Ladies and gentlemen, thank you for standing by and welcome to the Q2 2020 Autoliv Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. [Operator Instructions]. I must advise you that this conference is being recorded today, Friday, the 17th of July 2020. And I would now like to hand the conference over to your speaker today, Anders Trapp, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Sandra. Welcome everyone to our second quarter 2020 financial results earnings presentation. On this call, we have our President and CEO, Mikael Bratt; and our Chief Financial Officer, Fredrik Westin; and myself, Anders Trapp. During today's earnings call, our CEO will provide a brief overview of our second quarter results as well as provide an update on our general business and market conditions. Following Mikael, Fredrik will provide further details and commentary around the financials. At the end of our presentation, we will remain available to respond to your questions. And as usual, the slides are available through a link on the homepage of our corporate website. 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 U.S. GAAP to non-U.S. GAAP measures are disclosed in our quarterly press release and the 10-Q that will be filed with the SEC. Lastly, I should mention that this call is intended to conclude at 3 PM CET so please follow a limit of two questions per person. I will now turn it over to our CEO, Mikael Bratt.

Thank you, Anders. Looking now into the Q2 2020 highlights on the next slide. Before we start with the formal presentation, I would like to acknowledge our employees for their hard work and commitment to cost control, quality, and delivery position. The COVID-19 pandemic is first and foremost a human crisis, while safeguarding health and safety is our first priority and our global Smart Start Playbook has been instrumental to us when restarting our operations in a safe way. The automotive industry slump triggered by the shutdown of car plants and dealership in the wake of the coronavirus pandemic is the worst seen in our history. However, supported by last year's order intake, our organic sales developed better than light vehicle production in all regions. The drastic decline in light vehicle production in April coupled with the volatile restart and ramp up in May and June with limited visibility and business predictability had a drastic effect on our profitability despite forceful cost reductions. We have undertaken a number of actions to manage the evolving situation by accelerating cost savings, reducing expenses and strengthening our liquidity position. These actions include personnel cost reductions of 25% versus first quarter and launching the next step of our structural efficiency program. However, it is essential to balance the cost reduction response against the need for capacity to manage the recovery that has started. We also need to preserve capacity for the new normal market demand and our expected outgrowth. I am confident that the actions implemented and planned are positioning Autoliv well to benefit from any demand recovery. It is encouraging that operating cash flow turned positive in June and that we were able to reduce CAPEX by approximately 50% compared to the year earlier. It is also positive, that our customers' sourcing activities…

Thank you, Mikael. This slide, we are on Slide 8 highlights our key figures for the second quarter. Our net sales were 1 billion, which is a decline of 51% compared to the same quarter last year. Gross profit decreased by $385 million and the gross margin decreased by 17 percentage points compared to the same quarter 2019. The gross margin decline was primarily driven by lower sales and lower utilization of our assets due to the decline in light vehicle production as well as direct COVID-19 related costs. The sharp sales decline in April coupled with a volatile restart and ramp-up in May and June with limited visibility and predictability had a significant effect on our gross margin, despite significant reductions in cost for material and labor. The adjusted operating income declined by around $355 million to negative $171 million. Reported earnings per share declined by $3.25 to minus $3.0. The main drivers behind the decrease were $5.7 from lower operating income, partially offset by $2.37 in favorable impacts from taxes. Our adjusted return on capital employed and return on equity were minus 18% and minus 24% respectively. And as you know, no dividend was paid in the quarter. Looking now on the sales development in the quarter on the next slide, it highlights the fact that challenges in the second quarter were of a completely different magnitude than in the second [ph] quarter. The sharp sales decline in April, coupled with a volatile restart and ramp up in May and June with restricted visibility and predictability has been a challenge to manage. It has been difficult to optimize and efficiently run operations, not least when it comes to utilizing resources such as labor and material in the production. In addition, certain countries have emergency lockdown protocols such as…

