Apr 22, 2008
Executives
Jan Carlson – President and Chief Executive Officer Benoit Marsaud – Chief Operating Officer, Vice President Manufacturing Magnus Lindquist – Vice President, Chief Financial Officer Mats Odman – Vice President Corporate Communications Marika Fredriksson – Incoming Chief Financial Officer
Analysts
Himanshu Patel – JP Morgan Rod Lache – Deutsche Bank Securities Thomas Besson – Merrill Lynch Patric Lindquis – HQ Bank Brett Hoselton – Keybanc Capital Markets [Angus Trap - SEB] [Actus Veraserus - Swed Bank]
Operator
Good afternoon ladies and gentlemen and welcome to the Autoliv first quarter financial earnings 2008 conference call hosted by Mr. Jan Carlson, President and CEO.
My name is Wendy and I will be your coordinator for this conference. Throughout the presentation you will be on listen-only.
However, at the end of the call there will be an opportunity to ask questions. If you need assistance during the call please press *0 and an operator will be happy to help.
I will now hand you over to Mr. Jan Carlson to begin today’s conference.
Thank you.
Jan Carlson
Thank you Wendy. Welcome all of you to this presentation of the first 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. Also sitting in and listening to the call here with us today is our incoming CFO, Marika Fredriksson, who will join our company on September 1, later on this year.
I would like to take this opportunity to welcome you to Autoliv.
Marika Fredriksson
Thank you Jan. I really look forward to joining Autoliv in September and today I have the opportunity [inaudible] management.
Jan Carlson
Thank you Marika. We look forward to that.
We will now start with a quick review of the results and then discuss the outlook for the remainder of the year and after that we will be available for questions. You will find the slide presentation through a link on the front page of the Autoliv Corporate Web Site under financial reports.
If we now turn the page we will find the Safe Harbor Statement and as usual this is an integrated part of the presentation and we will not go through the details at this time. Moving on to the next page we have a summary for our first quarter 2008.
During the quarter we achieved record quarterly sales and operating cash flow for any first quarter. Our sales were more than $1.8 billion was an improvement of 8% and an EBIT of $127 million or 7% margin was slightly better than our guidance.
This was in spite of the adverse effects of the devaluation of the Turkish Lira of almost 40 basis points. Our earnings per share of $1.11 was an improvement of 22%.
This is a reflection of a lower tax rate and our share repurchase program. Strong operating cash flow of $165 million represented an increase of 84% mainly due to an improved working capital performance.
Last but not least we continue the share repurchase program and purchased 1.2 million share thereby returning $63 million to our shareholders. Overall we believe this was a good quarter for Autoliv despite a very difficult economic environment and I would like to acknowledge the Autoliv team for this strong performance.
Moving on to the next slide where we have our sales trends. In quarter one our sales increased $129 million and this was entirely driven by favorable currency translation of 9%.
The acquisition of our India [inaudible] venture added almost another 1%. The organic sales declined off 2.7% mostly a result of weaker NAFTA and western European light vehicle production somewhat offset by a stronger performance by Japan and the rest of the world.
If we look on the sales trend our last twelve month sales increased to a record of $6.9 billion and our sales since the first quarter of 2003 have increased on an average 8% per year. This should then be compared to earnings per share on the next slide and here we can see the earnings per share trend.
This represents close to a 16% average growth rate almost twice as fast as our sales trend of 8%. This superior earnings per share performance is above all a reflection of our share repurchase program and improving overall effective tax rates.
Looking specifically at quarter one 2008 earnings per share improved by $0.20 over prior year mainly due to share repurchase that added $0.13 and lower tax rate of $0.10. Moving to the next page, we have our return to shareholders where we combine the dividends and the buybacks.
For the last twelve months we returned $523 million which represents a 12.4% return on the average market cap during the same period. During this last twelve months the dividend in share buyback was essentially equal to free cash flow iteration which is in line with our company philosophy.
Our net debt has increased by approximately $80 million over the last year. Essentially most of this debt increase was used for acquisitions.
Given the current economic climate and turbulent financial markets and uncertainties in light vehicle production in our key markets we will continue to keep a close eye on our debt level while we also maintain an efficient balance sheet. Moving on to the next slide, we find some of the key business highlights for the quarter.
