Autoliv, Inc. 2026 Q3 Earnings Call

Please go ahead. Thank you, Madeleine.

Welcome everyone to our third quarter 2026 earnings call. On this call, we have our President and Chief Executive Officer, Mikael Bratt, our Chief Financial Officer, Monika Grama, and me, Anders Trapp, VP, Investor Relations. During today's earnings call, we will highlight several key areas, including our strong performance in a challenging market environment, ongoing mitigation actions to offset cost headwinds. We are going to give an update on the latest market developments and our shareholder returns, and our full-year guidance on the potential impact of ongoing geopolitical and market challenges. Following the presentation, we will be available to answer your questions. As usual, the slides are available on autoliv.com. Turning to the next slide, we have the Safe Harbor statement, which is an integrated part of this presentation and includes the Q&A that follows. During the presentation, we will reference non-GAAP measures.

The reconciliations of historical GAAP to non-GAAP measures are disclosed in our quarterly earnings release, available on autoliv.com, and in the 10-Q that will be filed with the SEC and at the end of this presentation. Lastly, I should mention that this call is intended to conclude at 3:00 P.M. Central European Daylight Saving Time, so please follow a limit of 2 questions per person. I will now hand over to our CEO, Mikael Bratt.

Thank you, Anders. Looking on the next slide. We delivered a strong third quarter in a tough environment, with adjusted operating margin exceeding our earlier indications and reflecting disciplined execution across the business. The progress we achieved during the quarter reinforces our confidence in further profitability improvement through year-end. Together with strong customer partnerships and ongoing efficiency initiatives, we believe we are well-positioned to continue delivering value for our stakeholders. Our positive sales momentum in Asia continued during the quarter. In China, we once again outperformed light vehicle production, driven by strong growth with Chinese OEMs, where our sales outperformed by almost 20 percentage points. In India, we grew sales by nearly 30% organically, reflecting mainly the trend of increased safety concerns in vehicles in India. Adjusted operating margin reached 9.7%, ahead of earlier indication, reflecting strong operational execution and higher engineering income.

I am pleased that our cash flow was strong despite working capital build-up due to strong sales in September. In the quarter, we repurchased over 1.2 million shares for $150 million and paid dividends of $63 million. Based on what we know today, we reiterate our full year 2026 guidance of flat organic sales with continued significant outperformance of light vehicle production, both with Chinese OEMs and in India. Following the first nine months of the year and continued raw material headwinds and higher logistic costs, we have narrowed down our adjusted operating margin guidance to be around 10.5%, which is at the low end of the range of around 10.5%-11%. This reflects the effectiveness of the mitigation actions outlined later in the presentation. Operating cash flow guidance remains unchanged.

CapEx is now expected to be around 4% of sales, compared with the previous expectations of less than 5% of sales. We also have several positive developments to highlight from the quarter, both in terms of our footprints and our product offering. Expanding in China is key to strengthening Autoliv's innovation, global competitiveness, and long-term growth. To support this and our growing partnerships with Chinese OEMs, we have opened our second R&D center in China. We also launched the Human Body Model Safety Suite, a virtual safety development platform that helps automakers evaluate occupant protection through advanced crash simulations. By helping customers improve safety performance earlier and shorten development time, it strengthens Autoliv's value proposition and growth opportunities. Looking now on the next slide. Third quarter sales were virtually unchanged despite light vehicle production declining.

This was due to outperformance relative to light vehicle production, including tariff-related compensations and favorable currency effects. Adjusted operating income for the third quarter decreased by 3% to $262 million. The decline reflects a $15 million supplier compensation, which benefited the third quarter of last year. The adjusted operating margin was 9.7%, 30 basis points lower than last year. Operating cash flow was $239 million, a decrease of $19 million. Looking now on the next slide. We continue to deliver broad-based operational improvements. Our positive direct labor productivity trend continued during the quarter, supported by the execution of our strategic initiatives, including automation and digitalization. Gross profit decreased by $26 million, with the gross margin declining from 19.3% to 18.4%. Approximately half of the year-over-year decline was attributable to the noted supplier compensation recognized in the prior year.

