Autoliv, Inc. (ALV) Earnings Call Transcript & Summary

Good morning, everybody, and thank you for joining us for this session with Autoliv as part of Deutsche Bank's global automotive conference. My name is Emmanuel Rosner, and I'm the senior U.S. autos analyst for Deutsche Bank. Autoliv is the global leader in automotive passive safety. The company has seen considerable organic sales growth acceleration, above market recently, benefiting from consistently high win rates over the past few years. We're very pleased to host with us this morning, Autoliv's President and CEO, Mikael Bratt; as well as Head of Investor Relation, Anders Trapp, for a discussion. The format for this session will be a short presentation by Mikael using a presentation and slides that should be on your webcast window, followed by a fireside chat around some of my prepared questions as well as questions from all of you on the call. [Operator Instructions] I highly encourage you to do so and to get involved in the discussion. Only I will see your questions, and I will ask them on this call without mentioning your name or affiliation. So now Mikael, thanks a lot for being with us today, and over to you.

Thank you very much. We have put together here a number of slides, as mentioned, to take you through, but we will make sure we have plenty of time for Q&A here. So without further ado, let's go straight into the presentation here. And as you can see on the slide, we have our safe harbor statement here, but I think we can go to the following slide, which has the heading Q2 2020: Execution in Unprecedented Time. And I think the Q2 started with, I would say, significant headwind here. Europe and Americas virtually at a standstill, and we saw Americas being 96% down compared to April previous year and Europe basically close to 90% down here so -- while we had China moving back up and was actually slightly over April 2019. We had a very diverse picture in the company here and a lot of focus then, of course, to deal with this volatile situation here. And I think we have managed to flex out meaningful costs during this very hefty reduction of light vehicle production, and we have also been very focused on our liquidity and cash flow. And as we have indicated here, our CapEx year-to-date, as of April, was down 30% compared to plan. And throughout this crisis here, we have maintained a strong liquidity position. We have canceled the dividend. We have drawn down on our credit facility, and we have on top of that now also secured additional loans from the Swedish Export Credit, and that has been mainly done to manage our debt portfolio. So half of that loan is expected to be used to pay down the equivalent amount with our credit facility. Moving on to the next slide. You see the current status of our operations. And as I indicated earlier here, mixed picture, but the good news here now is that in all regions, we are gradually ramping up as we moved into May and now, consequently, the following months as well. So we are on a trajectory in the right direction, but we should all remember that it is still from -- I mean, first of all, from very low levels and it goes gradually here. So still a long way to go before we are where we should be. And we are also here preparing for a volatile ramp-up also, so a lot of focus are kept on flexibility and to quickly react if we see any backlashes on the way up here for whatever reason here. And as I indicated, China was already, in April, at a healthy level. Europe started to start up again during the month of May, and North America was really the last days of May. So there is a sequential difference between Europe and North America and then also Japan, which was not completely at standstill here. But in some of our customers, they were standstill but started to open up also at the end of May. Strong liquidity position. We have a significant cushion here in $1.4 billion in cash as of April -- end of April and then, as I indicated here, some additional funding here coming from Swedish Export Credit in order to have improved debt maturity here. And we are, I would say, in good stage here with around 27% in the next 3 years to be refinanced. The rest is beyond that. And we have no covenants in any of these loans here as well. Following -- the next page, cost breakdown. We have here, as I said, addressed our variable costs and also what we then define as semi-fixed costs in a good way, I believe. But with this very sharp and deep decline of light vehicle production, it's still very challenging, of course, to keep an operating leverage of around 30%, as we have indicated here. So it could be higher considering then the normal, I would say, ballpark figure that we are talking about here. But good job done from the organization here, I would say. And the work, of course, continues here to improve our cost base and also making sure that when volume starts to come back, that we have good focus on cost and liquidity here. And I would say we are using all the tools in the toolbox to address this. Following slide. You see the volatility in our industry It's no news for you here, but I think what we can say here is we are at, I would say, bottom of the cycle here. As we have indicated, with 96% in the U.S. down April over April, the improvement should be in the right direction here. The big question, of course, is to what pace and to what new normal here. And my message here really is that we are not assuming anything here. We are very focused on making sure that we are doing a good job on the way up here regardless of what the new normal is. And our focus is to adjust our cost base to whatever that level would be. Going forward here, relentless focus on creating value for our shareholders, of course, through the main, I would say, areas that we have had in the past. So our way forward here is very much of the same. And I would say very clear -- if anything, I would say our strategic road map in the years to come here has been reinforced, I would say, by what's going on now in the economy and also from a pure COVID-19 perspective, and I will come back to that. So cost control and cash flow generation and, I would say, a prudent balance sheet is still main focus for us going forward. So looking at the financial medium-term strategy, current crisis management obviously, then to be ready for the new normal, whatever that is. But our strategic plan that is -- was outlined in 2019 is still very much valid and as I indicated before here, even reinforced. For example, just taking the need for using a high degree of automization and digitalization in our value chain, I would say, has also been -- added a new perspective, and that is the automization to secure that we have less exposure for our employees in the plants. We have high level of manual work in our plants. And of course, that means people are staying close to each other, a lot of people in the same building, and with automization, you're reducing that as well. So that is another aspect to what was already there in order to drive productivity and also stable production there. So just one example of it. But strategic road map's still the basis for our way forward here. On top of that, we are, of course, continuing to support our strategic initiatives, working with supply chain management effectiveness. We have, as a part of the crisis also here, task force to directly work with our supplier base, to secure that, but as a part of that also, you could say, reinforce some of our strategic initiatives there in that immediate interaction with our partners there. RD&E effectiveness, very much in focus there. But as always, health and safety remain at top of our priority list. And here, we are now assessing the new run rates for light vehicle production. And as we see, we are moving in the right direction here. And wherever we can expedite quicker as a result of the current situation, we will, of course, do that. And I think we have a very good, I would say, identified list of opportunities here. And we are all in on taking Autoliv now to the next level as we move forward here. So I think with that, I stop and open up for any questions you may have.

