Autoliv Inc (ALV) 2011 Q2 法說會逐字稿

Good day, and welcome to the Autoliv Q2 2011 results presentation conference call.

Today's conference is being recorded.

At this time, I'd like to turn the conference over to your host today, Mr.

Jan Carlson, President and CEO.

Please go ahead, sir.

Thank you, Rowena.

Welcome, everyone, to this earnings presentation.

Here in Stockholm, we have our CFO, Mats Wallin, and our VP Corporate Communications, Mats Odman, and myself, Jan Carlson, President and Chief Executive Officer.

We will open with a review of our second quarter results, including an overview of general business conditions.

Then we will discuss our near term guidance and full year 2011 indication.

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.

As usual, we will reference some non-US GAAP measures throughout the presentation.

The reconciliations to the US GAAP are disclosed in our quarterly press release and in the 10-Q filing.

Moving to the next slide, I would like to start out by mentioning that our continued commitment to quality has allowed General Motors to take our Company off new business hold.

We achieved a double digit operating margin for the sixth consecutive quarter, despite incurring extra costs related to the unpredictable light vehicle production recovery and industry component shortages.

I would like to extend my sincere thank you to our employees for their efforts and continued support to achieve these milestones.

As you already know, both the Department of Justice and the European Antitrust Commission has commenced investigations into anti-competitive behavior among automotive suppliers.

As we stated in our press release less than two weeks ago, we cannot elaborate on any details around the antitrust investigations, as they are ongoing.

Our stronger than expected performance in Europe, the Americas, China and rest of Asia, allowed organic sales to grow by 5%, while the global light vehicle production decline was 1%.

Our strong growth in active safety, along with our solid growth in the emerging markets, will continue to provide growth opportunities in the future.

On to the next page.

We achieved our best ever sales for a second quarter.

Our organic sales growth of 5% was ahead of our flat growth expectation assumed in our guidance.

This sales improvement allowed Autoliv to reach an EBIT margin of 10%, despite incurring extra costs related to the Japanese production disruption and industry component shortages.

These extra costs were mainly related to the slow production schedules early in the quarter, which ramped up shortly later in the quarter, along with managing some tight component supply situations.

The Japanese OEM recovery is progressing ahead of schedule, and most of those OEMs are expected to return to normal deliveries during the third quarter.

And lastly, our earnings per share return on capital employed and return on equity were the second best ever for a quarter two in the history of our Company.

Turning the page, our cash from operations was $132 million for the quarter.

The working capital headwind was mainly due to the negative effect of the release of tax reserves and tax payments.

Capital expenditures of $91 million was 4.4% of sales.

We now raise our full year 2011 CapEx estimate to around 4.5% of sales, from a previous range of $300 million to $350 million, corresponding to around 4% of sales, if it's required to support our expected growth in the emerging markets and active safety over the next couple of years.

The reason for our higher CapEx investments, you can see on the next slide, where you can see the updated long-term outlook according to IHS.

As illustrated, the global light vehicle production is expected grow rapidly, and reach 84 million vehicles already in 2012, and more than 100 million vehicles within six years.

It is this sharp increases that drives our need for additional manufacturing capacity, and CapEx especially, given the growth is highly concentrated in the emerging markets.

On the other hand, the developed markets will barely recover to 42 million vehicles in 2017, the same levels as we saw in 2007.

In 2012, emerging markets, rest of the world, and Eastern Europe, are expected to increase by 12%, or 5 million vehicles, and 20 million vehicles over the next few years, of which China and India are expected to increase 15% and 17%, respectively.

In the developed markets, Western Europe is expected to be flat, while Japan and NAFTA are expected to recover by 31% and 10% respectively.

Therefore, we must continue to adapt and further increase our capacities to support the future global light vehicle production footprint as highlighted on the next page.

Here, we can see some of the key investments to support this expected growth.

During the second quarter, we spent close to 50% of our capital expenditures on these priorities, and we raised our CapEx spending estimates for China from $100 million to $150 million over the three years 2010, 2011, and 2012.

