Earnings Call Transcript - ALV Q4 2024

Operator, Operator

Good day and thank you for standing by. Welcome to the Autoliv Inc. Fourth Quarter and Full Year 2024 Financial Results Conference Call and Webcast. All participants will be in listen-only mode during the conference. After the speakers’ presentation, there will be a question-and-answer session. Please note that today's conference is being recorded. I would now like to hand the conference over to your speaker Anders Trapp, Vice President Investor Relations. Please go ahead.

Anders Trapp, Vice President Investor Relations

Thank you, Ralf. Welcome everyone to our fourth quarter and full year 2024 earnings call. On this call, we have our President and Chief Executive Officer, Mikael Bratt; and our Chief Financial Officer, Fredrik Westin; and me, Anders Trapp, VP Investor Relations. During today's earnings call, we will cover several key topics, including our sales and record earnings, strong cash flow, and balance sheet. We will outline the expected margin improvement in 2025, as well as how our strong balance sheet and asset return will support continued high levels 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 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-U.S. GAAP measures. The reconciliations of historical U.S. GAAP to non-U.S. GAAP measures are disclosed in our quarterly earnings release available on autoliv.com and in the 10-K 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 a limit of two questions per person. I will now hand over to our Chief Executive Officer, Mikael Bratt.

Mikael Bratt, Chief Executive Officer

Thank you, Anders. Looking at the next slide, I am very happy to present the Record-Breaking Quarter. This is a testament to our employees' hard work, dedication, and commitment, and I want to thank them for their outstanding contributions and for consistently driving our success forward. Meeting our full-year guidance despite accelerated market headwinds showcases the company's adaptability and resilience driven by our diverse product portfolio and strong customer relationships. This achievement not only highlights our current success, but also lays a solid foundation for 2025 with continued margin expansion. Despite the light vehicle production mixed deterioration leading to lower sales, we'll reach new record highs in the quarter for operating profit, operating margin, and earnings per share. For the full year, we also had a record high operating cash flow. I am also pleased that we generated an exceptional level of return on our capital employed. Our strong performance was mainly a result of strict cost control. Our structural cost reduction program enabled us to reduce our indirect workforce by 1,400 since Q1 2023. We managed to accelerate our operating efficiency improvement, partly supported by the improved customer calloff accuracy, which contributed to a reduction of direct headcount by 4,500 in one year, which is a reduction of almost 9%. The strong results were also supported by agreements we reached with all major customers on excess inflation compensation. Cash flow continued to be strong, supporting a high level of shareholder returns. In the quarter, we repurchased shares for $102 million and retired 3 million shares. The Board of Directors has approved an extension of the share repurchase program until the end of 2025. Under the extended repurchase program, $480 million remains. Autoliv was rated BBB+ with a stable outlook by Fitch ratings in November. Looking now at financials in more detail on the next slide. Sales in the fourth quarter decreased by 5% year-over-year for several market-related reasons. This includes negative effects from currency translation, LVP development, as well as the regional and customer mix development. Despite this, the adjusted operating income for Q4 increased by 5% to $349 million from $334 million last year. The adjusted operating margin was 13.4%, a record for the company. Operating cash flow was a solid $420 million. Looking at the next slide, we continue to generate broad-based improvement. Our direct labor productivity continues to improve as we reduce our direct production personnel by 4,500 year-over-year. This is supported by the implementation of our strategic initiatives including automation and digitalization. Our gross margin was 21%, an increase of 180 basis points year-over-year. The improvement was mainly the result of direct labor efficiency and headcount reduction, partly offset by lower sales and supplier settlement as communicated in the previous quarter. As a result of our structural efficiency initiatives, the positive trend for RD&E and SG&A from the beginning of the year continued. Combined with the gross margin improvement, this led to the substantial improvement in adjusted operating margin. Looking now at the market development in the fourth quarter on the next slide. According to S&P Global, total global light vehicle production for the fourth quarter increased by 40 basis points, exceeding the expectation from the beginning of the quarter by over 4 percentage points. Most of this improvement was driven by local OEMs in China, supported by the scrapping and replacement subsidy policy, as well as high growth in South America. Key markets in North America and Europe performed in line with expectations. This resulted in a more unfavorable regional light vehicle production mix of around 4 percentage points in the quarter, significantly impacting our outperformance negatively. In the quarter, we did see calloff volatility improving, both from the third quarter and year-over-year. We will talk about the market development in more detail later in the presentation. Looking now at our sales growth in more detail on the next slide. Our consolidated net sales were $2.6 billion. This was $136 million lower than a year earlier, driven by lower light vehicle production, negative currency translation effects, and lower out-of-period cost compensation. The negative currency translation effect reduced sales by almost 2% in the quarter. Out-of-period cost compensation contributed