Autoliv, Inc. (NYSE:ALV) Q4 2022 Earnings Call Transcript

Autoliv, Inc. (NYSE:ALV) Q4 2022 Earnings Call Transcript January 27, 2023

Anders Trapp: Welcome everyone to our Fourth Quarter and Full Year 2022 Earnings Call. On this call, we have our President and CEO, Mikael Bratt; and our Chief Financial Officer, Fredrik Westin, and I am Anders Trapp, VP, Investor Relations. During today’s earnings call, Mikael and Fredrik will, among other things, provide an overview of the strong sales and margin development in the fourth quarter, give an update on the price negotiations, outline the expected sequential margin improvement in 2023 and the journey towards our medium-term targets, as well as provide an update on our general business and market conditions. We will then remain available to respond to your questions, and 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 some 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 03:00 PM Central European Time. So, please follow a limit of two questions per person. I 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 I believe reflects our strong execution culture. The fourth quarter and the full year 2022 were important steps towards our medium-term targets, as we, through price adjustments, managed to gradually offset the highest raw material cost inflation that our industry has seen in a decade. In the fourth quarter, our organic sales growth outperformed light vehicle production significantly, as a result of price increases, product launches, and higher safety content per vehicle. Our sales in the quarter were well over $2.3 billion, despite a 7% currency headwind. We also achieved a strong profit recovery, increased the adjusted operating margin to 10% for the fourth quarter and to 6.

8% for the full year, in line with our full year guidance. Our strong performance in the fourth quarter is especially encouraging considering that market conditions continued to be challenging with significant inflationary pressure and continued high level of customer call-off volatility. We generated a strong operating cash flow, meeting our full year indication. This combined with improved EBITDA lowered our leverage ratio to 1.4 times from 1.6 times last quarter. In the quarter, we paid $0.66 per share in dividend, an increase of around 3% from third quarter, and repurchased and retired 650,000 shares. Additionally, we retired 10 million of our treasury shares from previous stock repurchase programs. The second half year development in 2022 strengthens our confidence in our mid-term targets.

In addition, we expect that our balance sheet and positive cash flow trend will allow for higher shareholder returns. Looking now on an update of the 2022 margin progression on the next slide. During 2022, we reduced our cost base in a challenging market environment. We implemented hundreds of cost efficiency projects, especially in production and supply chain. As illustrated by this chart, we started the year at a very low adjusted operating margin level, mainly from severe inflation in raw material, but also due to inflation in other cost categories, such as labor and freight. We then managed to gradually improve the adjusted operating margin from 3.2% in the first quarter to 10% in the fourth quarter as a result of successful negotiations with our customers regarding cost compensation.

This sequential improvement reflects our high volumes and our strong focus on continuous improvement throughout the organization and our strategic roadmap initiatives. We managed to offset this raw material-related cost shock successfully by year-end 2022. For 2023, the main challenge is to tackle the inflation in the non-raw material cost base without neglecting the raw material cost risks. Looking on the next slide. To support a sustainable business model in an inflationary environment, we continue to work closely with our customers to secure price increases to compensate for inflation, volatile LVP and supply chain disruptions. During 2022, we reached agreements with almost all OEMs on non-raw material — on raw material related price adjustments as well as, to a limited extent, also for other cost category, such as labor and freight.

At the end of the year, product pricing largely reflected the cost level for raw materials. We have initiated discussions with our customers on non-raw material cost inflation, such as labor, logistics and energy. We believe price adjustments will offset the non-raw material cost inflation with small positive effects in the first quarter of 2023 and gradually larger positive effects as the year progresses. Looking now on the order intake on the next slide. 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 fast-growing in the number of EV platforms. The lifetime value of the 2022 order intake was in line with last year despite currency headwinds and a more negative LVP outlook.

The strong order intake over the past year is an evidence that our company is the leading company in the passive safety automotive industry. One of our key performance indicators, customer satisfaction, has continued to improve and is at the high level. However, this does not mean that we can relax. We always strive for improving products, services, processes and costs. Our strong order intake and current customer satisfaction support our confidence regarding our mid-term sales targets. Looking on the order intake in more details on the next slide. In 2022, order win rates for new EV platforms were higher, both with new EV makers and traditional OEMs. We estimate that around 45% of our order intake in 2022 was for future battery electric vehicles.

