Autoliv, Inc. (ALV) Earnings Call Transcript

Good day and thank you for standing by. Welcome to the Autoliv Inc. third quarter 2026 Financial Results Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Anders Trapp, Vice President, Investor Relations. Please go ahead.

Welcome everyone to our third quarter 2026 earnings call. On this call, we have our President and Chief Executive Officer, Mikael Bratt; our Chief Financial Officer, Monika Grama; and Anders Trapp, Investor Relations. During today's earnings call, we will highlight several key areas, including our strong performance in a challenging market environment, ongoing mitigation actions to offset cost headwinds. We're going to give an update on the latest market developments and our shareholder returns and our full year guidance and the potential impact of ongoing geopolitical and market challenges. Following the presentation, we will be available to answer your questions. 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 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 available on autoliv.com and in the 10-Q that will be filed with the SEC and at the end of this presentation. Lastly, I should mention that this call is intended to conclude at 3 p.m. Central European Daylight Saving Time. So please follow the limit of two questions per person. I will now hand over to our CEO, Mikael Bratt.

Thank you, Anders. Looking on the next slide. We delivered a strong third quarter in a tough environment with adjusted operating margin exceeding our earlier indications and reflecting disciplined execution across the business. The progress we achieved during the quarter reinforces our confidence in further profitability improvement through year end. Together with strong customer partnerships and ongoing efficiency initiatives, we believe we are well positioned to continue delivering value for our stakeholders. Our positive sales momentum in Asia continued during the quarter. In China, we once again outperformed the competition driven by strong growth with Chinese OEMs, where our sales outperformed by almost 20 percentage points. In India, we grew sales by nearly 30% organically, reflecting mainly the trend of increased safety content in vehicles in India. Adjusted operating margin reached 9.7%, ahead of earlier indication, reflecting strong operational execution and higher engineering income. I am pleased that our cash flow was strong despite working capital buildup due to strong sales in September. In the quarter, we repurchased over 1.2 million shares for $150 million and paid dividends of $63 million. Based on what we know today, we reiterate our full year 2026 guidance of flat organic sales with continued significant outperformance of light vehicle production, both with Chinese OEMs and in India. Following the first nine months of the year and continued raw material headwinds and higher logistic costs, we have narrowed down our adjusted operating margin guidance to be around 10.5%, which is at the low end of the range of around 10.5% to 11%. This reflects the effectiveness of the mitigation actions outlined later in the presentation. Operating cash flow guidance remains unchanged. CAPEX is now expected to be around 4% of sales compared with the previous expectations of less than 5% of sales. We also have several positive developments to highlight from the quarter, both in terms of our footprint and our product offering. Expanding in China is key to strengthening Autoliv's innovation, global competitiveness, and long-term growth. To support this and our growing partnerships with Chinese OEMs, we have opened our second R&D center in China. We also launched the Human Body Model Safety Suite, a virtual safety development platform that helps automakers evaluate occupant protection through advanced crash simulations. By helping customers improve safety performance earlier and shorten development time, it strengthens Autoliv's value proposition and growth opportunities. Looking now on the next slide. Third quarter sales were virtually unchanged despite light vehicle production declining. This was due to outperforming relative to light vehicle production, including tariff-related compensation, favorable currency effects. Adjusted operating income for the third quarter decreased by 3% to $262 million. The decline reflects a $15 million supplier compensation, which benefited the third quarter of last year. The adjusted operating margin was 9.7%, 30 basis points lower than last year. Operating cash flow was $239 million, a decrease of $19 million. Looking now on the next slide. We continue to deliver broad-based operational improvements. Our positive direct labor productivity trend continued during the quarter, supported by the execution of our strategic initiatives, including automation and digitalization. Gross profit decreased by $26 million with the gross margin declining from 19.3% to 18.4%. Approximately half of the year-over-year decline was attributable to the noted supplier compensation recognized in the prior year. Looking ahead, we expect fourth quarter gross margin to develop favorably compared to Q4 '25. All RD&E net expenses decreased year over year, driven by higher engineering income. As previously communicated, the increase in engineering income was primarily related to the timing of specific customer development projects. SG&A expense remained virtually unchanged, both year-over-year and sequentially. Turning to the light vehicle market development in the third quarter, let's move to the next slide. According to Mobility Global's October forecast, global light vehicle production declined by 1.9% in the third quarter, approximately 20 basis points below the expectations in July. The weaker than expected production environment was primarily driven by lower volumes in China among global OEMs, as well as softer production in North America and Japan. This was partly offset by stronger than expected performance in India and South America. The regional mix of global light vehicle production was approximately 90 basis points unfavorable during the quarter, mainly reflecting stronger production growth in lower content markets relative to other regions. Despite these market headwinds, our sales remained virtually unchanged year over year, supported by our continued outperformance relative to light diesel production, favorable currency effects and tariff related compensation. We will talk about the expected market development in the fourth quarter more in detail later in the presentation. Call-off accuracy has deteriorated somewhat compared with the beginning of the year, driven mainly by China, while other regions have returned to almost normal levels. Maintaining high call-off accuracy remains critical as it enables efficient production planning, inventory management and optimal capacity utilization across our operations. Looking now on our sales growth in more detail on the next slide. Our consolidated quarterly net sales was virtually unchanged despite market headwinds. Excluding currencies, our organic sales decreased $30 million or by 1%. Based on the latest light vehicle production data from Mobility Global, we underperformed the market by almost 1 percentage point globally. In Asia, excluding China, we outperformed the market by almost 3 percentage points, driven by continued strong sales growth in India, where we outperformed by 11 percentage points. Japan also contributed to the outperformance as we outperformed in Japan by almost 4 percentage points. In China, we delivered outperformance of around 1 percentage point, mainly because our sales growth to Chinese OEMs exceeded the light vehicle production growth by almost 20 percentage points. As a result, Chinese OEMs accounted for 58% of sales in China in the quarter, compared to 46% for the same period last year. While performance in America overall was in line with light vehicle production, North America delivered stronger results, outperforming light vehicle production by 2 percentage points. Globally, Chery, Suzuki and Nio were the largest drivers of sales during the quarter. Despite light vehicle production decline in China, China accounted for 20% of sales, Asia, excluding China, accounted for 20%, Americas for 34%, and EMEA for only 26% due to summer shutdowns. Moving on to the next slide. The third quarter of 2026 saw a high number of new launches, primarily in China, but also in Americas. The strong launch activity in China reflects Autoliv's continued momentum in this strategically important market and supports our ongoing outperformance relative to the market. Higher content per vehicle was driven in part by the adaptation of front center airbags across many of these new vehicles, as well as pedestrian protection systems. From a sales potential perspective, the BMW X5 and iX5 were the most significant launches during the quarter. Looking ahead, we expect a substantially higher number of launches in the fourth quarter compared with the same period last year, making 2026 a record year in terms of launch activity. This record will not stand for long as we expect a new record launch year again in 2027. Let's continue with the next slide. I will now hand over to Monika.