With these priorities, we are increasing our manufacturing capacity in the emerging markets, and accelerating our capacity and capability in active safety.

In addition to accelerating these capital expenditures, we are adding expansion costs in the P&L for the future growth in China and Brazil, and continue to accelerate our engineering development in active safety.

For example, over the next three years, we expect to double our sales in Brazil, and increase our sales in China, with up to 50%.

On focusing on growth opportunities, we will continue to remain shareholder friendly, as illustrated on the next page.

On this slide, we have our dividend trend.

Since reinstating the dividend in the second quarter of last year, we have increased our dividend per share by 50% over the last four quarters.

The dividend declared for the third quarter of $0.45 per share represents an annualized payment to shareholders of approximately $165 million.

The dividend payment in the third quarter of a little more than $40 million is a 32% increase from the previous high before the crisis in Q3 2007.

Turning the page, we have our production figures for the second quarter, which include recent acquisitions.

In almost every product area, we continue to significantly outperform the light vehicle production.

The only exception is with steering wheels, where we are essentially in line with global light vehicle production.

Our active safety business continue to grow very fast, and we expect to more than double the sales from 2010.

Therefore, we believe that we have, once again, increased our overall market share in this quarter.

On to the next page.

We have the second quarter light vehicle production according to IHS.

The global light vehicle production decline of approximately 1% year over year was 5 percentage points better than expected in the beginning of the quarter.

The light vehicle production improvement was approximately 1 million vehicles from the original expectation of -- for [42] in April.

As illustrated, our organic sales outperformed the light vehicle production in all regions.

Consequently, our organic sales increase of 5% was 6 percentage points better than global light vehicle production.

Moving to the next page, we have the commodity impact on our business, both sequentially and year over year.

For the second quarter, we had a negative year over year effect of $25 million, mainly driven by steel and yarn, and sequentially, we had $11 million more than we had in the first quarter.

Looking ahead for the third and fourth quarter, we now expect the negative year over year effect of nearly $33 million and $27 million, respectively, or $35 million more than we experienced in the first half.

In total, this is $103 million for full year 2011, which is $4 million more than in April, and approximately $45 million worse than we expected at the beginning of the year.

The commodity headwind on margins has been approximately 1% during the first half 2011, and is expected to be approximately 1.5% for the second half 2011.

On to the next page.

We have illustrated the swing in the light vehicle production outlook, according to IHS.

Looking specifically at this third quarter, the light vehicle production is essentially unchanged from April at a level of 18.4 million vehicles.

However, looking ahead into quarter four, the light vehicle production recovery is expected to be almost 1 million vehicles fewer than the forecast in April.

This essentially offsets the improvement we saw in quarter two.

However, as I said earlier, the acceleration of light vehicle production in late quarter two has cost overtime premium freights and extra costs.

Despite these erratic production changes, the full year 2011 global light vehicle production is expected to improve 5% year over year, and it will achieve a new record of 75 million vehicles, according to IHS.

On to the next slide.

We have the third quarter light vehicle production, also according to IHS.

The global light vehicle production is expected to be 1.1 million vehicles better than 2010, which is a 6% improvement year over year.

All the regions are expected to improve year over year, with the exception of Japan, which is expected to be down 7%.

Sequentially, from the second quarter, we see an unfavorable geographical mix.

Is it due to the light vehicle production drop of 700,000 in Western Europe, and with the [D3] due to summer holiday shutdowns, which is offset by a higher production in Japan.

However, we have lower market share than in Western Europe and with the D3.

Despite this unfavorable mix, our organic sales are expected to improve by 9% versus the same quarter last year.

On to the next slide.

We have our quarter three guidance and our updated full year 2011 indication.

For the third quarter, we expect a consolidated sales increase of 16% versus prior year.

Organic sales are expected to be 9%, based on current call-offs, while currency is expected to contribute the remaining 7% improvement.

Based on these sales assumptions and given the expected commodity cost headwind and higher R&D costs for active safety, we anticipate an operating margin of around 10% for the third quarter.

For the full year 2011, consolidated sales are expected to increase by 16% year over year.

