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Edited Transcript of ALV earnings conference call or presentation 24-Apr-20 12:00pm GMT

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Q1 2020 Autoliv Inc Earnings Call Stockholm Jun 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Autoliv Inc earnings conference call or presentation Friday, April 24, 2020 at 12:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Anders Trapp Autoliv, Inc. - VP of IR * Fredrik Westin Autoliv, Inc. - CFO & EVP of Finance * Mikael Bratt Autoliv, Inc. - President, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Agnieszka Vilela Nordea Markets, Research Division - Research Analyst * Christopher Patrick McNally Evercore ISI Institutional Equities, Research Division - MD * Emmanuel Rosner Deutsche Bank AG, Research Division - Director & Research Analyst * Erik Pettersson-Golrang SEB, Research Division - Head of Research for Sweden * Hampus Engellau Handelsbanken Capital Markets AB, Research Division - Automotive Analyst * James Albert Picariello KeyBanc Capital Markets Inc., Research Division - Analyst * Joseph Robert Spak RBC Capital Markets, Research Division - Analyst * Mattias Holmberg DNB Markets, Research Division - Analyst * Rod Avraham Lache Wolfe Research, LLC - MD & Senior Analyst * Sascha Sebastian Gommel Jefferies LLC, Research Division - Equity Analyst * Victoria Anne Greer Morgan Stanley, Research Division - VP ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you all for standing by, and welcome to today's Q1 2020 Autoliv Inc. Earnings Conference Call. (Operator Instructions) I must advise you all that this conference is being recorded today, Friday, 24th of April 2020. And without any further delay, I would like to hand the conference over to your first speaker for today, Autoliv's Head of Investor Relations, Mr. Anders Trapp, please go ahead. -------------------------------------------------------------------------------- Anders Trapp, Autoliv, Inc. - VP of IR [2] -------------------------------------------------------------------------------- Thank you, Gino. Welcome, everyone, to our first quarter 2020 financial results earnings presentation. Here in Stockholm, we have our President and CEO, Mikael Bratt; our new Chief Financial Officer, Fredrik Westin; and myself, Anders Trapp. During today's earnings call, our CEO will provide a brief overview of our first quarter results as well as provide an update on our general business and short-term 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 this presentation, we will reference some non-U.S. GAAP measures. The reconciliation 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. Central European Time, so please follow a limit of 2 questions per person. I will now turn it over to our CEO, Mikael Bratt. -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Anders. Looking now into the Q1 2020 key events on the next slide. Before we start with the formal presentation, I would like to acknowledge our employees for their continued actions and commitment to quality, delivery and safety during these exceptional times. During the quarter, global light vehicle production fell close to 25% as production in China and part of other markets in Asia came to stop in early February. And that most vehicle manufacturing plants in Europe and North America closed down in mid-March. We continue to outperform against global light vehicle production as our sales declined organically by 11 percentage points less than global light vehicle production declined. We outperformed light vehicle production significantly in all regions. Despite exceptional weak light vehicle production, we are able to report a strong first quarter. I'm especially pleased with our sales outperformance and that our gross margin was slightly higher than a year ago and adjusted operating margin was only 30 basis points lower. Our cash flow was actually at somewhat higher than Q1 last year. The task force we set up to initially manage the situation in China has been expanded to global scale and has been able to act promptly with timely cost reduction actions to offset much of the headwinds from the weaker light vehicle production in the quarter. We were able to safeguard our supply chain and made sure that no customer was affected by lack of Autoliv products. We have undertaken a number of actions to manage the evolving situation, including adjusting production and shorter workweek hours to meet lower demand. We have also reduced or suspended investments and spending that are not critical for daily operations, accelerated cost savings initiatives, furloughed personnel, often in government-sponsored programs and reduced compensation for executive officers and Board members. We have intensified working capital control through strict inventory control, close monitoring of receivables and close collaboration with suppliers. In addition, we have canceled the dividend, drawn fully on our revolving credit facility and thereby secured liquidity of USD 1.5 billion in early April. So far, we have not seen any changes to the sourcing behavior of our customers. During the quarter, our order intake share remained high and supportive of a prolonged sales outperformance. Given the uncertainty in the market, we have withdrawn our full year guidance until the effects of COVID-19 pandemic can be better assessed. Looking now on the adjusted sales performance on the next slide. Our sales declined organically by $283 million or by 13%, which was 11 percentage points better than the light vehicle production decline of almost 25%. As a result of a positive model mix and new launches over the last 12 months, we were able to outperform light vehicle production in all regions. The overall sales decline was driven by China, followed by Europe and North America. The only areas with organic growth were ASEAN and South America. The most impact from the coronavirus outbreak was in China, where sales fell organically by almost 37%. However, this compares favorably with the light vehicle production decline of nearly 50%. The outperformance was mainly coming from global OEMs. Sales in North America decreased organically by 9%, 2 percentage points better than the light vehicle production decrease. Almost half of the organic decline can be attributed to lower inflator sales. The decline was partly mitigated by organic growth with a multiple of OEMs, mainly with Tesla, but also with Subaru, Mazda and BMW. In South America, our sales increased by 7% organically despite a 17% decline in light vehicle production. The growth was mainly driven by sales to FCA. In Europe, we continued the trend from fourth quarter and outperformed light vehicle production by around 8 percentage points, impacted by recent launches of high-volume models at PSA, VW and Renault. As vehicle production came to stop amid the spread of the coronavirus, our sales dropped by close to 30% in the month of March. Sales in Japan decreased organically by 4% compared to the light vehicle production decline of 8%. Decreasing inflator replacement impacted sales negatively with 1.3 percentage points. Rest of Asia, organic sales declined by 4%, which was almost 14 percentage points better than light vehicle production within the region. Sales in South Korea, India fell, while sales in ASEAN increased despite lower light vehicle production. Looking at our recent model launches on the next slide. We continued to have a high level of launch activities in the quarter. The models shown on this slide are well distributed across the globe, and most of them will be available with some sort of electrified powertrain. For example, pure EV, mild hybrid or plug-in hybrid. The Autoliv content per vehicle is between $100 to almost $500. It is particularly