Edited Transcript of ALV earnings conference call or presentation 29-Jan-19 1:00pm GMT

James Albert Picariello, KeyBanc Capital Markets Inc., Research Division – Analyst [39]

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Just a question for Mats. The more obvious question, do you — are you willing to talk about your decision to move to your sidekick Veoneer? Or is that something that you don’t want to address?

Mats Backman, Autoliv, Inc. – CFO & Executive VP of Finance [40]

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No, I think I’m leaving that for the Veoneer. It’s not maybe for me to comment anything on this call when it comes to that.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division – Analyst [41]

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Okay, understood. All right. Orders are just fractionally down year-over-year. Historically, you guys talk about a 2- to 3-year lead time before production begins. Is that something that you’re still seeing at this point? Or given all the headwinds from a global light vehicle production backdrop standpoint, are things getting pushed a bit?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [42]

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No, I think we definitely see the same type of time horizon when it comes to new orders, I mean, the 18 to 36 months, as you referred to here. I mean, with the weakening light vehicle production, I would say, it’s nothing that impacts the launch plans here. So in terms of launching new vehicles and supporting these new launches is no changes and that’s why, I think, we are talking about this outperformance here where we see no changes to that.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division – Analyst [43]

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Okay. If we continue to see some commodity deflation or at least some stabilization, given the 3- to 6-month lead time — yes, the delay there, and you’re realizing it in your P&L, is there any upside to this in another year of 40 basis point headwind from a commodity standpoint if we continue to see some deflation?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [44]

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I think, I mean, lower raw material price, of course, is helpful over time, but there is a lead time in all that. So I don’t think you can make such a rough calculation on that. It’s many moving parts into that.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division – Analyst [45]

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Okay. And just last one for CapEx. You say it’s going to be down as a percentage of sales year-over-year. Previously you said that we should expect to see some normalization within 4% to 5% of sales range. Is the high end at 5% as something that you’re targeting in terms of your capital deployment for ’19?

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Mats Backman, Autoliv, Inc. – CFO & Executive VP of Finance [46]

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No. I mean, the only thing we’re guiding for is the lower capital expenditures in relation to sales. And when we’re talking about the 4% to 5%, that’s a more kind of a normalized historical level that we should aim for. But we are not — we’re not that granular when it comes to 2019 other than saying that we will decrease the capital expenditures in relation to sales throughout the year.

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Operator [47]

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We will now take our next question. Our next question comes from the line of Brian Johnson from Barclays Capital.

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [48]

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Hello there?

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Operator [49]

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(Operator Instructions)

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Brian Arthur Johnson, Barclays Bank PLC, Research Division – MD & Senior Equity Analyst [50]

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Can you hear me?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [51]

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Yes, we can hear you.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division – MD & Senior Equity Analyst [52]

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Yes. Could you give us a sense of the operating margin ideally by region, but just how some of the pressures play out by region? Is it fair to assume that China and Europe were really the source of lack of incremental profits and U.S. was more or less okay? Or is the launch activity in the U.S. weighing that down as well?

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Mats Backman, Autoliv, Inc. – CFO & Executive VP of Finance [53]

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I mean, we are not kind of that detailed giving margin profitability by region. But if you’re looking at the fourth quarter, in particular, when we are talking about increased launch costs, that’s related to the region where we have had most launches. I mean, for U.S., for an instance, looking at the fourth quarter, I believe we had more than 70% increase in number of launches in the fourth quarter year-over-year. So in terms of profitability in North America, that’s definitely affected by launch costs because that’s the region where we have the launch costs and where we have most of the launches. But other than that, I wouldn’t get into kind of a more granular guidance when it comes to the profitability by region.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division – MD & Senior Equity Analyst [54]

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Okay. And just next question. When you think of — since a lot of the issues here seem to be launch related, as we get into ’20 and even 2021, expecting a visibility, given your strong win rate, is this about 710 launch cadence likely to continue into those years?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [55]

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I mean, as we said, there is strong order intake, supports our growth beyond 2020 definitely with what we have seen now for 2018.

