Autoliv, Inc. (ALV) Q1 2013 Earnings Report, Transcript and Summary

Good day and welcome to the First Quarter 2013 Quarterly Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jan Carlson, President and CEO. Please go ahead, sir.

Thank you, Lisa. Welcome, everyone, to our first quarter earnings presentation here in Stockholm, we have our CFO, Mats Wallin; and our VP Corporate Communications, Mats Ödman; and myself, Jan Carlson, President and Chief Executive Officer. Also on today's call, we have Thomas Jönsson. Thomas will succeed Mats Ödman later this year. And Mats will retire after a very distinguished career of close to 20 years and completing 76 quarterly reports with our company as our VP of Corporate Communications. I will start off today's earnings call with a brief review of our first quarter results, including an overview of the underlying market conditions. And after that, our CFO will provide some commentary around the financial results. And then, I will conclude with outlook and how we see our business evolving throughout 2013. At the end of the presentation, we will remain available to respond to your questions. And as usual, the slide deck is available through a link on the front page of our corporate website. Turning the page, we have the Safe Harbor statement which, as you know, is an integrated part of this presentation which includes the questions and answers that follows. During the presentation, we'll reference some non-U.S. GAAP measures. The reconciliations to U.S. GAAP are disclosed in our quarterly press release and the 10-Q filed with the SEC. Moving to the next slide. We had another solid quarter of financial performance despite the continued decline in both Western Europe and Japan. Our sales and margins were better than guided, mainly due to a stronger growth in China and a smaller-than-expected sales decline in Europe and Korea. Our strong earnings of $1.32 per share was driven by the higher-than-expected organic sales. This figure excludes cost related to the ongoing antitrust investigations and capacity alignment. Our operating…

Thank you, Jan. On the next page, we have our key figures for our strong first quarter. Our sales of more than $2.1 billion was the second-best Q1 ever despite the 1% negative effects of currency and less than 1% organic sales decline year-over-year. Our organic sales declined of 9% in Europe and 15% in Japan was almost entirely offset by our strong organic sales growth in China and Active Safety. The decline in gross profit is primarily due to our lower sales in Europe, causing operating inefficiencies and lower sales in Japan in combination with the negative currency effects mainly from the Japanese yen. Moving on to the EBIT development on the next page. The EBIT margin of 8.8% was 1.2 percentage points lower than the same quarter last year. This difference was mostly due to 3 reasons: the organic sales decline had a negative effect of 20 bps, currency and transaction FX of 40 bps while the remaining 60 bps is mainly related to the changes in our production footprint and operating inefficiencies in Europe. Our margin outperformance versus guidance was 0.8 percentage point. This was mainly due to our stronger-than-expected organic sales adding 1 percentage point, which was partly offset by currency effects. The unfavorable currency effect versus guidance was primarily due to a weaker Japanese yen and Korean won. The depressed Western European market continues to impact our margins, which we are addressing through our capacity alignment on the next slide. During the first quarter, the savings from our capacity alignment was $3 million while the cash outlay was $5 million. In addition, we accrued $3 million for further capacity alignment activities. For full year 2013, we still expect to expense between $25 million and $50 million for further capacity alignment activities with a cash outlay in the range of $40 million to $70 million. As we mentioned on the previous earnings call, we expect the initial savings to be around $15 million in full year 2013. Looking now on to our cash flow on the next slide. Our strong operating cash flow was $141 million for the first quarter. We are on track to meet our operating cash flow target for this year of $0.7 billion. CapEx of $86 million was 4% of sales. However, we still anticipate capital expenditures to be around 4.5% of sales for full year 2013. The free cash flow of $55 million was mostly used to fund the dividend of $48 million. The current dividend to our shareholders is an increase of 20% year-over-year. I will now turn it back over to our CEO, Jan Carlson, for the outlook and closing comments.

