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

Good day, and thank you for standing by. Welcome to the Autoliv Second Quarter 2026 Financial Results 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. Please go ahead.

Thank you, Anders. Welcome, everyone, to our second quarter 2026 earnings call. On this call, we have our President and Chief Executive Officer, Mikael Bratt; our Chief Financial Officer, Monika Grama and me, Anders Trapp, VP, Investor Relations. During today's earnings call, we will highlight several key areas, including our strong performance despite the challenged market environment. We will provide an update on our structural cost reduction initiatives in EMEA, an update on the latest market development and our full year guidance and the potential impact of ongoing political challenges. Following the presentation, we will be available to answer 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 also at the end of the presentation. 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 now hand it over to our CEO, Mikael Bratt.

Thank you, Anders. Looking on the next slide. We delivered a record second quarter, both for sales and adjusted operating income underscoring the resilience of our company and the strength of our market position, supported by strong customer partnerships and the relentless focus and continuous improvement. We have built a solid momentum for the rest of the year. During the quarter, we also navigated geopolitical development effectively mitigating the impact of tariffs supply chain disruptions and raw material cost volatility. And as you might have seen in the report, I will hear from us during this call, we had several positive and negative onetime items in the quarter. This includes a supplier settlement reversion from Q3 2025, an IEEPA refund government income in India, an impairment charge related to restructuring activities in Turkey and a reverse expected credit loss reserve. Combined, these items have virtually no impact on the adjusted operating margin and only a slight negative impact on the top line. Our positive sales momentum in Asia continued during the quarter. In China, we once again outperformed light vehicle production, driven by strong growth with Chinese OEMs, where our sales outperformed by more than 40 percentage points. In India, we grew sales by 36% organically, reflecting mainly the spend of increased safety content in vehicles in India. Adjusted operating income and margin improvement improved despite raw material headwinds, particularly higher helium prices. The strong performance was primarily driven by higher sales and well-executed activities to improve efficiency and costs. I am pleased that our cash flow improved in line with our expectations, resulting in record operating cash flow for the second quarter and supporting our ambitious shareholder return strategy. Despite repurchasing over 1.6 million shares for USD 200 million and paying a dividend of USD 64 million, our leverage ratio improved to 1.2x. During the quarter, we announced additional structural cost initiatives which we will elaborate on in the next slide. 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 in both China and India. We continue to expect an adjusted operating margin of around 10.5% to 11%. This is based on the assumption that global light vehicle production will decline by around 2.5% and that the gross headwind from raw materials is around USD 110 million. I'm also proud that we signed strategic cooperation agreements with leading Chinese vehicle manufacturers, Great Wall Motor and XPENG. These agreements mark important milestones in our strategy to expand with leading Chinese vehicle manufacturers and further demonstrate the competitiveness of our safety solutions. They strengthen our position as a trusted safety partner and creates a strong platform for sustainable long-term growth, both in China and globally as they expand their footprint. Looking now on our continued cost reduction activities on the next slide. To strengthen our competitiveness and support our financial targets, we are continuing our global structural cost reduction initiatives. As a part of this effort, we have decided to gradually discontinue our manufacturing operations in Turkey, which today produce steel wheels, airbags and seatbelts. Production will be transferred to our existing facilities across EMEA area, allowing us to optimize our manufacturing footprint while maintaining our ability to serve customers efficiently. This decision is expected to affect approximately 2,200 employees. The transition will take place over the coming years with a complete closure anticipated during the first half of 2028. From a financial perspective, we expect total restructuring charges of approximately USD 142 million, of which USD 90 million was recognized in the second quarter of 2026. Cash out is expected to be approximately USD 129 million with a limited impact on our 2026 cash flow. Importantly, this initiative is expected to generate annual pretax savings of approximately USD 40 million. We benefits beginning to materialize in 2027 and reaching the full run rate in 2028. Overall, this action is an important step in improving our cost competitiveness and is supporting us in achieving our financial targets. Looking now on the next slide. Second quarter sales increased by approximately 3% year-over-year, driven by outperformance relative to light vehicle production, along with favorable currency effects, partly offset by lower tariff-related compensations. The adjusted operating income for Q2 increased by 7% to USD 270 million. The adjusted operating margin was 9.6%, [ 30 ] basis points higher. Operating cash flow was a strong USD 434 million, an increase of USD 157 million. Looking on to the next slide. We continue to deliver broad-based improvements. Our positive direct labor productivity trend continues. This is supported by the implementation of our strategic initiatives, including automation and digitalization. Gross profit increased by USD 8 million, while the gross margin decreased by 30 basis points, mainly due to the reversion of a supplier settlement. The decline in gross margin from 18.5% to 18.2%, driven by a supplier compensation reversion and asset impairments related to the Turkey restructuring, which combined reduces gross margin by almost 80 basis points. RD&E net increased year-over-year, primarily on negative currency translation effects, higher personnel costs and lower engineering income due to timing of specific customer development projects. SG&A decreased by USD 7 million, mainly due to reverse estimate of credit loss reserves, partly offset by negative FX translation effects. In relation to sales, SG&A improved by 40 basis points to 4.9%. Looking now on the market development in the second quarter on the next slide. According to S&P Global's July data, global light vehicle production declined by 0.3% in the second quarter, approximately