Autoliv Inc (ALV) 2007 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Autoliv Conference Call hosted by Jan Carlson.

My name is [Stefana], I will be your coordinator for today's conference.

For the duration of the call, you will be on listen only, however at the end of the call you will have the opportunity to ask questions.

[OPERATOR INSTRUCTIONS].

I am now handing you over to Mr.

Jan Carlson.

Thank you.

Thank you Steffi.

Welcome all of you to this presentation of the second quarter results for Autoliv.

Here in Stockholm we have our Chief Financial Officer, Magnus Lindquist; our Chief Operating Officer, Benoit Marsaud; our VP of Corporate Communications, Mats Odman; and me, Jan Carlson, Chief Executive Officer.

We intend to run this call as we usually do, starting with a presentation that is available if you click on the news calendar on the front page of our corporate website.

You should get there, and thereafter we will open up for questions, which we will do our very best to answer.

If we turn the page, you will find the Safe Harbor statement.

I will not go through the content, but as usual it is an integrated part of this presentation.

Going to the next page, we have the sales trend, and reported sales for quarter two were up more than 7%, corresponding to $120 million compared to the second quarter last year.

Organic sales were up 3% or $53 million, and up 1% more than expected.

This was primarily due to stronger light vehicle production than expected in Europe.

For Airbag products, we were up organically 2%, or $20 million.

This was mostly driven by the increase in sales for inflatable curtains.

Seatbelt products were up organically 6%, or $33 million, primarily driven by an increase for pretensioners, also including active seatbelts.

Geographically, we have an organic growth in all regions for the quarter, but the increase comes mainly from Japan and Rest of the World.

For instance, during second quarter we had more than 40% organic growth for seatbelts in Japan.

For the first time, Autoliv exceeded $1.7 billion in sales in a single quarter, and for the last twelve months we also had record sales of over $6.4 billion.

Looking on the next page, we have the light vehicle production.

The figures on these slides come from CSM and JD Power.

If we start from the top, we start with North America, the Detroit 3 is down close to 9%.

However, this is not as much as in quarter one, where they were down more than 14%.

The New Domestics continue to perform well and were up over 13% for the quarter.

In Europe, it's Eastern Europe that is the driver for the organic growth, up close to 16%.

For Japan, there is no significant change, and finally for Rest of the World, there is an increase which is mainly driven by China, South Korea and South America, all up over 10% respectively.

These countries are also the largest producers outside the Triad.

As you know vehicles produced in the Eastern Europe and Rest of the World still have a lower safety content, and we estimate the value of, for Rest of the World to be about US$170 per vehicle on average, while for the Triad the average value is over 300.

On the next page, we have our production numbers, which should be compared the light vehicle production on the previous slide.

Seatbelt products continue to show strong growth due to new business with several car models that we have, for instance the Honda CR-V, the Nissan Qashqai, Ford Mondeo, Opel Corsa and the ramp-up of production for several other vehicle platforms, particularly in China.

Pretensioners are also up 12% and mainly for the same reason as I have mentioned for seatbelts.

Frontal airbag is decreasing mainly due to the expiration of certain contracts actually.

Side systems continue to increase due to a higher penetration of inflatable curtains, mainly in North America.

Steering wheels are also up.

Organic sales grew by 16% in US dollars while the number of units produced grew by 12%.

This positive difference is due to mix effects, for example more leather wrap steering wheels.

In summary, you can say that we are taking market shares in seatbelts, pretensioners and steering wheels and we are growing in line with the markets for the side system.

On the next page, we find organic growth versus light vehicle production.

This slide is now slightly modified from our previous earnings calls.

Now we use global light vehicle production as comparison instead of light vehicle production in the Triad.

And that -- it seems the data from Rest of the World is becoming more reliable and this part of the market is also becoming increasingly important.

From the red line, which represents the change in global light vehicle production quarter-over-quarter, you can see that there is an estimated increase of 3.6% for second quarter.

This is basically in line with organic growth of 3.3% represented by the blue bar.

As many of you have read in the earnings release earlier today, we continue to outperform the light vehicle production in the Triad, and this is also still our dominant market.

As you also can see, we continue to have positive organic growth as we've had for the last three quarters, and we expect also this to continue for the coming quarters.

Turning into the next page, and we will find gross margin.

Gross margin of close to 20% was unchanged from first quarter this year, but down 1.5% compared to the second quarter last year, and the decrease is due to a combination of strong pricing pressure, sales mix effects, and higher direct material costs.

On the next slide, you can see that the raw material increase for this quarter was $5 million compared to second quarter 2006.