approximately $24 million in the quarter. This was $21 million lower than in the same period last year. Out-of-period compensations are retroactive price adjustments and other compensations that mainly relate to the first three quarters but were settled in the fourth quarter. Looking at the regional sales split, it reflects the high growth of automotive markets in Asia and our strong market position there. China accounted for 23%, Asia excluding China accounted for 20%, America's accounted for 30%, and Europe for 27%. We outlined our organic sales growth compared to light vehicle production on the next slide. Our quarterly sales were robust but slightly below our expectations, primarily due to a more unfavorable regional and customer mix. We continued to outperform light vehicle production significantly in Japan, rest of Asia, and in Europe, fueled by product launches and pricing. The outperformance in the rest of Asia was driven by India and South Korea. We expect continued strong outperformance in 2025 in India from a number of launches. In China, we underperformed as the light vehicle production growth mix continued to be tilted towards lower CPV models from Chinese domestic OEMs. In the Americas, we underperformed light vehicle production by 3 percentage points, mainly as a result of dealer inventory reductions by major customers and strong South American growth. Among the primary growth drivers for the company this quarter, five were Chinese OEMs and two were Japanese, underscoring the significance of the Asian market and its customers. On the next slide, we have the organic sales growth for the full year 2024. For the full year, we outperformed global light vehicle production by around 2 percentage points. We estimate that the regional light vehicle production mix was 2 to 3 percentage points worse than expected at the beginning of the year. We outperformed in Japan by 13 percentage points, in rest of Asia by 10 percentage points, and in Europe by 6 percentage points. Our sales to domestic Chinese OEMs grew by 24%, and they accounted for more than 37% of our China sales, up from 28% in 2023. Even so, the negative market mix still resulted in an underperformance of 7 percentage points in China. We expect this to improve in 2025 as our strong order intake with Chinese OEMs should result in a record number of new launches in 2025, leading to significantly better sales performance compared to light vehicle production in China. Looking now at the next slide. Our global market position is strong and we are the market leader in all regions and product categories. In 2024, our global market share was around 44%. This excludes sales of components such as inflators. This is almost 5 percentage points higher than in 2018. Supported by new launches, especially with Chinese OEMs and CPV growth, we expect sales to outperform light vehicle production by 2 to 3 percentage points in 2025. On the next slide, we see some key model launches from Q4. We saw a record number of significant launches in 2024. For 2025, we also anticipate a high number of launches, especially with Chinese OEMs. This highlights our growing position with Chinese OEMs and our success in capturing growth in the Indian market. The models shown here have an Autoliv content per vehicle from around $100 to over $400. Now looking on the next slide. In 2024, the industry's sourcing of new business was at the lowest level since 2018. This was driven by technological and geopolitical uncertainties, causing the sourcing of several large platforms to be postponed until 2025. In addition, model lifetime is shortening as Chinese OEMs share of the order book increases. Order intake market share with the rapidly growing Chinese OEMs exceeded 40% and a significant improvement compared to our current market share of close to 25% with this group. Looking at the order intake in more detail on the next slide. In 2024, order intake for new automakers mainly in North America and China accounted for almost one-third of our order intake. We won multiple awards supporting new markets and industry trends like foldable steering wins for self-driving vehicles, including a new type of driver airbags that deploy from the dashboard or ceiling. Autoliv has successfully secured business in the commercial vehicle sector bolstering our mobility safety solutions business. This expansion not only strengthens our market position, but also enhances our ability to deliver innovative safety solutions to a broader range of customers. We also won airbag contracts featuring low carbon cushion material, a significant step towards sustainability in automotive safety. These innovative airbags not only reduce the environmental impact but also lower the cost of the airbag module. Thanks to the robust order intake in recent years, we anticipate that the number of product launches in 2025 to be on a similar level as in 2024. This progress supports our long-term success. Let's now look at the sustainability program during 2024 on the next slide. Sustainability is an integral part of our business strategy and an important driver for market differentiation and stakeholder value creation. Our sustainability approach is based on four focused areas with clear ambitions and targets defined for each area. During 2024, we initiated and concluded a number of activities within these areas. For example, we continue to expand our addressable users by expanding testing, including diverse body shapes, ages, and genders. Through collaborations, we addressed protection for vulnerable road users. We significantly improved our recordable incidence rate; greenhouse gas emissions in our own operations were reduced by 50% compared to 2023, and the share of renewable electricity increased to 30%, having positive environmental and financial effects. We conducted our annual supplier climate survey to assess their readiness for our net zero supply chain goals. We also integrated climate performance into supplier selection and launched a climate accelerator program to support them. Turning the slide. I will now hand it over to Fredrik Westin.