Thank you very much, Fredrik. Moving to the next page. As you all are aware, we are in a downturn of historic proportions and we have so far in this call quite naturally focused on the short-term effects and actions. However, it's important to continue to execute on the strategic initiatives that create shareholder values. Our focus areas for shareholder value creation are unchanged. We would like to share with you some of the key components. We have visible near-term and long-term sales growth, backed by a strong order book. We also have our solid foundation and Autoliv heritage with cash flow focus and shareholder returns coupled with a strong balance sheet and prudent leverage policy. Collectively, our focus areas and business strategy execution will realize our full potential for creating shareholder value. Now looking on the strategies on the next slide. Our mid-term financial strategy brings together our key initiatives. crisis management to offset near term COVID-19 effects, adapting and optimizing our global operations and our footprint to the new normal medium-term market, continuing to execute on a strategic plan that was outlined in 2019. Now looking more on these initiatives on the next slide. Here we show our response to the challenging market conditions as covered in the previous slides. As you can see, it includes much more than just headcount and work week hour reductions. In addition, we continue to focus on further cost reduction actions, while balancing with the need for capacity to manage the market recovery. Considering the uncertainty of the market development, keeping a high degree of flexibility and agility is essential and will allow us to be an even stronger company post the COVID-19 pandemic. On the next slide, you can see the Structural Efficiency Program I that was launched a year ago.…

Thank you, Mikael. Turning the page, this concludes our formal comments for today's earnings call and we would like to now open up the lines for questions. So I now turn it back to Sandra.

Thank you. [Operator Instructions]. The first question comes from the line of Emmanuel Rosner. Please go ahead.

Hello, everybody. I was wondering if you would share with us some thoughts around your outlook for growth above market over the rest of the year. It was very encouraging to hear that you're not seeing any meaningful or long delays in some launches so does that mean that you should still be able to grow more than maybe 6 points above market in the second half?

Hi, there. No, let's reconfirm. I would say that our expectation is still that we should outperform the light vehicle production with around 6% as we earlier communicated. And as you see, now in the quarter we have had some fluctuations that already in Q1 was maybe higher than expected. But as we said with the market mix that we had, it should most likely be reversed than in the second quarter, and that is what we saw now. So I think that confirms that we are on the track that we have indicated and as the market hopefully now starts to normalize, on a regional basis, we believe that we will still come to the 6% outperformance.

Great, thank you. And then secondly, regarding of all the factors that you highlighted, headwinds and tailwinds in the second half are very helpful. I was wondering if you'd be willing to speak about the second half outlook in terms of decremental margins. Going into this quarter you had indicated for the second quarter potentially 30% plus decremental margins, obviously what sort of played out, any color you can give around either how to quantify those factors or how do you think about the decremental margins over the rest of the year?

Yeah, we are refraining from giving any specific guidance for the second half and then also that it would be -- it's difficult to make a comment on the incremental margin and also moving into Q3 and Q4. It will be highly dependent on the volume and also on the mix that we would see also in the second half. As we showed, the second quarter was hopefully a one-off quarter in terms of the speed and the magnitude of the volume decline, which as we explained had a decremental effect on obviously on the cost composition that should more normalize during Q3 and Q4, but it will still highly depend on end of the market growth per specific market to then be able to determine what the incremental margin would be. And then we also do still expect also in Q3, and to some extent also into Q4, a fairly say unpredictable market environment, which means that they would be still difficult to balance also our own capacity with the customer needs. So it's difficult to give a more specific guidance at this point of time.

Understood, thank you very much.

Thank you.

Thank you. Next question comes from the line of Hampus Engellau. Please go ahead.

Thank you very much. Two questions for me, would it be possible to add some flavor on the order take, you mentioned orders were flat in the first half compared to last year and I was wondering how that compared to available business that you were bidding for, maybe if you can add some flavor also in the market shares in that orders? That's first question. Second question is on this decremental effect on EBIT related to volume and productivity, 380 million, would it be possible to maybe get some more flavor on what is productivity and what is volume to help us predicting third and fourth quarter? Thanks.

Thank you, Hampus. First on the order intake, and then I hand over to Fredrik for the detrimental margin there but as you know, we are not giving market share during the year. We give it once a year when we close the year, but what we have indicated to you here in the report is that we have an order intake that continues on healthy levels and support our direction as a company, when it comes to our long-term targets here. So we will have to come back to market share numbers when it's time for that, but good first half year and then Fredrik, you can elaborate little bit on the decremental margin, there.