basis points better than expected in April, stronger-than-expected performance in North and South America Europe, India and South Korea helped offset softer production levels in China. The global regional LVP mix was approximately 60 basis points unfavorable in the quarter, primarily driven by stronger slightly reduction in lower content markets relative to other markets. During the quarter, volatility improved year-over-year, but declined slightly sequentially, driven by weaker development in China. We will talk about the market development more in detail later in the presentation. Looking now on our sales growth in more detail on the next slide. Our consolidated quarterly net sales exceeded USD 2.8 billion for the second time in our history. This was approximately USD 90 million higher than in the prior year, primarily driven by positive currency translation effects of USD 62 million. This benefit was partly offset by approximately USD 5 million of lower tariff-related compensations, mainly due to an IEEPA-related refund of $9.6 million during the quarter. Excluding currencies, our organic sales grew USD 27 million or by 1%, including negative tariff cost compensation. Based on the latest light vehicle production data from S&P Global, we outperformed the market by over 1 percentage points globally. Our outperformance was significant in Asia. In Asia, excluding China, we outperformed the market by 6 percentage points, driven by continued strong sales growth in India, where we outperformed by around 20 percentage points. Japan and South Korea also contributed to the outlook. In China, we delivered outperformance of more than 7 percentage points, supported by strong sales growth with Chinese OEMs with production grew over 40 percentage points faster than light vehicle production. As a result, the Chinese OEMs accounted for 55% of our sales in China in the quarter compared to 40% last year. The negative performance in the Americas can partly be attributed to lower tariff compensation following the IEEPA refund as well as an unfavorable mix driven by strong light vehicle production growth in lower content South American market. Globally, Chery, Suzuki, Nio, were the largest drivers of sales growth during the quarter. Despite the light vehicle production decline in China, China accounted for 19% of sales. Asia, excluding China, also accounted for 19%. Americas was 32% and EMEA was 30%. Looking now on the next slide. The second quarter of 2026 saw a high number of new launches, primarily in China with both Chinese and other wells. These new China launches reflect strong momentum for Autoliv Middle East and on market. Higher CPV is driven by front center banks on many of these new [indiscernible]. In terms of Autoliv's sales potential, the Nio ES9 is the most significant in the quarter. For rest of 2026, we expect a high number of new product launches, mainly driven by Chinese OEMs, offsetting fewer launches in Americas and Europe. 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 details on the next slide. So turning to the next slide. This slide highlights our key figures for the second quarter of 2026 compared to the same quarter of 2025. Our net sales were $2.8 billion, representing a 3% increase. Gross profit increased by $8 million and gross margin decreased by 30 basis points. The drivers behind the gross profit improvement were mainly positive FX effects and lower cost for materials. This was partly offset by $13 million in costs for our supplier compensation reversal and $9 million in asset impairments related to the restructuring facility. The adjusted operating income increased from $251 million to $270 million and the adjusted operating margin increased from 9.3% to 9.6%. The reported operating income of $192 million or $78 million lower than the adjusted operating income, mainly due to higher capacity alignment activities. The adjusted earnings per share diluted increased by $0.23 to $2.43. The main drivers were $0.18 from higher operating income, $0.10 from lower number of outstanding shares during partly offset by $0.07 from higher factors. Our adjusted return on capital employed and adjusted return on equity were solid 25% and 28%, respectively. We repurchased shares of $200 million and paid a dividend of $0.87 per share. Looking now on the adjusted operating income bridge on the next slide. In the second quarter of 2026, our adjusted operating income increased by $80 million. Operations contributed $61 million, primarily driven by higher organic sales and cost reductions supported by better all of stability. This was partly offset by $15 million in cost for our supplier compensation reversal, excluding $6 million of FX translation effect and the supplier compensation reversal, RD&E net and SG&A increased by $6 million, partly driven by $5 million lower RD&E reimbursement. During the quarter, we recovered approximately 83% of our U.S. tariffs, excluding IEEPA-related recovery bringing our year-to-date recovery rate to 78%. The combination of unrecovered tariff and the dilutive effects of the recovered portion was around 20 basis points negative. However, compared to last year, it was a positive impact of around 15 basis points as the negative effect of last year was around 35 basis points. Looking now at cash flow on the next slide. Operating cash flow for the second quarter was $434 million, an increase of $157 million. This change was primarily driven by a positive working capital impact of $240 million. The working capital contribution reflects a normalization following the first quarter increase, which was largely driven by the high sales level in March 2026 and several adverse onetime impacts. The improvement was primarily attributable to changes in accounts payable of $120 million, net receivables of $35 million and accrued severance and restructuring costs of $48 million. Free operating cash flow improved by $177 million to $340 million. Year-to-date operating cash flow increased by $4 million to $359 million, and free operating cash flow improved by $31 million to $178 million compared to the prior year. Capital expenditures net for the quarter decreased by $19 million. Capital expenditures net in relation to sales was 3.4% versus 4.2% year-on-year. The lower level of capital expenditures net is mainly related to lower footprint optimization and less capacity expansion. The cash conversion for the last 12 months was 119% and exceeding our target of at least 80%. Now looking on our debt leverage on the next slide. Autoliv's balance leverage strategy reflects our prudent financial management, enabling resilience, innovation and sustain stakeholder value over time. Our leverage ratio improved from 1.3 to 1.2x during the quarter despite shareholder returns totaling $264 million. Our net debt decreased by around $75 million in the quarter, while the 12-month trailing adjusted EBITDA increased by $33 million. On to the next slide. I will now hand it back to Mikael.

