Oct 21, 2008
Executives
Jan Carlson President and CEO Mats Odman – Vice President Corporate Communications Marika Fredriksson Chief Financial Officer
Analysts
Himanshu Patel – JP Morgan [Kenya Stahl] Thomas Besson – Merrill Lynch Patric Lindquis – HQ Bank Brett Hoselton – Keybanc Rod Lache – Deutsche Bank Anders Trapp – SEB Adam Jonas – Morgan Stanley Joe Amaturo – Buckingham Research Michael Anderson – Evli Bank Patrick Sjoblom – Cheuvreux [Ansi Bartenon] John Buckland – MF Global
Operator
Jan Carlson
We will start with a quick review of the quarterly results. This will include an update on our liquidity position and the status report on the action program.
Turning to the outlook, we will focus on the overall business climate and how we see this impacting our company in the future. After that, we will remain available for questions.
As usual, you will find the slide presentation through a link on the front page of the Autoliv corporate website under Financial Reports. We will now turn to the next page.
We will find the safe harbor statement. As you know, this is an integrated part of the presentation.
I know that this presentation includes some nonU.S. GAAP measures where the reconciliations to U.S.
GAAP can be found in the back of the quarterly earnings release and in the 10Q filing. Moving on to the next page, we have the summary for our third quarter results.
We are very satisfied that we managed to exceed our margin guide and reach almost 6% EBIT margin despite a 5% weaker global light vehicle production than expected. Another important achievement during this financial turmoil was our strong operating cash flow which exceeded $100 million.
In addition, since the third quarter we have managed to secure close to $200 million of new mediumterm financing. This credit is without covenants, even in this difficult financial market.
Overall, this shows a solid performance. I would like to extend a sincere thank you to all our employees for their efforts in this unprecedented environment.
We will now turn to the next page. We have the latest light vehicle production figures by region from CSM and JD Power for the third quarter.
This slide we see here illustrates the unpredictable climate that we operate within. During the quarter, there were close to 800,000 fewer vehicles produced globally than originally expected.
Also 200,000 vehicles less than last year. At the beginning of the quarter, global light vehicle production was expected to grow by 4%.
The outcome, however, was a decline of 1%. This deterioration of 5 percentage points was more than the 4 percentage points experienced by Autoliv.
The most important swings affecting Autoliv were experienced in Western Europe, Korea, and China. On to the next page, we have our organic space developments both global light vehicle production and the Triad.
For the third quarter, we saw our organic sales decline by 7% versus an expected decline of 3% at the beginning of the quarter. The main reason for this deviation to our guidance was in Western Europe where further production cuts at Volvo, 14%; Renault, 14%; and also PSA, 6% accounted for more than half of the deviation.
In Rest of the World, the volumes were down roughly 21% and 8% for Korea and China, respectively, as compared to our earlier expectations. These are also the largest markets in that region.
Turning the page, we have the Autoliv production figures for the third quarter, including the change from prior year. As you can see, the volumes in our seatbelt increased by more than 5%.
This was mainly due the continued strong demand in the Rest of the World along with market share gains in North America. The acquisition in India accounted for less than 1% of the improvement.
Curtain airbags were up 9%, mainly due to the increased penetration in the world regions. For our other product lines, the volume decline varied between 3% and 8% as you can see.
However, this is still less than the light vehicle production declines in our major markets, Western Europe and North America, of almost [12%] combined. As result, on a global basis we believe there has been no major changes to our overall market share.
Turning to the next page, we have our associate development. Since the same quarter last year, we have managed to decrease our work force in high cost countries with 2,500.
This was partially offset with an increase in the low cost countries of close to 1,500. This is excluding the effects of the India acquisition.
In response to the severe market conditions, we have managed to reduce our work force by 1,700 associates since quarter two. 1,100 of the reductions were in high cost countries, and 600 out of the 1,700 affected are permanent work force.
These changes are to a high degree the result of the actions initiated since the second quarter. We are very pleased with the fast start and the results in the third quarter.
Of course, we are prepared to take further actions as necessary. Turning to the next page, we have our gross margin trend.
The combined negative effects of commodity inflation, fixed asset impairment charge, and the decline in organic sales was 435 basis points. However, more than half of the negatives sales affects was mitigated by our own actions.
This resulted in a decrease in our labor cost and other cost reductions of 125 basis points. In addition, we had a favorable currency effect of 60 basis points that helped us lowering our cost.
In this way, with actions taken, the decline in gross margin was limited to 250 basis points compared to prior year. Moving on to the next page, we have the operating margin.
