Earnings Conference Call and Webcast: Fourth Quarter 2017 Financial Results

Transcription

1 Earnings Conference Call and Webcast: Fourth Quarter 2017 Financial Results Tuesday, 30 th January 2018

2 Welcome Operator Good day and welcome to the Q Autoliv Inc earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Anders Trapp. Please go ahead, sir. Agenda and Safe Harbor Statement Anders Trapp Vice President of Investor Relations, Autoliv Inc Agenda Thank you, Cecilia. Welcome everyone to our fourth quarter and year-end 2017 earnings presentation. Here in Stockholm we have our Chairman, President and CEO, Jan Carlson; our Chief Financial Officer, Mats Backman and myself, Anders Trapp, Vice President of Investor Relations. During today's earnings call our CEO will provide a brief overview of our overall company full year 2017 performance and outlook, as well as an update on our general business and market conditions. Following Jan, our CFO will provide further details and commentary around the Q financial results and early outlook for Q1 and full year Then, at the end of our presentation, we will remain available to respond to your questions and, as usual, the slides are available through a link on the home page of our corporate website. Safe Harbor Statement Turning the page, we have the Safe Harbor Statement, which is an integrated part of this presentation and it includes the Q&A that follows. During the presentation we will reference some non-us-gaap measures. The reconciliations of historical US GAAP to non-us-gaap measures are disclosed in our quarterly press release and a 10-K that will be filed with the SEC. Lastly, I should mention that this call is intended to conclude at CET, so please follow a limit of two questions per person. I will now turn it over to our CEO, Jan Carlson. Fourth Quarter 2017 Financial Results Jan Carlson Chairman, President and CEO, Autoliv Inc FY2017 recap Strong performance even with increased RD&E investments for long-term growth Thank you, Anders. Now looking into a recap of our full year 2017 performance, by turning the page, we are pleased with our strong outcome in the fourth quarter and for the full year I would like to start with acknowledging and offer my sincere thank you to the entire Autoliv team for delivering another year of quality and operational excellence with solid financial performance. For full year 2017, our record sales of $10.4 billion increased year over year 2

3 around 3% and included an organic sales growth of approximately 1.5%, which was driven by our passive and active safety products. Our sales growth and strong operating leverage resulted in a record gross profit of $2.15 billion for full year 2017 and grew our adjusted operating margin of 8.6%, despite a 70 basis point increase in RD&E cost year over year. These increased levels of RD&E costs are necessary to support our record order intake in both segments as we drive towards our 2020 sales targets. Our full year 2017 adjusted earnings per share of $6.58 declined year over year mainly due to the effect from Zenuity, which is focused on software development in ADAS and autonomous driving. Operating cashflow for full year 2017 of approximately $936 million was best ever year, while we returned roughly $366 million to shareholders through share repurchase and record dividends. This, along with other actions, resulted in a leverage ratio of 0.5 times, while our adjusted return on capital employed and return on equity of 19% and 14%, respectively, remained around historical levels. Within Passive Safety we see improving operating efficiencies and operating leverage on organic sales growth and vertical integration as the segment is ramping an unprecedented market share increase. During the year we undertook several strategic initiatives to increase long-term strategic value, including Zenuity joint venture, a LiDAR acquisition and several technology collaborations. And lastly, our decision to prepare for a spin-off of our Electronics business as a standalone entity. Prepare for next steps for 'tax-free spin off' of electronics business during Q Now looking into further details around the spin by turning the page, it was announced in the mid-december we concluded our strategic review and decided to prepare for a tax-free spin off of our Electronics business. Our intention is that both companies will be US companies with headquarters in Stockholm and have dual listings on stock markets in the US and Sweden during the third quarter 2018, where the primary listings for both companies will be in the US. The Passive Safety entity, or RemainCo, will retain the name Autoliv, while the Electronics entity, or SpinCo, will be named Veoneer, as you may have heard yesterday from our press release. As we mentioned at our Capital Markets Day last September and the press release last Friday, there will be some cost effect resulting from this transaction. Our best estimate of the cost at this time is as follows. Separation costs are expected to be up to $70 million and will be excluded from adjusted operating income. Tax-related cost for the company resulting from the separation of the legal entities in preparation for the spin off are estimated to be up to $80 million during the first half of The reallocation of certain corporate and engineering costs are expected to positively impact the operating margin by less than one percentage point for Autoliv as RemainCo as a standalone company. For Veoneer, the SpinCo, as a standalone company, the reallocation costs, including additional costs as a standalone entity, will negatively impact the operating margin by a few percentage points. Strong order intake in both segments Now looking at an update to our order intake on the next slide, we are pleased with the development of our order intake during For Passive Safety, our order intake in 2017 was $2.6 billion, which represented the third consecutive year of winning 50% or more of customer orders up for bid. The estimated 2017 Passive Safety segment lifetime sales of this order intake 3