Fredrik Westin, Chief Financial Officer

Thank you, Mikael. I will talk about the financials in more detail on the next few slides. So turning to the next slide. This slide highlights our key figures for the fourth quarter of 2024 compared to the fourth quarter of 2023. The net sales exceeded $2.6 billion, representing nearly a 5% decrease. The gross profit increased by $20 million and the gross margin increased by 1.8 percentage points. The adjusted operating income increased from $334 million to $349 million, and the adjusted operating margin increased by 120 basis points to 13.4%. The reported operating income of $353 million was $4 million higher than the adjusted operating income thanks to a positive impact from the reversal of capacity alignment accruals. Adjusted earnings per share diluted decreased by $0.70, where the main drivers were $0.90 from higher taxes and $0.10 from higher financial and non-operating items, partly compensated by $0.11 from higher operating income and $0.19 from a lower number of shares. The adjusted return on capital employed was a solid 35%, and our adjusted return on equity was 41%, driven by share buybacks impacting total equity. We paid a dividend of $0.70 per share in the quarter, and we repurchased shares for around $102 million and retired 3 million shares. Looking now at the adjusted operating income bridge on the next slide. In the fourth quarter of 2024, our adjusted operating income increased by $16 million, despite market headwinds from lower light vehicle production. Operations contributed with $57 million, mainly from improved calloff accuracy and higher operational efficiency, as well as lower recall costs. The largest offsetting factor to the increase was lower net sales. The net currency effect was $1 million negative, as the positive effects mainly from the Mexican peso versus the U.S. dollar were offset by translation effects and negative transaction effects from the Mexican peso versus the euro, the Japanese yen versus the Thai baht, and the U.S. dollar versus the Korean won. The impact from raw materials was around $6 million negative. Out-of-period cost compensation of $24 million was $21 million lower than last year. Costs for SG&A and RD&E net increased slightly on higher costs for SG&A personnel despite the offset from higher engineering income. The impact of the supply settlement, Mikael mentioned earlier, was around $10 million in the fourth quarter. Looking now at the full-year results on the next slide. 2024 was again impacted by labor and supplier cost inflation, lower and volatile light vehicle production, and customer price negotiations. Our net sales were $10.4 billion, a 1% decline on negative currency translation effects. The adjusted operating income increased by 9.5% to over $1 billion. The adjusted operating margin was 9.7% compared to our guidance of around 9.5% to 10%. The operating cash flow was $1.1 billion, in line with the guidance. Adjusted earnings per share increased to $8.32 per share, partly as a result of the share repurchases. Dividends of $2.74 per share were paid. Despite market headwinds and lower sales, adjusted operating profit, operating cash flow, as well as the earnings per share were all the highest we have ever achieved. Looking now at the cash flow in more detail on the next slide. For the fourth quarter of 2024, the operating cash flow decreased by $27 million to $420 million compared to the same period last year, mainly due to a less favorable working capital development. Capital expenditures net decreased by $18 million compared to the same period the previous year. Capital expenditures net in relation to sales was 5.0% versus 5.4% a year earlier. The free operating cash flow was positive $288 million compared to positive $297 million in the same period the prior year. For the full year 2024, operating cash flow increased by $77 million to $1.1 billion, mainly on higher net income. The free operating cash flow was almost $0.5 billion. Capital expenditures net decreased by $6 million. Capital expenditures net in relation to sales was unchanged at 5.4%. This level is slightly above what we expect for the longer term due to investments in capacity, mainly in Asia and in footprint optimization. The cash conversion in 2024, defined as free operating cash flow in relation to net income was around 77%, in line with our target of 80%. Now looking at our trade working capital development on the next slide. Trade working capital decreased by $117 million compared to the same period last year, where the main drivers were $204 million in lower accounts receivables, $179 million in lower accounts payables, and $91 million in lower inventories. In relation to sales, trade working capital decreased from 11.2% to 10.7%. The improvement in trade working capital is a result of our multi-year working capital improvement program and an improvement in customer calloff accuracy, enabling a more efficient inventory management. Our capital efficiency program aims to improve working capital by $800 million. To date, we have achieved around $700 million. Now looking at our shareholder returns on the next slide. Over the years, Autoliv has demonstrated its capability to generate solid cash flow across different market conditions. During 2024, we returned over $770 million to shareholders through dividends and share buybacks, setting a new record for the company. Over the last five years, we have significantly reduced our net debt while returning $1.9 billion directly to shareholders, this includes stock repurchases totaling over $1 billion. Since initiating the current stock repurchase program in 2022, we have reduced the number of outstanding shares by over 12%. When executing the program, we consider several factors, including our balance sheet, the cash flow outlook, our credit rating, and the general business conditions, as well as the debt leverage ratio. We always strive to balance what is best for our shareholders in both the short and the long term. Now looking at 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. While investing in our footprint and returning over $770 million to shareholders during 2024, our leverage ratio was unchanged at 1.2 times. Compared to the third quarter, our debt leverage ratio decreased by 0.2 times as our net debt decreased by $227 million, while the 12-month trailing adjusted EBITDA increased by $17 million. With that, I hand it back to you, Mikael.

