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Autoliv, Inc. (ALV) Q4 2023 Earnings Call Transcript

Autoliv, Inc. (ALV)

Q4 2023 Earnings Conference Call

Company Participants

Anders Trapp - Vice President, Investor Relations

Mikael Bratt - President and CEO

Fredrik Westin - Chief Financial Officer

Conference Call Participants

Colin Langan - Wells Fargo

Giulio Pescatore - BNP Paribas Exane

Emmanuel Rosner - Deutsche Bank

Michael Jacks - Bank of America Securities

Hampus Engellau - Handelsbanken

Bjorn Enarson - Danske Bank

Presentation

Operator

Good day and thank you for standing by. Welcome to the Autoliv Incorporated Fourth Quarter 2023 Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speaker’s presentation there will be the question-and-answer session. [Operator Instructions]

Please be advised that today’s conference is being recorded. I would now like to hand the conference over to our speaker today, Anders Trapp. Please go ahead.

Anders Trapp

Thank you, Nadia. Again, welcome everyone to our fourth quarter and full year 2023 earnings call. On this call we have our President and CEO, Mikael Bratt; and our Chief Financial Officer, Fredrik Westin, and me, Anders Trapp, VP, Investor Relations.

During today’s earnings call, Mikael and Fredrik will, among other things provide an overview of the record sales and earnings, the strong cash flow, balance and order intake for the 2023. They will also outline the expected sequential margin improvement in 2024 and the journey towards our targets. Mikael and Fredrik will also provide an update on our general business and market conditions. We will then remain available to respond to your questions and as per 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 press release available on autoliv.com and in the 10-K that will be filed with the SEC.

Lastly, I should mention that this call is intended to conclude at 3 p.m. Central European Time, so please follow a limit of two questions per person.

I will now hand over to our CEO, Mikael Bratt.

Mikael Bratt

Thank you, Anders. Looking on the next slide, I’d like to recognize the entire team for delivering another strong quarter, which reflects our strong execution culture. We ended 2023 on a strong note as we achieved or exceeded all our 2023 indications.

In the quarter, our organic sales grew by 16% outperforming light vehicle production significantly, especially in rest of Asia and Japan. The strong growth was mainly a result of product launches and customer compensations for inflationary pressure, as well as higher than expected light vehicle production. We generated a broad-based improvement in key areas, including gross margin and adjusted operating margins both year-over-year and sequentially.

Our cash flow was strong and the net depth leverage improved, while we increased our dividend and repurchased shares for 150 million in the quarter or approximately US$352 million for the year. We are making progress towards our intention of reducing our indirect workforce by up to 2,000. We now expect savings of around $50 million in 2024 from these initiatives.

Order intake developed well. It is especially encouraging to see the strong order intake with fast growing Chinese OEMs. For 2024 we foresee sales growing in mid-single-digit despite an expected modest decline in light vehicle production.

2024 should take us one important step closer to our adjusted operating margin targets, driven by improved call-off stability, growth, structural and strategic initiatives, and customer compensations. However, the heightened seasonality of earnings of prior years is likely to be repeated in 2024.

Now looking at the order intake more in detail on the next two slides. Our order intake for the full year continued to develop well, supporting long-term growth in a rapidly changing technology environment with many new OEMs and EV platforms.

The estimated lifetime value of our 2023 order intake was the highest in the past five years. The strong order intake is an evidence that our company remains the clear leader in the passive safety automotive industry.

One of our internal key performance indicators, customer satisfaction, continues to be on a high level. We continue to strive for improving products, services, processes and cost while maintaining industry-leading quality. Our strong order intake with a good mix of EV and ICE platforms, and the high level of customer satisfaction supports our confidence regarding growth also beyond 2024.

Looking on the next slide. In 2023 order intake for new EV platform was high, both with new EV makers and traditional OEMs. We estimate that around 45% of our order intake in 2023 was for future electric vehicles. Consumer demand for EVs may have faded somewhat in the short-term, but regulatory changes supporting EVs will increase, at least in Europe.

Although our products are drivetrain agnostic, it is important to have balanced exposure both to EVs and ICE to capture future market growth. With the order book that we have built, we believe that we have a good exposure to all growing segments.

