Autoliv, Inc. (NYSE:ALV) Q1 2024 Earnings Call Transcript

Autoliv, Inc. (NYSE:ALV) Q1 2024 Earnings Call Transcript April 26, 2024

Autoliv, Inc. beats earnings expectations. Reported EPS is $1.58, expectations were $1.4. Autoliv, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the Autoliv First Quarter 2024 Financial Results Conference Call. At this time all participants are in listen-only mode. After the speaker’s presentation there will be the question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to our first speaker today, Anders Trapp. Please go ahead.

Anders Trapp: Thank you, Nadia. Welcome everyone to our first quarter 2024 earnings call. On this call we have our President and Chief Executive Officer, Mikael Bratt; and our Chief Financial Officer, Fredrik Westin; and me, Anders Trapp, VP, Investment Relations. During today’s earnings call Mikael and Fredrik will, among other things, provide an overview of our strong sales, earnings and cash flow development in the quarter. How our strong balance sheet and asset return rate support the continued high level of shareholder returns. They will outline the expected sequential margin improvement in 2024 towards our targets, and we will also, as usual, provide an update on our general business and market conditions. We will then remain available to respond to your questions, and as usual, the slides are available on autoliv.com.

Turning to the next slide. We have the Safe Harbor statement which is an integrated part of this presentation and includes the Q&A that follows. During the presentation we will reference some non-U.S. GAAP measures. The reconciliations of historical U.S. GAAP to non-U.S. GAAP measures are disclosed in our quarterly earnings release which is available on autoliv.com and in the 10-Q that will be filed with the SEC. Lastly, I should mention that this call is intended to conclude at 3 p.m. Central European Time, so please follow a limit of two questions per person. I will now hand over to our CEO, Mikael Bratt.

Mikael Bratt: Thank you, Anders. Looking on the next slide. I want to express my appreciation to the entire Autoliv team for their unwavering dedication to achieve our goals and for delivering another strong quarter in a challenging environment. In the first quarter global light vehicle production declined year-over-year by around 1% according to S&P Global. We saw no improvement in call of volatility compared to fourth quarter 2023. Despite somewhat weaker than expected light vehicle production we achieved our margin indication for the first quarter and we are on track towards our full year guidance. In the quarter organic sales grew by 5% outperforming light vehicle production significantly especially in India, South Korea and Japan.

The strong growth was mainly a result of product launches last year. We generated broad-based improvement year-over-year in key areas including gross margin, operating margin and operating cash flow. This quarter marks the seventh straight quarter with more than 30% year-over-year increase in adjusted operating profit. The debt leverage was virtually unchanged versus Q4 2023 despite share repurchases of US$160 million in the quarter. Under the current stock repurchase program we have repurchased and cancelled 6.5 million shares for close to US$630 million. We are making progress towards our previously announced intention of reducing our indirect workforce by up to 2,000 people. We expect savings of around $50 million in 2024 from these initiatives.

We are reconfirming the full year 2024 guidance which sets a strong base towards continued high level of shareholder returns and our adjusted operating margin target of around 12%. However, the heightened seasonality of earnings of prior years is likely to be repeated in 2024. Now looking at the sustainability highlights on the next slide. Sustainability is a fundamental part of our business strategy. It is an important driver for market differentiation and stakeholder value creation. Guided by our vision of saving more lives we are driving a number of activities to take significant steps towards our climate commitment. For example, during the first quarter we successfully issued a second green bond using Autoliv’s sustainability financing framework aligned with the ICMA Green Bond Principles.

The bond drew significant interest from debt investors reflecting the strong support for Autoliv’s climate and sustainability agenda. Following Autoliv’s first partnership in 2021 with SSAB, a fossil-free steel, we are now introducing two additional collaborations for carbon-reduced steel with Arvedi and Thyssenkrupp. The aim is to reduce greenhouse gas emissions in our products by utilizing low-emission steel and increase use of recycled material. In addition to renewable electricity instruments, many Autoliv sites are increasing the use of on-site solar energy generation capacity. On this slide you can see one of the new solar parks in Utah, U.S. supporting our operation. We are partnering with BASF to introduce a new type of design for recycling PU foam for steering wheel rims.

