Autoliv, Inc.

Again, welcome everyone to our fourth quarter and full year 2023 earnings call. On this call, we have our president and CEO, Mikael Bratt, and our chief financial officer, Fredrik Westin, and me, Andersson, VP Investor Relations. During today's earnings call, Mikael and Fredrik will, among other things, provide an overview of the record sales and earnings, the strong cash flow, balance sheet, and order intake for the 2023 earnings call. They will also outline the expected sequential margin improvement in 2024 and the journey towards our targets. Mikael and Fredrik will also provide an update on our general business and market conditions. We will then remain available to respond to your questions, and as per usual, the slides are available on altoliv.com. Turning to the next slide, we have the safe harbor statement, which is an integrated part of this presentation and includes the Q&A that follows. During the presentation, we will reference non-U.S. GAAP measures. The reconciliations of historical U.S. GAAP to non-U.S. GAAP measures are disclosed in our quarterly press release available on autoliv.com and in the 10-K that will be filed with the SEC. Lastly, I should mention that this call is intended to conclude at 3 p.m. Central European Time, so please follow a limit of two questions per person. I will now hand over to our CEO, Mikael Bratt.

Thank you, Anders. Looking on the next slide. I'd like to recognize the entire team for delivering another strong quarter, which reflects our strong execution culture. We ended 2023 on a strong note as we achieved or exceeded all our 2023 indications. In the quarter, our organic sales grew by 16%, outperforming light vehicle production significantly. especially in rest of Asia and Japan. The strong growth was mainly a result of product launches and customer compensations for inflationary pressure, as well as higher than expected light vehicle production. We generated a broad-based improvement in key areas, including gross margin and adjusted operating margins, both year over year and sequentially. Our cash flow was strong and the net debt leverage improved while we increased our dividend and repurchased shares for 150 million in the quarter or approximately 352 million US dollars for the year. We are making progress towards our intention of reducing our indirect workforce by up to 2000. We now expect savings of around 50 million in 2024 from these initiatives. Order intake developed well. It is especially encouraging to see the strong order intake with fast growing Chinese OEMs. For 2024, we foresee sales growing in mid single digit, despite an expected modest decline in light vehicle production. 2024 should take us one important step closer to our adjusted operating margin target, driven by improved call-off stability, growth, structural and strategic initiatives, and customer compensations. However, the heightened seasonality of earnings of prior years is likely to be repeated in 2024. Now looking at the order intake more in detail on the next two slides. Our order intake for the full year continued to develop well, supporting long-term growth in a rapidly changing technology environment with many new OEMs and EV platforms. The estimated lifetime value of our 2023 order intake was the highest in the past five years. The strong order intake is an evidence that our company remains the clear leader in the passive safety automotive industry. One of our internal key performance indicators, customer satisfaction, continues to be on a high level. We continue to strive for improving products, services, processes, and costs while maintaining industry-leading quality. Our strong order intake with a good mix of EV and ICE platforms and a high level of customer satisfaction supports our confidence regarding growth also beyond 2024. Looking on the next slide. In 2023, order intake for new EV platform was high, both with new EV makers and traditional OEMs. We estimate that around 45% of our order intake in 2023 was for future electric vehicles. Consumer demand for EVs may have faded somewhat in the short term, but regulatory changes supporting EVs will increase, at least in Europe. Although our products are drivetrain agnostic, it is important to have balanced exposure both to EVs and ICE to capture future market growth. With the order book that we have built, we believe that we have a good exposure to all growing segments. New automakers, mainly in North America and China, accounted for around 25% of our order intake. Fast-growing Chinese OEMs accounted for around 50% of our order intake in China, and we expect this group of OEMs to account for close to 40% of our Chinese sales in 2024, up from 22% in 2022. We won multiple awards supporting new markets and industry trends like pretensioner seatbelts, for rear seat passengers, airbags with low carbon cushion material, as well as anti-submarining airbags for zero gravity style seats for self-driving vehicles. As a result of the strong order intake in the past years, we expect an increase in overall product launches in 2024, especially in China and Europe. This development contributes to building an even stronger platform for our long-term success. Now looking at the significant sequential cost improvements during 2023 on the next slide. Year to date, we have generated a broad-based improvement in key areas, both year-over-year and sequentially. On this slide, we highlight the sequential improvements. In the fourth quarter, we continued to actively address our cost base while successfully negotiating with our customers to secure pricing and other compensations that reflect the higher inflation. Our direct labor productivity continues to trend