Q4 2023 Autoliv Inc Earnings Call

Operator: Good day, and thank you for standing by. Welcome to the Autoliv Incorporated fourth quarter 2023 financial results conference call. At this time, all participants are in listen-only mode.

Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1 1 on your telephone keypad. You will then hear an automatic message advising your hand is raised.

Operator: To withdraw a question, please press star 1 again. Please be advised that this conference is being recorded. I would now like to hand the conference over to our speaker today, Anders Trapp. Please go ahead. Thank you, Nadia.

Anders Trapp: Again, I welcome everyone to our fourth quarter and full year 2023 earnings call. On this call, we have our President and CEO, Mikael Bratt, and our Chief Financial Officer, Fredrik Hustin, and me, Anders Trapp, VP Investor Relations. During today's call, Mikael and Fredrik will, among other things, provide an overview of record sales and earnings, the strong cash flow, balance sheet, and order intake for 2023. They will also outline the expected sequential market improvement in 2024 and the journey towards our targets. Mikael and Fredrik will also provide an update on our general business and market conditions. We will then remain available to respond to your questions, and, as per usual, the slides are available on altolive.com. Turning to the next slide. We have the Safe Harbor Statement, which is an integrated part of this presentation and includes the Q&A that follows. During the presentation, we will reference non-U.S. definitions.

Anders Trapp: The reconciliations of historical use gaps to non-use gap measures are disclosed in our quarterly press release, available on autoliv.com, and in the 10k that will be filed with the FEC. Lastly, I should mention that this call is intended to conclude at 3pm CET, so please follow the limit of two questions per person. I will now hand over to our CEO, Mikael Bratt. Thank you, Anders.

Mikael Bratt: Looking at the next slide, I'd like to recognize the entire team for delivering another strong quarter, which reflects our strong execution concept. We ended 2023 on a strong note as we achieved or exceeded all our 2023 indications. In the quarter, our organic sales grew by 60%, outperforming live vehicle production significantly, especially in the rest of Asia and Japan. The strong growth was mainly a result of product launches and customer compensation for inflationary pressure, as well as higher-than-expected light vehicle production. We generated a broad-based improvement in key areas, including gross margin and adjusted operating margins, both year-over-year and sequentially. Our cash flow was strong, and the net debt leverage improved when we increased our dividend and repurchased shares for 150 million in the quarter, or approximately 352 million US dollars for the year. We are making progress towards our intention of reducing our indirect workforce by up to 2,000.

Mikael Bratt: We now expect savings of around 50 million in 2024 from these initiatives. Ordering Tech, Developed World. It is especially encouraging to see the strong order intake from the fast-growing Chinese OEM. For 2024, we foresee sales growing in the mid-single-digit despite an unexpected modest decline in light vehicle production. 2024 should take us one important step closer to our adjusted upper rating margin target, driven by improved call-off stability, growth, Structural and Strategic Initiatives, and Customer Compensation. However, the heightened seasonality of earnings of prior years is likely to be repeated in 2024. Now looking at the order intake more in detail on the next two slides. Our all-in-tech for the school year continues to develop well, supporting long-term growth in a rapidly changing technology environment with many new OEMs and EV platforms. The estimated lifetime value of our 2023 order intake was the highest in the past five years. The strong ordering take is evidence that our company remains the clear leader in the passive space automotive industry.

Mikael Bratt: One of our internal key performance indicators, customer satisfaction, continues to be at a high level. We continue to strive for improving products, services, processes, and costs while maintaining industry-leading quality. Our strong order intake with a good mix of EV and ICE platforms and a high level of customer satisfaction supports our confidence regarding growth also beyond 2024. Looking at the next slide.

Mikael Bratt: In 2023, order intake for new EV platforms was hired, both with new easy makers and traditional OEMs. We estimate that around 45% of our order intake in 2023 was for future electric vehicles. Consumer demand for EVs may fade somewhat in the short term, but regulatory changes supporting EVs will increase, at least in Europe. Although our products are dry-frame agnostic, it is important to have balanced exposure to EVs and ICE to capture future market growth.

Mikael Bratt: With all the books that we have built, we believe that we have good exposure to all growing segments. New automakers, mainly North America and China, accounted for around 25% of our orders. Fast-growing Chinese OEMs accounted for around 50% of our order intake in China, and we expect this group of OEMs to account for close to 40% of our Chinese sales in 2024, up from 22% in 2022. We won multiple awards supporting new markets and industry trends, like pretensioner seatbelts for wheeler seat passengers, airbags with low carbon cushion material, as well as anti-submarine airbags for zero gravity style seats for self-driving vehicles.

Mikael Bratt: As a result of the strong order attack in the past years, we expect an increase in overall target launches in 2024, especially in China and Europe. This development contributes to building an even stronger platform for our long-term capacity. Now looking at the significant sequential cost improvements during 2023 on the next slide. Year to date, we have generated a broad-based improvement in key areas, both year-over-year and sequentially. On this slide, we highlight the sequential improvements.

Mikael Bratt: In the fourth quarter, we continued to actively address our cost base while successfully negotiating with our customers to secure pricing and other compensation that reflect the higher inflation. Our direct labor productivity continues to trend upward, supported by the implementation of our strategic initiatives, including automation and digitalization. Our gross margin improved by 410 basis points compared to the first quarter and by 140 basis points from the third quarter. This is mainly the result of higher labor efficiency and customer compensation. The positive trend for RD&E and SG&A in relation to sales has continued and have now declined by 270 basis points since Q1, partly as a result of normal functionality with high engineering reimbursements in the forecourt.

Mikael Bratt: Combined with the gross modeling improvement, this led to a substantial improvement in the adjusted operating module. Looking now at finances in more detail on the next slide. Sales in the fourth quarter increased by 18% year-over-year, mainly due to higher light vehicle production, new product launches, higher prices, and under compensation, and favorable currency translations. The strong sales increase and cost reduction activities led to a substantial improvement in adjusted operating income. Adjusted operating income increased by more than 40% to $334 million from $233 million last year. The adjusted operating margin was 12.1% in the quarter, an increase by over 2 percentage points from the same period last year and by almost 7 percentage points from the first quarter. Operating cash flow was $447 million, which was $15 million lower than the same period last year.

Mikael Bratt: The main reason for the lower cash flow was the unusually strong cash flow last year, which was related to the timing effects of cost-customer recovery. Looking now at the structural cost savings activities on the next slide. To secure our medium and long-term competitiveness and to support our financial targets, we launched a cost reduction initiative in June 2023 with the intent of reducing our indirect costs by up to 2,000 and the direct workforce headcount reduction of up to 6,000.

Mikael Bratt: We estimate that the annual cost reduction will amount to around 130 million when fully implemented, with around 50 million already in 2024 and around 100 million expected in 2025. Total accruals for capacity alignment in 2023 amounted to 280 million US dollars. We do not plan to announce further major production initiatives or details.

Mikael Bratt: At the end of 2023, around 75% of the planned indirect reductions were detailed and announced. We already see positive impacts on direct labor productivity as a result. Looking now at our sales growth in more detail on the next slide, our consolidated net sales increased to almost 2.8 billion US dollars, and the Yule Quarterly Record. It was over 400 million higher than a year earlier, driven by price, volume, mix, and character. Out-of-period cost compensations contributed 45 million US dollars. Also, period compensations are retroactive price adjustments and other compensations that mainly relate to the first three quarters but were negotiated in the fourth quarter. Looking at the region's state fees, Asia accounted for 41%, America for 31%, and Europe for 28%.

Mikael Bratt: We outline our organic sales growth compared to LVP on the next slide. I am very pleased that our organic sales growth significantly outperformed global light vehicle production growth in the fourth quarter, as we continue to execute on our strong order balance. According to S&P Global, Q4 live vehicle production increased by 9% year-over-year.

Mikael Bratt: This was more than 5 percentage points higher than expectations at the beginning of Q4, with most of the higher-than-expected production coming from domestic OEMs in China and in North America as the impact of the UNW strike was smaller than expected. In the quarter, we outperformed global light decay production by around 7 percentage points, with strong performance especially in the rest of Asia and Japan. The modest underperformance in China was mainly driven by a negative customer mix following strong light vehicle production growth for lower safety content vehicles. On to the next slide.

Mikael Bratt: For the full year, we outperformed global livestock production by around 9%, despite a negative regional black vehicle production. We also saw in Japan a 15% response, in the rest of Asia by 14% response, and Inshallah by the 8th of Sunday. The performance in China was mainly driven by increasing sales to domestic Chinese OEMs. Our sales to this group outperformed last week in production by 17 percentage points and accounted for 28 percent of our sales in China, up from 22 percent in 2022. In 2023, our global market share was around 45%. This is almost six percentage points higher than five years ago when the electronics business was spun off. Our global market position is strong in all price categories, with 47% of airbags, 45% of seatbelts, and 40% of the union.

