Autoliv Inc (ALV) 2010 Q2 法說會逐字稿

Good afternoon, good morning, ladies and gentlemen, and welcome to the Autoliv financial report for the second quarter 2010 conference call.

At this time all participants are in listen-only mode until we conduct a question and answer session, and instructions will follow at that time.

(Operator Instructions).

And just to remind you that this conference is being recorded.

I would now like to hand over to the Chairperson, Mr.

Jan Carlson, the President and CEO.

Please begin your meeting, sir, and I will be standing by.

Thank you.

Thank you, Ravia.

Welcome, everyone, to our earnings presentation for the second quarter.

Here in Stockholm we have our Chief Financial Officer, Mats Wallin; and our Vice President, Corporate Communications, Mats Odman; and me, Jan Carlson, President and Chief Executive Officer.

As in the past, we will open up with a review of the overall business condition along with our quarter results.

Then we will discuss the near-term outlook and the full year guidance for 2010.

At the conclusion of this presentation, we will remain available to respond to your questions.

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.

And as usual we will reference some non-US GAAP measures and the reconciliations to US GAAP are disclosed in the quarterly press release and in the 10-Q filing.

Moving on to the next slide, during the quarter we continued to execute on our strategy.

Our top line grew at a record pace, not only by outperforming the global light vehicle production but also thanks to recent acquisitions and our favorable platform mix.

This has resulted in increased market share for our company.

Financially, our restructuring efforts, working capital management and reduced CapEx spending have contributed to our record profit margin, returns and very strong cash flow.

And lastly, we remain committed to innovation and sustaining our technology lead through our small car and active safety initiative.

All of this will make our company even stronger in the future.

Turning the page, we're proud of our record performance, considering our company transformation over the last two years.

In the quarter we posted several new all-time highs, and thus exceeded the record levels from quarter one.

We had our best-ever margin, earnings and earnings per share, as well as our best return on capital employed and return on equity ever.

In addition, cash from operations was the second best ever for our company.

I therefore would like to acknowledge and sincerely thank the entire Autoliv team for your dedication to once again achieve record results, and your commitment to maintain our quality performance.

Thank you to all of you for a job well done.

Turning the page, we compare our recent second quarter performance to the same quarter before the crisis in 2008, since 2009 was an extreme year.

In spite of decline in the light vehicle production, our gross profit is 11% higher and our operating profit improved 55% to $229m.

Our action program reduced SG&A to 4.5% of sales, a level we have not seen in more than a decade.

Earnings per share improved to $1.60, while free cash flow increased to $204m.

And lastly, return on capital employed of 30% and return on equity of 23% were also all-time highs for our company.

All these results reflect our commitment to shareholder value.

On to the next page.

We had a very strong cash flow during the quarter.

Our cash from operations was $251m, mainly thanks to the sales recovery and continued improvement in working capital.

Our focus to maintain capital expenditures below historical levels allowed our company to achieve a free cash flow of $204m, the third best ever.

For full year 2010, CapEx will be less than D&A, and we expect CapEx will be in the range of $200m to $250m, or less than 4% of sales.

For the full year 2010 we estimate our cash from operations to be in the range of $600m to $800m.

Thanks to our strong cash flow, we now have the strongest balance sheet in the company's history.

This is a dramatic swing considering that we were not compliant with our internal debt policy only six months ago.

If you turn the page, you see that we have used our strong cash flow to invest in the future to improve growth, profitability and shareholder return.

Almost 50% of the free cash flow year to date has been used to fund growth, mainly the Delphi acquisition and the acquisition of the Norma minority interest.

In addition, we have spent approximately $55m to fund further expansions in Asia, accelerate research and development investments in Active Safety, along with additional restructuring activities.

Looking ahead, we will continue to evaluate the various growth opportunities and alternative uses of cash.

If we now turn the page again, we find the most recent light vehicle production according to IHS, former CSM.

As illustrated, organic sales growth outpaced NAFTA, Japan, rest of the world and global light vehicle production, while we grew in line with the market in Europe.

