Autoliv : Transcript (183.79 KB)

Autoliv Q1 2024

Results

Friday, 26th April 2024

Autoliv Q1 2024 Results

Friday, 26th April 2024

Introduction

Anders Trapp

VP Investor Relations, Autoliv

Welcome

Welcome, everyone, to our first quarter 2024 earnings call. On this call, we have our President and Chief Executive Officer, Mikael Bratt, and our Chief Financial Officer, Fredrik Westin, and me, Anders Trapp, VP Investor Relations.

During today's earnings call, Mikael and Fredrik will, among other things, provide an overview of our strong sales, earnings and cash flow development in the quarter, how our strong balance sheet and asset return rates support the continued high level of shareholder returns. They will outline the expected sequential margin improvement in 2024 towards our targets. And we will also, as usual, provide an update on our general business and market conditions. We will then remain available to respond to your questions. And as usual, the slides are available on autoliv.com.

Disclaimer

Turning to the next slide. We have the safe harbour statement, which is an integrated part of this presentation and includes the Q&A that follows. During the presentation, we will reference some non-US GAAP measures. The reconciliations of historical US GAAP to non-US GAAP measures are disclosed in our quarterly earnings release, which is available on Autoliv.com and in the 10-Q that will be filed with the SEC.

Lastly, I should mention that this call is intended to conclude at 15:00 Central European Time. So please follow a limit of two questions per person.

I will now hand over to our CEO, Mikael Bratt.

Overview

Mikael Bratt

CEO, Autoliv

Q1 '24 Key Highlights

Record first quarter sales and broad-based improvements

Thank you, Anders. Looking on the next slide. I want to express my appreciation to the entire Autoliv team for their unwavering dedication to achieve our goals and for delivering another strong quarter in a challenging environment.

In the first quarter, global light vehicle production declined year-over-year by around 1% according to S&P Global. We saw no improvement in call-off volatility compared to fourth quarter 2023. Despite somewhat weaker-than-expected light vehicle production, we achieved our margin indication for the first quarter, and we are on track towards our full year guidance.

2

Autoliv Q1 2024 Results

Friday, 26th April 2024

In the quarter, organic sales grew by 5%, outperforming light vehicle production significantly, especially in India, South Korea and Japan. The strong growth was mainly a result of product launches last year.

We generated a broad-based improvement year-over-year in key areas, including gross margin, operating margin and operating cash flow. This quarter marks the seventh straight quarter with more than 30% year-over-year increase in adjusted operating profit. The debt leverage was virtually unchanged versus Q4 2023 despite share repurchases of $160 million in the quarter.

Under the current stock repurchase programme, we have repurchased and cancelled 6.5 million shares for close to $630 million. We are making progress towards our previously announced intention of reducing our indirect workforce by up to 2,000 people. We expect savings of around $50 million in 2024 from these initiatives. We are reconfirming the full year 2024 guidance, which sets a strong base towards continued high level of shareholder returns and our adjusted operating margin target of around 12%. However, the heightened seasonality of earnings of prior years is likely to be repeated in 2024.

Now looking at the sustainability highlights on the next slide.

Q1 '24 Sustainability Highlights

Sustainability is a fundamental part of our business strategy. It is an important driver for market differentiation and stakeholder value creation. Guided by our vision of saving more lives, we are driving a number of activities to take significant steps towards our climate commitment. For example, during the first quarter, we successfully issued a second green bond using Autoliv's sustainability financing framework aligned with the ICMA Green Bond principles.

The bond drove significant interest from debt investors, reflecting the strong support for Autoliv's climate and sustainability agenda. Following Autoliv's first partnership in 2021 with SSAB, for fossil-free steel, we are now introducing two additional collaborations for carbon reduced steel with Arvedi and Thyssenkrupp. The aim is to reduce greenhouse gas emissions in our products by utilising low emission steel and increased use of recycled material.

In addition to renewable electricity instruments, many Autoliv sites are increasing the use of on-site solar energy generation capacity. On this slide, you can see one of the new solar parks in Utah, US, supporting our operations. We are partnering with BASF to introduce a new type of design for recycling PU foam for steering wheel rims. This new type of foam will enable simplified and scalable recycling.