Yeah, sure. As I said, on the cost side, we have had laser focus on discretionary spending and as we said, our personnel cost came out by 20% compared to the first quarter or from 28% if you look at it year-over-year, that is still in headcount reduction following and so on. But the sheer magnitude and also the speed of the decline makes it impossible to compensate the cost reduction or that with cost reduction when in April, our LVP was down -- our LVP was down 99% in North America. And then, for the group, it was 65% in April, 55% in May. So with those -- details of that magnitude, it becomes very difficult to adjust the costs accordingly. So to not say what was volume, what was productivity, I don't know, so meaningful but for sure, we had large productivity challenges during the quarter.

Thank you.

And they should also ease -- they should also ease now going into Q3 and Q4 as the volumes will normalize more.

So that's what I was looking for. Thank you.

Thank you. Next question comes from the line of Rod Lache. Please go ahead.

Hello, everybody. I had two questions. First, it sounds like you still have some concerns about volatile production schedules and it seems that to some extent is focused on Europe, could you maybe give us a little bit more color, maybe a few examples of what you're seeing and what you're seeing just vis-a-vis the Tier 2 supply chain there and whether there are some concerns along those lines? That's my first question.

Yeah. I think when it comes to the Tier 2s and I mean, our supplier base, I mean, that's something we are -- and have been monitoring very carefully from the beginning as we have indicated here. And I think there it's holding up quite well, I must say. And the challenge here of course is more of a let's call it, physical nature connected to the COVID-19 limitations and lockdowns and so on, potentially could have. But so far so good I would say. And also when it comes to the financial health they have there. So I think it's relatively good situation there under these circumstances. And I mean what we are indicating here is related uncertainty when it comes to the demand side continues to be high, as we still have the COVID-19 in societies in many of the important markets. And I think the bigger question at the end of that COVID period here will be then the underlying impact on the economy and we see of course unemployment increasing in many of these markets as well. So I think that's the big question.

Okay. So just to clarify your answer, is it more just economic and macro uncertainty as opposed to operational uncertainty there that you're highlighting?

Yes.

Okay. And then my...

Yeah. And also...

My -- go ahead.

No.

My second question was, just you originally targeted 12% margins, I think for 2023 and you highlighted that IHS isn't expecting to get back to 2019 levels of production until 2023, but I presume that that's -- that's lower than what you originally anticipated when you laid out those forecasts. Can you maybe just address that a little bit more, should we still be thinking about that as your target within that timeframe and what kind of adjustments, if it is, what kind of adjustments do you anticipate making in order to get there?

No, I think, I mean, we have as we laid out in the CMD roadmap towards our mid-term targets and the 12% as you are referring to here. And what we are saying here is that that continues to be our mid-term targets, but as you remember the mid-term target was expressed as a three to five-year target. Then with the headwind we see now it's more likely to be closer to five than to three years to get there as the LVP is significantly lower than what was expected when we stood here in the fourth quarter 2019 and talked about the direction. So, that of course is the additional headwind that we're not seeing. But we are confirming the 12% and we are saying depending on the scenarios here on light vehicle production, it may take a little bit longer time.

So just to clarify, are there any thoughts you could provide to us on a little bit near-term, maybe two or three years from now, should we sort of just take the 300 basis points of margin expansion that you were originally anticipating and just spread that between equally through the next couple of years or all the way through 2025 or is there anything you can suggest as a near-term landmark for us?

I would have liked to go into that kind of very detailed calculation scenarios there but I think the point is here that we continue with our strategic roadmap here and we have all the way said that we don't need a peak LVP to get there, but we need a stable LVP. And of course you lower this from the real scenario, more time is needed to adjust the cost base to whatever LVP we're talking about there. So I mean I think when you look, three to five years out in time, there's many different scenarios of how LVP could develop there. So I think that's the best way I can describe our intentions here.

Okay, alright. Thank you.

Thank you. Next question comes from the line of James Picariello. Please go ahead.

Hey guys. Just as we consider recovery scenarios for next year, can you just talk about what normalized incremental margins are for the company and maybe what puts and takes might affect that normalized range for next year, maybe just any color on that bridge, you'll have the incremental 45 million in phase 2 savings that should help a recovery and legacy programs which comes through at a higher contribution margin than your new launches, which were sitting in backlog, any color on this bridge would be great?