4 was approximately $13 billion. This strong order intake in Passive Safety over the last three years supports our 2020 sales target of more than $10 billion and organic sales CAGR of around 8% from For Electronics, we had our second consecutive year of strong order intake where in 2017 we were awarded close to $900 million of new contracts up for bid within our addressable market. The estimated 2017 Electronics segment lifetime sales of this order intake was approximately $4 billion. These orders, along with awards over the previous three years, provide confidence that we can achieve our 2020 Electronics sales target of around $3 billion and organic sales CAGR of 10% from and provides a very solid base towards the 2022 sales target. I should mention that the accumulated Active Safety contract wins represent more than 50% of our overall electronics order intake over the last four years. Consequently, in order to support this step up in growth, we have significantly increase our RD&E. In 2017 our net cost was around $740 million, or 7.1% of sales. Our RD&E net cost in full year 2017 is more than double and more than 200 basis points higher as a percentage of sales when compared to Although we believe RD&E in Passive Safety has peaked in full year 2017 as a percentage of sales, we see further increases in RD&E for growth in Electronics, in particular Active Safety, in the coming years. Active Safety and Zenuity update Now turning the page, we have the latest update on our Active Safety development and Zenuity joint venture. In Active Safety we had a record order intake, winning close to $450 million in the product areas we compete. We estimate this to be a market share in the high teens. During full year 2017 we significantly increased the number of customers for whom we are technically qualified to secure new business awards across all major product areas. We're also successful in securing contracts with our fourth Vision customer and enter into our first LiDAR and Roadscape contract. During full year 2017 we experienced Active Safety organic sales growth in the mid-single digits, mainly due to our lower order intake in 2014 and 2015 as a result of changing our Vision strategy towards internally developed algorithms. This trend will continue in However, we are preparing for eight major new programme launches to support our Active Safety organic sales growth, which will start to ramp up towards the end of 2019 and into marked the start up of our software joint venture, Zenuity, where the team ramped up to around 500 employees and consultants, which is expected to exceed 600 by the end of full year The cost reported in equity method was around $31 million in full 2017 for nine months, while entering into 2018 the quarterly run rate is approximately $15 million. We are pleased to see the Autoliv ADAS system is currently field testing ahead of the 2019 launch with a Zenuity software stack. In addition, we have level four vehicles running daily tests with autonomous drive, AD, Highway Pilot capabilities and are in discussions with six customers for various versions of this Zenuity software stack. Combined, these activities are running on around 20 vehicles. 4

5 FY 2018: looking ahead Executing towards the targets of the standalone business Looking ahead to 2018 on the next slide, we look forward to an exciting year as we execute towards our standalone business targets. Looking first to the spin of our Electronics business, Veoneer, we foresee the following next steps. During first half 2018 we expect to file the form 10 and disclose recast historical figures for 2015, 2016, 2017 for new standalone entities. In addition, during first half, we expect to host analyst days along with deal roadshows in the US and Europe for standalone entities ahead of the spin off. And lastly, during third quarter 2018, we expect the two standalone entities to commence trading. In Electronics, Veoneer, our early indication for full year 2018 for organic sales is to decline 3% year over year while currency translation is estimated to have a tailwind of roughly 3%. This assumes an organic sales decline, year over year, in restraint control systems and ANBS, our brake system joint venture, due to the timing of new programmes not ramping up until 2019 and 2020, while we estimate Active Safety to grow similar to We estimate, due to the decline in organic sales and planned increase in RD&E of $70 million to support our organic sales targets that the underlying profitability for the Electronics segment is to decline in In Passive Safety, our early indication for full year 2018 is for an organic sales growth of approximately 10%, which is roughly five times the light vehicle production according to the latest IHS projections. In addition, we estimate a translation currency tailwind of approximately 4%, based on mid-january currency rates. We estimate operating leverage from this strong organic sales growth is expected to drive a year-over-year improvement in the underlying profitability in 2018 for the Passive Safety segment. Full year 2018: key models in Passive Safety Contributing to the ramp-up of our expected organic sales growth Looking further into Passive Safety's full year 2018 outlook on the next page, we have identified some of the models within our Passive Safety segment which are currently ramping up now or will launch during We estimate that these models contributed more than three percentage points towards our Passive Safety organic sales growth during Q and anticipate these models to contribute approximately $500 million of organic sales growth for full year On an annual basis, these models represent more than 10% of our group sales, while our content on these models is in the range of $100 to more than $500 per vehicle. As I mentioned at our Capital Markets Day in September, we target our Passive Safety organic sales growth from to be approximately 8% CAGR. Overall market conditions Major light vehicle markets remain mixed and uncertain Looking now to the overall market conditions on the next page, where our major light vehicle markets remain mixed, with some uncertainties, in particular within China and North America. During the Q the inventory levels declined in both China and the US due to lower underlying light vehicle production against a fairly strong SAAR. 5