Thank you, Mats. Turning the page. We have our guidance for the second quarter. Based on our customer call-ups, we expect an organic sales increase of approximately 3%. This year-over-year increase is related to our continued strong growth in China, Rest of Asia and Active Safety. This growth is partially offset by the continued light vehicle production drop in Western Europe and Japan of 4% and 13%, respectively. Sequentially, our organic sales are expected to be up approximately 1%, mostly due to growth in Active Safety. In the second quarter, we expect to achieve an EBIT margin of approximately 8.5%. The favorable organic sales effect is more than offset by the higher RD&E, currencies and costs related to the changes in our production footprint. On to the next page. We have our indication for the full year. Based on our better-than-expected organic sales in the first quarter, we had raised our organic growth indication for the full year to be in the range of 2% to 4% from our previous indication of between 1% and 3%. Our full year 2013 EBIT margin indication of approximately 9% remains unchanged since negative currency effects are expected to offset this slightly higher organic sales. As we said on our last earnings call, this level of margin is the combination of a depressed Western Europe causing underutilized capacity and operating inefficiencies while ramping up capacity for the increased demand in the growth markets and Active Safety. On the next page, we have summarized our sales and margin outlook from the 2 previous slides. All figures related to our outlook assume that mid-April exchange rates prevail and excludes cost related to the ongoing antitrust investigation and capacity alignment. What remains to be added for the full year 2013 outlook is: consolidated sales are expected to be in the range of 2% to 4%, with the tax rate of approximately 27%; CapEx of approximately 4% -- 4.5% of sales; and unexpected operating cash flow of approximately $0.7 billion. All of these remain unchanged from our previous outlook. So to recap, we delivered another solid quarter of financial performance in a challenging and uncertain macro environment and remain focused on executing on our operational priorities. Turning the page. This concludes the formal comments of today's earnings call. We would now like to open it up for questions. And with that, I'll leave the word back to you, Lisa. Thank you.

[Operator Instructions] We will now take our first question from Matthew Stover of Guggenheim Securities. It appears that caller has stepped away, we will move to our next question from Ravi Shanker of Morgan Stanley.

The China strength was a real surprise. You've identified both mix on the global OEMs as well as some of the domestic OEMs as the driver of the strength. Can you elaborate a little bit more on -- is that just coming from demand? Was there any inventory correction that drove that? Or how sustainable do you think that is?

Well, it's always difficult to predict of model shifts. And this happened now during the quarter that the platforms where we have a good content per vehicle sold better than we expected 1 quarter ago, and that's why we are doing and performing better. So I think about the sustainable thing, it's very hard to predict. It is essentially the Chinese growth that is responsible for this, but also the organic sales is -- the better organic sales is coming from a slight less decline in Europe and also in South Korea.

Got it. And just looking ahead, you're guiding to a sequential decline in your margins in Tokyo and you've held your full year unchanged, of course. I know that the FX adjustment both ways in the -- from the euro and the yen, but can you just talk about why the sequential decline in Tokyo and why you didn't raise the full year margin?

If we talk about the sequential guidance in that we have guiding around 8.5% for the second quarter, it's a blend of that we have higher ordinary investments in the second quarter but also some further negative FX. So they are sort of eating up the little bit sequentially higher sales you see from Q1 to Q2.

And when it comes to the full year, the unchanged operating margin is coming from the currency effects. See, the currency had negative effect. Assuming the mid-April exchange rates eats up the positive effect, you would've expected from a -- from the change in the indication -- the sales indication.

Got it. And just finally, in my conversations with you in the last several months, you've seemed a little more cautious in Europe than some other suppliers and even some of the investor community. With 1 quarter under your belt, do you feel better about Europe now? Or do you think they're still risks in the second half?

Essentially, it's unchanged. It's a very uncertain environment and I cannot say I feel bad nor do I feel worse than we did 1 quarter ago. We had a better-than-expected quarter behind us and that's why we are raising slightly the safety indication. But otherwise, no change for Europe.