Yeah, sure. So we of course, there are efficiency measures we're taking now is to adjust for the volume decline that we've been facing. And of course, and as volume come back they will have an effect on the margins. But it is very, very heavily dependent on where the top line will end up. And as Mikael laid out, I mean, we still have the 12% target that we strive for, but it will be -- the deciding factor would be whether the volumes was in 2021 will be to give any type of flavor of where then a normalized margin in that market environment will be. But with the cost measures we're taking now, naturally our breakeven point is lower, so you should see a benefit from that.

And a normalized incremental margin range historically has been, what would you -- what would you state that range is?

I mean we've talked about 30% of -- or Mikael, do you want to comment?

No, I think, when it comes to growing business here, I think what we have said, as a guidance on ballpark figure there is the 20% coming, around 20%. But I think where we are right now and the volatility and the uncertainty, I mean, I would say is not normal incremental scenario where we are right now. So hence then that we are refraining from giving any guidance or indication of the way forward here. I think what we are saying here really is, we are taking severe measures to adjust our cost base for whatever the new normal is. And then we have to come back when we have some, let's call it more normal business situation here that makes it more predictable on how things develops. And of course we will come back and be more clear there on guidance and outlook.

Got it. And just one...

Go ahead.

On D&A, that's part of the headwind for the back half. Your D&A trended largely flat year-over-year through the first half, so what's the order of magnitude on the headwind for the back half on a year-over-year basis for D&A? And then just on CAPEX, is CAPEX still kind of trending in a third lower than your prior guidance, is that how we -- or a third lower than last year's CAPEX, is that the right way to be thinking about CAPEX? Thanks.

So CAPEX will come up in all during the second half. It's been a lot of I would say delaying and pushing out CAPEX. But as we said before, 70% of our CAPEX typically is related to new program. And then as Mikael laid out, the launch plans have not changed significantly AND with that we will also have an increased CAPEX during the second half. So we will not be able to maintain it at the level we had in the first half, and that will then also have an effect on the depreciation and amortization that will increase also during the second half.

Got it. Thanks.

Thank you. The next question comes from the line of Mattias Holmberg. Please go ahead.

Thank you. I think you mentioned in conjunction with the Q4 results that you expected the outperformance versus light vehicle production to be higher in the end of the year compared to the beginning of the year due to the phasing of model launches. Would you say that this still is the base case or will these launches be impacted by the delays that you mentioned?

Yeah, that's still the base case. But as you've seen here, I mean with all the volatility in the market, it has been more volatile development than expected. But when you sum it up at the end of the day, we still expect the 6% as I said. If the -- and then the question is do the delays impact the 6%? It's nothing we can see would impact us that as of today here. I mean what we indicated here, there are some delays, but no significant delays. So we have no reason with what we see and no today that would change that number. So that's still true.

Thank you.

Thank you. Next question comes from the line of Chris McNally. Please go ahead.

Thanks so much, gentlemen. Maybe I could just, a follow-up on the outgrowth question from before, I think incremental margins have been covered pretty extensively. Maybe not about the new launches, but just on mix compared to what you see now if we have a second half where China is again better than expectations, so IHS revise in China up to something like minus 10 and we get negative revisions in Europe would that be a drag on the 6% outgrowth?

I think, I mean, the bottom line of course is that the market share that we are taking altogether is still there. But when you look at the comparables here, of course we will have an impact if you have high content vehicles at the lower rate than the other vehicles here, you will have a mix effect. So mathematically we get the effect. But I think that will even out over time here, but of course you can play with different scenarios in the quarters here, but you will get the effect from the mix, if the mix effect, if you have the mix fact of course. So, but the bottom line is that our market share gain on is still there.

Great. And then just to tie back to Rob's previous question is, if the sort of 12% margin target maybe more like a three to five years. So in the 2024, 2025, could you just give us an idea of how long we should be using this 6%, I think you also used 4% to 6% in the past, when does the actual market share start to just tail off because the law of large numbers, you'll be in the high 40% on market share, just any when that sort of, we have to start dropping you just because you're approaching 50% market share?

I think the range we gave there at the Capital Markets Day, I mean valid for that time period that we talked about there and then each year, we are coming with the number for the current year and the 6% now is for 2020 and then we will come back with the guidance for 2021 when it's time for that, but the range is still valid.