This new type of foam will enable simplified and scalable recycling. Looking on our cost improvements on the next slide, we continue to generate broad-based improvements in key areas over the last 12 months. Our direct labor productivity continues to trend up, supported by the implementation of our strategic initiatives, including optimization and digitalization. Year-over-year, we have reduced our direct production personnel despite higher volumes. Our gross margin declined from the seasonality of a strong -- from the seasonal strong fourth quarter, but put -- improved but -- by 170 basis points year-over-year. The improvement was mainly the result of the higher direct labor efficiency and reductions within the indirect workforce. Volume growth and customer compensation negotiated last year.

As a result of our structural efficiency initiatives, the positive trend for RD&E and SG&A in relation to sales has continued, declining by 60 basis points since Q1 2023. Combined with the gross margin improvement, this led to a substantial improvement in adjusted operating margin versus Q1 2023. Looking now on financials in more detail on the next slide, sales in the first quarter increased by 5% year-over-year despite lower light vehicle production, a negative regional light vehicle production mix and unfavorable currency translation effects. The sales increased and our cost reduction activities led to a substantial improvement in adjusted operating income, increasing by more than 50% to US$199 million from US$130 million last year. The adjusted operating margin was 7.6% in the quarter, an increase by 230 basis points for the same period last year.

Operating cash flow was US$122 million, which was US$168 million higher than in the same period last year as a result of improved working capital effect versus last year. Looking now on the structural cost savings activities on the next slide. To secure our medium- and long-term competitiveness, and to support our financial targets, we launched a cost reduction initiative in mid-last year with intent to -- of reducing our indirect headcount by up to 2,000. We estimate that the annual cost reduction will amount to around $130 million when fully implemented, with around $50 million already in 2024 and around $100 million expected in 2025. For 2024, we expect to cash out approximately $85 million related to these initiatives. At the end of first quarter, our indirect headcount had declined by around 1,000 or by more than 5% since a year ago, with the majority of the decrease within production overhead, especially in best-cost countries.

We are already seeing a positive impact on direct labor productivity as a result of our initiative to reduce the direct workforce by the equivalent of up to 6,000. Looking now on our sales growth in more detail on the next slide. Our consolidated net sales increased by more than $2.6 billion, a new record for the first quarter. This was approximately $120 million higher than a year earlier, driven by price, volume and product mix, partly offset by lower light vehicle production, a negative geographical light vehicle production mix and currencies. Currency translation effects reduced sales by $12 million or by 0.5%. Looking on the regional sales split, Asia accounted for 37%, America for 34% and Europe for 29%. The lower than usual share of the total sales in Asia was a result of the lunar new year and low light vehicle production in Japan due to customers having certification issues with certain vehicle models.

We outline our organic sales growth compared to light vehicle production on the next slide. I am very pleased that our organic sales growth outperformed global light vehicle production significantly as we continue to execute on our strong order books. According to S&P Global, first quarter light vehicle production decreased by 1% year-over-year. This was more than 1 percentage points lower than expectations at the beginning of the quarter, with most of the lower than expected production coming in Japan and with global OEMs in China. We estimate that the geographical light vehicle production mix had 140 basis points negative impact on our outperformance. In the quarter, we outperformed global light vehicle production by more than 6 percentage points with strong performance, especially in the rest of Asia and in Japan.

The strong outperformance in the rest of Asia was mainly driven by India, where sales outperformed light vehicle production by 20 basis points due to higher installation rates for side airbags. In comparison, the modest outperformance in China was mainly a result of unfavorable customer mix following strong light vehicle production growth for lower safety content vehicles. On the next slide. Although we see some changes to our customers plans for model launches, especially for EV models, we expect a record number of product launches for 2024. Despite some changes to model launch plans by some customers, the trend towards electrification continues, although at a somewhat slower pace. On this slide, seven models are being made available as electrical versions.