up, supported by the implementation of our strategic initiatives, including automation and digitalization. Our gross margin improved by 410 basis points compared to the first quarter and by 140 basis points from the third quarter. This is mainly the result of the higher labor efficiency and customer compensations. The positive trend for RD&E and SG&A in relation to sales have continued and have now declined by 270 basis points since Q1, partly as a result of normal seasonality with high engineering reimbursements in the fourth quarter. Combined with the gross margin improvement, this led to substantial improvement in adjusted operating margins. Looking now on financials in more details on the next slide. Sales in the fourth quarter increased by 18% year-over-year, mainly due to higher light vehicle production, new product launches, higher prices and other compensations, and favorable currency translation effects. The strong sales increased and cost reductions activities led to substantial improvement in adjusted operating income. Adjusted operating income increased by more than 40% to 334 million from 233 million last year. The adjusted operating margin was 12.1% in the quarter, an increase by over two percentage points from the same period last year, and by almost seven percentage points from the first quarter. Operating cash flow was 447 million, which was 15 million lower than the same period last year. The main reason for the lower cash flow was the unusual strong cash flow last year, which was related to timing effects of customer recoveries. Looking now on the structural cost savings activities on the next slide. To secure our medium and long-term competitiveness and to support our financial targets, we launched a cost reduction initiative in June 2023 with the intent of reducing our indirect headcount by up to 2,000 and a direct workforce headcount reduction of up to 6,000. We estimate that the annual cost reductions will amount to around 130 million when fully implemented. with around 50 million already in 2024 and around 100 million expected in 2025. Total accrual for capacity alignment in 2023 amounted to 280 million US dollars. We do not plan to announce further major reduction initiative details. At the end of 2023, around 75% of the planned indirect reductions were detailed and announced. we already see positive impact on direct labor productivity as a result. Looking now on our sales growth in more detail on the next slide. Our consolidated net sales increased to almost 2.8 billion US dollars, a new quarterly record. This was over 400 million higher than a year earlier, driven by price, volume, mix, and currencies. Out-of-period cost compensations contributed with 45 million U.S. dollars. Out-of-period compensations are retroactive price adjustments and other compensations that mainly relates to the first three quarters, but were negotiated in the fourth quarter. Looking on the regional sales split, Asia accounted for 41 percent, Americas for 31 percent, and Europe for 28 percent. We outline our organic sales growth compared to LVP on the next slide. I am very pleased that our organic sales growth significantly outperformed global light vehicle production growth in the fourth quarter, as we continue to execute on our strong order book. According to S&P Global, fourth quarter light vehicle production increased by 9% year-over-year. This was more than 5 percentage points higher than expectations at the beginning of the quarter. of the higher than expected production coming from domestic OEMs in China and in North America as the impact of the URW strike was smaller than expected. In the quarter, we outperformed global light vehicle production by around seven percentage points with strong performance, especially in the rest of Asia and Japan. The modest underperformance in China was mainly driven by a negative customer mix following strong light vehicle production growth for lower safety content vehicles. On to the next slide. For the full year, we outperformed global light vehicle production by around 9 percentage points, despite a negative regional light vehicle production. We outperformed in Japan by 15 percentage points, in rest of Asia by 14 percentage points, and in China by 8 percentage points. The performance in China was mainly driven by increasing sales to domestic Chinese OEMs. Our sales to this group outperformed light vehicle production by 17 percentage points and accounted for 28% of our sales in China, up from 22% in 2022. In 2023, our global market share was around 45%. This is almost six percentage points higher than five years ago when the electronics business was spun out. Our global market position is strong in all product categories with 47% of airbags, 45% of seatbelts and 40% of steering wheels. Supported by new launches, market share gains and content per vehicle growth, as well as our further price increases, We expect sales to outperform light vehicle production by five to six percentage points in 2024. On the next slide, we see some key model launches for the fourth quarter. During 2023, we had a record number of product launches, especially in China, Europe, and Japan. For 2024, we see another step up in number of product launches, particularly in the first half of the year. The trend towards electrification is clear on this slide, with seven models being available as electric versions. The models shown here have an Autoliv content per vehicle of around 110 or higher, with the highest at over 800 US dollars. In terms of Autoliv sales potential, the Seeker 007 launch is the most significant. I will now hand it over to our CFO, Fredrik Westin, We'll talk you through the financials on the next slide.