The global light vehicle production growth of 29% was 8 percentage points or 1.2m vehicles better than the projection in April.

For NAFTA and Europe, the light vehicle production change was 6 percentage points and 9 percentage points respectively, better than expected in the beginning of the quarter.

China and India continued to have a strong performance with increases of 24% and 32% respectively, as compared to last year.

Turning the page, we have our production figures for the second quarter, which includes recent acquisition.

The volume in our seatbelt business increased by almost 50%, which was well ahead of global light vehicle production.

For side systems, we continued to outperform the TRIAD, mainly due to new businesses, increased penetration rate and acquisitions.

For steering wheel, frontal airbags and electronic control unit, we outpaced the global light vehicle production even excluding the effect of acquisition.

So overall, we continued to increase our market share in all products mainly frontal and head side airbags due to our strong growth in NAFTA and rest of the world along with acquisitions.

On to the next page, we have the commodity impact on our business.

For the second quarter we had a negative effect of $2m versus last year, as expected.

Looking ahead, for the remainder of this year, we expect the negative effect of $13m in quarter three, and $9m in quarter four.

This negative effect is primarily caused by steel, where we have a lag effect on supplier contracts.

On to the next page.

We have the third quarter light vehicle production figure which is expected to be up 7% versus 2009.

NAFTA and Japan are expected to continue their strong performance with increases of 23% and 14% respectively.

These increases will be slightly offset by a 7% decline in Europe, due to the scrapping incentives that boosted sales last year.

However, we should remember that Autoliv now has less than 40% of our sales in Europe.

I should also mention that the US light vehicle inventory levels remain at a healthy level around 55 days, or 2.2m units.

Turning the page, we have the quarterly production trend in 2007.

Looking specifically at quarter three 2010, we expect the normal seasonal dip, as we saw in 2007.

For the full year 2010 we expect light vehicle production of 58.2m, which has improved with each monthly update since the beginning of the year.

This level is now close to all-time high in 2007 of 68.5m vehicles.

As we look ahead, the light vehicle production is expected to sequentially improve from 16m vehicles in quarter three to 17.5m in the same quarter next year, and to 18.2m vehicles in fourth quarter 2011.

Turning the page, we have the financial outlook for third quarter and our latest full year 2010 indications.

For the third quarter, our organic sales are expected to increase by at least 20% while acquisitions should add 9%.

Consolidated sales are expected to increase by close to 25%.

On a US GAAP basis, including restructuring charges, we expect the third quarter EBIT margin to be at least 10%.

Based on this current HIS light vehicle production forecast, our indication is that full year 2010 consolidated sales are expected to increase to close to 35%.

Our organic sales growth is expected to be approximately 28%, and the effect of acquisitions to be approximately 9%.

Based on these sales assumptions, our indication is that we should achieve an operating margin of more than 11%, given our current vehicle mix and expected commodity costs.

As you can see on the slide, exchange rate for this guidance and indication is EUR1 equivalent to $1.22, and JPY92 equivalent to $1.

Turning to the next page, we conclude the formal presentation on today's call.

And I would now like to open up for questions.

And I leave the word back to you, Ravia.

Thank you.

(Operator Instructions).

Your first question comes from the line of Himanshu Patel.

Please go ahead, announcing your company name and location.

Hi, from JP Morgan.

(inaudible) Just two questions first.

I'm trying to understand what you're seeing in the second half for European auto production.

I know CSM has third quarter Europe down year-over-year.

Could you just broadly comment, is there quite a big divergence between the production rate year-over-year for low-end vehicles such as A and B segment versus the high-end vehicles?

We don't see any particular difference on the different segments.

We are seeing a continued, for us, positive mix, where the platforms that we have good content on we continue to growth, like the more highly specified cars in the upper segment.

And so the platform mix is good for us.

But otherwise we don't see any difference to the previous numbers.

There has not been any change.

Okay.

And then the outperformance of your organic revenue growth relative to industry production is just incredibly steep in China right now.

I think you were up 75%, and industry was up 24%.

Can you just give us a sense for what is driving that?

