Autoliv, Inc. (ALV) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to Autoliv, Inc. Second Quarter 2020 Financial Results Conference Call and Webcast. [Operator Instructions] Please note that today's conference is being recorded. I would now like to turn the conference over to your speaker, Mr. Anders Trapp, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Ralf. Welcome, everyone, to our second quarter 2025 earnings call. On this call, we have our President and Chief Executive Officer, Mikael Bratt, our Chief Financial Officer, Fredrik Westin; and me, Anders Trapp, VP, Investor Relations. During today's earnings call, we will cover several key topics, including our record sales and earnings for the second quarter, an update on the market development and tariffs that are affecting the automotive industry as well as how our strong balance sheet and asset returns provide financial resilience and the support for a continued high level of shareholder returns. 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 use GAAP to non-use 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. Lastly, I should mention that this call is intended to conclude at 3 p.m. Central European Time. So please follow a limit of 2 questions per person. I now hand it over to our CEO, Mikael Bratt.

Thank you, Anders. Looking on the next slide. I am proud to present a record second quarter, highlighting our company's resilience and strong market position fueled by strong customer relationships and our culture of continuous improvement. This achievement makes a solid foundation for the rest of the year. However, we remain cautious about the rest of the year as we navigate the complexities of tariffs and other challenging economic factors. It is encouraging that we, based on light vehicle production data from July, outperformed global light vehicle production despite continued significant headwinds from mix shifts. In China, we saw a clear improvement with the gap between our sales growth and light vehicle production growth narrowing compared to the previous quarters. This positive development was driven by recent product launches with Chinese OEMs. Notably, our sales in June outpaced the growth of the Chinese light vehicle production and we expect this positive trend to continue through the remainder of the year. We significantly improved our operating profit and operating margin compared to a year ago. This strong performance was primarily driven by well-executed activities to improve efficiency and costs. We successfully recovered approximately 80% of the tariff costs incurred during the second quarter and expect to recover most of the remaining portion later this year. The combination of not yet recovered tariffs and the dilutive effect of the recovered portion resulted in a negative impact of approximately 35 basis points on our operating margin in the quarter. We also achieved record earnings per share for the second quarter. Over the past 5 years, we have more than tripled our earnings per share, mainly driven by strong net profit growth, but also supported by a reduced share count. Our cash flow remained strong despite higher receivables driven by robust sales and tariff compensations late in the quarter. Our solid performance, combined with a healthy debt leverage ratio supports continuous strong shareholder return. We remain committed to our ambition of achieving USD 300 million to USD 500 million annually in stock repurchases as outlined during our Capital Markets Day in June. Additionally, we are increasing our third quarter dividend to $0.85 per share, reflecting our confidence in our continued financial strength and long-term value creation. Looking now on the next slide. Second quarter sales increased by 4% year-over-year, driven by strong outperformance relative to light vehicle production in several regions, along with favorable currency effects and tariff-related compensations. This growth was partly off by an unfavorable regional and customer mix. The adjusted operating income for Q2 increased by 14% to USD 251 million from USD 221 million last year. The adjusted operating margin was 9.3%, 80 basis points better than in the same quarter last year. Operating cash flow was a solid USD 277 million despite temporary working capital buildup from higher sales and tariff compensations. Looking now on to the next slide. We continue to generate broad-based improvements. Our positive direct labor productivity trend continues as we reduced our direct production personnel by 3,200 year-over-year. This is supported by the implementation of our strategic initiatives, including automation and digitalization. Our gross margin was 18.5%, an increase of 30 basis points year-over-year. The improvement was mainly the result of direct labor efficiency and headcount reductions. As a result of our structural efficiency initiatives, the positive trend for RD&E continued. Combined with the increased gross margin, this led to 80 basis points improvement in adjusted operating margin. Looking now on the market development in the second quarter on the next slide. According to S&P Global data from July, global light vehicle production for the second quarter increased 270 basis points exceeding the expectations from the beginning of the quarter by 200 basis points, supported by the scrapping and replacement subsidy policy, we continue to see strong growth for domestic OEMs in China, while light vehicle production and higher CPV markets in North America and Western Europe declined by around each. This resulted in an unfavorable regional light vehicle production mix of around 2.5 percentage points in the quarter, a significant negative impact on our overall outperformance. In the quarter, we did see call-off volatility continuing to improve year-over-year and sequentially from the first quarter. We will talk about the market development more in detail in the -- later in the presentation. Looking now on our sales growth in more detail on the next slide. Our consolidated net sales were over USD 2.7 billion, the highest for the second quarter so far. It was almost $110 million higher than last year, driven by price, volume, positive currency translation effects and $27 million from tariff-related compensation. Excluding currencies, our organic sales grew by more than 3%, including tariff cost compensations. China accounted for 18% of our group sales. Asia, excluding China, accounted for 19%, Americas were 33% and Europe was slightly more than 30%. We outlined our organic sales growth compared to light vehicle production on the next slide. Our quarterly sales were robust and slightly exceeded our expectations, driven by strong performance across most regions, particularly in Europe and India. Based on light vehicle production data from July, we outperformed light vehicle production in all regions except Japan and China, fueled by product launches and tariff compensations. In Japan, we were negatively affected by an unfavorable light vehicle production mix resulting from last year's production stop at Daihatsu due to homologation issues. Nevertheless, we outperformed the market by over 2 percentage points in the first half of the year. In China, our sales to domestic OEMs grew more than 16% aligned with the LVP growth. Our growth for the global customers in China was 2 percentage points higher than their light vehicle production. While the ongoing light vehicle production mix shift continued to impact our overall performance in China, we saw a clear improvement with the gap between our sales and light vehicle production narrowing compared to the past 3 quarters. On the next slide, we show some key model launches. As shown on this slide, the second quarter of 2025 saw a high number of new launches, primarily in Asia, including China. While some of these new launches in China remain undisclosed here, due to confidentiality, they reflect a strong momentum for Autoliv in this important market. The models displayed here feature Autoliv content per vehicle from close to USD 100 to over USD 500. We are also pleased to have launched seatbelt on 2 key small Japanese vehicles known as K-cars. This is a meaningful step forward as Autoliv has historically had limited exposure to this segment in Japan. In terms of Autoliv's sales potential, the [indiscernible] and the Honda new midsized electrical crossover, AP7 are the most significant. Higher CPV is driven by front center airbags on 6 of these vehicles as well as knee airbags. Now looking on the next slide. I will now hand over to Fredrik.