Supported by new launches, market share gains, and content per vehicle growth, as well as further price increases, we expect sales to outperform vehicle production by five to six percentage points in 2024. On the next slide, we see some key model answers for the fourth quarter. During 2023, we had a record number of product launches, especially in China, Europe, and Japan. For 2024, we see another step up in the number of product launches, particularly in the first half of the year. The trend towards electrification is clear on this slide, with seven models being available as electric versions. The models shown here have an output content per vehicle of around 110 US dollars, with the highest at over 800 US dollars. In terms of obsolete state potential, the Seeker 007 launch is the most significant. I will now hand it over to our CFO, Fredrik Lesteen, who will talk you through the finances on the next slide. Thank you, Mikael.

This slide highlights our key figures for the fourth quarter of 2023 compared to the fourth quarter of 2022. Our net sales were almost 2.8 billion. This was an increase of 18% year-by-year. Growth profit increased by 131 million, or by 33%, to 530 million, while the gross margin increased by 2.2 percentage points to 19.3%. The adjusted operating income increased from $233 million to $334 million, and the adjusted operating margin increased by 220 basis points to 12.1%. Non-gas adjustments amounted to 97 million, almost entirely for capacity alignment. Exhausted earnings per share, diluted, increased by 191 cents, where the main drivers were 75 cents from higher adjusted operating income, 109 cents from tax, and 10 cents from other items partly offset by financial costs.

Our adjusted return on capital employed and return on equity increased to 33% and 47%, respectively. We increased the dividends to 68 cents per share in the quarter, and we purchased and retired 1.5 million shares for around $150 million under our existing $1.5 billion stock repurchase program. Looking now at the Adjusted Operating Income Rate on the next slide, in the fourth quarter of 2023, our adjusted operating income of 334 million was 101 million higher than the same quarter last year. Our operations were positively impacted by improved pricing and other customer compensation, higher volumes, lower costs for premium freight, as well as our strategic initiatives, support offset by headwinds and general costs. The impact on raw material prices was $14 million. Out-of-period cost compensation was approximately 37 million higher than during the same period last year. Cost for FG&A and RD&E net combined was 30 million higher, mainly due to lower engineering income and labor cost inflation.

In relation to sales, it was unchanged compared to last year. The margin was also affected by the accrual of warranty and recalls of $70 million for 65 days. The accruals are related to three different cases.

As a result, the leverage on the higher sales, excluding currency effects and warranty and recall costs, was in the upper half of her typical 20-30% operational average. Looking now at the full year financial results on the next, Despite higher-than-expected bacterial production, 2023 was again a turbulent year with labor contemplation, supply disruptions, customer price negotiations, and continued volatile market economies. Our net sales were 10.5 billion, with sales increasing organically by over 18%, twice the increase in the underlying nice vehicle production and three percentage points higher than expected at the beginning of 2020. The adjusted operating income increased by 54% to 920 million.

The adjusted operating margin was 8.8% compared to our guidance of around 8.5% to 9.5%. The operating cash flow was 982 million compared to the guidance of around 900 million. Adjusted earnings per share increased by $3.79 per share to $8.19, where the main drivers were $2.51 from higher adjusted operating income and $1.31 from lower income taxes, partly offset by $0.18 from financial costs. Dividends of $2.66 per share were paid, and we repurchased and retired 3.7 million shares for around $352 million. Sales, Adjusted Operating Income, Operating Cash Flow, as well as Adjusted Earning Per Share were all the highest we have ever achieved. Looking now at the full year of Grassley Operating in Cambridge on the next slide, in 2023, our adjusted operating income of 920 million was 322 million higher than last year. The impact of raw material prices was limited. However, FX impacted the operating profit negatively by $54 million.

This was mainly a result of negative translation effects from the Mexican pay-as-go. Costs for FDNA and RD&E net combined were 95 million higher, but in relation to sales, they were down 60 billion. As a result, the leverage on the higher sales, excluding currency effects, was slightly above our typical 20-30% operational leverage range. This is despite not getting any leverage on inflation compensation from our customers.

Looking now at the cash flow on the next slide. For the fourth quarter of 2023, operating cash flow decreased by 50 million to 447 million compared to the same period last year, which was impacted by positive timing effects of customer confidence. Capital expenditures decreased to 150 million from 165 million. In relation to sales, it was 5.4% this year, down from 7.1% last year. Freecast locals, 297 million, about the same at the time.

Our fully operating cash flow was 982 million, a new record for the company. However, full year capital expenditures net in relation to sales were virtually unchanged at 5.4%. Free cash flow for the full year improved year-over-year by $186 million to $414 million. Our cash conversion, defined as C-Casco in relation to net income, was 85%. Now looking at our trade work and capital development on the next slide. During the fourth quarter, trade working capital decreased by 71 million, driven by 120 million higher accounts payable, partly offset by 30 million higher inventories, and by 90 million in high receivers.

The higher inventories and receivables were mainly due to higher sales. Our capital efficiency program aims to improve working capital by 800 million, and to date, we have achieved 500 million. Improvements in receivables and especially in inventories are lagging due to the high call of volatility and hence planning changes resulting in an inefficient system. We expect this to improve significantly in tandem with a reduced call of volatility over the coming years. Now looking at shareholder returns over the past five years, on the next page, Over the years, Autoliv has shown its ability to generate solid cash flow in periods with difficult market environments such as COVID lockdowns, the war in Ukraine, industry supply chain challenges, and related volatile and declining light vehicles. We have used both dividend payments and share repurchases to create shareholder value. Historically, the dividend has usually represented a yield of approximately 2-3% in relation to the average share price.

Mikael Bratt: Over the last five years, they have reduced the net debt significantly while returning almost $1.4 billion per bankruptcy shareholder. This includes stock repurchases of 5.1 million shares for a total of 467 million US dollars as part of the current stock repurchase program. Since we initiated the SCOG Repurchase Programme, we have reduced the number of outstanding shares by almost... We do consider several factors when executing the program, such as our balance sheet, the cash flow outlook, our credit rating, and the general business conditions, and not only debt leverage. We always strive to balance what is best for our shareholders, both in the short and long term. Now looking at our leverage ratio developments on the next slide. Despite increased stock repurchases and higher dividends, the debt-to-average ratio at the end of December 2023 improved to 1.2 times from 1.3 times at the end of the third quarter. This was a result of 108 million higher 12-month training adjusted EVTA as net debt was unchecked. We expect that our debt leverage and positive cash flow trend will allow for continued high shareholder returns going forward, and now I hand it back to you, Mikael. Thank you, Frederic.

Mikael Bratt: On to the next slide, of the year when the global outdoor industry finally reached pre-pandemic levels. 2024 is shaping up to be something of a transitional year. With many regions having already rebuilt inventories, S&P continues to see a production outlook that is more reliant on end customer demand. Global light vehicle production is projected to decline by close to 1% in 2024.

Mikael Bratt: This is due to the affordability of new vehicles, somewhat softer interest in EVs in some regions, and High Interest Rates. Most of the expected decline is in Japan and Europe. S&P Global expects first-half-year global life-cycle production to increase by 1%, while its second-half declines almost 3% compared to last year.

Mikael Bratt: Latter-day production in China continues to be supported by strong EV demand and export activity. In North America, the UAW strike and strong vehicle sales towards the end of 2023 have reduced inventories somewhat. Bolstering Production Volumes Slightly for 2024, Production in Europe is expected to decline as inventory restocking will no longer boost output, as was the case over the last two years. We based our full-year sales indication on a global light vehicle production decline of around 1%.

Mikael Bratt: Now looking at the next slide. In 2023, the main course challenges were around labor, cost inflation, and energy. For 2024, we expect inflation mainly to impact labor costs for us and for our suppliers. We estimate the combined labor exposure, our own and our suppliers, represents more than 40% of our cost base.

Mikael Bratt: Already during 2023, the tight labor market in some countries resulted in significantly higher than normal labor inflation. For 2024, it will see further headwinds from wage increases, especially in Europe and North America. Although many commodity indices are down since their peak in 2022, we currently assume raw material costs to only decline slightly in 2024. The reason being that the prices of specific raw materials used in our products, such as automotive grade steels, have not declined as much as the generic steel indices indicate. Additionally, we see higher costs for some materials, such as yarn and resin. However, the Red Sea situation has not yet had any measurable impact on our own operations.