Okay, thank you very much.

Thank you. Next question comes from the line of Joseph Spak. Please go ahead.

Hi, thank you. The first question, I just want to clarify the order intake first half in line with last year. I know you're not -- you don't talk about market share, but is that on a dollar basis, because if so, like we've definitely heard that, awards are still somewhat constrained given customer focus is in other, it was another challenges and the -- out of your volume assumptions are also lower, so, it would suggest your share is picked up a little bit?

No, as I said, we are not comment the market share of the order intake. But what we are saying is that in terms of value, it's still there at the level.

Okay. So on a dollar basis, it's flat with the first half of last year?

Yes.

Okay. And then the second question I have is, if you go back to the financial crisis, Autoliv definitely consolidated plants and adapted your production capacity. I think I lost track of a number of times on this call that you mentioned, this is a downturn of historic proportions. And you also mentioned the potential for further structural cost reductions, including footprint which remain under evaluation. So can you just shed a little bit more light on your thought process there and the considerations, is it really just a lower volume outlook than prior or is there also a chance here to take advantage of the overall situation and maybe increase the efficiency of your footprint, even if volume outlook is would be not as changed as some of the drastic scenarios?

Yeah. Yes, I mean, what I laid out at the end of the presentation was really just to get back to our roadmaps towards our mid-term targets here. And that is to drive efficiency across the whole value chain and really end to end and including then footprint and things of that magnitude. So that is to support our long-term journey and not as a response to the current situation. I think what we have done in this quarter is to aggressively or I would say forcefully adjust the cost base to the current situation, but underlying is still that we are driving these efficiency agenda, and effectiveness agenda that we have. So as we have indicated here, we will have some most likely some capacity alignments coming here but we will announce and inform about them when those decisions are done on a case-by-case basis.

And if that occurs, is there scope within that too, can you sort of mention the 12% target, maybe three to five years, I mean, is there a scope to maybe bring that closer to the lower end of the range if those actions are taken?

No, I would like to go into that type of specification here. I mean, as I said from the beginning here. I mean the mid-term targets is three to five years out. And of course with that potential headwind we see now with the light vehicle production significantly lower than originally thought, we indicated, it will take a little bit longer potentially take a little bit longer time, but we have also been very clear from the beginning is that we are not looking for light vehicle production to be some kind of peak levels here. We just need to make sure that we have the stable light vehicle production at reasonable levels and that we need time.

Thank you.

Thank you. Next question comes from the line of Vijay Rakesh. Please go ahead.

Yeah, hi, thanks, guys. Mikael and Fredrik, so, just I was looking at your comments, you said order intake is pretty much tracking flat year-on-year. And looks like LVP down first half, but given those strong order trends and I think IHS otherwise up some numbers yesterday, it looks like some decent outlook from Daimler, how do you see, you are seeing there are some upside versus what you're thinking. Do you think the trends are improving a little bit further?

No, I would like. I mean, I think the certainty is so high out there with both the COVID and then the impact on the economy there. So we would not like to speculate if it, could be better or worse related to the IHS numbers that you see out there. So for us, it's very much working with our scenario planning and making sure that we do the right activities for whatever development we will see here.

Got it. And I know you mentioned mix shift is a little bit of headwind here. When you look at those that we -- mix shift to lower content vehicles or the used vehicles, do you have any visibility on how long those trends sustain or do you see any trends that kind of make you more favorable in terms of shifting back to have value products there? Thanks. That's it.

No, I mean, it's almost the same question there on how the different markets will develop. I think of course that the regional mix effect that we have seen now both in Q1 and now in Q2 as indicated should normalize over time and you get the same relationship between the -- between the regions, but when and or how quick that will happen, I think it's the same question here. It's too much question mark still out there.

Thanks.

Thank you.

Thank you. Next question comes from the line of Ryan Brinkman. Please go ahead.

Hi, thanks for taking my question, which is, are there certain financial or operating milestones with regard to your own performance or certain industry conditions that you're looking for that could cause you to reinstate the dividend. And while you have historically been I think more conservatively capitalized than most peers, do you foresee any change going forward with regard to your targeted leverage ratio to protect against unforeseeable disruptions such as pandemics etc.