Thank you, Monika. I will talk about the outlook for 2026, more in detail on the next few slides. Turning to the next slide. Overall, S&P Global expects global light vehicle production to decline by 2.3% in 2026, representing an almost 2 percentage point downward revision from its general forecast. The downgrade is primarily driven by lower production expectations in China and Middle East, while many other markets continue to demonstrate notable demand resilience. In Europe, light vehicle production is expected to decline by nearly 1% [ affecting ] on growing affordability challenges and increasing competition from Chinese imports. North America, S&P Global has survived outlook afford and now expects production to decline by only 1% in 2026. The market continues to display resilience despite uncertainty related to the conflict in the Middle East and the higher fuel prices. S&P Global has lowered its outlook for China light vehicle production by 4 percentage points since January and now expect a 5% decline in 2026. The weaker outlook reflects a challenging demand environment, driven by reduced government incentives, ongoing macroeconomic headwinds and increasingly cautious consumer sentiment despite continued strength in the vehicle export. S&P Global and revised light vehicle production outlook upward for both Japan and South Korea and now expect production to decline by only 1% and 2%, respectively. The improved outlook reflects strengthening exports to the U.S. and Europe, supported by robust demand for fuel-efficient hybrid electric vehicles. India's light vehicle production is expected to increase by 9%, driven by a reduction in purchase taxes on new vehicles, which benefit smaller and lower-priced models. However, escalating political tension in the Persian Gulf continue to increase risks across the automotive value chain with potential implications for energy prices, consumer sentiment, supply chain stability raw material availability and overall industry volumes. Now looking at the second half year development on the next slide. As we look ahead to the second half of the year, we remain focused on managing a dynamic external environment. We are closely monitoring the potential impact of geopolitical developments in and around Persian Gulf, which could affect supply chains, raw material costs and overall, vehicle demand. Our 2026 guidance currently assumes a gross raw material headwind of approximately USD 110 million. And we continue to evaluate multiple scenarios as the situation evolves. Despite these challenges, we expect margin expansion to be supported by FX, engineering income and customer actualizations. For the third quarter, we expect the adjusted operating margin to be similar to the first half year level. Importantly, customer compensation engineering income, other litigation initiatives are expected to be weighted towards the fourth quarter, resulting in a significant step-up in profitability in the fourth quarter. Therefore, the earnings structure in 2026 is expected to be similar to that of 2023 and 2024, reflecting both the timing of anticipated compensations and a cyclical seasonal ramp-up in profitability and operating leverage. Now looking on the updated full year guidance on the next slide. This slide shows our full year guidance, which excludes effects from capacity alignment and antitrust-related market. It is based on no material changes to tariffs or trade restrictions that are in effect as of July 9, as well as no significant changes in the macroeconomic environment or changes in customer fall of volatility or significant supply chain disruptions. We expect to outperform light vehicle production by around 2.5 percentage points as our organic sales is expected to be flat, while global light vehicle production is expected to decline by 2.5%. The net currency translation effects on sales is expected to be around 2.5% positive. The guidance for adjusted operating margin is around 10.5% to 11%. Operating cash flow is expected to be around USD 1.2 billion. And we expect CapEx to be below 5% of sales. Our positive cash flow strong balance sheet supports our continued commitment to a high level of shareholder returns. We expect a tax rate around 30%. Looking on to the next slide. This concludes our from an comments for today's earnings call, and we would like to open the line for questions from analysts and investors. I now hand it back to our operator, Sandra.