interesting to see front center airbags on 3 of these vehicles. We expect to continue to see strong growth coming from front center airbags as Euro NCAP has introduced the far-side load case in their updated rating program. Four of the vehicles are equipped with knee airbags from Autoliv on the driver side. Tesla Model Y has a knee airbag also on the passenger side. Currently, we see limited effects from the COVID-19 on the OEMs 2020 launch plans, and we continue to support them with engineering, testing and by setting up new production lines. However, we believe that some projects that have planned launch dates closer to the year-end or later may be delayed. Vehicle facelifts in other areas where the automakers may change their plans. Now it's my pleasure to introduce our new Chief Financial Officer, Fredrik Westin. Fredrik joined our executive leadership team in early March, and he will now speak to the financials on the next slide. -------------------------------------------------------------------------------- Fredrik Westin, Autoliv, Inc. - CFO & EVP of Finance [4] -------------------------------------------------------------------------------- Thank you, Mikael. This slide highlights our key figures for the first quarter. Our net sales were $1.8 billion, which is a 15% decline compared to the same quarter last year. Despite the lower sales and lower utilization of our assets from the decline in LVP, our gross margin improved by 50 basis points, as it was positively impacted by the absence of costs related to the social unrest in Mexico, savings from indirect and direct workforce adjustments, lower raw material costs and also positive currency effects. Although gross margin improved, the lower sales led to a decline of USD 48 million in gross profit. The adjusted operating income declined by around $30 million to USD 136 million, mainly as a result of the lower sales. Reported earnings per share declined by $0.41 to $0.86. The main drivers behind the decrease were $0.53 from lower operating income and $0.05 from financial items, partially offset by $0.16 favorable impact from lower tax. Our adjusted ROCE and ROE were both at 15%. Dividend paid in the quarter was $0.62. Looking now on the adjusted operating margin development on the next slide. Our adjusted operating margin of 7.4% was 30 basis points lower than in the first quarter 2019. Q1 2019 was, however, negatively affected by temporary costs for the social unrest in Matamoros in Mexico. Excluding this cost, our adjusted operating margin would have been 8.7% a year ago. As illustrated by the chart, the adjusted operating margin was positively impacted by lower cost for raw materials of 30 basis points, lower cost for SG&A and RD&E of 50 basis points and positive FX effects. These positive developments were more than offset by the effects of lower sales. The lower organic sales negatively affected the margins by around 37 -- 370 basis points. However, we managed to mitigate some of the negative operating leverage effects from the lower sales by a number of activities, such as accelerated cost-saving initiatives that started in previous quarters, by adjusting production and workweek hours and by furloughing personnel. Looking on the next slide. For the first quarter of 2020, the operating cash flow was USD 156 million compared to USD 154 million a year earlier, as the lower net income was more than offset by less negative effect from changes in operating assets and liabilities and increased deferred income tax. Capital expenditures amounted to USD 88 million in the first quarter, which is about 4.8% in relation to sales. Compared to last year's, capital expenditure decreased by $20 million as we suspended or delayed some investments. As a result, our free cash flow improved by $22 million to $68 million compared to the same quarter last year. Cash conversion improved to 90% this quarter compared to 41% the same quarter a year earlier. Looking on the next slide. We have, as you know, a long history of a prudent financial policy. Our balance sheet focus and long-term shareholder-friendly capital allocation policy remains unchanged despite the current market conditions. The leverage ratio at March 31, 2020, was unchanged at 1.7x since the beginning of the year. The lower net debt was offset by lower last 12 months EBITDA. At the next slide, you can see our liquidity position and the maturities. As illustrated, our liquidity position is strong. We had around USD 1.5 billion in liquidity after drawing fully on our revolving credit facility on April 2. We have very limited amount of maturities in the next 3 years with around USD 320 million in debt maturities in 2020 and around USD 275 million in 2021. We have no need for any major refinancing of existing debt until 2023. Therefore, we believe that we have secured a significant liquidity cushion to manage our business successfully in this challenging environment. I will now hand back to Mikael. -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Thank you, Fredrik. I'm proud on how Autoliv employees have been creative in finding ways that we can use Autoliv resources and competence in supporting society's battle against the COVID-19 crisis. On the next slide, we show some examples of initiatives taken by Autoliv associates around the world. In Poland, we have worked with local hospitals to manufacture and deliver masks. In North America, we are using our laser cutting machines to cut materials for local sewing company that manufactures masks. In India, we have provided food to migrants that have become stranded and have no income to feed their families or themselves. Looking at the market situation on the next slide. You can see that our industry is in a downturn of historic proportions. March is typically one of the busiest months of the year for the car industry. This year, however, the automotive industry has seen its worst March for decades. As consumers were unable to visit car showrooms due to social distancing and government enforced closures as well as shutdown of parts of society, light vehicle sales declined roughly by 38% in the U.S. and by 55% in Europe in March. There is a great uncertainty in light vehicle sales and production due to the evolution of the pandemic, government actions and policies changes as well as end consumer demand for new vehicles. Therefore, it's currently not possible to estimate the light vehicle production run rate we will reach post the COVID-19 pandemic. Regardless of what level of light vehicle production that will be the new normal, we will have to adapt. We are, therefore, working with different scenarios in preparing for the new normal, some of them significantly lower than the current IHS estimate. Keeping a high degree of flexibility and agility is, therefore, essential to be an even stronger company post the COVID-19 pandemic. Moving to the next page. The situation for major light vehicle markets is very uncertain and changes day by day. OEMs in China are gradually coming back to their previous production levels, and China Passenger Car Association reported that the retail sales were 14% above last year's level in the second week in April. However, the situation remains fluid and OEMs will be adjusting their pace of production according to inventory levels and market demand. Production disruption in other regions, which supply components to automakers in China, can potentially slow down the recovery. A number of European automotive plants have restarted or are preparing to start again after more than a month of coronavirus-related shutdowns. The production rate will likely be volatile with reduced chips to adapt to uncertain demand development and availability of components. In U.S. and Canada, most OEM plants plan to