Autoliv, Inc.

Good day and thank you for standing by. Welcome to the Autoliv Inc first quarter 2025 financial results conference call. At this time all participants are in a listen only mode. After the speaker's presentation there will be a question and answer session. To ask a question during the session you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Anders Trapp, Head of Investor Relations. Please go ahead.

Thank you, Melanie. Welcome, everyone, to our first quarter 2025 earnings call. On this call, we have our President and Chief Executive Officer, Mikael Bratt, Our chief financial officer, Fredrik Kvistin, and me, Anders Strat, VP Investor Relations. During today's earnings call, we will cover several topics, including our strong sales and earnings development in the first quarter, market development and tariffs that are affecting the automotive industry, as well as how our strong balance sheet and asset returns provide financial resilience and support the continued high level of shareholder returns. Following the presentation, we will be available to answer your questions. As usual, the slides are available on autoliv.com. Turning to the next slide, we have the statement, which is an integrated part of the presentation and includes the Q&A that follows. During the presentation, we will reference non-US 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 the SEC. Lastly, I should mention that this call is intended to conclude at 3 p.m. Central European Time, so please follow the limit of two questions per person. I now hand over to our CEO, Mikael Bratt. Thank you, Anders.

Looking on the next slide. I am happy to present the solid first quarter showcasing the company's adaptability and resilience, driven by our diverse product portfolio and strong customer relationships. This achievement lays a solid foundation for 2025. However, we remain cautious about the reminder of the year as we navigate the complexities of tariffs and other economic factors. It is encouraging that we, based on light vehicle production data from March, outperformed global light vehicle production despite continued significant headwinds from light vehicle production mix shifts, particularly in China. The stronger than expected sales were partly driven by LVP pull forward in Europe and North America. We significantly improved our profit and operating margin compared to a year ago. This strong performance was primarily driven by well-executed cost reduction activities. Our structural cost reduction program reduced our indirect workforce by over 1,500 since Q1 2023, and our direct headcount by 3,700 over the past year. We neutralized tariffs almost entirely in the quarter by agreement with customers. We also achieved record earnings per share for the first quarter thanks to lower number of shares and high net profit. I am also pleased that we continue to generate a high level of return on capital and plot. Our cash flow remained solid despite higher receivables from strong sales towards the end of the quarter, supporting a high level of shareholder returns. In the quarter, we repurchased and retired 500,000 shares for 50 million US dollars and paid a dividend of 70 cents per share. Looking now on the next slide. Last night, Autoliv was recognized by the automotive news in the category PACE Pilot Innovation to Watch. The prestigious PACE Pilot Award recognizes achievements under development with new materials, fresh ideas, creative processes, and bold execution in the automotive and future mobility space. received the award for its Bernoulli airbag module, which inflates larger airbags more efficiently by leveraging pressure differential with the small single stage inflator, lowering deployment costs and weight. I want to thank the team for this great achievement. It reflects our collective effort and commitment to excellence and innovation. Looking now on financials in more detail on the next slide. Sales in the first quarter decreased by 1% year over year due to negative effects from currency, light vehicle production development, and adverse regional and customer mix development. Adjusted operating income for Q1 increased by 28%. to $255 million from $199 million last year. The adjusted operating margin was 9.9%, 230 basis points better than in the same quarter last year. Operating cash flow was a solid $70 despite a temporary working capital buildup. Looking now on the next slide. We continue to generate broad-based improvement. Our positive direct labor productivity trend continues as we reduce our direct production personnel by 3,700 year over year. This is supported by the implementation of our strategic initiatives, including optimization and digitalization. Our gross margin was 18.6%, an increase of 160 basis points year-over-year. The improvement was mainly the result of direct labor efficiency and headcount reduction, partly offset by a supplier settlement as communicated last year. As a result of our structural efficiency initiatives, the positive trend for RD&E continued. Combined with the gross margin improvement, this led to 230 basis points improvement in adjusted operating margin. Looking now on the market development in the first quarter on the next slide. According to S&P Global data from March, global light vehicle production for the first quarter declined 40 basis points. exceeding the expectation from the beginning of the quarter by 140 basis points. Supported by the scrapping and replacement subsidy policy, we continue to see strong growth for domestic OEMs in China, while light vehicle production in higher content per vehicle markets in North America and Western Europe declined by 7% and 10% respectively. This resulted in an unfavorable regional light vehicle production mix of more than three percentage points in the quarter, significantly impacting our outperformance negatively. In the quarter, we did see call off volatility continue to improve year over year. We will talk about the market development more in detail later in the presentation. Looking now on our sales growth in more detail on the next slide. Our consolidated net sales were 2.6 billion US dollars. This was slightly lower than a year earlier, driven by negative currency translation effects, which reduced sales by almost 4% in the quarter. Excluding currencies, Our organic sales grow by 2%, including out-of-period compensations