Significant Sequential Cost Improvements

Looking on our cost improvements on the next slide. We continue to generate broad-based improvements in key areas over the last 12 months. Our direct labour productivity continues to trend up, supported by the implementation of our strategic initiatives, including automisation and digitalisation. Year-over-year, we have reduced our direct production personnel despite higher volumes.

Our gross margin decline from the seasonal strong fourth quarter improved by 170 basis points year-over-year. The improvement was mainly the result of the higher direct labour efficiency and reductions within the indirect workforce. Volume growth and customer

3

Autoliv Q1 2024 Results

Friday, 26th April 2024

compensation negotiated last year. As a result of our structural efficiency initiatives, the positive trend for RD&E and SG&A in relation to sales has continued, declining by 60 basis points since Q1 2023. Combined with the gross margin improvement, this led to a substantial improvement in adjusted operating margin versus Q1 2023.

Looking now on financials in more detail on the next slide.

Q1 '24 Financial Overview

Strong sales and profit development

Sales in the first quarter increased by 5% year-over-year despite lower light vehicle production, a negative regional light vehicle production mix, and unfavourable currency translation effects. The sales increase and our cost reduction activities led to a substantial improvement in adjusted operating income, increasing by more than 50% to $199 million from $130 million last year.

The adjusted operating margin was 7.6% in the quarter, an increase by 230 basis points compared to the same period last year. Operating cash flow was $122 million, which was $168 million higher than in the same period last year as a result of improved working capital effect versus last year.

Looking now on the structural cost savings activities on the next slide.

Structural Cost Reduction Initiatives

Simplifying our logistics and geographic footprint to significantly lower our cost base

To secure our medium and long-term competitiveness and to support our financial targets, we launched a cost reduction initiative in mid-last year with intent of reducing our indirect headcount by up to 2,000. We estimate that the annual cost reduction will amount to around $130 million when fully implemented, with around $50 million already in 2024 and around $100 million expected in 2025.

For 2024, we expect to cash out approximately $85 million related to these initiatives. At the end of first quarter, our indirect headcount had declined by around 1,000 or by more than 5% since a year ago with the majority of the decrease within production overhead, especially in best cost countries.

We are already seeing a positive impact on direct labour productivity as a result of our initiative to reduce the direct workforce by the equivalent of up to 6,000.

Looking now on our sales growth in more detail on the next slide.

Q1 '24 Sales Growth and Regional Sales Split

Our consolidated net sales increased to more than $2.6 billion, a new record for the first quarter. This was approximately $120 million higher than a year earlier, driven by price, volume and product mix, partly offset by lower light vehicle production, a negative geographical light vehicle production mix and currencies.

Currency translation effects reduced sales by $12 million or by 0.5%.

Looking on the regional sales split. Asia accounted for 37%, Americas for 34%, and Europe for 29%. The lower than usual share of the total sales in Asia was a result of the Lunar New

4

Autoliv Q1 2024 Results

Friday, 26th April 2024

Year and low light vehicle production in Japan due to customers having certification issues with certain vehicle models.

We outlined our organic sales growth compared to light vehicle production on the next slide.

Q1 '24 Organic Sales Growth - Outperforming Global LVP by 6pp

I am very pleased that our organic sales growth outperformed global light vehicle production significantly, as we continue to execute on our strong order book. According to S&P Global, first quarter light vehicle production decreased by 1% year-over-year. This was more than 1 percentage points lower than expectations at the beginning of the quarter, with most of the lower-than-expected production coming in Japan, and with global OEMs in China.

We estimate that geographical light vehicle production mix had 140 basis points negative impact on our outperformance. In the quarter, we outperformed global light vehicle production by more than 6 percentage points, with strong performance especially in rest of Asia and in Japan.

The strong outperformance in rest of Asia was mainly driven by India, where sales outperformed light vehicle production by 20 percentage points due to higher installation rates for side airbags. In comparison, the modest outperformance in China was mainly a result of unfavourable customer mix following strong light vehicle production growth for lower safety content vehicles.

Q1 '24 Key Model Launches

On the next slide, although we see some changes to our customers' plans for model launches, especially for EV models, we expect a record number of product launches for 2024. Despite some changes to model launch plans by some customers, the trend towards electrification continues, although at a somewhat slower pace.