resume production at their facilities by early May. Production disruption of components in Mexico can potentially slow down the rest of the region as there is uncertainty around the start-up for plants in Mexico due to the government's stay-at-home measures. Most OEMs in Japan have announced closures and slowdowns in April and May. The Golden Week holiday is expected to be extended by a couple of days. Looking on the next slide. We have summarized the situation for Autoliv operations in our major regions. In China, our production has gradually recovered to around 100% compared to this time last year. However, the automotive industry has been particularly hard hit during the pandemic and it will take months for the industry to recover to full efficiency and to reach a stable demand. In Europe, our plants are assuming and ramping up production in line with our customers' needs. All tech centers are back in operation, however, with lower than normal capacity. In North America, 10 of our 13 sites are fully shut down. In the 3 sites that are open, we run limited production for overseas customers. In Japan, 70% of our plants are running. In South Korea, our airbag plant is producing at near-normal rates, while the seat belt plant is open but not running full shifts. Looking on the next slide. We show our response to the challenge in market conditions. This includes much more than just head count and workweek hour reductions. Firstly, in response to the new working situation brought by the coronavirus, we have stepped up our efforts to secure health and safety for our employees through new policies and procedures for increased awareness and changed behavior as well as protective equipment. In addition to securing a strong liquidity position of $1.5 billion, we have also intensified our capital management through strict inventory control, reduced or suspended investments and spending that are not critical for daily operations, close monitoring of receivables and close collaboration with suppliers. We have undertaken a number of cost-reduction activities such as adjusted production and workweek hours, accelerated cost savings initiatives, furloughed personnel, often in government-supported programs and accelerated the redesign of products for lower costs. In addition, we have, for the time being, suspended our dividend payments and reduced executive salary levels. While we continue to focus on further cost-reduction actions, we are also planning and preparing to restart production as shown on the next slide. We are preparing for restarting and ramping up in coordination with our customers and suppliers. We are deeply focused on keeping our employees, customers and suppliers safe when we restart production at our facilities. To navigate this new normal, we have developed a playbook that lays out processes to raise awareness of new health protocols and to support execution in a challenging situation. The Smart Start guideline includes practical recommendations based on guidelines from World Health Organization and our lessons learned from our recent ramp-up in China. We are providing personnel protection equipment, such as masks and VCs and making redesign of production environment, for instance, setting up protective screens. Our first focus is now on Europe, which is starting to ramp up as of this week. Turning the page. We have summarized the business environment in Q1 and Q2. The pandemic impacts on the consumer demand, supply chain and OEM production cannot be forecasted with a satisfactory degree of confidence. Consequently, we withdraw our full year guidance, and it is not possible to determine when a new full year outlook can be made. The situation is, however, more challenging currently than it was in the first quarter. Customer closures are now affecting the majority of our operations for an unclear period of time compared to the more limited but significant scope in first quarter. It is currently difficult to estimate how large the second quarter light vehicle production decline will be. The regional mix will have a more negative impact on sales in the second quarter due to higher safety content in vehicles in Europe and North America. In the first quarter, we had a positive impact on sales from regional mix. IHS latest outlook dated April 16 indicates the global light vehicle production decline of 45% in the second quarter. A decline of such magnitude would, of course, have a significant negative impact on our sales, and we do not expect to be able to offset the effects of the lower sales with cost-reduction activities while planning for production restarts. We are, therefore, expecting the decremental margin in the second quarter to be significantly higher than it was in the first quarter. When it comes to CapEx, we are scrutinizing everything, delaying what can be delayed. Typically, 70% of our CapEx is related to new production lines, which very much is driven by the plans of our customers and are difficult for us to postpone. On to the next slide. We have to manage the current challenges post COVID-19 pandemic without losing focus on the long-term opportunities. Autoliv is operating from a position of strength in terms of available liquidity, flexible structure and not at least, dedicated and experienced employees. This exceptional situation requires tough decisions that we will make as necessary. It is of utmost importance to ensure that we have an adequate cost structure that supports our profitability targets regardless of what level of light vehicle production that will be the new normal. The strategic initiatives and structural improvement projects we outlined on our Capital Markets Day in 2019 remain key priorities, although some projects may be somewhat delayed. We will continue our efforts for flawless execution of new launches, improving customer satisfaction further, and thereby supporting our stronger market position. I will now hand back to Anders. -------------------------------------------------------------------------------- Anders Trapp, Autoliv, Inc. - VP of IR [6] -------------------------------------------------------------------------------- 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 line for questions. So I turn it back to Gino. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) So our first question comes from the line of James Picariello. -------------------------------------------------------------------------------- James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [2] -------------------------------------------------------------------------------- Just on your -- the quarter's significant market outperformance. Within your guidance framework last quarter, and I know, obviously, a lot has changed since then, but you talked about stronger growth over market position for the second half. Now was that a factor of better mix in the quarter, favorable customer exposure? Or was there really just a delay in your ramp down, which maybe gets caught up in the second quarter? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- I would say that the outperformance in the first quarter was, to a large extent, contributed by a favorable regional mix in the quarter where we saw China light vehicle production falling with close to 50% and then we have lower content in that sense. And then you had high, let's call it, value content per vehicle in Europe and U.S. still at high level for the most of the quarter. It was not until the last 2 weeks, basically, where you saw the effects in Americas and Europe. So a favorable regional mix in the quarter contributed to the outperformance. -------------------------------------------------------------------------------- James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [4] -------------------------------------------------------------------------------- Got it. And have you -- did you also benefit from any competitor issues, maybe competitors struggling more so than Autoliv in the quarter? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- I think, no. I mean in the quarter, it's purely, I would say, the mathematics of the run rate in the OEMs -- on the OEMs side here. And there you had the effects, which I have mentioned regionally. -------------------------------------------------------------------------------- James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [6] -------------------------------------------------------------------------------- Okay. Got it. And then just on Mexico, can you remind us what percentage of your North America sales mix is tied to your production operations in Mexico? And then just given what's going on with the peso, will there be a sizable FX transactional benefit potentially this year? Just if you could help us walk through how to think about that flow through? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [7] -------------------------------------------------------------------------------- No. I think when it comes to the Mexico-U.S. relationship, I would say you should more see it as the total automotive industry that is very connected. So I think for us, of course, we have a high portion of production in Mexico. I mean that's one of our biggest production countries. So of course, that is important that, that goes hand-in-hand with what's happening in the U.S. But I think the question is much broader than Autoliv specific here. It's the whole automotive industry that needs to be in sync between Mexico and the U.S. to actually get into a ramp-up that is sustainable. -------------------------------------------------------------------------------- James Albert Picariello, KeyBanc Capital Markets Inc., Research Division - Analyst [8] -------------------------------------------------------------------------------- And just the pace -- just your thoughts on the FX transaction? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [9] -------------------------------------------------------------------------------- No, it's not -- you shouldn't count on anything there. I would say it's not -- I mean first of all, we have no guidance, as you know, for the -- either the quarter or the year here. And I think the FX is in that category here as well. I mean we have no indications for the quarter here on that. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Your next question comes from the line of Rod Lache from Wolfe Research. -------------------------------------------------------------------------------- Rod Avraham Lache, Wolfe Research, LLC - MD & Senior Analyst [11] -------------------------------------------------------------------------------- Just a few questions. First, you've historically demonstrated a lot of agility in terms of adjusting your cost structure. Pretty -- you have a very variable cost structure compared to most other auto suppliers. Can you just maybe give us a sense of how that could come into play here, for example -- obviously, not in Q2, but longer term, if revenue stayed below historical levels, maybe if it stayed at the levels that you saw in the first quarter, and you were given enough time, is there any way to characterize the magnitude of cost adjustment and margin that you would ultimately believe you could achieve? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [12] -------------------------------------------------------------------------------- I think -- I mean what you're mentioning here about the time is the critical here. I think we have stated for a long time, when it comes to our medium- to long-term targets here that the critical question there is not that we need to get back to some kind of all-time high levels that we have seen in the past here, it is stability that is critical. But that's over time. And since we're not giving any guidance here, I don't want to get into any time horizons when we talk about this. But we have a structure that provides good flexibility. And I would say here that -- I mean if you look at our total cost base, I mean around half of our sales is purchase components. Now the 10% is connected more to direct labor and then another 10% other flexible type of cost or flexibility. So it leaves around 30% as fixed costs roughly there. But as we all know, long term, you can also work with that. But that's kind of the ballpark you should think about. And then when you have a situation like we have right now, where it comes to definite stop in just a few -- couple of days, it looks very differently. And also when we're looking into the quarter here, it's a very steep stop. So I would say normal calculation there is maybe not visible here. But over time, that's the ballpark figures you should think about. -------------------------------------------------------------------------------- Rod Avraham Lache, Wolfe Research, LLC - MD & Senior Analyst [13] -------------------------------------------------------------------------------- Okay. And do you have any views on -- obviously, every company in the world is putting in place new operational protocols for safety, social distancing. Does that, in your view, have any long-term consequences for productivity? Or how we think about just operationally, the inefficiency that's introduced there? And then lastly, can you comment just on what you're hearing about the trajectory of these restarts? So Europe seems like that's underway. Is it just a few plants? Are your customers telling you anything about the level of production and how that is expected to ramp over the next weeks? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [14] -------------------------------------------------------------------------------- Yes. I think all in all -- I mean if we start with your last question, I think when it comes to the visibility here, it is, of course, very, very low under these circumstances. And as we have mentioned and you also have seen, some OEMs are starting some of their plants. So it's more site by site, I would say, and model by model that they are starting. And the levels are very low and -- at this point in time. And I think also when you look at the ramp-up, it will go relatively slow way. But what it all depends on is, of course, how the virus is developing here, if it's stabilizing, if it's declining or if it's continuing to spread and increase. So that's the million dollar question on how that is developing because that's how we would be able to restart across the continent here. And that visibility is, of course, very low for everybody in the industry. So I think we will have -- not -- it will be required to have a lot of flexibility here, and that's what we're focusing on here because you could very well see it increasing and then coming down a little bit again and so on. So uncertainty is very, very high and very low visibility. And I think that's also the feeling and the signals we get from our customers, for sure. Looking at the consequences, if I understood your question right on the new measures that we need to implement to keep our employees safe here under current circumstances, if that has a long-term negative impact on productivity and so on. And I would say, I guess it's too early to say that, but I don't expect it because the measures we are taking is under these current circumstances. I don't see them, to a larger extent, continue beyond the virus situation. So it's more connected once again to how the COVID-19 pandemic evolves here. Of course, there is some more cumbersome procedures there in terms of equipment and so on that you need, but I don't see any problem for us to keep up with our productivity work and securing quality and deliveries according to customer expectations here. So it's something we are well equipped to manage. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- Next question comes from the line of Mattias Holmberg from DNB. -------------------------------------------------------------------------------- Mattias Holmberg, DNB Markets, Research Division - Analyst [16] -------------------------------------------------------------------------------- You show a quite decent decline year-on-year in CapEx spend. And I'm just trying to understand, sort of assuming that there are no changes or delays to your customers' launch schedule or activities. Is there still any room to further scale down the CapEx level from what you reported in Q1? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [17] -------------------------------------------------------------------------------- I mean that's an ongoing work, of course, to see how we can optimize the timing of the things that needs to be invested. So I think here is the usual scrubbing of the CapEx that has been ongoing and will continue to go on. And that's why it's so important here to stay very close to our customers to understand if there is any changes to their own schedule or so when it comes to launches, et cetera, on how that could impact us in the way that we could delay some of the investments. But all the start of production commitments that we have with our customers, of course, can never be jeopardized. So that's the bottom line in terms of what type of CapEx investments we need to stay on with. But we continue to scrub the numbers here, absolutely. -------------------------------------------------------------------------------- Mattias Holmberg, DNB Markets, Research Division - Analyst [18] -------------------------------------------------------------------------------- One more question from my side. Talking about the regional mix again, which you explained here, how it impacted you positively in Q1. Given the dynamics of how the sector has been impacted throughout the year so far, would it be reasonable to assume that you then would have a negative regional mix impact in the second quarter? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [19] -------------------------------------------------------------------------------- Yes. I mean going into the second quarter, with what we also described around the volumes in Europe, North America and that China is ramping up. So I would say, it should be assumed that we should see the reverse in the second quarter here. But it's a very dynamic situation here, but based on that... -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Next question comes from the line of Sascha Gommel from Jefferies. -------------------------------------------------------------------------------- Sascha Sebastian Gommel, Jefferies LLC, Research Division - Equity Analyst [21] -------------------------------------------------------------------------------- The first one would be on working capital and how this is going to unwind in the second quarter because your absolute level of receivables is higher than payables. So is it fair to assume that from that side, we should expect a little bit of an inflow? And then similarly, from inventory, it ticked up a bit Q1 versus full year numbers. So do you also expect from an inventory side that you get some support? -------------------------------------------------------------------------------- Fredrik Westin, Autoliv, Inc. - CFO & EVP of Finance [22] -------------------------------------------------------------------------------- Let me take that question. So if I start with the inventory side. The background is, of course, at end of March, we were ramping up in China while ramping down in Europe and in the U.S., and this was done with a very steep curves at the same time. So we need to make sure that we have the material on the one hand side to be prepared for the ramp-up, but also that we don't -- yes, and then not jeopardize that. But at the same time, of course, also do what we can do to take out the necessary or the unnecessary inventory. It's a very difficult balancing act at the moment. And with the uncertainty on the volumes, it will remain so. So it's very difficult to then predict where the inventory development will be in the second quarter. I mean our plan is to, of course, take out as much as we can, but it is this balancing act that I described. On the receivables side, it will follow the sales development. And we expect that to pick up during the second quarter. So with that, you should expect then also buildup of receivables in the second quarter. And that then will have a negative development on, say, cash from working capital. But there, the key is to manage then the overdue part of that and make sure that we don't run late on collecting. But it is -- I think it will be -- it will follow the mathematics of the ramp-up, and that's the very, very difficult part to explain or to forecast at the moment. -------------------------------------------------------------------------------- Sascha Sebastian Gommel, Jefferies LLC, Research Division - Equity Analyst [23] -------------------------------------------------------------------------------- Understood, very clear. And then my second question would be on your -- the decremental margin. We touched it multiple times already. Would you be willing to give a number of -- like if we would exclude product and regional mix, how much your underlying operating leverage is? Just to get a better understanding of how much of that is actual mix and how much of it is actually volumes? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [24] -------------------------------------------------------------------------------- Yes. I think, I mean, I was a little bit touching that in the previous question when I talked about the fixed and flexible cost. And what we said here is that around 30% are fixed. So with a short stop like we see right now, it's maybe worse situation -- at least most likely a much worse situation than normal rule of thumbs here of around 30%. So I would say, we'll see, but it depends on a lot of things here. As you said, its fluid situation. But with short stops like this, it's very, very challenging. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- The next question comes from the line of Chris McNally from Evercore. -------------------------------------------------------------------------------- Christopher Patrick McNally, Evercore ISI Institutional Equities, Research Division - MD [26] -------------------------------------------------------------------------------- I'm just going to follow-on the topic of decremental margins. You had a great raw material benefit in the quarter, looking at sort of the drag over the last year or 2. Could you put some parameters around either, maybe the benefit going forward or when the peak benefit should be? Should it sort of be in Q2 and Q3 somewhat offsetting the pure volume decremental margin? -------------------------------------------------------------------------------- Fredrik Westin, Autoliv, Inc. - CFO & EVP of Finance [27] -------------------------------------------------------------------------------- No. I think, as I said, we can't give any guidance, and we are not giving any guidance here. So I think it's -- we cannot basically give you any time horizon on this. So I think what we said in the beginning of the year was the direction we saw at this time. I think what is happening right now is impacting so many things in our industry, but also other industries that it's all moving parts right now. So I think we would like to -- we need to refrain from giving any indications there because it's too