Edited Transcript of ALV earnings conference call or presentation 17-Jul-20 12:00pm GMT

The automotive industry slump, triggered by the shutdown of car plants and dealership in the wake of the coronavirus pandemic is the worst seen in our history. However, supported by last year’s order intake, our organic sales developed better than light vehicle production in all the regions. The drastic decline in light vehicle production in April, coupled with the volatile restart and ramp-up in May and June, with limited visibility and business predictability had a drastic effect on our profitability despite forceful cost reductions. We have undertaken a number of actions to manage the evolving situation by accelerating cost savings, reducing expenses and strengthening our liquidity position. These actions include personnel cost reductions of 25% versus first quarter and launching the next step of our structural efficiency program. However, it is essential to balance the cost reduction response against the need for capacity to manage the recovery that has started. We also need to preserve capacity for the new normal market demand and our expected outgrow. I am confident that the actions implemented and planned are positioning Autoliv well to benefit from any demand recovery. It is encouraging that operating cash flow turned positive in June and that we were able to reduce CapEx by approximately 50% compared to the — a year earlier. It is also positive that our customers’ sourcing activities and model launch plans are close to unchanged. Our engineering support for these activities remain high, even though there are some limited new model launches delay.

I am also pleased that order intake for the first half year was in line with last year. To further strengthen our liquidity position and credit resources, the company entered into a lending facility of approximately $0.6 billion with the Swedish Export Credit Corporation.

Looking ahead, we see improvement potential from the fact that the sales trend was positive during the quarter, month-by-month and also in the first weeks of the third quarter.

Looking now at the LVP development during the quarter on the next slide. Pandemic restrictions have hit — have hard hit the automotive sector with deep monthly volume drops and significant uncertainty around volumes. In China, OEM returned to above precrisis production levels with domestic OEMs growing by 8%, while global OEMs grew by 6%. Automotive manufacturing was at a virtual standstill in April in Europe and Americas, which normally are almost 2/3 of Autoliv annual sales.

The recent industry restart in these regions is a positive development. However, the ramp-up started on a very low level and was characterized by strong fluctuations in customer demand. This low business predictability led to inefficient resource utilization.

Looking now on our sales performance on the next slide. Our sales declined organically by $1 billion or by 48%. We were able to outperform light vehicle production in all major regions. Despite strong regional performance, our decline was slightly more than the change in global light vehicle production. As we indicated in earlier communications, the shifts in the regional LVP mix turned out negative in the quarter. As markets with high safety content per vehicle declined more than markets with low safety content per vehicle. This temporarily paused our trend of substantially outperforming global light vehicle production that began in the second half of 2018. The only area with organic growth was China. Slowing sales of replacement inflators had a 1.4 percentage point negative effect on our sales in the quarter.

In North America, our sales fell organically by almost 67%. However, this compares favorably with the LVP decline in — of nearly [70%]. Despite that we had a 3.6 percentage points negative effect from lower inflator replacement sales. Our outperformance was mainly coming from positive vehicle mix and recent launches with several customers, such as Tesla, FCA and Honda. Our sales in China recovered strongly during the quarter and grew organically by more than 8%, outperforming the light vehicle production by close to 2 percentage points. The outperformance was due to strong sales to global OEMs. In Europe, organic sales declined by 58%. We continued the trend from the previous quarters and outperformed light vehicle production by 3 percentage points. Impacted by recent launches of high-volume models at Volvo, PSA and BMW. Sales in Japan decreased organically by 47%, in line with the light vehicle production decline. The only OEMs where our sales increased in the quarter was with Honda and Suzuki based on recent major launches.

In Rest of Asia, organic sales declined by almost 42%, which was almost 20 percentage points better than light vehicle production decline. Within the region, sales in South Korea was less affected by the pandemic and the sales decline was limited to 11%.

Looking on the next slide. The situation for major light vehicle markets continued to be uncertain as the development of the pandemic and the different governmental measures are difficult to predict. Based on our Looking now at the LVP development during the quarter on the next slide. Pandemic restrictions have hit — have hard hit the automotive sector with deep monthly volume drops and significant uncertainty around volumes. In China, OEM returned to above precrisis production levels with domestic OEMs growing by 8%, while global OEMs grew by 6%. Automotive manufacturing was at a virtual standstill in April in Europe and Americas, which normally are almost 2/3 of Autoliv annual sales.

The recent industry restart in these regions is a positive development. However, the ramp-up started on a very low level and was characterized by strong fluctuations in customer demand. This low business predictability led to inefficient resource utilization.

Looking now on our sales performance on the next slide. Our sales declined organically by $1 billion or by 48%. We were able to outperform light vehicle production in all major regions. Despite strong regional performance, our decline was slightly more than the change in global light vehicle production. As we indicated in earlier communications, the shifts in the regional LVP mix turned out negative in the quarter. As markets with high safety content per vehicle declined more than markets with low safety content per vehicle. This temporary post our trend of substantially outperforming global light vehicle production that began in the second half of 2018. The only area with organic growth was China. Slowing sales of replacement inflators had a 1.4 percentage point negative effect on our sales in the quarter.