Thank you, Mikael. This slide highlights our key figures for the fourth quarter of 2023 compared to the fourth quarter of 2022. Our net sales were almost 2.8 billion. This was an increase of 18% year over year. Gross profit increased by 131 million or by 33% to 530 million while the gross margin increased by 2.2 percentage points to 19.3%. The adjusted operating income increased from 233 million to 334 million, and the adjusted operating margin increased by 220 basis points to 12.1%. Loan gap adjustments amounted to 97 million, almost entirely for capacity alignments. Adjusted earnings per share diluted increased by 191 cents, where the main drivers were 75 cents from higher adjusted operating income, 109 cents from tax and 10 cents from other items, partly offset by financial items. Our adjusted return on capital employed and return on equity increased to 33% and 47% respectively. We increased the dividends to 68 cents per share in the quarter and repurchased and retired 1.5 million shares for around $150 million. under our existing $1.5 billion stock repurchase program. Looking now on the adjusted operating income bridge on the next slide. In the fourth quarter of 2023, our adjusted operating income of 334 million was 101 million higher than the same quarter last year. Our operations were positively impacted by improved pricing and other customer compensations, higher volumes, lower cost for premium freight, as well as our strategic initiatives, but partly offset by headwinds from general cost inflation. The impact from raw material prices were 14 million positive. Out of period cost compensation was approximately 37 million higher than during the same period last year. The VFX impact was limited. Cost for SG&A and RD&E net combined was 30 million higher, mainly due to lower engineering income and labor cost inflation. In relation to sales, it was unchanged compared to last year. The margin was also affected by the accruals for warranty and recalls of 70 million or 65 basis points. The accruals are related to three different cases. As a result, the leverage on the higher sales excluding currency effects and warranty and recall costs was in the upper half of our typical 20 to 30% operational leverage range. Looking now at the full year financial results on the next slide. Despite higher than expected light vehicle production, 2023 was again a turbulent year with labor cost inflation, supplier disruptions, customer price negotiations, and continued volatile light vehicle production. Our net sales were 10.5 billion, with sales increasing organically by over 18%, twice the increase in the underlying light vehicle production, and three percentage points higher than expected in the beginning of the year. The adjusted operating income increased by 54% to 920 million. The adjusted operating margin was 8.8% compared to our guidance of around 8.5% to 9%. The operating cash flow was 982 million compared to the guidance of around 900 million. Adjusted earnings per share increased by $3.79 per share to $8.19. where the main drivers were $2.51 from higher adjusted operating income and $1.31 from lower income taxes, partly offset by 18 cents from financial items. Dividends of $2.66 per share were paid, and we repurchased and retired 3.7 million shares for around $352 million. Sales, adjusted operating income, operating cash flow, as well as the adjusted earning per share were all the highest we have ever achieved. Looking now at the full year adjusted operating income bridge on the next slide. In 2023, our adjusted operating income of 920 million was 322 million higher than last year. The impact from raw material prices was limited. FX impacted the operating profit negatively by 54 million. This was mainly a result of negative translation effects from the Mexican PSO. Cost for SG&A and RD&E net combined was 95 million higher. However, in relation to sales, it was down 60 basis points. As a result, the leverage on the higher sales, excluding currency effects, was slightly above our typical 20% to 30% operational leverage range. This is despite not getting any leverage on the inflation compensation from our customers. Looking now on the cash flow on the next slide. For the fourth quarter of 2023, operating cash flow decreased by 15 million to 447 million compared to the same period last year, which was impacted by positive timing effects of customer compensations. Capital expenditures net decreased to 150 million from 165 million. In relation to sales, it was 5.4% this year, down from 7.1% last year. Free cash flow was 297 million about the same as last year. Our full year operating cash flow was 982 million, a new record for the company. Full year capital expenditures net in relation to sales was virtually unchanged at 5.4%. Free cash flow for the full year improved year over year by 186 million to 414 million. Our cash conversion defined as free cash flow in relation to net income was 85%. Now looking at our trade working capital development on the next slide. During the fourth quarter, trade working capital decreased by 71 million, driven by 120 million higher accounts payables, partly offset by 30 million higher inventories, and by 19 million in higher receivables. The higher inventories and receivables were mainly due to the higher sales. Our capital efficiency program aims to improve working capital by 800 million and to date we have achieved 580 million. Improvements in receivables and especially in inventories are lagging due to the high call of volatility and hence planning changes resulting in inefficiencies. We expect this to improve significantly in tandem with the reduced call of volatility over coming years. Now looking at shareholder returns over the past five years on the next slide. Over the years, Autoliv has shown its ability to generate solid cash flow in periods with difficult market environments, such as COVID lockdowns, the war in Ukraine, industry supply chain challenges, and related volatile and declining light vehicle production. 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. Over the last five years, we have reduced the net debt significantly while returning almost $1.4 billion directly to shareholders. This includes stock repurchases of 5.1 million shares for a total of $467 million as part of the current stock repurchase program. Since we initiated the stock repurchase program, we have reduced the number of outstanding shares by almost 6%. We do consider several factors when executing the program, such as our balance sheets, 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. Now looking on our leverage ratio development on the next slide. Despite increased stock repurchases and higher dividend, the debt leverage ratio at the end of December 2023 improved to 1.2 times from 1.3 times at the end of the third quarter. This was a result of 108 million higher 12 months trailing adjusted EBTA as the net debt was unchanged. We expect that our debt leverage and positive cash flow trend will allow for continued high shareholder returns going forward. I now hand it back to you, Mikael. Thank you, Fredrik.