We are proud that we were successful in winning many contracts with new automakers. New automakers, mainly in North America and China, accounted for over 30% of our order intake, up from 12% last year. We won multiple awards supporting new markets and industry trends like knee airbag, side airbags in India, integrated child seats, seatbelts specifically designed for electrical vehicles, as well as seatbelts for zero-gravity style seats for self-driving vehicles. As a result of strong order intake over the past years, we expect an increase in overall product launches in 2023. This development contributes to building an even stronger platform for our long-term success. Looking now on the financial overview on the next slide. Our consolidated net sales of $2.3 billion was 10% higher than a year earlier despite 7 percentage points currency headwind.

Adjusted operating income, excluding costs for capacity alignment, increased from $177 million to $233 million. The adjusted operating margin was 10% in the quarter, 1.7 percentage points higher than the same period last year. The higher operating margin was mainly a result of higher prices, operational leverage on higher volumes as well as costs saving activities. Operating cash flow was $462 million, which was $146 million higher than the same period last year, mainly due to improved working capital and higher net income. Looking now on sales growth in more detail on the next slide. Despite the currency headwind, the fourth quarter consolidated net sales increased by more than $200 million to $2.3 billion. Organic sales grew by 18% in the fourth quarter compared to last year; retroactive pricing contributed with approximately $8 million, and price volume mix contributed with almost $360 million in the quarter.

Looking on the regional sales split, Asia accounted for 42%; North America for 32%; and Europe for 26%. We outlined our organic sales growth compared to LVP on the next slide. I am very pleased that our organic sales growth outperformed global light vehicle production growth in the fourth quarter. This was achieved as we continued to execute on our strong order books. According to S&P Global, light vehicle production increased by around 2% year-over-year in the quarter. This was slightly lower than expected in the beginning of the quarter, as production in North America, Japan and China were lower than expected. Based on latest light vehicle production numbers, we outperformed global light vehicle production by around 15 percentage points in the quarter and by around 7 percentage points for the full year.

In the quarter, we outperformed in Europe by 23 percentage points; by 14 percentage points in both China and Japan; and by 9 percentage points in America. Supported by new launches, market share gains and CPV growth, as well as further price increases, we expect sales to outperform light vehicle production by around 12 percentage points in 2023. On the next slide, we see some key model launches from the fourth quarter. In the quarter, we had a high number of launches, especially in China and Japan. The models shown on this slide have an Autoliv content per vehicle from approximately $200 to close to $500. These models reflect the changes seen in the automotive industry in recent years, with several relatively new OEMs represented, and that’s four out of nine are available as pure electrical vehicles.

In terms of Autoliv sales potential, the entirely redesigned Honda Pilot and Honda Accord launches are the most important. The long-term trend to higher content per vehicle is supported by front center airbags, knee airbags, more advanced seatbelts and active pedestrian protection systems. Looking to our sustainability approach on the next slide. Guided by our vision of saving more lives, our mission is to provide world-class life-saving solutions for mobility and society. Sustainability is an integral part of our business strategy and fundamental driver for market differentiation and stakeholder value creation, helping to ensure that our business will continue to thrive and contribute to sustainable development in the long term. Our sustainability approach is based on four focus areas: saving more lives; safe and inclusive workplace; climate; and responsible business, each consisting of broad ambitions and more specific short-term targets.

Our sustainability approach is anchored in well-established international frameworks such as the UN Global Compact of which we have been a signatory for several years. We aim to be carbon neutral in our own operations by 2030 and furthermore aim for net zero emissions across our supply chain for 2040. These commitments place Autoliv among the front runners in the broader group of automotive suppliers. As a part of this commitment, our reduction targets were approved by the Science Based Targets initiative in February of 2022. We cooperate with international organizations, suppliers and customers to ensure maximum positive impact. A few examples of such partnerships includes the UN Rome Safety Fund, the green steel collaboration with SSAB, and to push the boundaries of safety to include vulnerable road users.

Now looking at the sustainability progress in 2022 on the next slide. During 2022, we initiated and concluded a number of activities to ensure our commitments and contribution to the UN Sustainable Development Goals and our own sustainability targets. For example, we took steps to reach our ambition of saving 100,000 lives per year by expanding our activities in the vulnerable road user area. We conducted sustainability audits and carried out climate surveys covering 98% of our direct material suppliers. We substantially increased our use of renewable electricity. We trained all senior management members in the main areas of our climate program, including decarbonization levers. Autoliv is committed to provide safe working conditions for our employees.

As a result of our continuous improvement activities, the incident rate reduced by over 20 percentage points in 2022. We will provide more information on our progress in our coming annual sustainability report. I will now hand over to our CFO, Fredrik Westin, who will talk you through the financials on the next slides.