Mikael Bratt: We have noticed that some customers have reduced their volume temporarily, but it is too early to estimate what potential impact it may have for 2024. Cost compensation negotiations will again be challenging, but nevertheless, we expect that price adjustments and other compensation will offset costly inflation. Looking at the 2024 Business Outlook on the next slide, we expect a significantly improvement in the Adjusted Operating Model in 2024 compared to 2023. Supported mainly by organic sales growth, a more stable light vehicle production, structural and strategic initiatives, cost control, and capital compensation. We expect the adjusted operating margin in the first quarter to be around 7%, a significant decline from the fourth quarter of 2023 due to lower light vehicle production, lower engineering income, cost inflation, and timing of cost compensation.

Mikael Bratt: This is in line with decisionality in the past two years. We anticipate price adjustments and cost compensation will gradually, throughout the year, offset cost inflation, and the pattern is expected to be similar to the quarterly pattern seen in 2022 and 2023, with limited positive effects over the course of the year. This treasury should be further supported by improvements in swift cost controls, structural savings, as well as expected gradual improvement in the supply chain and light vehicle production stability.

Mikael Bratt: Looking at our 2024 financial guidance on the next slide. This slide shows our full year 2024 guidance, which excludes costs and gains from capacity alignment, antitrust-related matters, and other discrete items. Our full year guidance is based on a life-weekly production decline of around 1%. Despite lower light vehicle production, our organic sales are expected to increase by around 5%. No net currency translation effects are expected on FACE.

Mikael Bratt: The guidance for adjusted operating margin is around ten and a half percent. Operating cash flow is expected to be around 1.2 billion US dollars. Our reported cash flow trend should allow for continued high shareholder returns. We foresee a tax rate of around 28% in line with our previous indications of 25-30% as the new normal tax rate. Look into our sustainability approach on the next slide. Guided by our vision of saving more lives, our mission is to provide world-class life-saving solutions for mobility and society. Sustainability is an integral part of our business strategy and an important driver for market differentiation and stakeholder value creation, helping to ensure that our business will continue to thrive and contribute to sustainable development in the long term. Our sustainability approach is based on four focus areas: Fairen Morlaix, a Safe and Inclusive Workplace Climate, and responsible business, each consisting of long-term ambitions and more specific short-term targets. Our sustainability approach is anchored in well-established international frameworks such as the UN Global Compact and science-based targets.

Mikael Bratt: We aim to be carbon neutral in our own operation by 2030 and further aim for net zero emissions across our supply chain by 2040. These ambitions will help us to live among the frontrunners in the broader group of automotive suppliers. Now looking at the sustainability progress in 2023 on the next slide. During 2023, we initiated and concluded a number of activities that highlight our commitment and contribution to the UN Sustainable Development Goals and our own sustainability targets. Wolfgang, we are the four... We are at the forefront of broadening test models to include more body shapes and parameters such as age and gender. We have increased the use of renewable electricity, contributing to a significant decrease in greenhouse gas emissions from our own operations.

Mikael Bratt: The incidence rates have improved, and we carried out our annual climate survey at direct material suppliers to trust their alignment with our climate requirements and emissions, turning the slide to look at progress towards our target. In the medium term, we are expecting to continue to grow our core business. Herbert, Siegfried van Singer, through execution on the Karen Strong Audible.

Mikael Bratt: The other important growth driver is the safety content of the vehicle, which is driven by continuous updates of government regulations and trespass rates. Our growth target for the three years, 2022, 2023, and 2024, was to grow organically by around 4 percentage points, more than likely in production growth per year, on average. This excludes any price compensation for raw materials and other inflationary costs.

Mikael Bratt: The growth in 2022 and 2023 and the guidance for 2024 means that we expect to exceed these targets. To maintain the growth momentum beyond 2024, we are pursuing an ambitious innovation program. The Strong 2023 ordering package supports continued growth momentum. Now looking at multiple levers for modern improvements on the next slide. In the past two years, Al-Talib has significantly reduced its cost base.

Mikael Bratt: We have implemented hundreds of cost-efficiency projects, especially in production and supply chains. Our adjusted operating margin target of around 12% is based on the framework communicated at our investor day in June 2021, a business environment with a stable global lighting production of at least 85 million units and that headwinds from inflation are offset through price competition. We remain confident that when these conditions are met for the full year, we are capable of reaching 12% adjusted operating margin targets. We now expect that the light vehicle production conditions will be fulfilled during 2024. We expect that polar volatility through 2034 will be lower than in 2023 but remain higher than the pre-pandemic level, having a negative impact on our productivity and efficiency. We expect continued inflationary pressure in 2024, with customer compensation lagging behind the cost increase. To offset the negative effects of inflation and market conditions and to secure our long-term competitiveness, we have launched a number of cost-saving activities.

Mikael Bratt: We believe that the net effect of our actions and headwinds should result in a substantial step in 2024 towards our adjusted operating margin target. Now looking at delivering shareholder values in our 2024 Business Agenda on the next slide. To drive towards our financial targets and deliver a share of the value, the health and safety of our employees is our first priority, while continuing more activities to further improve quality and efficiency. We also continue our efforts in the slow-less execution of new launches, improving customer satisfaction further, and thereby supporting our new and strong market position. Through our capital efficiency program, we aim to unlock capital from receivables, inventory, and payables.

Anders Trapp: Combined with execution of a strategic plan, this should lead to strong cash flow generation, which sets Outlive up for attractive shareholder value creation. By executing on our strategic initiatives, footprint optimization, and negotiating compensation from OEMs, we believe we will mitigate headwinds from cross-ministry. To progress towards our climate targets, we will focus on increased resource efficiency and reducing our carbon footprint. I will now hand this back to Anders. Thanks a lot. Turning to the last page, this concludes our formal comments for today's earnings call, and we would like to open the line for questions from analysts and investors. I now hand it back to you, Nadia.

Operator: Thank you so much, dear participants. As a reminder, if you wish to ask a question, please press star 11 on your telephone keypad and wait for your name to be announced. So if you have a question, please press star 11 again. Liszt and Babel will compile the key and narrow studies.

Operator: We'll take a few moments. And now we're going to take our first question, and it comes from the line of Colin Langan from Wells Fargo. Your line is open, please ask the question.

Colin Langan: Oh great, thanks for taking my questions. Looking at your comment on this a bit, your long-term target is 4% over the market, and the guidance implies about 6%. I think it implies 5% to 6%. Any reason why it's so strong this year, and maybe, is that including some of the inflationary cost recoveries that you're expecting? I know that was a bit of a help.

Mikael Bratt: Any thoughts on the China headwind you called out in the quarters? That'll help. Thank you for your questions there. The 4% outperformance versus LDP takes us into 2024, so this is the last year of the three-year period that we have communicated on, and as we said there, we expect to over deliver on that target. And, of course, it is thanks to the growth we have created through low intake over the last couple of years. And, of course, we have seen good development on the content for vehicles also, and we expect to see that also next year. This excluded, as we mentioned, also the price negotiations that were on top of that.

Mikael Bratt: Then beyond 2024, we have the 46% organic growth target, where the current, let's say core business, should be 2 to 4. So that is our target beyond there, beyond 2024. Regarding China, the...

Mikael Bratt: The minus 2% versus 70p we saw in the fourth quarter is due to mixed effects. As I mentioned here, we had... roads, significant growth on the low-end vehicles, or the vehicles with lower safety content than usual. But if you look at the full year, we had a very strong outperformance there of 8% for the full year. So we look very positively at China, and we feel that we are well-positioned with the new E-D players and also the EOMs in general there. So a positive view on China going forward. Got it. And any caller on, you called out labor inflation again with other questions. Any way to frame how large this is in terms of dollars?

Yeah, I mean, he's progressed to about the same level as he had last year, which he said would be somewhere mid-single digit above normal, let's say, inflation, so pre-23 basically, and we're also giving some based on here on the slides on our labor cost of our percent of sales. So with that, we can calculate what the impact is. And that's the major inflationary where we also expect some energy increases based on the surcharge on materials that we're buying, especially on textiles. So those are the main two components.

Colin Langan: Alright, thanks for taking my questions. Thank you. Thank you. Now we're going to take our next question. Just give us a moment.

And the next question comes from Giulio Pescatore on the MP Paribas exam. Your line is open until you have two questions. Hi, thanks for taking my question. The first one on the buyback, I just wondered if you'll be comfortable getting closer to the upper end of the leverage range in 2024, especially considering a further uplifting margin potential in 2025 and the good cash flow generation you expect for this year. On the second question on inflation and compensation, you mentioned that you expect full compensation for costs. Does that mean at the end of the year, so we shouldn't expect full compensation in 2024 as a whole, but by the end of the year, you think you can have full compensation with potentially some slippage in the first few months? Is that a fair way to describe it?