In North America, our sales fell organically by almost 67%. However, this compares favorably with the LVP decline of nearly 70% . Despite that we had a 3.6 percentage points negative effect from lower inflator replacement sales. Our outperformance was mainly coming from positive vehicle mix and recent launches with several customers, such as Tesla, FCA and Honda. Our sales in China recovered strongly during the quarter and grew organically by more than 8%, outperforming the light vehicle production by close to 2 percentage points. The outperformance was due to strong sales to global OEMs. In Europe, organic sales declined by 58%. We continued the trend from the previous quarters and outperformed light vehicle production by 3 percentage points. Impacted by recent launches of high-volume models at Volvo, PSA and BMW. Sales in Japan decreased organically by 47%, in line with the light vehicle production decline. The only OEMs where our sales increased in the quarter was with Honda and Suzuki based on recent major launches.

In Rest of Asia, organic sales declined by almost 42%, which was almost 20 percentage points better than light vehicle production decline. Within the region, sales in South Korea was less affected by the pandemic and the sales decline was limited to 11%.

Looking on the next slide. The situation for major light vehicle markets continued to be uncertain as the development of the pandemic and the different governmental measures are difficult to predict. Based on our Smart Start playbook developed for our ramp-up following COVID-19 related shutdowns, we have invested in employee safety equipment, redesigned production lines and workplaces. We also adopted new processes for interactions with our suppliers and customers to safely manage the restart and ramp-up of our operations. OEMs in China have gradually come back to their previous production levels. In the second quarter, China accounted for 47% of global light vehicle production which is close to twice their normal share. All European automotive plants have restarted production after more than a month of shutdowns. However, the production rates are still volatile with reduced ships to adapt to uncertain demand development. In North America, vehicle production resumed in mid-May, about 2 weeks later than in Europe. However, the ramp-up has been faster and less volatile. Supply disruptions in Mexico can potentially slow down the rest of the region due to the government’s stop light system. In Japan and rest of Asia, OEMs are adjusting their pace of production according to inventory levels and to domestic and export market demands.

Looking at our recent model launches on the next slide. As expected, we had a relative low number of launches during the quarter. A few launches were pushed out, and we expect higher number of launches during the second half of the year, when a number of important platforms are scheduled to be introduced. The models shown on this slide are well distributed across the globe and the Autoliv content per vehicle is between $120 to over $300. The majority of these models will be available with some sort of electrified powertrain, for example, pure EV or plug-in hybrid. The long-term trend to higher CPV is supported by the continued trend of more front center airbag installations. We are starting to see some COVID-19 effects on the OEM launch plans for 2020 and 2021. And we expect to see a few months of delays on several platforms. We have recently seen increased demand for engineering developments work as OEMs are trying to catch up time lost during the close down in April and May.

Now I will hand over to our Chief Financial Officer, Fredrik Westin, who will talk about the financials on the next slides.

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Fredrik Westin, Autoliv, Inc. – CFO & EVP of Finance [4]

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Thank you, Mikael. This slide, we’re on Slide 8, highlights are our key figures for the second quarter. Our net sales were $1 billion, which is a decline of 51% compared to the same quarter last year. Gross profit decreased by $385 million, and the gross margin decreased by 17 percentage points compared to the same quarter 2019. The gross margin decline was primarily driven by lower sales and lower utilization of our assets due to the decline in light vehicle production as well as direct COVID-19 related costs.

The sharp sales decline in April, coupled with a volatile restart and ramp-up in May and June with limited visibility and predictability had a significant effect on our gross margin despite significant reductions in costs for material and labor.

The adjusted operating income declined by around $355 million to negative $171 million. Reported earnings per share declined by $3.25 to minus $2.0. The main drivers behind the decrease were $5.7 from lower operating income, partially offset by $2.37 in favorable impact from taxes. Our adjusted return on capital employed and return on equity were minus 18% and minus 24%, respectively. And as you know, no dividend was paid in the quarter.

Looking now on the sales development in the quarter on the next slide. It highlights the fact that challenges in the second quarter were of a completely different magnitude than in the first quarter. The sharp sales decline in April, coupled with a volatile restart and ramp-up in May and June with limited visibility and predictability has been a challenge to manage. It has been difficult to optimize and efficiently run operations, not least when it comes to utilizing resources such as labor and material in the production. In addition, certain countries have emergency lockdown protocols such as Mexico and India, which created specific challenges as employees that must stay at home were still entitled to full base pay.

Looking now on our cost base on Slide 10. Normally, we consider 75% of our costs to be variable or semi variable, including direct material, freight and direct labor. 20% are considered semi fixed, meaning that given enough time, these costs can be adjusted and 5% are considered fixed costs. In response to the pandemic, we have implemented actions on each and every cost line, including aligned headcount, including hiring freeze, reduced work week hours, furloughing supported by government programs when available and reduced discretionary spending sharply.

