Maximizing Long-term Cash Flow

Our value-creating process focuses on long-term cash flow. This should provide funds for competitive returns to shareholders - in addition to maintaining earnings momentum and an adequate financial position. We therefore focus on growing earnings per share, while limiting the capital required for taking full advantage of Autoliv's growth potential.

	Cost Breakdown Of Autoliv’s revenues, nearly 50% is used for buying components from external suppliers. (The raw material portion of these costs is 33%, and the remaining 67% are value added in the supply chain.) The second most important cost to control is labor, which represents 27% of sales, including 11% for direct labor in manufacturing and 16% in indirect labor in overhead and research and development. The 16% in Other costs include depreciation, freight, insurance and a variety of other small cost items.
	Four Ways to Create Shareholder Value When analyzing what to do with cash flow from operations ($680 million in 2004), we use the model below. Since the Company pays less than 5% interest on marginal loans while Autoliv’s return on equity is 13%, it is not profitable to reduce debt further, following the net debt reduction in 2004 of $186 million. Dividend payments increased to $70 million, from $51 million in 2003. Since the return on equity is much higher than the cost of equity, we invested more than $300 million in our business. Management also believes that buying back Autoliv stock is a good investment. Consequently, $144 million of the year’s cash flow was used to repurchase Autoliv shares.
	Return to Shareholders Since 2000, Autoliv has increased its dividend payments to shareholders by 56% from $45 million to $70 million in 2004. In addition, the Company has returned $320 million to shareholders by buying back 11.6 million Autoliv shares at an average cost of $27.61. In 2004, the dividends of $70 million corresponded to an annual yield of close to 2.0%. Including the $144 million for repurchased shares, Autoliv returned $214 million or 67% of the 2004 net income to shareholders, corresponding to 5% of the Company’s average market capitalization during 2004.

Topline Growth

One of Autoliv's targets is to outperform the global occupant restraint market.

This target has been met every year for the last several years. Our market (i.e. the global automotive safety market) has risen by an average of 5% since 1997 when the new Autoliv company was started. At the same time, Autoliv's sales have grown at an annual average rate of 10%, and by about 6% excluding acquisitions, divestitures and currency translation effects.

In units sold, the market and Autoliv's sales have grown even faster, but the values in dollars have been affected by the continuous price pressure on automobile components.

Market Share Gains

Autoliv is well positioned to continue to achieve superior growth, although we may not always be able to outperform our market.

Our Company is better positioned in the market's growth areas, such as side airbags and advanced seat belt techno-logies. We have strong positions in the emerging markets in Asia where both vehicle production and the safety content per vehicle are growing fast.

Compared to most of our competitors, we also have a better position with the frontrunners among the vehicle manufacturers, i.e. those who are taking market share and rapidly increasing their production volumes.

Consequently, we expect to continue to increase Autoliv's market share long-term.

Market Growth

Our market should also continue to grow, mainly as a result of new regulations and new technologies that increase the safety content per vehicle. Hence the average sales value per vehicle will increase for our industry.

The most important new regulation is the proposal from the U.S. Department of Transportation to introduce new side-impact test requirements for all new vehicles in the United States. This regulation, which Congress is expected to approve in the fall of 2005, could significantly increase the demand for curtain airbags and other side-impact airbags over the next several years.

In addition, forecasting institutes expect global light vehicle production to continue to grow at approximately 3% per year due to strong growth in Asia.

Cost Control

Nearly 50% of Autoliv's revenues are spent on components and other direct materials from external suppliers (see graph "Cost Breakdown"). Another 27% of revenues are used for salaries and other costs for employees (most of whom are in manufacturing).

R,D&E (Research, Development and Engineering) currently absorbes 6%, and S,G&A (Sales, General and Administration) about 5% of sales. Both R,D&E and S,G&A expenditures are primarily salaries.