The 250 basis points negative gross margin effect has decreased to 160 basis points on the EBIT level thanks to our cost reduction effort in RD&E and SG&A. Therefore, we managed to offset most of the negative 210 basis points negative effects we saw in the previous slide with our cost reduction effort and achieve and EBIT margin of close to 6%, excluding restructuring and severance charges.
Thereby exceeding our guidance in this tough environment. On to the next slide, we have the EPS bridge for the quarter versus prior year.
Here we have also separated the currency effects. The positive currency effect was $0.18 a share, while a lower tax rate and the share buyback improved the EPS $0.05 combined.
Commodity and energy inflation negatively impacted the EPS by $0.31. And the decline in organic sales also negatively impacted the EPS by $0.32.
However, cost reduction and action programs mostly offset this negative effect by $0.29 a share. On to the next slide, we have the cash flow performance.
Cash from operations exceeded $100 million during the third quarter, which traditionally is a weak cash flow quarter. This cash flow was mostly used for capital expenditures which continued to track less than 5% of sales.
More than ever, we are focused on working capital management where we saw our working capital decline to 9.2% in relation to sales from 9.5% last quarter. This was mainly due to a decline in accounts receivables of $160 million resulting in a 75day sales outstanding.
That is a oneday improvement from last year. Turning the page, we have our return to shareholders.
Our combined dividend and buyback program of $412 million over the last 12 months represents the 12% return on our average market cap. Of course, a good question from many of you would be what is the future of your buyback program.
As we normally say, you will see the results on the website within four days, beginning of next week. Also, in this environment, it would be prudent, of course, to hold on to cash.
Turning the page, we have our net debt to capitalization trend. During the quarter, our net debt increased by $84 million, and our net debt to cap grew to 36% from 33%.
However, this increase was entirely due to the Tyco acquisition and acquisition of the automotive radar and the share repurchase totaling $107 million. As stated before, we remain committed to a strong investment rate.
Of course, especially during this turbulent economic environment. Moving to the next page again, we feel it's appropriate considering the turmoil in the credit market to highlight our strong liquidity position.
Autoliv has a very favorable financing position with $1.75 billion of depth available for the next two years. This is well in excess of our gross and net depth requirements.
$1.5 billion is available for four years or longer. We also have a very strong liquidity position with cash on hand of $500 million as of today.
This is more than our commercial paper and medium term note maturities during the remainder of the year. This also covers for most of our capital market maturities for 2009.
More than half of this cash is currently invested in government T bills, and the remainder is invested with selected four banks that participate in the funding of Autoliv. Last, but not least, we have a healthy cash flow.
On to the next slide, we have summarized the early results relating to the action program and other actions in response to the market development. As mentioned earlier, we have decreased our work force by 1,700 people since quarter two.
This is including normal flex in production volume as well as structure changes. Our estimated savings during quarter three was in total $5 million for these activities.
Based on the continued eroding environment, we anticipate decreasing another 1,300 associates during quarter four. This will come in both high cost countries and low cost countries.
We expect the second half savings to be at least $20 million, and we anticipate savings on accelerating the material initiatives to begin in second quarter next year. Turning the page, effect of the credit crisis.
Weakened consumer confidence and a unstable commodity and currency environment continue to take a toll in our industry. As an example, since our last conference, North America, the 2008 light vehicle production has been cut to a 17year low of 12.9 million vehicles.
In Western Europe, the expected light vehicle production is also expected to be cut to a 11year low of 15.4 million vehicles. As we also alluded to in our last call, the Rest of the World has shown that it is not immune to the current environment.
The light vehicle production has been cut and is expected to be cut with 900,000 vehicles. That was in July.
While looking ahead to 2009, we anticipate a further drop of almost 2 million vehicles within the Triad. On a positive note, commodity costs continue to decline.
And side system penetration, of course, continue to increase in the Triad. Turning the page, we have the latest expected light vehicle production figures by region from CSM and JD Power.
This is now for fourth quarter and versus last year fourth quarter. For the first time in the recent history, you can see that through all regions in total, with exception of part of Europe, Eastern Europe, it's showing a decline.
In North America, the light vehicle production is expected to decline; it's expected to be around 19%. Western Europe is expected to decline 13%.
Combined, this represents a 16% decrease in our two largest markets. Additionally, the market deterioration is expected to spill over into Asia and South America as we said before.
In Japan, light vehicle production is expected to decline 7%. In the Rest of the World, light vehicle production is expected to decline 1%.
Where China and Korea, we saw the largest market in the Rest of the World, is expected to be down 4% and 9% respectively. On to the next page.
