Autoliv Inc (ALV) 2012 Q2 法說會逐字稿

Good day, and welcome to the Q2 2012 Autoliv earnings release conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to your host today, Jan Carlson, President and CEO.

Please go ahead.

Thank you, Caroline.

Welcome everyone to our second quarter earnings presentation.

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

We will open up today's earnings call with a quick review of our quarterly results, including an overview of general business conditions.

Then we will focus on the outlook, and how we see our business improving throughout the remainder of 2012.

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.

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

Moving on to the next slide, we continue to execute on our growth and operational strategies.

Our organic sales growth and EBIT margin were slightly better than expected, despite a 10% light vehicle production drop in Western Europe.

Cash flow rebounded, as expected, from quarter one, and the operating cash flow for the first half of the year was the second best in the history of our Company.

We also paid a record dividend of $0.47 per share in the quarter, and continue to generate strong returns on investment.

Looking ahead, we see a more uncertain macro environment.

For instance, in our largest market, Europe, light vehicle registration in Western Europe continued to run at a 17-year low, and light vehicle production continues to decline.

Due to this, we announced our capacity alignment program at the start of the year.

Our investment in growth will continue pay off over the next several quarters.

As a result, we expect to outperform the light vehicle production by approximately 5 percentage points during the second half of this year.

And lastly, despite the headwinds in Europe, we still expect to return to double digit EBIT margin in the third quarter, excluding costs for antitrust investigations and capacity alignment.

Turning the page, we have some of our key figures for the second quarter.

We achieved a new record sales of $2.1 billion for a second quarter, and an underlying EBIT margin of 9.4%.

Our return on capital employed and return on equity remained strong at 23% and 15%, respectively.

Turning the page, we have our cash flow.

During the quarter, we generated an operating cash flow of $219 million, and our capital expenditures of $85 million was approximately 4.1% of sales.

However, the full year 2012 indication remains unchanged, at around 4.5% of sales.

This level of investment is required to deliver growth rates above the market growth, and support our strong order intake.

During the quarter, we returned $45 million to our shareholders in the form of the dividend, which is a new record payout.

This concludes my formal comments around the second quarter.

And I now want to look into the outlook.

On the next page, we have the third quarter light vehicle production according to IHS, and that is expected to increase 2.1% year over year.

In April, the expectation was an increase of 3.8%.

This change in light vehicle production is primarily due to a lower production outlook for Western Europe, China, and rest of Asia.

However, IHS still expects a year over year growth in North America, Japan and China of 8% each, while the production in Europe is expected to be down 8%.

On the next page, we have our outlook for the third quarter.

Based on our customer call-offs, we expect to continue to offset this strong negative headwinds from Western Europe, and achieve an organic growth rate of nearly 4%.

This growth is due to our long-term investments in China in active safety that are paying off, and due to important platform launches.

For the third quarter, we expect an underlying operating margin of approximately 10%.

Sequentially, our margin improvement from the second quarter is mainly due to better utilization of our capacity investments in China, and R&D, net.

On the next slide, we see some of our key launches in China.

These models will contribute to our market share gains and overall market outperformance in the second half of this year.

The annual revenues for these models are in the range of $10 million to $40 million each.

On the Great Wall H6 platform, we have a good example where Autoliv supplies all of the passive safety product.

These launches will have Autoliv reach close to $1.2 billion of revenue in China this year.

Turning the page, we have the second half light vehicle production as expected -- is expected to increase by approximately 1% year over year, according to IHS.

This year over year increase is approximately 2 percentage points less than IHS forecasted back in April.

And despite this negative market trend, we expect to outperform the global light vehicle production by 5 percentage points during the second half of this year.

On to the next page.

We have the outlook for the second half of 2012.

Year over year, our organic sales are expected to increase by approximately 6%, which is 2 percentage points less than we expected back in April.

This change in our sales guidance of approximately $90 million lower sales is in line with lower light vehicle production expectation in Europe, China, and rest of Asia, mentioned on the previous slide.

As a result, our implied operating margin guidance is in the range of 10% to 10.5% for the second half of this year.

Our sequential margin improvement from the first half of the year is due to better leverage in our capacity in China and active safety, as well as lower R&D, net.

As illustrated on the next page, we have some of our key launches in the product area of active safety.

We are expanding our presence in this fast-growing market with our advanced technologies.

For instance, we launched our first radar product for collision warning with General Motor, as advertised on the Cadillac XTS.

We are also expanding our vision camera system to BMW 6 series, where it will be used for forward collision warning, lane departure warning, and speed sign recognition.