And should we expect that 3x rate of outperformance to continue for a while?

Or was this a one- or two-quarter blip?

For the time being and what has been the reason for it has been a ramp-up effect of new businesses in China and in combination with a positive vehicle mix.

We have been driving sales by new cars, for example, the Geely, the Emgrand and Great Wall, the CoolBear, etc.

and FAW.

There has been a number of examples where the launches we have had over the last number of quarters is coming into effect and giving us the boom.

So we have there a positive vehicle mix.

We also believe that that vehicle mix will continue, at least for a number of quarters, which we can see for now.

Okay, useful.

And then, last question, I wanted to just come back to margins.

I think this last quarter your sequential contribution margins were fairly high, somewhere around 40%.

Could you elaborate a little bit about what stage do you sense your contribution margins really start coming down because of either OEM pricing pressure accelerating, or more likely, capacity needing to be added back into the business?

Is that -- should we think about that as something that occurs perhaps a year from now, second half of 2011?

Or could we start seeing a lot of that surface even at the start of 2011?

I leave that question to Mats Wallin.

Going forward, of course, we have seen -- looking back now, first of all, on the quarter we have had, we had quite a lot of sales increase.

We were able to take that really with the margins you have seen.

Going forward we will see higher raw material prices.

So they will, of course, impact partly the margins we're going to see going forward.

But as we have said, we have been -- we're going to have a contribution margin between 25% and 35%.

We are in the high end.

But we might be impacted by the raw materials going forward.

And then just one last, if I could.

In raw materials, you guys talk about that a lot, but if you go back to the '05 and '08 commodity spike, it was only worth about, I think, $60m or something per year, which worked out to be about 1 percentage point on your EBIT margin.

Your EBIT margins right now are low double digit at worst, and your long-term guidance is 8.5%.

So I'm just trying to reconcile, aside from commodity costs, what else is it that's going to bring those margins down?

Because it doesn't -- assuming the rate of commodity inflation in this next step cycle is not that different than what you had witnessed last few cycles, it seems like you can't really bridge that down to a 8% to 9% margin if you're at 11.5% or whatever by the end of this year.

Commodity prices could of course affect it.

You never know where it's going to go.

And customer prices may also affect the situation, even if we have not seen any increased pricing pressure above the 4%, the 2% to 4% range, and it has not gone above, so far, even during this quarter.

If you look onto the production trend, on the current trend that we are seeing for the time being, you could say that we could foresee a double digit operating margin, given the current trend.

Great, thank you very much.

Thank you.

Our next questions come from the line of Rod Lache.

Please go ahead, announce your company name and location.

Good morning, everyone, it's Pat Nolan in for Rod today.

Good morning.

I've just got a couple of questions.

First on the currency assumption, it seems pretty conservative versus where we are now.

Is there something as far as hedges or something that's maybe impacting you there?

I give the word to Mats.

Can you repeat the last sentence, please?

Are there any hedges or something, currency hedges that you have in there that's maybe negatively impacting it?

No, we have no currency hedging.

We have no currency contracts brought forward for our currency [quota].

So this is the sort of currencies we have given us of today, and you have seen on the outlook the currencies we have used.

It has been -- we are based on the euro, $1.22 euro/dollar, $1.22.

If you would recalculate this to today's rates for the third quarter this would have -- the currency rate that we had before we started this call, we would have an additional top line of approximately $40m and approximately a net EBIT in the range of $4m to $5m.

And can you just elaborate a little bit on raw materials?

I know there's a lag impact.

But do you see raw materials actually becoming a slight tail in for you as you move into the first half of next year?

Yes, you're absolutely correct.

If the current trends will prevail where the prices are declining, we had a peak as we see it in raw materials in the late part of April, during May and first, absolute first part of June.

We had some renewals of contracts we were forced to execute during that time.

And therefore we have now the lag effect here coming in predominantly in third quarter but also somewhat in fourth quarter.

If the current trends will prevail raw material prices will come down during first half of 2011.

And could you maybe comment on what you're -- I know you're forecasting pricing getting tougher going forward, but what are you seeing as far as the back half?