On this slide, seven models are being made available as electrical versions. The models shown here have an Autoliv content per vehicle from around US$130 to over US$400.

In terms of Autoliv sales potential, the BMW 5 Series Touring launch is the most significant, followed by the Subaru Forester. The long-term trend to higher content per vehicle is supported by front centre airbags on three of these models, more advanced seatbelts and pedestrian protection airbags and hood lifters.

Another interesting launch is the Tata Punch EV that illustrates the trend towards more sophisticated safety systems and higher safety content in India.

I will now hand it over to our CFO, Fredrik Westin, who will talk you through the financials on the next slide.

Financial Review

Fredrik Westin

CFO, Autoliv

Q1 '24 Financial Overview

Thank you, Mikael. This slide highlights our key figures for the first quarter of 2024 compared to the first quarter of 2023.

5

Autoliv Q1 2024 Results

Friday, 26th April 2024

Our net sales were $2.6 billion. This was a 5% increase. Gross profit increased by $64 million or by 17% to $443 million, while the gross margin increased by 1.7 percentage points to 16.9%. The adjusted operating income increased from $131 million to $199 million, and adjusted operating margin increased by 230 basis points to 7.6%.

Non-GAAP adjustments amounted to $5 million from capacity alignment and antitrust-related matters. Adjusted earnings per share diluted increased by $0.68, where the main drivers were $0.54 from higher operating income and $0.10 from lower income taxes.

Our adjusted return on capital employed and return on equity increased to 20% and 21%, respectively. We paid a dividend of $0.68 per share in the quarter and repurchased and retired 1.4 million shares for around $160 million under our US$1.5 billion stock repurchase programme.

Q1 '24 Adjusted Operating Income Bridge

vs. prior year

Looking now on the adjusted operating income bridge on the next slide. In the first quarter of 2024, our adjusted operating income of $199 million was $68 million higher than the same quarter last year.

Our operations were positively impacted by cost saving activities, higher volumes and commercial recoveries, partly offset by headwinds from general cost inflation. The net currency effect was $8 million negative, as we continue to see negative effects mainly from the strengthening of the Mexican peso and the weakening of the Japanese yen and Korean won, but partly offset by positive impact from the Turkish lira.

The impact from raw materials and out-of-period cost compensation were negligible. Costs for SG&A and RD&E net combined was $4 million lower despite labour cost inflation. In relation to sales, SG&A and RD&E net combined declined by 60 basis points.

As a result of our cost saving activities, the leverage, excluding currency effects, on the higher sales was substantially above our normal 20% to 30% range.

Looking now at the cash flow more in detail on the next slide.

Cash Flow

Strong performance from working capital and higher net income

For the first quarter of 2024, operating cash flow increased by $168 million to $122 million compared to the same period last year, mainly due to improved working capital effects versus last year.

Capital expenditures net decreased to $140 million from $143 million last year. In relation to sales, it was 5.4% this year, down from 5.7% last year. The free cash flow improved by $171 million compared to the same period the prior year, mainly due to the improved operating cash flow. The last 12 months cash conversion, defined as free cash flow in relation to net income, was 108%.

Now looking at our trade working capital development on the next slide.

6

Autoliv Q1 2024 Results

Friday, 26th April 2024

Trade Working Capital in Relation to Sales

During the first quarter, trade working capital increased by $104 million, driven by $123 million lower accounts payables, partly offset by $15 million in lower inventories and by $4 million in lower receivables. The lower inventories and receivables were mainly due to lower sales than in the fourth quarter of last year.

Compared to the same period last year, trade working capital decreased from 14.1% to 12.8% in relation to sales. Our capital efficiency programme aims to improve working capital by $800 million. And to-date, we have achieved around $500 million.

Improvements in receivables and especially in inventories are lagging due to the high call-off volatility and hence planning challenges that cause inefficiencies. Over the coming years, we expect the inventories to improve significantly in tandem with reduced call-off volatility.

Now looking on our leverage ratio on the next slide.

Debt Leverage Ratio

Our continued focus on balance sheet efficiency is supporting our strong performance for cash flow, cash conversion, and return on capital employed. I am particularly pleased with our leverage ratio, which improved compared to a year ago, despite investing in our footprint and returning $700 million to shareholders.