As we highlighted quarter the market turbulence continues not only by further NAFTA production cuts but also more severe commodity inflation and currency fluctuation. Although western Europe is expected to perform better than originally planned in the first half year of this year the outlook would indicate a slight deterioration in the back half of this year.
We continue to have strong performance in the emerging markets and in Japan where we are significantly outperforming the markets. In addition we continue to increase market shares in seatbelts and safety electronics while we are maintaining our share on the [side] systems.
And lastly our customers continue to recognize our superior market leadership position with outstanding supply performance awards; for instance General Motors and at Toyota. If we move on to the next slide we have the light vehicle production figures by region.
These figures come as usual from CSM and JD Powers. If we look on our two largest markets, Western Europe and NAFTA combined they were down 5.6% versus prior years as compared to a decline of 6.4% that was expected last quarter.
For the first time in recent history there was also a decline with the new domestic OEM’s in North America. Combining NAFTA, Western Europe and Japan we [inaudible] approximately 85% of our sales.
There is a decline of 2.8% in light vehicle production. Moving on to the next page we find organic growth development versus both local light vehicle production and the triad.
Organic sales decline of 2.7% for the quarter was in line with the large vehicle production decline in our main markets as we saw on the previous slide. The shortfall to the triad is due to the increased light vehicle production in Eastern Europe of 15.2% but with a lower content to vehicle, less than $160 U.S.
dollars. The difference when compared to the globalized vehicle production is due to other faster growing regions like the rest of the world with the lower safety content per vehicle than the global average over $270.
The rest of the world is approximately $160 per vehicle. Turning the page we have the quarterly production figures for the quarter as compared to prior year.
As mentioned earlier we continue to increase market shares in seatbelts. We have grown our seatbelt volumes and pretensioners by 14% which is more than five times as fast as the global light vehicle production.
Our market shares are improving also in safety electronics while we continue to grow in line with the market side systems. On the next page we conclude safe analysis with a bridge versus prior year.
As mentioned [inaudible] currency translation effect added $159 million or 9% to sales. As illustrated on this chart seatbelts and side airbags added $20 million combined while rear and frontal airbags were down $31 million due to [passive] contracts and sharper declines on specific model phase outs.
Moving on to the next slide, we have the gross margin and the gross margin for quarter one has declined by 80 basis points from prior year. The main driver for this shortfall is the net negative effect of currencies of approximately 40 basis points.
This was mainly due to a balance sheet valuation caused by the drop of the Turkish Lira. Commodity prices were in line with expectations of less than $3 million and had a negative 20 basis point effect including fuel surcharges.
The decline in organic growth and overall sales mix added an unfavorable effect of 40 basis points. This was partially offset by the move of production to local countries where we achieved a labor savings of 20 basis points.
Moving on to the next slide, we have the operating margins. The operating margin of 7% for quarter one was slightly better than our guidance of close to 7%.
The unfavorable gross margin effect mentioned earlier of 80 basis points was partially offset by continued improvements in our RD&E costs corresponding to 40 basis points. SG&A has an unfavorable effect which was offset by the amortization of intangibles and others.
Despite eroding light vehicle production, environment in NAFTA and Western Europe we are satisfied that we kept the margin at 7% especially after absorbing the unexpected 40 basis points of currencies. Moving on to our next slide, we see that moving pieces of currency for our business and due to the weakening of the U.S.
dollar the favorable translation effect of converting non US currency into U.S. dollars had a positive effect on operating income of $11 million.
This as you know has no effect on the market. The transaction effect though of currencies had a negative effective of $1 million.
This figure includes many moving parts that partially offset each other. As an example we purchased components from the European ports for the NAFTA region and the Asia region as well as export components from the U.S.
to Japan and a couple of other examples. We have the Turkish Lira again as we mentioned earlier of $7 million.
So to conclude the net currency effect was favorable $3 million in EBIT but had a negative effect on the margin of 40 basis points. For the year, assuming currency rates prevail, the net currency effect is expected to be positive by approximately $30 million, however the margin effects will be negative by 20 basis points due to valuation and transaction exposure.