Thank you, Mikael. I will talk about the financials more in detail now on the next few slides. So if we turn to the next slide. This slide highlights our key figures for the second quarter of 2025 compared to the second quarter of 2024. Our net sales were approximately $2.7 billion, representing a 4% year-over-year increase. Gross profit increased by $27 million, and the gross margin increased by 30 basis points. The adjusted operating income increased from $221 million to $251 million, and the adjusted operating margin increased by 80 basis points to 9.3%. The adjusted earnings per share diluted increased by $0.33 where the main drivers were $0.27 from higher operating income and $0.10 from lower number of shares. Our adjusted return on capital employed was a solid 24% and our adjusted return on equity was 28%. We paid a dividend of $0.70 per share in the quarter and we purchased shares for USD 51 million and retired 0.5 million shares. Looking now on the adjusted operating income bridge on the next slide. In the second quarter of 2025, our adjusted operating income increased by $30 million. Operations contributed with $35 million, mainly from higher organic sales and by execution of operational improvement plans supported by better call-off volatility. The net currency effect was $12 million positive, mainly from revaluation effects. The impact from raw materials was around $4 million negative. Out of period cost compensation was $6 million lower than last year. The combination of unrecovered tariffs and the dilutive effect of the recovered portion resulted in a negative impact of approximately 35 basis points on our operating margin in the quarter. Looking now at the cash flow on the next slide. Operating cash flow for the second quarter of 2025 totaled $277 million, a decrease of $63 million compared to the same period last year despite a $29 million increase in net income. The decline was primarily driven by higher receivables, reflecting strong sales and tariff compensations toward the end of the quarter. Capital expenditures net decreased by $32 million. Capital expenditures net in relation to sales was 4.2% versus 5.6% a year earlier. The lower level of capital expenditures net is mainly related to lower footprint CapEx in Europe and Americas and less capacity expansion in Asia. The free operating cash flow was $163 million compared to $194 million in the same period the prior year as the lower operating cash flow was partly offset by lower CapEx. The cash conversion in the last 12 months, defined as free operating cash flow in relation to our net income was around 65%, somewhat below our target of 80%. Now looking at our trade working capital development on the next slide. Our trade working capital increased by $185 million compared to the prior year where the drivers were $251 million in higher accounts receivables and $21 million in higher inventories, partly mitigated by $87 million in higher accounts payables. In relation to sales, the trade working capital increased from 11.2% to 12.5%. We view the increase in trade working capital as temporary as our multiyear improvement program continues to deliver results. Additionally, enhanced customer call of accuracy can enable a more efficient inventory management. Now looking on our debt leverage ratio development on the next slide. Autoliv has consistently prioritized maintaining a balanced leverage ratio reflecting our prudent financial management and commitment to a strong balance sheet. This approach has enabled the company to navigate economic fluctuations, invest in innovation and continue to deliver value to stakeholders over time. In the quarter, we refinanced a SEK 3 billion loan from Swedish Export Credit Corporation with a new 1-year SEK 2 billion loan. Our leverage ratio remained strong at 1.3x, well below our target limit of 1.5x and has remained stable compared to both the end of the first quarter and the same period last year. This comes despite returning USD 550 million to shareholders over the past 12 months. Our net debt decreased by $31 million while the 12 months trailing adjusted EBITDA increased by $34 million in the quarter. Now looking at the tariff situation on the next slide. We are closely monitoring the evolving tariff situation. Thanks to our well-diversified customer portfolio and strong manufacturing footprint across the USMCA region, we are well positioned to navigate these challenges. Customers and duties have long been a part of doing business. even before the current wave of tariffs. Last year, we paid approximately USD 100 million in such costs on a global level, and they are reflected in the sales price. Currently, we estimate that our total gross exposure to tariffs could roughly double to around $200 million. However, we are actively engaging with our customers to mitigate the impact through measures such as adjusting shipping points enhancing USMCA compliance and exploring compensation mechanisms. In the second quarter, due to timing, customer compensation booked during the quarter covered approximately 80% of the tariffs paid. Most of the remaining charges are expected to be recovered later in the year. Despite the uncertainty, we continue to believe that the net effect on our adjusted operating income for 2025 would be around 20 basis points on our operating margin due to the dilution effect. We remain vigilant, particularly in assessing how these developments may influence end customer demand in the U.S. With that, I hand it back to you, Mikael.