On the next slide, which is 11, you can see cost breakdown for the second quarter. In the current environment, with sales declining by an unusual magnitude, coupled with a volatile ramp up, some costs that normally are considered to be variable are no longer fully variable. There’s a time element to the variability of some costs. Additionally, when adjusting the variable cost of sales decline of 50%, fixed costs will represent a much larger part of the cost than under normal circumstances. As you can see, the fixed and semi-fixed cost increased from 25% in a normal environment to 36% of total costs, which, of course, means a larger-than-normal impact on profitability from changes in sales.

On Slide 12, and looking now on the adjusted operating income development, it was an exceptional quarter with adjusted operating income, $355 million lower than in the second quarter of 2019. That equals to about 25 percentage points lower adjusted operating margin. As illustrated, the adjusted operating income was positively impacted by lower cost for raw materials, lower cost for SG&A and RD&E and positive FX effects. These positive developments were more than offset by the effects of lower sales volumes and productivity from low business predictability and the volatile restart and ramp-up and additionally, direct COVID-19 related costs, such as cost for personnel protective equipment, temporary supply [support] and [premium] freight amounted to almost USD 10 million in the quarter.

We managed to mitigate some of the negative operating leverage effects from the lower sales by a number of activities, such as accelerated cost-saving initiatives that started in previous quarters and by adjusting production and work week hours and by furloughing personnel. As a result of these measures, personnel costs were reduced by 25% versus the first quarter of this year.

Looking on next slide. For the second quarter of 2020, operating cash flow was negative $128 million, a decrease of $310 million when excluding the EC antitrust payment of last year. The decline in operating cash flow was a result of the lower net income, partly offset by improved working capital, mainly due to accounts receivables declining more than accounts payables. We have also intensified working capital control through strict inventory control, close monitoring of overdues and close collaboration with suppliers. As Mikael already mentioned, cash flow turned positive again in June, thanks to gradually improving sales and working capital control. Capital expenditures amounted to $64 million in the second quarter, which is about 6% in relation to sales. But compared to last year, capital expenditures decreased 50% as we suspended or delayed investments substantially. Free cash flow was nevertheless negative $192 million, a decline of $247 million year-over-year.

Now looking on the next Slide 14. We have, as you know, a long history of a prudent financial policy. Despite the current market conditions, our balance sheet (inaudible) remains unchanged. The leverage ratio at June 30, 2020, was 2.9x. The (inaudible) leverage was a result of our net debt increase by $208 million in the quarter, while EBITDA over the last 12 months, at the same time, decreased by $350 million. It is worth noting that compared to a year ago, net debt has only increased by $60 million. Our ambition is to improve our net debt and EBITDA in the near future. However, as the leverage ratio is calculated on last 12 months data, we do expect the ratio to remain elevated for some time.

On the next slide, Slide 15, you can see that our liquidity position remains strong. We entered a new lending facility in the quarter of $0.6 billion compared to the cash outflow of USD 0.2 billion in the quarter. We had around $1.7 billion in liquidity and unused credit facilities as of June 30. And we have no need for any major refinancing of existing debt until 2023. Therefore, we believe to have secured significant liquidity cushion to manage our business successfully in the current challenging environment.

Looking on the next slide. These charts show that our industry is in a downturn of historic proportion. According to IHS, full year 2020 global light vehicle production is expected to reach 67 million units, which is a decline of 22% against 2019. There’s great uncertainty in light vehicle sales and production due to the evolution of the pandemic, government actions and policy changes as well as customer demand for new vehicles.

For the second half of 2020, IHS predicted a decline of about 11% in global light vehicle production, with the largest contractions occurring in China, Europe and Japan. As you can see from the chart on the left, it took almost a decade for car sales in Europe to recover from a recession that began in 2008. The U.S. market took about 5 years to bounce back, but sales have been virtually flat since 2015. Significant growth in China initially helped compensate, but the market has been in decline since 2018. In the current uncertain environment, IHS is not expecting global light vehicle production to return to 2019 level — of 2019 levels before 2023.

Looking at the next slide 17. As we communicated earlier this year, we see some tailwinds and some headwinds for 2020. You can see the main headwinds include growth from executing on the strong order book and the structural efficiency programs. The main headwinds include operational headwinds from COVID-19, including volatility and customer ramp-ups and declining and unpredictable production (inaudible) replacement sales. We continue to evaluate and analyze prevailing automotive demand conditions, especially as lockdowns ease and phased reopenings continue for OEM plants and dealer showrooms across the world. We believe the net effect of tailwinds and headwinds should result in a year-over-year decline in adjusted operating margin in the second half of 2020 compared to the second half of 2019. However, we do expect the business environment to improve significantly in the second half year compared to Q2 2020.

With that, I hand it back to Mikael.

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [5]

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Thank you very much, Fredrik. Moving to the next page. As you all are aware, we are in a downturn of historic proportions. And we have so far in this call quite naturally focused on short-term effects and actions. However, it’s important to continue to execute on the strategic initiatives that create shareholder values. Our focus areas for shareholder value creation are unchanged. We would like to share with you some of the key components. We have visible near-term and long-term sales outgrow, backed by a strong order book. We also have our solid foundation and Autoliv heritage with cash flow focus and shareholder return, coupled with a strong balance sheet and prudent leverage policy. Collectively, our focus areas and business strategy execution will realize our full potential for creating shareholder value.