Thank you, Mikael. I will talk about the financials more in detail on the next few slides. Turning to the next slide. This slide highlights our key figures for the third quarter of 2026 compared to the same quarter of 2025. Net sales were $2.7 billion, representing a 0.5% decrease. Gross profit decreased by $26 million and gross margin decreased by 90 basis points. The driver behind the lower gross profit was mainly the $12.5 million supplier compensation in 2025, as Mikael mentioned, as well as higher costs for raw materials. This was partly offset by positive FX effects and supplier cost reduction. The adjusted operating income decreased from $271 million to $262 million, and the adjusted operating margin decreased from 10.0% to 9.7%. The reported operating income of $254 million was $8 million lower than the adjusted operating income, mainly related to capacity alignment activities. The adjusted earnings per share diluted, decreased by 13 cents to $2.19. The main drivers were 16 cents from higher taxes, 9 cents from lower operating income, partly offset by 11 cents from lower number of outstanding shares, diluted. Our adjusted return on capital employed and adjusted return on equity were solid, 24% and 25% respectively. We repurchased shares for $150 million and paid a dividend of $0.87 per share. Now on the adjusted operating income bridge on the next slide. In the third quarter of 2026, adjusted operating income decreased by $9 million year-over-year. Operational contributed $34 million despite slightly lower sales, primarily driven by cost reduction activities. RD&E and SG&A net had a $17 million positive effect, mainly reflecting $26 million higher RD&E reimbursements. This includes $2 million of unfavorable foreign exchange translation effects. This was partly offset by the $15 million supplier compensation that positively impacted last year's results. Raw material costs had a gross negative impact of $42 million in the quarter, with non-ferrous metals and oil-related components accounting for the majority of the increase. During the quarter, we achieved customer compensation covering more than 80% of tariff costs. However, tariff-related headwinds still reduced our adjusted operating margin by around 35 basis points, including dilutive effects. Looking now at cash flow on the next slide. Operating cash flow decreased by $19 million to $239 million compared to the prior year, mainly because of lower net income. Net working capital in relation to sales was 13.5% at the end of the quarter compared to 13.9% a year ago. The improvement was mainly driven by higher payables in relation to sales, while inventories and receivables to sales were relatively unchanged. Free operating cash flow was positive $124 million compared to positive $153 million in the prior year. Capital expenditure net increased by €9 million year over year. Capital expenditure as a percentage of sales rose to 4.3% compared with 3.9% in the prior year, mainly reflecting increased investments in production and RD&E equipment. The cash conversion was 80%, in line with our target of at least 80%. Year-to-date operating cash flow decreased by $15 million to $598 million compared to the prior year. Now looking on the next slide. Over the years, Autoliv has consistently demonstrated its ability to generate strong cash flow across a variety of market conditions. Over the last 12 months, we returned approximately $760 million to shareholders through dividends and share repurchases. Looking at the past five years, we have returned a total of $2.9 billion directly to shareholders, while at the same time strengthening our balance sheet and improving our leverage profile. This includes more than $1.7 billion in share repurchases and nearly $1.2 billion in dividends. During this five-year period, we reduced our outstanding share numbers of approximately 18%. As of quarter end, approximately $1.9 billion remained available for repurchase under the current board authorized share repurchase program out of the total of $2.5 billion original authorization. Our capital allocation decisions are guided by a disciplined assessment of our balance sheet, cash flow outlook, leverage, credit ratings, and market conditions with a continued focus on delivering long-term shareholder value. Now, looking on our debt leverage ratio development on the next slide. Autoliv's balanced leverage strategy reflects our prudent financial management, enabling resilience, innovation, and sustained stakeholder value over time. Our leverage ratio was 1.3 times at quarter end compared with 1.2 times a quarter ago. The increase was driven by a roughly $64 million increase in net debt during the quarter, combined with a modest $6 million decrease in trailing 12-month adjusted EBITDA. Despite a quarter-over-quarter increase, our leverage remains at a low level and well within our targeted capital structure. On to the next slide. I will now hand it back to Mikael.

