Autoliv Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 20, 2023

There are 12 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Autoliv Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer 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.

Operator

Please go ahead.

Speaker 1

Thank you, Sandra. Welcome everyone to our Q3 2023 earnings call. On this call, we have our President and CEO, Mikael Bratt and our Chief Financial Officer, Fredrik Christine and me, Anders Trapp, VP, Investor Relations. During today's earnings call, Mikael and Frederic will, among other things, provide an overview Of the strong sales, earnings and cash flow development we had in the 3rd quarter, the structural cost reduction activities that we are doing to secure our long and medium term and our updated full year indications as well as provide an update on our general business and market conditions. We will then remain available to respond to your questions.

Speaker 1

And as usual, the slides are available on autolive.com. Turning to the next slide. We have the Safe Harbor statement, which is an integrated part of this presentation and includes the Q and A that follows. During the presentation, we will reference some non U. S.

Speaker 1

GAAP measures. The reconciliations of historical deals, again, with non U. S. GAAP measures are disclosed in our quarterly press release that is available on autoliv.com and in the 10 Q that will be filed with the SEC. And lastly, I should mention that this call is intended to conclude at 3 pm Central European Time.

Speaker 1

So please follow a limit of questions per person. I will now hand over to our CEO, Mikael Bratt.

Speaker 2

Thank you, Anders. Looking on the next slide. Our performance continued to improve substantially in the 3rd quarter. First, I would like to thank our employees for their great contributions to the 3rd quarter results and the efforts to further strengthen Our organic sales are low double digits, outperforming light vehicle production significantly, especially in Asia. The strong growth was mainly a result of higher than expected light vehicle production, product launches and customer compensations for inflationary pressure.

Speaker 2

The adjusted operating income was a new record for the 3rd quarter since the Veoneer spin off. We generated a broad based improvement in key areas, including gross and operating margins, both year over year and sequentially. Our cash flow was strong and the debt leverage remained well within our target range. While we maintained our dividend and almost tripled the number of shares repurchased compared to the 2nd quarter, We are making progress towards our intention of reducing our indirect workforce by up to 2,000. We have now detailed a large part of our structural cost reduction actions, including optimization of the company's geographic footprint and organization.

Speaker 2

The National Highway Transportation Safety Administration has issued a good initial decision to recall 50 2,000,000 airbag inflators identified by our competitor, ARC. Autoliv estimates that less Then 10% of the identified inflators were included in airbag modules that Autolip supplied to customers after Autoliv acquired certain Delphi assets in 2009. Autoliv is not aware of any performance issues regarding the ARC inflators, including with its airbags. At this stage, it is too early to talk about any replacement plan. We are, of course, prepared to support our customers with replacement products.

Speaker 2

The light vehicle production in 2023 is now expected to develop slightly better than expected, and we have therefore increased our full year organic sales indications in line with this. We expect 4th quarter adjusted operating margin to improve by 1.5 to 2 percentage points compared to last year, in line with the previously communicated improvement pattern. Additionally, we expect the ongoing reorganization of our global functions and European operations to lead to a slightly lower tax rate for 2023 than previously anticipated. These changes are also expected to reduce our normalized tax rate from 2024 and onwards to a range of 25% to 30%. Now looking at the significant sequential cost improvements on the next slide.

Speaker 2

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 Q3, we continued to actively address our cost base, while negotiating with our customers to Our labor efficiency continues to trend up, supported by the implementation of our strategic initiatives, including automation and digitalization. Our gross margin improved by 2 70 basis points compared to the Q1 and by 90 basis points from the 2nd quarter. This is mainly a result of the higher labor efficiency and customer relations.

Speaker 2

The positive trend for RD and E and SG and A in relation to sales have continued and have now declined by 130 basis points since Q1. Combined with the gross margin improvements, this lead to a substantially improvement in adjusted operating margin. Looking now on financials in more detail on the next slide. Sales increased by 13%, mainly due to new price paratus, higher prices and favorable currency translation effects. The strong sales increased and cost reduction activities led to a substantially improvement in adjusted operating income, Excluding effects of capacity alignment and antitrust related matters, adjusted operating income increased by more than 40% to $243,000,000 from $103,000,000 last year.

Speaker 2

The adjusted operating margin was 9.4% in the quarter, an increase by close to 2 percentage points from the same period last year and by over 4 percentage points from the Q1. Operating cash flow was US202 million dollars which was US30 million dollars 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 recoveries. Looking now on the limit impact of the UAW strike in North America on the next slide. The UAW strike in North America is in its 5th week.