The models shown here have an outlet content per vehicle from around US$130 to over US$400. In terms of Autoliv sales potential, the BMW 5-Series Touring launch is the most significant, followed by the Subaru Forester. The long-term trend to higher content per vehicle is supported by front center airbags on three of these models. More advanced seatbelts and pedestrian protection airbags and hood lifters. Another interesting launch is the Tata Punch.ev that illustrates the trend towards more sophisticated safety systems and higher safety content in India. I will now hand it over to our CFO, Fredrik Westin, who will talk you through the financials on the next slide.

Fredrik Westin: Thank you, Mikael. This slide highlights our key figures for the first quarter of 2024 compared to the first quarter of 2023. Our net sales were $2.6 billion. This was a 5% increase. Gross profit increased by $64 million or by 17% to $443 million, while the gross margin increased by 1.7 percentage points to 16.9%. The adjusted operating income increased from $131 million to $199 million. The adjusted operating margin increased by 230 basis points to 7.6%. Non-GAAP adjustments amounted to $5 million from capacity alignments and antitrust related matters. Adjusted earnings per share diluted increased by $0.68, where the main drivers were $0.54 from higher operating income and $0.10 from lower income taxes. Our adjusted return on capital employed and return on equity increased to 20% and 21%, respectively.

We paid a dividend of $0.68 per share in the quarter and repurchased and retired 1.4 million shares for around US$160 million under our US$1.5 billion stock repurchase program. Looking now on the adjusted operating income bridge on the next slide. In the first quarter of 2024, our adjusted operating income of $199 million was $68 million higher than the same quarter last year. Our operations were positively impacted by cost saving activities, higher volumes and commercial recoveries, partly offset by headwinds from general cost inflation. The net currency effect was $8 million negative, as we continued to see negative effects mainly from the strengthening of the Mexican peso and the weakening of the Japanese yen and Korean won, but partly offset by positive impact from the Turkish lira.

The impact from raw materials and out of period cost compensation were negligible. Cost for SG&A and RD&E net combined was $4 million lower despite labor cost inflation. In relation to sales, SG&A and RD&E net combined declined by 60 basis points. As a result of our cost saving activities, the leverage excluding currency effects was -- on the higher sales was substantially above our normal 20% to 30% range. Looking now on the cash flow more in detail on the next slide. For the first quarter of 2024, operating cash flow increased by $168 million to $122 million compared to the same period last year, mainly due to improved working capital effects versus last year. Capital expenditures net decreased to $140 million from $143 million last year.

In relation to sales, it was 1 -- it was 5.4% this year, down from 5.7% last year. The free cash flow improved by $171 million compared to the same period the prior year, mainly due to the improved operating cash flow. The last 12 months cash conversion defined as free cash flow in relation to net income was 108%. Now looking at our trade working capital developments on the next slide. During the first quarter, trade working capital increased by $104 million, driven by $123 million lower accounts payables, partly offset by $15 million in lower inventories and by $4 million in lower receivables. The lower inventories and receivables were mainly due to lower sales than in the fourth quarter of last year. Compared to the same period last year, trade working capital decreased from 14.1% to 12.8% in relation to sales.

Our capital efficiency program aims to improve working capital by $800 million and to-date we have achieved around $500 million. Improvements in receivables and especially in inventories are lagging due to the high call of volatility and hence planning challenges that cause inefficiencies. Over the coming years, we expect the inventories to improve significantly in tandem with the reduced call of volatility. Now looking on our leverage ratio on the next slide. Our continued focus on balance sheet efficiency is supporting our strong performance for cash flow, cash conversion and return on capital employed. I am particularly pleased with our leverage ratio, which improved compared to a year ago despite investing in our footprint and returning $700 million to shareholders.