Has that pricing pressure really picked up from the customers yet, or are we still yet to see that?

It has not yet picked up.

It's always difficult to give any forecast on this one.

We haven't seen any pricing pressure going above the 4% that we normally indicate varying between 2% and 4% depending on where we are in the business cycle and over product.

Is it running towards the high end in that range in the back half?

We said in the previous earnings call that we were running towards the high end of that range and we are still in the same range.

Got it.

Thanks very much.

I'll get back in the queue.

Thank you.

The next questions come from the line of David Leiker.

Please go ahead, announce your company name and location.

Good morning or good afternoon, everyone, I guess.

Good morning, David.

If I look at slide five, I guess, that's where you look at 2010 versus 2008; I think it's a great perspective of the change in profitability of the business at this level of volume.

But the sales number is relatively flat.

Can you reconcile that to me and the organic growth opportunities that you have to help us understand, I would expect that your revenue numbers [and] production to be higher than this not necessarily lower.

Yes.

There is this change mix here because the decline has been in, for instance, Western Europe where the content per vehicle is much higher than in China where we have had the growth.

So that shift has affected, of course, our business more than the vehicle production in general.

One unit is one unit, but the units now produced in the emerging markets have less sales.

Okay.

Maybe (technical difficulty) covered that.

Secondly, as we look at China there is talk about inventories being too high there and production starting to come down, How much of a pullback are you expecting or do you see in your production schedules in China going forward here sequentially?

If you look onto the production schedule ahead, it has been over the last couple of months roughly around 800,000 passenger vehicles.

In addition to this, you should have somewhere between 150,000 and 200,000 minivans.

Minivans are the small buses with significantly less equipment and lower content per vehicle.

We would assume that the passenger vehicle level will remain at the approximately 800,000 level for the rest of the year.

And we would assume also that the minivan level will remain on the level between 150,000 to 200,000 units per month for the rest of the year.

That is what we can see.

And this is somewhat lower than we saw in the beginning of the year, but that is what is our best estimate is of now.

That is looking out a couple of months or through the end of the year do you think?

Through the end of the year it's approximately on that level.

It can shift a little bit between month to month.

And if you look on China as such the traditionally season -- lower seasonal level is in April to July.

And if you count on to the first month, the first half of 2010 you have had an increase of 42% in registration in China.

But we expect this to come down a little bit here to this level I just mentioned, which has been the case -- the level for the last couple of months.

July may even be somewhat a little bit lower, but then we estimate that to pick up a little bit here during the fall.

Okay, great.

And then the last item here I had an opportunity a couple of weeks ago to see the city that you guys built in Gothenburg on the Active Safety.

And as you do your work through Active Safety, do you see yourself accelerating (inaudible) increased R&D spending around Active Safety.

And is that going up against sequentially from what we talked about three months or is that just a fairly steady level of spend as we go forward here.

It's not going up sequentially.

We are -- we talked about an initiative of $30m to $35m over two years, and that is what you are seeing now coming through.

We decided upon this in -- during first quarter and we are implementing this and ramping it up.

So this is the same level as we have seen.

No additional on top of that.

And then can you talk at all about the timeline where you're in a position to start to talk about new business and where it's there at all, what kind of timing we should have and is there something -- tell me about that?

Well, I think we are -- we are never, as you know, talking a lot about the business award and order intake, but I can say that we have been very successful in taking new business relative to its low level, its existing low level in the Active Safety area today.

Still, measured from a corporate standpoint it's a very low, low level but from an Active Safety point of view for Autoliv it is significant that we have taken new business.

And as you know, we are the world's leader in radar, and we are continuing to maintain that position.

And then, lastly, as you continue your investment here, I'd like you to comment on feedback you got from your customers in terms of your technology, your product offering in this space relative to the competitors, and you are going against -- up against some different folks than you usually do.

Well, I think we have mentioned before that we have taken a larger portion than our average market share of all the awards that have been out there.

So that, I think, is the best proof that our technology and our offer is more competitive than our competitors' offer.