Speaker 2

The impact of Boliv in Q3 was very limited. Our North American employees are not represented by UAW, but we are indirectly impacted by lost sales and more unpredictable and volatile LVP. In first half twenty twenty three and the Detroit 3 North American accounted for around 30% of our global sales or 36% of our sales in Americas. We estimate that we lost less than $2,000,000 in sales in the Q4. As per October 19, The per week revenue hit from the assembly plant strike is around 6,000,000 We have developed a response plan to the strike and built some inventory of components and finished products to support a quick ramp up when the strike is over.

Speaker 2

At this point, it's difficult to estimate the full impact of the UOW strike on our 4th quarter sales and profitability. There are many unknown factors, including scope, length of action as well as potential recovery of lost volumes after the strike, but also possible sales increases for brands not affected by the strike actions. Our full year 2023 indications are based on the assumption that the UAW strike is not prolonged beyond what is included in the S and P Global October outlook. Looking now on the announced structured cost reductions initiatives on the next slide. To secure our medium term non Competitiveness and to support our financial targets, we are accelerating our global structural cost reductions as previously communicated.

Speaker 2

This includes a substantial reduction of our global workforce with a particular focus on our European operations. These initiatives will continue to optimize our geographic footprint for a more effective structure while reducing costs and driving improved margin and cash flow. We intend to simplify and consolidate how we operate in all areas. The headcount reduction will affect people in the base of our offices, technical centers and plants, including leadership positions at all levels. On July 13, we announced the first step of our planned reductions of around 1100 indirect and direct employees.

Speaker 2

On October 5, we announced the reduction of 300 indirect employees in China, Japan, Sweden, United States and the closure of an office in Netherlands. These first steps are expected to reduce costs by around SEK 35,000,000 in 2024, €65,000,000 in 2025, €85,000,000 when fully implemented. Looking now on our Sales growth in more detail on the next slide. Our consolidated net sales increased to US2.6 billion dollars a record for the Q3. This was close to US300 $1,000,000 or 13% higher than the year earlier, driven by price, volume and currencies.

Speaker 2

Out of the period cost compensations contributed with EUR 6,000,000. Out of period compensations are retroactive price adjustments and other compensations that mainly relates to 1st and second quarters and earnings were negotiated in the 3rd quarter. Looking on the regional sales pitch. Asia accounted for 40%, Americas for 35% and Europe for 25%. We outlined our organic sales growth compared to light vehicle production on the next slide.

Speaker 2

I am very pleased that our organic sales growth significantly outperformed global light vehicle production growth in the 3rd quarter, as we continued to execute on our strong order book. According to S&P Global, 3rd quarter light vehicle production increased by close 4% year over year. This was 7 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 OEMs in Eastern Europe. In the quarter, we outperformed global light vehicle production by around 7 percentage points. We outperformed The performance in China was mainly driven by increasing sales to the fast growing domestic Chinese OEMs.

Speaker 2

Our sales to this group outperformed light vehicle production with close to 30 basis points as we continue to deliver on the strong order book in China. We expect the positive year over year sales growth trend to continue into the Q4. On the next slide, we see some key model launches from the Q3. In the quarter, we had a high number of product launches, especially in China and Europe. The trend towards electrification is clear, with 6 models being available as electric version.

Speaker 2

6 of the models shown on this slide have an auto live content per vehicle of around $300 or higher, with the highest at over USD 7.50. In terms of Autolip sales potential, the BMW I5, 5 series launch is the most significant. For the full year, we expect a record number of launches with high number in China, Europe and South Korea. I will now hand it over to our CFO, Fredrik Vistin, who will talk about the financials on the next few slides.

Speaker 3

Thank you, Mikael.

Speaker 2

Please now

Speaker 3

I'd like to highlight our key figures for the Q3 of 2023 compared to the Q3 of 2022. Our net sales were DKK2.6 billion. This was a 13% increase. The gross profit increased by 200 by €82,000,000 or by 21 percent to €465,000,000 while the gross margin increased by 1.3 percentage points to 17.9%. The gross profit increase was primarily driven by price increases, volume growth, lower cost for material and premium freight.

Speaker 3

This was partly offset by increased costs for personnel related to volume growth and wage inflation. In the quarter, we made a total adjustment of SEK 11,000,000 to the operating income, of which SEK 10,000,000 was for capacity alignments. The adjusted operating income increased from SEK 173,000,000 to SEK 243,000,000 and the adjusted operating Margin increased by 180 basis points to 9.4%. I will explain more when we go through the operating income bridge. Adjusted earnings per share diluted increased by CAD 0.40 where the main drivers were CAD 0.57 from higher adjusted operating income, partly offset by SEK0.10 from financial items and SEK0.07 from taxes.