Mikael Bratt: Thank you. Thank you for your questions and comments there. On the buybacks, as you know, we only report on what we have done on a regular basis here on our web page here, and we are, I mean, very committed to our program that we have. And I think you can see that we have, in the fourth quarter here, a healthy level of buybacks and, Of course, we are focusing a lot on making sure that we have the cash regeneration needed, and as you see from the report here, we are committed to being a shareholder-friendly company when it comes to the regular dividend and also the buyback program, and we will come back on that as we progress here. And that's as much as I can say here today.

Mikael Bratt: With regard to inflation, there is a lead time, and as we have indicated here already, you see, let's say, the cost effects of inflation hitting us earlier in the year, and then we have negotiations throughout the year. And in the same fashion as we were stating last year, our focus here is to get the full compensation and the height of the compensation rather than to, you know..., look at it quarter by quarter here, so it's the full year competition that is the priority and the height of it. So therefore, you get this, let's say, new seasonality, if we call it that, where you have a WCQ1 and then you have improved throughout the year. So that's the reason behind that. Arnold, if you would like to add anything after this,

More... And overall, our expectation is that we should be compensated also for the full year effect. And that was also the case in 2023. Whereas in 2022, with the raw material compensation, there was a component that we were not compensated for in 2022. Hence, there was a carryover effect in 2023. But we don't expect that same pattern for 2024.

Emmanuel Rosner: Thank you. Now we're going to take our next question. And the next question comes from Emmanuel Rosner from Deutsche Bank. The line is open, please ask your question. Thank you very much.

Emmanuel Rosner: My first question is, I was hoping to ask you about... comments a little bit more about your path towards the 12% reiterated operating margin target. I very much appreciate the scorecard that you put at the end of the slide that I picked up. Understanding it correctly, it looks like production is probably at the right level, at least cost recovery, sort of like, you know, offset by some of your cost reduction programs. So it is the main impediment to getting to your target, the COAS accuracy. And if so, I guess, what is the line of sight?

Is it fair to assume that this will normalize, or are there further actions that you need to get you to this target? Okay, maybe there are a lot of components in your question. So, I mean, overall, the framework is pretty clear. Eighty-five million, we say.

As it looks right now, the £85 million seems to be in place as an assumption here for 2024. Then we come to the other two, that we are made whole on inflation compensation or potentially have an impact also on a full year, as long as we have inflation and there's always this catch-up effect, and Jens Stoltenberg. Then the last component is on the call for stability.

And here we have a graph in our presentation where it's clearly not in place going into the year. I mean, we've seen it kind of stabilizing at around 90 percent now during the second half of last year. We are not assuming right now that this will improve significantly during 2024. And then there's also, even if it were to come up to pre-pandemic levels, closer to 100 percent, there's also a time lag between when that accuracy is actually in place until we can also get the efficiency in our network.

Mikael Bratt: Yes, it's turning towards the framework, but for sure, 2024 will not be in place, and it remains to be seen how much of that, the number two and three here, will come into place during 24 and then what the impact is for 25. Looking at the building blocks of how to get from the 8.8 that we have now in 2023 up to the 12%, you can divide it into three buckets. One is the structural initiatives and hedge fund reductions. The second one is the volatility improvement combined with the labor productivity development, and then the third component is sales growth and our strategic initiatives, and it's roughly, I would say, one third of the margin contribution from those people. Very great, Paolo; thank you. So let me just hone in on my second question on the sales growth piece of it, as we look past this year and towards some of your targets. I think you started in the past. You had reported sometimes on your annual win rate, and oftentimes they were at like 50% or better.

Mikael Bratt: Obviously, your market share is 45%. Can you comment on the win rate, and I guess what the confidence level is in being able to capture additional market share over the next few years beyond the 2024 framework? Yeah, as you know, we have communicated here since last year around the lifetime revenue on the order intake, and I think... We had a very good 2023, the highest in five years in terms of lifetime revenue. And what we are saying here is that we reached a 45% market share in 2023, which we had indications a few years back that that was what we expected us to grow into. And with the order intake and the order book we have, we expect to defend this market share. We do not, I would say, have a target or an ambition to set a new level of our market share here. It is really to defend this market share position with healthy business, of course. If we can grow more in a healthy way, of course, we will do it, but it's not the target in itself.

Mikael Bratt: So the growth that we expect going forward, the two to four as I talked about, and we have announced earlier, beyond 2024, is connected to light vehicle production and content with more sophisticated products. Thank you very much. Thank you. Now we're going to take the next question. Thank you for a moment, and the next question comes from the line of Michael Jacks from Bank of America Securities. The line is open; please ask your question. Hi, good afternoon.

Thanks for taking my questions. First one, just on price recoveries. Some other suppliers have struggled to seek compensation for wage inflation, and also those that have clearly been more successful.

Is there anything structural you could point to that gives you the confidence that you can achieve the same in 2024? And then the second question is just on working capital. What is the magnitude of improvement expected in 2024 in relation to...

Mikael Bratt: Thank you. Let me start with price recovery, and Fredrik will comment on the working capital there. But on price recovery, I can't say there's a structural element to it. I think it's, I mean, of course, I can only comment on what we are doing here, and we have now, for the last two years, had very constructive dialogues with our customers around the over and above normal cost increases we see in the system here. And I mean, we're starting out with raw materials, and there we have also mentioned that we have made I mean, it works both ways, obviously.

Mikael Bratt: So when we see that come down, we will also hand that back to our customers. When it comes to the other components here, it's a little bit different in nature, but I think it's very important to get compensation for all these inflationary components here. And we, for this year, definitely have the labor in focus here. And I mean, that's the nature of inflation.

It needs to be passed on to the end consumer, meaning the price of the car at the end of the day. So we need to push that on because there is no possibility for us to compensate our suppliers unless we get the path right here. It's not sustainable, and that's something we just need to continue to work hard with, and we will do that. Our focus here going forward as well. Mikael, on your second question, working practically, we reported here that we have achieved around 580 million of the 800 million target that we set ourselves. In the 800 million target, we also detailed that around 500 million of that would come from improved payables, and that we have achieved or even overachieved already to date. So we don't expect more to be contributed from that component.

So inventory is challenging right now due to the call of volatility, as we show here that it's kind of stabilizing at still two, say, poor levels, and as I mentioned, we don't expect this to improve significantly during 2024, and accordingly, we do not also expect that we will be able to do so much on the inventory side either in 2024. And we do not guide for working capital specifically, but we see a very strong operating cash flow guidance here of 1.2 billion, but there is then more opportunity coming later from improving working capital. That's very clear. Thank you. Thank you. Now we're going to take the next question. Thank you for joining us. Have a great day, and the question comes from Hampus Engellau from Hamdansbanken. Your line is open; please ask your question. Yeah, two questions for me. I'm very curious about the drop in active seat space during the quarter, minus 11%, given the big spread to the LVP that increased by more than 9%. I don't know if you can take that later, but it's just out of curiosity.

I don't know if I should come back to this question because I'm trying to understand the dynamics here. I can definitely see that the MSRs are retroactively compensating you guys for rising costs in the quarters, but on the laser side, could you maybe... Give us some more detail on how those negotiations are going, given that those conflicts are quite permanent and sticky, and are you guys getting compensated for this also, and how does the process work? I think on the active seatbelts side, there is no drama about that; of course, you get mixed effects also in specific years where you have made some outgoing core models where you have a high level of, in this case, active seatbelts, and my expectation is that you should see that recovering in the next year or so.

Mikael Bratt: So there's no drama to that, it's more of a temporary mixed effect, and then on the cost compensation here, if I understand you right, I mean the names of all those... As you said, the labor cost increase is easy to talk about, and therefore it will not come down. So of course, there is an absolute necessity for that inflationary component to come through. There is no room for anything else, and that is what we are doing here, and we, of course, have very detailed supporting documents to provide. When we go to our customers, we explain how that connects to their specific business and how it's correlated.

So that's something we need to go through, and I think we went through it partly already last year when we saw in some cases and in some regions that impact already in 2023. So we expect to do more of that. Thank you. Now we're going to take our next question. Thank you for this moment, and our question comes from the line of Bjrn Enarson from Danske Bank. Your line is open; please ask your question. Thank you. I also have a question on price.