We will now move to our next question from Rod Lache of Deutsche Bank.

This is Dan Galves in for Rod. It looks like clearly new business and mix was more positive than we expected in the quarter. Do you still expect Active Safety and new business to be accelerating in the back half or should the effect be kind of similar to Q1?

We would expect the growth to somewhat accelerate throughout the year. You're right on that. And besides that, we haven't given any guidance for full year on Active Safety. We have, out there, a target of $500 million for 2015. And we'll remain committed to that target.

Okay. And just following up on Europe. I know you guys do your best to track inventories in the region, as do we. We're starting to hear from some industry contacts that inventories came down significantly in the first quarter. Are you hearing the same thing or do you have an updated opinion on the inventory situation at the dealers in Europe?

As of right now, we have no updated information on exports and imports into Europe. But we don't feel that would be the case that it's coming down. If anything, maybe somewhat higher or unchanged.

Okay. And just one more. I think you had talked about an RD&E increase year-over-year of, I think, approximately $45 million. It was only up maybe $3 million in the quarter. Is there any change to your view on RD&E cost growth in 2013?

No, there is no change. We -- you're absolutely right on the $45 million. And that's the same figure.

We will now move to our next question from Brian Johnson of Barclays.

I know you don't break out, obviously, detailed financials, but could you give us a sense as we kind of think about the puts and takes over the course of the year where you have higher versus lower incremental/decremental margins. What I'm trying to understand is to what extent does this better-than-expected content growth in China and in Active Safety kind of really move the needle in helping with the margins.

. You're absolutely right, what you started off with, we are not disclosing margins per region or per product lines. The only thing -- what we have done is that we have communicated a better than corporate average in the past of margins in Asia or in China, particularly than when it comes to the regions. We have not said how much. We have just said that when you have high utilization of your assets and factories, it -- and it's growing fast, it should do better than average. And besides that, we have no more information to give you. On the Active Safety side, as you know, we have not disclosed margins either. It is a drag on our corporate margins and that is due to the heavy investments in RD&E. You can see some respective growth coming out of these investments. So that is just as far as I can give you an update today.

Okay. And on the Chinese sales, are -- when you track to the end-market sales, is it that the models that you are on are doing better than the market, e.g. consumers are gravitating towards top safety picks or the higher NCAP-rated vehicles over there? Or is it that you're getting more and more installations on platforms overall?

It is a combination of both. Content in China is moving upwards and it's trending up. And over some years, you would see some uptick in the average content per vehicle. But what is more important is that you are on the right platforms where you have a higher content per vehicle. As to the slide that we showed here, there are several of these car models that have a content when they are fully equipped of over $300. So if you are on these platforms, they are selling well, you are doing good. And we have been very good in tracking these vehicles so far.

We will now take our next question from Ryan Brinkman of JPMorgan. Ryan Brinkman - JP Morgan Chase & Co, Research Division: You talked about a positive mix of vehicles in the quarter that carry your content. But what about the trend in content within those vehicles? So for the products that you produce that are options, how are the option take rates trending? I know that the long-term trend is for sharply higher penetration, particularly in Active Safety. But I'm wondering if for cyclical reasons, maybe you see pressure in regions of the world which aren't doing as well from a macroeconomic perspective?

No, I cannot say that. Really, there -- it happens here and there that when it's not mandatory, people take out some products when they are under heavy pressure. It happened in the past. In -- particularly in U.S., we could see some of the car models being -- taking out side systems when they become -- when they came under pressure. That is now gone as it's now legislated to have 100% installation rates also on side systems. So I cannot say that, that is an effect of the pressure to invest in Europe also. Ryan Brinkman - JP Morgan Chase & Co, Research Division: Okay. Can you help us understand the current penetration rate of airbags in different emerging markets, particularly in China, and where you can see that going maybe over the medium-term?

