Autoliv, Inc.

Good day and thank you for standing by. Welcome to the Autoliv incorporated second quarter 2024 financial results conference call and webcast. At this time all participants are in listen only mode. After the speaker's presentation there will be the question and answer session. To ask a question during the session you need to press star 1 1 on your telephone keypad. You will then hear an automatic message advising your hand is raised. To withdraw a question please press star 1 1 again. Please be advised that today's conference has been recorded. I would now like to hand the conference over to our first speaker today, Anders Trapp. Please go ahead.

Thank you, Nadja. Welcome, everyone, to our second quarter 2024 earnings call. On this call, we have our president and chief executive officer, Mikael Bratt, and our chief financial officer, Fredrik Christine, and me, Anders Trapp, VP of Investor Relations. During today's earnings call, Mikael and Fredrik will, among other things, provide an overview of our sales, earnings, and cash flow development in the quarter, how our strong balance sheet and asset return rates support a continued high level of shareholder returns. They will outline the expected sequential margin improvement in the second half of 2024 towards our targets, and the continued improvement of our business with domestic Chinese OEMs. 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. 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 some non-U.S. GAAP measures. The reconciliations of historical US GAAP to non-US GAAP measures are disclosed in our quarterly earnings release available on autoliv.com and in the 10Q that will be filed with VSEC. 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 now hand over to our CEO, Mikael Bratt.

