Autoliv, Inc. (ALV) Q4 2012 Earnings Report, Transcript and Summary

Good day and welcome to the Q4 2012 Autoliv Inc. Earnings Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Jan Carlson, President and CEO. Please go ahead.

Thank you, Batina. Welcome everyone to our Q4 earnings presentation. Here in Stockholm we have our CFO, Mats Wallin; our VP Corporate Communications, Mats Odman; and myself, Jan Carlson, President and Chief Executive Officer. We will start off today’s earnings call with a brief review of our Q4 and full year 2012 results including an overview of our general business conditions. Then we will focus on the outlook and how we see our business evolving throughout 2013. At the conclusion of this presentation we will remain available to respond to your questions. And as usual, the slide deck is available through a link on the front page of our corporate website. Turning the page we have the Safe Harbor statement which as you know is an integrated part of this presentation. During the presentation we will reference some non-US GAAP measures and the reconciliations to US GAAP are disclosed in our quarterly press release and our 10(k). Turning the page again, in Q4 we had a solid financial performance especially considering the challenging environment. We achieved an organic sales growth of 1.5% which was within our guided range of 0.0% to 2.0%. Our 9.4% EBIT margin was slightly better than our “around 9.0%” guidance, and that’s despite the significant headwind in gross margin. Earnings of $1.58 per share, which excludes costs related to the ongoing antitrust investigations and alignment, was positively impacted by both a better than expected tax rate and an overall lower cost of borrowing. Lastly, our cash flow developed as expected and we achieved an operating cash flow close to $0.25 billion. These results were achieved despite the challenging macro environment, as you can see if we turn to the next page. Here we have the light vehicle production for Western Europe and the growth markets. The…

Thank you. (Operator instructions.) Our first question comes from Ravi Shanker of Morgan Stanley. Please go ahead. Ravi Shanker – Morgan Stanley: Thanks very much, good afternoon. A question on the margins for 2013. You had indicated that R&D would be a headwind in the first half and it has been a bit of a tailwind in the second half. Can you talk about why you’re seeing that shift in the cadence of R&D? Is there something to do with lumpiness in the programs? And also do you think R&D bounces back to the more normalized level of about $120 million or so a quarter or is it going to kind of true up for how much lower the second half of 2012 was?

I can start off to give you some general color and Mats will continue explaining more the details between first half and second half. If you look to R&D, this is a consequence to some extent of our long-term strategy to invest in new technologies for active safety but it’s also a consequence of the record order intake which we are now starting to work with. These programs will launch in 2015 timeframe and then generate sales. When it comes to the level we have said that R&D net should be lower than 6% and that is what we’re aiming for also for this year.

Yeah, and we should then look into the R&D increase itself, it approximates around a $45 million increase net and we believe that the growth part of it will increase fairly even over the quarters in 2013. Ravi Shanker – Morgan Stanley: Very good. And then a bigger picture question: you have cited a lower option take rate in Europe as one of the mixed headwinds. Do you think that’s a temporary thing based on where production rates are now or do you think that’s a little more structural given the move toward austerity in Europe and that’s going to take some time to rebound?

I’m not sure about that. As we said here earlier in the presentation, Euro NCAP will strengthen and will sharpen up their rules to be able to achieve four- and even earlier five-star cars. So I’m not sure that’s going to affect the take rate effectively. If car makers are going to continue to focus on safety which I’m sure they will, we will expect take rates to continue to stay even in a difficult environment. Ravi Shanker – Morgan Stanley: Very good, thank you.

Our next question today comes from Erik Pettersson of ABG Sundal Collier. Please go ahead. Erik Pettersson – ABG Sundal Collier: Thank you. Two questions: the first one is on organic growth in China for this year. What level are you expecting there post the sort of 6% rate you had in Q4? And then secondly, when you talked about a temporary margin impact here in 2013 from increasing vertical integration, I guess that means that you expect benefits margin-wise in the long run. When do you believe we could see that on profitability and what kind of magnitude should we be thinking about? Thank you.