Fredrik Westin: Thank you, Mikael. 2022 was again the turbulent year with both lower and more volatile light vehicle production than expected at the beginning of the year, mainly due to supply chain disruptions. Our net sales were $8.8 billion, with sales increasing organically by close to 14%, twice the increase in the underlying light vehicle production. The adjusted operating income decreased by 12% to $598 million. The adjusted operating margin was 6.8% compared to our latest guidance of reaching the upper range of between 6% and 7%. The operating cash flow was $713 million compared to the guidance of between $700 million and $750 million. Earnings per share was $4.85. Dividends of $2.58 per share were paid, and we repurchased and retired 1.44 million shares for $115 million.

Looking now at the full year adjusted operating income bridge on the next slide. For the full year of 2022, our adjusted operating income was $598 million. This was $85 million lower than the previous year, which was a result of higher costs for raw materials and FX combined of approximately $460 million. Costs for call-off volatility such as premium freight and labor and material inefficiency increased substantially as well. This was partly offset by positive effects from actions including price increases and cost saving activities as well as higher volumes. SG&A and RD&E net combined was virtually unchanged despite 14% organic growth. Looking on the quarterly performance on the next slide. This slide highlights our key figures for the fourth quarter of 2022 compared to the fourth quarter of 2021.

Our net sales were $2.3 billion. This was 10% higher than Q4 2021. Gross profit increased by 8% to $399 million, while the gross margin declined slightly to 17.1%. The gross margin decrease was primarily driven by cost inflation and the volatile light vehicle production and has largely been compensated by price increases and cost savings. In the quarter, we made $3 million in provisions for capacity alignment activities. The adjusted operating income increased from $177 million to $233 million. The adjusted operating margin increased from 8.3% to 10.0%. The operating cash flow was $462 million, and I will provide further comment on our cash flow later in the presentation. Earnings per share diluted increased by $0.49, where the main drivers were $0.43 from higher adjusted operating income and $0.04 from lower tax costs.

Our adjusted return on capital employed and return on equity both increased to 25%, up from 19% and 18%, respectively. We paid a dividend of $0.66 per share in the quarter, an increase of $0.02 from last year and repurchased and retired 650,000 shares for $55 million under our stock repurchase program. Looking now on the adjusted operating income bridge on the next slide. In the fourth quarter of 2022, our adjusted operating income of $233 million was $56 million higher than the same quarter last year. The impact of raw material price changes was negative $83 million in the quarter. Foreign exchange impacted the operating profit positively by $9 million. This was mainly a result of positive revaluation effects, partly offset by negative translation effects.

SG&A and RD&E net combined was $22 million lower, mainly due to timing of engineering income and positive currency translation effects. Our operations were positively impacted by improved pricing, higher volumes, as well as our strategic initiatives, partly offset by the significant headwinds from call-off volatility and general cost inflation. As a result, the leverage on the higher sales, excluding currency effects, was in the upper end of our typical 20% to 30% operational leverage range, despite the substantial headwinds from raw materials. Looking at our cash flow overview on the next slide. For the fourth quarter of 2022, operating cash flow increased by $146 million to $462 million, mainly due to stronger performance in working capital and higher net income.

During the quarter, trade working capital decreased by $132 million as a result of improved payables in part due to our capital efficiency program, partly offset by higher inventories. The continued inefficiencies in inventories is a result of the volatile light vehicle production and logistics challenges. Our ambition is to eliminate these inefficiencies as soon as possible, which requires the stabilization of the supply chain and call-off patterns from our customers. For the fourth quarter, capital expenditures net increased by 8% to $165 million. In relation to sales, it was 7.1%, virtually the same as a year ago. The high level is related to the ongoing footprint activities and capacity expansion for growth especially in China. For the fourth quarter of 2022, free cash flow was $297 million, $133 million higher than a year earlier.

For the full year of 2022, operating cash flow declined somewhat from the prior year to $730 million, mainly due to inventory inefficiencies. Cash flow — free cash flow amounted to $228 million, down $72 million from 2021. CapEx in relation to sales was 5.5%, in line with our full year indication and the cash conversion was around 54%. In 2023, we expect positive cash flow development from higher net income and a gradually more stable light vehicle production. Now looking on our leverage ratio developments on the next slide. The leverage ratio at the end of December 2022 was 1.4 times. This was an improvement from the 1.6 times in the previous quarter, as our 12-months trailing adjusted EBITDA increased by $49 million and our net debt decreased by $99 million.