Thank you, Monika. I will talk about the outlook for the remaining of 2026 more detailed on the next few slides. Turning to the next slide. Mobility Global now expects global light vehicle production to decline by 1.9% in 2026, almost 2 percentage points downgrade from its January forecast, primarily driven by weaker outlooks for China and the Middle East, as the industry continues to face the effects of the conflict in the Middle East and soft demand in China, partly offset by resilient vehicle sales in other markets. For the fourth quarter, Mobility Global forecast global light vehicle production to decline by approximately 4.5% year over year. The expected decline is largely driven by lower production in China, where softer domestic demand is only partially offset by continued strength in exports. As a result, Mobility Global has reduced its fourth quarter outlook for Chinese light vehicle production to a 9% decline. In the Americas, light vehicle production is expected to decline by approximately 2%, reflecting inventory adjustments in North America. In Europe, production is expected to decrease by around 1% as automakers continue to face increasing competitive pressure from Chinese manufacturers. In contrast, Mobility Global has significantly upgraded its Japan outlook to 2% growth from 12% decline. This is driven by production recovery following Q3 plant disruptions caused by natural disasters, continued strong exports of fuel efficient hybrid vehicles to the U.S. and Europe. Despite the expected year-over-year decline in global light vehicle production in Q4, production is forecast to increase sequentially by more than 1 million units or approximately 5%. Now looking on the fourth quarter development more in detail on the next slide. As we look ahead to the remainder of the year, we remain focused on managing a dynamic external environment. We are closely monitoring the potential impact of geopolitical developments in the Middle East, which continues to affect supply chain, raw material cost, and overall vehicle demand. Despite this uncertainty, we expect our financial performance to strengthen in the fourth quarter versus the third quarter. Margin expansion is supported by higher sales volume, increased engineering income and customer compensation related to raw material inflation. In addition, our ongoing cost efficiency initiatives, including greater automation and digitalization across our operations, are expected to further enhance profitability and operating leverage. Combined, these actions are expected to result in a meaningful, stronger margin profile by year end. Despite market headwinds, we expect strong free cash flow generation to continue throughout the year, supporting the ongoing execution of our share repurchase program and dividends. Looking at our full year guidance, there are several factors expected to weigh on the adjusted operating margin. Throughout the year, we have taken proactive measures to mitigate the additional headwinds impact in 2026. These are presented in more detail on the next slide. When our original full year 2026 guidance was set in January, our assumptions reflected a significantly more favorable cost environment than what we see now. Since then, the business has faced additional headwinds amounting to approximately 170 to 280 basis points. To address these headwinds, we have taken a broad range of commercial, operational, and cost-efficiency actions, including improving direct labor productivity through optimization, digitalization, and continuous improvement initiatives. Accelerating Value Engineering and Value Analysis Initiative. Implementing SG&A cost reduction measures, and tighter spending controls. Securing raw material recovery through customer negotiations and indexation. Delivering savings through commercial negotiations with suppliers. Through disciplined execution of these initiatives, we expect to offset most of the incremental headwinds. As a result, the net impact on our full year adjusted operating margin is expected to be limited, demonstrating the resilience of our business model and our ability to proactively manage a challenging cost environment. Looking now on the next slide. This slide shows our full year guidance, which excludes effects from capacity alignment and antitrust-related matters. It is based on no material changes to tariffs or trade restrictions that are in effect as of October 15, 2026, as well as no significant challenges in the macroeconomic environment changes in customer call-off volatility or significant supply chain disruptions. We expect to outperform light vehicle production by around 2 percentage points as our organic sales is expected to be flat while global light vehicle production is expected to decline by 2%. The currency translation effect on sales is expected to be around 2.5% positive. While market headwinds have prompted a slight adjustment to our outlook, change is relatively minor. The guidance for adjusted operating margin is now narrowed to around 10.5%, the low end of our range of around 10.5% to 11%. Operating cash flow is expected to be around $1.2 billion. We expect CAPEX to be around 4% of sales compared to previous guidance of less than 5%. Our strong cash flow generation and disciplined capital spending support our continued commitment to delivering attractive share of returns. We expect a tax rate of around 30%. 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. Before I do that, I would like to make a small correction there to my comment when it comes to the sales growth and regional sales split in the Q3. I accidentally said that we underperformed the market by almost 1%. It should of course be we outperformed the market by almost 1 percentage point globally in the third quarter. So, with that correction, I would now like to hand it over to Madeleine, our operator.