basic. -------------------------------------------------------------------------------- Christopher Patrick McNally, Evercore ISI Institutional Equities, Research Division - MD [28] -------------------------------------------------------------------------------- That's fair. And then maybe just more of a follow-on to Rod's question about a more longer-term view to variable margins. In previous downturns, we've seen significant restructuring. You took a good amount of restructuring last year as sort of we were already at production levels that were well below the $100 million to $110 million that we all thought a couple of years ago. Is there a level of production or sort of a trigger that would cause the next round of restructuring? I'm thinking more about permanent cuts to production capacity and white collar workforce. -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [29] -------------------------------------------------------------------------------- Yes. I mean, of course, we are working with a number of scenarios here. And as we have indicated here, I mean the rule and -- normal rule of thumb is what we have stated before. And I think beyond that is all depending on how the development is coming through here. And we are, of course, working with a number of scenarios here, and we will need to do whatever we need to do to make sure that we come out in a strong way, and I'm convinced that we have the tools and also the measures available here for whatever we need to do. So it all depends on the overall situation, and we will execute accordingly. But we can't give any more details in terms of time and size. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- Next question comes from the line of Erik Golrang from SEB. -------------------------------------------------------------------------------- Erik Pettersson-Golrang, SEB, Research Division - Head of Research for Sweden [31] -------------------------------------------------------------------------------- I have one question that hasn't been asked more or less. And it's that I understand you don't want to give a full year guidance here on sales, even though there is [projection] -- there are vehicle projections to relate to. But the -- on the topic about outperformance then for the full year, is it fair to assume it's the second quarter regional mix in terms of auto production continues for the second half that your previous indication of around 6 percentage points of outperformance would be lower in spite of a good mix in Q1? -------------------------------------------------------------------------------- Fredrik Westin, Autoliv, Inc. - CFO & EVP of Finance [32] -------------------------------------------------------------------------------- Yes. I think, I mean, we know what kind of orders we have taken over the past couple of years. I think the long-term direction that we have indicated as a result of these orders, is still, of course, the basis for looking forward here. But what is happening right now with a very volatile movements in our industry regionally, but also, I mean, in terms of size, it, of course, changes the short-term measurement here. And as you heard the explanation for the first quarter, we believe that if what we have described now, current situation is, you could expect the reverse. But it all depends also, of course, on beyond that on how the market is coming back and how it synchronized back to some kind of normal relationships there. But of course, those things impacting. So therefore, it's very difficult to give you any -- and that's why we're refraining from the whole guidance altogether because it's so many moving parts, including this one. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- The next question comes from the line of Victoria Greer from Morgan Stanley. -------------------------------------------------------------------------------- Victoria Anne Greer, Morgan Stanley, Research Division - VP [34] -------------------------------------------------------------------------------- Just a few, please. Firstly, I understand how much the raw material situation is moving around, but could you give us an indication of how much that contributed just in Q1? The second thing, on the geographic mix, you've outlined the differences in terms of content per vehicle, that's clear on the top line, but is there any difference in margin there? And then the last thing on the Matamoros impact, thanks for quantifying that in the bridge. Should we think about any ongoing year-over-year impact? Or was that really just a Q1 '19 issue that doesn't repeat for the rest of the year? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [35] -------------------------------------------------------------------------------- Yes. I think, I mean, first question, raw material impact in the first quarter, as you see from the bridge there, we're talking about the 30 basis points positive contribution from raw materials. So starting the year... -------------------------------------------------------------------------------- Victoria Anne Greer, Morgan Stanley, Research Division - VP [36] -------------------------------------------------------------------------------- Sorry. And on the top line, sorry, that's what I meant. What did it do on the top line? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [37] -------------------------------------------------------------------------------- The raw material impact on the top line? I don't -- I can't give you a number there. Unfortunately, I don't have that. On the ongo -- if Matamoros was a onetime from last year that we reverse in this year. If you -- your question was, do we have ongoing for the rest of the year, that would have the same effect. Was that the question? -------------------------------------------------------------------------------- Victoria Anne Greer, Morgan Stanley, Research Division - VP [38] -------------------------------------------------------------------------------- Yes. Is there anything more to comp out for the remaining quarters? Or it was just a Q1 '19 effect that's been this one-off impact on the margin because it doesn't repeat? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [39] -------------------------------------------------------------------------------- No. Almost nothing. So this was the big one. And then, sorry, the third question was? -------------------------------------------------------------------------------- Victoria Anne Greer, Morgan Stanley, Research Division - VP [40] -------------------------------------------------------------------------------- On the geographic mix and the difference in content per car in the different regions, you've been clear about that impact on the top line that, that will reverse in Q2. Should we think about any different margins there or it's just a content issue? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [41] -------------------------------------------------------------------------------- No. I mean what we are referred to here is the content issue and the top line effect here. But -- and of course, in terms of EBIT mix here, we don't go into the details per product and region here. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- The next question comes from the line of Agnieszka Vilela from Nordea. -------------------------------------------------------------------------------- Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [43] -------------------------------------------------------------------------------- I have a couple of questions. Starting with the kind of cost side of your business and what you can do there. We know that the program you announced last year was supposed to bring about $60 million in yearly savings. How is that proceeding? And do you already see need for extending restructuring because of what's happening now? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [44] -------------------------------------------------------------------------------- I think when it comes to the structural efficiency program, we launched last year and saw some effects last year. But the full effect should be reached during this year. I would say we are on track on that, and we are expecting to see the full delivery of that during this year. I think we have indicated in the past here that fully executed is not until we come into the second quarter here. And... -------------------------------------------------------------------------------- Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [45] -------------------------------------------------------------------------------- Do you plan anything above that? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [46] -------------------------------------------------------------------------------- I think going forward here, I mean we are working through all types of cost reductions of, let's call it, short-term nature right now. Then I think the scenario planning we are working will give additional more long-term effects that is needed potentially. But it all comes down to what will be the new normal, so to speak, beyond the current short-term challenge where we are all dependent on the result of the COVID-19. So to get to the new normal, we need to leave COVID-19 behind us. -------------------------------------------------------------------------------- Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [47] -------------------------------------------------------------------------------- And if you could quantify any cost benefit that you see from the support from the governments and states in different regions? And also, just to tell us if you believe that it's in any way different from what happened during the financial crisis? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [48] -------------------------------------------------------------------------------- I think the governmental support and programs, it's too early to give any effects, talk about any numbers there. So broad range of programs, and we are also in different phases of these different programs. And I would say also some -- much is similar to -- so far, similar to what we saw in the financial crisis. I think some countries here have added some initiatives that was not there. So it's a little bit mixed picture. But in many places, especially in the bigger ones, we see similar kind of activities here. But I would say it's too early to give a number on that. -------------------------------------------------------------------------------- Agnieszka Vilela, Nordea Markets, Research Division - Research Analyst [49] -------------------------------------------------------------------------------- Yes. And then the last question for me is, really, if you could elaborate why you felt the urge to draw down on all of your revolver, given the fact that you have quite limited maturities in both 2020 and 2021? So what was the reason really behind that? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [50] -------------------------------------------------------------------------------- I think you should see it as just very cautious and proactive activity here for what is a very challenging time. And as we have alluded to here -- during the call here is, and also in our report, is that the uncertainty is very, very high. We are talking about restarts here in Europe and the intention of restarting in North America in early May. But as we are dependent on this pandemic situation, meaning we need to get that behind us in order to get back to where we all should be in the industry, so to speak. We don't know how it will develop, if it's improving or if it's stabilizing or if it's diminishing. So very, very uncertain. So we think that's the prudent way to manage the company. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- Next question comes from the line of Hampus Engellau from Handelsbanken. -------------------------------------------------------------------------------- Hampus Engellau, Handelsbanken Capital Markets AB, Research Division - Automotive Analyst [52] -------------------------------------------------------------------------------- Two questions for me, and I apologize if it's already been asked because I was a bit late on this call. But in the 11 percentage point outperformance organic growth during the quarter, would it be possible for you to maybe split how much is the sales mix from China and how much is market share gains? And referring back to the 6 percentage points that you referenced about outperformance for the year, when you talked about it previously, was that figure back-end loaded? That's my first question. -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [53] -------------------------------------------------------------------------------- When we talked about it in the beginning of the year where we said we will have an outperformance of 6%, yes, it was back-end loaded. So what we see here now in the first quarter is to fullest extent a regional mix effect, as we said here, where China with lower content per vehicle falling with 50%, while Europe and North America was holding up well. That was the consequences of that regionally. -------------------------------------------------------------------------------- Hampus Engellau, Handelsbanken Capital Markets AB, Research Division - Automotive Analyst [54] -------------------------------------------------------------------------------- And then on -- I know that you're not giving any guidance, but if I look at the IHS numbers, with a 45% drop second quarter, minus 7% Q3, minus 8% million Q4. From your talks to the OEMs and like indicated and even if it's like really the early stage planning for second half, is that in the ballpark of what type of discussions you're having with the car OEMs when it comes to that, et cetera? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [55] -------------------------------------------------------------------------------- I think what we are saying here about uncertainty is reflected in our discussion with the OEM because I think no one has a clear view on how this will develop, hence the situation here where we are dependent on the virus basically. And concern is high also from our customers on how it actually would play out. I think there is, of course, some plans, some expectations and hopes, but very few know, of course. -------------------------------------------------------------------------------- Operator [56] -------------------------------------------------------------------------------- Our next question comes from the line of Emmanuel Rosner from Deutsche Bank. -------------------------------------------------------------------------------- Emmanuel Rosner, Deutsche Bank AG, Research Division - Director & Research Analyst [57] -------------------------------------------------------------------------------- One more clarification on the decrementals. So when I look at your margin progression year-over-year, you sort of helpfully break down sort of like the volume and other business impact versus some of the offsetting cost savings. It looks like your decremental margins would have been a certain amount and that about 1/3 of it is offset through cost savings. Any indication you can give us around the magnitude of potential cost savings as you move into Q2 and the rest of the year? Could it be stepped up at the level of Q1 or even step back? I guess how do you think about that? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [58] -------------------------------------------------------------------------------- No. I don't think we can give any more details surrounding that than what we have got here -- got so far here because, as we said, the uncertainty is high and I think that's the visibility we can give you what we've already stated, unfortunately. -------------------------------------------------------------------------------- Emmanuel Rosner, Deutsche Bank AG, Research Division - Director & Research Analyst [59] -------------------------------------------------------------------------------- Okay. So then on the different topics. So obviously, over time, your growth above market is heavily driven by sort of the market share gains. I think you also indicated that your win rate has stayed pretty high. Can you maybe talk about your discussion -- recent discussion with automakers around timing of those launches? Are there any important or major delays just sort of like know how are things sort of like looking for the rest of this year? Are things being pushed out? And any notable differences between regions? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [60] -------------------------------------------------------------------------------- No, as we indicated here before, I mean, so far, we don't see any -- really any delays here. Of course, that's something we are cautious of, considering the uncertain development here. But so far, nothing is indicated in that direction. So in that sense, business as usual. -------------------------------------------------------------------------------- Anders Trapp, Autoliv, Inc. - VP of IR [61] -------------------------------------------------------------------------------- We have time for one last question. -------------------------------------------------------------------------------- Operator [62] -------------------------------------------------------------------------------- And that comes from the line of Joseph Spak from RBC. -------------------------------------------------------------------------------- Joseph Robert Spak, RBC Capital Markets, Research Division - Analyst [63] -------------------------------------------------------------------------------- Maybe one more quick one on the outgrowth. I know this is a pretty sort of just-in-time industry, but is it possible there were sort of any shipments maybe in like the second week of March, like right ahead of sort of the last 2 weeks shutdown in North America and Europe that sort of contributed to some of the outgrowth that would reverse in the second quarter? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [64] -------------------------------------------------------------------------------- Yes. I mean you longer, we had Europe and North America running here in the quarter, it supported that mix effect. So yes. -------------------------------------------------------------------------------- Joseph Robert Spak, RBC Capital Markets, Research Division - Analyst [65] -------------------------------------------------------------------------------- So it's possible that they took some orders, assuming that they would continue to produce and then they sort of probably had to shut down? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [66] -------------------------------------------------------------------------------- Yes. I think -- I mean our customers are starting to pick up. So -- I mean we don't have any insight that looks like there, but that's reasonable to think, yes. -------------------------------------------------------------------------------- Joseph Robert Spak, RBC Capital Markets, Research Division - Analyst [67] -------------------------------------------------------------------------------- Okay. And then maybe just one on some of the risks you called out in the newsletter. You talked about maybe potential some demand or even part shortages in China, uncertainty in Mexico. I mean the UAW is coming out now and saying they're not sort of comfortable with sort of an early May restart. And also, just what are you seeing in your supply chain? Because if I go back to some very old notes from the financial crisis, I think you said back then, you guys sort of helped to support like maybe 10 or so of your suppliers. And are you seeing anything there or needing to take any action there? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [68] -------------------------------------------------------------------------------- I mean we are, of course, very close to our supplier base and working together with them to have all the restart activities lined up and so on. And including that, of course, monitoring also the health of the suppliers. And I must say, so far, it looks good. We are not currently in any way close to the situation where we were in the financial crisis. So I will say, healthier positions now. But you should also remember that we are only basically 2 months into this crisis here also. So of course, that's something we need to continue to look carefully at. But I would say, so far so good. And we haven't needed to do anything yet. -------------------------------------------------------------------------------- Operator [69] -------------------------------------------------------------------------------- Yes. Joseph, any follow-up question? -------------------------------------------------------------------------------- Joseph Robert Spak, RBC Capital Markets, Research Division - Analyst [70] -------------------------------------------------------------------------------- Yes, sorry. And just on some -- on like maybe Mexico or some of the risks in China that you pointed out? -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [71] -------------------------------------------------------------------------------- Yes. I think, I mean, it's just to reiterate again, the uncertainty here. And I mean to get U.S. going full again, you need to have Mexico with you on that. And I think we see different status in terms of how the stay-at-home policies looking like and so on and also the ambitions to restart in terms of timing and so on. So there is a lot of unknowns surrounding all this. And that's why we are very cautious here of giving any indications on where we think we're going because there's so many things that -- it's outside a normal industry judgments, you could say, because we are, once again, dependent on how the virus develops and also the regional and country governments are reacting to that. -------------------------------------------------------------------------------- Operator [72] -------------------------------------------------------------------------------- Thank you for all of your questions. I'll hand back the call now to the President and CEO, Mr. Mikael Bratt, for closing remarks. Please go ahead, sir. -------------------------------------------------------------------------------- Mikael Bratt, Autoliv, Inc. - President, CEO & Director [73] -------------------------------------------------------------------------------- Thank you, Gino. Before we end today's call, I would like to say that while preparing for restarting, we will continue to managing the effects of the short light vehicle production decline with a never-ending focus on quality and operational excellence. Our second quarter earnings call is scheduled for Friday, July 17, 2020. And thank you, everyone, for participating on today's call. We sincerely appreciate your continued interest in Autoliv. Until next time, stay safe. -------------------------------------------------------------------------------- Operator [74] -------------------------------------------------------------------------------- Thank you. That does conclude our conference for today. Speakers, please stand by. Participants, you may all disconnect. Thank you for joining us. Stay safe, everyone.