To the first part, organic growth in China, we don’t give specific outlooks for any region on sales numbers. It’s just an exception if we are doing that. We last year gave some numbers on active safety so we refrain from giving you any information on that one, unfortunately. When it comes to the second question which is the vertical integration, you can see already that later on this year partially this will start to give us some tailwinds. So the effect out of it and the margin number, the improvement I have no specific number to give you but the effect will kick in even later on this year. Mats?

I think also that when accounting for vertical integration we are looking at it from business case to business case and we do it when we believe it’s cost efficient for us and it sort of exceeds our target for returns. Erik Pettersson – ABG Sundal Collier: Could you in any way quantify what the cost structure would look like compared to history or anything similar for wanting to put it in perspective, what you’re doing with the setup?

I think it’s a bit too early to say in that perspective. Jan?

No, we have no detailed color to give you on this one. We are investing as you know in China for many activities that we announced earlier last year, a significant investment in pyrotechnics and general manufacturing in China for instance. We are building up facilities in India; we are building other facilities also in Thailand for vertical integration and all of this is to defend and to sustain the margins that we have. Erik Pettersson – ABG Sundal Collier: Thank you.

We will now take a question from Johan Dahl of Penser Bank. Please go ahead. Johan Dahl – Penser Bank: Thanks, good afternoon. I was just wondering regarding the capacity alignment that was chartered to begin in 2012, and did I get you correctly there that you expected some $50 million lower cost in 2013 from that program? And could you also elaborate a bit on how that looks for ’14, what’s the step up in savings from those particular actions?

You are right – we will expect savings of $50 million this year from restructuring capacity alignment. There will be a step up in 2014 and also into ’15 but the number of those we will have to come back to you later on. Johan Dahl – Penser Bank: Okay. And also with regards just quickly on your revenue or top line guidance, you talked about a strong order impact for quite some time now, at least for the past two years and still this guidance is pretty much in line with global light vehicle production. Is it not until ’14 or not until ’15 we’ll start to see orders kicking in?

You know how it is – you take an order and then you have a development phase and ramp up phase. So effectively it takes around two to three years before you can see the effect out of it. Johan Dahl – Penser Bank: Thanks.

Our next question today comes from Stephan Puetter of Goldman Sachs. Please go ahead. Stephan Puetter – Goldman Sachs: Good afternoon, many thanks for taking my questions – two if I may. The first one, if you could just give us a little bit of color on what you expect from raw materials in 2013 and also in that context, if I can sort of put all the comments together can we assume your 9% margin target for this year is probably a little bit more a floor than a base case given the uncertain environment? And then the final question is just on the balance sheet and the ability to redeploy the very strong position for acquisitions. You pointed out continued strong cash flow but also your growth expectations in active safety. Are you still looking for potential acquisitions? Do you think there are any opportunities or are the prices right now simply too expensive? Many thanks.

If we start with the first one, the raw materials for Q1 we expect a raw material decrease of roughly around $2 million; and for the full year we expect $3 million – so not a big difference to 2012. If you take the 9% indication for the full year, this is our best estimate and we have indicated around 9%. We have given you also a range for the organic sales growth. So this is our best estimation as of today, and I have not any more color to give you at this point on the operating margin. For the balance sheet and the acquisitions, let me first say that as we said in the presentation here we are a very shareholder-friendly company. We are returning two thirds of our free cash flow to shareholders in terms of dividend. We are looking to deploy this balance sheet and this strong balance sheet for growth – that is built into our strategy. We are looking primarily for acquisitions in active safety and technology acquisitions to be able to participate in consolidation of this market and to get better economies of scale. That is our strategy and it remains our strategy for the time being. Stephan Puetter – Goldman Sachs: Okay, thank you very much.

We will now take a question from Anders Trapp of SEB. Please go ahead. Anders Trapp – SEB Enskilda Securities: Yes, hi. I also have a question on the balance sheet, if it’s something that’s holding you back from making acquisitions or availability or something else. And also what you mentioned, acquisitions in active safety, technology acquisitions – could they be sizable enough really to make an impact on the strong balance sheet that you have? I’m also wondering when you look at active safety, to grow the active safety business either through acquisitions or internally, if you’re looking into new product areas beyond the ones that you are into now. And I guess that’s the questions actually.