Mikael Bratt: I mean, you have been very successful in getting compensation, but also, we have seen OEMs coming from high profitability, and as you mentioned yourself, we need to see inflation coming to the price of the cars, but we've also seen price cuts on cars. We've also seen Orient reporting lower profitability and accepting perhaps lower profitability as they are investing in price in a way. Is this a situation that impacts sub-suppliers in general, or how has it I think the point from my side here is that that has nothing to do with their profitability or our profitability. This is inflation that needs to be passed on; it's not sustainable for us to pay our suppliers as long as we can get the pass through, so that is just something that we are very firm on and needs to continue to be firm on; there is no other way than that.

Mikael Bratt: Then I think when you look at the price reductions and so on towards the end consumers, I think there are, of course, different reasons for that you see those prices coming down, which probably are more on an individual basis between the OEMs, so I have no comments on that. But we need to focus on our business here, which we are doing, so you have to continue to press on that, and perhaps, in the process, we haven't really seen a correlation between car prices and your price negotiations. I mean, you have your negotiations with the team that's your customers, and then there are other teams setting the price for the actual cars. Or is there a correlation? No, I mean, not from our perspective; there's no correlation, and I think that's my point here, that they need companies to take care of their business, and in our case here, we need to get compensation for the inflation in our system, which includes us.

And one more thing, I mean last year I'd like to remember that you had an outlook that was based on an LVP a little bit below what was in the market back then or by S&P, and now you're in line with that, and largely, we also saw this catch-up driven sales, and now it's more assets you highlighted more in line with the market. Is there nervousness about where the market will end up when you are talking to your customers or people in the industry, as we are maybe? heading into more of a slowdown or more visible this year than last year. I think, I mean, at least from the dialogues we have with our customers on the way forward here, I don't see any discrepancies to what we refer to here as the minus one from S&P Global in general.

I think there is more of this mixed effect between ICE and EVs, and especially in Europe, where maybe the EVs are slowing down somewhat, but it's more of a mixed effect there, and for us, that is neutral because, as you know, we are well represented in both categories and we are agnostic to the driveline question here, so we don't see the effect on our end here.

Mikael Bratt: Very good. Thank you. Thank you. Dear participants, due to time, we are not taking any further questions. I would like now to hand the conference over to Mikael Bratt for any closing remarks. Thank you very much, Nadia. I am confident that we will deliver a substantial increase in sales, operating cash flow, and adjusted operating income in 2024 while maintaining substantial shareholder return. Our actions are driving both short-term and long-term improvements, and we believe these actions enable us to take important steps toward our target. While we remain agile and prepared for more adverse market developments, should that be necessary, Australia continues to focus on our vision of saving more lives, which is our most important direct contribution to a sustainable society.

Mikael Bratt: Our first quarter-hundred call is scheduled for Friday, April 26th, 2024. Thank you, everyone, for participating in today's call. We sincerely appreciate your continued interest in Auschwitz. Until next time, stay safe. That does conclude our conference for today. Thank you for participating. You may now disconnect. Have a nice day. Thank you for watching!

[music].

Okay.

Good day and thank you for standing by welcome to the old Tilly's incorporated fourth quarter 2023 financial results Conference call. At this time, all participants are in listen only mode.

After the speaker's presentation, there will be the question and answer session.

To ask a question during the session you need to press star one bond on the telephone keypad, you won't or can't I know thematic message you're driving a hazardous waste do we draw a question. Please press star one again please.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to our speaker today on this topic. Please go ahead.

Thank you Claudio.

Again, another one to our fourth quarter and full year 2023 earnings call.

On this call we have our president and CEO, Nicole dropped and our Chief Financial Officer, Larry Christine and me on the sharp VP Investor Relations Julien.

During today's earnings call me cannot say ethnic wind among other things provide an overview of the record sales and earnings the strong cash flow balance sheet and order intake for the transfer Center suite.

They would also outline the expected sequential margin improvement in 2024, and the journey towards our targets.

It could also provide an update on our general business and market conditions.

We will then remain available to respond to your questions.

Our usual slides are available on <unk> com.

Turning to the next slide.

We have the safe Harbor statement, which is an integrated part of this presentation and includes the Q&A that follows.

During the presentation, we will reference non U S GAAP measures.

Conciliation of historical U S GAAP to non us GAAP measures are disclosed in our quarterly press release available on the ultimate Dot com and in the 10-K that will be filed with the SEC.

I should mention that this call is intended to conclude at three P. M. Central European time. So please follow a limit of two questions per person.

I will now hand over to our CEO.

Thank you Anders looking on the next slide.

Yeah.

I'd like to recognize the entire team for delivering another strong quarter, which reflects our strong execution culture.

We ended 2023 on a strong note as we achieved or exceeded all our 2023 indications.

In the quarter, our organic sales grew by 16% outperforming light vehicle production significantly.

Especially in rest of Asia and Japan.

This strong growth was mainly a result of product launches and customer compensations for inflationary pressure as well as higher than expected light vehicle production.

We generated a broad based improvement in key areas, including gross margin and adjusted operating margins both year over year and sequentially.

Our cash flow was strong and the net debt leverage improved while we increased our dividend and reports, but repurchasing shares $450 million in the quarter or approximately $352 million for the year.

We are making progress towards our intention of reducing our indirect workforce by up to 2000.

We now expect savings of around $50 million in 'twenty 'twenty four from these initiatives.

Order intake developed well.

It is especially encouraging to see the strong order intake would fast growing Chinese Oems.

For 'twenty 'twenty four we foresee sales growing in mid single digits. Despite an expected modest decline in light vehicle production.

'twenty 'twenty four should take us one important step closer to our adjusted op.

Margin targets driven by improved call of stability.

Gross structural and strategic initiatives.

And customer compensations.

However, the heightened seasonality of earnings of prior years is likely to be repeated in 2024.

Now looking at the order intake more in detail on the next two slides.

Our order intake for the full year continued.

Well supporting long term growth in a rapidly changing technology environment with many new Oems and EV platforms.

The estimated lifetime value of our 'twenty to 'twenty three order intake was the highest in the past five years.

This strong order intake is an evidence that our company remains the clear leader in the passive safety automotive industry.

One of our internal key performance indicators customer satisfaction continues to be on a high level.

We continue to strive for improving products services.

Assesses.

And costs, while maintaining industry leading quality.

Our strong order intake with a good mix of EV and ice platforms.

The high level of customer satisfaction supports our confidence regarding growth also beyond 'twenty 'twenty four.

Looking on the next slide.

In 'twenty to 'twenty three order intake for new EV platform was higher.

Both with new EV makers and traditional Oems.

We estimate that around 45% of our order intake in 2023 more sports future electric vehicles.

Cause consumer demand for Evs may have faded somewhat in the short term.

But regulatory changes supporting Evs will increase at least in Europe.

Although our products are drivetrain agnostic. It is important to have a balanced exposure both to evs and ice to capture future market growth.

With the order book that we have been we believe that we have a good exposure to all growing segments.

New automakers, mainly North America, and China accounted for around 25% of our order intake.

Fast growing Chinese Oems accounted for around 50% of our order intake in China.

And we expect this group of Oems to account for close to 40% of our Chinese sale in 2024 up from 22% in 2022.

We won multiple awards supporting new markets and industry trends like pretension or seatbelts for rear seat passengers.

Airbags with low carbon cushion material.

As well as anti submarine knee airbags for zero gravity style seats for self driving vehicles.

Yeah.

As a result of the strong order intake in the past years, we expect an increase in overall product launches in 2024, especially in China and Europe.

This development contributes to building, an even stronger platform for our long term success.

Now looking at the significant sequential cost improvements during 2023 on the next slide.

Yeah.

Year to date, we have generated a broad based improvement in key areas.

Both year over year and sequentially.

On this slide we highlight the sequential improvements.

In the fourth quarter, we continued to actively address our cost base, while successfully negotiating with our customers to secure pricing and other compensations does reflect the higher inflation.

Our direct labor productivity continues to trend up supported by the implementation of our strategic initiatives, including ultimate optimization and digitalization.

Our gross margin improved by 410 basis points compared to the first quarter and by 140 basis points from the third quarter.

This is mainly the result of the higher labor efficiency and customer conversations.

The positive trend for audience and SG&A in relation to sales have continued and have now declined by 270 basis points since Q1.

[laughter], partly as a result of normal seasonality with high engineering reimbursements in the fourth quarter.

Combined with the gross margin improvement this led to substantially improvement substantial improvement in adjusted operating margin.

Looking now our financials in more details on the next slide.

Oh.

Sales in the fourth quarter increased by 18% year over year.