It is the penetration rate. If you take side systems, maybe it has a penetration rate of -- in between 10% and 20% still. If you take frontal systems, it has a penetration rate of maybe above 80%. But that is also having a quite big variance between passenger cars and if you take minivans. Minivans are producing a quite large number of vehicles or they are producing a quite large number of minivans in volumes, but they have virtually no or very little content. So it varies again over platform mix and between types of cars.

We will now take our next question from Richard Hilgert of Morning Star.

Would like to ask a little bit more about your expectations on production in Europe and in China. In Europe, as the previous caller had stated, we've been hearing about inventory reductions in the first quarter. I'm wondering, the guidance for the full year here, how would you characterize how you expect production to go for the remainder of the year? Are we in a more steady-state now compared to what we were in the first quarter, and you would expect that steady-state to kind of stay the same as opposed to shutdowns and ramp ups going back and forth because of inventory reduction? Or are you expecting more shutdowns to come in the second quarter and then for the rest of the year?

We have our call-ups from our customers and that is what we base our next quarter guidance on. For the full year indication, we used, to a large extent, the IHS figures. So a lot of these and what you see here in our indication for the full year is based on IHS numbers. And then, as I said before, we rate the indication with 1 percentage points due to a better-than-expected first quarter. I don't see any real change as of now than I saw in February. I can -- as I've said before, I'm not saying it's getting worse, I cannot say it's getting better either. I think it's all dependent on how the macroeconomic situation develops throughout the year in Europe. We had some quite extensive incentive programs in the previous recession in Europe in 2008 and '09 time frame which would lead to -- that the need to renew the fleet in Europe would have been less than in absence of such an incentive programs. The production was up and car sales was up. So now when times are not looking so good, in many of the European countries, the likelihood for buying a new car may be low. I don't have more figures to -- or information to give you than just that and to -- what we are doing is that we are following the overall situation to see what's happening [ph].

Okay. And then on the China front, it's a different -- it's the opposite situation. Inventory levels have been growing in China. And again, are you going just off of IHS production forecasts for your forecast or do have some color you could give us on your expectations how production over there should go for the year? Are inventories going to stay at these higher levels and continue to trend maybe more so towards the 65, 70 days that we see in most other markets or will they pull back to some of the historic levels that we've seen over there?

I'm not sure -- the inventory is getting up, having an uptrend in China. I think or what we see from various sources are that inventory is or could be even coming down in China. How much that will affect the sales for us and how much that will benefit for us in the future is, of course, remains to be seen. I think, again, here, it's very important that you are on the right good selling platforms and that is what's driving our sales to a large extent. We have been very good in penetrating the good platforms, both at domestic Chinese OEMs and on foreign OEMs, and we will hope to stay so for the remainder of the year.

We will now take our next question from David Leiker of Baird Asset Management (sic) [Robert W. Baird & Co.] David Leiker - Robert W. Baird & Co. Incorporated, Research Division: I wanted to just follow-up first on Slide 14 in your slide deck. You have savings there in 2013 of $15 million in restructuring. When we roll out to 2014, how much of that -- what will that number look like for '14?

We don't have a sort of forecast of '14. But of course, we expect, as you can see, do a lot of cash outlays in this year between $40 million and $70 million. And the payback time from that period of you do the cash, is between 2 and 3 years. So you will gradually see savings improve over the timeline. But how much it will be for '14, it's too early to say. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: But it sounds like it would be larger than what you're seeing in '13.

We hope, of course. I mean, if we do the cash outlay, the savings will come. But as you -- but as you can also see from it, it's difficult to predict. We have the time frame between 2 and 3 years. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then just a follow-up here on Ryan's question earlier on take rates. The last few quarters, you had talked about some drag on organic growth because the take rates in, particularly, in Germany had been weaker than expected. Is that getting better or is that still where it was before?

You mean take rates on Active Safety or... David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Yes, and some of the higher content features which, I suspect, would probably be more Active Safety.