Organic sales are now expected to increase by more than 9%, while acquisitions and currency of less than 2% and 5% respectively.

These are expected to continue to contribute the remainder of the top line growth.

For the full year 2011, we are modifying our EBIT margin to be more than 11%, from around 11.5%.

This is mainly due to higher costs for expansion in growth markets.

I should mention that this outlook excludes any legal costs related to the ongoing antitrust investigation.

Turning to the next page, this concludes today's presentation, and -- yes, of today's call, and we would now like to open it up for questions and answers.

And with that, I leave the word back to you, Rowena.

Thank you.

Thank you, Mr.

Carlson.

(Operator instructions) And we'll take our first question from [Giacomo (inaudible)] from [Banske].

Please go ahead.

Good afternoon.

This is [Giacomo (inaudible)] from [Bank Suisse].

Well, my question is -- the first question is on the margin.

Basically, you decided to invest a small portion, but a portion of your margin in the future growth.

I would like to understand if this is going to be a theme that will continue also for 2012 and 2013, this, let's say, investment in new areas.

Just to understand if it's something structural that you're seeing, or with this investment, you will be able to benefit in the next years from the growth in these areas?

Thank you very much.

Thank you.

Well, if you look to the change, if you refer to the change here from 11.5% to more than 11%, the reason for that, this is two factors.

It is mainly related to the expansion costs, but you also are related to some of the friction costs, and also, raw material.

What we are looking into when it comes to the expansion costs, we are seeing accelerating some of the activities that we have in plan, that we have had in mind, so we have brought forward some of the activity from other years into 2011.

And we are also seeing some extra costs.

So those two components are the reasons for the extra expansion costs, as we are referring to.

It's difficult for us to see the outlook.

We have, as you know, also changed the CapEx levels for China for the three years 2010 to 2012, from approximately $100 million to $150 million.

And we will have to be back to you with that level at a later stage.

But this times is the extra cost and activities brought forward.

So basically, this is not something that should be taken also looking forward, from here on you should benefit from the operating leverage basically, right?

We would benefit from the operating leverage, and as we tried to explain here in the -- with this slide, there is a significant growth opportunity from the increased light vehicle production in the emerging markets.

And this is the reason why we are doing this investment, as we exemplified also on the slide here, with further expansion and further resources, being able to meet this expansion.

Thank you very much.

And we'll take our next question from Hampus Engellau from Handelsbanken.

Please go ahead.

Thanks very much.

I had one question.

This might be -- it's on the costs during the quarter, if it would be possible to maybe quantify the impact from Japan, and also, other industry costs during the quarter.

If you look to the Japan costs, as we have said, the sales on this is $50 million less than expected in the first quarter.

That is what it says in the press release.

And if you look to -- on the impact, on the EBIT dollar value, it is in the range of between $5 million to $10 million.

Thank you.

And we'll take our next question from Rod Lache from Deutsche Bank.

Please go ahead.

Hi, everybody.

I understand that you're not really commenting on the investigation, but I was just wondering if you can maybe comment on peripheral issues.

Can you quantify what the impact is in terms of bidding activity, or for yourselves, if there is anything happening right now in that area?

And also, do you have any preliminary estimate for what you're incurring in terms of legal and investigative fees, and how would you account for those?

As we said earlier here, the guidance for the third quarter and the full year indication is excluding any legal costs, or any costs related to this investigation.

I will not speculate or comment, actually, on an ongoing investigation, as we have said before.

And regarding any bidding activities, etc., I will also at this point refrain and stand away from any comments around this.

Is it -- do you incur -- do you expense legal costs as incurred?

I'm -- it's just more of an accounting question.

Or do you sort of put them into a bucket and --

Yes, we expense them, and for the first half of this year so far, for quarter one and quarter two related to this investigation, we have had between $3 million and $4 million.

Okay.

And related to the -- some of these premium freight and extra costs that you're incurring for the erratic production, presumably, those don't recur next year, if you have a more level production level.

Do you have any estimate for what those costs would be?

I think if we talk about the cost in total for the second quarter now, was around [$50 million], if we take it all, everything coming out of the erratic movement in LVP and the coming out also from the extra costs in Japan.