of 4 million US dollars. The regional sales split reflects the seasonally weak sales in China due to the Lunar New Year celebration. China accounted for 17%. Asia, excluding China, accounted for 20%. America for 33% and Europe for 30%. We outline our organic sales growth compared to last week's production on the next slide. Our quarterly sales were robust and slightly exceeded our expectations, driven by strong performance across most regions, particularly in Europe and America. Based on light vehicle production data from March, we outperformed light vehicle production in all regions except China, fueled by product launches and pricing. In China, our sales to domestic OEMs grow by 19%, aligned with their light vehicle production growth. Our growth with the global customers in China was just one percentage point below theirs. LVP growth. Due to LVP mix shift that continues, we underperformed significantly in China overall. Among the primary net sales growth drivers for the company this quarter, four were Chinese OEMs and two were Japanese, highlighting the importance of the Asian market and its customers. On the next slide, we show some key model launches. New launches in the first quarter of 2025 was, as you can see on this slide, mostly in America, Europe, and South Korea, with few launches in China. The reason for this is that many OEMs are planning to unveil new vehicles in the Shanghai Auto Show in April. We expect significant number of new launches in China as of Q2. But we are unable to disclose these launches as the vehicles have not yet been unveiled. The models displayed here features Autoliv content for vehicles ranging from approximately 130 to nearly 500 US dollars. In terms of Autoliv's sales potential, the US-produced Honda Passport and the Ford Expedition are the most significant. Now looking at the next slide. I will now hand it over to Fredrik Christian. Thank you, Mikael. I will talk about the financials now more in detail on the next few slides. So turning to the next slide. This slide highlights our key figures for the first quarter of 2025 compared to the first quarter of 2024. Our net sales was 2.6 billion, representing a 1% decrease. Gross profit increased by 35 million, and the gross margin increased by 1.6 percentage points. The adjusted operating income increased from 199 million to 255 million, and the adjusted operating margin increased by 230 basis points to 9.9%. The reported operating income was 1 million lower than the adjusted operating income, mainly due to costs for capacity alignment. Adjusted earnings per share diluted increased by 58 cents, where the main drivers were 48 cents from higher operating income and 13 cents from lower number of shares. Our adjusted return on capital employed was a solid 26%, and our adjusted return on equity was 29%, driven by share buybacks impacting total equity. We paid a dividend of 70 cents per share in the quarter, and repurchased shares for slightly over 50 million US dollars and retired half a million shares. Looking now on the adjusted operating income bridge on the next slide. In the first quarter of 2025, our adjusted operating income increased by 56 million. Operations contributed with 46 million mainly from high organic sales and improved operational efficiency supported by the better call of accuracy. The net currency effect was $5 million negative, as the positive effects from the Mexican peso versus the US dollar was offset by translation and revaluation effects. The impact from raw materials was around $5 million negative. Out-of-period cost compensation was $4 million higher than last year. Costs for SG&A and RD&E net decreased slightly, despite higher costs for SG&A personnel. The recycled accumulated currency translation differences related to the divestment of our idle operations in Russia amounted to 12 million. And the year-over-year impact from the supplier settlement in 2024 was around 2 million negative. Looking now at the full year result on the next slide. On the cash flow, sorry, on the next slide. For the first quarter of 2025, operating cash flow decreased by $45 million compared to the same period last year to $77 million, mainly a result of increased receivables following the strong sales towards the end of the quarter. Capital expenditures net decreased by $47 million. Capital expenditures net in relation to sales was 3.6% versus 4.5% a year earlier. The lower level of . The free operating cash flow was negative 16 million compared to negative 18 million in the same period the prior year as the lower operating cash flow was offset by lower capex. The cash conversion in the last 12 months defined as free operating cash flow in relation to net income was around 72%, slightly below our target of 80%. Now looking at our trade working capital development on the next slide. Trade working capital decreased by 56 million compared to the prior year, where the main drivers were 11 million in higher accounts receivables, 17 million in lower accounts payables, and 84 million in lower inventories. In relation to sales, the trade working capital decreased from 12.8% to 12.4%. The improvement in trade working capital is a result of our multi-year working capital improvement program and an improvement in customer call of accuracy enabling a more efficient inventory management. Now looking on our debt leverage ratio development on the next slide. Autoliv has consistently prioritized maintaining a strong leverage ratio, reflecting our prudent financial management and commitment to a strong balance sheet. This approach has enabled the company to navigate economic fluctuations, invest in innovation, and continue delivering value to stakeholders over time. Our leverage ratio is virtually flat year-over-year at 1.3 times, despite close to $700 million in shareholder returns. Compared to the end of last year, our debt leverage ratio increased by 0.1 times as our net debt increased by 242 million US dollars while the 12-month trailing adjusted EBTA increased by 55 million US dollars. With that, I hand it back to you, Mikael. Thank you very much, Fredrik. On to the next slide. In recent years, our business has faced significant challenges from COVID disrupted global supply chain, component shortages, inflation, and the changing LVP landscape. Our company has adapted quickly, found new ways to mitigate risk, and maintaining