Speaker 3

Our adjusted return on capital employed and return on equity increased to 25% and 21%, respectively. We paid a dividend of €0.66 per share in the quarter, And we repurchased and retired around 1,230,000 shares for $120,000,000 under our stock repurchase program. Looking now on the adjusted operating income bridge on the next slide. In the Q3 of 2023, Our adjusted operating income of SEK 243,000,000 was SEK 70,000,000 higher than the same quarter last year. Our operations were positively impacted by improved pricing and other customer compensations, higher volumes, Lower cost for premium freight as well as our strategic initiatives that were partly offset by the significant headwinds from general cost inflation.

Speaker 3

The impact from raw material prices was limited. Out of period cost compensation was approximately SEK6 1,000,000 lower than during the same period last year. FX impacted the operating profit negatively by €8,000,000 This was mainly a result of negative translation effects. Costs for SG and A and RD and E, net combined, was €14,000,000 higher, mainly due to higher personnel costs and projects. However, in relation to sales, it was down 50 basis points.

Speaker 3

As a result, the leverage on the higher sales, excluding currency effects, was in the upper half of our typical 20% to 30% operational leverage range. This is despite not getting any leverage on the inflation compensation from our customers. Looking now on the cash flow on the next slide. For the Q3 of 2023, Our cash flow decreased by €30,000,000 to €202,000,000 compared to the same period last year, mainly as a result of less favorable working capital effects, partly offset by the higher net income. Year to date operating cash flow increased by €285,000,000 compared to the same period last year to €535,000,000 mainly due to higher adjusted operating income and less negative working capital effects.

Speaker 3

During the Q3, working capital grew by SEK 36,000,000 driven by higher inventories. We will provide more information on trade working capital on a later slide. Capital expenditures net decreased to €151,000,000 from €164,000,000 in the previous year. Capital expenditures net in relation to sales was 5.8% compared to 7.1 percent a year earlier. Free cash flow was SEK 50,000,000 in Q3, €18,000,000 lower than a year earlier.

Speaker 3

And year to date, free cash flow has improved by €186,000,000 to €107,000,000 Our full year indication of an operating cash flow of around €900,000,000 is unchanged. Last 12 months cash conversion defined as free cash flow in relation to the net income, was 99%. Now looking on our trade working capital developments on the next slide. During the Q3, trade working capital increased by €11,000,000 driven by €35,000,000 higher inventories, partly offset by SEK14 1,000,000 higher accounts payables and by SEK10 1,000,000 in lower receivables. The higher inventories was mainly due to the continued volatility and the UAW Strikes.

Speaker 3

In 2019, we launched our capital efficiency program aiming to improve working capital by SEK 800,000,000. To date, We have achieved almost SEK350 1,000,000 all from payables so far. Receivables and especially inventories are lagging due to the high call off volatility and hence planning challenges resulting in inefficiencies. We do expect this to improve significantly in tandem with the reduced call of volatility. Now looking on our leverage ratio development on the next slide.

Speaker 3

Our debt leverage ratio at the end of September 2023 was 1.3x, unchanged compared to the prior quarter. This was a result of SEK 26,000,000 higher net debt and SEK 77,000,000 higher 12 months trailing adjusted EBITDA. Now looking on shareholder returns on the next slide. Altiliev has shown in the past several years its ability to generate Solid cash flow in periods with difficult market environments such as COVID lockdowns, the war in Ukraine, industry supply chain challenges and related substantial decline in light vehicle production. We have used dividend payments and share repurchases to create shareholder value.

Speaker 3

Historically, the dividend has usually represented a yield of approximately 2% to 3% in relation to the average share price. Over the last 5 years, we have reduced the net debt significantly, while returning SEK1.2 billion directly to shareholders. This includes stock repurchases of 3,600,000 shares for a total of JPY317 1,000,000 as part of our current stock repurchase program. We are considering several factors when executing the program such as our balance sheet, the cash flow outlook, our credit rating and the general business conditions, not only the debt leverage ratio. We always strive for the balance that is best for our shareholders both long and short term.

Speaker 2

I now hand it over

Speaker 3

to Nick back to Jelle.

Speaker 2

Thank you, Frederik. Looking at the next slide. As supply chains have improved in many regions, vehicle demand, sales backlogs and inventory restocking are now the main drivers of market development. S and P Global now expects that the 4th Quarter global light vehicle production to increase by 3.6% compared to last year. Compared to the Q3, volumes are expected to increase by around 2%, mainly to normal seasonality from summer shutdowns in the 3rd quarter.

Speaker 2

Despite concerns surrounding elevated vehicle pricing in some markets And deteriorating credit conditions, global full year 2023 light vehicle production is projected to increase by over 7%. This is 250 basis points higher than their forecast from July. This increase is driven by lower content vehicle models in China and higher growth in Eastern Europe, While production forecast for higher content markets, Western Europe and North America is lowered. For Autoliv, this change impacts average content per vehicle negatively by more than 500 points compared to S and P's July forecast. Light vehicle production in China continues to show relative strength, owing to both a strong EV demand and export activity, mainly benefiting the domestic OEMs.