Mikael Bratt, Chief Executive Officer

Thank you, Fredrik. On to the next slide. As we enter 2025, the full-year outlook for global light vehicle production by S&P Global stands at minus 0.5%. The light vehicle production outlook is factoring in regional specific influences, particularly the recent extension of the vehicle scrappage and replacement policy in China, systemic headwinds in Europe and North America, and slower EV adaptation growth. The latest forecast indicates a LVP decline of almost 2% for the first quarter versus last year. LVP in China is projected to increase 4% in the first quarter following a particularly strong performance in the fourth quarter of 2024. The ongoing trend of global OEMs losing market share is expected to persist, but to moderate in the following quarters. The forecast for North America first quarter LVP is minus 6%. The main reason is the continued need for more vehicle inventory corrections. The light vehicle production in Europe is expected to drop 9% for the first quarter, mainly due to inventory adjustments. From the fourth quarter to the first quarter, global LVP is projected to decline by 14%, a reduction of over 3 million vehicles. This drop is significantly higher than what we have observed over the past three years, where it has averaged around 7%. Based on S&P Global's forecast and our own analysis, our 2025 guidance is built on a global light vehicle production decline of around 0.5% and the region mix in line with S&P's forecast for the full year. Now looking at the business outlook on the next slide. We expect 2025 to be a challenging year for the automotive industry with LVP declining and geopolitical risks remaining. However, our continued efficiency focus is expected to support further improvement of our profitability. We expect to significantly improve our sales performance in China, and that the continued strong cash flow and balance sheet sets a solid foundation for our continued commitment to a high level of shareholder returns and our financial targets. We expect cost pressure from inflation to moderate in 2025, but we still expect some pressure coming mainly from labor, especially in Europe and the Americas. We expect calloff volatility in 2025, on average, to be slightly lower than it was in 2024, but remaining higher than the pre-pandemic level. We also anticipate a challenging first quarter in terms of operating margin, which should gradually improve throughout the year, similarly to the sequential development we've seen in the past few years with a relatively weak first quarter and gradual improvements throughout the year. Turning to the next slide. In closing, to summarize our 2025 outlook, we expect continued sales outperformance versus light vehicle production, improved profitability compared to 2024. This improvement is primarily supported by structural cost reduction and strategic initiatives, higher sales, as well as a favorable currency effect. We remain mindful of the risk of deteriorating economic conditions and potential tariffs. But I am confident that our leading position, the work we have done to become more resilient, and our experience and agility will enable us to manage future challenging conditions. Now looking at the 2025 guidance in detail on the next slide. This slide shows our full-year 2025 guidance, which excludes effects from capacity alignment, antitrust-related matters, and other discrete items. Our full-year guidance is based on a global light vehicle production decline of around 0.5%, a tax rate of around 28%, and that the net currency translation effects on sales will be around minus 2%. Based on this, we expect our organic sales to increase by around 2%. The guidance for adjusted operating margin is around 10% to 10.5%. Operating cash flow is expected to be around $1.2 billion. Our positive cash flow trend and our strong balance sheet support our continued commitment to a high level of shareholder returns. The guidance for 2025 does not include any new or increased tariffs or other trade limitations, which may impact our operations. We are monitoring the situation closely and are prepared to be agile as possible to adjust to any such development. Looking at the next slide, this concludes our formal comments for today's earnings call. And we would like to open up the line for questions from analysts and investors. I now hand it back to the operator, Ralf.