[Operator Instructions] We are now going to take our first question. And this question comes from Tom Narayan from RBC. Please go ahead.

Yes, the first one is on the EMEA performance versus the market. You mentioned there were some shutdowns there, but I guess I would think that would have impacted the market as a whole, not just I believe the perhaps it was related to these exports into Europe. I'm not sure what your indexation is to those, but just some color on the EMEA underperformance in the quarter, and then I have a follow-up.

Sure, thank you for your question. I think, first of all, I would say that, I mean, yes, Europe is a challenging market. And here we have some swings between the different OEMs. So, I mean, there are elements of customer mix from our point of view. I think we have said before here that our market share ambition globally is to protect the market share we have. And if you come to the more, I mean, mature markets, you have more of a stable situation there. And then when you see some shifts, between the customers, of course, it gets a bigger impact than normally if you're in a growth mode or so. So I should not read into much into those swings you see there. I would also say that, of course, you are impacting this also well when you see export from China coming into Europe. But since we are on most of those vehicles also, you have maybe, you know, seemingly a minus in the European business, but we have a plus in China. And that doesn't come through when you look at the numbers region by region like that. I would say it's not that that's why, but it's one reason why maybe we emphasize more the overall market share development and outperformance here than the regional shifts. But of course, key here is to grow for us with the OEMs that are growing and taking market shares globally, which we are doing here. And I think the strong outperformance with Chinese OEMs in the quarter here is another evidence of exactly that in India.