Yes. I think if you look throughout the year, as we mentioned here, the Collision Prevention Assist from Mercedes is now rolling out on face-lifted and new platform vehicles. And we would hope to come back even later this year with more information about this. But it looks like that other OEMs are also going to roll out more Active Safety on their vehicles later on this year, which would have a positive effect for us. I think what is driving this to a large extent is the change in the Euro NCAP and the necessity to have these kind of products if you aim for 5-star-rated vehicles. So we would anticipate this would be an increased rollout. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: And then on Mercedes, are you supplying content on there beyond -- for the Active Safety -- beyond just your radar systems? What do you all have that you're supplying there?

You will hopefully see later on. We have talked about night vision and we have talked about active seatbelts and the related products to Active Safety before. But we will come back to that later when it's rolled out. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Okay, great. And then, 2 last items here. When -- you're upside the guidance, you talked about organic growth. Can you talk a little bit -- is that predominantly related to what we've been talking about here in China in some of the high content vehicles or is there something more than that?

I think if we talk about the full year guidance and the change sort of from the sales perspective, it's mainly due to our stronger first quarter. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Yes, right. I guess I was talking about the bridge that you had working through the revenue growth, on Page 13, that organic -- you're talking about the organic growth here in the quarter, in particular, launch mix. I'm guessing that's predominantly China -- no?

Yes. China is, of course, doing a big portion of our improvement in relation to our guidance, yes. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: And then the last item here, we're seeing across the supplier space, this merging of Active Safety with infotainment and some of the future things people are talking about are trying to integrate some of those together. I just want to understand how you play in that, whether you're a supplier to some of those systems, whether you're a partner there, whether you need to make an acquisition to have a bigger presence on the infotainment side. Just what your thoughts are on how that's going to evolve for you?

Dave, the most important part is that we drive safety and we save lives for our customers and for the end customers. We will maybe be able to elaborate a little bit more on this on the Capital Market Day, how we see Active Safety moving on later on in the future. We have been focused on the sensor part, we have been focused on the chassis system part. And there is where we have our main activities. It's in the vision -- night vision radar. But also, as you know, we are in development of our brake control system, integrating stability control and airbag controller together. That has been and is now our focus. How this will evolve in the future? I think it's somewhat difficult to have a good grip over. And as I said, maybe we can elaborate a little bit more when we see each other in May. David Leiker - Robert W. Baird & Co. Incorporated, Research Division: Okay, great. And then, Mats Ödman, best wishes to you. It's been great working with you the last 10 years and hope to see you in a couple of weeks. Mats Ödman: Thanks a lot. It's been my pleasure.

We will now move to our next question from Johan Dahl of Penser Bank.

I was wondering regarding the stock bond and new orders you have for -- you had for one of your major customers some while ago. Is that starting to impact you? Is that baked into your current full year guidance or is that something that we should see further along maybe into '14, '15?

You're talking about on the GM new business hold? And that is...

Indeed, yes.

Yes, that is -- first and foremost, we are out of the new business hold, so it's quite some time. And we will see the first effect out of this in 2014 and then later on. But to the highest extent, this has been offset by business from other customers.

Okay, great. Can I also just ask you quickly on the bridge you kindly provided which was very useful. The hundred basis point drag from footprint and currency in your current guidance, is that -- how is that progressing throughout the year just in broad terms, in Q2 and second half?

I think if you go to the second quarter, you will also see the same level of impact. So there you have sort of costs related to our changes in our production footprint. And that goes also for the entire year that you have a cost because you need to grow, you need to put in more assets in the growing markets, you get more depreciations. At the same time, you have the capacity alignment in Europe and also some inefficiencies in relation to that -- to those activities in Europe. That altogether, of course, creates more costs on our production overhead.

Okay. So for the full year, it's fair to say that takes the basis points on -- 40 basis points on currency, that's a fair indication?