Now looking on the strategies on the next slide. Our midterm financial strategies brings together our key initiatives. Crisis management to offset near-term COVID-19 effects, adapting and optimizing our global operations and our footprint to the new normal medium term market, continuing to execute on a strategic plan that was outlined in 2019.

Now looking more on these initiatives on the next slide. Here, we show our response to the challenging market conditions, as covered in the previous slides. As you can see, it includes much more than just the headcount and work week hour reductions. In addition, we continue to focus on further cost reduction actions, while balancing with the need for capacity to manage the market recovery. Considering the uncertainty of the market development, keeping a high degree of flexibility and agility is essential and will allow us to be an even stronger company post the COVID-19 pandemic.

On the next slide, you can see the structural efficiency program, one that was launched a year ago. This program is now almost fully implemented. We have seen the expected positive effects of the program. The program should reach its full effect during the second of this year, and we expect full year 2020 year-over-year savings to amount to $50 million. We have now identified further structural cost improvement opportunities and are launching a second step of structural efficiency program. For 2020, the program is expected to generate savings of around $10 million. For the most part, it should be implemented by — in the first quarter of 2021, and it should reach its full effect by the end of 2021, with annualized savings of around USD 65 million. The program will mainly impact Americas and Europe. Headcount is estimated to be reduced by more than 900, which is close to 5% of total indirect headcount. When the 2 programs are fully implemented, we expect headcount to have been reduced by more than 1,700. The cost for the program is estimated to be around USD 65 million and cash out to be spread from Q3 2020 to Q4 2021.

Looking now on the next slide. We also continue our work with strategic initiatives and structural improvement projects outlined at our CMD in 2019. We are investing to improve the efficiency of value chain from end-to-end, such as flexible automization, digitization and engineering efficiency, including factor of the future. The ambition is to ensure we have an adequate cost structure that supports our medium-term profitability targets also in a lower light vehicle production environment. Although the additional challenge of a lower market could mean more time is needed to reach our targets.

Looking now on the next slide. To summarize, we have to manage the current challenges poised by the COVID-19 pandemic without losing focus on the longer-term opportunities. Autoliv is operating from a position of strength in terms of available liquidity, flexible structure and especially our dedicated and experienced employees. This exceptional situation requires tough decisions that we will make as necessary. I am proud that we have a solid organization that managed to reduce costs, safely restore the operations while continuing to execute our long-term strategy.

I will now hand back to Anders.

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Anders Trapp, Autoliv, Inc. – VP of IR [6]

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Thank you, Mikael. Turning the page. This concludes our formal comments for today’s earnings call, and we would like to now open up the line for questions. So I now turn it back to Sandra.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Emmanuel Rosner.

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Emmanuel Rosner, Deutsche Bank AG, Research Division – Director & Research Analyst [2]

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I was wondering if you would share with us some thoughts around your outlook for growth above market over the rest of the year. It was very encouraging to hear that you’re not seeing any meaningful or long delays in some launches. So does that means that you should still be able to grow more than maybe 6 points above market in the second half?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [3]

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Let’s reconfirm, I would say that our expectation is still that we should outperform the light vehicle production with around 6% as we earlier communicated. And as you see now in the quarters, we have some fluctuations that already in Q1 was maybe higher than expected. But as we said, with the market mix that we had, it should most likely be reversed than in the second quarter, and that is what we saw now. So I think that confirms that we are on the track that we have indicated. And as the market hopefully now starts to normalize on a regional basis, we believe that we will still come to the 6% outperformance.

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Emmanuel Rosner, Deutsche Bank AG, Research Division – Director & Research Analyst [4]

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Great. And then secondly, regarding — after all the factors that you highlighted, headwinds and tailwinds in the second half, are very helpful. I was wondering if you’d be — willing to speak about the second half outlook in terms of decremental margins. Going into this quarter, you had indicated for the second quarter, potentially 30-plus percent decremental margin. It’s obviously what sort of played out. Any color you can give around either how to quantify those factors? Or how do you think about decremental margins over the rest of the year?

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Fredrik Westin, Autoliv, Inc. – CFO & EVP of Finance [5]

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Yes. We verbally — we refrain from giving any specific guidance for the second half and then also the — it could be — it’s difficult to make a comment on the incremental margin and also moving into Q3 and Q4. It will be highly dependent on the volume and also on the mix that we would see also in the second half. And as we showed, the second quarter was, hopefully, a one-off quarter in terms of the speed and the magnitude of the volume decline, which, as we explained, had a decremental effect on [I’d say] the cost composition. That should more normalize on Q3 and Q4, but it will still highly depend on the market growth per specific market to then be able to determine what the incremental margin would be. And then we also do still expect also in Q3 and to some extent, also into Q4, a fairly unpredictable market environment, which means that there will be still difficult to balance also our own capacity with the customer needs. So it’s difficult to give a more specific guidance at this point of time.

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Operator [6]

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Next question comes from the line of Hampus Engellau.