Moving on to the next slide, we have the EBIT bridge for the quarter versus prior year and here we have separated the currency effect. Overall the slight improvement in EBIT is driven from the improvement in our RD&E utilization of $10 million.
This was mostly offset by the decline in our organic growth of $7 million. So the net positive effect of currencies and lower amortization of intangibles was offset by a higher commodity costs and SG&A.
So overall, considering the negative effect of the revaluation and the decline in organic growth we are encouraged we are able to keep the EBIT level. On to the next slide we have our headcount performance.
The main increases have resulted from the acquisition of our India joint venture. The remaining increase results from ramping up production in local countries such as Romania and China and that is mostly offset by a decline in some of our higher cost countries such as the United States and France.
Looking at the next page we have the summarized tax effect. As reported we had the benefit of a lower than expected tax rate.
We will not go through the details here but I would like to mention we expected the lower tax rate to generate more than $16 million of tax savings for the full year of 2008. If even incremental $11 million for the remainder of the year assuming 28% tax rate for full year 2008.
We also expect longer term tax rates to remain around 30% for the next two years. Looking on to the next page we have the key figures on comparable basis.
Return on equity of 13.7% was more than 1.5 better than the 12.1% of a year ago. This is due to both higher net income and lower shareholder equity mainly resulting from the high level of share repurchase over the last twelve months.
We are very pleased with our working capital performance of 9.5% of sales. Not only have we decreased by $163 million from a year ago but we remain below our goal of less than 10% of sales.
The factoring program of $131 million now represents close to 1.9% of the twelve month sales and continues to reduce the overall cost of capital. Lastly our net GAAP to capitalization increased to 33% from 31% a year ago mainly due to acquisitions as the free cash flow has been allocated to share buybacks and EBITDA.
Turning the page we have the cash flow. $106 million of free cash flow is a record high for any first quarter and is an improvement of $91 million over the prior year.
The last twelve months free cash flow of $557 million is a record for any twelve month period and this performance is not only a reflection of strong earnings but also continued working capital and capital expenditure discipline. Although we do not expect our [take] spending levels to remain at this low level, we do not expect them to exceed 5% of sales for the year 2008.
Turning the page, we find our share buybacks. In quarter one we bought back more than 1.2 million shares, returning $63 million to our shareholders in addition to the quarterly dividend of $29 million.
This brings the cumulative buyback up to 31.8 million shares. This average cost of $42.80 is close to a 20% discount over today’s share price and even after recent turbulence in the stock market.
Accumulated, we have bought back shares for approximately $1.36 billion. Now roughly 5.8 million shares remain on the current authorization.
On to the next slide…we can see how the light vehicle production in NAFTA and Western Europe has changed over the last three months and if you look on the chart and we start form the bottom you see the solid red line and then the dashed red line. These two lines represent the light vehicle production change for the NAFTA region.
The solid line as it is seen right now in April and the dashed line as how it was seen in January. Moving upwards you see the dashed black line with the triangles and the solid black line with the triangles representing the Western Europe change in light vehicle production.
The dash line again as it was seen in January and the solid line as it is seen right now. Overall, we can conclude that Western Europe is expected to be slightly better than expected by 1% or down 3.9% for the year.
Whereas the NAFTA region as shown by the red lines with the rings is now expected to be worse for the full year by 2% or down by 6.7% for the year. On to the next slide, we have the revised global light vehicle production outlook.
Here you can recognize now the new updated changes in light vehicle production for Western Europe and NAFTA. The bottom line here is the NAFTA region with the red line and the rings and then the black line with the triangles representing Western Europe.
Moving upward you see also the line in green representing the change in Triad and then globally in purple the line for globalization production. Overlaid on this you see also the expected quarterly organic growth throughout the year in the thicker solid blue lines.
Despite the significant headwind of light vehicle production we expect for the full year to outperform NAFTA and the Western European market but also the Triad by more than 3%. We still expect organic growth to improve sequentially throughout the year and including the recent acquisition of the Indian [inaudible] company we expect to grow 4% more than the Triad.