As a result of new launches, our active safety revenues are expected to be around $250 million already this year, and will contribute to our second half outperformance versus light vehicle production.

Generally speaking, the [fitment] rates of these new technologies run in the range of 10% to 50%, depending on the model and the customer.

However, an increasing number of models are adopting active safety systems as standard equipment.

For instance, on the Mercedes A class, where we have launched our radar technology, our product is standard for collision prevention assist.

I believe this is the first time radar becomes standard on a small car in the so-called A segment.

Looking now on the next slide, we summarize our sales and margin outlook for the current quarter and full year.

All figures related to our guidance and outlook assume that mid-July exchange rates and exclude costs for antitrust investigation and capacity alignments.

For the third quarter, we expect an organic sales increase of nearly 4%, as mentioned earlier.

This is more than offset by a negative 6% currency effect, resulting in a sales decline of approximately 3%.

Given these sales assumptions, we expect an operating margin of approximately 10% in the third quarter.

For the full year, the indication is for a consolidated sales increase of approximately 1% year over year, while the organic sales increase is expected to be approximately 6%, as compared to 7% in April.

Therefore, based on all of these assumptions, we modify our EBIT margin indication to approximately 10% for full year 2012, to reflect the modified full year light vehicle production outlook.

And we maintain our operating cash flow indication of approximately $700 million for the full year 2012.

So to summarize, we are pleased with our overall results and progress as we continue to execute on our strategies despite a mixed and uncertain macro environment.

We now turn the page.

This concludes the formal comments of today's earnings call, and we would like now to open it up for questions.

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

Thank you.

Certainly, Mr. Carlson.

(Operator instructions) We'll now take our first question today from Brett Hoselton from KeyBanc.

Please go ahead.

Gentlemen, good morning -- or, good afternoon, I guess.

Good morning to you, Brett.

How are you?

I'm doing just fine.

How are you?

Good, thanks.

Wanted to ask you two thoughts here.

First of all, just on the quarter, the tax rate was a little bit higher than we had anticipated, and my question here is, was there anything unusual impacting the tax rate that might have driven it a little bit higher?

And then, what's your expectation going forward for the remainder of the year?

I leave it to Mats.

Okay.

If you look now into the second quarter here, the tax rate has been impacted by -- that we see more earnings relatively in high tax countries like US and Japan.

And so that has driven up the tax rate in the quarter, due to that mix effect.

That mix effect will also have an impact on the full year prediction.

We guided before around 27% for the remainder of the year.

Now we see around 28% for the remainder of the year, for the same reason that we see relatively more earnings in the US and in Japan.

Okay.

And then, looking at your margin guidance for 2012, it looks like a slight revision here from up -- or, from 10% to 11% range previously, to kind of in the range of around 10%.

You know, I view that as somewhat of a reduction in your guidance.

My question is, is that directionally how we should be thinking about it?

In your mind, what are the primary one or two drivers for that?

Well, I think the key driver for this is the lower light vehicle production, resulting in the lower organic sales for us.

We will have a lower organic sales for our second half, of approximately $90 million, compared to what we thought in April.

And, you know, if you just take the effect out of this, you'd be -- this would imply a lower operating margin for second half.

And we communicated last quarter approximately 11% for second half, and we are down now to between 10% and 10.5%, depending on uncertainty.

Okay.

Thank you very much, gentlemen.

Thank you, Brett.

We'll now take our next question from Rod Lache from Deutsche Bank.

Please go ahead.

Good morning, everyone.

It's actually (inaudible), on for Rod.

Good morning, Rod.

Ted.

Ted.

Two questions.

First, can you just discuss what you're seeing as far as the pricing and commercial agreements in the European market?

There has been some talk by some of your competitors that the price givebacks, the timing's been pushed out a little bit, or actually, pricing's gotten a little bit worse.

And also, if you could just comment if there's any update on the antitrust investigations.

Regarding pricing, we really see no difference.

We had approximately 3% pricedowns, which is in the mid-point of the range of 2% to 4% for the quarter, for second quarter.

And so really, no difference, whether easing up or getting worse, I would say right now.

On the antitrust investigation, as you know, we treat the US part, the DOJ part, for an Autoliv perspective, to be behind us.

However, that investigation is still ongoing from DOJ side to some -- and many of our competitors.

From an Autoliv perspective, we are still under the investigation from the European Commission, as you know.

And I have no comments further that I can share with you on that one, whether from the financial perspective or from a timing perspective.