Operator, Operator

Thank you, sir. We are now going to proceed with our first question. The questions come from the line of Colin Langan from Wells Fargo. Please ask your question.

Colin Langan, Analyst

Oh, great. Thanks for taking my questions. Maybe if you could just start with maybe framing some of the puts and takes when we think about the margins year-over-year. I think you mentioned FX transaction. I mean I think in '23, that was like $60 million of a drag. Is that kind of the framework of the good news that we should be thinking about? And then does the labor inflation offset 100% through the year with recoveries? Or is that maybe a net negative? And then maybe any framing of the restructuring help we should be expecting?

Fredrik Westin, Chief Financial Officer

Yes. On the FX, I would refrain from the guidance when it's included in, obviously, what we have here on the operating margin side. But I don't want to give what we expect from different currency pairs here to contribute. But the pairs should continue to be a positive for us. Then on the contribution of restructuring, we expect, as we've said before, around $50 million in incremental savings in 2025 and we had $50 million of savings in line with our expectations in 2024. Other than that, the headwinds are from inflation. The headwind from the supplier cost inflation is higher than what we're expecting from labor cost inflation, and the labor cost inflation continues to come down. I mean, we've seen a gradual improvement, and we were talking now about clearly a small percentage numbers versus where excess inflation kicked in. And then we are expecting to offset that by commercial recoveries from our customers, but it will be throughout the year.

Colin Langan, Analyst

Got it. That's very helpful. Obviously, a lot of headlines these days around tariffs, particularly on goods from Mexico to the U.S. Can you help us frame if a tariff is in place, how much of an impact that would be? And how you think you might be able to offset and work with customers to offset that?

Mikael Bratt, Chief Executive Officer

No, I think if or when tariffs would be implemented there. And for us, it is mostly a question of Mexico, U.S. tariffs. Of course, that is passed on to our customer that is necessary there. So I mean, that would start immediately to be a discussion with our customer because there is no reason at all why we, as a supplier, should absorb any cost like that. And I mean ultimately, it will be a higher cost for vehicles sold in the U.S. And we are preparing ourselves for that as soon as that might come.

Colin Langan, Analyst

Okay, great. Thank you.

Operator, Operator

We are now going to proceed with our next question. The questions come from the line of Edison Yu from Deutsche Bank. Please ask your question. Your line is open.

Edison Yu, Analyst

Thank you for taking our questions. First up on the outlook. I'm curious, what kind of impact are you embedding from mix in 2025? Is that going to actually be a positive going forward relative to 2024?

Fredrik Westin, Chief Financial Officer

We expect about a 1 percentage point negative mix in 2025 compared to 2024. It should be an improvement from 2024, where we experienced a negative mix of around 2 to 3 percentage points. In 2025, this is expected to improve to approximately 1 percentage point. I would like to clarify that previously we mentioned a 4 basis points negative mix in Q4, which actually translates to 4 percentage points in Q4.

Edison Yu, Analyst

Understood. Understood. And then on the order intake, I know you have the slide showing obviously, there is a decline. And I think you called out a couple of big programs or a couple of big platforms. Can you give us a sense of what happened there and when you expect those or what kind of impact you would expect on the growth, if any?