Yes. And for my follow-up, you know, you described the raw material cost increase resulting in the basic guidance cut, and I believe it was $10 million impact to the '26 numbers. I know you're not giving '27 guidance today, but just curious how we should think about the raw material cost increase leading into '27. Is the expectation that you could all of that with recoveries in the year, or is this a similar dynamic that there's a... Just kind of a bleeding that happens to forward periods. Like, I guess, how should we think about this?

As you commented, we don't give any details around 2027 yet. It's in connection with the earnings call for Q4, but I would say that when it comes to raw materials, I would say that we expect it to be as challenging in 2027 as it has been in 2026. I would say that's as much as we can comment really on that specifically. So I would say no headwind or tailwind coming from that, but of course we are seeing 2026 as a very challenging year. Translates and moves into 2027 when when when when we get there, but more details to come.

All right.

We are now going to take our next question. And this question comes from Emmanuel Rosner from Wolfer Research. Please go ahead.

Okay, maybe first question focusing on the implied post quarter outlook implied by your guidance. So this would obviously be a very high margin around 14% or so. Can you maybe give us some sort of sense of how much visibility and confidence you have in some of these drivers of margins step up and in particular to the extent, you know, the recovery is there, you know, are those already secured? Is that, you know, where are you, I guess, in that negotiation process?

Sure. I think, first of all, Q4 is the stronger quarter in the year, as you know. And I think with the full year guidance here, we are confirming that that's also the case this year. And of course, one part that makes it stronger is the engineering income that will be a part also this year. We have alluded to the higher sales and and also as Mobility Global says here now, so another 1 million units in Q4 compared to Q3. So support trust in the sequential, development there. Otherwise, I mean, it is to to really drive here the customer compensation and tariff recovery in line with with what we have done throughout the year here. And I think we have a good momentum there. We, I would say, maybe this year compared to other years is that, and which is part of the guidance, of course, it's nothing on top of there. But as we understand that the full year impact here is of course that this cost pressure continues throughout the year here and makes it very tight to also fix the full year effect in the year, which more speaks to that we are on the lower end of the range than anywhere else in the range there. But I mean, we move into the fourth quarter here with confidence. I think the Autoliv team has done a great job maneuvering through this. And as you saw here, I mean, the additional headwind on top of what we expected in the beginning of the year, I mean, 1.8 percentage points more is quite meaningful, I would say, that we have absorbed here through price compensations and also our own cost out activities here. And that also includes material cost optimization with the suppliers also, of course, that we do our part there. So, I think we have a good activity plan.

For the fourth quarter. Okay, I appreciate the color. And then as a second question, maybe focusing on China, so I appreciate the color on the breakdown between, you know, and your performance between global and Chinese, you know, local OEMs. Can you maybe comment on, you know, what is, you know, what portion of your business in China is geared towards exports and any thoughts on to the extent there are some measures being put around the world to limit some of these exports, whether there would be a good thing for you or on a relative basis or a bad thing, something that we should focus on?

Yes, I think in first of all I think that starting point the export vehicles tend to, I mean we don't have a separate supply chain for the export vehicles or the domestic vehicles for our respective customer in China. It's the same models and then the specification may differ but in most circumstances I mean it's the same type of product so we don't really see that difference which vehicle goes where in that regard. But as I said, we are managing these dynamics in a good way, thanks to our global presence and high market share in the total market. And we have talked about that before that we have a strong diversified portfolio with a widespread representation among the different customers. So if it moves in between, we are, on the platforms that also are gaining it's some traditional are losing, you could say, in all this. And if there would be more, let's say, restrictions coming up between the regions on, you know, you can't export, you need to localize, with our footprint, we can support the customer that then wants or forced to localize the order and to export from another region. So I think that's really a strength without a doubt here is that we can offer our customers a lot of flexibility. And I mean, if you talk specifically about the Chinese OEMs exporting from China versus Europe and you need to localize in Europe, I mean, today we are already part of the China supply chain for them if they have that set up with CKD, for example, or if they want to localize, then we can support them with local production. So I would say we're well prepared for whatever comes in terms of that dynamic.