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Hampus Engellau, Handelsbanken Capital Markets AB, Research Division – Automotive Analyst [7]

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Two questions for me. Would it be possible to add some flavor on the order take. You mentioned orders were flat in the first half compared to last year. And I was wondering how that compared to available business that you were bidding for, maybe if you can add some flavor also on the market shares in that order? And that’s the first question. Second question is on this decremental effect on EBIT related to volume and productivity, $380 million. Would it be possible to maybe get some more flavor on what is productivity and what is volume to help us predicting [sales] in the fourth quarter?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [8]

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Thank you, Hampus. First, on the order intake and then hand over to Fredrik for the decremental margin there. But as you know, we are not giving market share during the year. We give it once a year when we close the year. But what we have indicated to you here in the report is that we have an order intake that continues on healthy levels and support our direction as a company here when it comes to our long-term targets here. So we will have to come back to market share numbers when it’s time for that. But good first half year. And then Fredrik, you can elaborate a little bit on the decremental margin there.

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Fredrik Westin, Autoliv, Inc. – CFO & EVP of Finance [9]

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Yes, sure. As I said, on the cost side, we have had laser focus on discretionary spending. And as we said, our personnel costs came down by [25%] compared to the first quarter or around 28% if you look at year-over-year, that is still in head count reduction following and so on. But the share of magnitude and also the speed of the decline makes it impossible to compensate the cost reduction — or that with cost reductions. I mean, in April, our LVP was down 99% North America. And then for the group, it was 65% in April and 55% in May. So with those — details of that magnitude, it becomes very difficult to adjust the cost accordingly. So to now say what was volume and what was productivity? I don’t know, (inaudible) so meaningful. But for sure, we had large productivity challenges during the quarter. Again, this should also ease now going into Q3 and Q4 as the volumes will normalize more.

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Operator [10]

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Next question comes from the line of Rod Lache.

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Rod Avraham Lache, Wolfe Research, LLC – MD & Senior Analyst [11]

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I had 2 questions. First, sounds like you still have some concerns about volatile production schedules. And it seems that, that, to some extent, it’s focused on Europe. Can you maybe give us a little bit more color. Maybe a few examples of what you’re seeing and what you’re seeing just vis-à-vis the Tier 2 supply chain there and whether there are some concerns along those lines? That’s my first question.

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [12]

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Yes. I think when it comes to the Tier 2 (inaudible) and I mean, our supplier base, I mean, that’s something we are and have been monitoring very carefully from the beginning, as we have indicated here. And I think there, it’s holding up quite well, I must say. And the challenge here, of course, is more of a, let’s call it, physical nature, connected to the COVID-19 limitations that the lockdowns and so on potentially could have. But so far, so good, I would say, and also when it comes to the financial health they have there. So I think it’s relatively good situation there under these circumstances. And I mean, what we’re indicating here is really that uncertainty when it comes to the demand side continues to be high as we still have the COVID-19 in societies in many of the important markets. And I think the bigger question at the end of that COVID period here will be then the underlying impact on economy. And we see, of course, unemployment increasing in many of these markets as well. So I think that’s the big question.

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Rod Avraham Lache, Wolfe Research, LLC – MD & Senior Analyst [13]

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Okay. So just to clarify your answer, is it more just economic and macro uncertainty as opposed to operational uncertainty there, that you’re highlighting?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [14]

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Yes.

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Rod Avraham Lache, Wolfe Research, LLC – MD & Senior Analyst [15]

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Okay. And then my — my second question was just — you originally targeted 12% margins I think for 2023 and you highlighted that IHS isn’t expecting to get back to 2019 levels of production until 2023. But I presume that, that’s lower than what you originally anticipated when you laid out those forecasts. Can you maybe just address that a little bit more? Should we still be thinking about that as your target within that time frame? And what kind of adjustments — if it is, what kind of adjustments do you anticipate making in order to get there?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [16]

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No. I think — I mean, we have, as we laid out in the CMD road map towards midterm targets and the 12%, as you’re referring to here. And what we are saying here is that, that continues to be our midterm targets. But as you remember, the midterm targets was expressed as a 3 to 5 year target. And with the headwind we see now, it’s more likely to be closer to 5 than to 3 years to get there as LVP is significantly lower than what was expected when we stood here in the fourth quarter ’19 and talked about the direction. So that, of course, is additional headwind that we’ve not seen. But we are confirming the 12%, and we’re saying depending on the scenarios here on light vehicle production, it may take a little bit longer time.

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Rod Avraham Lache, Wolfe Research, LLC – MD & Senior Analyst [17]

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So just to clarify, are there any thoughts you could provide to us on a little bit near term, maybe 2 or 3 years from now? Should we sort of just take the 300 basis points of margin expansion that you were originally anticipating and just spread that between equally through the next couple of years? Or all the way through 2025? Or is there anything you can suggest as a near-term landmark for us?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [18]

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I wouldn’t like to go into that kind of very detailed calculation scenarios there. But I think the point is here that we continue with our strategic road map here. And we have all the way said that we don’t need a peak LVP to get there, but we need a stable LVP. And of course, you lower this from — the real scenarios is more time is needed to adjust the cost base to whatever LVP we’re talking about there. So I mean, I think, when you look 3 to 5 years out in time, there’s many different scenarios of how LVP could develop there. So I think that’s the best way I can describe our intentions here.