And that they appreciate our technology lead.

Okay.

Thank you very much.

Thank you, David.

Your next questions come from the line of Johan Trocme.

Please go ahead, announce your company name and location.

Johan Trocme from Nordea.

Good afternoon to you.

Good afternoon.

A question regarding your position in the market, you noticed during the intense crisis period that you won more business than your competitors because of customers' faith in your relative strength and position.

Looking at the current tendering activity for deliveries to platforms among your customers, do you see any signs of those forward moves in market share and position being perhaps more permanent in nature?

Or do you see customers showing a tendency now to start to want to give more business back to customers now that it is more evident that they have the health to survive longer term?

We are still seeing an advantage.

We are still seeing an overrepresentation in awards to Autoliv relative to our global market share, so that is still the fact.

It's too early to say something about the market share, because even the orders we took a year ago are still not in production.

And even if we have been successful or very successful in gaining a lot of the orders it's all about the success of the platform and how that would be received when it's coming out.

Of course, if you get a number of awards, and if you get the lion's share of that you have a good base.

But we will have to wait for a year or so more before we can see the final result part of this good order intake.

Okay I see.

But at least you have seen the trend being sustained in that you seem to be gaining a bit more still than you did say two years ago?

Yes.

Okay.

Thanks very much.

Thank you.

(Operator Instructions).

Your next questions come from the line of Anders Trapp.

Please go ahead, announce your company name and location.

SEB Enskilda in Stockholm.

I have one or two questions.

Well, first of all, actually when listening to what you're saying and seeing what's happened in the last nine months I just sort of wonder, so what can go wrong.

Well, I am sure there are many things that can go wrong, but I think for the time being we are hanging in there and performing and executing to the action program that we have in place.

And the light vehicle production seems to be stable and continuing upwards, so it looks good.

Very good.

On the (technical difficulty) you had, if I understand it, or if I understand it correctly, the reason why you did better than you had guided for in terms of profitability, margins were positive, sales a little bit better but also maybe more importantly the mix was better than expected.

Is that something that you include also in your forecast for the full-year guidance or for the Q3 guidance that the positive mix will continue?

And what do you see for next year in terms of the mix?

We have looked on the mix effect for the third quarter and also as far as we can see into the fourth quarter.

The longer you come the more uncertain it is, because we are relying not on our own [call offs] in the production system but only on the IHS forecast.

For -- but it will continue, the positive mix, to answer your question, will continue for the third quarter.

And it will also continue as far as we can understand for the remainder of the year.

We have less of visibility into 2011 of the specifics around the vehicle mix.

But as I said before if the trend will continue we would also continue to do good results.

To look at the mix now, let's say make it simple large cars versus small cars, and compare it to before all the incentives, etc., are we back now?

[If I said] on the large cars, so are we back now to the pre-incentive situation in US and Europe or are we still on the high-end now for small cars than before?

I think you are much better back to a normal balance level, but still in Europe it's very much dependant on the export situation for BMW and for Daimler in particular.

You are seeing a skew toward the larger, the higher end specified vehicle still.

So that's still on the situation in Europe, mainly due to the export part of it.

Finally, a question on the potential component shortages or especially and notably electronics now that a lot of companies have been complaining about that in these Q2 reports.

Have you seen any kind of electronics shortage coming up?

Yes, we have seen electronic shortages and we are, as all and everyone, also hit by this.

But we have been able to compensate for it.

We have found other solutions for it.

And we have not had any production stops or anything similar to around it.

But we have been concentrating extra efforts to deal with the situation, yes.

Okay, thank you.

Thank you.

(Operator Instructions).

The next questions come from the line of Peter Testa.

Please go ahead, announce your company name and location.

Yes, it's Peter Testa from One Investments.

I had a couple of questions please.

I was hoping to help better understand the balance between better mix and better penetration when looking at your sales growth.

And I was wondering if you might be able to help us understand the magnitude of the gap between your growth and that of the market, for the Triad is one part of the answer and the rest for the other part of the answer.