New automakers, mainly North America and China, accounted for around 25% of our order intake. Fast-growing Chinese OEMs accounted for around 50% of our order intake in China and we expect this group of OEMs to account for close to 40% of our Chinese sales in 2024, up from 22% in 2022.

We won multiple awards supporting new markets and industry trends like Pretensioner Seatbelts for rear-seat passengers, airbags with low-carbon cushion material, as well as anti-submarining airbags for zero-gravity style seats for self-driving vehicles.

As a result of the strong order intake in the past years, we expect an increase in overall product launches in 2024, especially in China and Europe. This development contributes to building an even stronger platform for our long-term success.

Now looking at the significant sequential cost improvements during 2023 on the next slide. Year-to-date, we have generated a broad-based improvement in key areas, both year-over-year and sequentially.

On this slide, we highlight the sequential improvements. In the fourth quarter, we continued to actively address our cost base, while successfully negotiating with our customers to secure pricing and other compensations that reflect the higher inflation. Our direct labor productivity continues to trend up, supported by the implementation of our strategic initiatives, including automation and digitalization.

Our gross margin improved by 410 basis points compared to the first quarter and by 140 basis points from the third quarter. This is mainly the result of the higher labor efficiency and customer compensations.

The positive trend for RD&E and SG&A in relation to sales have continued and have now declined by 270 basis points since Q1, partly as a result of normal seasonality with high engineering reimbursements in the fourth quarter. Combined with the gross margin improvement, this led to substantial improvement in adjusted operating margin.

Looking now at financials in more detail on the next slide. Sales in the fourth quarter increased by 18% year-over-year, mainly due to higher light vehicle production, new product launches, higher prices and other compensations, and favorable currency translation effects. The strong sales increase and cost reduction activities led to substantial improvement in adjusted operating income.

Adjusted operating income increased by more than 40% to $334 million from $233 million last year. The adjusted operating margin was 12.1% in the quarter, an increase by over 2 percentage points from the same period last year and by almost 7 percentage points from the first quarter.

Operating cash flow was $447 million, which was $15 million lower than the same period last year. The main reason for the lower cash flow was the unusual strong cash flow last year, which was related to timing effects of customer recovery.

Looking now on the structural cost savings activities on the next slide. To secure our medium- and long-term competitiveness, and to support our financial targets, we launched a cost reduction initiative in June 2023, with the intent of reducing our indirect headcount by up to 2,000 and a direct workforce headcount reduction of up to 6,000.

We estimate that the annual cost reductions will amount to around $130 million when fully implemented. With around $50 million already in 2024 and around $100 million expected in 2025. Total accrual for capacity alignment in 2023 amounted to US$280 million.

We do not plan to announce further major reduction initiatives details. At the end of 2023, around 75% of the planned indirect reductions were detailed and announced. We already see positive impact on direct payable productivity as a result.

Looking now on our sales growth in more detail on the next slide. Our consolidated net sales increased to almost US$2.8 billion, a new quarterly record. This was over $400 million higher than a year earlier driven by price, volume, mix and currencies.

Out-of-period cost compensations contributed with US$45 million. Out-of-period compensations are retroactive price adjustments and other compensations that mainly relate to the first three quarters but were negotiated in the fourth quarter.

Looking on the regional sales split, Asia accounted for 41%, America’s for 31% and Europe for 28%.

We outline our organic sales growth compared to LVP on the next slide. I am very pleased that our organic sales growth significantly outperformed global light vehicle production growth in the fourth quarter, as we continue to execute on our strong order book.

According to S&P Global, fourth quarter light vehicle production increased by 9% year-over-year. This was more than 5 percentage points higher than expectations at the beginning of the quarter, with most of the higher than expected production coming from domestic OEMs in China and in North America as the impact of the UAW strike was smaller than expected.

In the quarter, we outperformed global light vehicle production by around 7 percentage points with strong performance especially in the Rest of Asia and Japan. The modest underperformance in China was mainly driven by a negative customer mix following strong light vehicle production growth for lower safety content vehicles.

On to the next slide. For the full year, we outperformed global light vehicle production by around 9 percentage points despite a negative regional light vehicle production. We outperformed in Japan by 15 percentage points, in the rest of Asia by 14 percentage points and in China by 8 percentage points. The performance in China was mainly driven by increasing sales to domestic Chinese OEMs....

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