We are now going to take our next question. And this question comes from Chris McNally from Evercore ISI. Please go ahead.

I just wanted to follow on to Emmanuel's question, maybe to put some numbers to it. We're all trying to figure out this Chinese algorithm, right, which kind of gets a little bit more, the numbers just become less dramatic Q4 and next year. For the implied Q4, are you expecting that China organic growth will go sort of back to positive? And then again, for 2027, it's early, but we all kind of know that the exports will be up, whether that's 10 or 20 percent. We're all in debate. But is the expectation that we will still have Chinese organic growth, given your sort of, you know, customer mix.

I don't know if I would like to give a number there, but what I mean as you said, I mean the light vehicle production according to Mobility Global is negative in China. But with that said, I have great confidence in our say future development of continuing to grow with the Chinese OEMs as we move forward. So, yes, I think we we are on the right trajectory here. It's the LVP that gives the the delta to speak at the end of the day here, but that we I think you have to wait to see what the net number is, but we are on a good trajectory with the Chinese OEMs and I expect it to continue to grow that's my my uh.

Yes, so sorry, so sort of a paraphrase is that the growth over market should remain a significant driver, but you're focused on the light vehicle, which is obviously pretty negative in Q4, so maybe that's an unfair question, and then '27 is a little bit easier. Okay, perfect. And then if we could just zone in on the inflation, right, the 180 basis point. If you have so many pass-throughs, right, the timing we all know, that will be somewhat of a pressure into next year. But I was curious, of the 180 basis points, how much was actually the Thailand... flooding and logistics right we heard from GM this this week that logistics you know what was a headwind in Q3 Q4 could typically those would not be compensated so just curious if you can call out either or as a bucket sort of those those two because those are kind of one-offs.

Connected to the Thailand flooding, we see we can call it not material impact in our results in Q4. Of course, this is considering coverage from our property damage and business interruption insurance. And then connected to the logistics cost, we see indeed in some of the divisions double digit cost increases, especially in the North America. To offset this, we have taken logistic optimization initiatives to reduce the mileage. That is partly compensating the cost. As you well know, this is a cost very difficult to pass on. So there is a limited impact that, to a large extent, we are looking on other compensating effects to recover and not say one-to-one in the same area.

Okay, excellent. Great detail.

We are now going to take our next question. And this one comes from Winnie Dong from Deutsche Bank. Please go ahead.

I wanted to just follow up on the years guide. I understand that you've narrowed the margin to the lower end. Was there anything that's more specific? I think you've talked a lot about cost already, but anything specific that pushes you to the low end of that range? And then to a certain extent, what sort of light do you think carries into 2027?

I think, I mean, as we have alluded to here is the higher than expected cost pressure that we have seen across the board here. I mean, we have had on one of these slides, I think the team has done a great job to offset such a large portion of it that we still can be in the range. So good job there. I think what is more, you know, moving into '27 is really what we talked about here before, connected to the raw materials. I would say that we expect that to continue to be some headwinds. So, I think that slide is really a good summary of why it's the lower end and not the upper.

Got it. Separately, I kind of want to ask about mobility safety solutions, and specifically, I mean there's a product in terms of safety switch outside of vehicles. You're kind of marketing them for battery energy storage, etc. Which seems like, you know, one of the few ways to get growth that's not tied to LVP. So just any initial takes on how to frame the opportunities there.

I think it's an interesting opportunity here in the light of the electrification that is going on in society. We are having a dedicated team here to develop that business and here we're talking about both high voltage and low voltage, etc. to see what we are doing there. And I mean, we have interesting, and we are also growing this business as we speak. Then we have decided and elected not to give too much details and numbers at this point in time, because we believe that it's more meaningful to come back to you when we have meaningful progress. Volumes around that and can talk more in great detail. It's a little bit of a, you could say, startup phase right now, but interesting opportunities in the midterm for sure.

Great.