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Operator [19]

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Next question comes from the line of James Picariello.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division – Analyst [20]

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Just as we consider recovery scenarios for next year, can you just talk about what normalized incremental margins are for the company? And maybe what puts and takes might affect that normalized range for next year? Maybe just any color on that bridge. You’ll have the incremental $45 million in Phase II savings that should help, a recovery in legacy programs, which comes through at a higher contribution margin than your new launches, which are sitting in backlog. Any color on this bridge would be great.

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Fredrik Westin, Autoliv, Inc. – CFO & EVP of Finance [21]

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Yes, sure. So of course, the efficiency measures we’re taking now is to adjust for the volume decline that we’ve been facing. And of course, and as volume comes back, they will have an effect on the margin. But it is very, very heavily dependent on where the top line will end up. And as Mikael laid out, I mean, we still have the 12% target that we strive for, but it will be — the deciding factor will be where the volumes also in 2021 will be to give any type of a flavor of where then a normalized margin, that market environment will be. But with the cost measures we’re taking now, I mean, naturally, our breakeven point is lower. So you should see a benefit from that.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division – Analyst [22]

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And the normalized incremental margin range historically has been — what would you state that range as?

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Fredrik Westin, Autoliv, Inc. – CFO & EVP of Finance [23]

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We’ve talked about 30% but, Mikael, do you want to comment?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [24]

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I think when it comes to growing business here, I think what we have set as guidance and ballpark figure there is the 20% coming — around 20%. I think where we are right now and the volatility and the uncertainty, I mean, I would say it’s not normal incremental scenario where we are right now. So hence then that we are refraining from giving any guidance or indications of the way forward here. I think what we are saying here, really is that we are taking severe measures to adjust our cost base for whatever the new normal is. And then we have to come back when we have some, let’s call it, more normal business situation here makes it more predictable on how things develop. And of course, we will come back and be more clear there on guidance and outlooks.

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James Albert Picariello, KeyBanc Capital Markets Inc., Research Division – Analyst [25]

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Got it. And just on D&A, that’s part of the headwind for the back half. The D&A trended largely flat year-over-year through the first half. So what’s the order of magnitude on the headwind for the back half on a year-over-year basis for D&A? And then just on CapEx, is CapEx still kind of trending in the 1/3 lower than your prior guidance? Is that how we should — or as 1/3 lower than last year’s CapEx? Is that the right way to be thinking about CapEx next?

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Fredrik Westin, Autoliv, Inc. – CFO & EVP of Finance [26]

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So CapEx will come up during the second half. It’s been a lot of delaying and pushing out CapEx. But as we said before, 70% of our CapEx typically is related to new program. And then as Mikael laid out, I mean the launch plans have not changed significantly. And with that, we will also have an increased CapEx here during the second half. So we will not be able to maintain it at the level we had in the first half. And that will then also have an effect on the depreciation and amortization that will increase also during the second half.

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Operator [27]

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Next question comes from the line of Mattias Holmberg.

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Mattias Holmberg, DNB Markets, Research Division – Analyst [28]

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I think you mentioned in conjunction with the Q4 results that you expected the outperformance versus light vehicle production to be higher in the end of the year compared to the beginning of the year due to the phasing of model launches. Would you say that this still is the base case? Or will these launches be impacted by the delays that you mentioned?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [29]

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Yes. That’s still the base case. But as you have seen here, I mean, with all the volatility in the market, it has been more volatile development than expected. But when you sum it up at the end of the day, we still expect the 6%, as I said. If the question — then the question is, do the delays impact the 6%? It’s nothing we can see would impact that as of today here. I mean, what we indicated here there are some delays, but no significant delays. So we have no reason with what we see and know today that will change that number. So just into.

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Operator [30]

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Next question comes from the line of Chris McNally.

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Christopher Patrick McNally, Evercore ISI Institutional Equities, Research Division – MD [31]

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Maybe if I could just follow-up on the outgrowth question from before. I think incremental margins have been covered pretty extensively. Maybe not about the new launches, but just on mix compared to what you see now, if we have a second half where China is, again, better than expectations. So IHS revised that China is up to something like minus 10 and we get negative revisions in Europe. Would that be a drag on the 6% outgrowth?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [32]

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Yes. I think, I mean, the bottom line, of course, is that the market share that we are taking all together is still there. But when you look at the comparables here, of course, we will have an impact if you have high content vehicles at the lower rate than the other vehicles here, you will have a mix effect. So mathematical, you will get the effect. But I think that will even out over time here. But of course, you can play with different scenarios in the quarters here, but you will get the effect from the mix, if the mix effect — if you have the mix there, of course. So — but bottom line is that our market share gain on is still there.