Just one follow up.

Do we expect the legal fees to kind of continue at this -- kind of $5 million rate, for the -- until we reach a resolution on the European side?

You know, we focus very hard on the -- when we had this investigation, to really cooperate and to emphasize very strong activity in the beginning of it.

So we front-loaded our activities quite a bit here, and that also resulted, we would think, to some extent, that we came out earlier than many of the others.

We should look to the legal costs, this -- the lawyers' fees, to somewhat go down from here and onwards.

All right.

Just one last question.

Working capital line, much better performance this quarter versus first quarter.

What kind of range should we be expecting on a full year basis?

We have said that the targets for our working capital is to be less than 10% of sales.

And now we are seeing the second quarter, 6.7%.

We have to remember that in that number, we also have provisions for restructuring and capacity alignment of $6 million to $7 million, reducing the working capital.

They will be paid off over time and over the years.

We also had in the working capital the DOJ accrual of $14.5 million, also reducing the working capital.

And that has been paid off now in July.

So if you would take out restructuring and the DOJ, the working capital would be around 7.6% of sales, if we look into the second quarter.

Got it.

And we should expect that to move closer to 10% by year-end?

We -- the target is to be less than 10%, and I mean, you know how this working capital, it can vary from quarter to quarter.

But this is the level we are, at least for the second quarter.

(multiple speakers) --

Okay, thanks very much.

We'll now take our next question from Ryan Brinkman from JPMorgan.

Please go ahead.

Hi, good morning.

Thanks for taking my question.

You know, you mentioned third quarter margins improving, I think, quarter over quarter, from lower RD&E expenses.

Is that simply a seasonal phenomena, or do you think that -- when do you think you can begin to lever RD&E expenses on a year over year basis?

We will continue to invest in new technology, and active safety, and also, in general, from a very general perspective, we have said that RD&E should be below 6% net.

And we expect to return to below 6% from third quarter and onwards, and we expect that to be also the case for the full year 2012.

We haven't further discussed it, to bring R&D figures down to low [5.%] or something.

So -- but that's what we have said, 6% should be the cap.

Okay, that's helpful, thanks.

And then you updated us on some of your upcoming active safety launches.

I was wondering if there were any other milestones that were achieved in the quarter in regards to the active safety business, for example, new contract wins, etc.

Well, there is a continuous discussion about new contracts.

We don't talk so much about new contracts until they materialize in sales, because you don't really know the take rate and the outcome of the contracts.

But there is a flow of new activities, as we are growing this area so fast.

You saw we grew the area in second quarter with 30%, and we expect to grow the active safety even higher in the second half of this year.

Okay, thanks.

And then just real -- finally, you know, which region or product area is giving rise to your capacity alignment costs?

This is principally in Europe, I imagine.

What kind of payback do you see on this?

Thanks.

We expect the payback to be two to three years, and it's primarily Europe, as you said.

Thank you.

Thank you.

We'll now take our next question from Johan Dahl from Erik Penser Bank.

Please go ahead.

Yes, hi, there.

Can you hear me?

We hear you well, Johan.

Great.

That's great.

I just had a question regarding the -- you know, Autoliv's performance over IHS numbers.

You (inaudible) 2% outperformance in the third quarter, and then you say 5% for the second half.

Could you just help us, what's driving it in the fourth quarter, in your mind?

Well, it is launches in China and in active safety, predominantly, that is helping us to increase the outperformance.

And we -- you saw some of the important ones on the slide in the formal presentation.

But in the essence, that is the reason why outperforming.

Those are mainly occurring in the fourth quarter, I presume?

Third and fourth quarter.

And secondly, I was wondering on the -- is there anything else?

I mean, you referred to the better utilization in China, and lower R&D net.

Is there anything else boosting your margins in the second half, or just other variable costs, if you understand me?

If you look into the second half, there is some other items we have to remember.

We see seasonally higher engineering income in the second half.

That's also part of it.

But that is something we always see, from every year.

And then on top of that, if you compare second half to first half, you also have vacation impact.

So we are releasing vacation accruals in the third quarter of about $10 million, and that is also an impact, if you see it, sort of second half versus first half.

Okay, that's helpful.

Would you be able to say anything regarding raw material outlook?

Raw material outlook for the full year is $10 million worse than last year, so $10 million up.

We have revised that figure down now from $15 million in the previous quarter, so slight revision down.

Great, thanks.

Thank you.

We'll now take our next question from Hampus Engellau from Handelsbanken.