Now looking at the liquidity position onto the next slide. At the end of the quarter, we had a significant liquidity cushion of approximately $1.7 billion in cash and unutilized committed credit facility. To minimize refinancing risks, we have diversified our long-term funding sources and we also have a maturity profile that is well spread over the coming years. None of the credit facilities are subject to financial covenants. With that, I hand it back to you Mikael.

Mikael Bratt: Thank you, Fredrik. Let’s look at the financial and market environments we see for 2023 on the next few slides. Large part of the auto industry continues to operate at or near recessionary levels, mainly due to supply chain constraints. Despite concerns surrounding the ongoing volatility of the supply chain and recessionary fears, global production is projected to increase by 3.5% to 82 million vehicles in 2023, according to S&P Global January 2023. For first quarter, global light vehicle production is expected to improve by 2.6% compared to last year, but decline by 6%, more than 1 million units, compared to the fourth quarter. This decline versus fourth quarter is mainly an effect of supply chain issues from the recent wave of COVID-19 in China.

With the relaxing of the COVID policy in China, LVP as well as short-term demand have been negatively impacted. As a result, first quarter production in China has been lowered by close to 0.5 million units, with volume losses expected to be recovered in subsequent quarters. In North America and Europe, the near-term production forecast continue to be limited by automakers’ ability to produce not by demand. Now looking on the next slide. We expect 2023 to be a challenging year. As inflation impacts our non-raw material cost base, which is almost twice as large as our raw material cost base. In 2022, the main cost challenge was related to raw materials affecting our costs for purchased components. Although many commodity indices are down since their peaks in 2022, we currently assume raw material costs unchanged in 2023.

The reason being that the prices of specific raw materials used in our products such as automotive grade steel has not declined as much as the generic steel indices would indicate. Additionally, we see higher cost for some material such as yarn and resin. For 2023, the main cost challenge is related to labor and energy inflation, which impacts us directly as well as through suppliers’ value-added costs. Already during 2022, the tight labor market, mainly in North America, resulted in significantly higher-than-normal labor inflation. For 2023, we foresee further headwinds from wage increases, especially in Europe. We also predict cost increases from suppliers due to labor inflation and higher energy costs. Additionally, we expect higher costs for logistics and utilities in our operations, mainly in Europe.

We have initiated new discussions with our customers aimed at offsetting this broader inflation. We believe it will be challenging, but nevertheless we expect the price adjustments will gradually, throughout the year, offset non-raw material cost inflation. Looking at the 2023 business outlook on the next slide. We expect a significant improvement in adjusted operating margin in 2023 compared to 2022, supported mainly by 15% organic sales growth, cost control and product price adjustment. We expect continued high sales outperformance versus light vehicle production in 2023, supported by launches, higher prices, content per vehicle increases and regional mix. We expect the adjusted operating margin in the first quarter to be around 5% due to lower LVP, and cost inflation is expected to increase faster than our cost compensations in the beginning of the year.

We anticipate price adjustments will gradually, throughout the year, offset non-raw material costs inflation and the pattern will be similar to the quarterly pattern seen in 2022, with limited positive effects in the first quarter and gradually more as the year progresses. This trajectory will be further supported by improvements from strict cost control, footprint optimization as well as expected gradual improvements of the supply chain and light vehicle production stability. Looking at our 2023 financial indications on the next slide. Our full year 2023 indication excludes costs and gains from capacity alignment, anti-trust related matters and other discrete items. Our full year indication is based on a light vehicle production growth assumption of around 3%, in line with S&P Global outlook.

We expect sales to increase organically by around 15%. Currency translation effects are assumed to be around negative 1%. We expect an adjusted operating margin of around 8.5% to 9%. Operating cash flow is expected to be around $900 million. Our positive cash flow trend should allow for increasing shareholder returns. Turning the slide to look at progress towards our mid-term targets. In the medium term, we are expecting to continue to grow our core business, airbags, seatbelts and steering wheels, through execution on the current strong order books. The other important growth driver is safety content per vehicle, driven by continuous updates of government regulations and crash test ratings. Based on our order book and expected CPV increases, our growth targets for the medium term is to grow organically by around 4 percentage points more than light vehicle production growth per year on average.