Direct Material

Our long-term target is to annually reduce direct material costs by a level consistent with the decline in market prices for our safety systems. In 2004, we reduced our direct material costs by slightly more than 2%, which was somewhat less than targeted due to higher prices in the steel market. The steel content in purchased components amounted to 5% of sales (i.e., approximately $300 million) in 2004.

The most efficient cost-reduction method is redesigning and replacing existing designs and components with new, more cost-efficient ones. In 2002, for instance, we launched a redesigned passenger airbag that has 40% less weight than the previous product generation. Using fewer components also accelerates the manufacturing process, thereby reducing costs even more.

Another cost-reduction method is the current supplier consolidation program, which is expected to reduce our global supplier base from over 2,000 suppliers to less than 500 in a few years. We are also increasing our component sourcing in low-cost countries.

Labor Costs

Our target is to improve labor productivity by at least 5% per year to offset higher labor costs. In 2004, labor minutes per manufactured unit decreased by 6%.

In addition, we continue to reallocate jobs to low-labor-cost countries. In 2004 alone, headcount in these countries increased by 2,500 to 35% of total headcount.

Thanks to these measures total labor cost have remained unchanged in relation to sales since the beginning of the decade despite pricing pressure from customers, salary increases and expansion in R,D&E, which has been concentrated in high-labor-cost countries where most vehicle models are being developed.

Short-term Cash Flow

Roughly one-third of Autoliv’s costs are relatively fixed. As a result, our short-term earnings are highly dependent on capacity utilization in our plants and are therefore sales dependent. Cash-flow also depends on the timing of payments from customers (primarily the ten largest vehicle manufacturers). Short-term cash flow could therefore swing substantially from month to month.

Total production levels in our major markets are good overall indicators of Autoliv’s capacity utilization, but the production levels of individual vehicle models are most critical, since many under-utilized production lines cannot be used to supply another car model.

Cash Requirements

During the next few years, cash needed for working capital is targeted to remain below 10% of sales (although it may fluctuate somewhat between quarters). This key ratio declined from 10% at the beginning of 2004 to 8% at the end of the year.

It is also our policy to maintain net debt significantly below three times EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) and an interest coverage ratio significantly above 2.75 times. Since these ratios were 0.8 and 14.8, respectively, at the end of 2004, there is no need for further debt reductions.

We believe that depreciation (including amortization) will be adequate for covering anticipated capital expenditures during the next few years.

The need for additional manufacturing capacity could, however, be affected by the above-mentioned new side-impact test regulation in the United States.

Capital Employed

We have a number of initiatives for better utilization of capital employed, such as plant consolidations, outsourcing and moving to low-labor-cost countries where less capital-intensive manufacturing processes can be used.

Currently, 53% of Autoliv’s capital employed consists of goodwill and other intangible assets (mainly from the acquisition of Morton ASP in 1997). In 2004, the return on total capital employed was 16% on average. However, on the tan-gible asset portion (i.e., capital employed excluding goodwill and other intangible assets) the return was 40%. As long as we grow Autoliv’s business organically – and we currently do not foresee any major acquisitions – the intangible assets will not increase. Consequently, Autoliv could continue to grow its earnings faster than capital employed.

Returning Funds

In summary, Autoliv has the potential to continue to generate strong free cash flow, cash that should be returned to shareholders.

In 2004, we repurchased 3.4 million shares for $144 million (i.e., an average cost per share of $41.88). Since the repurchase program was started in 2000, 11.6 million shares have been repurchased at an average cost of $27.61 per share. At the end of 2004, when the Autoliv share closed at $48.30, the market value of this investment of $320 million exceeded half a billion dollars.

In addition, we have raised the quarterly dividend per share by more than 170% in five steps including the increase for the second quarter 2005.

We are continuously evaluating the best ways to compensate shareholders. For this evaluation, the Board uses internal forecasts, external advice from an investment bank as well as analysts’ target prices for the Autoliv stock.

In addition, the Board takes tax effects into account to make sure that funds are returned to shareholders in the most efficient way, thereby creating the highest possible shareholder value out of all available market and business conditions.