As we highlighted on the last call a major reason for this improvement is illustrated on the next slide where we have identified the top six launches for our company in 2008. In addition to these platform launches which represent an excellent mix of incumbent replacement business along with new [compass] business we allocate from the GM Global [absilon platform launches] and also the Chrysler [inaudible].
It is expected during 2008 that these launches will contribute significantly to the sequential improvement during the year in organic sales. Moving on to the next slide as we have alluded to in our previous earnings call and also a few weeks ago in a published Reuters interview we said that the commodity environment continues to deteriorate and could have assorted negative effects on our business.
As you can see here we now expect the negative commodity effects to be around $32 million for the year versus the $12 million expected a quarter ago. As illustrated the increases are related to steel, magnesium and aluminum of $20 million combined.
It is expected that most of the incremental effects will be loaded more to the second half of the year. For quarter one we came in pretty much as expected around $3 million while we expect $8 million for quarter two, $5 million more than originally expected thereby leaving approximately $20 million for the second half of the year.
Moving on to the next slide we have highlighted the major headwinds that we expect for the full year 2008. We estimate the commodity surcharges, currencies related to transaction effect and the effects net of the start up costs will have a negative impact of $45 million versus prior year.
This will have a negative effect on the margin by approximately 50 basis points on the operating margin from our earlier guidance. However, this negative EBIT effect will be substantially offset by the favorable currency translation headwind for $45 million.
To help offset this headwind we continue to keep up the pressure internally and externally on materials, labor, sourcing in local countries and overhead reduction and in addition we are developing also our means to mitigate the effects of commodities pressure through an increase reimbursement with our customers. Moving on to our last slide before we open up for question-and-answer we have the financial outlook.
For the full year 2008 we expect our sales to increase by 10% of which the organic sales increase of 2% remains unchanged. This is despite a weaker light vehicle production outlook in the Triad.
The India acquisition is expected to add almost 1% while the currency is now expected to add 7%. Our EBIT margin guidance remains unchanged at 8-8.% despite the uncertain situation of light vehicle production and the headwinds mentioned on the previous slide.
For the second quarter of 2008 consolidated sales are expected to increase 14% of which 2% is organic growth and 1% related to acquisitions. EBIT margin is expected to be at least the same level as last year of 7.7% As mentioned earlier we expect the lower effective tax rate close to $60 million of additional tax earnings.
That was not included in our earlier guidance for full year 2008. Overall we believe this is a positive outlook especially given today’s environment and economic climate.
Moving then to the final slide which concludes today’s presentation. We thank you all for listening and we are ready to take your questions.
Operator
Thank you. Ladies and gentlemen if you would like to ask a question please press 7 on your telephone keypad.
If you change your mind and wish to withdraw your question simply press 7 once again. You will be advised when to ask your question.
Thank you. Our first question comes from the line of Himanshu Patel with JP Morgan.
Please go ahead.
Himanshu Patel – JP Morgan
Hi. I have two questions.
On slide 15 I think you show RD&E expenses being a $10 million favorable on EBIT. I thought it was roughly flat year-over-year and it may be just a housekeeping issue but looking at the year ago RD&E expense it looked like it was about $112 million and this quarter and it looks like about $113 million.
Jan Carlson
Yeah. You are right but this is the offset for foreign exchange.
So we have less the total impact of account to the EBIT of approximately $3 million here so this is adjusted for exchange rate. So you have the same favorable exchange rate in last year’s quarter as this year’s quarter.
[Not Identified]
You have the same but smaller effect on SG&A.
Himanshu Patel – JP Morgan
Thank you. Second question…working capital performance was relatively benign this quarter.
Is there something in the working capital performance this quarter you would call out as being particularly favorable or should we think of this as a normal performance for first quarter of the year?
[Not Identified]
I think we had targeted to stay below 10% of sales and we ended up with 9.5. So from that perspective we are well in line with the target.
But as you know the cash flow and working capital could fluctuate within the quarters and in the first quarter last year we had a little bit weaker quarter but we don’t have anything in particular that should tell us this would be much weaker in the second quarter. It depends on [inaudible] of the sales in the quarter.
If you have particular stronger sales at the end of the quarter or the beginning of the quarter. In this particular first quarter we had actually a bit stronger sales in January and February and a little bit weaker in March.