6 In the EU27 we saw another strong year where, in 2017, vehicle registrations were close to pre-crisis levels and light vehicle production set a new record. For first quarter 2018 the overall global light vehicle production is expected to increase by around 0.5%, year over year, according to the latest IHS figures. This assumes light vehicle production will decline year over year in China by approximately 4% while the light vehicle production in Japan and rest of Asia is expected to increase around 2% and 1%, respectively. In North America, the light vehicle production is expected to increase approximately 1% in first quarter, year over year, while South America is expected to continue its recovery with a year-over-year increase of approximately 15%. In Europe the light vehicle production is expected to increase approximately 2% year over year in first quarter. This is comprised of increases in Western and Eastern Europe of around 2% and 3%, respectively. Looking at the latest full year 2018 global light vehicle production, the IHS early projection is for a year-over-year increase of 2%. This is mainly driven by increases in all major regions with the exception of Japan, as illustrated on the slide. I will now hand it over to our CFO, Mats Backman, to present the financials and our outlook. Mats. Financial Results and Outlook Mats Backman CFO, Autoliv Inc Q highlights Strengthening our market position and preparing for our step up in growth Thank you, Jan. Looking now to the fourth quarter highlights on the next slide, we are pleased with our strong end to 2017, where our record sales for any quarter of $2.7 billion increased year over year by close to 5%. Our organic sales growth of 1.1% was 60 basis points better than the LVP and roughly one percentage point better than our guidance, mainly due to stronger sales in China with both local and global OEMs. Our adjusted operating margin of 9.6% was better than our guidance, mainly due to the better than expected organic sales growth. Our adjusted earnings per share of $2.03 increased 19% year over year due to higher operating income and a lower tax rate. During the quarter we also generated a record operating cash flow close to $400 million and returned $52 million to shareholders through dividends with a leveraged ratio of 0.5 times, within our long-term range. Despite higher levels of investment for growth in CapEx and RD&E we had an adjusted return on capital employed and return on equity of about 21% and 16% respectively. While supporting our growth opportunities, we continued to see improving operating efficiencies in our gross margin development, which helps to mitigate the net margin effect from higher levels of RD&E. 6

7 Lastly, we continue to improve our market position for the long term, as our Zenuity joint venture established a technology collaboration with TomTom to provide a reference platform for our software mapping solutions. Operating income and margin bridge Looking into more details on our year-over-year margin improvement on the next slide, our adjusted operating margin of 9.6% was 30 basis points better, year over year. As illustrated by the chart, improved operating leverage from the organic sales growth and improved operating efficiencies, including vertical integration, drove a record gross profit. This improvement, in addition to favourable currency effects, more than offset the planned higher investment in RD&E to support our future sales growth targets and our higher raw material costs. Q4 product volumes Strong volume growth in high value-added seatbelts Looking now to our production volumes on the next slide, we have summarised our delivery quantities for the fourth quarter. In Passive Safety, our seatbelt volumes continue to have favourable mix towards advanced, high value-added products, such as pre-tensioners and active seatbelts. Our airbag and steering wheel products overall performed better than the global LVP, due to strong growth in Europe, China, Japan and South America, which was partly offset by a decline in North America and South Korea. Within Electronics, our Active Safety volumes increased by 4%, mainly due to radar and camera systems. Our restraint controls and underlying braking system unit volumes declined, mainly due to the phase out of certain programmes when new customer launches ramp up in Cash flow Looking toward cash flow on the next slide, as mentioned earlier our operating cash flow was the best ever for any quarter or full year, mainly due to strong working capital performance. Our CapEx of 5.5% of sales for full year 2017 was within our expected range of 5 6%, as set out at the beginning of the year. The year-over-year commodity cost increase was about $7 million for fourth quarter and about $30 million for the full year 2017, both as we indicated at the beginning of the quarter. Full year 2017 capacity alignment and anti-trust related costs were about $26 million and $18 million respectively, while the cost for the separation of our business segments was about $9 million. Combined, these costs were $53 million. Our tax rate for full year 2017 was about 28%, excluding discrete, while our current estimate for the full year 2018 is for a tax rate of around 29%, excluding any discrete items. Lastly, we expect CapEx to remain higher than normal levels again in full year 2018, as we have seen over the last couple of years. However, we will come back to this in upcoming quarters when we provide guidance for the standalone entities. Full-year segment reporting Strong operational performance in Passive Safety driving group profitability Looking now to our segments on the next slide, we have summarised our segment reporting for the full year In Passive Safety, our organic sales growth of slightly more than 2% 7