Speaker 2

Near term production, light vehicle production in North America continues to be impacted by the ongoing UAW strike. The latest S and P forecast for the 4th quarter is revised down to minus 7%. This includes the continue of the strike actions already announced through Thanksgiving. Production in Europe is to a large extent secured by OEM sales backlogs. However, we are set to see the underlying demand as abated due to higher vehicle prices and tighter credit conditions.

Speaker 2

And the order backlogs at OEMs are shrinking going into 2024. We base our full year sales indication on global light vehicle Production growth of around 7%. Now looking at the expected adjusted operating margin progression in the next slide. For the Q4, we expect substantial improvements of the adjusted operating margin. We anticipate further cost compensations from customers.

Speaker 2

The headcount reductions that we talked about previously should support operating leverage and profitability. We expect continued high year over year sales growth supported by launches, higher light vehicle production and higher prices. We have continued to see an improvement of supply chain stability throughout the year with reduced customer call off volatility. However, the improvement is somewhat slower than we had expected as it deteriorated somewhat in Europe in Q3. This, together with the higher sales and adverse FX development, means that we expect the 4th quarter adjusted Looking at our full year 2023 financial indications on the next slide.

Speaker 2

This slide shows our updated full year 2023 indications. The indications exclude costs and gains from capacity alignment, antitrust related matter, a litigation settlement and other discrete items. Our full year indication is based on a light vehicle production growth assumption of around 7%, up from 4% in the previous indication. As a consequence, our organic sales is expected to increase organically by around 17% instead of the earlier indications of growth of around 15%. Currency translation effects are assumed to be around positive 1%.

Speaker 2

The range for the adjusted operating margin is unchanged around 8.5% to 9%. Operating cash flow is expected to be around SEK 900,000,000 Our positive cash flow trend should allow for continued high shareholder return. Note that our full year 2023 indications are based on assumptions that the UAW strike is not prolonged beyond what is included in the S and P Global October outlook. I will now hand it over to Fredrik to briefly talk about 2024 and the improvements we see.

Speaker 3

Yes. Turning to the next slide. For 2024, we see some tailwinds and headwinds. The main tailwinds include call off stability leading to direct labor efficiency improvements, savings from the structural initiatives as outlined earlier, Effects of continued operational improvements from automation, digitalization, but also favorable raw materials and executing on the strong order book. The main headwinds include operational headwinds from expected continued inflationary pressure, although smaller than this year, which we expect to lead to a customer compensation catch up later in the year, just as it was in 20222023.

Speaker 3

Considering these potential tailwinds and headwinds, we expect a year over year improvement in adjusted operating margin. We expect 2024 to be an important step towards our medium term target of 12% adjusted operating margin. As we have communicated, the medium term targets rest on a few key conditions, which are that global light vehicle production is at least €85,000,000 that the call of volatility is back to pre pandemic levels and that we have full compensation for inflationary pressure after 2021 for a full year. We intend, as usual, to come back with the 2024 full year indication in connection with our Q4 earnings release in January. And I now hand it back to you, Mikael.

Speaker 2

Thank you, Fredrik. On to the next slide. This concludes our formal comments for today's earnings call, and we would like to open the line for Questions from analysts and investors. I will now hand it over back to our operation, operator Sandra.

Speaker 3

Thank

Operator

Our first question comes from the line of Emmanuel Rosner from Deutsche Bank. Please go ahead.

Speaker 4

Thank you so much. I had two questions around some of the factors you've highlighted going into 2024. The first one you're mentioning on the slide is the customer call offs as a positive. So just was curious if you could give a little bit more color of what you've actually seen in Europe This quarter where you indicated that there may have been some sequential deterioration. What do you think drives this?

Speaker 4

And is that Sort of like an ongoing issue. And then as we move essentially into 2024, how do we think about these savings? Is it just Better incremental margin on higher volume or is it like is there a discrete bucket of, I don't know, headcount reduction

Speaker 2

Thank you, Emmanuel. Let me start with the call off then and hand over to Fredrik To take you through the second part of your question there. As we have talked about throughout not only this year, but since some time back Here, we have had a challenging situation when it have come to this volatility resulting in a stop and go in our operations here. And that has throughout the year improved and gone in the right direction, including Europe. But what we saw in Q3 here in Europe was that it turned to the worse again.

Speaker 2

And that is, I would say, Surely related to supply issues in the in our customers' value chain here. So of course, the root cause for that could vary. But for example, we still see that The semiconductor situation is still a problem for some of our customers. We have no reason to believe that this Deterioration in Europe comes from any end consumer deterioration or situation at all. So I see it very much connected to the reasons we have had the last quarters and years here that unfortunately went in the wrong direction For Europe.