That is [far to the explanation].
[Not Identified]
I think in general we could say we have increased effort in managing the working capital and we have communicated that through the earnings calls. That is what you are seeing here as to what an effect of that.
We are putting even more focus on accounts payables, receivables, inventory, etc. on the daily activities.
Having said that it is not impossible that in some quarter it could bounce back up above the 10%.
Himanshu Patel – JP Morgan
Okay then Jan just a quick question on European restructuring or maybe this is for Benoit. What are you guys thinking right now?
It sounds like the first half industry production was a little bit better…it sounds like CSM is talking about some incremental softening in the second half of the year. I know you have internally toyed with the idea of accelerating some of the European restructuring ideas.
Have you guys placed a better framework around that and would you be willing to discuss any of your thoughts on that at this stage?
Jan Carlson
We are continuing to discuss restructuring work as a sort of normal part of our business. As you know some of our customers are moving to the eastern part of Europe.
We are following them both when it comes to production and both when it comes to RD&E. We have communicated that we will take restructuring as it comes when it comes.
There will be no isolated big restructuring program announced. So, that is how we are operating now and for the future.
Himanshu Patel – JP Morgan
Okay. Thank you.
Operator
Thank you. Our next question comes through from Rod Lache from Deutsche Bank.
Please go ahead.
Rod Lache – Deutsche Bank Securities
Yes. A couple of questions.
The Turkish Lira revaluation, was that a one-time adjustment or is that something that continues to flow through?
Jan Carlson
We would hope it would not continue to flow through. It was a continuous decrease of the Turkish Lira and then we went in and made the balance sheet revaluation as for the effect of the decreasing Lira.
Rod Lache – Deutsche Bank Securities
Okay so that is flowed through the income statement? Not just generally through the balance sheet?
Jan Carlson
Yes.
Rod Lache – Deutsche Bank Securities
Okay. And just talking about the full year outlook on margins Q1 was down but you are still expecting a positive comparison for the full year.
You did talk about raw materials headwinding tougher in the second half. To what extent is the benefit of cost savings that you are expecting coming in unevenly?
Is this mostly just easier production comps? Can you just elaborate a little bit on what some of the drivers would be of the second half improvement in margins?
[Not Identified]
I think it is a mixture of a number of things. It is a mixture of activities we have initiated throughout the last year.
It is a mixture of even more stronger focus on the cost side – the general cost awareness. It is of course an effect of also we are increasing efforts in getting back commodity price increases from our customers.
In particular when it comes to magnesium. You know magnesium is a vital part of our steering wheel business.
It should be not so difficult to isolate compared to steel which is sort of an ingredient in many of our parts and distributed throughout the product that we have. We are increasing our efforts to get a magnesium price increases back from our customers.
One example is one of our larger customers has already accepted to reimburse us 70% of the magnesium price increase. That is an example.
We are encouraged by that and we will go back to our customers for the price increase. Another part is low cost country sourcing.
We have talked about global country sourcing. During the quarter that went by we increased the local country sourcing by 4% only in the quarter.
That is giving effect…it should give effect throughout the second half of the year. Then we have the design changes and the general cost controls.
This all in all gives us the comfort to stay with the guidance despite headwind in the commodities and also the currencies.
Rod Lache – Deutsche Bank Securities
Is the benefit from the shipped and inflator production in China already in the numbers or is that something that comes in later?
[Not Identified]
It is already in the numbers. This is nothing new.
This has been factored in already earlier.
Rod Lache – Deutsche Bank Securities
Okay. Thinking about global mix changes that are occurring with higher energy costs and also the commentary you gave earlier about the out performance in emerging markets where content is somewhat lower, over the next few years does that have a meaningful impact do you think on your long-term organic growth?
Do you have some updated thoughts on what you think that should be over time?
[Not Identified]
We don’t think so overall. We communicated back a half a year ago on our capital market day we could see that market will grow between 4-5% over the longer term.
We believe still that is the effect. Over the longer term we will have an increase content per vehicle in the emerging markets and we would foresee that the content in the vehicles in China, Eastern Europe and other emerging markets will be on the same levels as what is in Europe and in NAFTA in the longer run.