8 was primarily driven by strong growth in all major regions except North America and South Korea, largely due to high-end steering wheels and advanced seatbelts. In addition, this growth was positively impacted by currency translation of about 0.5%. Combined, this resulted in a consolidated net sales increase of about $216 million to $8.1 billion. In Passive Safety, the 10.2% operating margin was in line with last year, as increased RD&E to support the heavy launch period essentially offset the operating leverage from organic sales growth and operating efficiencies. In Electronics, the organic sales decline of less than 1% was primarily driven by timing of new model launches in restraint controls and brake systems, which more than offset the positive Active Safety organic growth. This, in combination with the ANBS acquisition effect of about $121 million, resulted in a net consolidated sales increase of about $100 million to $2.3 billion for Electronics as the currency translation impact was minimal. The negative 7.8% operating margin for Electronics was mainly affected by the goodwill impairment charge related to ANBS joint venture in the fourth quarter of $234 million. The underlying Electronics segments operating margin for full year 2017 was 2.3%, excluding the impairments effect. Looking ahead Q guidance Looking now at our outlook, on the next slide, where we have our first quarter guidance, which is primarily based on our customer call offs. Our organic sales are expected to grow less than 1%, mainly due to strong growth in rest of Asia, South America and Japan, which is mostly offset by Europe, South Korea and China. Sequentially, our consolidated sales are expected to increase by about 2%, mainly due to the ramp up of new business in Passive Safety, which more than offset the sequential decline in global LVP from the fourth quarter 2017 of about 3%. As a result, we expect to achieve an adjusted operating margin of around 9% for the first quarter Year over year the benefits from higher operating efficiencies is partly offset by planned higher RD&E to support future growth and a negative impact from currency. Sequentially, Q1 from Q4 last year, the adjusted operating margin decline is mainly due to higher RD&E net. Full-year 2018 indication Looking now upon our full year on the next slide. Our full year 2018 indication is for an organic sales growth of more than 7%. This strong growth is mainly driven from Active Safety and Passive Safety in all major regions except South Korea. However, this is partly offset by lower sales in restraint and brake control systems due to the phase out of certain programmes when the new customer launches ramp up in Our full-year 2018 indication is for an adjusted operating margin of around 9%. The estimated year-over-year improvement is mainly the result of improved operating efficiencies and operating leverage on organic sales growth, which is partly offset by higher planned RD&E in Electronics and a negative impact from currencies. 8

9 Financial outlook Summarising our outlook on the next slide, our guidance and full-year indication assumes mid-january exchange rates prevail and excludes costs for capacity alignment, anti-trust related matters and costs related to the separation of our business segments. Our net consolidated sales for the first quarter are expected to increase by more than 7% due to our organic sales growth and favourable currency translation effects of more than 6%. Our full year 2018 early indication is for net consolidated sales of more than 11% due to our strong organic sales growth and favourable currency translation of about 4%. Based on these sales assumptions and currency assumptions, we estimate an adjusted operating margin of around 9% for first quarter and full year Overall, this shows a strong sales growth and margin development year over year despite increase RD&E investment in Active Safety to support our sales target. Lastly, related to currencies, we estimate the positive impact of currency translation on earnings will essentially be offset by the unfavourable impact on transaction effects. I will now turn it back to Jan. Summary Jan Carlson Chairman, President and CEO, Autoliv Inc Thank you, Mats. Turning the page, this concludes our formal comments for today's earnings call but before we open up for Q&A, I would like to summarise with a few comments. As I mentioned earlier, yesterday we unveiled our new company name for our Electronics business, Veoneer, as a standalone business where the Veoneer brand will be seen as a visionary pioneer in automotive electronics, ADAS, automation and new mobility. We concluded 2017 on a strong note, with our highest ever sales, gross profit and operating cash flow, along with a record order intake for the third consecutive year. Looking ahead to 2018, we estimate our earnings per share to grow faster than our organic sales growth rate. We are very pleased to see that our planned strategy to transform our company over the last several years to invest in growth through vertical integration, capacity alignment and RD&E are doing well and paying off. All of this is leading up to the fact that our two business segments have never been in a better position and are now ready for the next phase, where both companies, Autoliv and Veoneer, are well-positioned to save more lives and create more value as standalone entities. Thank you, and turning the page, I will now turn it back to our moderator, Cecilia, and open up for Q&A. Q&A Operator: Thank you, sir. If you wish to ask a question at this time, please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. We will now take our first question from David Leiker from Baird. Please go ahead, sir. David Leiker (RW Baird): Good morning, everyone. 9