Okay, let’s start with the first one if there’s something holding us back. I don’t think there is anything holding us back. You know the criteria we have talked about before – the uncertainty in the market; we have unfortunately some ongoing investigations. But our prime reason for the balance sheet is to have the opportunity to execute when the opportunity comes. So I think that is nothing changed from previous, and this is our strategy and this remains. Sizable acquisitions, if there is something out there – yes, I think there are sizable acquisitions that are out there that we could execute if they would be for sale. But the problem is that many people see this as a growth area as well as we do, and they hold onto their assets. So there are we believe still opportunities for some sizable acquisitions and we have talked about a size of $1 billion or around that number before, and that’s the number we hold onto. Looking to the product areas, as you know we are strong already in the radar area. We are leading in the night vision area. We are getting ourselves to very quickly establish the [inter] vision area and you know we have also taken our first order in domain controller already announced last year. So this is an area where we are not currently active in which could also be an area to acquire business in. So I think that’s the focus area that you have there. Anders Trapp – SEB Enskilda Securities: Are you in anyway looking outside active safety?

We are a safety company from our DNA, our history and where we are focused on. We are here to save more lives. Our products save today more than 25,000 people’s lives every year – we are aiming to grow that number. We are not currently looking outside the safety area. Anders Trapp – SEB Enskilda Securities: I’m sorry, I mean if there is anything in the passive safety that could be, if there’s anything here or just are you too big to really do anything on the passive?

You know we have talked of looking for acquisitions in Japan. We are continuing to look for acquisitions in Japan and that’s an opportunity for us. We have a good market share within the rest of the world in all regions, which would make it increasingly more difficult to do it. I wouldn’t say it would be impossible but it would be increasingly more difficult. So Japan is of course an interesting area but you know how it is in Japan – it takes a long time and it takes time to get to know each other before something happens. Anders Trapp – SEB Enskilda Securities: Right, thank you very much.

Thank you, Anders.

Our next question comes from Rod Lache of Deutsche Bank. Please go ahead. Rod Lache – Deutsche Bank: Hi everybody. This whole thing, if you don’t mind just to back up a minute and just revisit that earnings bridge for 2013: based on your guidance, organic growth is roughly $165 million or so if we use the midpoint and you have a little bit of a positive as well, $80 million positive from FX. Your implied earnings are down maybe $40 million. You did comment that you have an increase in RD&E of $45 million and then a positive from restructuring savings. Can you just help us understand what actually is kind of driving this decline in still an organic growth situation? Is the decremental margin in Europe still quite high relative to the incremental that you’re getting on the new business? Is that primarily what’s driving that?

Okay. I’ll try to help you here. Given the fact that you’re seeing higher sales you also have to remember that the FX translation impacts, they do not impact margins generally speaking because you have the same impact on the revenue side as you have on the cost side generally speaking. So what you’re seeing here really is, as we talked about earlier today, higher RD&E – the $45 million – but you also see higher costs in our production overhead areas where you see mainly depreciation but also other costs related to the production increasing. We estimate that impact to be around $55 million to support the growth and to support the strong order intake we have had. Rod Lache – Deutsche Bank: Right, but that production overhead increase is not offset by the organic, just the operating leverage on the $165 million of organic growth and maybe some small margin on FX?

We normally talk about the margin between 25% and 35% on higher sales like $165 million so then you can do the math. I mean if you take the midpoint of it then you’re talking about $50 million more earnings out of the higher sales. Rod Lache – Deutsche Bank: Right. But you’re guiding to lower earnings, so you’re basically saying that the overhead increase this year is similar to the operating leverage that you’d normally get; and then you have the additional impact of the engineering. Is that basically it then?

And the production overhead, so that makes altogether around $100 million. Rod Lache – Deutsche Bank: Alright. And can you give us a sense also of the flexibility in your labor cost structure? So you have a relatively high temporary workforce compared to most suppliers. How should we be thinking about your ability to utilize that? Basically have you maxed that flexibility out at this point?

