated. It will fade out towards the end of the year actually, and so we will see that already.
It's going if you look on the net effect for 2008 compared to 2007, you have a negative effect in the fourth quarter, but already in the fourth quarter. In the first quarter you have a negative of $1 million compared to '07.
In the fourth quarter for '08 we expect this to have a positive impact, so it's coming down in the fourth quarter of $5 million. So already there were see it's leveling down.
David Leiker - Robert W. Baird
Okay. And then on that same slide.
Did you say you are restructuring at $23 million in '07, or was it $7 million to $10 million?
Jan Carlson
It is $23 million, so this restructuring is $23 million for the full year '07, and it's going to be the same for '08.
David Leiker - Robert W. Baird
Then what's the $10 million on the slide 13?
Magnus Lindquist
It's an incremental increase from 2006.
David Leiker - Robert W. Baird
Okay I follow. And then lastly Jan, we've talked about this in the past; if you look at with this 8% to 9% margin target at the operating margin line, you generate return on capital of around 10% or something like that.
I think there is some indication that the profitability of the business could be better than that. Then putting you on target for that 8% to 9% number, is that something that in a two year, three year, or four year period, you can get to a position and start raising that target?
Jan Carlson
Maybe, we could be able to do so, Dave, in all fairness during this market conditions and where we are today, I would not speculate in going above the 8% to 9%. As we've said before, we are committed to be in this range, and we will see how the market turns out to be, of course there are opportunities for us to increase efficiency and be better in every corner of it, it's always like that but you also know the market headwind, you will have headwinds that we don't think about today.
So 8% to 9% is what we stand to.
David Leiker - Robert W. Baird
Okay, and then that the last item is on the minority interest, and that is down considerably I think. It's probably mostly due to buying out your partners, but is there anything else going on there?
Magnus Lindquist
No, you are completely right. The major part is the acquisition although Autoliv Korea Mando Corporation, which we did in the first quarter last year.
David Leiker - Robert W. Baird
So this will be a more normal run-rate going prior to what we're seeing here in the fourth quarter.
Magnus Lindquist
Yeah.
David Leiker - Robert W. Baird
Okay, perfect. Thank you.
Jan Carlson
Thank you, Dave.
Operator
Thank you. There are no further questions currently in the queue, so a final reminder ladies and gentlemen.
(Operator Instructions). And a further question from the line of Richard Howe from Polaris Capital Management.
Please go ahead.
Richard Howe - Polaris Capital Management
Good morning.
Jan Carlson
Good morning.
Richard Howe - Polaris Capital Management
I wanted to ask of the capital expenditures that you anticipate in 2008.What portion of that capital expenditure would be maintenance capital expenditure?
Jan Carlson
Okay. Yeah.
Well, we have looked into this question and it's very, very hard to predict. If you look on, depends on what you say maintenance, what is new et cetera, but the best estimate we have is that it's less than 10%.
That is new, the rest is maintenance.
Richard Howe - Polaris Capital Management
Okay. So 10% is for growth and 90% is for maintenance?
Jan Carlson
Yes.
Richard Howe - Polaris Capital Management
That's great. Thank you.
Jan Carlson
Thank you.
Operator
Thank you. That was our final question, so I will now hand you back to your host to conclude today's conference call.
Thank you.
Jan Carlson
Okay. And while here from Stockholm we thank you all for participating and for all the good questions and we will look forward to talk to you again on April 22 for our first quarter earnings call.
Thank you very much.
Operator
Ladies and gentlemen, thank you for joining today's conference. You may now replace your handsets.