Thank you, Anders. Looking on the next slide. I would like to thank all our employees for managing through a challenging quarter with lower and more volatile light vehicle production than expected. Profitability improved both year over year and sequentially despite lower net sales, driven by successful execution of cost reductions and pricing. I am pleased that we have been able to settle cost compensation claims with the majority of our customers and target to close most of the remaining claims in Q3. We are making good progress towards our previously announced intention of reducing our indirect workforce by up to 2,000 and related savings of 50 million US dollars in 2024. Sales in all regions in the second quarter developed less favorably than what we had expected, especially in June. This was due to lower light vehicle production with certain key customers following weaker sales and inventory adjustments. We saw no improvement in call-off volatility compared to first quarter 2024. However, it is encouraging that customer production plans for the third quarter are stronger, indicating that the June weakness should be temporary. The lower than expected sales impacted our adjusted operating margin in the quarter, with an operating leverage at the higher end of our normal 20% to 30% range. Cash flow continued to be strong, supporting both a high level of shareholder returns and an improvement of the leverage ratio to 1.2 times, even with shareholder returns of 250 million US dollars in the quarter. I am also pleased with the high return on capital employed. In addition to the credit ratings from S&P, we have now added a second credit rating as Modi's on July 17 assigned a long-term credit rating of BAA1 with stable outlook. Although we adjusted our full year 2024 guidance down, mirroring softer global light vehicle production, we remain focused on delivering on our around 12% adjusted operating margin target, while the positive development of our cash flow and balance sheet supports our continued commitment to a high level of shareholder returns. Illustrating our close cooperation with innovative and fast-growing Chinese OEMs, we have signed a strategic cooperation agreement with Xiaopeng Aero, Chinese leading flying car innovator, to pioneer safety solutions for future mobility. Looking now on the market development in the second quarter on the next slide. The global light vehicle production for the second quarter came in more than three percentage points lower than expected in the beginning of the quarter, according to S&P Global. The largest reductions were in Europe, Japan, and in China. In part, the reductions reflect a focus from OEMs on inventory management due to recent sales weakness in China and increasing headwinds for certain OEMs. As a result, we continue to experience high call-off volatility throughout the quarter, especially in June. The lower volumes and the higher volatility together with a negative customer mix had a substantial impact on our top line and earnings. especially in June when our sales was 12% lower than expected at the beginning of the quarter. However, we expect this to be a temporary headwind as customer production plans are developing better so far in the third quarter. We will talk about the market development more in detail in the presentation. Looking now on our cost improvements on the next slide. We continue to generate broad-based improvement in key areas. Our direct labor productivity continues to trend up, supported by the implementation of our strategy initiatives, including optimization and digitalization. Year over year, we have reduced our direct production personnel by 1,400. Our gross margin improved by 130 basis points from the first quarter and year over year. The improvement was mainly the result of the higher direct labor efficiency, reductions within the indirect workforce, and customer compensations. As a consequence of the lower than expected sales, RD&E and SG&A in relation to sales increased by 30 basis points versus Q2 2023. Now looking on financials in more detail on the next slide. Sales in the second quarter decreased by 1% year over year on unfavorable currency translation effects. lower light vehicle production and a negative regional and customer light vehicle production mix. The adjusted operating income for Q2 increased by 4% to 221 million from 212 million US dollars last year. The adjusted operating margin increased by 50 basis points to 8.5% despite lower sales. Operating cash flow was 340 million, which was 39 million US dollars lower compared to the unusually strong second quarter last year. Q2 last year was positively affected by reversal of negative working capital effects. Looking now on our sales growth in more detail on the next slide. Our consolidated net sales was 2.6 billion US dollars. This was approximately 30 million US dollars lower than a year earlier, driven by negative currency translation effects of 49 million. Lower light vehicle production and lower level of out-of-period cost compensation, partly offset by a positive price positive price, volume, and product mix. The negative currency translation effect reduced sales by almost 2% in the quarter. Out-of-period cost compensations contributed with approximately $6 million in the quarter. This was $24 million lower than in the same period last year, reflecting the lower level of inflation this year. Out-of-period compensations are retroactive price adjustments and other compensations that mainly related to our first quarter but were negotiated in the second quarter. Looking on the regional sales split, Asia accounted for 37%, America for 34%, and Europe for 29%. We outlined our organic sales growth compared to light vehicle production on the next slide. Our sales in the quarter came in lower than expected, as light vehicle production in all major regions was lower than predicted. According to S&P Global, light vehicle production declined by 1% year-over-year in the quarter. This was more than three percentage points worse than expected at the beginning of the quarter. We estimate that geographical light vehicle production mixed had 190 basis points negative impact on our outperformance. Despite this, some key customers were adjusting inventories. Our organic sales growth outperformed global light vehicle production by 140 basis points. We continued to outperform light vehicle production significantly in Japan, rest of Asia and in Europe, fueled by product launches and pricing. The outperformance in the rest of Asia was driven by South Korea and India. For India, we expect a strong outperformance in the second half of the year from a number of launches early in the third quarter. In America, we underperformed slightly as some key customers reduced production. In China, the market developed unfavorably with certain brands and models with low out-of-leave content growing strongly, while some of our key global customers' production declined significantly, leading to seven percentage points underperformance in China. On the next slide, we look a bit closer on the Chinese market and our development there. We are rapidly strengthening our position with fast-growing domestic Chinese OEMs. It has been a long road for China's domestic producers to really rival global vehicle manufacturers. With China taking the lead in the production of electric vehicles and with the high rate of new domestic Chinese car models coming to market, we have seen a major pivot towards domestic brands in the Chinese market. As a result, Chinese OEMs have grown their share of the Chinese light vehicle production from around 40% in the beginning of 2022 to close to 55% in the second quarter of this year. As a result of our strong order intake in recent years, we have continued to expand our business with domestic Chinese OEMs. They accounted for 38% of our Chinese sales in the Q2 2024, up from 20% in the beginning of 2022. In Q2 2024, our sales to this group increased by 39% versus a year ago and by 25% versus Q1 2024. The safety content per vehicle, CPV, is on track to grow by around 10% from 2022 to 2024. for both global and domestic Chinese OEMs. Due to the large difference in CPV between the two groups and the fast-growing market share for Chinese OEMs, the average CPV is expected to grow by only 5% during the same period. This has a negative impact on our ability to outperform light vehicle production in China currently. Although incentive programs such as subsidies for ICE vehicles replacement and vehicle financing programs have been implemented to support light vehicle sales, demand remains stagnant in China. Due to stiff competitions between OEMs, a wide-ranging price war has taken place since last year. Therefore, many end consumers have become hesitant to purchase a new vehicle on expectations for further price reductions. However, lately we have seen signs of a moderation of the price war. The potential impact of the new EU tariffs on Chinese exports remains difficult to assess. In this context, it is important to understand at the large majority of the Chinese exports on conventional ICE cars to Asia, the Middle East and Africa. However, we see global OEMs relocating production from China to Europe and Chinese OEMs accelerating efforts to add production capacity outside of China. Looking at our recent model launches on the next slide. Although we see some changes to our customers' plans for model launches, we continue to expect a record number of product launches for 2024. As can be seen from this slide, six of these models are produced in China, reflecting our strong position with Chinese OEMs as well as with global OEMs producing in China. The trend towards electrification continues, especially in China. On this slide, all models but one are being made available as electric versions. The models shown here have an Autoliv content per vehicle from around $130 to over $500. In terms of Autoliv sales potential, the Nissan Kicks launch is the most significant, followed by the Stellato S9, which is a collaboration between Huawei and Bike. The long-term trend to higher CPV is supported by front center airbags on five of these models. More advanced seat belts and pedestrian protection hood lifters. Now looking at the sustainability highlights on the next slide. Guided by our vision of saving more lives, we are taking significant steps towards our sustainability commitment. For example, Autoliv and the UN Road Safety Fund are collaborating to enhance motorcycle safety. The collaboration supports the UN Sustainable Development Goal 3.6, which aims to reduce road traffic fatalities and injuries, and Autoliv's goal of saving 100,000 lives annually. We are also completely phased out sulfur hexafluoride, SF6, that was used in steering wheel production. SF6 was our largest source of fugitive emissions that was responsible for around 6% of Autoliv's total Scope 1 and 2 emissions in 2023. We have continued to increase the use of renewable electricity though additional renewable electricity instruments and further increasing on-site solar energy generation capacity. In collaboration with Key's supply chain partners, we have developed airbag cushions made from 100% recycled polyester. Using recycled materials is a crucial step towards Autoliv's commitment to reduce emissions across its product range and will contribute to Autoliv's ambition to achieve net zero greenhouse gas emissions across the supply chain by 2040. I will now hand over to our CFO, Fredrik Westin, who will talk you through the financials on the next slide.