We have the most recent changes in light vehicle production for North America and Western Europe. These two regions make up 70% of our sales.
The NAFTA region is represented by the lines with circles. For quarter four, this deterioration is 8 percentage points from minus 11% expected in July to minus 19% now in October.
This is mainly due to continued erosion of the truck and SUV market. Important for us as we are overrepresented on cars, the car production is actually expected to increase which is favorable for us.
Western Europe is represented by the lines with the square. The quarter four change is also 8 percentage points here, from minus 5% to minus 13%.
However worth mentioning here is that these estimates are from September. Consequently, the actual change could be even higher given the financial turmoil at the end of September.
On to the next slide, we have the commodity impact on our business. For the full year 2008, we have raised our assumptions slightly from $60 million to $65 million.
This is the result of a $5 million higher cost, mainly steel in quarter three. For quarter four, we have taken a conservative approach and assumed that this run rate will continue.
As communicated during the quarter, we are changing to more shortterm contracts to be able to take advantage of the current trend of decreasing prices in the raw material market. Consequently, if the current trend continues, there will be a positive effect in 2009.
Moving on to the next page, we have made an update to our estimated headwind. As mentioned on the previous slide, commodity, fuel, and energy inflation is now expected to negatively impact our fullyear 2008 results by $87 million, or 130 basis points of margin versus last year.
In addition, we now expect also organic sales to decline by 7% and not the 1% as in July. This 6% drop in our organic sales for full year 2008 erodes the margin by approximately 180 basis points.
However, more than half of this erosion should be offset by cost savings from the action programs and other cost reduction actions. The compilation therefore implies that we would have a 6.5% margin for 2008 excluding the effects of restructuring and action program.
This compilation is, of course, based on many uncertain assumptions; but it is the best estimate that we can give you at this stage. On to our last slide before we open up for Q and A.
We find the financial outlook for the remainder of the year. This is based on the current assumptions.
In quarter four we expect the organic sales to decline in the order of 12% due to the light vehicle production drop, as we talked about primarily from the major markets. Consolidated sales are expected to decline by 10%, and we expect fourth quarter EBIT margin to be approximately 5%.
For the full year 2008, this would lead to a consolidated sales increase of 2%, and that is including organic sales decline of almost 6%. Acquisitions are expected to add almost 1% while currency is expected to add 7%.
Our full year 2008 EBIT margin guidance has therefore been revised to around 6.5%, excluding severance and other restructuring costs. To summarize, I am pleased that we started to develop our action program already in July.
This and other actions have given us the possibility to offset a significant portion of the current and upcoming headwind. It's also important that Autoliv maintains a strong balance sheet, especially during these uncertain times.
Turning to the next page, we conclude the formal presentation of today's call, and we would very much like to open up for questions.
Himanshu Patel JP Morgan
I have two questions. Can you talk about the rate of production schedule revisions from Europe car makers?
Have they started to slow down and sort of stabilize in the last couple of weeks?
Mats Odman
We have seen over the last couple of weeks during October a continued change. In particular, we would say that it is significant or affecting Western Europe or the European production.
Therefore, we believe the figures we see here in the forecast might be too good, actually, reflecting the current environment, and that's related to Western Europe. We haven't seen for the time being any significant cuts in North America.
It's mostly related to Western Europe.
Himanshu Patel JP Morgan
Then, lastly, you mentioned FX transaction was more favorable than you expected. Which currencies were involved there?
Marika Fredriksson
The Turkish lira and the ron, the Romanian.
Operator
Your next question comes from [Kenya Stahl].
[Kenya Stahl]
The R&D costs were lower in this quarter and generally you have to get payments back from CapEx in the fourth quarter. Since it was lower already in the third quarter, should we expect a higher R&D cost hitting the P&L in the fourth quarter this year?
Mats Odman
Compared to last year, if you remember last year, we had an exceptionally low R&D cost net. That was due the unexpected end of year income that came in very late in the quarter.
In relation to last year, you should expect to look towards a higher R&D. But overall, we have said that we should come in on the south side of 6% when it comes to R&D costs in relation to sales that is still valid.
Operator
Your next question comes from Thomas Besson Merrill Lynch.
Thomas Besson Merrill Lynch
Can I continue on that? You said in the presentation on the last slide that you expect ForEx to have a positive impact of 1% on quarter four revenues.
Can you elaborate on that because seeing the Euro dollar rate at 1.32 and currently I think at 1.36 for Q4.
Mats Odman
It's based on the current exchange rate. It has not taken into account any changes of the currencies between dollar and it.