And as I said in our first quarter conference call, we expect raw material cost to increase by at least $20 million for the full year, compared to last year.

And we now see $15 million after two quarters.

However, we still believe that the raw material prices will be relatively flat in quarter three, and therefore we feel confident about a full-year guidance of approximately $20 million.

If we talk about these (inaudible) suppliers, also here we saw an increase of close to $3 million, about the same level at for quarter one.

And we will see also the same level -- we expect to see the same level going into quarter three.

So, $3 million for the three quarters respectively.

Turning the page and you could see the operating margin development.

The operating margin reported for the quarter was 5.9%.

The underlying operating margin adjusted for the legal provision was 7.7% compared to 8.8% last year.

This decrease of 1.1% is mainly related to gross margin and SG&A, and it's also partly offset by an improvement in RD&E.

Next page shows an explanation to the increase in this legal provision.

And the lawsuit that we had that we started in a court judgment on this July 11 was based on a claim of a former supplier that alleged Autoliv's predecessor, Morton International, of having breached the terms in a supply agreement.

And the agreement was signed back in 1995 by Morton; as you know, former Autoliv merged with Morton in 1997.

And the case did not involve any claims of personal injury or product liability or anything similar, and the supplier actually doesn't exist today.

We have calculated the post-judgment interest based on our attorney's reading of the law, but as you know the court will make the final decision and final calculation.

However, we do not believe any difference will be material.

This case was also disclosed in the annual report for 2006 and also in prior annual reports going back as long as 2003, when the lower court produced its judgment.

If we turn to the next slide, we have the income statement and I will not go through all the details and all the figures on the slide.

I will comment on the main changes.

And sales and gross profit we have already covered, so I will start with SG&A.

Here we see an increase of close to $12 million or 5.4% of sales, and half of this increase is due to currencies and other one-time effect.

And the other half are planned increases in Asia and expansion in electronics, and also temporary increases in professional services.

If we move down, RD&E is almost flat, but has decreased in relation to sales from 6.9% to 6.3% and other operating costs reflect the increase in the legal provision and $6 million is also related to restructuring activities.

Going further down on this slide, we see that net interest is up $4 million.

It's mainly related to higher interest rates, share buybacks, and the Mando acquisition we did in quarter one.

And under minority, we see the favorable impact actually of this Mando acquisition also.

Finally, reported earnings per share is $0.72 for the quarter.

If we adjust for the increase in legal provision, it is $0.98.

The stock repurchase program, we had a favorable effect on the EPS of $0.02.

Turning the page again, you can see a table showing the impact or the increase in legal provision.

I will not go through the figures here on this slide, but it should give you support when you analyze the underlying performance and this one-time effect.

Turning to the next slide, we have return on capital employed, and capital employed is slightly above 15% adjusted for the legal provision, reported return on capital employed is 11.9%.

The underlying decrease here compared to last year is mainly due to lower gross profit, but also higher capital employed resulting actually from higher working capital and to the Mando acquisition.

Next page is return on equity.

It went the similar way as for return on capital employed, exclude the one-time effect, then look on the underlying figures; we have a decrease of 1.4% compared to quarter two last year.

This decrease is mainly explained by lower gross profit, but also somewhat higher equity.

Turning the page, and you can see key figures both as reported, but also as pro forma for second quarter 2007.

The pro forma column here are excluding the increase in legal provisions.

Most of the key figures we have already discussed actually so if we look on the operating working capital, you can see that we have a significant decrease compared to previous quarter.

The decrease is mainly related to lower accounts receivables, lower inventory levels and higher accounts payable.

If we look on the net debt, it's up $79 million compared to quarter two 2006, which is actually almost the same amount as the price of the Mando acquisition.

And this means that we have used all remaining free cash or about $335 million during the last 12 months for share buybacks and dividend payouts.

On the next page, we have cash flow.

Cash flow from operations has improved by approximately $150 million compared to second quarter last year.

The increase of legal provision has a negative effect on the net income, but the cash flow is offset by a reversal that is reported in the non-cash items.

Higher CapEx this quarter is partly due to a sale of asset last year as we also talked about in the previous quarter.

The $230 million after CapEx is a record high for any quarter and it flows to our annual target of at least $0.25 billion.

And we are at $167 million after six months this year and $340 million for the last 12 months, as you can see, which is the best last 12-month period since 2007.

Turning the page, and we will find headcount.

Total headcount for the group is down 200 people compared to quarter one this year, and the decrease is coming from a reduction of nearly 500 in high-cost countries, partly offset by an increase of 300 in low-cost countries.