Fredrik Westin, Chief Financial Officer

Yes, we have observed a significant decrease in sourcing activity from our customers since we spun off the electronics business. This unusually low sourcing trend has persisted throughout the year. Many discussions indicate that OEMs are prioritizing sourcing for projects due to uncertainties regarding the drive train. Additionally, there is uncertainty about production locations, affecting decisions on where to produce specific platforms. This situation has greatly influenced overall market development for 2024, more so than we anticipated at the beginning of the year. We've noted that several platforms where we are the incumbent have also been postponed to 2025. We expect that sourcing for these projects will begin to materialize in the first half of this year.

Edison Yu, Analyst

Got it. Thank you.

Operator, Operator

We are now going to proceed with our next question. The questions come from the line of Chris McNally from Evercore. Please ask your question.

Chris McNally, Analyst

Thanks so much, team. Actually, just wanted to follow up on Edison's question and think about mix in a different way. I don't think, you obviously don't guide by region. But when I think about plus 2% organic at the midpoint, I was wondering if you could just take a shot at sort of ranking from strongest organic to weakest sort of across your four regions, non-Asia, China, North America and Europe. Just sort of where we may see the highest to lowest?

Mikael Bratt, Chief Executive Officer

No. I think as we have indicated here, we see the strongest growth opportunities and growth in Asia. I mean, you have, of course, China, where we are also taking market share with Chinese OEMs here that continue to strengthen our already leading market position there. And of course, in the rest of Asia, also, you have strong contribution from India where we not only see the LVP growing, but also the content is growing there. And then, of course, we have, I’d say, Europe in a challenging situation and also, I’d say, North America here when we look at LVP growth in general there. So yes, I think it is a little bit the same picture as we have seen this year here. So the trend continues more.

Chris McNally, Analyst

It is very encouraging. I know maintaining quality is challenging, but it's positive to hear that China is showing growth in the market. Regarding the weakness in North America and Europe, is that where the OEM mix is most affected, especially when you mentioned the decline? Independent forecasts suggest that the Detroit 3 is down to low to mid-single digits, and the German 3 in Europe is likely facing a tougher year due to NEV regulations. Is there a lack of secular growth in North America and Europe, or is it primarily a mixed issue for 2025 in those regions?

Mikael Bratt, Chief Executive Officer

No, I think, I mean, it's very much related to, I would say, the overall economic situation in those regions. So I mean it is the LVP production per se that is the biggest challenge there. So no, nothing specific there on an OEM level, I would say it's more related to what was mentioned here before around uncertainty on drive-lines from the end-consumer, the overall affordability from the end consumer and so forth. So they're holding it down.

Fredrik Westin, Chief Financial Officer

And of course, when it comes to export out of these regions also the competitiveness, you could say.

Operator, Operator

We are now going to proceed with our next question. The questions come from the line of Vijay Rakesh from Mizuho. Please ask your question.

Vijay Rakesh, Analyst

Hi. I have a quick question. Regarding the 2% organic growth, I'm curious about how you are accounting for any potential tariffs that may arise in Canada, tariffs related to Mexico, and how these factors could affect the 2025 LVP or the EV mandated aspect. What assumptions are being made in this regard?

Mikael Bratt, Chief Executive Officer

Yes. No, I would say, I mean, there is no tariff assumptions included in the guidance for 2025 here, basically for reason, it is very difficult to have a view on it. It's many different scenarios you can think about now the level of tariffs, the length of the tariffs and as an example. So that is not included in the outlook here. It's something we are following very closely. And as we said here, in terms of our own impact potentially there, we will start negotiating with the customer immediately about passing that on. And then if the impact it may have on the demand from the end-consumer, we have no detail around at this point in time.

Vijay Rakesh, Analyst

Got it. And then on China, definitely encouraging to see that you're focusing on that. When you look at the CPV in 2024, like approximately where does that average out and just wondering how much of a step-up you would see on the average CPV, let's say, in 2025.

Fredrik Westin, Chief Financial Officer

The CPV in China decreased slightly year-over-year from 2023 to 2024, primarily due to the market mix. As mentioned earlier, scrappage premiums have favored lower-end vehicles. Consequently, we observed a decline in the overall content per vehicle in the China market compared to the previous year, but we anticipate a reversal of this trend in 2025.

Mikael Bratt, Chief Executive Officer

And the trend in the market is, of course, to gradually increase the content in the vehicles in all different segments here. So I would say, this is a more temporary nature as a result of the shift in the OEM mix, so to speak.

Vijay Rakesh, Analyst

Got it. Thank you.