Thank you, Fredrik. On to the next slide. The outlook for global light vehicle production in 2025 continues to be uncertain with regional variations influenced by tariffs, slowing economic growth and other factors. S&P now forecast global light vehicle production to grow by 0.4% in 2025, following growth of over 3% in the first half of the year. However, their outlook for the second half has weakened considerably with light vehicle production now expected to decline by more than 2%. In North America, the production outlook has been significantly downgraded due to the trade risks and higher vehicle prices from import tariffs, especially for the fourth quarter. This reduction is likely to affect vehicles produced in Mexico and Canada more severely. In Europe, production in the first half of the year continued to exceed expectations, leading to the overall upgrade by S&P's full year forecast. However, the outlook for the second half of 2025 remains unchanged as S&P expects inventory reductions to take effect after a strong first half of production versus rather subdued vehicle sales. China is also growing, driven by government policies supporting the new energy vehicle market and relaxed outdoor loan policies. Japan and South Korea are potentially facing declines due to the impact of lower exports to the U.S. Overall, while some regions are still expecting growth, the global auto industry remains cautious, navigating the complexities of tariffs and other economic factors. Now looking on our way forward on the next slide. At our Capital Markets Day in June, we outlined our strategic road map for sustainable growth and long-term value creation. We emphasized our medium- and long-term growth opportunities, particularly through deepening partnerships with leading global and Chinese OEMs positioning Autoliv as the clear market leader also in the future. We showcased innovations across our core safety systems, airbags, seatbelts and steering wheels, as well as new mobility safety solutions. Global growth outlook for automotive safety overall is supported by light vehicle production growth, driven by positive GDP trends in emerging markets and by continued increases in safety content per vehicle. Our strong performance culture is driven by clear key behaviors to guide us, a clear mandate and expectations end-to-end, continuous improvement mindset, partnerships across the value chain, both with customers and suppliers. Operationally, we demonstrated progress that contributes to improved profitability, especially through productivity improvements, automation and digitalization, footprint optimization and commercial excellence. We reaffirmed our commitment to strong shareholder return with an ambition of USD 300 million to USD 500 million in annual stock repurchases and maintaining a healthy leverage ratio not above 1.5x. Now looking on the business outlook on the next slide. We expect the second half of 2025 to be challenging for the automotive industry with lower light vehicle production year-over-year. However, our ongoing focus on efficiency is expected to further enhance our profitability. We anticipate a significant improvement in our sales performance in China. Additionally, our strong cash conversion and solid balance sheet provide financial resilience and a robust foundation for maintaining higher shareholder -- high shareholder returns. We successfully navigated the new tariff environment in the first half of the year. This gives us confidence that it is possible to continue on that course, but there is significant uncertainty. Contrary to the past 3 years, we do not anticipate the gradual quarter-by-quarter adjusted operating margin increase as the inflation environment differs from recent years. We expect cadence more in line with our historic normal seasonality with the fourth quarter anticipated to be the strongest of the year, while the third quarter anticipated to be the weakest quarter in the year. Notably, global light vehicle production is expected to drop by 1 million units or nearly 5% in Q3, making the weakest quarter of the year. Turning to the next slide. This slide shows our full year 2025 guidance, which excludes effects from capacity alignment and trust-related matters and is based on no material changes to tariffs or trade restrictions that are in effect as of July 10, 2025, as well as no significant changes in the macroeconomic environment or changes in customer call-off volatility or significant supply chain disruptions. Based on the strong first half year performance and the impact from tariff compensation, we expect our 2025 organic sales to grow around 3%, we expect an adjusted operating margin of around 10% to 10.5%. Operating cash flow is expected to be around USD 1.2 billion. Our positive cash flow and strong balance sheet supports our continued commitment to a high level of shareholder returns. Our full year guidance is based on a global light vehicle production decline of around negative 0.5%, a tax rate of around 28% and that the net currency translation effects on sales will be around 0. We are monitoring the situation closely and we are prepared to be as agile as we can to adjust to any changes. 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. And I will now hand it back to Ralf.