profitability. Now facing a challenging tariff situation, we are well equipped with a diversified customer portfolio, a broad regionalized footprint, a strong balance sheet, and a single focus on automotive safety and saving lives. Autoliv has a diversified customer and model mix in North America. This diverse model mix base helps Autoliv mitigate risks associated with slowing import of certain vehicle models from Mexico and Canada. The company has multiple production and assembly facilities across North America. ensuring timely delivery of airbags, seatbelts and steering wheels. Our largest production hub is in Mexico. However, not all products are made there meet USMCA standards due to customer specific components or the unavailability of certain materials like magnesium and leather for steering wheels. Our logistics in North America are complex. While some of our Mexican production support local vehicle manufacturing, the majority is still destined for U.S. vehicle assembly plants. For products sent to the U.S., customers manage about one-third of the transportation and import, and these shares continue to grow. Driving from past experiences, Autoliv has developed a strategy to handle tariffs. Over the years, we demonstrated that our methods for navigating challenging environments are effective. On to the next slide. The instability and overall magnitude of the tariffs have placed the automotive industry in a challenging position. Tariff costs need to be passed on to the end consumers, which would lead to higher vehicle prices and potentially impact consumer demand and light vehicle production. To mitigate the effects of US tariffs on auto parts and materials, we have implemented several strategic measures. We established a task force early in the year with the focus on minimizing the impact of We are engaged in ongoing discussions with our customers to find setups that are mutually beneficial while negotiating compensation for the transition period. Our large existing footprint in the U.S. enables us to navigate the challenges posed by tariffs effectively. It gives us opportunities to ramp up production in the U.S. Should that be the best option when evaluating future production locations together with our customers? We are committed to increase our compliance with the USMCA regulation, working closely with our customers and suppliers to achieve this through increased local sourcing of components and changing of specifications. On to the next slide. The outlook for global light vehicle production in 2025 has become significantly more uncertain since January, with regional variation influenced by tariffs, slowing economic growth and other factors. In North America, the production outlook may be significantly downgraded due to trade risk and higher vehicle prices from import tariffs. This reduction is likely to affect vehicles produced in Mexico and Canada more severely. In Europe, production is expected to increase slightly short-term due to revision in EU regulations and higher demand in some Eastern European markets. China is also growing, driven by government policies supporting the new energy vehicle market. Japan and South Korea are potentially facing decline due to the impact of lower exports to the US. Overall, while some regions are still expecting growth, the global auto industry remains cautious, navigating the complexities of tariffs and other economic factors. Now looking on the business outlook on the next slide. We expect 2025 to be a challenging year for the automotive industry. However, our ongoing focus on efficiency is expected to further enhance our profitability. We anticipate a significant improvement in our sales performance in China. Additionally, our strong cash conversion and solid balance sheet provide financial resilience and a robust foundation for maintaining high shareholder returns. We expect cost pressures from in 2025. But still, we expect some pressure coming mainly from labor, especially in Europe and America. However, the ongoing tariff situation could add inflationary pressure. Certain raw material prices have increased, and we expect headwind for the year, mainly in the US. We successfully navigated the new tariff environment in the first quarter. This gives us confidence that it's possible to continue on that course, but there is significant uncertainty. Contrary to the past three years, we do not anticipate a gradual quarter-by-quarter adjusted operating margin increase as the inflationary environment differs from recent years. However, the fourth quarter is still expected to be the strongest of the year. Turning to the next slide. This slide shows our full year 2025 guidance, which excludes effects from capacity alignment, antitrust-related matters, as well as no further changes to tariffs or trade restrictions that are in effect as of April 15, 2025. as well as no significant changes in the macroeconomic environment or changes in customer call of volatility or significant supply chain disruptions. The business environment uncertainties make it difficult to predict the reminder of 2025. However, based on the strong first quarter performance and encouraged... Operating cash flow is expected to be around 1.2 billion US dollar. Our positive cash flow and strong balance sheet It supports our continued commitment to a high level of shareholder return. Our full year guidance is based on a global life vehicle production decline of around negative 0.5%. A tax rate around 28% and that the net currency translation effect on sales will be around minus 3%. We are monitoring the situation closely and are prepared to be as agile as needed to adjust to any changes. Looking on the next slide. We are pleased to invite you to the Autoliv Capital Market Day on June 4th, 2025 in Stockholm, Sweden. Join us to learn more about our journey towards achieving our target. capturing growth opportunities, and translating these into attractive and sustainable payroll returns. We will showcase our belief in strategically securing a strong position with successful OEMs, supporting our medium and long-term growth in a rapidly changing market environment. You will also have the opportunity to see our latest innovation and technology. I personally look forward to seeing you all in Stockholm. Now turning the 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. I will now hand it back to Madeleine.