Is -- did you just say $50 million?

I thought you had said previously, it was --

1-5.

1-5.

1-5, 15.

$15 million, but that includes the impact of the $50 million lower sales correct?

Yes.

Okay.

So you don't have an estimate specifically for just some of the unusual costs that you're incurring to -- for premium freight, and that sort of thing?

I mean, we, of course, if we look ahead, we hope that it will be more stable in terms of the LVP, and that should come back in the more normal level in the coming quarters.

Okay.

And just last question.

I think previously, you had said that there would be roughly a $70 million increase in R&D costs.

I think that also included some comparisons in terms of reimbursement this year.

Is that still your estimate?

And do you have any preliminary view on what the ongoing level of R&D is likely to be beyond this year?

The ongoing level, as we have said, it will be south of 6%, if you look to the R&D level, including the extra spending.

Okay.

And is the $70 million still a good estimate for this year?

I think if you look into the full year, extra costs on R&D compared to last year, it's around $80 million right now, if you look into everything including active safety and what we spend by now.

Okay, thank you.

And we'll take our next question from Philip Watkins from Citi.

Please go ahead.

Oh, thanks very much, taking my question.

I was wondering if you could provide a little more granularity on the costs that you're bringing forward for emerging market expansion this year.

And if I may, just on this year's -- the margin guidance of more than 11%.

I don't know if you're able to sort of give us a steer whether it's nearer, really, to 11% than 11.5%, perhaps.

Thank you.

If you look to the more, the costs that we are incurring, and if you refer to the accelerated and extra costs with relation to expansion, it is infrastructure costs, it is hiring of people, preparing for the expansion in form of plants, in the forms of setting up lines, etc.

So it's production overhead, and it's SG&A that is coming on board, and related costs to that expansion, and also to building the plants.

So that are the type of costs that are coming earlier, and somewhat more extra high costs than expected on the -- all the existing activities.

Is that mostly in Asia?

Is there a -- or is it really --

It's mainly related to Latin America and China.

Okay.

So then, if you look to the margin guidance, we don't elaborate more than what we have done here, but it's closer to 11% or more -- as we say, more than 11%.

Whether it's closer to 11.5%.

We are coming from a previous guidance of around 11.5%, and now we're saying, more than 11%.

No, no, I understand.

Is there any changes to your expectations -- well, the expectations you had three months ago, related to platform mix, or actually, geographical mix within that change?

There are really no changes when it comes to platform mix.

We are -- we believe we are going to have a good platform mix looking ahead.

We are well represented on the well selling car platforms from our main customers.

We are seeing a slight negative geographical mix also here ramping up during third quarter, while some of the Japanese OEMs are coming back.

And we can see that the effect of the ramp up in Japan with some of our customers will have a negative mix.

But that's more related to the comeback of Japan.

We call it geographical.

The platform mix are still going to remain positive, we believe, for the quarters to come.

Thank you.

And we'll take our next question from Anders Trapp from SEB.

Please go ahead.

Hi, there.

I have a couple of small questions, please.

First, regarding the outlook, the LVP outlook from -- provided by IHS.

I wonder if when you look into your orders, they don't -- the noise you are hearing from your customers, if you agree with IHS, or if you have a slightly different opinion near or longer term.

Also, I wonder about the price pressure.

Generally, how many -- you've been talking about 2% to 4%, and being closer to 4% than 2%, if that's still the case, or if any change there.

And also, detail on the CapEx level beyond this year.

Was it still 4.5% we expected also for the coming years, please?

If you look on -- what was the first?

Oh, yes, the conservative from IHS.

We believe IHS may be somewhat conservative also for the third quarter, somewhat conservative here.

We are, as we said, comparing our call-offs to the figures that we see from IHS.

It's difficult to quantify, but maybe somewhat conservative.

If you look to the pricing pressure, we have said 2% to 4%.

We have said in the upper part of the range before, and there is no change to this.

It is around 4%.

So essentially no change as before.

The CapEx levels, I can refer to Mats.

Okay.