It’s different from plant to plant and from region to region. For the group we have around 18% as being temps but there’s also very big differences depending on where you are. And generally speaking you’d see much lower temps for example in Europe because Europe has been quite a depressed area for some time. So in Europe you see maybe more around 6%. Rod Lache – Deutsche Bank: Okay, thank you.

We will now take a question from Thomas Besson from Cheuvreux. Please go ahead. Thomas Besson – Cheuvreux : Thank you very much. I have three questions, please. Firstly, on your volume assumptions for Europe, you’re expecting a big drop in Q1 which I think is consistent with what everybody assumes. But don’t you believe that the recovery in Q2/Q3 might be optimistic given what we are seeing in terms of end demand in Europe currently? And generally [that’s going to come out down] about 15%, so the restocking process is actually not taking place yet at all. So don’t you think there is downside risk to your Q2 Europe production figure? That was the first question. The second, you mentioned the S-Class as being a wonderful car for you and I think it’s a wonderful car for Daimler as well. Could you remind us when the production of this car is supposed to start because we may have been delayed again a bit? Is it an H2 event for you, a Q2 event? And lastly, on the mid-term, long-term margins you’ve discussed over time, do you still view it at a similar level or should we think that with Europe unlikely to recover anytime soon maybe we’re going to get back to a sustainable level rather close to the long-term historic margin around 9% rather than 10% plus?

Okay. We can start with the first one, the volume assumptions. We don’t see a particular recovery of light vehicle production in Europe throughout the year in particular, when you look to the Western Europe. You see some recovery in Eastern Europe and some increase gradually over the year, but if you look to the light vehicle production according to IHS for Q1 and Q4 it’s almost exactly the same level. And unfortunately this is on the low level as we saw it was in Q4, so there is really no recovery we see in Europe. You can always question whether there is a further downside to this one but I don’t think anyone can speculate on that for the time being. When you talk about the S-Class and the launch of the S-Class I think you better direct that question directly to Daimler. I think that’s probably wiser for at least us here, that you talk to them about it. When you talk about mid- and long-term margin, you can see gradually during the year based on the indication that we are increasing our margin throughout the year. And as we said earlier in the presentation we will get leverage form the vertical integration and the growth. We will see savings coming in from our capacity alignment program and those savings as I said will step up into 2014 and also continue into 2015. We continue to expect also the leverage from the growth and vertical integration to continue into 2014. So those are two positive points that will and should affect our margin also later on. The depressed vehicle production in Western Europe is difficult to say anything about I would say at this time, to whether and when that is going to improve. That is as much as I can say to the margin development for the time being. Thomas Besson – Cheuvreux : Great, thank you very much.+

Thank you, Thom. Thomas Besson – Cheuvreux : We will now take a question from Andreas Koski from Nordea. Please go ahead. Andreas Koski – Nordea : Thank you. So a lot of questions have been asked but just one question on the dividend: you don’t have a set dividend policy but when you talk about the dividend you talk a lot about the cash flow. Is it better for us analysts to think about the dividend in terms of available cash flow and then how much you can pay out of that instead of focusing on DPS versus EPS? Because on DPS/EPS you have a reasonably low dividend but given the cash flow and everything we’ve heard now on the call about CAPEX investments and acquisitions, etc., perhaps it’s better for us to focus on the cash flow and this is basically the rate you will be running at going forward?

I think you should look upon it as a shareholder returns philosophy and how we use our free cash. We have if you look back a number of years been very shareholder-friendly through buyback programs and dividends, and then we ran into the situation of the depression and very difficult times. We suspended the dividend, we suspended the buyback programs. We have reinstated the dividend and we have increased it up to the highest level ever. And also during the last couple of years we have focused on our strategy of technology development. So rather than looking at anything about cash flow level or (inaudible) level etc., for the time being we are shareholder friendly. We will give you a return but now we are focusing to give you the best return through acquisition and through growth. Andreas Koski – Nordea : That’s excellent, thank you.