No, I think, I mean first of all, the dividend and it's a question for the Board ultimately, but we of course we need to get through this in current COVID crisis here and then come out on the other side of that. And then of course as soon as we feel that we are on some more stable ground. I think all those questions will be answered over time here, but where we are right now I think full focus on driving liquidity, sorry driving cash flow and securing liquidity here for the future. And of course our ambition here is to make sure that we continue to be a shareholder friendly company in terms of returning liquidity to our shareholders absolutely. But then one step at a time here as we come out of the most challenging quarter in Autoliv's history.

Okay, thanks. And I heard you talked earlier about kind of 30%-ish normalized decrementals 20% plus normalized incrementals, I mean after 2008, 2009 though, your margin, your incremental was so strong, because of your cost cuts your margin actually rose to higher than the pre-crisis levels. How are you thinking about this crisis and its ultimate impact on margin, how much of the cost cuts you're instituting could maybe stick after volume comes back, causing margin to potentially be higher, is that a potential outcome here?

As I said, I don't want to give any indication or guidance on our future earnings or top line here based on everything I've already said here. But once again, I mean, we are extremely focused here in the company now to drive productivity and efficiency to get to our mid-term targets over time here and that is what we're working on. And then of course we have to come back on the progress of that and as we come out of this also more stable ground also coming back to guidance and those kind of forward-looking statement, when the time is there.

Okay, thank you again.

We have time for one more question.

Okay, no problem. It comes from the line of Brian Johnson. Please go ahead.

Hi, team. This is Jason Stuhldreher on for Brian. I appreciate for squeezing me in here. Maybe just a quick question to round out the cash flow discussion. As we think about the second half, there is obviously puts and takes between CAPEX stepping up, working capital going one way or the other, but I think coming into the quarter we were cautiously optimistic that potentially you could be cash flow breakeven for the year obviously, highly contingent upon volumes, but if we do see the type of volumes that IHS is calling for, is that a reasonable target for investors to think about or is there some precluding factor that would prevent us -- prevent you guys from getting there?

Yeah, I mean. Again I think I addressed this one data point that we're -- that we're not confirming back in the case. We will of course not during the in Q3 and Q4 because of the ramp-up, it will be also tie up of working capital with receivables and inventories ramping up as volumes increase. And we will have a very, very strong focus on our cash conversion. And we also have a target there that we're striving for to achieve, but it also there say a highly uncertain journey here during the second half. But I mean we will be very, very focused both on CAPEX as we said. There will be an increase because of the higher launch activity in the second half and because we pushed out so much of the second quarter, but then they also the other elements of net working capital that will build up as a nature just of increase in volumes. But it's, so it is difficult to make any more specific guidance around that here. And it also -- a lot depends on how the top line also plays out during the second half.

Understood, okay that's helpful color. And then just my last question, just on the launch cadence within the industry. I think we've all been impressed or surprised by how resilient the launch plans of OEMs have been up until this point and the comments that you had in the press release and in your prepared remarks made it seem like those plans that we're still on track. I think there is one line that said recently, you've seen a few OEMs talk about launch delays. Just curious of your overall comments in general are around the new launches are more constructive or less constructive than they were at this time a quarter ago.

No, I think, as I said, I mean, we've seen some delays, but I mean it's not significant today. So it's to a large extent that would say following through. I mean of course when you have a situation like this that could be a lot of practical reasons for delaying it under these circumstances. So, it's not very dramatic, I would say. And actually we also see some corners, some ambitions to speed up or to catch-up for lost time. So I think, I mean, potentially helping out itself over time here, but our ambition is still to follow through on all those programs. And as we have said also there were few activity in terms of new quotes etc., is also following the original plan. So we don't see any push outs or delaying so many in a meaningful level there either, so very much [indiscernible].

Understood. Thank you.

Thank you.

With this we hand back over to Mikael Bratt for final remarks.

Thank you, Sandra. Before we end today's call, I would like to say that while we continue to manage the effects of the pandemic, we have a never ending focus on quality and operational excellence. Our third quarter earnings call is scheduled for Friday, October 23, 2020. And thank you everyone for participating on today's call. We sincerely appreciate your continued interest in Autoliv and until next time stay safe.

That does conclude the conference for today. Thank you for participating. You may all disconnect.