Please go ahead.

Thank you very much.

I have two questions.

Just going back to these restructuring charges.

I noticed only $5 million during the quarter, and I was wondering if you could maybe shed some light on the remaining, how it would be distributed between third and fourth quarter, maybe, if we're closer to $60 million to $80 million, given the run rate?

My second question is more speculative, on active safety, what you see in activity from Chinese local OEMs, and also prospectuses from Euro NCAP, taking your active safety when testing cars.

Thanks.

If you look to the restructuring charges, there will be more coming, but we are in the planning and discussion phase, so it's hard to judge when it's coming, in third or fourth quarter.

But there will be more coming.

And it's also hard to really say inside which level inside the range, if it is closer to $60 million or closer to $80 million at the moment.

We are right now discussing this.

It also depends on the outlook of the general market trends.

So I cannot give you a more precise figure than the $60 million to $80 million, unfortunately.

If you then look to what's happening in the Euro NCAP side, there is an activity ongoing, on these activities.

And if you just hold on for a while, I will try to see if we can get that.

(inaudible).

Maybe we take the next question and we come back to that for a while.

I give you some more details.

Sure, thanks.

Thank you.

We'll now take our next question from (inaudible) from Jeffries.

Please go ahead.

Hi, it's Peter Nesvold.

I've had a few phone problems, so I don't know if this question has been asked.

If so, just let me know, and I'll read the transcript.

This platform mix, I mean, it's been nice multi-year tailwind for the Company.

We saw a little bit of an air pocket on German sales in May.

It looked like maybe they rebounded in June.

Can you just sort of speak to what's discounted into the second half outlook regarding platform mix?

Does it kind of stay the course where it is now?

Or do you see luxury starting to trend lower?

Thank you.

We still continue to see a strong platform mix.

We believe that the luxury vehicle will also continue.

If you looked in particular to China, you have seen China trending down a little bit.

We should have in mind that China's still a growth market which is expecting to grow 7%, which is a respectable number.

But in this change, we maybe even see a higher -- even higher trend towards more premium brand vehicles.

You can also see that Chinese OEMs are trading down, compared to the foreign OEMs a little bit in China.

So we believe the current mix will stay, and there will be a good premium oriented mix, also looking ahead.

If I can ask just one brief follow up then on that?

If there were a slowdown in China for luxury, how would we anticipate it?

Where would we see it?

Because sometimes, the data that we get out of that market can be very lagging.

So any help you can provide on that point would be great.

Well, I think there will be a -- you know, you could basically see that fairly swift.

We see that in our customer call-offs.

Or, we would see it in our customer call-offs fairly fast if it would happen, but we haven't seen that.

We also believe that the foreign OEMs inside China have a very good position, and they are having -- they are actually taking market shares, and their product program is more oriented to higher equipped vehicles.

So, you know, if it would come, we would probably see it fairly -- very immediate, actually.

Thank you.

We'll now take our next question from Brett Hoselton from KeyBanc.

Please go ahead.

Hi, gentlemen.

Hi, Brett.

I was hoping to -- I was hoping you might be able to just expand or talk a little bit more specifically, and this is just kind of a follow on from the previous question.

On the changes in back half expectations for Europe, and obviously, it looks like Western Europe is your primary change here, where you've seen the changes primarily, in terms of -- is it primarily just domestic production, targeted at domestic sales, and is it at the lower end, then?

That's kind of what it sounds like you're suggesting.

Well, I guess if you look to the different car manufacturers in Europe, you can see where you have a decline.

And I think you have seen French OEMs taking a hit, you have seen Italian taking a hit.

You have seen Germany trading well, and the premium brands are trading well.

And when you look into Europe, if you look to the different OEMs, these German premium brands are also more depending on the export and into the regions where car sales is doing better.

So I think it follows through on the macroeconomic level and on the premium versus small car profile.

Okay, perfect.

Thank you very much.

Thank you.

We'll now take our next question from David Leiker from Robert W. Baird.

Please go ahead.

Hi, good morning.

This is Joe on the line for David.

Hi, good morning.

I just wanted to circle back kind of on an earlier question.

JCI was out talking yesterday about how, while they expect R&D reimbursement from their customers, just the cadence of receiving that is being stretched out, so the automakers are taking a little more time and actually getting them the reimbursements.

I just want to circle back and see if that's consistent with what you're seeing or expect in the second half.

We are not seeing any increase or major positive deviation on the engineering income or engineering payout from customers, or reimbursements.

It has been rather stable.