If we would see a further strengthening of the dollar, of course we would change. This is due to the current environment.
Thomas Besson Merrill Lynch
To follow up on the question about R&D, if your revenues were to eventually, first of next year with volumes coming down, could we imagine R&D being brought back up above 6% or are you going to try to limit the amount of R&D significantly next year?
Mats Odman
We have now seeing the action program back in July, do you remember that, we are consolidating the application and engineering parts. We will continue to do so.
We will continue to offset to the absolute highest extent and maybe even more the consolidation on the engineering, application engineering side with increased development that we have in technology.
Thomas Besson Merrill Lynch
Another quick question. When looking at the full year 08, you speak of $75 million cost for your action program.
Implying that there will be more in Q4 than Q3. There seems to be a positive effect on income.
Can you narrate on what is in there? In previous years, it's been mostly negatives of other income and expense line.
It seems that outside your action program, this year you have something positive for the first time since 2003. Could you comment on that?
Mats Odman
I don't know that there is any other significant positive effect on the other income and expense. It's mostly related to the restructuring charges.
I am not sure I am really following what you're after.
Thomas Besson Merrill Lynch
I am asking you if there's going to be something else in other income and expense or if it's only going to be the $75 million in H2? That's all I'm asking.
Mats Odman
I understand. It's not any major thing.
There is maybe some smaller portions. But the absolute majority of it is related to restructuring.
Operator
Your next question comes from Patrick Lindquis HQ Bank.
Patrick Lindquis HQ Bank
I have a question on the timing of the savings, the 120. You mentioned that you were aiming at getting a run rate of 80% midyear.
Is that only on the savings? On top of that should we look for the materials efforts or is that included in the 120 number?
Mats Odman
The material that we have announced as a part of the action program is including in the 120. What we are seeing on top of this is that the action program is possibility for lower raw material prices.
Patrick Lindquis HQ Bank
I was getting into that. You mentioned in an interview a potential positive between $30 million and $40 million for 09, given the current spot rates.
Are those positive effect coming from virtually across the board or is there any specifics that you want to point out which is driving this?
Mats Odman
Basically they are coming from across the board. Actually, you see more or less falling raw materials prices across the board.
That is, the prices that are important for us. There are certainly lags in the various kinds.
If you take, for instance, steel prices that we are further away from the steel business. We buy very small portions directly.
There is a lag effect. Virtually coming from across the board.
Patrick Lindquis HQ Bank
Relating to that, have you seen any from the OEMs that they're starting to say now you have a tailwind coming up in raw materials, thus, with the bad volumes, you need to help our bottom line and give us more on price?
Mats Odman
I think the customer always thinks we should lower the prices. They will find whatever possibility they will to take to lower the prices.
Patrick Lindquis HQ Bank
Final question. On the mix for 2009, do you have a feel for where your order books are?
Assuming that the rates of different models will roll out, should we expect the mix to be a positive contributor to your growth in 2009?
Mats Odman
We expect the mix to be positive. First of all, we have during the 2008 suffered from the phaseout effects of the two largest platforms you have in Europe, the Renault Megane and the Volkswagen Golf.
These are now relaunching and we should have a phasein effect here in Europe and a positive impact. We would expect it to be.
Even so important when we talk about North America, one of our most important markets here, we see a decline for the year forecasted to be 9%. But it will look on cars, it's much less.
As you know, we are overrepresented on cars. For North America we have only 25% of our sales in trucks.
As cars are doing better, we should see also that in favor to us when we hear about the general downtrend in light vehicles production in North America.
Patrick Lindquis HQ Bank
I stand corrected. The total net in Europe should still be a positive.
I assume that the growth is coming out of Eastern Europe where installed penetration is lower on safety for cars. That's a negative.
But the net is positive.
Mats Odman
Too early to say about the total sales development. We will have to come back to that a little bit later and see how it has developed.
From a mix point of view, we should have a positive impact next year. That's as much as we can say.
Operator
Your next call comes from Brett Hoselton Keybanc.
Brett Hoselton Keybanc
First of all, with regards to the restructuring, you're looking at $120 million run rate, I am assuming that's what you're expecting your run rate to be by the end of 2009, beginning of 2010, is that correct?
Mats Odman
That's correct.
Brett Hoselton Keybanc
And you already are expecting to achieve about $20 million as of the end of 2008, correct?
Mats Odman
Correct.
Brett Hoselton Keybanc
How should we think about that ramp up of the $120 million through 2009? Would you consider it to be a steady state ramp up or is there a particular quarter where you are going to see a step function improvement in the savings rate?
