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Autoliv, Inc. (ALV)

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Autoliv, Inc. (ALV)

Q2 2017 Earnings Conference Call

July 21, 2017, 08:00 ET

Executives

Anders Trapp - VP, IR

Jan Carlson - Chairman, CEO, President and Member of Research Advisory Board

Mats Backman - CFO and Group VP of Finance

Analysts

Hyong Lim - Wells Fargo Securities

Rod Lache - Deutsche Bank AG

Emmanuel Rosner - Guggenheim Securities

Vijay Rakesh - Mizuho Securities

Victoria Greer - Morgan Stanley

Christopher McNally - Evercore ISI

John Hernander - Nordea Asset Management

Brian Johnson - Barclays PLC

Erik Karlsson - Bodenholm

Kai Mueller - Bank of America Merrill Lynch

Hampus Engellau - Handelsbanken Capital Markets

Ashik Kurian - Jefferies LLC

Joseph Spak - RBC Capital Markets

Ryan Brinkman - JPMorgan Chase & Co.

aAgnieszka Vilela - Carnegie Investment Bank AB

Brett Hoselton - KeyBanc Capital Markets Inc.

Presentation

Operator

Welcome to the Autoliv, Inc. Second Quarter Financial Results 2017. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Anders Trapp, Vice President, Investor Relations. Please go ahead, sir.

Anders Trapp

Thank you, Lisa. Welcome, everyone, to our Second Quarter 2017 Earnings Presentation. Here in Stockholm, we have our Chairman, President and CEO, Jan Carlson; our Chief Financial Officer, Mats Backman; and myself anders Trapp, Vice President of Investor Relations. During today's earnings call, our CEO will provide a brief overview of our overall company performance and outlook as well as an update on general business conditions, while our CFO will provide further details and commentary around the financial results and outlook. Then 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 page, 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 3:00 p.m. CET. So please limit your questions to 2 questions per person.

I will now turn it over to our CEO, Jan Carlson.

Jan Carlson

Thank you, Anders. Looking on the second quarter highlights by turning the page. We had another quarter of solid financial performance while taking additional steps to strengthen our market position for the long term. Our organic sales growth for the quarter of 0.2% was slightly better than the global light vehicle production, primarily due to our strong growth in active safety in all regions, excluding North America. However, our organic sales growth was lower than our guidance due to weaker light vehicle production in China and North America than we anticipated at the beginning of the quarter. This was partially offset by stronger-than-expected demand for our products in Europe. This resulted in an adjusted operating margin of 8.4%, essentially in line with our guidance due to our improved operational leverage, a strong operating cash flow of close to $180 million and an adjusted earnings per share of $1.44.

During the quarter, we returned $210 million to shareholders through dividends and share repurchases. Consequently, our leverage ratio increased to 0.7x, while we had an adjusted return on capital employed of approximately 18% and return on equity of approximately 12%.

To support our growth opportunities, we're pleased to have hired more than 1,300 engineers over the last year, especially given the war for talent. As a consequence, we now expect our RD&E net to be more than 7% of sales for full year 2017. However, mitigating this effect on our operating margin, we see improving leverage in our gross margin development. Also, during the quarter, China approved an update to their NCAP which adds rear-seat safety, pedestrian protection and active safety to their rating score. It is expected that this will have a positive effect on the safety content per vehicle in China over the next decade for our products.

And lastly, we're pleased to have recently announced 3 technology corporations, thereby further strengthening our presence and product offerings in active safety. Looking more on the details of this corporation on the next page. The 3 agreements include Velodyne, NVIDIA and Autotech Ventures. Relating to LiDAR, we signed a commercialization agreement with Velodyne, a market leader in LiDAR technology. Under this agreement, Velodyne, as Tier 2, will supply their next-generation integrated laser and detector multi-chip module to Autoliv. Autoliv will then design, develop and manufacture high-volume automotive-grade LiDAR sensors and software to be sold to our traditional OEM customers as well as to shared mobility customers such as the robo-taxi market.

We intend to deliver prototype LiDAR sensors in low volumes during 2018 and 2019 and are preparing for serial production in 2020. Related to our Zenuity software platform, Autoliv and Volvo Cars have partnered with NVIDIA for the next generation processing platform. This visual computing platform, with artificial intelligence and deep learning techniques, will enhance the object recognition, enabling the Zenuity software to better anticipate threats and thereby, navigate more safely through potential hazardous situations.

Our partnership targets to utilize this processing platform on the Zenuity Level 4 software to be launched in 2021.

And lastly, Autoliv agreed to invest $15 million in Autotech Ventures, a venture capital fund which specializes in ground transportation technologies. This investment will provide another source to identify tech startups in the area of highly automated and autonomous driving.

Read the rest of this transcript for free on seekingalpha.com