[Operator Instructions] We are now going to proceed with our first question. And the questions come from the line of Tom Narayan from RBC.

I have two. The first one is on the China domestic performance. I think in your prepared remarks, you said that you performed with the market in the second quarter, but then June, it looks like you outpaced the market. Just curious how we should think about the progression here. Is that something that you think continues to outpace the market? Or is this specific to June? I know you mentioned this China was potentially helping drive your expectation for improvement in H2. So that's my first question and I have a follow-up.

Okay. Thank you. Yes, I think what we're trying to say here with our description of the development in China is that we are progressing in line with what we have indicated before that through the growth of our business with the Chinese OEMs, we are closing the gap that we have seen over the last couple of quarters here. And I would say that towards the end of the quarter, we saw this, I would say, turning the corner here and starting to catch up the underperformance that we have seen over the last 3 quarters here. So we feel that we are on the right track, and we expect this to continue and that we should be in an outperformance situation in China for -- towards the end of this year.

Okay. And my second one might be a somewhat naive question, so apologies. There's a slide that has product volumes. I think it has like knee airbags down 9% versus LVP chest, side up 8%. My sense is this just might be lumpy based on mix is just seeing what kind of swing. Just curious how that works, why there would be such big swings, is that just function of launch activity and mix dynamics?

Yes, it is that. So even if it is one of these product categories, the sales price can still be quite different. So yes, it is the mix effect within there that kind of sometimes look disconnected from the sales development of -- if you then take airbags and steering wheels combined or seatbelts combined.

We are now going to proceed with our next question. And the next question comes from the line of Colin Langan from Wells Fargo.

Just to follow up on the tariff commentary. I mean, you recovered most of it in Q1. Any reason why only 80% actually, you had a few more months. It was actually pretty impressive in Q1, you got so much recovered. Any reason why it's a little slower in Q2. And just to be clear, you still expect by the end of the year to get 100% of all your tariff costs. I mean -- or is it going to be a little bit of a lag that gets recovered into next year?

No, I think, I mean, as you said, I mean, we had some tariffs hitting us in the first quarter here, but it was really in March that started. And then, of course, we have a full quarter here now with yes, high level. And as we are accruing this every day when we ship the products, of course, when you get towards the end of the quarter and the closing, you have some outstandings that are still in negotiation mode. So it's a pure timing effect. And that's why we feel confident that we will regain that towards the end and next quarter here. So it's a pure, I would say, a calendar question here in my mind here. So -- of course, Q1 lower amount, less of an impact, Q2 bigger. And with the pace we have on a day-to-day operations here, we have the timing towards the end of the quarter. So pretty straightforward in that regard.

Okay. Got it. And then just as we think about the guidance, the margin guide is unchanged, FX a little bit better, I would assume, on a percent basis, that doesn't affect the margin, as usually FX converts an average margin. You also highlight the raw material costs. Is that worse? Any quantification of how much worse that is? And are there -- or what is the offset to kind of keep the percent margin guidance in check?

