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Autoliv, Inc. (ALV)

ALV 
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Autoliv, Inc. (ALV)

Q4 2017 Earnings Conference Call

January 30, 2018 8:00 AM ET

Executives

Anders Trapp – Vice President-Investor Relations

Jan Carlson – Chairman, President and Chief Executive Officer

Mats Backman – Chief Financial Officer

Analysts

David Leiker – Baird

David Lim – Wells Fargo

Emmanuel Rosner – Guggenheim

Steven Hempel – Barclays

Vijay Rakesh – Mizuho

Joseph Spak – RBC Capital

Bjorn Enarson – Danske Bank

Thomas Besson – Kepler Cheuvreux

Victoria Greer – Morgan Stanley

Rod Lache – Deutsche Bank

Itay Michaeli – Citi

Presentation

Operator

Good day, and welcome to the Q4 2017 Autoliv, Inc. Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Anders Trapp. Please go ahead, sir.

Anders Trapp

Thank you, Cecelia. Welcome everyone to our fourth quarter and year-end 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 full year 2017 performance and outlook as well as an update on our general business and market conditions. Following Jan, our CFO will provide further details and commentary around the Q4 2017 financial results and early outlook for Q1 and full year 2018.

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 the page, we have the Safe Harbor statement, which is an integrated part of this presentation and it 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-K 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 follow a limit of two questions per person.

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

Jan Carlson

Thank you, Anders. Now looking into a recap of our full year 2017 performance by turning the page. We are pleased with our strong outcome in the fourth quarter and for the full year 2017. I would like to start with acknowledging and offer my sincere thank you to the entire Autoliv team for delivering another year of quality and operational excellence with solid financial performance.

For full year 2017, our record sales of $10.4 billion increased year-over-year around 3% and included an organic sales growth of approximately 1.5%, which was driven by our Passive and Active Safety products.

Our sales growth and strong operating leverage resulted in a record gross profit of $2.15 billion for full year 2017 and grow our adjusted operating margin of 8.6%, despite a 70 basis point increase in RD&E cost year-over-year. This increased levels of RD&E costs are necessary to support our record order intake in both segments as we drive towards our 2020 sales targets.

Our full year 2017 adjusted earnings per share of $6.58 declined year-over-year mainly due to the effect from Zenuity, which is focused on software development in ADAS and autonomous driving. Operating cash flow for full year 2017 of approximately $936 million was best ever year, while we returned roughly $366 million to shareholders through share repurchase and record dividends. This, along with other actions, resulted in a leverage ratio of 0.5x, while our adjusted return on capital employed and return on equity of 19% and 14% respectively, remained around historical levels.

Within Passive Safety, we see improving operating efficiencies and operating leverage on organic sales growth and vertical integration as this segment is ramping an unprecedented market share increase. During the year, we undertook several strategic initiatives to increase long-term strategic value, including Zenuity joint venture, LiDAR acquisition and several technology collaborations, and lastly, our decision to prepare for a spin-off of our Electronics business as a stand-alone entity.

Now looking further into further details around this spin by turning the page. As was announced in the mid-December, we concluded our strategic review and decided to prepare for a tax-free spin-off of our Electronics business. Our intention is that both companies will be U.S. companies with headquarters in Stockholm and have dual listings on stock markets in the U.S. and Sweden during the third quarter 2018, where the primary listings for both companies will be in the U.S.

The Passive Safety entity or RemainCo will retain the name Autoliv, while the Electronics entity or SpinCo will be named Veoneer as you may have heard yesterday from our press release. As we mentioned at our Capital Market Day last September and the press release last Friday, there will be some cost effect resulting from this transaction.

Our best estimate of the cost at this time is as follows. Separation costs are expected to be up to $70 million and will be excluded from adjusted operating income. Tax related cost for the Company resulting from the separation of the legal entities in preparation for the spin-offs are estimated to be up to $80 million during the first half of 2018. The reallocation of certain corporate and engineering costs are expected to positively impact the operating margin by less than one percentage points for Autoliv as RemainCo as a stand-alone company.

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