We will now take a question from Hampus Engelieu of Handelsbanken. Please go ahead. Hampus Engelieu – Handelsbanken : Thank you very much. I have two questions. Just looking at your organic growth guidance, if I compare this with the OEMs’ production forecasts for ’13 and look at your mix, I’m arriving at the mid of your range of 1.6% organic growth for ’13. However, if I look at Q1 it seems like you’re a little bit more bearish, issuing 4.0% while I’m arriving at a 2.5% drop in organic growth. Maybe could you shed some more light on the reason why Q1 looks a little bit weaker? My second question is on the cost cutting, further measures you’re taking of $25 million – how we should view that between the quarters, and also maybe give some details on exactly what you’re doing. Thanks.

Okay, I can try to give you some answer even if it’s not much on the first one. If you look to the growth we see an extremely depressed Western Europe and we see it is affecting very much the sales in Q1 but also throughout the year. We are also seeing a gradual improvement in launches throughout 2013 and we have important such both in active safety and also in the passive safety area that will kick in and help us throughout the year. Thirdly, this is very much dependent as you know on the mix, and we have a mix situation also here coming from the situation where the JOEMs in Japan have been hit through the political issues in China and that may remain for some time; and we would hope that would ease out throughout the year. So I cannot sort of give you any details on exactly why your estimations are not relating directly to our guidance but this is how we think and how we argue. The next one was you said something about $25 million cost cutting. Hampus Engelieu – Handelsbanken : Yeah, the restructuring program that you’re extending.

Oh, okay, you wanted to have some more details on it. Unfortunately I cannot give you any details around this alignment program and the extension of the alignment program. We have said between $25 million and $50 million and that is a quite wide gap, but if you decide to do something at this point after we have been doing an extensive restructuring program it’s becoming more and more expensive. So each thing you do is having a bigger chunk of money and that’s why the gap is as wide as it is. Hampus Engelieu – Handelsbanken : Should we think of this as frontloaded, i.e. Q1, Q2?

You should not think about it as frontloaded because there is virtually no money for it in Q1. So it’s between Q2 and Q4, and I have at this point no information to give you when. But it’s not in Q1. Hampus Engelieu – Handelsbanken : Alright, thanks.

We will now take a question from Matthew Stover of Guggenheim Securities. Please go ahead. Matthew Stover – Guggenheim Securities: Thank you very much. Most of the questions have been asked. Two question: number one, on the vertical integration should we think your level of CAPEX as a percent of sales over the next couple of years, just before the recession you were running just under 5%. During the recession you lowered that like all companies sort of to just above 3% and now you’re in the low- to mid-4%. So that’s the first question and I have a follow on.

Okay. We do think for 2013 in the CAPEX in relation to sales at the same level we have had in 2012, around 4.5%. Matthew Stover – Guggenheim Securities: Okay, thank you. And then the restructuring actions that have been announced, can you give us some context for how you’re thinking about this? Would you be surprised to see more actions announced in the future or does this sort of take into full account your current view of how the weakness in Europe will continue to play out?

$25 million to $50 million is our best estimate to date on what we see and can feel here in Europe about the environment and car production, and the macroeconomics and whatever we can factor into it. I don’t think anyone can speculate on the deterioration or improvement. This is to the best of our knowledge. We will not refrain from taking more actions if time would continue to deteriorate from here, and if it were worsening we would act. And you know we are acting fast and we will continue to do that. Matthew Stover – Guggenheim Securities: Thank you very much, Jan.

Thank you, Matt.

(Operator instructions.) Our next question comes from Agnieszka Vilela from Carnegie. Please go ahead. Agnieszka Vilela – Carnegie : Yes, I have two questions if I may. The first one is regarding the price pressure. Do you see any more price pressure right now especially in light of the situation in Europe? And my next question is on active safety, and more specifically on the vision system that you launched one year ago more or less. How is it going with the state of development there and if you could share your view of your market share envisioned?

