Autoliv, Inc.

Welcome everyone to our second quarter 2020 earnings call. On this call, we have our president and chief executive officer, Mikael Bratt, our chief financial officer, Monika Grama, and me, Anders Trapp, VP Investor Relations. During today's earnings call, we will highlight several key areas, including our strong performance despite the challenging market environment. We will provide an update on our structural cost reduction initiative in EMEA. An update on the latest market development and our full year guidance and the potential impact of ongoing year political challenges. 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 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-use gap measures. The reconciliations of historical use gaps to non-use gap measures are disclosed in our course learning release available on Outlook.com and in the 10Q that will be filed with the SEC and also at the end of this presentation. 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 it over to our CEO Mikael Bratt.

Thank you Anders. Looking on the next slide. We delivered a record second quarter both for sales and adjusted operating income, underscoring the resilience of our company and the strength of our market position. Supported by strong customer partnerships and a relentless focus on continuous improvement. We have built a solid momentum for the rest of the year. During the quarter, we also navigated geopolitical development effectively, mitigating the impact of tariffs, supply chain disruptions, and raw material cost volatility. And as you might have seen in the report, and will hear from us during this call, we had several positive and negative one-time items in the quarter. It includes a supplier settlement reversion from Q3 2025, an IEPA refund, government income in India, an impairment charge related to restructuring activities in Turkey, and a reverse expected credit loss reserve. Combined, these items have virtually no impact on the adjusted operating margin and only a slight negative impact on the top line. Our positive sales momentum in Asia continued during the quarter. In China, we once again outperformed light beacon production, driven by strong growth with Chinese OEMs, where our sales outperformed by more than 40% this fall. In India, we grew sales by 36% organically, reflecting mainly the trend of increased safety content in vehicles in India. Adjusted operating income and margin improvement improved despite raw material headwinds, particularly higher helium prices. The strong performance was primarily driven by higher sales and well-executed activities to improve efficiency and costs. I am pleased that our cash flow improved in line with our expectations, resulting in record operating cash flow for the second quarter and supporting our ambitious shareholder return strategy. Despite repurchasing over 1.6 million shares for 200 million US dollars and paying a dividend of 64 million US dollars, our leverage ratio improved to 1.2 times. During the quarter, we announced additional structural cost initiatives, which we will elaborate on in the next slide. Based on what we know today, we reiterate our full year 2026 guidance of flat organic sales with continued significant outperformance of light vehicle production in both China and India. We continue to expect an adjusted operating margin of around 10.5 to 11%. This is based on the assumption that global nitrogen production will decline by around 2.5% and that the gross headwind from raw materials is around 110 million US dollars. I'm also proud that we signed strategic cooperation agreements with leading Chinese beacon manufacturers, Great Wall Motor and Chopin. These agreements mark important milestones in our strategy to expand with leading Chinese vehicle manufacturers and further demonstrate the competitiveness of our safety solutions. They strengthen our position as a trusted safety partner and create a strong platform for sustainable long-term growth, both in China and globally, as they expand their footprint. Looking now on our continued cost reduction activities on the next slide. To strengthen our competitiveness and support our financial targets, we are continuing our global structured cost reduction initiatives. As a part of this effort, we have decided to gradually continue our manufacturing operations in Turkey. which today produce steering wheels, airbags, and seatbelts. Production will be transferred to our existing facilities across EMEA region, allowing us to optimize our manufacturing footprint while maintaining our ability to serve customers efficiently. This decision is expected to affect approximately 2,200 employees. The transition will take place over the coming years, with the complete closure anticipated during the first half of 2020. From a financial perspective, we expect total restructuring charges of approximately 142 million US dollars, of which 90 million US dollars was recognized in the second quarter of 2020. Cash out is expected to be approximately 129 million US dollars with a limited impact on our 2026 cash flow. Importantly, this initiative is expected to generate annually pre-tax savings of approximately 40 million US dollars with benefits beginning to materialize in 2027 and reaching the full run rate in 2028. Overall, this action is an important step in improving our cost competitiveness and it's supporting us in achieving our financial target. Looking now on the next slide. Second quarter sales increased by approximately 3% year over year. Driven by outperformance relative to light vehicle production along with favorable currency effects, partly offset by lower tariff-related compensations. The adjusted operating income for Q2 increased by 7% to $270 million. The adjusted operating margin was 9.6%, 30 basis points higher. Operating cash flow was a strong $434 million, an increase of $157 million. Looking on to the next slide. We continue to deliver broad-based improvements. Our positive direct labor productivity trend continues. This is supported by the implementation of our strategic initiatives, including automation and digitalization. Gross profit increased by $8 million, while the gross margin decreased by 30 basis points, mainly due to the reversal of a supplier. The decline in gross margin from 18.5% to 18.2% driven by a supply compensation reversal and asset impairment related to the Turkey restructuring, which combined reduces gross margin by almost 80 basis points. RD&E net increased year over year, primarily on negative currency translation effects, higher personnel costs, and lower engineering income. due to timing of specific customer development projects. SG&A decreased by 7 million US dollars, mainly due to reverse estimates of credit loss reserves, partly offset by negative FX translation effects. In relation to sales, SG&A improved by 40 basis points to 4.9%. Looking now on the market development in the second quarter on the next slide. According to S&P Global's July data, global light vehicle production declined by 0.3% in the second quarter, approximately 160 basis points better than expected in April. Stronger than expected performance in North and South America, Europe, India, and South Korea helped offset social production levels in China. The global regional LVP mix was approximately 60 basis points unfavorable in the quarter, primarily driven by stronger, slightly cheaper production in lower content markets relative to other markets. During the quarter, volatility improved year over year. but declined slightly sequentially driven by weaker development in China. 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 quarterly net sales exceeded 2.8 billion US dollars for the second time in our history. This was approximately 90 million US dollars higher than in the prior year, primarily driven by positive currency translation effects of 62 million US dollars. This benefit was partly offset by approximately 5 million US dollars of lower tariff-related compensation. mainly due to an AIPA-related refund of 9.6 million during the quarter. Excluding currencies, our organic sales grow 27 million US dollars, or by 1%, including negative tariff cost compensation. Based on the latest light vehicle production data from S&P Global, we outperformed the market by over 1 percentage point globally. Our outperformance was significant in Asia. In Asia, including China, we outperformed the market by six percentage points, driven by continued strong sales growth in India, where we outperformed by around 20 percentage points. Japan and South Korea also contributed to the outperformance. In China, we delivered outperformance of more than 7 percentage points, supported by strong sales growth with Chinese OEMs, whose production grew over 40 percentage points faster than light-beaker production. As a result, the Chinese OEMs accounted for 55% of our sales in China in the quarter, compared to 40% last year. The negative performance in the Americas can partly be attributed to lower tariff compensation following the AIPA refund, as well as an unfavorable mix driven by strong life-saving production growth in lower-content South American markets. Globally, Chery, Suzuki, NIO were the largest drivers of sales growth during the quarter. Despite the light vehicle production decline in China, China accounted for 90% of sales.

Asia, excluding China, also accounted for 90%.