Thanks a lot, Mikael, for this overview. Just a couple of follow-ups first on your presentation and some of the slides you published. So you were showing some of the April trends. Obviously, a lot of the restarts have happened since then, in May, and then ramping up pretty quickly. When you sort of like look at the current situation, are there any specific geographical areas that have you concerned? I mean from the outside, it feels North America is ramping up pretty solidly. China, obviously, you already have them back to previous year levels. So any large risk factors that you see here? Or are you seeing this generally ramping up and it's just a matter of getting there?

No, I think, I mean -- as you say, I mean, it has gone fairly well, and I think maybe better than expected in, for example, Americas here. But I think what we're trying to say here is that we are cautious for any setbacks because the COVID-19 is still around. And I think, I mean, some countries here are more exposed than others. And I would say, even in Europe here, it's not completely gone. So the big question, of course: Will there be a second wave? I have no personal view on that. And I don't think we are -- I mean we are definitely not the experts in that field. But what we need to make sure is that we are ready for whatever comes our way here in terms of the development as we move forward, so i.e., flexibility is key here. The bigger question maybe then is beyond that, and that is what is the new normal. And here, we come into the question about what kind of damage had this now done to the underlying economy, I mean, in terms of unemployment rates going up and then what kind of support or incentives would there be in the different regions, countries and so forth. So there's a lot of question around that. I think right now, the ramp-up is very much around order books that were already there with the OEMs. And the big question is, how has the order books been filled? And we all know that, I mean, for example, in Europe, many dealerships in many countries has been closed during the same period there. So that needs also to get started. So that visibility is still not that clear.

Okay. Understood. Another follow up -- actually, a question from an investor on your slide. So the -- you gave the cash position at the end of April. Net debt appears flat from end of Q1 through end of April. Does that imply that the net cash burn was very low in the month of April?

Yes, yes. It's about $100 million in April because, as you know, we had $1.5 billion there when we went into the situation here into April, end of March. So no, I think -- as I said, I think we have managed quite well here to focus on the liquidity and the cash flow and reduce the CapEx spend short term here to hold on to the liquidity.

And I guess one more from investors around this issue of liquidity. Some of your peers have recently issued equity to provide added flexibility for M&A or commercial opportunity while protecting their credit rating. Do you see a similar opportunity for Autoliv?

It's not on our radar or to-do list. I think what we have done here is that we have secured liquidity through the means we described here. We have, I would say, a balanced maturity structure here. And our focus now is to get back on track here and to generate liquidity here. And I would say we have already, from the beginning, a prudent view on our balance sheet and had a balance sheet in good shape when we went into the crisis to withstand this for what we see right now.

So let's shift focus to your growth above-market profile, obviously driven by program launches, new business. Are you seeing any meaningful delays or cancellation there either this year or sort of like in your sort of 3 -- in your multiyear backlog?