You see here a short reduction in Mexico and that is mainly a reflection of lower demands from the Detroit 3 car manufacturers.

48% of our headcounts are now in low-cost countries versus 43% a year ago, so a 5% increase in the low-cost country headcount.

Looking on the next page, you'll find share buyback, the slide showing the share buyback.

And in the first half-year we bought back approximately 1.7 million shares.

And that is returning close to $100 million to our shareholders.

Second quarter, we bought back 1 million shares, and in the second quarter it was returning about $50 million.

And regarding dividends, we have for quarter three an unchanged level of $0.39 per share.

This gives approximately $125 million in yearly payouts to the shareholders in dividends.

And in the last 12 months, we have bought back shares for 250 million and thereby returning as I said to you earlier about $335 million to shareholders in dividends and share buyback programs.

Remaining mandate authorize the management to repurchase another 4.4 million shares.

Next page shows the forecasted light vehicle production for North America according to CSM.

Quarter three shows a record recovery compared to last year and for quarter four the outlook is relatively flat.

Together with a weak light vehicle production in the first half of 2007, it looks like this year is another year of decrease in light vehicle production for North America.

On the next page, we find the forecast for Europe and for quarter three we see an increase of 5% and that is due to an increase of 21% in Eastern Europe, while the light vehicle production is expected to be flat actually for the Western part of Europe.

Quarter four looks also good with an increase of close to 6% and light vehicle production in Europe shows growth of close to 5% for the full year, but virtually all of it will be in Eastern Europe and not in the markets with a higher size [inaudible].

If you turn the next page, you see the figures for Japan.

It shows a small increase of about 1% for quarter three, but all in all it's relatively stable development for the second half of the year.

And finally then, on the next page, you see the figures for Rest of the World.

We could see a strong increase as expected, and also as in the previous quarters, quarter three is expected to be up close to 14% and quarter four up close to 12% actually.

Overall, second half shows a stronger light vehicle production globally than the first six months of the year.

Finally on the next page, we have the outlook.

For quarter three, we expect to increase our organic sales by approximately 4%, and given the current exchange rates we estimate a consolidated sales increase of close to 7% for quarter three.

EBIT margin for this quarter, quarter three, is estimated to approximate at 7%.

For the full year, we estimate organic sales to grow by more than 3%, and for the full year EBIT margin we stick to our guidance from April and we expect to be close to 8% underlying, and reported to be close to 7.5% due to the increase in legal provision.

As you all understand, to reach this full year's guidance we expect an EBIT margin of about 9% for quarter four this year.

So to sum up quarter two, we had reported very strong cash flow, we had reported strong sales, we have continued organic growth, and we believe this gives a solid base for continuous growth.

So the next slide concludes our presentation.

Thank you all very much for listening and we are ready to take your questions, and we will try to do our best to answer them.

Thank you, ladies and gentlemen.

[OPERATOR INSTRUCTIONS].

We've got a question coming from the line of Alex Toms from Morgan Stanley.

Please go ahead with your question.

Hi, good afternoon everyone.

Just a quick question on, what gives you the confidence in the margins in Q4?

Is it cost cutting?

Is it new programs coming on stream?

Why are you so confident about doing [non-step] margins in Q4?

And then the second question is on D3 production in Q3 and Q4, can you just give us a bit more flavor about what you are expecting there?

Are you expecting Q3 to artificially be high because of strikes, etcetera?

Thanks.

If we start with the first question, I could leave the second question to Mats.

The first question on the quarter four margin, traditionally quarter four is a strong quarter for us.

We have, as you all are aware of, initiated actions on the margin side.

We will see a number of these actions to start to pay off in the quarter four.

So that is what we are expecting to happen.

We are also expecting a continued organic growth in quarter four and also traditionally on the engineering side, a lot of the engineering income is traditionally coming in the fourth quarter.

So that should by itself help improving the margin in quarter four.

So those actions continued strong growth in the sale side, action that we have initiated and also on the -- the expected engineering income in the fourth quarter should be at this 9% level for quarter four mainly.

The second question, I -- (multiple speakers)

About the vehicle production, I think we will start then with North America.

The transplants of the new domestics, whatever you prefer to call them, they will continue at about the same pace as in the second quarter something like 30%, whereas the big three, they will have a small uptick of almost 2%, but that is from a very low level last year.

So the comparison is quite easy and if you look at Europe, we have said or rather this CSM and JD Powers that there will be an increase of 5% in Europe and here the French customers, which are very important for us, will not be so strong, whereas the others where we are not so -- have such a high market share will do a little better.