10 Jan Carlson: Good morning. David Leiker: I m still at Baird, despite the pronunciation. Two questions: in your slide deck, you had a picture there of fiscal 2018 key model launches for Passive Safety. Is there something similar to that on the Veoneer side that you can share? Jan Carlson: There is definitely something. As we talked about here, we have eight major model launches. We can develop that; we don t have it offhand here right now. But if you look to this page, as such, nine out of these models have Electronics content and five have Active Safety contents on these models, being the Passive Safety growth driver models. But we can come back to you with a similar page on Electronics. David Leiker: Okay, that s useful. And then the second thing, when you look at the win rate that you re getting in the Active Safety, and then also you didn t talk quite what the win rate was on the autonomous driving side, but if you could give us some context on that, but more importantly, why are you winning? What s the basis behind this of why you re winning and who are you winning against? Jan Carlson: Well, I think why we re winning is we have a competitive product. It has taken time to be come on the bid list, to be technically qualified, and now we are up for competing on the awards and we are increasing our win rate. We tried to lay this out on the Capital Market Day. You can see from the slide deck here that we have a new customer on business side. We have been technically qualified to more customers on ADAS ECUs, and we have a new customer, our first customer, on LiDAR and on Roadscape. I think competitiveness, seeing the value in what we are producing and our technology, both when it comes to vision and radar system and both when it comes to stereo vision and mono vision. David Leiker: Okay, thank you. I ll follow-up with Ray on that thing. Thanks much. Jan Carlson: Thank you. Operator: We will now take our next question from David Lim from Wells Fargo. Please go ahead. David Lim (Wells Fargo): Hi, good afternoon, gentlemen. Looking at the outlook in 2018, Mats, can you sort of tell us or couch what s the raw material headwind that you re expecting in 2018? I mean, doing some rough math, it looks like the organic contribution margin is around 14-15%. Mats Backman: Yeah, we have it s a rather small raw material impact looking into We are estimating about four million in the first quarter corresponding to about 10 bps, and we are actually anticipating the four million for the full year. So basically, looking on the full year impact, it s basically flat in terms of margin. David Lim: Got you. So total full year raw mat headwind is about four million, just to be sure? Mats Backman: Four million. Yes. That s correct. David Lim: Yes, and then and then Jan, I was wondering on the eight major launches, and this is a two-part question. Eight major launches, can you couch like what the on the ELE side of it, you know, what is the products that you re launching with? Is it radar, vision, et 10

11 cetera? And then we also heard that there s some price pressure in radar and vision, and vision mainly in China. How do you guys handle the undercutting from your competition? Thank you. Jan Carlson: Well, I guess, as we ve said, alluding a little bit to Dave s question earlier here, we believe we have a competitive product portfolio from a technology standpoint, from a pricing standpoint. When it comes to the different model or programme major launches programme launches that we have here, it s across the board. It s including all our product segments, essentially. And, you know, it s a spread of different products that is going into production within our area of core products, radar, vision, ADAS controllers. David Lim: Great. Thank you. Operator: We will now take our next question from Emmanuel Rosner from Guggenheim. Please go ahead. Emmanuel Rosner (Guggenheim): Hello, everybody. Jan Carlson: Hello. Emmanuel Rosner: My first question is, can you give a little bit more colour on some of the recent ADAS business wins? Seems like you have a new vision win as well as LiDAR. I m curious on timing of launch of, you know, these wins. What is the configuration of it as well? Like are we talking about one LiDAR or multiple LiDAR per car? And then towards is it towards ADAS or some levels of semi-autonomy? Jan Carlson: It s mostly ADAS orders that we are looking to here. And the launch of these projects are 2019 at the earliest or later, actually. So, the bookings that we see here now is actually driving more towards the 2022 than the 2020 target. Some of it is affecting also the 2020 target, but most more of them into When it talks about the configuration, it s a widely spread type of configuration for different platforms when it comes for more simple type of products or up to more advanced premium models. Emmanuel Rosner: Got it Thanks for the colour. And then on the Passive Safety side, obviously, guidance for very strong organic growth in 2018, but maybe somewhat back-end loaded since Q1 is not going to be that strong. Which quarter is the acceleration expected to happen? Is it mostly Q2? Jan Carlson: It is it s spread between Q2 to Q4. And if you look to the effect of the strong order intake, you see that already in quarter one, and we mentioned that in the release, that it has a positive effect of 6% estimated already from quarter one but it s offset by a platform changeover that has a negative impact in the first quarter that we do not see for the remaining part of the year. So, it s happening as we speak, but will continue with less negative offset for quarter two to quarter four. Emmanuel Rosner: Great. Thank you very much. Operator: We will now take our next question from Brian Johnson from Barclays. Please go ahead. Steven Hempel (Barclays): Yes. Hi, good afternoon, team. This is actually Steven Hempel on for Brian. Just want to drill down a little bit on the goodwill impairment charge for the Brake Control business. I believe at the October 15 Capital Markets Day you were targeting less than a billion sales for Brake Control in 2019, and it looks like it s about $470 million here in