Speaker 2

But otherwise, I would say, as an average, we are climbing up towards the 90% level. But as you remember, pre pandemic, we were basically at 100. So we are still Far from where we were before the pandemic when it comes to the stability altogether in the company regardless of region there. So Fredrik, maybe?

Speaker 3

Yes. So then yes, for next year, I mean, it's if you look at S&P Global, based on that, So there will also the expectation is that we should also expect some even a bit limited volume growth. So So that should help the margin development, but then it is more importantly the further improvement on the call of Stability. I mean, we do have significant inefficiencies in our operations due to the current A significantly lower level of stability. And the further this comes up to the 100% that Mikael mentioned, the more it will allow us to move or operate back at the efficiency levels that we've been used to.

Speaker 3

But of course, then the 3rd component is the structure initiatives that we have added on to this and both on the indirect side and the direct side that is also supported by what we're doing on automation and digitalization.

Speaker 4

Thank you. And then my second question is specifically about the structural initiatives. I think earlier in the year when you had first announced A plan for headcount reduction. I think you had mentioned at the time a potential total of 8000 headcount reduction. I think so far based on the plans announced, the first test, I think you've announced maybe about 1400 or so of this 8,000.

Speaker 4

So obviously a lot more to go. So my questions are, is 8,000 still the right number in the current environment? And then what could be the timing for Not just announcements of additional steps, but can any of those still benefit 2024 or would that be beyond that?

Speaker 3

Yes. So we did announce 8,000, but we also split that into 2 groups. It was 2,000 of what we call indirect or Salaried employees and then 6,000 on the direct side. The direct side, the 6,000 is very much connected to what we just talked about before. So it is also based on that we come back or that the stability levels on the call offs also support that.

Speaker 3

And then we Should be able to come back to the regular type of productivity achievements that we have been operating at, which would then allow us to take out 6,000 people With the volumes of end of March as the basis for that number, and that is progressing. Then on the 2,000, Yes, we have announced so far 1400, of which 300 were direct. So of the 2000, we have announced 1100. And also the savings associated with that. So there's more to come, but we have So far progressed on more than half of the $2,000 And also cost wise of what we've taken, Also more than half has been booked already.

Speaker 3

And you can also see now in the Q3 that our headcount is down by 400 employees on the indirect So yes, some of those activities are already in place.

Speaker 2

Thank you very much. Thank you.

Speaker 5

Thank you.

Operator

Thank you. We will now take the next question from the line of Colin Langan from Wells Fargo. Please go ahead.

Speaker 6

Great. Thanks for taking my questions. In the last slide, you noted inflationary pressure and the timing of customer compensation Sort of the big headwind into next year. I mean, what are the new inflationary costs that we should be thinking about into next year? Or is it that you're getting a little bit more pushback on getting recoveries?

Speaker 6

Is that the other part of the issue? And then in general, can you just remind us How much of what you've already gotten recovered is in the piece price versus what would actually need to get maybe renegotiated at the start of next year?

Speaker 3

Yes. So on the first I mean, we use the same macroeconomic forecast that you have At your hand and available. So we do expect that inflation levels should come down as they are right now, and they should be lower next year than this year. But we do also expect that Specialty Labor will have a higher inflation level next year than what it has had as historical averages, But most likely less than what we've had in this year. But we'll come back to that when we talk more specifically on 2024.

Speaker 3

Then on the recovery side, I think we are as we have progressed as expected. I mean, we did indicate after the second Quarter's earnings or in the call that there might be a delay from Q3 into Q4, but that has not really happened. So Q3 developed Developed more or less as we had expected initially, meaning that it's not as much back end loaded in this year as we had communicated back then. And it's also it was more piece price recovery in the Q3 here now than lump sum What we have communicated in the Q2.

Speaker 6

But does that mean when you go into next year, You'll have to renegotiate those lump sums again. And is that a concern as you go into next year that you might get more pushback given the labor inflation the automakers are facing?

Speaker 2

I think already last year, we also had lump sums that we renegotiated this year. I think the important thing is that We have, I would say, a process together with our customers how to get compensated for The inflationary components here and we have, I would say, an annual Process here where we take that into account. So I think the split of what is lump sum and what is more a piece price related is Connected to the type of inflation. You could say, I mean, if it's something of temporary nature, it Should, of course, not need to be in the same level as we move forward. So it's Very detailed negotiation with each customer.

Speaker 2

But what you need to remember also is that this is mirroring what we have with our suppliers. So we have A fair amount of lump sums paid to our supplier base as well. So we balance these two sides of the business here against the charter here to make sure that we have a good cost structure and a flexible cost structure to offset any changes But for me, I feel very comfortable with the way we get compensated here. And As long as we are in the inflation environment, this will be an ordinary course of business to negotiate with our customers on an hourly basis for this type of costs.