The debt leverage ratio at the end of March 2024 was 1.3 times, up 0.1 times from last quarter. Compared to the fourth quarter 2023, our net debt increased by $184 million, while the 12-month trailing adjusted EBITDA improved by $72 million. We expect that our debt leverage and positive cash flow trend will allow for continued high shareholder returns going forward. Now looking at shareholder returns over the past five years on the next slide. Over the years, Autoliv has shown its ability to generate solid cash flow in periods with varying market environments. We have used both dividend payments and share repurchases to create shareholder value. Historically, the dividend has usually represented a yield of approximately 2% to 3% in relation to the average share price.

During the last 12 months, we have returned around US$700 million to shareholders through both dividends and share buybacks, a new record for the company. Over the last five years, we have reduced the net debt significantly, while returning US$1.5 billion directly to shareholders. This includes stock repurchases and cancellation of 6.5 million shares for a total of close to US$630 million as part of the current stock repurchase program. Since we initiated the current stock repurchase program in 2022, we have reduced the number of outstanding shares by more than 7%. We consider several factors when executing the program, such as our balance sheet, the cash flow outlook, our credit rating, and the general business conditions and not only the debt leverage ratio.

We always strive to balance what is best for our shareholders, both short- and long-term. Now looking on our efficient balance sheet that supports our shareholder returns on the next slide. A strong balance sheet and good return on capital employed is fundamental for long-term shareholder value creation. Despite an operating margin impacted by the challenging market environment for the past five years, our return on capital employed have remained strong, averaging around 17%. Our capital turnover rate, meaning our sales in relation to average capital employed, has improved substantially over the past three years and is now significantly above our five-year average. With that, I hand it back to you, Mikael.

Mikael Bratt: Thank you, Fredrik. On to the next slide. Despite still elevated interest rates, the global light vehicle production continues to show relative strength. S&P Global’s updated forecast for full year 2024 indicates a modest decline of 0.4% instead of 0.8% three months ago, with additional volume increases primarily in China and North America. Dry trend mix developments vary by region, as certain markets face somewhat slower EV growth rates, while other areas continue to see rather high demand for EVs. S&P Global expects second quarter global light vehicle production to increase by close to 3%, while they see second half of the year declining almost 2% compared to last year. Light vehicle production in China continues to be supported by strong EV demand and export activity.

The outlook for North American light vehicle production for 2024 was revised higher to 14.6 million units on demand resilience, less impact from supply chain issues and increasing inventory levels of new vehicles. The light vehicle production forecast for Europe has increased slightly to minus 2, mainly due to stronger than expected actuals in the first quarter. Based on S&P Global’s forecast and our own analysis, our 2024 guidance is built on a global light vehicle production decline of around 1% for the full year. Now looking on the business outlook on the next slide. We continue to see significant improvements in adjusted operating margin in 2024 compared to 2023, supported mainly by organic sales growth, a more stable light vehicle production, structural and strategic initiatives, cost control and customer compensations.

We continue to face inflationary pressure, especially labor costs and we expect compensation for what is in excess of what we can offset through normal productivity measures. The discussions with our customers are progressing according to plan. We anticipate that price adjustments and cost compensations will gradually, throughout the year, offset cost inflation. We expect the pattern to be similar to the pattern seen in 2022 and 2023. Looking at our 2024 financial guidance on the next slide. This slide shows our full year 2024 guidance, which excludes effects from capacity alignment, antitrust-related matters and other discrete items. Our full year guidance is based on a global light vehicle production decline of around 1%. Our organic sales is expected to increase by around 5%.

No net currency translation effects are expected on sales. The guidance for adjusted operating margin is around 10.5%. Operating cash flow is expected to be around US$1.2 billion. Our positive cash flow trend should allow for continued high shareholder returns. We foresee a tax rate of around 28% in line with our previous indications of 25% to 30% as the new normal tax rate. Looking on the next slide. This concludes our formal comments for today’s earnings call and we would like to open the line for questions from analysts and investors. I now hand it back to Nadia.

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