12 So, I guess is there is still a path to less than $1 billion for that business over time? And it seems like the sales in that business have been going down rather than up. So, I guess, if you could just remind us the kind of strategic logic for acquiring that Brake Control business and then kind of the outlook for that business over the next couple of two to three years? Jan Carlson: If you look to the impairment testing I m asking, you may fill me in and you may know the details here, it s more because of the closure business has deteriorated. The business that came along with the formation of the joint venture has declined more than what we could foresee entering into this joint venture. It s lower volume on existing contracts and it s also some contracts that has disappeared out of it. If you look to the long-term prospect of this business, we believe definitely it has a positive future. We had a very strong order intake in We had almost a strong order intake in But as you know, the discount factor of the dollars in the outer years has less of an impact, and therefore as a part of the quarterly closing, our judgment was to impair this goodwill and that s why it s coming here. We believe it has a good future and are seeing a strong customer interest on the business. I don t know if you want to add something, Mats? Mats Backman: No, I mean, that s correct. I mean, as we can see a more back-end loaded business plan for the business and when you re applying a discounted cash flow on that one, then you re getting that kind of effect in the annual impairment testing. So, Jan, you re right. Steven Hempel: Okay. And then just following up on your cooperation with Adient for integrating Passive Safety products into kind of disruptive mobility seat arrangements. I guess, is that more of a margin or a content opportunity? Or put in put another way, is there going to be more airbags going into the vehicles? Or is this more opportunity around kind of advanced engineering for new seat structures in Passive Safety arrangements in vehicles that might justify higher margins and returns on investor capital? Jan Carlson: I think it is a consequence of different seating positions, and there are ways of staying ahead of the curve when it comes to innovation and the changing layout of compartment for cars being built different when autonomous drive is an important content of the vehicle. And this will be more of an innovation activity for some period of time now until you see more concrete results out of different layouts in the compartment. Steven Hempel: Got it. Thanks for taking our questions. Jan Carlson: Thank you. Operator: We will now take our next question from Vijay Rakesh from Mizuho. Please go ahead. Vijay Rakesh (Mizuho Securities): Hi guys, good quarter and guide here. Just looking at the Veoneer side, I was just wondering, if you look at Active Safety, your order intake jumped pretty nicely in 2016/17. I was wondering as you look at 2018, any thoughts on what your Active Safety order intake looks like? Jan Carlson: We are not guiding for order intake. We will report as we normally do nowadays, report order intake once a year. And we will come back to you down the road with order intake for Active Safety or for Electronics as such. We said that some of the order intake was back- 12

13 end loaded in 2017, and all of the orders that we could see, foresee and anticipate, some of them or a few of them were pushed into So, all of these orders that we had in mind did not materialise yet. It s still out to be awarded. And, still, we had a record order intake in 2017 on Active Safety. Vijay Rakesh: Got it, great. And on the Active Safety side again, as you look at 2018, I know you are still adding headcount in R&D, but any thoughts on where when you see the operating margins kind of bottom? Do you think, you know, given a two-year cadence, some of these orders that you got in 2015/16 start to materialise late in the year or early into next year and your margins, operating margins on the Active Safety improve? Thanks. Jan Carlson: We haven t commented on margins specifically on Active Safety. We set out our margin target of 0-5% for the business as standalone in 2020, you remember in our Capital Markets Day. And, as you can see here now, for this segment and for what we are talking about here in this report, we have an organic sales decline this year and we have also an increased step up in RD&E of 70 million. So, of course, that has a negative impact on the margin for this year. The ramp up of the new business as we also said here in this slide presentation is coming towards the end of Vijay Rakesh: Got it, thanks. Operator: We will now take our next question from Joseph Spak from RBC Capital. Please go ahead. Joseph Spak (RBC Capital Markets): Thanks, good afternoon. I was wondering if you could just talk a little bit more about some of the segment margin commentary for when each segment is going to be a standalone company? I mean, specifically, you mentioned profit is going to be higher for Passive and then lower for Electronics, and you talk about some of the percentage point increase, but what s the right margin base to be really talking about for each segment going forward? Jan Carlson: We are not guiding when it comes to the standalone companies looking on the full year, so you have the segment information there. But you re correct, I mean, when we are splitting up the segments and distributing costs, we can see a kind of a net negative impact on the Electronics and a positive on the Passive Safety side. And the reasoning behind that is basically that we will have some higher standalone costs related to corporate cost looking on Electronics. But it s also a question about how to distribute group finance or RD&E as well, as we have RD&E that is group financed today that is going for the different segments, and to a larger extent to Electronics than Passive Safety ramp. So that s the kind of the background for that statement. Joseph Spak: Sure. Yeah, I mean, I guess put a different way, like the 9% for the total company, like if we were to sort of include some of those costs for to get Electronics or Veoneer off the ground, you know, is it 50 bps? If we like reconsolidate it, what s sort of the range we would be we should be thinking about? Jan Carlson: Well as we said in the release, you should look towards up to a percentage point s improvement for the Passive Safety part. And if you look to the Veoneer profitability, it is probably slightly negative. It s very hard to estimate at this time being, but you can calculate the increased RD&E and the standalone costs. Maybe a low single, mid-single digit negative is 13