Speaker 6

Got it. All right. Thanks for taking my questions.

Speaker 3

Thank you.

Operator

Thank you. We will now take the next question. One moment please. From the line of Matthias Holmberg from DNB Markets. Please go ahead.

Speaker 7

Great. Thank you. First, I would just like to clarify on the tax rate given that

Speaker 3

it's

Speaker 7

likely to have quite material impact on the Net profit going forward. So in order to get to the 20% for the full year, given that you've had sort of a bit above 30% year to date, Am I correct to assume that you're paying basically 0 tax in Q4? And then also on that topic, the 25% to 30% that you see There's a new normalized tax rate going forward, quite wide range and also significantly lower than the 32% you've had in the past. Could you specify it perhaps a little bit more than that? Or is there any reason why you've given such a wide range?

Speaker 7

Thank you.

Speaker 3

Yes. So yes, you're right. I mean, we're taking down the guidance here for the tax from 32% to around 20%. This is due to the ongoing and very significant reorganization of both global functions and our European operations, which is expected to lead to a reduced tax rate in this year, which is also very much associated with the ongoing restructurings. That but it's also important, this is not cash effective in this year.

Speaker 3

So it will not affect the taxes paid in this year. Then going forward, we do expect, as we said, the normalized tax rates to be then around 25% to 30% From 2024 onwards, yes, I think using the midpoint of that range is not a bad assumption at the moment. And this would then also be also impacting the taxes paid also from 2024 onwards.

Speaker 7

And should we view this sort of as a permanent steady state going forward in terms of tax rate?

Speaker 3

Yes, you can. Yes. Great.

Speaker 7

Thank you. And a final question for me. You mentioned the potential recall here of the ARC inflators. I'm just curious, are you as a company liable for the inflators ARC has produced? Or how would that work in a potential Recall situation?

Speaker 2

I mean, ARC is I mean, they are a competitor to us. I mean, that's Their exposure. Then, of course, our part of that, as mentioned here, is where we have purchased these components from them. So we are also Customer to them in this regard. And the portion that is related To Autoliv modules, as far as we understand and see here, there has not been any cases connected So that volume here.

Speaker 2

So we, of course, following this development here Very closely, but we see this also clearly as something we can support our customers with In case of a recall, but where they need to have replacement, but we are not there yet.

Speaker 7

And do you believe that you could get compensation in a potential recall from ARC? Or would you have to sort of cover that cost yourself?

Speaker 2

If there would be such a situation, our expectations, of course, is that this is on ARC's account

Speaker 7

Thank you.

Operator

Thank you. We will now take the next question from the line of Jairam Nathan from Daeva. Please go ahead.

Speaker 5

Hi, thanks for taking my question. I was just wanted to go to the LAP outperformance slide. So it looks like the outperformance in North America and Europe have declined Quite a bit from the first half. And what are the main reasons for that? And how should we think about the regional outperformance for next year?

Speaker 2

No, I think if you go back in time, you can see that this number is a little bit volatile, but The direction is clearly that we are continuing to grow our market share in respective Regions, you talked about here. And of course, in a single quarter, you can have certain mix effects. So I shouldn't read in too much to that. I think we are steadily moving towards the market share of around 45% that We have communicated earlier on and yes, I think we have a good activity level also to backfill our order book Yes, to support that.

Speaker 5

Okay, thanks. And just finally on the share buybacks and debt to debt levels. Given the higher interest rate environment and maybe for longer, does that change your thinking on the debt levels and Buyback funding? Thanks.

Speaker 2

I think we believe that with the good cash flow generating Operations we have today, it supports well the buyback program that we are committed to here. And I don't see this being something that would affect our way forward here.

Speaker 5

Okay, great. Thank you.

Operator

Thank you. We will now take the next question from the line of Giulio Pescatore from BNPP Exane. Please go ahead.

Speaker 8

Hi, thanks for taking my question. The first one On the guidance, just quickly, I'm just trying to understand exactly what assumptions are you incorporating with regards to the strike. So you said you are in line with IHS. Does that mean that you expect the strike to continue until the end of November? I think that's what S and P is currently forecasting.

Speaker 8

And is that does that mean EUR 6,000,000 per week until the end of November? Is that what you are including in the 1.5% to 2% margin improvement in Q4? And maybe if you can give us also an indication of what operating leverage or drop through on that lost revenue Are you incorporating in the assumption? Thank

Speaker 3

you. Yes. So the short answer to your first question is yes. So it is until the end of November. And from what we can tell right now, it is around SEK6 1,000,000 per week that is the impact on our top line.