So we believe that will not have the longer term effect. For the time being and as of now we are seeing a growth in the seat belt products primarily in the seat belt products have a higher material content for the time being but after some time we would not expect that to be the effect.
Rod Lache – Deutsche Bank Securities
Thank you.
Operator
Your next question comes through from the line of Thomas Besson with Merrill Lynch. Please go ahead.
Thomas Besson – Merrill Lynch
Good afternoon. I have a few questions as well.
Jan on your guidance when you stress specific [inaudible] commodities and production is this a way to tell us you are going to be more on the low end of your guidance? Or a first step into saying it might become more difficult to reach it?
Jan Carlson
I think it is the first part. It is a way to tell you it is in the lower part of the range.
Thomas Besson – Merrill Lynch
Okay. Very well.
Can you say something about the gross margin trend? I mean you are expecting sequential improvement in organic growth.
Is it fair to expect that during the second part of the year your gross margin could tick up again?
Jan Carlson
It is fair to say. We had communicated that back in the previous earnings call that we have a target to come back to around 20% and that target is still there.
It is fair to expect that it will grow back. Of course the headwind and changes that we have seen now in particularly coming from the commodities are making it more difficult for us.
Our target is still to be around 20% and it is not impossible we will get there by the second half or end of the year.
Thomas Besson – Merrill Lynch
Okay. Do you think your comments about debt and [giving] is it fair to expect your pace of buyback is too slow in the coming quarter versus what you have done which has been quite impressive specifically in 2007?
Jan Carlson
The buyback level? I think as we said the company philosophy is to allocate the cash flow for dividend and for share buyback.
I see no reason why we should go away from that right now. Of course this is dependent on the imminent acquisition and how close you are to an acquisition that is standing in front of your door.
But we are generally a shareholder friendly company and we return the money as much as we can.
Thomas Besson – Merrill Lynch
Looking at your other operating income it is a very volatile number this figure depending on [someone else] do you have any kind of way to predict that number or is it really something that depends on [inaudible] and so on?
Jan Carlson
No. Magnus?
Magnus Lindquist
No. Last year we had the main judgment as we have discussed in several calls but also normally we take the severance charges for restructuring activities and last year it was roughly $23 million U.S.
dollars for restructuring charges and we have said that for this year, 2008, it will be approximately the same level.
Thomas Besson – Merrill Lynch
Okay. Last question to follow-up on the question on long-term [cross out] Autoliv.
You stressed in one of the first slides that reported top line growth for the last five years has been around 8% for Autoliv. Can you remind us the organic portion of this 8% top line growth for the last five years?
[Not identified]
I’m afraid we cannot, Tom. I’m very sorry.
We will for sure get back to you. Magnus is running out and trying to get the figures.
Thomas Besson – Merrill Lynch
Okay. Sorry.
Thank you very much.
Operator
Thank you. Our next questions comes through from the line of Patric Lindquis from HQ Bank.
Please go ahead.
Patric Lindquis – HQ Bank
Hi there guys. I have a question on the margins in the first quarter.
I mean, you could in a way that the 40 basis that you were hit by the Lira was offset by some things that went the right way. Could you talk a bit about what they were and whether you expect those effects to continue throughout the year?
[Not identified]
As Jan alluded to earlier we have a lot of ongoing activities when it comes to cost reduction. For example sourcing from low cost countries where we have increased the sourcing just in the past quarter to 4%.
We have ongoing layoffs of people in production like in France and the U.S. and we are increasing production in low cost countries.
So there is lots of activities going on in order to in small steps improve the margin but it is not one particular activity or action. It is a number of small activities.
Patric Lindquis – HQ Bank
Okay. Since you are saying that you are guiding towards maybe the lower end of the margin range for the full year and we know you have [delta] roughly 20 basis points referring to the raw material issues from 12 to 30 but still advise that you are seeing some other headwinds because as you say you are running cost improvements over low cost countries and what have you that will boost margins also in the latter part of the year.
Are there any other headwinds that you are seeing or expecting or supplier issues becoming more of a problem?