Mainly due to higher light vehicle production, new product launches higher prices and other compensations and favorable currency translation effects.

The strong sales increased and cost reduction activities led to substantial improvement in adjusted operating income.

Adjusted operating income increased by more than 40% to $334 million from $233 million last year.

The adjusted operating margin was 12, 1% in the quarter and increased by over two percentage points from the same period last year and by almost seven percentage points from the first quarter.

Operating cash flow was 447 million, which was $15 million lower than the same period last year.

The main reason for the lower cash flow was the unusually strong cash flow last year, which was related to timing effects of cost customer recovers.

Looking now on the structural cost savings activities on our next slide.

To secure our medium and long term competitiveness and to support our financial targets.

The cost reduction initiative in June 2023.

With the intent of reducing our indirect head count.

By up to 2000.

And then direct workforce head count reduction of up to 6000.

We estimate that the annual cost reductions will amount to around.

$130 million when fully implemented.

With around $50 million already in 2024 and around $100 million expected in 2025.

Total accrual for capacity alignment in 2023 amounted to $218 million U S dollars.

We do not plan to announce further major reduction initiatives.

The types.

At the Amdocs 2023 around 75% of the plant indirect reductions per detailed and announced.

We already see positive impact on direct labor productivity as a result.

Looking now on our sales growth in more detail on our next slide.

Our consolidated net sales increased to almost $2 8 billion U S dollars.

A new quarterly record.

This was over 400 million higher than a year earlier, driven by price volume mix and currencies.

Out of period cost compensation contributed with $45 million.

Our top period compensations are retroactive price adjustments and other compensations that mainly relates to the first three quarters, but were negotiated in the fourth quarter.

Looking on the regional sales split Asia accounted for 41% Americas, 31% in Europe with 28%.

We outlined our organic sales growth compared to MVP on the next slide.

I am very pleased that our organic sales growth significantly outperformed global light vehicle production growth in the fourth quarter as we continued to execute on our strong order book.

According to S&P global fourth quarter light vehicle production increased by 9% year over year.

This was more than five percentage points higher than expectations at the beginning of the quarter.

With most of the higher than expected production coming from domestic Oems in China and in North America as the impact of the UAW strike or smaller unexpected.

In the quarter, we outperformed global light vehicle production by around seven percentage points with strong performance, especially in rest of Asia and Japan.

The modest underperformance in China was mainly driven by a negative customer mix following strong light vehicle production growth for lower safety content vehicles.

Onto the next slide.

Okay.

For the full year, we outperformed global light vehicle production by around nine percentage points.

Despite a negative reading on light vehicle production mix.

We outperformed in Japan by 15 percentage points and rest of Asia by 14 percentage points.

And in China by eight percentage points.

The performance in China was mainly driven by increasing sales to domestic Chinese Oems.

Our sales to this group outperformed light vehicle production by 17 percentage points and accounted for 28% our sales in China up from 22% in 2022.

In 2023, our global market share was around 45%. This is almost six percentage points higher than five years ago. When the electronics business was spun off.

Yeah.

Our global market position is strong in all product categories with 45, 47% of airbags, 45% of seatbelts.

And 40% of steering wheels.

Supported by new launches and market share gains and content per vehicle growth as well as our further price increases we expect sales to outperform light vehicle production by five to six percentage points in 2024.

On the next slide we see some key model launches for the fourth quarter.

Okay.

During 2023, we had a record number of product launches, especially in China, Europe and Japan.

For 2020 before we see another step up in number of product launches, particularly in the first half of the year.

The trend towards electrification is clear on this slide with seven models being available as electric versions.

The model shows shown here have an hour to the content per vehicle of around 110 or higher with.

With the highest at over 800 U S dollars.

In terms of out of the sales potential the seeker Seara Seara seven launch is the most significant.

I will now hand, it over to our CFO predictable Steven will talk you through the financials on the next slide.

Thank you Micha.

Slide highlights our key figures for the fourth quarter of 2023 compared to the fourth quarter of 2022.

Our net sales were almost $2 8 billion. This was an increase of 18% year over year.

Gross profit increased by $131 million or by 33% to $530 million, while the gross margin increased by two two percentage points to 19, 3%.

The adjusted operating income increased from 233 million to 330 $334 million and adjusted operating margin increased by 220 basis points to 12, 1%.

non-GAAP adjustments amounted to $97 million almost entirely for capacity alignments.

Adjusted earnings per share diluted increased by 191 cents.

The main drivers were at 75 from higher adjusted operating income 190, <unk> from tax and 10 funds from other items, partly offset by financial items.

Our adjusted return on capital employed and return on equity increased to 33% and 47% respectively.

We increased the dividend to <unk> 68 per share in the quarter and repurchased and retired one 5 million shares for around $150 million.

Under our existing $1 5 billion stock repurchase program.

Looking now on the adjusted operating income bridge on the next slide.

In the fourth quarter of 2023, our adjusted operating income of 300 $334 million was $101 million higher than the same quarter last year.

Operations were positively impacted by improved pricing and other customer compensation higher volumes lower cost for premium freight as well as our strategic initiatives are partly offset by headwinds from general cost inflation.

The impact from raw material prices were $14 million positive.

Out of period cost copper compensation was approximately $37 million higher than during the same period last year.

The FX impact was limited.

Cost for SG&A and rdna net combined.

30 million higher mainly due to lower engineering income.

Labor cost inflation.

In relation to sales was unchanged compared to last year.

The margin was also affected by the accruals for warranty and recall of $17 million or 65 basis points. The accruals are related to three different cases.

As a result, the leverage on the higher sales, excluding currency effects and warranty and recall costs within.

It was in the upper half of our typical 20% to 30% operational leverage range.

Looking now at our full year financial results on the next slide.

Despite higher than expected at vehicle production.

2023 was again, a turbulent year with labor cost inflation supplier disruptions customer price negotiations and continued volatile light vehicle production.

Our net sales were $10 5 billion with sales increasing organically by over 18% twice the increase in the underlying light vehicle production and three percentage points higher than expected in the beginning of year.

The adjusted operating income increased by 54% to $920 million.

The adjusted operating margin was eight 8% compared to our guidance of around eight 5% to 9%.

The operating cash flow was $982 million compared to the guidance of around $900 million.

Adjusted earnings per share increased by $3 seven $9 per share to $8 19 were the main drivers were $2 51 from higher adjusted operating income and $1 31 from lower income taxes, partially offset by 18 from financial items.

Dividends of $2 66 per share were paid and we repurchased and retired three 7 million shares for around $352 million.

Sales adjusted operating income operating cash flow as well as the adjusted earnings per share were all the highest we have ever achieved.

Looking now at the full year adjusted operating income bridge on the next slide.

And in 2023, our adjusted operating income of $920 million was $322 million higher than last year.

The impact from raw material prices was limited.

FX impacted the operating profit negatively by 54 million. This was mainly a result of negative translation effect from the Mexican peso.

Costs for SG&A and <unk> net combined was 95 million higher however in relation to sales was down 60 basis points.

As a result, the leverage on the higher sales excluding currency effects were slightly above our typical 20% to 30% operational leverage range. This is despite not getting any leverage on the inflation compensation from our customers.

Looking now on the cash flow on the next slide.

For the fourth quarter of 2023 operating cash flow decreased by $15 million to $447 million compared to the same period last year, which was impacted by positive timing effects of customer compensations.

Capital expenditures net decreased to $150 million from $165 million in relation to sales. It was five 4% this year down from seven 1% last year.

Free cash flow was $297 million about the same as last year.

Our full year operating cash flow was $982 million, a new record for the company.

Full year capital expenditures net in relation to sales was virtually unchanged at five 4%.

Free cash flow for the full year improved year over year by 186 million to $414 million.

Our cash conversion defined as free cash flow in relation to net income was 85%.

Now looking on our trade working capital development on the next slide.

During the fourth quarter trade working capital decreased by $71 million, driven by $120 million higher accounts payable, partly offset by $30 million higher inventories and by $19 million and high receivables the higher inventories and receivables were mainly due mainly due to.

The higher sales.

Our capital efficiency program aims to improve working capital by $800 million and to date, we have achieved $580 million.

<unk> and receivables and especially in inventories are lagging due to the high call it volatility enhanced planning changes, resulting in inefficiencies.

We expect this to improve significantly in tandem with the reduced call it volatility over coming years.

Now looking at shareholder returns over the past five years on the next slide.

Okay.

Over the years <unk> has shown its ability to generate solid cash flow and periods with difficult market environments, such as Colgate lockdowns worn Ukraine indices, the industry supply chain challenges and related volatile and declining light vehicle production.