Looking ahead, we expect fourth quarter gross margin to develop favorably compared to Q4 2025. R,D&E net expenses decreased year-over-year, driven by higher engineering income. As previously communicated, the increase in engineering income was primarily related to the timing of specific customer development projects. SG&A expense remained virtually unchanged, both year-over-year and sequentially. Turning to the light vehicle market development in the third quarter, let's move to the next slide. According to Mobility Global's October forecast, global light vehicle production declined by 1.9% in the third quarter, approximately 20 basis points below the expectations in July. The weaker-than-expected production environment was primarily driven by lower volumes in China among global OEMs, as well as softer production in North America and Japan. This was partly offset by stronger-than-expected performance in India and South America.

The regional mix of global light vehicle production was approximately 90 basis points unfavorable during the quarter, mainly reflecting stronger production growth in lower content markets relative to other regions. Despite these market headwinds, our sales remained virtually unchanged year-over-year, supported by our continued outperformance relative to light vehicle production, favorable currency effects, and tariff-related compensation. We will talk about the expected market development in the fourth quarter more in detail later in the presentation. Call-off accuracy has deteriorated somewhat compared with the beginning of the year, driven mainly by China, while other regions have returned to almost normal levels. Maintaining high call-off accuracy remains critical as it enables efficient production planning, inventory management, and optimal capacity utilization across our operations. Looking now on our sales growth in more detail on the next slide. Our consolidated quarterly net sales was virtually unchanged despite market headwinds.

Excluding currencies, our organic sales decreased $30 million or by 1%. Based on the latest light vehicle production data from Mobility Global, we underperformed the market by almost one percentage point globally. In Asia, excluding China, we outperformed the market by almost three percentage points, driven by continued strong sales growth in India, where we outperformed by 11 percentage points. Japan also contributed to the outperformance as we outperformed in Japan by almost four percentage points. In China, we delivered outperformance of around one percentage point, mainly because our sales growth to Chinese OEMs exceeded their light vehicle production growth by almost 20 percentage points. As a result, Chinese OEMs accounted for 58% of our sales in China in the quarter, compared to 46% for the same period last year.

While performance in Americas overall was in line with light vehicle production, North America delivered stronger results, outperforming light vehicle production by 2% performance. Globally, Chery, Suzuki, and NIO were the largest drivers of sales during the quarter. Despite light vehicle production decline in China accounted for 20% of sales. Asia, excluding China, accounted for 20%, Americas for 34%, and EMEA for only 26% due to summer shutdowns. Moving on to the next slide. The third quarter of 2026 saw a high number of new launches, primarily in China but also in Americas. The strong launch activity in China reflects Autoliv's continued momentum in this strategically important market and supports our ongoing outperformance relative to the market. Higher content per vehicle was driven in part by the adaptation of front center airbags across many of these new vehicles, as well as pedestrian protection systems.

From a sales potential perspective, the BMW X5 and iX5 were the most significant launches during the quarter. Looking ahead, we expect a substantially higher number of launches in the fourth quarter compared with the same period last year, making 2026 a record year in terms of launch activity. This record will not stand for long, as we expect a new record launch year again in 2027. Let's continue with the next slide. I will now hand over to Monika.

Thank you, Mikael. I will talk about the financials more in details on the next few slides. Turning to the next slide. This slide highlights our key figures for the third quarter of 2026 compared to the same quarter of 2025. Our net sales were $2.7 billion, representing a 0.5% decrease. Gross profit decreased by $26 million, and gross margin decreased by 90 basis points. The driver behind the lower gross profit was mainly the $12.5 million supplier compensation in 2025, as Mikael mentioned, as well as higher costs for raw materials. This was partly offset by positive FX effects and supplier cost reductions. The adjusted operating income decreased from $271 million to $262 million, and the adjusted operating margin decreased from 10.0% to 9.7%. The reported operating income of $254 million was $8 million lower than the adjusted operating income, mainly related to capacity alignment activities.