In some sense it's -- what of that is coming from mix versus higher penetration of the market?

If your -- are we talking about Europe in specific or we --

No, we talk about Triad as one part of the answer, so Europe, Western Europe, US, Japan and the other part of the answer because I assume it's quite different in the rest of the world, places like China, India and Indonesia, etc.

Okay.

If you take the recovery in Japan it has been a lot of large cars.

The recovery that we have had in Japan is coming from a lot of the large cars that is going through the export, where we have higher content.

And we have had a favorable mix in Japan as a lot of these Japan cars that we are onto are export vehicles.

You have examples like the Mitsubishi Outlander, you have Nissan Serena, you have Lexus Lx470, etc., Toyota Land Cruiser, and so all of them have very high content with a lot of equipment which is favorable to us.

If you look on the favorable mix on the US side, we have had strong sales to Ford F Series, which is a substantial addition through the launch, the recent launch that they had.

We had also Chevrolet Equinox, we have the Traverse, we have the Silverado, and also the launch of the Grand Cherokee and the ramp-up of this that has contributed to us, all cars with good launch -- with good content.

In the US, as you know, there is mandatory high penetration of (inaudible) so the delivery value in average of course in the US is the highest in the world, so that is causing us a good thing.

When you look onto the European side we did not outperformed Europe, we outperformed the rest of the markets but we were in line with Europe.

We still also there have a nice mix with the larger cars, as I mentioned to (inaudible) here before like the Mercedes E Class, the C Class, the ramp up of the 5-Series.

And also the Volvo XC90 actually which is a relatively old car, but still enjoyed a nice quarter that went by.

The launch was also here in Europe good for us, the Renault Fluence with a delivery value of $155 where we have a lot of content onto this vehicle.

That is the vehicle that is now launching predominantly for the Eastern Europe markets and also the -- predominantly the Eastern Europe is based on a Megane platform.

So that's really the rationale behind our performance and the mix.

Okay, and the rest of the world market the extent to which that's really more penetration versus the mix of sales?

Rest of the world if you look onto China, as I mentioned before, we have had ramp up effect in China, the Geely, Emgrand, Great Wall, CoolBear all launches they've had recently have been ramping up with relatively high content for being cars in China.

And, of course, also the same goes for South Korea which also has been a favorable market for us.

So penetration, if you look to penetration in China it is increasing in the upper segment, but the average content is stable because you are filing up with very low content cars.

So penetration and ramp up in China is key to the word.

Good mix, platform mix in Japan content cars on export is the answer in Japan.

Fine.

And then one question just to go back to one at the beginning of the call, I'm trying to answer at which point you have to start making more investment in capacity.

So where we might start to see CapEx increase because you note in your slide your Q2 2010 is pretty close to Q2 2008 in terms of sales now.

So is there a point looking forward where we should expect to start to see maybe more capacity added higher CapEx?

Well, if we look into our CapEx now for 2010 we expect 2010 CapEx to be between $200m and $250m.

And if we also look into the need for CapEx, I mean if we talk about China and Asia we see, of course, a greater need to do expansion there where we are having higher growth.

And that will -- if we look into longer perspective also increase our CapEx in terms of a ballpark of 4% of sales if you look beyond 2010.

Okay.

We are looking towards expansion.

Due to the ramp up and to the increase of the emerging markets, we are going to see expansions of sites and production facilities in China, in India, in Thailand, etc.

So we are going to see expansions of that.

And we are looking for actually seven plant extensions.

Not of them all decided right now, but that is what we are currently looking on.

But all of these expansions are included in this indication of roughly 4% of sales in CapEx.

Very good.

Thank you very much, I appreciate it.

Thank you.

We have no further questions at this time, I hand the conference back to you sir thank you.

If there are no further questions I would like to thank you all very much for your attention and interesting questions.

I look forward very much to the next earnings call on Tuesday, October 26.

And I wish you all a good time until then.

Thank you very much.

Thank you, ladies and gentlemen.

Thank you for your participation.

This concludes today's conference.

You may now disconnect your lines.

Thank you.