We have used both dividend payments and share repurchases to create shareholder value.

Historically, the dividend has usually represented a yield of approximately 2% to 3% in relation to the average share price.

Over the last five years, we have reduced the net debt significantly.

While returning almost $1 4 billion directly to shareholders. This includes stock repurchases of $5 1 million shares.

Total of $467 million as part of the current stock repurchase program.

Since we initiated the stock repurchase program, we have reduced the number of outstanding shares by almost 6%.

We do consider several factors when executing the program such as our balance sheet, the cash flow outlook, our credit rating at the general business conditions and not only the debt leverage ratio, we always strive to balance what is best for our shareholders, both short and long term.

Now looking on our leverage ratio of development on the next slide.

Despite increased stock repurchases and higher dividends the debt leverage ratio at the end of December 2023 improved to one two times from one three times at the end of the third quarter.

This was a result of $108 million higher 12 months trailing adjusted EBITDA at the net debt was unchanged.

We expect that our debt leverage and positive cash flow trend will allow for continued high shareholder returns going forward.

I now hand, it back to you.

Thank you fredrik onto the next slide.

After a year, where the global outdoor industry finally reached pre pandemic.

Levels.

2024 is shaping up to be something of a transitional year.

We had many regions having already rebuilt inventories S&P continues to see a production outlook that is more reliant on the end customer demand.

Global light vehicle production is projected to decline by close to 1% in 2024. This is due to affordability of new vehicles somewhat softer interest in evs in some regions.

And high interest rates most of the expected decline is in Japan and Europe.

S&P Global expect first half year global light vehicle production to increase by 1%, while let's say second half declining almost 3% compared to last year.

Light vehicle production in China continues to be supported by a strong EBIT demand and export activity.

In North America, the UAW strike and a strong vehicle sales towards the end of 2023 have reduced inventories somewhat.

<unk> production volumes slightly for 2024.

Production in Europe is expected to decline as inventory restocking.

No longer boost output.

Once the case over the last two years.

We based our full year.

Sales indication on our global light vehicle production decline of around 1%.

Now looking on the next slide.

In 2023, the main cost challenges.

We're around labor cost inflation in energy.

2024, we expect inflation, mainly to impact labor cost for us and for our suppliers.

We estimate the combined labor exposure, our own and our suppliers represents more than 40% of our cost base.

Already during 2023, the tight labor market in some countries resulted in significantly higher than normal labor inflation.

2024, we've received further headwinds from wage increases, especially in Europe, and North America.

Although many.

Commodity indices are down since their peak in 2022, we currently assume raw material costs to only declined slightly in 2024.

The reason being that the prices of specific raw material used in our products.

Such as automotive grade steel has not declined as much as the generic steel indices indicate.

Additionally, we see higher cost for some material such as Jan addressing.

The Red Sea situation has not yet had any measurable impact on our own operations.

We have noticed that some customers have reduced their volume short term.

But it is too early to estimate what potential impact it might have for 2024.

Cost compensation negotiations will again be challenging, but nevertheless, we expect that price adjustments and other compensation will offset cost inflation.

Looking at the 2024 business outlook on the next slide.

We expect a significantly improvement in adjusted operating margin in 2024 compared to 2023.

Supported mainly by organic sales growth a more stable light vehicle production.

Structural and strategic initiative.

Cost control and customer compensations.

We expect the adjusted operating margin in the first quarter to be around 7%.

A significant decline from the fourth quarter in 2023 due to lower light vehicle production lower engineering income cost inflation and timing of cost compensation. This.

This is in line with the seasonality in the past two years.

We anticipate price adjustments and cost compensations will gradually throughout the year offset cost inflation and the pattern is expected to be similar to the quarterly pattern seen in 2022, and 2023 with limited positive effects in the first quarter.

This tractor is should be further supported by improvements from strict cost control structural savings as well as expected gradual improvement of the supply chain in light vehicle production stability.

Looking at our 2024 financial guidance on the next slide.

This slide shows our full year, 2024 guidance, which excludes costs and gains from capacity alignment antitrust related matters and other discrete items.

Our full year guidance is based on a light vehicle production decline of around 1%.

Despite lower light vehicle production, our organic sales is expected to increase by around 5%.

No net currency translation effects are expected on sales.

The guidance for adjusted operating margin is around 10, 5%.

Operating cash flow is expected to be around one 2 billion U S dollars.

Our positive cash flow trend should allow for continued high shareholder returns.

We foresee a tax rate of around 28% in line with our previous indications of 25% to 30% as the new normal tax rate.

Looking to our sustainability approach on the next slide.

Yeah.

Guided by our vision of saving more lives. Our mission is to provide world class life saving solutions for mobility in society.

Sustainability is an integral part of our business strategy and an important driver for market differentiation.

And stakeholder value creation, helping to ensure that our business will continue to thrive and contribute to sustainable development in the long term.

Our sustainability approach is based on four focus areas.

Saving more lives.

Safe and inclusive workplace.

Climates, and responsible business each consisting of long term ambitions and more specific short term targets.

Our sustainability approach is anchored.

Good in well established international frameworks.

It's just the UN global compact and science based targets.

We aim to be carbon neutral in our own operations by 2013.

Further aim for net zero emissions across our supply chain by 2040.

These ambitions plays out to leave among the front runners in the broader group of automotive suppliers.

Now looking at the sustainability progress in 2023 on the next slide.

Sure.

During 2023, we initiated and concluded a number of activities that highlight our commitment and contribution to the UN sustainable development goals and our own sustainability targets.

For example.

We are therefore.

We are at the forefront of broadening test models in to include more 40 shapes and parameters such as age and gender.

We have increased the use of renewable electricity contributing to a significant decrease in greenhouse gas emissions from our own operations.

The incidence rates have improved.

And we carried out our our new climate survey at direct materials suppliers to track their alignment with our clients' requirements and ambitions.

Turning to slide to look at progress towards our targets.

In the medium term, we are expecting to continue to grow our core business.

Airbags, seatbelts and staying with us.

Through execution on the current strong order books.

The other important growth driver is safety content per vehicle, which is driven by continuous updates of government regulation and crash test ratings.

This excludes enterprise compensation for raw material and other inflationary costs the growth in 2022, and 2023 and the guidance for 2024 means that we expect to exceed these targets.

To maintain the growth momentum beyond 2024, we're pursuing an ambitious innovation program.

The strong 2023 order intake supports continued growth momentum.

Now looking on the multiple levers for margin improvement on the next slide.

In the past two years, our two lead has significantly reduced its cost base.

We have implemented hundreds of cost efficiency projects, especially in production and supply chain.

Our adjusted operating margin target of around 12% is based on the framework, commonly mutated at our Investor Day in June 2023.

Business environment with stable global light vehicle production of at least $85 million and.

And that headwinds from inflation is offset through price compensations.

We remain confident.

Thus when these conditions are met for the full year, we are capable to reach the 12% adjusted operating margin target.

We now expect that the light vehicle production conditions will be.

Fulfill during 2024, we expect a call of volatility through 'twenty 'twenty four will be lower than in 2023, but remain higher than the pre pandemic level.

A negative impact on our productivity and efficiency.

We expect continued inflationary pressure in 2024.

Customer compensations lagging behind the cost increases.

To offset the negative effects from inflation and market conditions and to secure our long term content competitiveness, we have launched a number of cost saving activities.

We believe that the net effect of our actions and headwinds.

Should result in a substantial step in 2024 towards our adjusted operating margin targets.

Now looking on delivering shareholder value through our 2024 business agenda on the next slide.

To drive towards our financial targets and deliver shareholder value the health and safety of our employees is our first priority.

While continuing more activities to further improve quality and efficiency.

We also continue our efforts of flawless execution of new launches improving customer satisfaction, further and thereby supporting our new and strong market position.

Through our capital efficiency program, we aim to unlock capital from receivables inventory and payables combined with execution of our strategic plan. This should lead to strong cash flow generation, which sets out to live up for attractive shareholder value creation.

By executing on our strategic initiatives footprint optimization and negotiating compensation from Oems, We believe we will mitigate headwinds from cost inflation.

To progress towards our climate targets, we will focus on increased resource efficiency and reduction of carbon footprint.

I will now hand, it back to Anders.

Thank you Mikael.

Turning to the last page. This concludes our formal comments for today's earnings call and we would like to open the line for questions from analysts and investors.

I'll now hand, it back to you or not yet.

So much better.

As a reminder, if you wish to ask a question. Please press star one on the telephone keypad and wait finance will be announced to withdraw. Your question. Please press star one again, please from Bob will compile the key narrow stebbins will take a few moments.