This excludes any price compensation for raw materials and other inflationary costs. In 2022, our outperformance was 7 percentage points, including price adjustments. And for 2023, we expect to outperform light vehicle production by around 12 percentage points. This is substantially above our growth target. Even if we disregard the effect of price increases on the outperformance, we are still on track to deliver on the growth target of 4 percentage points outperformance on average. To maintain the growth momentum beyond the market share-driven growth, we are pursuing an ambitious innovation program. Now, looking on the multiple levers for margin improvements on the next slide. In the past two years, Autoliv has significantly reduced its cost base in a challenging market environment.

We have implemented hundreds of cost efficiency projects, especially in production and supply chain. Our medium-term adjusted operating margin target of around 12% is based on the previously communicated framework. This relies on the continued implementation of our strategic initiatives, including optimization, digitalization and footprint optimization together with the following conditions: a business environment with a stable global light vehicle production of at least 85 million; and that headwinds from inflation do not have a greater net negative impact on our operating margin that we had in 2021, offset through price compensation or declining raw material prices. We remain confident that if these conditions are met for the full year 2024, which we see as possible if the political and macroeconomic situation improves, we should reach the 12% adjusted operating margin target in 2024.

Now looking on the next slide. I look forward to sharing more about our journey with you at our Investor Day on June 12, 2023, where the main focus will be on product, strategic roadmap, as well as automation and operational efficiency. The event will be held at our technology center in Auburn Hill, Michigan USA. I’m looking forward to seeing many of you there. Turning to the next slide. In closing, to summarize our 2023 outlook, we expect continued strong sales outperformance versus light vehicle production; a challenging first quarter in terms of operating margin, which should gradually improve throughout the year; a significant full year adjusted operating margin improvement compared to 2022. We remain mindful of the risk of deteriorating economic conditions and supply chain disruptions, but I am confident that our leading position, the work we have done to become more resilient and our experience and agility will enable us to manage further challenging conditions — the future challenging conditions.

I will now hand back to Anders.

Anders Trapp: Thank you, Mikael. Turning to the next slide, this concludes our formal comments for today’s earnings call and we would like to open the line for questions. I now turn it back to you, Raf.

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Q&A Session

Operator: Thank you, sir. We are now going to proceed with our first question. The questions come from the line of Rod Lache from Wolfe Research. Please ask your question. Your line is open.

Rod Lache: Hi, everybody. Thanks for taking my questions. Just firstly, in 2021, you announced digitization and automation program that should save about $160 million, I think, over two years, and it was $60 million from footprint changes, and there was also an expectation that R&D would decline by 100 basis points. Can you just provide a little bit more color on what you’ve achieved so far on those, and what you see as achievable in front of you in 2023?

Mikael Bratt: Thank you, Rod. No, I think when it comes to those activities that we laid out there in 2021 and originally actually in 2019 as a part of our journey here and I would say, it was a number of strategic roadmaps initiatives that should strongly support our journey here. I would say that we are performing well on those. And I think we have been consistent throughout the last couple of challenging years here to hold on to the majority of these initiatives to secure that. The underlying improvements were still on track despite that we have this challenging environment, of course, disturbing the overall net result here. But I would say thanks to those initiatives, we are feeling comfortable on the way forward here. And of course, they have also contributed for us to deliver results that we are delivering here in this quarter as well. So, long story short, I would say, we are on track when it comes to those strategic roadmap initiatives that you referred to.

Rod Lache: Can you maybe provide some quantification of what is still in front of you from those? And the reason I’m asking maybe just — I’m looking at the fourth quarter strong margin, and I know that there’s typically a seasonal lift of about 120 basis points from engineering recoveries, but it would look like you would — even adjusted for that, you’d be in the mid to high 9% range off of that. Presumably there’s some positive from these restructurings and digitization and automation, but your target margin for the full year 2023 is only 8.5% to 9%. So, could you help me reconcile that maybe with a little bit of a bridge?

Mikael Bratt: Yes. I think, let me start and I will hand over to Fredrik here to take you through different steps there. But coming back to the strategic initiatives here, as I said, they are on track. But with that said, we also see that we have still a lot of opportunities in that area. I mean, some of them have longer lead times and we are in progress here of securing many of the footprint initiatives that we have launched, for example, as (ph) strategic initiatives. And, specifically, when it comes to automation here, it’s, of course, a gradual journey as we are implementing it also when we have new program launches. So, they have a sequential development that will take some calendar time. So, good progress, but still great opportunities as we move forward here.

And, of course, the bridge from where we are in ’20 — I expect us to be here in relation to the midterm targets. There are a number of components as we always went through, but I’ll let Fredrik take you through the details there.