14 an estimate on the Veoneer side as a standalone company for 2018, but that s very rough. And it s today very early to comment on. We will get more colour on that later on in this process. Mats Backman: And maybe also to stress that in the in the communication at the Capital Markets Day when we gave the target for 2020, this was included in that targets. Joseph Spak: Okay. That s helpful. Jan Carlson: All of this when we talk about these projections, this is what we have had in mind. This is sort of in the underlying business plan leading up to the targets for 2020, and I think it s worthwhile when we now see the shorter-term development of RD&E here going forward. It is a part of the plan, reassuring the targets in 2020 and And I think what was left a little bit outstanding at the Capital Market Day was the order intake as such, and now we can conclude that materialised. So, we feel increasingly confident in those targets based on the outcome of Joseph Spak: Okay. And just one follow-up then. Like as you go through the spin, you know, something that we ve seen in the past for other companies that have undergone these sort of corporate actions is the RemainCo, which in this case should be Autoliv, is left with some with an infrastructure cost that s a little bit too large for its size, so there s some work that needs to be done to take those costs down over time. Do you anticipate that being the case on the passive side? Jan Carlson: No. We don t. Go ahead, Mats. Mats Backman: If you re looking on the kind of the distributed corporate costs, I mean that definitely Passive Safety needs to have a kind of a cost base that is fit to the size of the company. Jan Carlson: We are also distributing the total corporate costs today between Veoneer and Autoliv. So, parts of the staff that is going and working today on the corporate side will be oriented towards Veoneer and parts of it will go with Autoliv. So, you know, it will reduce its size. The Autoliv as RemainCo will automatically have an adjusted size based on this spin-out of the Veoneer resources. Joseph Spak: Okay. That s helpful. Thank you. Operator: We will take our next question from Björn Enarson from Danske Bank. Please go ahead. Björn Enarson (Danske Bank): Thank you. Looking at the order intake so during 2017 on the Active side, it was, as you mentioned, pretty back-end loaded. Are there any reasons for that to repeat itself, that we will have a very lumpy order intake? Or should we assume a more of an evenly spread-out order intake looking ahead? Jan Carlson: There are fewer orders being awarded in the area of Active Safety as being the product area as such than we are used to in Autoliv on the Passive Safety side. So, it s hard to say as of today. We may come back to that during the spring here when we speak more about Veoneer as a standalone entity. But the orders are more discrete generally, you would say, than what we are used to in the airbags and seatbelts side. Björn Enarson: Okay, thank you. 14

15 Operator: We will take our next question from Thomas Besson from Kepler Cheuvreux. Please go ahead. Thomas Besson (Kepler Cheuvreux): Thank you very much. I have two questions, please. First, could you give us an indication on the timing of the release of the financial statements of the two companies and the management team of both companies, please? The first question. Jan Carlson: It will come some time during the spring. We don t have an exact timetable to give you here. We will develop this here some time during end of first quarter, beginning of second quarter, but we don t have a good timing for you to give. And we will also as soon as we have more information to give and when it s practically possible, we will give you that. As you saw from the, or heard from the release or slide set here, at some time during first half, we will file the Form 10, et cetera. We are currently now working on the org structure, on the organisational structure, as such, and then we will populate that with names and then thereafter it will further develop and will be released both internally and externally. Thomas Besson: Okay, thank you. Second question, when I look at the Electronics underlying operating income for 2017, is it fair to assume that the Passive Safety, Electronics is a profitable business, but that the other two are probably loss making? And if that s the case, is there a further risk that there could be potentially more goodwill impairment on the braking JV? Or have you removed the entire risk of that with what you announced last week? Jan Carlson: Yes, when it comes to the ANBS joint venture, the charge we took in terms of impairment now, it was for the full amount of goodwill. So, it s no goodwill left on that one. And then looking on the different parts of Electronics, I mean we are not disclosing or guiding anything on that level so to speak looking on the different parts in terms of Restraint Controls, Active Safety and ANBS. Thomas Besson: Okay. Just a follow-up, am I right to remember that you used to say at the start of the Nissin JV that this was supposed to be a business that would operate at par with the group? Jan Carlson: I think long-term we said that, and I don t think we give any further guidance on this one, but this has a positive outlook based on the order intake. And we may be back later on with specific margin guidance as Veoneer later on. For the time being, we don t give any more guidance on it. I think we should be very pleased with strong order intake in 2016 and in 2017 for this brake joint venture here, which is promising good for the future. Thomas Besson: Okay. Thank you very much. Operator: Please note we have five minutes left in today s conference. We will now take our next question from Victoria Greer from Morgan Stanley. Please go ahead. Victoria Greer (Morgan Stanley): Hi, there are two from me, please. One, just to check up on the discussion earlier about the allocation of central costs. The 2020 margin target, 13% in Passive and 0-5% in Electronics, that s post all of the effect of allocating central costs, is that right? Jan Carlson: Yes. Mats Backman: Yes. 15