Speaker 3

Of course, this can change daily. And on the drop through here, I mean, it remains to be seen what that will be at the end of the quarter. As Mikael mentioned here before, we do see that at the moment, the volumes seem to be picked up positively by some of the competitors. They are not unionized by UOW, so it's still a very fluid environment here that we need to monitor throughout the quarter.

Speaker 8

Okay. Thank you. And you're also not assuming a big pickup after the end of the strikes, a big pickup in volumes?

Speaker 3

Yes. Good, Mandy. I think some pickup if it goes through into basically Thanksgiving And then a pickup then to recover some of that volume in the Q4. But again, it's very fluid and it remains to be seen here how The overall volumes also developed.

Speaker 8

Okay. Thank you. Then the second question on the article.

Speaker 3

Is it fair

Speaker 8

to say that you stand to benefit more than way more than you stand to lose out of this recall? I mean, both in terms of the potential replacement impact and in terms of the long term implication with regards to pricing if one of your competitors was to suffer. And that's the first part of the question. And the second part is, can you maybe help us Quantify the potential opportunity for you on the replacement side because it feels like it's very significant, right? It's over the course of 10 years, of course.

Speaker 8

But Let's say that the €52,000,000 recall does materialize. I mean, is it fair to say that you might have 50% share of that And can you just help us understand the opportunity here if the recall does go into effect?

Speaker 2

I think it's too premature to speculate in that. I mean, as we all know, it's not in that stage yet. And there is work With NHTSA and of course, ARC and the customers there that is ongoing. So we are Standing by and willing to support our customers if needed, but it's too early To start to talk about any numbers or potentials and so forth in this. We just have to wait and see here.

Speaker 8

Okay, understood. Okay, thank you.

Operator

Thank you. We will now take the next question from the line of Agnieszka Vilela from Nordea. Please go ahead.

Speaker 9

Perfect. Thank you. So starting with the EBIT bridge, I note that probably for the first time in 9 Quarters reported positive impacts from raw materials, a moderate one, but still positive. So could you please maybe talk about some deflation that you see in your cost input and what is it is related to? That's my first question.

Speaker 3

Yes, correct. It's the first time in a long time here that we see positive effect on raw materials. We have guided for a flat development for the full year, which means that we should see an even stronger positive development also in the Q4. So yes, we do see that raw materials prices are coming or costs are coming down for us. So far, it's been mainly driven by non ferrous Materials, especially magnesium, that has come down from the peaks, but also steel has been favorable.

Speaker 3

But we have seen still some increases this year, especially on the textile side. But we also expect that This should be more favorable going forward. Then on what this means for next year, I mean, we As we said before, I mean, we have this 6 to 9 months time lag between where spot prices or indices are moving until that manifests itself in our Cost structure. So we are monitoring very closely what that means, but we'll talk more specifically about that then with the guidance for next year.

Speaker 9

Great. Thank you. And just to understand a follow-up on that. Will your customers require then Price decreases because of lower input costs for you? Or how should we think about it?

Speaker 3

Yes. We do expect that we will then also give some of that Those price decreases back to our customers. And then we have a higher level of pass through clauses with the customers now. So yes, when raw material Costs come down. We then also adjust our prices accordingly.

Speaker 3

But I mean that should have a favorable impact on the margin because it was margin dilutive on the way up and then it should be Somewhat accretive on the way down.

Speaker 9

Perfect. Thank you. And then my second question, I think, Michael, you mentioned That the car production in Europe so far is secured by backlog, but you see demand abating and also order backlog shrinking going into 2024. And if color you could provide to us when you speak to your customers in Europe in regards to their production planning?

Speaker 2

Yes. I think as you know, I mean, the problem we have here is that Even if we have visibility, the pickups is deteriorating. So it's in a short So, on perspective, where we have the challenges here, I mean, within the week here. Otherwise, I think when it comes to the overall Production planning, there is nothing indicating that we are looking at the weaker European market. I think what is happening is, of course, that After all these years of backlog buildup, that is now normalizing.

Speaker 2

So I would say from a consumer point of view, we have nothing indicating that we should have lower volume due to that. I think we are seeing more normalization of backlog and volatility coming from the supply Look, component issues that we have talked about earlier. So that otherwise, we don't see anything.

Speaker 9

Thank you.

Speaker 5

Thanks.

Operator

Thank you. We will now take the next question from the line of Hampus Engelau from Handelsbanken. Please go ahead.

Speaker 10

Thank you very much. Two questions from me. First, Mikael, if you could maybe talk a little bit about the development in China with the local OEMs, quite hefty growth there. How much is this driven Battery electric cars coming into the market and exports and how much is it driven by, I guess, more competition in China on Be more safe. Go ahead, Alberto.

Speaker 10

I'll take the second question.