[Operator Instructions] We will now take the first question from the line of Colin Langan from Wells Fargo.

Great. If I look at your comments about the cadence of margins, I think you had previously said it would be more linear. Now it sounds -- I think the math is something like you need a 15% margin in Q4 to kind of get to the midpoint of your full year guidance. What changed and how maybe we should think about raw material costs? I think year-to-date, you had $26 million. Is that a similar number in Q3? And is all of that recovered in Q4? And is that why we have the -- is that a big driver of the Q4 spike is the recovery of that raw material in Q4?

Thank you. Good question there. I mean, as you said, I mean, when we started this year, our expectation was that we should see more of a, let's say, normal traditional sequence of how the quarter played out in the year. And now we're talking about the more back-end loaded. And the reason and why it's more back-end loaded is because we see the inflationary pressure here in the value chain as a result of the Persian Gulf. So I think what has changed is really the upward pressure on the cost side. And for us, as you know, we don't buy raw materials directly. So it's to our supply chain, and we have time line there, but we also have, say, diluting effect of the high profit as well. But we need to get through and then enter into the negotiations with our customers here on price adjustments. So the way of working is very similar to what we saw, if you got during the inflationary year standpoint '23, '24 as we [indiscernible] the year. So that is really the change compared to when we talked about before. . And let me just say then also that, I mean, I feel very comfortable in how this tractor look like? Because I mean, first of all, we have highlighted before. Secondly, we are very focused around the different activities to secured the outcome here, meaning that it's a combination, of course, of our internal work here to drive efficiency and cost improvement in general and here we also, as we stated in the report, we have a good momentum in what we do there, and that's why we feel comfortable here to retain and maintain the full year guidance. And then in combination then with price discussions very happy the time [indiscernible] and also here, I would say we have well-established routes also to manage that. So yes, I mean, we have here activities here to do and have confidence in our ability to work on that.

And we should expect almost 100% of the raw materials recovered? Just to clarify. Or is there still some exposure not for the year because of the timing?

No. I mean it's a combination of, let's call it, self-help, meaning that we need, of course, to do our bit here with making sure that we don't let through everything in -- from our suppliers. So we're working with our suppliers to make sure that we are as efficient as possible in this environment there. And then we have also cost-out activities internally in the company and then the third leg is then the price adjustments with our customers here. So as you know, the price negotiations with the customers is also very detailed. It's not a general percentage adjustment. It is really down to the component level here to see how the different components have been impacted by customers. So hence the lead time also. But there are several levers to work with how to offset the invention.

Got it. And just last question. You lowered production from 1 to down 2.5. What is the offset? Is that better growth over market? And where are you seeing that sort of better-than-expected growth that's offsetting the production weakness? Is that maybe a geographic mix helper?

No, I think, I mean, what we see here is, of course, is that we have a positive mix with how the market is developing. And we also have good growth with our Chinese customers here in India sort of contributing here. So I think we are in the right places here to capture the growth that actually [indiscernible].

We will now take the next question from the line of Emmanuel Rosner from Wolfe Research.

Great. One follow-up on the cadence, please. Are you expecting -- just to be clear, are you expecting most of the mitigating impact from the recoveries and from your own self-help to happen in the fourth quarter? I'm just trying to understand the delta between what you're seeing for Q3 margins and then what maybe consensus expectations were, that's probably like $35 million delta? Like just curious if -- are these unmitigated headwinds in Q3 and then you get it all back in Q4?