16 Victoria Greer: Yeah, great. Thank you. Just to clear that up. Secondly, I want to ask about the weakness in the braking and the ADAS ECUs, it s really helpful, thank you, that you ve given us the Electronics order intake. And we ve known for a while that, you know, in Active Safety, 2015 orders were pretty weak and then you got a big acceleration in 2016 and now in You know, the pattern actually looks like it s been very similar for the rest of Electronics. You know, we re pretty familiar with the product changes for Active Safety, but could you talk about what changed for the Passive Safety ECUs and the and the braking systems in terms of product or OEM planning or launches, you know, that you ve got this big disparity between the 2015 orders and then the 2016? What s going to be driving the acceleration that you ll get, I guess, 2019 or so? Jan Carlson: It has been a good year here in 2017 for both restraint control and for brake control. And as we mentioned many times now, 2016 was a good year also for the brake control joint venture. The fact of the good order intake is that there were important platforms up for bid. Where we had a competitive offer, we could offer a good solution to customers. And in the technology side for our brake joint venture, we have a superior technology towards hybrid vehicles and fully-electric vehicles with, I think, a very competitive product offering in this market that helped us very well winning business here. On the Electronics side, on the Restraint Control side, it s a broader business, where we have been successful in capturing a good portion of the business. As we also said here, 50% of the business awarded here in 2017 goes to Active Safety, so the remaining part, Brake and RC&S, is the other 50%. Victoria Greer: Okay, but so for braking, we can really think about2016 as the first year that you were launching joint products and so that s been pretty successful, is that the right way to think about it? Jan Carlson: Yes, well, the whole joint venture was formed in April So, it wasn t even a full year and still we were able to capture, as we said, an important platform to a Detroit 3 here, which is, I think, a very good acknowledgment of our technology and also of the trust in this company. This has continued with good order intake in 2017 for the brake joint venture. Victoria Greer: Great, thank you. Jan Carlson: Thank you. Operator: We will now take our next question from Rod Lache from Deutsche Bank. Please go ahead. Rod Lache (Deutsche Bank): Good morning. Just two questions. One is, does the goodwill impairment affect the margin forecast for 2018 if you can just size up what the effect of that is? And then secondly, I presume that the 9% margin forecast for actually, let me ask a different question. The Electronics NewCo presumably will consume some cash for a few years even out to 2020 with the 0-5% margin. And I think you pointed out that you re going to capitalise it with a cash injection to basically allow it to carry forward for a few years through that cash burn. Can you give us a sense of what you re thinking in terms of the amount of capital that you re going to need to provide to that business? Mats Backman: I can start with the first one. When it comes to the goodwill, no impact whatsoever looking onto 2018 from that one. Secondly, when it comes to the capital structure 16

17 that s something we re working on right now. But, I mean, we are as we communicated at the Capital Markets Day, what we are aiming for is to capitalise the new entity, the spin, in order to be able to meet all the targets that we presented at the Capital Markets Day, meaning the organic growth and the 2020 target and so forth. And still have the RemainCo, Autoliv, to retain a strong investment grade. Rod Lache: Can you size it? Mats Backman: No, I wouldn t put a size on that. But when you are talking about the negative cash flow, yes, we are aiming for covering the negative cash flow on the spin. Rod Lache: Okay. And just to clarify on your answer on goodwill, I presumed you were amortising goodwill. So, if you took an impairment Mats Backman: No. We are not. Rod Lache: You re not? Mats Backman: No, we don t have any depreciations related to goodwill. I mean, the way we are dealing with goodwill and basically all companies is an impairment test on annualised basis so no depreciation on that. Rod Lache: Got it, okay. Thank you. Anders Trapp: Okay. Just a reminder: we are almost down to the full hour. So, we have time for one more question. Operator: We will take our next question from Itay Michaeli from Citi. Please go ahead. Itay Michaeli (Citigroup): Hi, great. Thanks, good afternoon. Just on the Electronics, the prior 0-5% margin target in 2020 and improving that beyond 2020, as we think about some of the headwinds you laid out for 2018 but offset by some of the new business wins, do you have at this point any bias as to the low or high-end of that 0-5% range as well as the path to improve that beyond 2020? Any update to that guidance? Jan Carlson: No, we don t, unfortunately. I m sorry, not at this time. We will develop this further down the road when Veoneer is formed and up and running and trading, and we will be back to you on analyst days or capital market days probably with more information, but we do not have that. And the simple reason for that is, again the usual implications of order intake, strong order intake, continued good business wins that would force us to invest more like we have done for some years now in the Passive Safety, and you see that it s finally paying off and then coming around as we have been talking about. And, you know, whether there are parallels to be drawn on this one on Active Safety and Electronics remains to be seen. That s why the relatively wide range. We apologise for that unclarity here, but it is the best we can provide you with for now. Itay Michaeli: Sure. And then just a quick follow-up on page six, and I apologise if I missed this, but on the Level 4 highway pilot investments that you re making, can you remind us what you assume or estimate the total cost of that system would be to the automaker as well as what the Autoliv Electronics content per vehicle might be as well as maybe what part of that Zenuity would be getting for those Level 4 programmes? Jan Carlson: I don t think we have given any numbers on that for the time being. We will have to be back to you with a complete system offer or a cost or price for that. We haven t given you that so far. 17