Mats Odman
I wouldn't say it would be a step function. As we have said before, we said initially that a lot of it will come gradually during 2009.
As you now see, we have accelerated the pace quite significantly. We will reduce our work force by more than 3,000 or more by the end of the year already.
There is an accelerated effect coming into 2009 as we have stated previously. The other thing is also the raw materials.
How that is affecting us. As it most probably affects us more heavily on the second half of 2009.
Still an overweight of the savings will be in 2009 of the combined effects of the raw materials and action program.
Brett Hoselton Keybanc
On the commodity cost and also the fuel and energy cost. As we think about the $65 million, the $22 million, how much of that is weighted towards the back half of 2009?
Sounds like virtually all of it for the bulk of it is? Is that a fair statement?
Mats Odman
Bulk of it, you could say backweighted.
Brett Hoselton Keybanc
As we think about 2009 revenue outlook, it sounds like you feel that you're going to have a positive mix in Europe. Is that correct?
And then in other regions of the world, would you expect your mix to positively or negatively impact your revenue?
Mats Odman
We would expect the mix, of course we are hit by the general decline in the volumes, that we are generally down. But the fact we are launching a lot of new cars during this year, in particular quarter four in Europe.
That particular mix effect should be positive in 2009.
Brett Hoselton Keybanc
As we think about your margin outlook for 2009, you have the benefits of the structuring program, you have the headwinds with respect to the commodities cost, are there anything else material that you think might positively or negatively impact your margins?
Mats Odman
I think you know we are taking all and every item into account in the action program. The action program is such and how much we can accelerate that is the most important part together with raw materials.
Those are the two things.
Brett Hoselton Keybanc
Finally, with your solid balance sheet and obviously, you're very fortunate to have that at this point. Given a weaker market condition, is there any opportunity here to make additional acquisitions here given that some of your competitors or suppliers may be a little weaker?
Mats Odman
We are monitoring this as careful as we are always doing. The room for financing and the room for maneuvering, even though we have a very strong balance sheet ourselves, is different than it normally is.
We are looking very close to the opportunity that may come up from here and there on migrating into interesting adjacent areas.
Operator
Your next question is coming from Rod Lache Deutsche Bank.
Rod Lache Deutsche Bank
Just a couple points of clarification. First of all, did you say that you exceeded global production with your organic growth?
Can you help us a little bit with that versus the 7% organic growth that you reported?
Mats Odman
We talking about two different things. If you look at the swing in the production compared to what was expected in July, we have a decline in global production of 5% versus we have a deviation of 4%.
Jan Carlson
It's not so that we are exceeding by decline organically 7%. The global light vehicle production was down 1% for the quarter so we are not exceeding that.
But we are less off in the variance than global light vehicle production.
Rod Lache Deutsche Bank
Just the clarify also on slide 6, the production volumes. Is that all more or less aggregating to something like a 4% decline in production volume?
You have seatbelts up 5%.
Mats Odman
I think it is around 2.5%. Unweighted.
Rod Lache Deutsche Bank
That's not a weighted average based on your different exposures though. Versus the Triad decline of 4%, would you say that you're performing more or less in line with that on a weighted basis?
Jan Carlson
I think what we can see here is that we are clearly up in seatbelts and up in curtains. That is the growth coming from Rest of the World primarily and market shares in North America.
And of course the penetration on the curtains. I think that's as good as we can say for today.
Rod Lache Deutsche Bank
Lastly, in the prior call you had mentioned a pretty stiff headwind from energy costs. Can you update us on how that is affecting your P&L at this point, your expectations going forward?
Jan Carlson
Why don't we look into that while we take the next question and we will be back on that one.
Operator
Your next question comes from Anders Trapp SEB.
Anders Trapp - SEB
I have a couple of questions. First to be 100% sure, the page you showed about your financing covering all the maturities that you have.
Mats Odman
Yes.
Anders Trapp - SEB
Also I wonder, you were talking second quarter that you expected a pretty impressive mix improvement already in the fourth quarter from the launches of new models. Is that still on or is that delayed?
Because to me it seems like a proselytization for why your Q4 would be down so much more than what you said before.
Mats Odman
You are very right. If you look on to what we said for quarter four last quarter and what we see today, it is a decline.
The reason for that is mainly that if you look on the global light vehicle production or if you look on the decline in our major market is 7% or 8%. There you have one thing that is down in the fourth quarter.
The launch part as such is corresponding to approximately 2% decline. Then we have another 4% decline in the fourth quarter related to vehicle mix.