On the CapEx, we talked around 4.5% for 2011 and as we can see, for 2012 now, we still think that it should be around 4% for 2012.

But it's very early to say.

But that is what we can see as of now.

Okay, very good.

Just to follow up both on the LVP growth next year, I mean, you have been outgrowing the underlying market sort of forever, or most.

Do you have reason to believe that you will continue to do so also next year?

It is too early to say.

We will have to come back to that in January.

But so far, as you can see for the remainder of the year, it looks good.

Thank you.

Thank you.

And we'll take our next question from Thomas Besson from Bank of America Merrill Lynch.

Thank you, hi, it's Thomas.

I have three small questions, please.

One detail on the accounts.

You have a small positive number in the other income and expense this year.

I'd just like to know if you could elaborate on what -- what is exactly here?

Another question on your position on potential acquisition.

You've explained why you raised CapEx (inaudible) for this active safety development, and acceleration in emerging market.

But are you still looking around for a potential further acquisition beyond the Hella deal you've made?

And how much would you eventually be willing to spend?

And finally, one, I think, more theoretical question about the investigation on the -- (inaudible) for the question that Rod tried earlier.

Can you just tell us if the impact of such investigation is just on past years, or can also concern the current year as well, as long as the investigation effectively lasts?

Okay, about the other income/expense line in the second quarter, we have a small negative of a couple of million dollars.

It's more positive, sorry.

It relates to divestment of a business we had, which made a gain of around $4 million.

But we also have some legal expenses in here of around $2 million, related to the investigation.

So the net plus $2 million is a net of a gain and legal costs.

Okay, thanks.

We take the next question, the next part of that, the acquisitions.

The strategy that we have to acquire, try to acquire a business in the (inaudible), region of active safety, and also in markets where we have an opportunity to grow, would -- is still remaining.

There are no change to our strategy.

We remain very interested in trying to grow and use the strong the balance sheet that we have for the growth opportunities in these areas.

And then we have the third question, which was -- Tom, what was the third part?

You had a third question, Tom.

He seems to have stepped away from the line, gentlemen.

Oh, okay.

Please press *1 again if you wish to join the queue.

Okay, I did not recall the last -- if you are -- hear this, Tom, you can come back again, and then we can take the third part of the question.

I didn't leave --

Oh, okay.

Sorry, I didn't leave.

I don't know why -- I'm still here.

The question was relatively simple.

On such investigation, the question is, on theory, in theory, is the potential damage to your earnings on past years, or it also potentially a threat for your earnings during the investigation, which I understand can be a very long process?

Well, as we have said, Tom, we are not commenting, and we are not discussing anything related to this investigation.

So I stay out of this question also, actually, and that's how it is for now.

Okay, thank you.

(Operator instructions) And we'll take our next question from Kenneth Toll from Carnegie.

Please go ahead.

Yes, so let me try to ask a question this way.

When -- before the crisis, there was pretty tough relationships between the OEMs and the suppliers, and through the crisis, that improved somewhat when OEMs noticed that it was quite hard for them when some suppliers went bust and so on.

And since the crisis, the relationships in the industry have been a little bit better than it was before.

Do you think that this whole thing with the antitrust investigations within the whole industry will sort of change that game plan, that OEMs feel closer to their suppliers, and feel the need to work together?

Well, Ken, as I said, this is a lot of speculations you can make.

You can think about what has been, and what has happened, etc., around this, and you can think about how this -- can this occur, and why did it occur, etc.

Again, here, I will not at this point speculate in anything when it comes to this investigation and try to draw any conclusions of why and how and what at this stage.

So again, here, I cannot answer your question, really, when it comes to this, and how it came about, or whatnot.

Okay, I had to give it a go, at least.

Thank you.

You had to.

Thank you.

And we'll take our next question from [Ensi Nord] of Nordea.

Please go ahead.

Yes, hello, Ensi here from Nordea.

Can I just ask you, on China, you referred to IHS growth numbers for China for 15% annually in the next three years.

And then you say that you expect your Chinese sales to grow by 50% in the next three years.