The pricing pressure is as usual – we have not seen any deviation. We have said between 2% and 4% and that is valid as of now. A good point for you to think about is approximately the midpoint as of today. When you talk about the vision system and active safety, we are progressing. We launched it last year. We are not at the market share, the high market share that we have in the radar. We are climbing up. I don’t have the exact market share number to give you here but I can come back to you a little bit later on it, but as this is launching and ramping up it is not the expected market share that we will have in the future. Agnieszka Vilela – Carnegie : Thank you.

We will now take a question from Richard Hilgert from Morningstar. Please go ahead. Richard Hilgert – Morningstar : Thanks, good morning everyone, or good afternoon. Just one strategic question to kind of follow up on: in your presentation you talked about the issues with NCAP and that in order to make five stars, a certain level, manufacturers would have to have certain safety equipment in their vehicles; for four stars then in a following time period they’d have to at least have this equipment. And I’m curious to know in the triad markets, developed markets where average safety content per vehicle runs $350 to $400, I’m wondering what would be the average content if manufacturers were to pursue a strategy where they tried to attain the highest safety ratings possible?

It will certainly increase we believe. I have not a good number of the content in the full installation to give you here today. It depends on whether you solve this with radar technology or vision technology, etc. and how you choose to deal with it. But it will certainly increase as from where it is today. You know, today when you look to the take rates of it, it varies maybe as an option rate from very low digits, low double digits to maybe up to 50% or so before it’s becoming a standard. So it varies today, and in the event you will have this as a requirement for five stars or four stars we believe it will become a standard equipment on the cars. But I have not a good number to give you on the value as of today unfortunately. Richard Hilgert – Morningstar : Okay. And I’m sorry, can you go back to your comment about the take rate. Do you have any kind of an idea on a percentage basis how much of a change we’re talking about, just a rough guestimate?

Well as I said, it varies from lower, maybe lower double digit rates to maybe up to 50% or so when you have options. And if it’s becoming a rate of about 50% or 60% sometimes it’s migrating over to standard instead because of the strategy from an OEM. But you know, this we believe will increase, and what is also important for us is to see the migration from the top end of their platforms down to the lower parts of the segments within manufacturers and I think we have a couple of good examples here – on Mercedes where it started off in the S-Class many years ago and today it’s standard on A-Class and B-Class where you have radar equipment onto it. So I think that’s a good example of manufacturers seeing the advantage of preventive safety and not only occupant protection. Richard Hilgert – Morningstar : Very good, thank you very much.

We will now take a question from Philippe Barrier from Societe Generale. Please go ahead. Philippe Barrier – Societe Generale: Yes, good afternoon, Philippe Barrier’s associate. Two questions if I may: the first question is regarding the situation in Japan. Do you think that the lower pollution in Japan, assuming local market will decrease and exports to China will decrease again, do you think that it could eat the profitability in this region and negatively affect the full-year guidance? The second point is the investment strategy. Assuming you cannot make any acquisitions do you think that actually you can offset the lack of acquisitions by increased organic growth – [using] that higher CAPEX in the future in order to get higher growth assuming you cannot buy any companies which will be sizable in the market?

If you take the Japanese local production and what will happen, I think that the weakening of the Yen will support local Japanese production. And so that will be a positive thing for the Japanese car industry inside Japan, so that is my view here that if that will continue it will have a positive benefit from it. When it comes to the investment in CAPEX and in technology, we are spending a sizable amount already of our CAPEX and also our technology investments in R&D for products. We should remember that a majority of this is already coming from organic development, and the $500 million in active safety by 2015 is coming based on our order book that we have grown organically. Whether we are able to continue and even exceed these growth rates – we saw a growth rate here last year in active safety of close to 40%. It could be, I am not sure – it is a difficult thing to do to achieve higher rates than that but it could be possible. For us it is important that we continue our efforts in active safety, and as I said earlier I think we have a very good chance to be successful ultimately. Philippe Barrier – Societe Generale: Okay, thank you.

We currently have no further questions in the queue.

Okay, if we have no further questions I would like to thank everyone for your attention and your continued interest in our company. We look forward from here in Stockholm to speaking with you again during our Q1 earnings call on Friday, April 26, 2013. I wish you all a good day and bye-bye for now. Thank you.

That will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.