We have important customers of ours with large platforms to ours that have not performed really well. That is corresponding to another 4%.
There you have basically all in all 14%. That's what we alluded to in one of our slides last quarter plus 2% and now we're saying minus 12%.
Anders Trapp - SEB
Also, the restructuring program is impressive in increasing pace. I wonder do you think this is enough or if it's not enough can you do more and if so, when?
Mats Odman
We are continuously looking into the action program as such. As you can understand, the 1,700 was not according to our plan a quarter ago.
We have accelerated this significantly. We are taking out 3,000 or more by the end of the year.
We will continuously monitor what there is to be done, if needs to be done. You can never rule out that we will be forced to take more than the $75 million at the end of the day if it continues.
For the time being, this is the best estimate that we have.
Anders Trapp - SEB
About the commodities, fuel, and energy cost increases. Today you are now estimating it to be $65 million plus $22 million, I think for the full year.
$90 million if you round it off a little bit. Then you were talking about that maybe with the falling spot prices, we are talking maybe $30 million or $40 million of that you can get back next year.
If that's correct, shouldn't it really be more than that?
Mats Odman
We said at least $30 million to $40 million with the current rate. If this is falling, it could be more.
That is what we have today.
Anders Trapp - SEB
One housekeeping question. What should we expect for tax rate and CapEx for next year?
Marika Fredriksson
For the tax rate, [29%].
Mats Odman
If we look into the CapEx, we are looking into the CapEx as such. If you start with the CapEx for this year, we are actually on run rate on this last 12month run rate right now, all $289 million, close to $290 million.
This is lower than expected in our last call, actually. So you should more look towards that run rate.
We have fairly low regional guidance for full year between $350 million and $380 million in CapEx.
Operator
Your next question comes from Adam Jonas Morgan Stanley.
Adam Jonas Morgan Stanley
A question about the $500 million drawdown on the revolver. First, I think we can agree that was a good move.
I missed where you said you parked the proceeds. More important than that, the there any meaningful spread in terms of what you're paying on that borrow and what you're getting from where it's invested.
Any meaningful spread or cost to you for having that flexibility drawn down?
Marika Fredriksson
The $200 million that we have were financed after the quarter closed. We have an average interest rate of 6.75% currently.
The first interest rate is one quarter. Then we have placed these [inaudible] in T bills.
Adam Jonas Morgan Stanley
What about the draw on the revolver?
Mats Odman
The revolver we have LIBOR plus 17.5 basis points.
Adam Jonas Morgan Stanley
And that's also invested in T bills?
Mats Odman
Yes, not all, but to a large extent.
Adam Jonas Morgan Stanley
Question on the cash component of the restructuring cost. Is it fair to assume that as you take them, you will pay them in cash.
Is it a meaningful delay? For example, up to $33 million in the third quarter.
When's the cash outflow for that?
Mats Odman
As you saw, we had a cash out in the quarter for $7 million in the third quarter. Out of the $33 million that has been allocated, we have had a cash out of $7 million for the third quarter.
Adam Jonas Morgan Stanley
I will assume then, this takes a better part of six months for that full $33 million to be reflected in the balance sheet?
Mats Odman
It depends on when it's related to major restructuring like plant closures or part closures. If you look on the cash outlay as we said on the slide, for accumulated for the year, we will have another $9 million in quarter four.
In total, $16 million for the second half of the year.
Adam Jonas Morgan Stanley
My last question is just a bit theoretical, but I think you have attempted to answer this before. I ask again because your cost structure changes over time as you continually shift from HCC to LCC.
But all else equal, I know it never is, but all else equal, what is your variable margin that we could assume to apply in organic growth decline or increase into a EBIT bridge for you.
Mats Odman
As you said, it differs from high cost country from product to product and from region to region. You can calculate it backwards if you take the gross profit, which could be in the range of close to 20% or below and then you add back 5% of D&A and then you can come to one end.
You can also take it from above and you can come to another end of 35%. It is between the ballpark of between 25% to 35%.
Operator
Your next question comes from Joe Amaturo Buckingham Research.
Joe Amaturo Buckingham Research
You did a good job with working capital improvement in the third quarter. What's your expectation for the rest of the year?
Mats Odman
We are committed to be below 10%.
Joe Amaturo Buckingham Research
You're not anticipating any kind of payback or reversal of this accounts receivable benefit that you received in the third quarter?
Jan Carlson
No, not really. We feel committed to this level.
Joe Amaturo Buckingham Research
Given that you revised your margin guidance and such, can you just give us an update of where you feel free cash flow will come out for 2008?