No. I mean the majorities in Q4, I think that's how you should read it. I mean, of course, we are managing a part of it in the third quarter. But as a natural progression also if you look at the engineering income, it's mainly in the fourth quarter rather than in the third quarter. So I think that's financially. So it's really engineering income. It is also the higher customer compensation that we talk about here for the inflation. And I think also if you look at the sales provision, it's also for the remainder of the year also geared towards the fourth quarter. So net debt that's really the reason for that.

Understood. And then can you give us a little bit more color around the IEEPA refund dynamics? I wasn't able to follow exactly to what extent it helped your EBIT in the quarter and what you expect on a full year basis?

So right now in the quarter, we got back around $12 million from the government, which we largely passed on to our customers around $9 million. So we retain a positive impact of $3 million in the net results. And as mentioned previously, we -- our aim is to recover the tariff or the net impact of the tariff year-to-date to a lot extent on year to go and to reach a similar recovery rates that we had in the prior year, which was around 5%.

We will now take the next question from the line of Tom Narayan from RBC. .

I have a follow-up to Colin's question on the growth over market. I remember at the Investor Day in Sweden, we heard a story about how we're going to see good growth over market coming from a leasing content per vehicle, especially from emerging markets. You got calling for 2.5% growth over market this year. I know there are some offsets, right, notably, Americas in this past quarter was down 5%. So I just wanted to understand that a little bit more. I know in the report, there was a call out of South America, which had, I guess, lower content per vehicle and then on replacement vehicles. But does this mean that the growth in South America were happening in vehicles with no safety content? I just want to understand why it would be down I know that's versus a very strong market level in South America, but if you have any safety content, I would think it would be up. So I just want to understand that better. And then I have a follow-up.

Yes. I mean let me start. Because I mean, when we talk about the growth in the Capital Markets Day, you mentioned here, I mean, was really 3 significant buckets we talked about. One was LVP, 1% to 2%. It was then the content that's 1% to 2%. So I mean if you had a flat LVP, you had a content growth there of 1% to 2% on top of that. And what we're talking about now here is really that we see a market that is down with 2.5%, the LVP portion of it. And then, of course, we have a mix effect here connected to the content very much. And what we talk about here is when South America is growing and U.S., if we stay in America, so to speak, and then simplify a little bit which is a high content, it's flat or even will be down. Of course, you have -- even if you have growth in South America content, it's not enough to offset what's going down in the high content markets. . So there, of course, you'll get a negative mix effect on the content side. So long story short, we definitely see that the content growth is there. And we see also how both, let's call it, the low content markets are growing in the content as well as the high content over time here. And when we talk about India specifically, it's very much so that is a content-driven growth that we see. I mean in the last 2 years, the content have grown sequentially with 20% 2 years in a row. So a strong growth there. So what we try to [indiscernible] capital market definitely still not here. But of course you have a mix effect here that is not moving in the full potential here.

Okay. Understood. And then my follow-up, I guess, what was, I guess, the rationale to move production from Turkey to EMEA? Was it cost saves coming from a plant maybe that wasn't as automated? Was it labor? I guess what was driving that decision?

No. I think, I mean, we constantly review our global footprint. And here, we're talking about EMEA, where we have over the last couple of years, taken significant steps to consolidate our activities and optimize them as we move forward. And that's something we have done and we continue to do going forward also to make the work we have the most competitive setup. And we saw here now that with the opportunity to continue to consolidate capacity into other sites in Europe. We have a strong business gains to do so, and you have seen the numbers and how the numbers here. And that was tough decision to take and painful for our quality in Turkey that have done a great job over the years. But we need, of course, to make sure that we maintain our competitiveness. So we are moving some to our Tunisian operations that is -- has been growing plant over the last couple of years here. And we're also moving into other sites of Europe and Romania, for example. So it's to continue to sharpen our position.

We will now take the next question from the line of Winnie Dong from Deutsche Bank.

I just wanted to follow up on your production assumption for the full year a little bit more. So now you're assuming 2.5% decline previously, you were at 1%. I think lately, it has actually improved all a little bit. So I just wanted to understand if there is a mixed situation that's going on? And if you can help us triangulate what you're seeing and if you're just truing up to what the market it's trending towards.