[Not identified]
No. The supplier issues and the other issues we have been talking about are very much on the same level.
It is the uncertainty in the light vehicle production. If you just look literally into the light vehicle production for quarter four you can see that quarter four seems to be a little bit weaker than the current outlook was for a quarter ago.
But there really is no other headwinds that we are seeing.
Patric Lindquis – HQ Bank
And a question on organic growth which you say will accelerate quite significantly in the second quarter I presume that is related partially to U.S. launches and what have you.
What is your feel for those or what are your clients saying about the roll out? Are they still progressing according to plan?
Jan Carlson
The roll out launches are according to plan. Some of the launches are sort of very much steep.
Some of our customers can change orders very fast actually from one day to another in general so thereby you have an effect of the launch pretty much very quickly. We also see that once the launch is coming up the sales will increase again.
You have that double effect of the negative sales for the old version of the cars. So for us it is a combination of additional platforms, additional vehicles and also the launch of existing platforms where our content is a higher [safe]?
Patric Lindquis – HQ Bank
So the increased risk that you are talking about does not refer to your clients telling you they are less certain for the prospects of their new launches?
Jan Carlson
No. There is not any such comments.
The last vehicle production in general and the sales in general we can all read about but there is no specific information about them.
Patric Lindquis – HQ Bank
Okay. Thank you.
Operator
Thank you. Our next question comes through from the line of Brett Hoselton from Keybanc Capital Markets.
Please go ahead.
Brett Hoselton – Keybanc Capital Markets
Good morning or good afternoon gentlemen. Can you go into a little bit more detail with slide 17?
What is going on with the taxes?
Magnus Lindquist
Slide 17…yes. In the end of last year, 2007, there was an upcoming change in the tax legislation in France which then allows you to make broader tax credits for R&D activities and costs.
That then helps us to therefore get tax credits and effectively reduce the tax rate from underlying 31% that regarded at that time to down to 28% for this year. Then we talked about how we have certain discreet tax items which we will very likely have from one quarter to another given the different kind of tax activities in various other countries.
But the main change in the underlying tax rate is the new French tax laws.
Brett Hoselton – Keybanc Capital Markets
Okay. And the new tax law is that extended for the next, it sounds, for the next two years?
Magnus Lindquist
Yes. Until further notice.
When we made the previous guidance we were not really sure how the new laws should apply to us and our R&D activities but we assessed that here in the first quarter together with our auditors and our tax experts and come to this conclusion.
Brett Hoselton – Keybanc Capital Markets
Okay. And then looking at the change in RD&E, obviously a fairly significant change…or at least from my opinion a fairly significant change.
Is that indicative of anything? It sounds like…are you in effect spending less money on RD&E expense and that is going to be something you are going to see going forward?
[Not identified]
We are more efficient when it comes to application engineering. We have no change at all depending on future developments, conceptual programs, research or basic development of new products.
What we have done is we have moved more people from high cost countries to low cost countries. Last year we took about 300 people in high cost countries and we replaced them with 270 low cost countries.
This quarter behind us now, first quarter, we took out 41 heads in high cost countries and replaced them with 40 heads in low cost countries. It is a continuous transfer to be where the growing customers are and to take advantage of the lower cost.
Brett Hoselton – Keybanc Capital Markets
Okay. Then as far as capEx, a little lower in the quarter.
Just simply seasonality or according to certain contracts or programs that you have?
[Not identified]
Basically seasonality and also a focus on investing in low cost countries. So not any significant changes.
Brett Hoselton – Keybanc Capital Markets
Okay. Thank you very much gentlemen.
Operator
Thank you. Our next question comes through from [Angus Trap from SEB].
Please go ahead.
[Angus Trap - SEB]
Hi. I have two questions if I may.
First I wonder if you could tell us a little bit more about what you see happening to average share selling value per call or per vehicle in the places in the world where we actually have growth? You said it was $160 per vehicle in the rest of the world.
Can you say something more about that and what is the growth rate? Is there a big difference between China, India and Eastern Europe?
I know you said it is going to be the same as Western Europe in the longer run, but I guess it is a very long road to walk until we are there. Can you say something about the growth rate and the production increase, etc.