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Mats Backman, Autoliv, Inc. – CFO & Executive VP of Finance [56]

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If we’re looking at launches and by region, so to speak, I mean, the first wave that we have seen has been very much related to North America. But as you probably recall, we have been talking about market share gains mainly in 3 regions, that’s North America, China and Japan. And looking into 2019, we will see an increased number of launches in China as well.

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Brian Arthur Johnson, Barclays Bank PLC, Research Division – MD & Senior Equity Analyst [57]

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Okay. And so I guess, final question. Given that, is there anything you’re doing just as a broad operational focus to make launches smoother because it seems like for the next 2 or 3 years, there’s going to be a fact of life good news for the top line. But as we’ve seen in 4Q ’18 and ’19 guide doesn’t really help with the margin.

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [58]

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Definitely. As we said, I mean, the launch cost — higher launch cost we have seen during 2018 is being addressed in various ways. And when we say that it will take a couple of quarters to solve that — or several quarters to solve that it’s through, actually, making sure that we have an efficient launch organization for the new higher level of launches that we have seen now as a consequence of the new order intake. So that’s through continuous improvement efforts and effectiveness in the launch teams that we’ll take care of that.

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Operator [59]

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Speakers, there are 3 remaining questions in the queue if you wish to take them.

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Anders Trapp, Autoliv, Inc. – VP of IR [60]

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Yes, I think we can take them.

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Operator [61]

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The next question comes from the line of Vijay from Mizuho.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division – MD of Americas Research & Senior Semiconductor Analyst [62]

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Mikael and Mats, just when you look at the U.S., there’s a bright spot for you, grew very nicely 2018. What are you expecting in 2019, given some of the challenges on the U.S. side with inventories and rates going up?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [63]

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I think when it comes to the total market in the U.S., we see more a sideways movement there when it comes to the underlying demand. And I think also inventory levels in the industry is at okay-ish level here. So when it comes to that, I think we’re looking quite positively on North America we would foresee today. Then of course, our launch activity is continuing in North America. We’re not giving a breakdown or indication for the overall organic growth. But of course, North America continued to be a key region in terms of that. And as Mats said here that the wave started in North America, but then China and Japan are the regions where we’re looking at growth. So okay on North America.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division – MD of Americas Research & Senior Semiconductor Analyst [64]

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All right. I know you mentioned you haven’t seen any pushouts with slowdown in LVP in China and Europe. But especially with some of the OEMs tweaking their mix away from sedans, are you seeing any changes in the order book on your passive side?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [65]

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No, I think we continue to see the same as we have alluded to before here, and we always need to lean for 1 year making sure that we have good competitiveness from our side here.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division – MD of Americas Research & Senior Semiconductor Analyst [66]

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All right. Last question. On the launch costs, what are you assuming for 2019? Like, obviously, you have a lot of launches going on in the first half, but for the full year, what is the impact from launch costs?

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Mats Backman, Autoliv, Inc. – CFO & Executive VP of Finance [67]

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We’re not giving kind of an exact number when it comes to kind of launch costs and communicate kind of elevated launch costs for 2019. Just kind of repeating what Mikael said, we talked about the launch costs to be elevated for several quarters. And that’s what we’re looking into, looking now at the first half of 2019. But we cannot be more specific than that.

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Operator [68]

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Your next question comes from the line of Julian Radlinger from UBS.

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Julian Radlinger, UBS Investment Bank, Research Division – Equity Research Analyst [69]

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Just 2 left from my side. I’ll start with the easy one. In the Q3 presentation, you provided a slide that showed the number of launches in 2017, 2018. And in that presentation, you had 2018 740 launches. And now in the latest presentation, that number has gone down to 710. Given that you provided the Q3 presentation pretty far at the end of the year, what has changed in the last 2 months or so that brought that number down?

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Mats Backman, Autoliv, Inc. – CFO & Executive VP of Finance [70]

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Some launches have been pushed into 2019.