Mats Odman
Free cash flow, we haven't done any of that estimation for the fourth quarter actually. We will have to revisit that question.
Joe Amaturo Buckingham Research
Let me ask it differently. If there's no reason to believe that you should be cash flow negative in the fourth quarter, right?
Mats Odman
No.
Operator
The next question comes from Michael Anderson – Evli Bank.
Michael Anderson – Evli Bank
Regarding 2009 again, when I looked at old annual reports from 2001, the organic sales decline was 3% and the underlying margin was 6%. What's your feeling when you hear those numbers to go into next year?
Is there any structural difference nowadays? In the annual report from 2001, there was a lot of talks of pricing pressure and so on.
Do you feel that is different this time or is it more of a matter of where we see the market and how much production rates will fold? Also regarding the mix, you were talking about a positive mix.
Aren't we seeing a global shift towards smaller cars? We will see a lot less V70s, XC90s, and BMWs being produced next year, which should hurt you I think.
Mats Odman
Two things. We are in the midst of an action program.
It's different than in 2001 when we were hit quite by surprise by a significant decline. We are right now in the midst of a strong action program that we will accelerate according to the pace.
The second thing is that we have a much higher low cost country position. We were, I guess, around 2001 less than 20% or work force in low cost countries.
That is one area. The second area of course we will use and we have already used is the temporaries.
We have a 13% temporary work force in our group. Things are different right now structurally in our company than it was in 2001.
Coming back to the second part of the smaller vehicle, it's all dependent on the specification level you have on the vehicle. Whether it's small or large, it's less important.
BMW [inaudible] for instance, $550 per vehicle in content for Autoliv. [inaudible] over $350 per content.
Both of them very small cars. Small cars, high list safety specified, good for Autoliv.
Operator
Your next question comes from Patrick Sjoblom Cheuvreaux.
Patrick Sjoblom Cheuvreux
A little bit of a followup here. I couldn't follow you on the guidance that you gave on FX effect in the fourth quarter.
When I look at the Euro against U.S. dollar, it is trading now at roughly 1.32 or so.
That means it's like down 8%, 9% against last year. With half of sales in Europe, that's like almost 4% negative if you make blunt calculations.
There must be something else been going up very much. Just help me with how I should think here.
Then I have a more general question on outlook.
Mats Odman
I think we will have to come back to you on that and look at the facts some more. Bear with me on that.
Patrick Sjoblom Cheuvreux
Then to more general thought. I am just thinking of to get your view on car demand in western Europe and North America.
Looking back at the drops we saw, say in 2000, 2001, 2002, when we had a downturn previously. At that time, interest rates were clearly higher than they are now and the central banks stimulated the economy on car sales by lowering that, too, seems to be a little bit depletive this time around.
When we hear JD Power talking about 12 million cars, a 17year low, etc., do you see any reason to believe there's going to be a recovery from these levels or should we expect to remain at these levels for quite a while now because it's at least one of the keys to financing cost seems to be already at the lowest level.
Mats Odman
I think of course the financial turmoil makes it difficult for consumers in some cases to buy cars. People can't seem to afford to buy a new car.
On the other hand, the car fleet will get older, maintenance costs will increase and at some point people will buy a new car anyhow. They may or may not be delayed.
When it comes to North America the leading indicator is the prices for homes. When that is stabilizing and you can see it stabilizing, you can also see car buy coming back at some point.
And also you have the effects of fuel consumption and environmentally friendly, being more environmentally friendly and less emissions. That will also impact the people that want and drive to buy new cars.
Patrick Sjoblom Cheuvreux
And please come back on that currency thing.
Operator
Rod Lache Deutsche Bank
I just wanted to follow up. Can you tell us how large your commercial paper program is in total and is it correct that the program is not backed by receivables?
Jan Carlson
We can do that in effect.
Rod Lache Deutsche Bank
Is it your assumption that the commercial paper can be rolled at this point or are you assuming that you are taking this out with your revolver.
Mats Odman
We have our expert here next to us Mr. Hans [inaudible].
Hans [inaudible]
We have two commercial paper programs, one U.S. dollar program of $1.1 billion and one Swedish program of the equivalent to $1 billion.
The outstanding under these programs currently is less than $300 million. We are rolling maturities in both programs currently.
We have a $1.1 billion covered back up until 2012.
Rod Lache Deutsche Bank
It's not backed by receivables or it is?
Mats Odman
No, it's not.
Rod Lache Deutsche Bank
And the $200 million financing that you commented on earlier, were you taking out actually a maturity in 2009 that was out there. Did some of the numbers talking about in your future maturities didn't match exactly what you had in your 10K.