No. At this point, we don't see any meaningful delays. I mean, of course, anecdotally, you see between different OEMs some delays in terms of weeks and months, but I would say it's not related to the COVID. It's more -- as you always have some delays in different projects for various reasons. But there is no delays because of us, and there is no delays for we can see due to the COVID or the market situation. So we see that -- I mean, following plan and also, I would say, even on the RFQ side, very much also following the regional plan for bringing in tenders for new business opportunities.

I can add some color there. I mean if you look at Europe, I mean, there's -- very important for the OEMs to see the launches coming through because it also includes, of course, a swing towards -- a little bit away from combustion engine and into hybrids and electrics, which is important and needed to meet the CO2 requirements. So I think it's very important to keep the pace for the OEMs in Europe. I think in U.S., maybe there's been a little bit of facelift that has been moved into next year, but there's not really any material changes as we can see it. But of course, we have also said that there could be, but we haven't seen it yet.

Okay. That's very helpful color. And so then if we try to think about your growth above markets, originally for 2020, you were guiding to 6 to 7 points above market, very much back-end loaded in terms of the timing of new launches. If new business is not really getting too much delay, should you still be able to achieve that even, obviously, off of a weaker market and that would be in the second half?

I think the pattern in itself in us -- in terms of us taking market share is still there. I think the challenge here, of course, now is how the different regions are going to have their light vehicle production development because you can have mix effect from that. I mean if one region where we were supposed to grow more than in another region and that region goes down while the others go up, et cetera, you can have some mix effect there. But all in all, our market share growth on the back of the win rate the last couple of years is still there.

Okay. And you were mentioning very encouragingly that the automakers are still quoting, attributing future new business in the current environment. Any update on your win rates on new business? Has -- have things changed at all as things get a little more competitive? And then on the other side, do you see potential to go higher than that? Or will the automakers be more cautious once you're too concentrated with one supplier?

I think I mean, in terms of numbers, we only give them once a year, as you know. But as we indicated after the first quarter, we said this year has started on a good level. We don't have a market share target per se. I mean what we have said is, of course, that we should defend the market share that we are growing into. And here, I would say that, I mean, we will definitely not give up any market share for sure. So whatever we can continue to grow, we will do that, but we will do that as a part of driving a healthy business. So the market share is not the target per se.

Understood. And I guess what are the drivers of the continued high win rates? You would think there would be some competitive response from some of the other players now that there's been a little bit of consolidation. Is it technology? Like can you just give us a sense of how you win this business?

I think I mean, as always, it's a question of making sure that we are competitive and competitive not only in price. I think competitiveness is very much around QDC. I mean making sure quality is superior, deliver -- deliveries in both components -- production components and parts in time, but very much also around the product development, program development together with the customer. Because when you win an RFQ, you become a very integrated part of the customer's program, meaning the launch of the new vehicle or the upgraded vehicle and your capability of meeting that deadline and the challenges you have together there is critical. So that deliverable is very much a competitive question as well. And then you need to do it with an attractive price. So the whole combination there is critical. And I would say, as you mentioned here, innovation, meaning making sure that technologies and new ideas, you're a good contributor to support your customer in developing new safety features, is critical. So the whole package there is what drives the selection. And that means, for us, it's very much to secure that we are forward-leaning in all those categories because the size of the company is not giving you automatic advantage or anything like that. You're not more successful than the last RFQ you won, and therefore, you need to be on your toes to make sure that you drive all those categories forward here to make sure that you are in the forefront here and that you are stable and reliable supplier in all times. And of course, in times like this, it's even more important to have a stable supplier.

So let's shift maybe to the margin outlook. You reported very strong cost performance in the first quarter. The decremental margins were just 18%. At the same time, you said then and you're saying in today's slides again that in the near term, with the volatility, it could be more than 30%. How should we think about that as things sort of stabilize, so maybe in the second half and beyond? What do this incremental/decremental look like for the second half or on a go-forward basis?

No, I mean -- as we said, we haven't indicated anything for -- in terms of performance. More than that, we are focusing on all these categories. I think coming back to the challenge right now in the second quarter and in April and May here as -- even though you flex out good the variable cost here, the mix of your cost structure will become very different than, I mean, virtually down to 0 in terms of top line in a month, then you move sideways. And of course, then the mathematical effect on the leverage becomes very challenging. So that's why we're saying what we are saying here, that the drop was so significant here in April that, yes, pure mathematics tells you the challenge there. When it comes to us being able to ramp up well here, I think, I mean, we all have the flexibility here to meet that ramp-up. So I'm not considering -- concerning about that. And we will have a lot of focus, of course, on doing that efficiently. I think the challenge here is also -- when I say doing that efficiently is how the ramp-up will be in terms of volume because, if you look maybe not on the totality, but when you look at the different OEMs, there is a big variation in terms of how to call-offs for the next couple of days and next week will look like and how that is changing. That is still very volatile. And that means that maybe you add on more cost there to be ready for that volume and then that volume doesn't come. Very similar to what we talked about just 2 years ago when we had the WLTP situation where there was high fluctuations within a short time span there. And that's how the ramp-up is looking like right now, in many cases.