Also I wonder if you can comment upon what is happening when the steel prices, or what is your take on…I understand some of the world’s biggest steel players are aiming to raise prices on already defined contracts in retrospect to compensate for rising cost for iron ore, at least in the U.S. I wonder if you have…what is your view on that?
Is it happening and is it included in your revised guidance?
Jan Carlson
We saw the same value in emerging markets.
[Not identified]
Yes you are right. It will take some time to walk down the path to reach the same level of content in emerging markets that is in Western Europe and North America.
However, we are seeing an increased base rate of the units. We said the rest of the world $160.
It is increasing but also have to take into account that price decreased. We have maybe a slightly higher price pressure in growing markets than in the rest of the world and in the established markets due to the increase in volume.
That is partly offset in the content per vehicle in the rest of the world. We are at $160 today.
It is hard to predict where it is going but it is definitely increasing. As we said before maybe somewhat faster in this part of the world the take rate of new products as it was in Europe and North America when products were launched.
I have no good figures if you don’t have any for the future take rates. I don’t think we have that at hand actually for what it would be in 2-3 years.
When it comes to the raw material prices we haven’t seen any retrospect with price increase. Maybe that is the case that they will increase steel prices based on iron ore but that is some layers away from us actually.
We have though seen suppliers want to renegotiate already existing contracts and we are pushing back and of course holding tight against that as much as we possibly can. So already negotiated prices could be up for discussion and we are holding back but no retrospect.
[Angus Trap - SEB]
Alright. Thank you.
Operator
Thank you. Our next question comes through from the line of [Actus Veraserus from Swed Bank].
Please go ahead.
[Actus Veraserus - Swed Bank]
[inaudible]
Jan Carlson
Fourth quarter is also this year as it was last year…the most important quarter. You are right.
[Actus Veraserus - Swed Bank]
Then. If I read you correctly you said cash flow will be headed back to the shareholders.
Is that fair to say that you would be more aggressive on share buybacks if you have a very strong cash flow?
Jan Carlson
As we have said the philosophy has been to return free cash flow in dividends and share buybacks. We have also said that we communicated last quarter and reiterate here we watch closely on the financial market.
We watch closely on the credit situation and also on the uncertainties in light vehicle production. Q4 is also watched close to what could come in terms of acquisitions and from a strategic review you are making.
So to commit to an increase here and there I guess you will have to wait and see until Monday and then you will…Thursday maybe it is and then you will see where we are.
[Actus Veraserus - Swed Bank]
It used to be Mondays. Lastly on the take back you said not more than 5% of sales.
Is 350 a good guess?
Jan Carlson
350-380.
[Actus Veraserus - Swed Bank]
Okay. Thank you.
Operator
Thank you. That was our final question and there are no more in the queue so a final reminder ladies and gentlemen if you do wish to ask a question today please press 7 1 on your telephone keypad.
Thank you I have a follow-up question from the line of Brett Hoselton from Keybanc Capital Markets.
Brett Hoselton – Keybanc Capital Markets
Thank you so much. During the conference call you mentioned acquisitions a number of times and my question is what are you thinking about at this point in time?
I’ve heard mixed in terms of smaller acquisitions but I’ve also heard the possibility that you could be looking at possibly larger acquisitions. So what are you thinking in terms of acquisitions?
[Not identified]
I think what we are looking for is acquisitions in the area of active safety and the technology that could be gained for us in coming pass through into the market of active safety and we’re looking for acquisitions in emerging markets there also when it comes to passive safety that we could grow the business even faster in the emerging markets. If it is a large acquisition or a small acquisition?
I think it has to fit with what is right for us. We are reviewing this.
We are looking for opportunities in both areas actually for the time being. You know how it is.
The acquisition has to be something that is for sale for you that makes sense. Don’t increase your risk level into the company which is important.
Brett Hoselton – Keybanc Capital Markets
Thank you very much.
Operator
Thank you. That was our final question.
I will now hand you back to your host to conclude today’s conference. Thank you.
Jan Carlson
Here from Stockholm we thank you for your participation and also your interesting questions. We look forward to seeing you again on the second quarter earnings call which is July 22.
Thank you very much.