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Christopher Patrick McNally, Evercore ISI Institutional Equities, Research Division – MD [33]

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Great. And then just to tie back to Rod’s previous question. If the sort of 12% margin target is maybe more like a 3 to 5 years, so 2024, 2025, could you just give us an idea of how long we should be using this 6%. I think you also used 4% to 6% in the past. When does the actual market share start to just tail off because of the love large numbers, you’ll be in the high 40% on market share? Just any — when that sort of, we have to start dropping it just because you’re approaching 50% market share?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [34]

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No. I think the range we gave there at the Capital Markets Day, I mean, that’s valid for that time period that we talked about there. And then each year, we’re coming with a number for the current year. And the 6% now is for 2020 and then we will come back with the guidance for 2021, when it’s time for that. But the range is still valid.

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Operator [35]

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Next question comes from the line of Joseph Spak.

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Joseph Robert Spak, RBC Capital Markets, Research Division – Autos and Leisure Analyst [36]

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The first question, I just want to clarify the order intake first half in line with last year. I know you’re not — you don’t talk about market share, but is that on a dollar basis? Because if so, like we’ve definitely heard that awards are still somewhat constrained given customer focus was on other challenges. And the outer year volume assumptions are also lower. So it would suggest your share has picked up a little bit?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [37]

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No. As I said, we are not commenting market share of the order intake. But what we are saying is that in terms of value, it’s still there.

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Joseph Robert Spak, RBC Capital Markets, Research Division – Autos and Leisure Analyst [38]

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Okay. So on a dollar basis, it’s flat with the first half of last year?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [39]

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Yes.

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Joseph Robert Spak, RBC Capital Markets, Research Division – Autos and Leisure Analyst [40]

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Okay. And then the second question I have is, if we go back to the financial crisis, Autoliv adeptly consolidated plants and adapted your production capacity. I think I lost track of the amount of times on this call that you mentioned, this is a downturn of historic proportions. And you also mentioned the potential for further structural cost reductions, including footprint, which remain under evaluation. So can you just shed a little bit more light on your thought process there and the considerations? Is it really just a lower volume outlook than prior? Or is there also a chance here to take advantage of the overall situation and maybe increase the efficiency of your footprint even if volume outlook, it would be not as changed as some of the drastic scenarios?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [41]

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Yes. I mean, what I laid out in the — at the end of the presentation, I was really just to get back to our road maps towards our midterm targets here, and that is to drive efficiency across the whole value chain and really end-to-end and including then footprint and things of that magnitude. So that is a part of our long-term journey and not so — response to the current situation. I think what we have done in this quarter is to aggressively or, I would say, forcefully adjust the cost base to the current situation. But underlying is still that we are driving this efficiency agenda and effectiveness agenda that we have. So as we have indicated here, we will have some — most likely some capacity alignments coming here. But we will announce and inform about them when those decisions are done on a case-by-case basis.

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Joseph Robert Spak, RBC Capital Markets, Research Division – Autos and Leisure Analyst [42]

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And if that occurs, is there a scope within that to — because you sort of mentioned the 12% target, maybe 3 to 5 years. I mean, is there a scope to maybe bring that closer to the lower end of the range, if those actions are taken?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [43]

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No. I wouldn’t like to go into that type of specification here. I mean, as we said from the beginning here, I mean, the mid-term targets is 3 to 5 years out. And of course, with that potential headwind we see now with the light vehicle production significantly lower than originally thought, we indicated it will take a little bit longer, potentially take a little bit longer time. But we have also been very clear from the beginning is that we are not looking for light vehicle production to be at some kind of peak levels here. We just need to make sure that we have a stable light vehicle production at reasonable levels, and then we need time.

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Operator [44]

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Next question comes from the line of Vijay Rakesh.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division – MD of Americas Research & Senior Semiconductor Analyst [45]

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Mikael and Fredrik, so just — I was looking at your comments, you said order intake is pretty much tracking flat year-on-year. And looks like, obviously, LVP is down first half, but given those strong order trends and I think IHS revised up some numbers yesterday, it looks like some decent outlook from time there. How do you see — do you think there’s some upside versus what you’re thinking? Do you think the trends are improving a little bit further?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [46]

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No. I would like — I mean, I think the uncertainty is so high out there with both the COVID and then the impact on the economy there. So I would not like to speculate it — could be better or worse related to the IHS numbers that you see out there. So for us, it’s very much working with our scenario planning and making sure that we do the right activities for whatever development we will see here.

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Vijay Raghavan Rakesh, Mizuho Securities USA LLC, Research Division – MD of Americas Research & Senior Semiconductor Analyst [47]

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Got it. And I know you mentioned mix shift is a little bit of headwind here. When you look at those — that mix shift to lower (inaudible) vehicles or the used vehicles, do you have any visibility on how long those trends sustain? Or do you see any trends that kind of make you more favorable in terms of shifting back to higher-value products there?

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

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No. I mean, it’s almost the same question there on how the different markets will develop. I think, of course, that the regional mix effect that we have seen now both in Q1 and now in Q2, as indicated, should normalize over time and you get the same relationship between the regions. But when and/or how quick that will happen, I think it’s the same question here. It’s too much question mark still out there.

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Operator [49]

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Next question comes from the line of Ryan Brinkman.

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Ryan J. Brinkman, JPMorgan Chase & Co, Research Division – Senior Equity Research Analyst [50]

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Which is, are there certain financial or operating milestones with regard to your own performance or certain industry conditions that you are looking for that could cause you to reinstate the dividend? And while you have historically been, I think, more conservatively capitalized than most peers. Do you foresee any change going forward with regard to your targeted leverage ratio to protect against unforeseeable disruptions, such as pandemics, et cetera?