The debt leverage ratio at the end of March 2024 was 1.3 times, up 0.1 time from last quarter. Compared to the fourth quarter 2023, our net debt increased by $184 million, while the 12-month trailing adjusted EBITDA improved by $72 million. We expect that our debt leverage and positive cash flow trend will allow for continued high shareholder returns going forward.

Now looking at shareholder returns over the past five years on the next slide.

Strong Balance Sheet & Cash Flow Supporting Shareholder Returns

Repurchased 6.5 million shares for $627 million under current mandate

Over the years, Autoliv has shown its ability to generate solid cash flow in periods with varying market environments. We have used both dividend payments and share repurchases to create shareholder value. Historically, the dividend has usually represented a yield of approximately 2-3% in relation to the average share price.

During the last 12 months, we have returned around US$700 million to shareholders through both dividends and share buybacks, a new record for the company.

Over the last five years, we have reduced the net debt significantly, while returning $1.5 billion directly to shareholders. This includes stock repurchases and cancellations of 6.5 million shares for a total of close to $630 million as part of the current stock repurchase programme.

Since we initiated the current stock repurchase programme in 2022, we have reduced the number of outstanding shares by more than 7%. We consider several factors when executing the programme such as our balance sheet, the cash flow outlook, our credit rating, and the general business conditions, and not only the debt leverage ratio. We always strive to balance what is best for our shareholders, both short and long term.

7

Autoliv Q1 2024 Results

Friday, 26th April 2024

Now looking on our efficient balance sheet that supports our shareholder returns on the next slide.

Efficient Balance Sheet to Support Shareholder Returns

A strong balance sheet and good return on capital employed is fundamental for long-term shareholder value creation. Despite operating margin impacted by the challenging market environment for the past five years, our return on capital employed have remained strong, averaging around 17%.

Our capital turnover rates, meaning our sales in relation to average capital employed, has improved substantially over the past three years and is now significantly above our five-year average.

With that, I hand it back to you, Mikael.

Conclusion

Mikael Bratt

CEO, Autoliv

Light Vehicle Production Outlook

Global LVP to decline by ~1% in 2024

Thank you, Fredrik. On to the next slide. Despite still elevated interest rates, the global light vehicle production continues to show relative strength.

S&P Global's updated forecast for full year 2024 indicates a modest decline of 0.4% instead of 0.8% three months ago, with additional volume increases primarily in China and North America.

Drivetrain mix developments varied by region as certain markets faced somewhat slower EV growth rates, while other areas continued to see rather high demand for EVs. S&P Global expects second quarter global light vehicle production to increase by close to 3%, while they see second half of the year declining almost 2% compared to last year.

Light vehicle production in China continues to be supported by strong EV demand and export activity. The outlook for North American light vehicle production for 2024 was revised higher to 14.6 million units on demand resilience, less impact from supply chain issues and increasing inventory levels of new vehicles.

The light vehicle production forecast for Europe has increased slightly to minus 2%, mainly due to stronger than expected actuals in the first quarter. Based on S&P Global's forecast and our own analysis, our 2024 guidance is built on a global light vehicle production decline of around 1% for the full year.

Now looking on the business outlook on the next slide.

2024 Business Outlook

We continue to see significant improvements in adjusted operating margin in 2024 compared to 2023, supported mainly by: organic sales growth, a more stable light vehicle production, structural and strategic initiatives, cost control and customer compensations. We continue to face inflationary pressure, especially labour costs, and we expect compensation for what is in

8

Autoliv Q1 2024 Results

Friday, 26th April 2024

excess of what we can offset through normal productivity measures. The discussions with our customers are progressing according to plan.

We anticipate that price adjustments and cost compensations will gradually throughout the year offset cost inflation. We expect the pattern to be similar to the quarterly pattern seen in 2022 and 2023.

Looking at our 2024 financial guidance on the next slide.

Full Year 2024 Guidance

Based on global LVP declining ~1%

This slide shows our full year 2024 guidance, which excludes effects from capacity alignment, antitrust-related matters and other discrete items. Our full year guidance is based on a global light vehicle production decline of around 1%.