We could see some changes, if you go back three, four years ago, but for the time being, now, it hasn't changed dramatically.

Trending even further back, there has been rather the opposite, that many customers has asked to (inaudible) to take more engineering costs and depreciate over [piece] price.

So rather over longer term perspective, it has been the opposite trend.

But for now, there hasn't been any recent changes.

Okay, great.

Just in terms of the European forecast, so it sounds like you use the IHS number, and then you do channel checks, and your channel checks are sort of backing that up.

I'm just wondering, I think the -- you know, you get a three to four week production schedule.

So are you getting more of a longer term, or maybe a -- you know, a two to three months' outlook from these channel checks that is making you feel comfortable with the European number?

I have to correct you there.

Our guidance for third quarter is based on our customer call-offs.

It's not based on our IHS numbers.

We are using our IHS numbers for the outer quarters, if you -- in first quarter, guiding for the full year, and also here, for fourth quarter, we are factoring in IHS numbers.

But for third quarter, it's more or less based on the customer call-offs.

We are then checking these numbers against IHS, so that is how the -- how our guidance is based, based on.

And sorry if I missed it, but what are your checks yielding for kind of a year over year growth number, versus what IHS has?

Well, we have no reason to comment.

We don't think that, you know, for the outer years, we don't have any added opinion, for the outer quarters and months.

We have no other opinion than IHS.

We have between six weeks, four to eight weeks, depending on customers on call-offs.

That's what we use for the quarter that we are in when we guide.

For fourth quarter, we don't have any significantly different figures than IHS.

Okay.

And then my last one.

I think you've typically talked about the ability to outperform global light vehicle production by, you know, 2% to 4%.

In Q3, you're going to see 2%, and then in Q4, a little bit above that.

You've had a lot of mix issues this year.

So I'm just wondering, based on your platform outlook, your customer mix heading into 2013, is there any reason not to expect to come in within that range, or even a directional indication, if you will be at the high or low end?

We have had many, many quarters with outperformance, and we have had now underperformance for a couple of quarters due to the tsunami effect.

There wouldn't -- sort of intuitively, be no reason why we should not continue to outperform.

However, this is very difficult to forecast.

You don't know the platforms that you are on, how they are received.

You don't know how the mix is going, that you are on the right platforms that are selling well, etc.

So that's very difficult to say, from time to time.

We have been very successful in capturing the right platforms.

We have been successful in increasing our order intake, and thereby, grabbing market share, and thereby also outperforming.

I would stay away from commenting how this would look like for outer years, because it's very difficult to have a very [factual] opinion of it.

Okay.

Thank you very much.

(Operator instructions)

I would then like to come back to the comments from Hampus.

You asked about the Euro NCAP and what's happening in the area of active safety.

And if you look to the upcoming years here, you have a new rating related to active safety, which is speed assist, coming in 2013.

You have autonomous emergency braking, 2014.

Lane departure warning and lane keep assists in 2014 as well.

And then, emergency braking for pedestrians starting in 2016.

So there are a lot of activities happening right now here, related to active safety in the Euro NCAP area.

If you look to active safety and into other regions, there are less of activities so far in North America and in Asia related to active safety.

But we believe that when this is coming on, there will be follow up activities in North America and in Asia also.

Maybe Asia will maybe take some longer time, but they'll follow on in North America.

We will now take our next question from David Lesne from UBS.

Please go ahead.

Your line is open, please go ahead.

Yes, sorry.

Good afternoon.

I just have one question, please.

If we are to see some capacity being removed and some plants closing in Europe, what would be the impact for Autoliv?

And also, do you have some facility, depending on the production, of one single customer?

No, we don't have any one thing, customer depending facility.

What we are doing with our capacity alignment is just aligning capacity to where the customers are and the market demand.

You probably remember, we had another situation in 2008 where there was a drastic situation, and drastic crisis throughout the entire world, and that was more of a cut program, where we would have to cut due to a very sharp decline across the globe.

Now this is aligning to customers, and to customer expectation, and where we see production flowing in the future.

That is more aspect to Autoliv.

Okay, thank you.

As there are no further questions in the queue, I would now like to turn the call back over to your host for any additional or closing remarks.

Well, thank you, everyone, for your attention and continued interest, and interesting questions.

I hope you all have a safe and relaxing summer, and we look forward speaking to you again at our third quarter earnings release on Tuesday, October 23, 2012.

Until then, have a very good summer.

Thank you very much.

That will conclude today's conference call.

Thank you for your participation.

You may now disconnect.