Operator, Operator

We're now going to proceed with our next question. The questions come from the line of Hampus Engellau from Handelsbanken. Please ask your question.

Hampus Engellau, Analyst

Thank you very much. I have two questions. First, regarding the LVP outlook, is it derived from your discussions with the OEMs or S&P? I think it includes a 10% tariff for the U.S. Additionally, there are significant developments happening in Europe, such as a large program for battery electric centers and changes in how penalties are applied to OEMs that do not meet the 93.6 MG requirements. It’s interesting to see how your outlook aligns with S&P's 0.5 LVP. My second question is about the content per vehicle in India. I understand you have a small market share there; what’s the situation regarding commitment from the OEMs? Thank you.

Mikael Bratt, Chief Executive Officer

Thank you, Hampus. Regarding the LVP outlook, we plan to make adjustments based on our insights in the coming weeks and months. However, the year-on-year 0.5% decline we are discussing is primarily stemming from the S&P Global data. We have not made our own assessments of potential impacts from tariffs or similar factors. If these elements are included in the S&P figures, they remain unaltered on our end. As we previously stated, we don't have a more accurate forecast than anyone else. When it comes to India, we see continued improvement. Overall, in 2024, sales were around $120 million, and we expect this to rise to nearly $140 million next year, possibly reaching $160 million beyond that. As we've mentioned before, we believe there are significant growth opportunities in India, with both the LVP and CPV segments contributing. With a 60% market share in India, we are well-positioned to capitalize on this. Currently, India accounts for 4% of our sales, which is comparable to the South Korean market.

Hampus Engellau, Analyst

Excellent. Thank you very much.

Operator, Operator

We're now going to proceed with our next question and the question has come from the line of Michael. Your line is open.

Unidentified Analyst, Analyst

Hi, great. Hi, Mikael, Fredrik. Thanks for taking my question as well. My first question would be great if you could share a more specific reading on the exit rate for calloff accuracy in Q4. It looks like it picks up quite nicely. And how that compares to the level that is built into the '25 guidance. And then my second question just goes back to the point on favorable ForEx transactional effects. I know Fred, you don't want to give a very specific guide on that. But does that imply that you see a net tailwind at an EBIT level? Or is you are just referring to some kind of an offset against the top-line ForEx headwinds that you're expecting?

Fredrik Westin, Chief Financial Officer

Yes. So on the exit rate in terms of call-off stability, so we were at around 94% in the fourth quarter, and we saw a good development in Europe, Americas, and also in rest of Asia whereas China continues to be at that lower reliability levels. We believe that 2025 on average should be at a better level than '24 on average. So that it continues to be somewhere between the 90% and 95% range, which we believe is encouraging. And Michael, can you ask your second question again?

Unidentified Analyst, Analyst

Yes, sure. Thanks for that. Just back to the point on transactional effects for ForEx. Does that statement or that guide imply that you see a net tailwind at an EBIT level from transactional effects? Or is it meant to be just an offset against the top-line ForEx headwind that you're seeing?

Fredrik Westin, Chief Financial Officer

I don't want to provide guidance on the transactional effects for the entire year. However, in the fourth quarter, we experienced a very positive trend due to the exchange rate between the U.S. dollar and the Mexican peso, which produced around a $12 million positive transactional effect for us. This was somewhat countered by the currency fluctuations involving the Japanese yen against the Thai baht and the U.S. dollar against the Korean won, along with the import of euro-denominated products into Mexico, which collectively had about a $4 million negative impact. This nearly negated the positive effect we observed from the peso. The situation will depend on how these currencies fluctuate, and we have provided our assumptions in the guidance slide, which will inform our forecast. We'll need to monitor where the foreign exchange rates settle.

Unidentified Analyst, Analyst

Okay, clear. Thank you, Fredrik. If I could just sneak in one final one. Just in terms of your expectations around the phasing of improved outperformance in China, I think previously, you were a little more confident that you could start to see some outperformance already at the beginning of 2025. Is that still the case? Or is it more an H2 situation?

Mikael Bratt, Chief Executive Officer

No. I think what we have said here is that it will gradually improve here, and it is always difficult to be exact on the timing here due to, as you said, I mean, here we are seeing a real push due to the incentives that are in place. But we feel confident about the shift in trend here as a result of the increased share of the orders that we are taking. So we are on the right track and have to come back on the exact detail as the place comes through.