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Julian Radlinger, UBS Investment Bank, Research Division – Equity Research Analyst [71]

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Okay. Simple question, simple answer. The other question I had is maybe just getting back to the 2020 targets one more time or one last time. And putting it a little bit differently than many of the questions that were asked today on that. Can you just explain why you felt confident enough to guide for 2020 targets over a year ago and all the way up to Q3 ’18. But now that we’re actually closer to that date, you don’t want to provide a guidance anymore? Or, put differently, what changed in your visibility most recently that makes you reluctant to provide a guidance when you gave one before that?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [72]

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I think it’s important to point out here that the 2020 was not a guidance, it was a target for 2020 set at the Capital Markets — and communicated at Capital Markets Day in 2017. So that was a 3-year target for the company. So very different from a guidance.

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Julian Radlinger, UBS Investment Bank, Research Division – Equity Research Analyst [73]

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Okay. But…

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [74]

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So what we have done now is that we have said that, I mean, more than $10 billion in turnover remains and around 13% EBIT remains — adjusted EBIT remains, but it’s pushed out in time.

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Operator [75]

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Your final question comes from the line of from Deeya D’souza from Morgan Stanley.

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Deeya D’souza, Morgan Stanley, Research Division – Associate [76]

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I’ll keep it very quick. I have 2 questions. One is on the underperformance in EU. You guys, I think, underperformed by 1.5%. Just wondering whether, like, if you could just be a bit more granular on where that comes from because we knew the production was going to fall. I just wanted — and I think you mentioned higher safety content. I just wanted a bit more clarification on that. And my second question was around your cost reductions in China despite lower production there. I think you said something earlier that the China team were at the limits in cost reductions there. I just wanted a bit more clarification on other regions and how much room for cost reductions you have.

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [77]

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I think the first question here in Europe, it’s related to mix. And as we alluded to you before, I mean, we are in cars with high content of passive safety products. And when you see that type of volume going down and you see the ones with lower content going up, which was the main difference between Western and Eastern Europe, we have a mix effect that results in a number you saw here and very similar to what we saw here in the previous quarter as well in Q3. When it — so when it comes down to cost flexibility, I would say that, I mean, we always are focusing on making sure that we have high flexibility in our total value chain. And I think what we referred to here in China is really that they have demonstrated a good work in that area. And we are having the — we need to make sure and we have to make sure that we are working with that in all our regions, of course, as a part of our daily business here to secure that.

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Mats Backman, Autoliv, Inc. – CFO & Executive VP of Finance [78]

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We have — I mean, looking at China, we have the flexibility, and the team has done a great job as well. But I think it’s one thing that we need to remember looking at the development of sales in China. What we are showing for the quarter now — for the fourth quarter is, I believe, minus 3.7% or something like that, close to minus 4%. But if you’re looking into that in more detail, we have a significantly worse development with the local OEMs in China, and we actually have some growth with global OEMs, meaning that we are getting kind of an uneven utilization if we’re looking at production lines when we have such a difference in growth between different brands and between the local OEMs and global OEMs, which makes it a little bit tough to mitigate the volume effects when it comes to a fixed [absorption] as well.

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Deeya D’souza, Morgan Stanley, Research Division – Associate [79]

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So you think that it just makes it difficult to kind of predict what the kind of impact would be based on the difference between the local and global OEMs in China?

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Mats Backman, Autoliv, Inc. – CFO & Executive VP of Finance [80]

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No, no, no, not to predict the impact as such, but to mitigate the effects from lower volumes.

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Deeya D’souza, Morgan Stanley, Research Division – Associate [81]

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Okay. Yes, makes sense. Is that — so it’s based on mix then and things like that.

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Mats Backman, Autoliv, Inc. – CFO & Executive VP of Finance [82]

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Yes.

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Operator [83]

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Thank you. That was the final question for your call. Speakers, please continue.

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [84]

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Thank you, Alice. Before we end today’s call, I would like to say that we will continue to execute on our growing business volumes and new opportunities with a never-ending focus on quality and operational excellence. Also, I should mention that our first quarter earnings call is scheduled for Friday, April 26 in 2019. Thank you to everyone to participate on today’s call. We sincerely appreciate your continued interest in Autoliv and hope to have you on the next call. Goodbye for this time.

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Operator [85]

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Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all now disconnect.

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