That would suggest you growing virtually in line with the market, if I've got it right.

Are you not expecting to be able to outgrow the market going forward?

Or are you just being cautious here?

What we said was, the margin -- our sales between 2011 and 2014 would grow from approximately or slightly below, or around $1 billion, to $1.5 billion in three years.

That's what we said.

Did you refer to the light vehicle production for the same years, or -- I think the light vehicle production, if you look here, in China, it's anticipated to have a 7% growth this year in China.

Next year it's about 15%, 1-5 percent in 2012.

2013, according to IHS, I think it's 10%, and 2014, I think it's 10%.

All right, thank you.

(Operator instructions) And we'll now take our next question from Himanshu Patel from JPMorgan.

Please go ahead.

Hi, good afternoon, guys.

Hi, good afternoon, Himanshu.

A couple questions.

First, just on the friction costs associated with the Japanese production ramp-up, where does that stand in Q3?

I know the absolute volumes of production is better, but are they giving you guys enough lead time now where you're -- they're sort of flexing labor in the most efficient way?

I think to the highest extent, we are back to normal.

Some of our customers are not back to full production, not back to normal yet.

But if you look to our supply and the supply situation that we have had, we had issues during the second quarter.

We were not stopping any customers, but we had to seek special routes to get our supply.

And we had, as we said, frictions in our own production also when it comes to, in particular, the later half.

But for quarter three, it should, in all essence, run pretty normal.

Okay.

And then, this emerging markets investment cost, I guess, pull forward or increase.

Historically, you guys don't really have a history of underestimating CapEx or investment needs, at least, not in any given year.

And this is a change that happened intra-year, within a three month period.

So I guess I'm just trying to understand, what really changed in the last 90 days to make you need -- to cause the increase in investment spending?

Was it something your OEM customers asked you to do in terms of pulling forward investments, or was this simply driven by views from external data vendors like IHS on higher emerging markets production than what you had expected before?

I think this is a very good question, and there is no clear answer to it.

It is a mixture of many smaller things.

As we have said, we have some extra costs in the ongoing activities.

We have some changes and some actions being brought forward in terms of higher vertical integrations in some of our countries where we are bringing forward expansions in the component production and similar, into emerging markets, that was probably scheduled at the later stage.

So it is a mixture of that, together with also some increase in production volumes.

And when you scrutinize all of this, the sum of it is what's going to build the change.

So there is really no clear one time or a one thing here, or two things.

It's the sum of many other things that has brought this together, into the change.

And then, just one related question.

I don't know if you can answer this.

But on the legal fees, you mentioned $3 million to $4 million in H1.

Just hypothetically, if one was to assume that the investigation remains open throughout this entire year, do we expect that rate of legal fees going forward, or is there sort of an increase?

I mean, obviously, the $3 million to $4 million was -- presumably, most of that was in Q2, rather than Q1.

But I'm just trying to understand how we should think about those costs, if there's any way at all to kind of predict or bracket the upper, lower bounds of that in the second half.

Well, we don't know, and that's why we have guided without legal costs.

The only fact we can say is that the European Commission investigation started off in early June, and the DOJ investigation started off with the subpoena regarding February, and that is the only fact.

So as of now, we have two ongoing investigations.

And for the lion part of the first half, we had only one investigation ongoing.

Okay, very good, thank you.

(Operator instructions) Mr.

Carlson, we currently do not have any questions in the queue.

Okay.

I would then thank you, everyone, for your attention, and just a little bit of the recap of the presentation.

In the first half of 2011, we achieved an 11% EBIT margin on a consolidated sales increase of -- or, 18%, which organic sales increased nearly 10%, while global light vehicle production was up 3%.

And if you look at our underlying performance and compare first half to second half, sales and EBIT margin are essentially the same, despite a $35 million sequentially commodity headwind from first half.

With that recap, small recap, I would like to thank everyone for your attention and continued interest in our Company.

We look forward to speaking with you again during our third quarter earnings call on Tuesday, October 25, 2011.

Until then, I hope you will all have a safe and relaxing summer.

Thank you very much, all of you.

That will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.