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

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No. I think — I mean, first of all, the dividend is a question for the Board, ultimately. But of course, we need to get through this current COVID crisis here and then come out on the other side of that. And then, of course, as soon as we feel that we are on some more stable ground, I think all those questions will be answered over time here. But where we are right now, I think a full focus on driving liquidity and — sorry, driving cash flow and securing liquidity here for the future. And of course, our ambition here is to make sure that we continue to be a shareholder friendly company in terms of returning liquidity to our shareholders, absolutely. But one step at a time here as we come out of the most challenging quarter in Autoliv’s history here.

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Ryan J. Brinkman, JPMorgan Chase & Co, Research Division – Senior Equity Research Analyst [52]

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Okay. I heard you talk earlier about kind of 30%-ish normalized decremental, 20% plus normalized incrementals. I mean, after 2008, 2009 though, your margin — your incremental was so strong because you had cost cuts that your margin actually rose to higher than the precrisis levels. How are you thinking about this crisis and its ultimate impact on margin? How much of the cost cuts you’re instituting could maybe stick after volume comes back, causing margin to potentially be higher? Is that a potential outcome here?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [53]

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As I said, I don’t want to give any indication or guidance on our future earnings or top line here based on everything I’ve already said here. But once again, I mean, we are extremely focused here in the company now to drive productivity and efficiency to get to our midterm targets over time here. And that is what we’re working on. And then, of course, we have to come back on the progress of that. And as we come out of this, also more stable ground also coming back to guidance and those kind of forward-looking statements when that time is there.

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Anders Trapp, Autoliv, Inc. – VP of IR [54]

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We have time for one more question.

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Operator [55]

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It comes from the line of Brian Johnson.

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Jason Flynn Stuhldreher, Barclays Bank PLC, Research Division – Research Analyst [56]

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This is Jason Stuhldreher on for Brian. I appreciate you squeezing me in here. Maybe just a quick question to round out the cash flow discussion. As we think about the second half, there’s obviously puts and takes between CapEx stepping up, working capital going one way or the other. But I think coming into the quarter, we were cautiously optimistic that potentially you could be cash flow breakeven for the year. Obviously, highly contingent upon volumes. But if we do see the type of volumes that IHS is calling for, is that a reasonable target for investors to think about? Or is there some precluding factor that would prevent you guys from getting there?

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Fredrik Westin, Autoliv, Inc. – CFO & EVP of Finance [57]

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Yes. I mean, again, IHS is one data point that we’re not [confirming] that in any case. We will, of course, now during the Q3 and Q4, because of the ramp-up, it will be also a tie-up of working capital with receivables and inventories ramping up as volumes increase. And we will have a very, very strong focus on our cash conversion. And we also have a target there that we’re striving forward to achieve. But it’s also there, say, a highly uncertain journey here during the second half. But I mean, we will be very, very focused both on CapEx, as we said. There will be an increase because of the higher launch activity in the second half and because we pushed out so much on the second quarter. But then there are also the other elements of net working capital that will build up as a nature, just a thing, increasing volumes. But it’s — it is difficult to make any more specific guidance on that here. And it also a lot depends on how the top line also plays out during the second half.

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Jason Flynn Stuhldreher, Barclays Bank PLC, Research Division – Research Analyst [58]

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Understood. Okay. That’s helpful color. And then just my last question. Just on the launch cadence within the industry. I think we’ve all been impressed or surprised by how resilient the launch plans of OEMs have been up until this point. And the comments that you had in the press release and in your prepared remarks made it seem like those plans were still on track. I think there was one line that said, recently, you’ve a few OEMs talk about launch delays. Just curious of your overall comments in general are around new launches are more constructive or less constructive than they were at this time a quarter ago?

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [59]

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No, I think as we said, I mean, we’ve seen some delays. But I mean, it’s not significant delay. So it’s — to a large extent, I would say, following through. And I mean, of course, when you have a situation like this, there could be a lot of practical reasons for delaying it under these circumstances. So is not very dramatic, I would say. And actually, we also see some corners, some ambitions to speed up also to catch up for lost time. So I mean, potentially heading out itself over time here, but high ambition still to follow through on all those programs. And as we have said, also, there are a few activity in terms of new quotes, et cetera, is also following the original plan. So we don’t see any push-outs or delays of any meaningful level there either. So very much climbing through.

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Operator [60]

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We hand back over to Mikael Bratt for final remarks.

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Mikael Bratt, Autoliv, Inc. – President, CEO & Director [61]

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Thank you, Sandra. Before we end today’s call, I would like to say that while we continue to manage the effects of the pandemic, we have a never-ending focus on quality and operational excellence. Our third quarter earnings call is scheduled for Friday, October 23, 2020, and thank to everyone for participating on today’s call. We sincerely appreciate your continued interest in Autoliv and until next time, stay safe.

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Operator [62]

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That does conclude our conference for today. Thank you for participating. You may all disconnect.