So we will have a rather negative mix effect in Europe.

You asked about strikes and such things, but I am afraid nor we -- neither these institutes can foresee that so of course you have to take these numbers with a pinch of salt.

And we have seen also a very strong swing from the figures these institutes had at the beginning of the second quarter for Europe and the final outcome, so you should be aware of that they are not very -- that you have to take them with a pinch of salt.

Okay.

Thanks.

Thank you.

We have got no further questions in queue.

[OPERATOR INSTRUCTIONS].

We have got another questions coming for you from the line of Jon Hyltner from Swedbank.

Please go ahead with your question.

Hi, just a question regarding market share.

You had an organic growth that exceeded the production growth in the Triad, is this due to a gain in market share, or had you grown more outside the Triad or is it due to mix of effects, etc.

if you could please shed some light on that?

As we said, we are -- we believe we are gaining market shares in seatbelts.

We believe we are gaining market shares in steering wheels, and actually we are also believing we are gaining some market shares in electronics.

That is primarily outside the Triad I would say in Japan and primarily outside the Triad.

Okay.

Thank you.

And one question regarding the cash flow, if I may.

You reduced working capital quite significantly and are reaching your target of working capital of 10% relative sales.

Do you expect to keep this up through the second half of '07 and keep working capital at these levels?

We are targeting that, but as you know we have a seasonal impact in the working capital.

So, normally the third quarter is a little bit weaker because of the vacation period and so on.

So, normally it's a little bit weak in the third quarter and a little bit better lower working capital in the fourth quarter.

So, all in all, we are just driving it to maintain this level.

Okay, thank you very much.

Thank you.

The next question comes through from the line of Frederic Labia from Societe Generale.

Please go ahead.

Hi good afternoon.

A quick question, you said previously that you were expecting the margin to improve in Q4 on the back of measures you have taken to address the cost structure?

Could you just maybe detail these measures and see what is going to be short term, what is going to be long term?

And just a question to rebound on the previous one.

You said if I look at your forecast for Q3, you say that the organic growth is going to be close to 4% just in line with positioning the Triad meaning that you don't expect to gain any market share in Triad or elsewhere, so is there any reason for that?

We thought with the measures, I would say it's a little bit too complicated to go in all the details, but as you know when you run a business, you take all sorts of actions in taking out people on the overhead side, [inaudible] up the production overall in the plants and you can take a certain level of measurables that will improve the margins, generally talking and we would see a number of these effects, number of these actions start to take effect in quarter four.

When we talk about the margins in the Triad as we expect, we don't see we are gaining market shares really in the Triad for quarter three, that's the situation.

Okay, thanks.

Thank you.

We've got a question coming through from the line of Patrick Nolan from Deutsche Bank.

Please go ahead.

Hi, I just had a question in reference to the cash flow, any consideration about the pace of buybacks in light of the cash flow coming in better than your expectations?

Well, you will see that on Monday as normal.

Actually we don't -- on Tuesday.

As you know, we don't comment on the actions in the buyback mandate that we have in these calls.

Okay.

And can you just talk about the cost saving actions, I know you just touched on the headcount reductions that will start to flow through in the fourth quarter, but what other measures have you been taking and how do you expect that to flow through not only for the rest of this year, but through next year as well.

Well, we have continuous activities in cost cutting activities, cost cutting actions actually and that is regarding moving a larger portion of our sourcing from high-cost country to low-cost country.

We are continuing to transfer people from high-cost country to low-cost country and as you have seen here now we are have increased since the last year 5% of the headcount in low-cost countries and we are now at 48%.

We would not hesitate to go even further maybe up to 60% on the headcount in the low-cost countries.

So there is one measurable that we will continue to increase.

We'll continue to increasing the efficiency in our products, to redesign our products, to make them even more cost efficient and also to adopt them more as we talked a little bit about in our previous call for more sourcing in low-cost countries.

So, there are a number of activities ongoing and have been ongoing that we may have reinforced even here now in the second quarter for cost cutting activity.

Is there a particular quarter that redesigns with flow through?

Like redesign (multiple speakers).

No, you cannot say that, redesigns and cost reduction versions of different products, it's a continuous flow, you cannot refer to any particular quarter on that one.

Okay, thank you.

Thank you, we've got no further questions in queue, so I hand over to the host to conclude today's conference.

Very well, that was not so many questions.

We thank you very much for all of you participant and -- participating and listening.

We are here to report on the third quarter results on October 25 and so until then I wish you all a very happy vacation or summer -- for the rest of the summer and talk to you on October 25.

Thank you.

Thank you for joining today's conference.

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