So are you essentially waiting to see how some of these normalized demand shapes up before potentially taking additional restructuring actions? I'm curious, for example, for your European operations. And if volumes seem to stabilize lower for longer, then you need -- would you then need a deeper restructuring of the footprint?

I think what we have said here is that -- I mean the underlying activity road map here is connected to our strategic road map that we have laid out here. And as you saw in our Capital Markets Day, I mean, we basically leave no area untouched here in terms of what we need to do, can do and potentially will do, but we will come back in time and size of it as we take those potential decisions as we move forward. So I mean, today, we have nothing more to give there in terms of detail, more than that we continue to work with our strategic road map, and we'll come back with details as soon as we have them.

Of course. And then when I look at the magnitude of your cost savings in the first quarter coming from various different markets, which one of those are more temporary in nature versus some that you could see beyond this year? Any way to quantify this for us?

I think it's difficult to quantify today here. But of course, I mean, the big numbers is really short term because they are -- as I said, they are variable and they are flexible, connected to the volumes we have. But I mean the underlying effort here to drive productivity and structurally improve the cost base continues and has continued throughout this period. So you see some effects of that. And I mean when we look at the Q1, of course, we had a benefit from the structural program we did in 2019, and that would be finalized during, basically, the second quarter this year, is of a long-lasting nature. And other activities like that also have a long-lasting nature. But of course, when you see that hard break that we have gone through now, of course, the majority of the cost is -- cost out is temporary.

Understood. And then just a final one on the margin. So I guess, back at your Investor Day in November, which feels maybe like a lifetime ago at this point, you had laid out updated midterm targets for 12% margin and then long-term targets for 13%. Is this framework still in place? Is this still achievable? And if so, what will it take to realize them?

I mean the simple answer is yes. But let me give some color to that because, I mean, as I said, the direction, the potential, et cetera, is still -- and we also commented on that already in November when we said that we don't need to have an all-time high light vehicle production to get to those levels, but what we need is healthy, stable levels here. And then, of course, you lower -- that is compared to where we were in -- at that point in time. You more time -- we need more time then to offset it. So of course, LVP is important here, but we haven't said it's a prerequisite that it's an all-time light vehicle production, but it needs to be healthy and stable in relation to where we were in '19 when we set these targets out.

Okay. And then maybe to conclude, a couple of questions around capital allocation. What do you need to see to restore your common dividend?

Yes. I think I mean, first, we need to get back to a new normal -- stable new normal in order to judge how that looks like. So I think today, it's too early to give some kind of time frame even to that. We need to see how this COVID-19 plays out, and we also need to see, okay, what kind of impact has it done to the underlying economy and where -- do we get back on stable ground? And how does the outlook from that point look like? But I mean our ambition here is definitely to secure that we can continue to be a shareholder-friendly company in terms of returning liquidity to our shareholders, no doubt about it. But I think today is too much uncertain to have a very clear statement on when and how.

Understood. And then with your large market share in passive safety, have you looked at other product categories to drive growth in the future? Or right now, it's very much the plan around passive safety, improving returns, getting back to normal?

Yes, yes. I think I mean...

Are you looking at...

No, I mean, as you know, as a part of our strategic road map, there is what we call adjacent business opportunity, and that is still there. But where we are right now, I mean, the focus is, of course, on the operational -- short-term operational challenges and to securing then productivity improvements supporting then our EBIT journey at the back of the order book that we have built up. So that's our top priority. But further down the road, there is opportunities that we are thinking about and planning for, but that is, I would say, a few years out in time.

Understood. I think we're out of time. So Mikael and Anders, I want to thank you so much for joining us and for your insights today. I want to thank all the investors on the line for joining this session. Next up, we have Veoneer on track 1 as well as Yandex self-driving operations on track 2. So join us for this as well. But Mikael and Anders, thank you so much.

Very good. Thank you. Bye-bye.

Thank you very much. Bye.

Bye.