Our organic sales is expected to increase by around 5%. No net currency translation effects are expected on sales. The guidance for adjusted operating margin is around 10.5%. Operating cash flow is expected to be around US$1.2 billion. Our positive cash flow trend should allow for continued high shareholder returns. We foresee a tax rate of around 28%, in line with our previous indications of 25-30% as the new normal tax rate.

Looking on the next slide.

This concludes our formal comments for today's earnings call, and we would like to open the line for questions from analysts and investors.

Q&A

Colin Langan (Wells Fargo): It seems like your recovery seems to be trending well in Q1, but there have been some concerning headlines. I think at least one automaker has announced some sort of no more claims policy. Are you finding it harder to get recoveries from automakers? Is there a lot more pushback as we are starting the year?

Mikael Bratt: Thank you for your question. And I think I have mentioned it many times before and it is a fact that, I would say, it has never been easy to negotiate these claims. However, I think that over the last two years, we have found a way of working together with our customers and how to identify a fair compensation. And we have also mentioned it is a very detailed negotiation because it is a fact-based and evidence-based discussion.

And as we have indicated for you here in the first quarter, we are progressing according to plan. And yes, I think we have good discussions with our customers on the way forward. But of course, it is tedious work to go through.

Colin Langan: Got it. I think one of the other factors of getting to the 12% was the lack of call-offs on schedules. I mean, how is that trending? Is that getting closer to back to historical norms? Or is there still room there to improve?

Mikael Bratt: Compared to one year ago, of course, we see improvements, and we saw a gradual improvement during 2023. We ended the year over around 90%-ish accuracy when it comes to the call-offs. And now in Q1, we do not see any sequential improvement. So we are still at around 90%. However, what we see is, of course, that it is not the same

9

Autoliv Q1 2024 Results

Friday, 26th April 2024

customers that has the same challenges. So it varies a little bit between the customers, but in large it is very much the same as we had in Q4.

Colin Langan: And the 90% compares to like the 98% historically?

Mikael Bratt: Yes. I mean before the pandemic and what we see as normal is more the 98% to 100% accuracy.

Mattias Holmberg (DNB Markets): A bit curious on the margin guidance. Given that you come in stronger than expected in the first quarter and still leave the full year guidance intact, does that imply that the year will be less back-end loaded? Or is it simply that you do not think that the Q1 beat was material enough to warrant a raised guidance for the full year?

Fredrik Westin: Thanks for the question. Yes, we had a bit weaker top line in the first quarter than expected, but that was offset by the better cost control and also some of the cost reduction activities coming through faster than we had planned. But that does not really change the picture for the full year in terms of our expected cost savings.

And so for the full year, I think we had a good start of the year, but most of our assumptions for the full year remain intact, and that is also why we stick to the full year guidance.

Mattias Holmberg: I have another question on the phasing of your market outperformance for the year. Given what seems to be some delays you mentioned here, electric vehicles in particular, does that change in any way when you expect to see your outperformance? Or should we assume that the 5% or 6% that your organic growth guidance implies will be quite evenly spread throughout the year?

Fredrik Westin: We have not indicated really how it plays out here between the different quarters. I think when you see the change in the launch programmes or the movements between the different platforms, I would say due to the very diverse portfolio that we have and the neutrality when it comes to our products and the driveline connection, we expect very limited, if any, impact from this. Of course, there is some work needed to be done to reschedule any plan. But in terms of the overall launch and outperformance, no impact from that or very limited.

Mattias Holmberg: A quick final one just on raw materials, a small headwind in the quarter. Do you have any visibility on where that is tracking for the second quarter?

Mikael Bratt: We do not guide raw materials on a quarterly basis. But I mean, overall, we expect raw materials to have a smaller impact for the full year. We see improvements on steel and non-ferrous metals, but that is offset on the textile side mainly. And also, we expect to have increases on electronic components, but more or less a fairly neutral development for the full year.

Dan Levy (Barclays): Just wanted to get into the pricing cadence for the year. Maybe if you could just comment there. I think the comment you just provided implied that the 1Q margin strength was driven by better cost control. But maybe you could just provide some comments on how the pricing benefits factored into the 1Q strength. Was anything pulled forward or was that as planned?

Fredrik Westin: Yes. I mean we had commercial recovery also in the first quarter in line with our expectations. And as we have said here that we are expecting a gradual

10