I think if you sort of take it all in sort of for the full year, then we are talking about an -- in total, around $0.4 million in total, if you take all in. You have sort of RD&E, which is increasing, but you also have higher production overheads and then you have sort of the rest of the operations. So it's $0.4 million approximately.

We will now take our next question from Hampus Engellau of Handelsbanken.

Maybe I'm touching on this again because I was asking about the productivity and efficiencies that you had in China given the ramp-up, how that has precede you in the quarter, what we should expect in the coming quarters? That's my first question. And second question is more on if you could maybe compare a little bit China NCAP to Euro NCAP in terms of these cars. What would your guess be? Will this car have a 5-star rating in the Euro NCAP? And speaking about the local Chinese, that we see it's 5 stars in China NCAP.

If I start with NCAP comparison, maybe Matt can take this -- about the first part of your question. There was an example of a car tested in China for 5 stars and the same car was then tested in Europe for the Euro NCAP, and then got 4 stars, according to the Euro NCAP. I think what's happening here is that China NCAP is driving a very good work to increase road safety in China among the passenger vehicles. That is a blend of what they have learned from Euro NCAP and from U.S. NCAP. But it takes time to get there. And in the same way as Europe is now increasing the demand for getting 5 stars, a 5-star-rated car according to the latest regulations may not be even -- a 5-star car in the previous regulations may not even get more than a 3-star rating in Euro NCAP to the latest regulation. So in that sense, I think that to get the 4-star in Europe and having a 5-star in China, I think it's a good result.

All right. Okay. And then on the productivity?

Yes.

Yes. On the productivity side in China, we also have to be aware that we will invest more in China. We will see, of course, more CapEx coming up in China. And there, it -- we will have some start-up FX. So that will be, of course, also a factor for the China development. But to estimate how that -- how much that will be, I think is too early.

We will now move to our next question from David Jacobsson of Pareto. David Jacobsson - Pareto Öhman, Research Division: I was just wondering if you could help us with raw material impact. How much of the $8 million that you stated is locked in and also, how that breaks down in terms of steel and plastic?

If you would take to the split of the raw materials, the main part is coming from yarn. And I think, the main part there was -- it is $6 million, the favorable effect on the yarn side. You have a favorable effect also of $4 million on the steel side and then you have some headwinds on the nonferrous metals that is going on the other direction. And all in all, for the full year, you will end up -- we will end up with the best estimate on $8 million. Some of this is not locked up because we are running on much shorter contracts for -- particular for steel and so this can fluctuate steel throughout the year. These are the prices that we are currently seeing that we are using to make the forecast. The prices can change and, as you know, the terms have changed over the year. So that is the best estimate that we have today but they could change going forward. David Jacobsson - Pareto Öhman, Research Division: Okay. And once it's sold out, it was $4 million in the quarter and you expect another $4 million for the rest of the year?

Correct. It's $4 million year-over-year, quarter 1 to quarter 1, and $8 million year-over-year, full year. David Jacobsson - Pareto Öhman, Research Division: All right. Just another detailed question on the staff development that you're -- just talking about footprint and cost savings, etc. But you were still increasing staff with 100 -- a few hundred people outside local countries. And could you comment on that, please?

You mean SG&A or... David Jacobsson - Pareto Öhman, Research Division: No, I was just looking at the number of employees and staff development that I would rather expect that to go down.

Well, as we said, if you look to the total number of heads that we have here, in high-cost countries, it decreased with 5% compared to last year. And in low-cost countries, it increased with 10% in -- compared to last year. What we are doing is that we are building up facilities predominantly in the growth markets and that is requiring staff. It's requiring production overhead. It's requiring also some of the SG&A. And we are also bringing -- building up engineering people for the growth in Active Safety. As you know, we are increasing Active Safety engineering spend from around $60 million last year to around $70 million this year. So that is requiring the staff that we see, and if that is the staff increase you referred to.

We will now move to our next question from Angieszka Vilela of Carnegie.

I have a question on China. Could you specify how much proportion of your sales in China is targeting the Chinese OEMs right now?