Yes. So on the guidance, the impact of tariffs, if that was your first part of the question. So that's the main reason for the increase in the organic growth from 2% to 3%. So that is the tariff component there that we expect to be able to pass on to the customer and then the impact of that on our top line. And then we expect a 20 basis point dilution effect on the full year from tariffs, which is a combination of just the pure dilution effect that we have sort of the compensation on the sales line, but you have no EBIT effect from it. So that's one part of the dilution effect, but we also expect that there will always be at the quarter end, some costs that we need to absorb first before we can pass it on to the customer. And then on your raw material question, we actually expect that raw materials have improved. We see that the raw material situation has improved slightly versus Q1, so that we now expect a headwind of close to $20 million which is then a drop from around $40 million that we were expecting after the first quarter. But it has slightly improved actually for this year.

We are now going to proceed with our next question. And the next question comes from the line of Edison Yu from Deutsche Bank.

I wanted to -- first of all, I want to come back on the margin I know you're looking for 3Q to be weakest. Can you just maybe walk us through the main drivers of that relative to the second quarter?

Yes. It's basically the volume that we already -- that Mikael mentioned during the presentation. If you look at S&P Global, that indicates a roughly 1 million unit drop between Q2 and Q3. which is not so different from the typical seasonality. Q3 is typically the weakest LVP quarter. And then we still continue to expect that the fourth quarter will be the strongest quarter, both in terms of volumes but also then with the regular seasonality that we have higher engineering income in the fourth quarter. So more return to the more traditional seasonality that we had pre inflation.

Understood. Understood. And just more generally, we've seen reports that some of the big OEMs are trying to be a bit more stringent on some of the terms with the suppliers. Have you seen any of that come up in your discussions or at least potentially any impact of that happening later in the year?

I think, I mean the terms and condition is, I would say, a regular business to go through and it's a negotiation around those also. So I wouldn't like to point out that as a specific topic here. I think it's a natural part of us interacting with our customers here. So it's a negotiation around that as well.

We are now going to proceed with our next question. And the questions come from the line of Emmanuel Rosner from Wolfe Research.

Just on tariffs again. Just a quick one of maybe housekeeping or clarification. Would it be your expectation that in the third quarter, you will, therefore, overrecover tariffs so like you'll have the 20% under recovery from Q2 and then the full Q3 tariffs or that every single quarter will likely have a little bit of a lag, and therefore, you could also end the year not fully recover?

Yes. I think and as Fredrik already mentioned here when it comes to full year here that we expect, of course, there will be some calendar effects there that you have spillover, so to speak, from what is not in a timely fashion, being able to conclude before you close the books. So I mean, the size of it, I wouldn't like to speculate. But of course, you had some calendar effect there as well.

I guess that's also true from a quarter point of view as you don't expect to overrecover?

No, no, no. That's my point. So I mean, every closing in the quarter, I mean, be it Q3, Q2 or Q4, ultimately, you have this time effect, yes.

Understood. And then I guess longer term, so you had your Capital Markets Day recently, 12% margin is still very much the target. Holistically, how much of the drivers to get there are things that are generally under your control in terms of headcount reduction, efficiencies, automation, et cetera? And how much of it is really things that would require essentially a more stable market or different industry conditions?

Yes, I think we have tried to frame it here, I mean, around the stable and reasonable LVP level here, and we are talking about $85 million here and call outs stability back to pre-pandemic here. So I mean, that's still valid for sure. But as you can see here in the quarter here, we are delivering well on what is in our control. And I think that's really our focus here to make sure that we have good traction on our different levers that we have identified for our -- within our own control, so to speak.

We are now going to proceed with our next question, And the questions come from the line of Hampus Engellau from Handelsbanken.

Two questions from me. Just some clarification on China. How -- given the price competition we see there among the domestic OEMs, has that, in any way, changed your pricing situation has become tougher for you guys in terms of negotiations? That's my first question. Second question is, is India, if you maybe could update us on the situation in maybe market share? And also how much contribution of growth you had from India this year?

Hampus, I can start with China and then Fredrik can jump in on India there. But I mean, I mean, first, I mean, as you know, I mean, automotive industry is very focused on cost and has always been. And I think we have shown that we have the capability to be price competitive wherever we are operating also in China where we are the market leader in the China local market. What we have talked about here is the mix effects that we have been impacted by. But we are regaining that. So I would say, my view here and feeling here is that we are able to meet the cost pressure that you have in the China market and also elsewhere here. So hence, our focus here on continuing to drive efficiency and I would say, cost out in the whole system here.

And then answer on your question regarding India. So we have significantly outperformed the underlying LVP growth in the first half of the year. And we have around 60% market share in India. For the full year 2025, we expect that India will make up around 5% of our group sales. That's adding around, yes, $100 million top line.

We are now going to proceed with our next question. And the questions come from the line of Vijay Rakesh from Mizuho.