Operator, Operator

We are now going to proceed with our next question. The questions come from the line of George Galliers from Goldman Sachs. Please ask your question.

George Galliers, Analyst

Yeah. Good afternoon. And thank you for taking my questions. I had two questions, if I may. The first one, just related to order intake on Slides 11 and 12. It's very helpful on Slide 12 to see the share of order take, which is accruing to new OEMs. But if I apply that to the dollar order amount on Slide 11, it would seem to imply that the absolute order intake from new OEMs was down year-over-year. Is that correct? And if yes, could you perhaps explain why that is? Is it because of the new OEMs also reconsidering product offerings? Or is it related to the point you make around some of the Chinese OEMs having shorter lifetime for that program?

Mikael Bratt, Chief Executive Officer

Let me start with the order intake. The factors affecting the value of order intake include delays in launching new vehicles, particularly in the western world, and the shortening lifetime for the Chinese OEMs. These two main factors contribute to the current situation. However, I believe we have enough order intake to maintain our market share, which is about 45%, as we move forward. It's also encouraging to see strong growth among the Chinese OEMs that we've detailed earlier. Overall, this reflects the current dynamics in the industry rather than any other issues.

George Galliers, Analyst

Thank you.

Operator, Operator

We are now going to proceed with one last question. And the questions come from the line of Agnieszka Vilela from Nordea.

Agnieszka Vilela, Analyst

Perfect. I have two questions, if I may. Starting with your market share, it was 44% in 2024, marginally lower than in '23. Can you just say what was the reason for that? And also, do you expect a further decline in market share in '25?

Mikael Bratt, Chief Executive Officer

No. Thank you. As I said, I feel comfortable with the order book we have to support our market share around 45%. The difference you see between '23 and '24 is very marginal. The main reason for that is actually that we have the strong growth of BYD in China where we and no one else are selling to them as they have their in-house manufacturer of safety products. But we are selling, for example, inflators to them. And that's not included in our market share, and that I would say is a meaningful volume to them. So if you would count that, a little differently. But in my book here, we are standing stable around 45%.

Agnieszka Vilela, Analyst

Understood. Fair point. And then also you mentioned that Q1 will be a challenging quarter in terms of the operating margin. And when I look at your previous performance, usually, the margin decreased by some 4 to 5 percentage points sequentially in Q1. So should we expect a similar decrease now or maybe even more pressure due to somewhat weaker Q-on-Q car production?

Fredrik Westin, Chief Financial Officer

I don't want to guide you specifically on the first quarter. But I mean, if you look at what have been the drivers for the margin decline in the past couple of years, where it has been around 5 percentage points from Q4 to Q1. It has been the lower LVP, as we mentioned during the presentation, that was over the last three years, a decline of 7% sequentially quarter-over-quarter. Right now, we are seeing a decline of 14%, so twice that number. And that, of course, would also have a higher impact on our operating leverage and also the operating income. Then it's the very traditional or typical seasonality that we have on the engineering income side. That's not going to be any different this year than it has been in previous years. And then also what we've seen in the last year is the combination of the fallaway of lump sum recoveries that we then need to reinstate throughout the year and inflation coming in, and that combined effect is lower this year than it has been in previous years. But if you take all of the three combined, maybe that’s not so dissimilar to what we've seen previously because of the larger LVP decline.

Operator, Operator

The Q&A session is now closed. I will now hand back to Mikael Bratt for closing remarks.

Mikael Bratt, Chief Executive Officer

Thank you, Ralf. I am pleased to invite you to our Capital Markets Day on June 3, 2025, and I look forward to sharing with you how we see our way forward. More details to be announced shortly. Before we conclude today's call, I want to emphasize our commitment to achieving our target of around 12% adjusted operating margins. Our focus remains on structural cost reduction in innovation, quality, and sustainability. Despite significant market challenges such as fluctuating demand and lower LVP in important markets, we continued our strong performance. The positive trend in our cash flow and balance sheet reinforces our dedication to delivering strong shareholder return. Our first quarter call is scheduled for Wednesday, April 16, 2025. Thank you all for joining today’s call. We truly value your continued interest in Autoliv. Until next time, drive safely.

Operator, Operator

This concludes today's conference call. Thank you all for participating. You may now disconnect your lines. Thank you.