Is this an additional financing source?
Mats Odman
Yes. It is a new mediumterm financing.
Part is over two years and one part is over three years.
Operator
The next question is from [Ansi Bartenon].
[Ansi Bartenon]
My question is related to the ownership structure of Autoliv in Norma and how you have been treating the minority shareholders in Norma since 2005. There's a number of amount of deposits being deposited on a quarterly basis being deposited in Autoliv.
Since no other shareholder has any say to those deposits, Autoliv allows this to pay quarterly dividends and maintain this quarterly dividend stream. How do you tend to continue with that?
This is actually against Estonian law.
Mats Odman
I know that, I have heard these currency arguments before and there have been discussions at the shareholders' meetings about these things. I can assure you definitely that we are not violating any laws of course.
[Ansi Bartenon]
Mistreatment of minority shareholders, completely. You wouldn't be able to pay such dividends and continue with the share buyback program and you know that.
Mats Odman
As everybody can read for himself, we have now more than half a billion dollars of cash on hand. That is simply not true.
The fact is that the Norma management gives the investor interest deposit [inaudible] the money in Autoliv and that's why they do that, excess cash. With Norma management we have not taken the position where they should put their money.
[inaudible] Why don't we take this as a separate topic? I will be available for you to discuss this as a separate topic and we can take that offline.
Operator
We currently have no questions coming through. We have a question from the line of John Buckland MF Global.
John Buckland MF Global
Much earlier in your presentation, you mentioned that the forecast you're making may not be correct because of developments in recent weeks. Is that based on the schedules you've seen and can you just give us an idea about how your estimates might have gotten more pessimistic.
I am not sure whether you did actually give us a clue what you thought the development would be in 2009. The last question is you said you were also letting people go in low cost countries, which seems surprising to me.
Perhaps you could tell me what low cost countries you are reducing work force?
Mats Odman
We will start with the first question of 2009. I think it was not our meaning to give you any guidance for 2009.
We can just elaborate on the raw materials prices will most certainly come down. We will lose more vehicle production and we have an action program in place that we will accelerate according to the market conditions.
I think that's basically everything I can say in 2009. Regarding the accuracy in our forecasting, you have seen the production schedules change so fast and that is changing even as we speak.
As production schedules are changed and will decrease to the absolute most. This is to the best of our knowledge to date.
That we can give you the guidance for productions and for the operating margin. Coming then into the low cost countries, when you see falling demand in the region, even in Rest of the World, you see for instance Korea, you see falling growth in China.
You also see there is a need to adjust the resources. In Europe and also in respect to the low cost countries part of Europe.
We have a combination of exporting out of low cost countries into high cost countries. Therefore it will be a mix of reduction of work force where we have the product being affected by lower volume.
I cannot share with you here today which countries that is reducing and what we are intending to reduce here right now.
John Buckland MF Global
Can you not give us a bit more information about these schedules? You say they're changing every day and they're getting worse.
What degree are we seeing?
Mats Odman
In the last couple of days, we are seeing we are somewhat getting updated from our customers. We will receive, I don't know what that will mean, the official figures will come out of JD Power for Europe here in a couple of weeks, week and a half.
I would not be surprised if that is down from where we are today. That has been the occasion that we see when we look into our production schedules for forward.
To give you more exact updates on which customers you can read and about important customers of ours like Volvo, as we talked about earlier, is cutting back production and laying off people in Sweden. There is a change in the production environment that is affecting us.
Operator
We have no further questions. I will hand you back to your host for today's conference.
Jan Carlson
We will have some outstanding questions regarding currencies and also maybe regarding fuel costs and updates on that.
Mats Odman
I have some information from our associates here. As to the FX effect, most of the favorable effect will come from Japan.
The Euro rate that we have based the guidance on is 1.45. So it's correct that it's somewhat higher than to date.
Exactly what effect that will have on our sales, you can calculate for yourself. That's why we have written in these reports that the exchange rates are more in favor than in quite a long time.
As for the utilities, we have an increase there, including freight, of $22 million now in our guidance. That's a small decline compared to July when we had $23 million.
This $1 million would come in the fourth quarter.
Jan Carlson
Of course added to that is the old price will stay on this low level that we currently see, we would expect a further decline in 2009. With that, I would like to thank everyone for their attention and interesting questions and I look forward to talking to you again next year in January.
I hope in the meantime all and everyone can get a nice holiday season. Thank you very much.
Operator
Thank you for joining today's conference.