Speaker 2

Yes, quickly on No, I don't think I have a number for you to give you the breakdown what is driven by what there. But as you said, I mean, we see Export growth for Chinese OEM increasing quite significantly So yes, mainly Asian countries, you could say, but also to Europe there. And also the overall ambition from the Chinese OEMs here to increase the safety content. And I would say Quite dynamic market here where there requests for new innovations Together with us to improve content is a great growth opportunity for us here and good collaboration here with our Chinese OEMs here. So strong position for us in China altogether there.

Speaker 10

Fair enough. Maybe a last question then for me is, in this process of the optimization and digitalization of the production, would it It's possible for you to maybe share some light on where you are in that process? How much how far have you come and how much is left?

Speaker 2

I think in the Investor Day here, we had a picture slide there showing I don't have it front of me here now. But there you saw that we have come fair amount in certain of our product families here, but still A lot of opportunities left. So I mean, we have plenty of opportunities to continue this journey. I think in some of the Product families, maybe we are on a 30%, 40% of the potential. So yes, plenty of room to capitalize on optimization and digitalization going forward.

Speaker 2

But I can refer to that A slide in the presentation deck on the Investor Day that I can see more details.

Speaker 3

Thank you.

Speaker 2

Thank you.

Operator

Thank you. We will now take the next question from the line of Rod Lars from Wolfe Research. Please go ahead.

Speaker 11

Hi, everybody. I'd like to understand what your Q4 implied margin, your guidance of 11.5% to 12% Suggests for the run rate of margin if we adjust it for seasonality, because we know that Q4 is typically, I think at least 100 basis points above average due to seasonality of recoveries, maybe a few other factors. Is that the case? Is that roughly the magnitude That we should be thinking about if we're thinking about a run rate. And then, you also, you reiterated the 12% margin objective At an 85,000,000 unit LVP as long as it's stable, so S and P is already there.

Speaker 11

Could you quantify what the magnitude is of the Inefficiency due to instability that you're experiencing right now.

Speaker 3

Yes, Rod. So the seasonality in the Q4 is not different this year than in other years. So it's around 100, 110 basis points that we also expect this year. And then most of that is related to the engineering income That is seasonally higher in the Q4. The rest of the margin increase is from the structural cost initiatives we're putting in place and then the further Yes, development on the commercial recoveries with our customers.

Speaker 3

And then on See, the margin was up. Yes, I think we have to come back on that. Nothing has changed from what we have said earlier At the Investor Day or in other discussions, it is the same logic that, that still applies to what we've said before.

Speaker 11

Yes, I understand. I was just hoping you might just give us a sense of the burden that Autoliv Is incurring right now from that inefficiency?

Speaker 3

I don't think we've given a number before and I don't want to do that either now. But as Mikael I said before here is that we actually saw that in some parts of the world, especially Europe, the call of reliability went backwards in Q3. It was in a good track throughout the year. And in, say, all other regions, it continued to improve. But unfortunately, Europe, it went backwards.

Speaker 3

Yes. And then it has very, very different types of how that manifests itself in our inefficiency. So it's very difficult to give a number. That's why I want to would like to refrain from it.

Speaker 11

Okay. And just lastly, if the recall happens as Nitsa is suggesting, it obviously makes sense that Autolaf would participate in some way supporting your customers with replacement modules. Could you just At a very high level, talk about what typically happens in advance of something like that. Do your customers ask for engineering work Kind of ahead of time. If this were to happen, what would you guess would be the earliest that you could accommodate the industry?

Speaker 11

And how long would the process of supporting the industry to do something of that magnitude take?

Speaker 2

I think it's I mean, to start with, I mean, the process would be that we that the customer engaged And request us to quote for such an activity and of course, then work with any Engineering adjustment needed from our side. I mean, the specific details there is difficult to answer because It's unique by customer and it's depending on our own product portfolio here and what needs to be done there. So that's a unique case. But I think we have shown in the past that we are capable of supporting our customers in quite significant recall situations So I expect us to be able to do that fairly quickly if this would happen here as well.

Speaker 11

Okay. Thank you.

Operator

Thank you. I would now like to turn the conference back to Mikael Bratt for closing remarks.

Speaker 2

Thank you, Sandrine. I'm confident that we will deliver a substantial increase in sales, operating Cash flow and adjusted operating income in 4th quarter. We continue to advance of our structural cost reductions initiatives, And we see an improving position with fast growing OEMs as well as continued gradual stabilization of supply chains. This forms a strong foundation for continued strong development in the years to come that support our mid term targets. Autoliv continues to focus on our vision of saving more lives, which is our most important direct contribution to a sustainable society.

Speaker 2

Our Q4 earnings call is scheduled for Friday, January 26, 2024. Thank you, everyone, for participating in today's call.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Autoliv Q3 2023
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