Yes, we can do that. For -- if you look to the second quarter in China, we had about 16% of -- or -- so for the second quarter -- first quarter, I mean, we have about 16% of our sales in China to Chinese OEMs.

And then if you could elaborate on the average safety content in China. I mean because I -- if I'm correct, it's been hovering around $200 per vehicle. But then, my idea is that you're mostly exposed to more specified cars in China. So if you could compare the development for your average clients in China and also if you could then see if the gap between the international OEMs and the Chinese has been produced right now?

I'd -- it's a -- I don't have those figures with it me here. The gap is -- will take some time still to close. We have some good examples here of the 5-star-rated cars in the Chinese OEMs and they are working hard to get to a better safety standard. Let us come back more to this on our Capital Market Day, where we will have more time to elaborate and give you a better figure of the spread of safety content in China and how that will effect the future.

We will now take our question of Peter Nesvold of Jefferies. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: So you've sort of touched on this throughout the call, but the margin guidance this year seems more back-end-loaded than we normally see. Can you just bridge the margins from first half to second half and just outline what are the major contributors to the margins accelerating in the back half of the year? It might help us kind of frame what's inside your control and what's more levered to industry volumes.

I think if you look into the first half and second half, there is one sort of big factor, which is doing the improvement in the second half. And it's -- actually, we get more engineering income in the second half, which we also usually do. And so that is sort of the normal pattern. So that's the driver behind it. H. Peter Nesvold - Jefferies & Company, Inc., Research Division: Okay. But if I sort of take the midpoint of the guidance for 2Q versus the midpoint for the full year, I get sort of a 60 basis point step up in the second half. And normally, it's -- actually, your margins are a little bit more front-loaded in the first half but it -- you're saying it's the engineering income that, that's really the biggest driver?

Yes. That's a big driver. I don't...

But there is also another sequential improvement of the operational inefficiencies that we are seeing here. We are having better utilization of growth coming throughout the year that will improve the margin in the back half or the second half of the year. We have talked about the operational inefficiency related to capacity alignment in Europe, but also other inefficiencies by having people at the wrong place. And we will hope to solve that throughout the year. So that is also a contributing factor.

[Operator Instructions] We will now move to our next question from Adam Brooks of Sidoti & Company, LLC. Adam Brooks - Sidoti & Company, LLC: A few quick questions here. One, are you seeing any strain on your supply base, and maybe if you are, what regions you're seeing it?

Not for the time being. And you remember in the previous crisis, we saw quite a big strain on supply base and particularly in the U.S. You would expect to see the same level of strain probably in Europe as of today, but for the time being, we are not seeing that actually. And we are monitoring this, having a lot of lessons learned from the previous crisis. But not to date. Adam Brooks - Sidoti & Company, LLC: Okay. And if we look at the temp workforce, I think it was at about 18% for the full company. Can you give us sense of where that's at in Europe?

It is below 10% in Europe and at some plants, it's actually close to 0. And we are using as much as we possibly can to flex out the people and the resources here when volumes are down. Some of it is not possible to do for some reasons and some of it is possible, but below 10%.

[Operator Instructions] As there are no further questions at this time, I would like to hand back over to your host for any additional or closing remarks.

Thank you, Lisa. I would like to thank everyone for your attention and continued interest in our company. And before we close off today's call, I would like to remind everyone of our Capital Market Day at our research and safety center in Vargarda, Sweden on May 14. This CMD will be webcast live, for those of you unable to attend in person, please visit our website for further details. And lastly, I would like to extend a sincere thank you to Mats Ödman for great work over the years with our company, and I wish you a very happy retirement, Mats. Mats Ödman: Oh, thank you.

We look forward to speaking to you again during our second quarter earnings call on Friday, July 19, 2013. Goodbye for now. Thank you.

That will conclude today's conference call, ladies and gentlemen. Thank you for your participation. You may now disconnect.