And now we're going to take the first question and it comes from the line of Colin Langan from Wells Fargo. Your line is open. Please ask your question.

Oh, great. Thanks for taking my questions.

Just looking at the your comment on this is about your long term targets of 4% over market. The guidance implies about six I think you said in slides five to six.

Any reason why it's as strong this year and maybe is that including some of the inflationary cost recoveries that you're expecting I know that was a bit of a help last year.

And any thoughts on the China headwind you called out in the quarters that also kind of continue.

Thank you for your question Sir.

4% outperformance versus LBP.

It takes us into 2024. So this is the last year of the three year period that we have communicated on them and as we said that we expect to to over deliver on that.

Target.

And of course it is thanks to two.

To the.

The growth we have.

Weighted through the orientation over the last couple of years and of course, we have.

<unk> seen good development on.

Content per vehicle also and we expect to see that also also next year.

Florida.

You mentioned and also the price negotiations that is on top of that <unk>.

Then beyond 2024, we have the 4% to six where the core 4% to 6% organic growth target.

Where are the current let's say core business should be two to four.

So that is our target beyond there.

Beyond 2024 regarding China.

The.

The minus 2% versus LBP, we saw in the fourth quarter is due to mix effects.

As we mentioned here we had.

Sure.

Growth significant growth on the low end vehicle sort of let's say the vehicles with lower.

Safety content neutral, but if you look at the full year.

We had a very strong outperformance there of 8% for the for the full year. So we look very positively on China, and we feel that we are well positioned with the.

And.

Let's say the new EDI players and also the.

<unk>.

In general there so positive view on China going forward.

Got it.

Any color on you called out labor inflation again with all the cost of any way to frame how large pieces in terms of dollars or the impact that's dragging your margins for sure.

Yes.

Actually to be about the same level as we had last year.

Which where we said would be somewhere in mid single digits above normal inflation, so pre 23 basically.

And we're also giving some breakdown here on the slides on our on the labor cost.

As a percent of sales.

So with that you can.

Great.

And that's the major inflation.

Expecting then on top of that we also expect some energy.

Increases basically is a surcharge on materials that we're buying especially on textiles.

So those are the main two components.

Got it alright, thanks for taking my questions.

Thank you.

Scott will go and take our next question.

Thank you.

And our next question comes from the line of Scott.

Got it from BNP Paribas. Your line is open please ask your question.

Hi, Thanks for taking my question. The first one on the buybacks just wondering if you would be comfortable getting closer to the upper end of the leverage range in 2024, especially considering a further uplift in margin potentially in 2025 and the good cash flow generation you expect for this year.

Second question on.

Inflation in compensation, you mentioned that you expect from compensation for costs does that mean at the end of the year. So we shouldnt expect full compensation on slide 24, as a whole but by the end of the year. You think you can have from competition with potentially some slippage in the first few months.

Is that a fair way to describe it thank you.

Thank you for your question.

The buybacks.

As you know we only report on what we have done.

On a regular basis through our web page here.

We are.

Very committed to our program that we have and I think you can see that we have in the fourth quarter here.

Hence the level of or buybacks and.

Of course, we.

We're focusing a lot on making sure that we have the cash flow generation needed and as you see from the report here we are committed to <unk>.

Shareholder friendly company when it comes to.

Both the regular dividend and also to the buyback program and we will come back on that SP progress here, but.

That's as much as I could say here today.

Today.

Regarding the inflation or is there is a lead time in and as we have indicated here already.

Youll see let's say the cost effect from inflation anything else.

Earlier in the year and then we have the negotiations throughout the year and in this in the same fashion as we were stating last year. Our focus here is to get the fully full compensation in the height of the compensation raw bran two.

Yeah.

Looking at the quarter by quarter here. So it's the full year compensation that is the priority and the highest of it.

So therefore, you'll get this let's say new seasonality, if we call. It that's where you have Q1, and then gradually improve throughout the year. So that's the reason behind us I don't know.

If you would like to add anything that's really cool.

No.

And overall, our expectation is we should be compensated also for the full year effect.

And that was also the case in 2023.

Whereas 2022 with the raw material compensation there was a component that we are not we're not compensated for in 'twenty. Two hence there was a carryover effect into 'twenty three but we don't expect that same pattern.

24.

Okay very clear thank you.

Thank you.

Pat will then take over next question.

And the next question comes from one of <unk> Rosner from Deutsche Bank. Your line is open please ask a question.

Alright, Thank you very much.

My first question I was hoping to ask you about.

Could you comment.

A little bit more about your path towards the 12% reiterated our operating margin target.

I much appreciate the scorecard that you put at the end of the slide deck.

Understanding you correctly it looks like production is probably in the right level at least maybe.

Speaker Change: <unk> cost recovery.

Offset by some of your cost reduction program. So.

Speaker Change: Is the main impediment to getting to your targets.

The cough accuracy and if so I guess what is the line of sites.

Is it fair to assume that this will normalize or are there further actions that you need to get you to your targets.

Okay. I mean, there are a lot of components here in your question. So.

So overall the framework is I think pretty clear $85 million, we say.

As it looks right now 24 $85 million.

It seems to be in place as an assumption here for 2024 that when it comes to the other two that we are made whole on the inflation compensation.

Speaker Change: That will.

Potentially have an impact also on a on a full year.

Speaker Change: As long as we have inflation and there is always this catch up effect.

From the cost come in until we are we are compensated for it.

Again here our ambition is to have that also in place for 2024.

That remains to be seen also how inflation develops during the year and advanced component is on call of stability.

Here, we have a <unk>.

In our presentation, where it's clearly not in place going into the year.

We've seen it kind of yes.

Or stabilizing at around 90% now during the second half of last year, we're not assuming it right now that this will improve significantly during 2024 and then there's also even if it were to come up to the pre pandemic levels closer to the 100%. There is also a time lag of that.

Speaker Change: When I say that accuracy is actually in place until we can also get the efficiency in our network.

Speaker Change: So.

Yes, its trending towards the framework, but for sure 2024, it will not be in place and it remains to be seen.

How much of that.

Two and three year will come in place during 2004, and then what the impact is 425.

Looking at the building blocks of how to get from the $8 eight that we have now in 'twenty three up to the 12% is roughly you can dive right into three buckets. One is the structural initiatives in the head count reductions. The second one is the volatility improvement combined with the labor productivity.

And then the third component is.

Sales growth and our strategic initiatives and it's roughly I would say one third.

<unk> contribution from those three buckets.

That is great color. Thank you. So let me just hone in for my second question on the sales growth piece of it as we look past this year and towards.

Some of your targets I think we've talked in the past.

You had reported sometimes on your annual win rates and oftentimes they were at like 50% or better obviously your market share you reported that 45% what is the.

Can you comment on the win rates and I guess, what is the confidence level in being able to capture additional market share over the next few years beyond 2024 framework.

Yes.

Speaker Change: We haven't seen last year communicated here around the lifetime revenue on the order intake in I think.

We had a very good 2023 and the highest.

Speaker Change: In five years here in terms of lifetime revenue and.

What we are saying here is that we reached the 45% market share in 2023, which we have indicated seen some years back that that's most of what we expected us to grow into.

Speaker Change: And with the order intake and order book we have.

Expect to defend this market share.

We do not have I would say a target or an ambition to to set a new level of market share here. It is really to defend these market share position with.

Healthy as the business of course.

If we can grow more.

And in a healthy way.

What we will do it but it's not a target in itself. So the growth that we expect going forward.

The two to four as I talked about.

And we have announced earlier beyond 'twenty 'twenty four is connected to light vehicle production and content.

With more sophisticated products.

Thank you very much.

Thank you.

Now I'll go and take our next question.

Thank you Ms amendments.

And the next question comes from the line of Michael Jack from Banc of America Securities. Your line is open. Please ask your question.

Hi, good afternoon, thanks for taking my questions.

Michael Jack: First one just on price recoveries. Some other suppliers have struggled to compensation for wage inflation.

And at a level of scale, even more successful is there anything structural that you could point towards that gives you the confidence that you can achieve the same in 2024.

And then second question is just on working capital what is the magnitude of improvement expected in 2024 in relation to that.

Michael Jack: The remaining gap.

TD, Steven 10 billion target that you had in mind. Thank you.

Thank you, let me start with the price recovering Frederic will comment on the working capital there but.

The price recovery.

I can say this.

Actual to it I think it's a I mean.

Of course, I can only comment on what we are doing here and we have now for the last two years have had very constructive dialogues with our customers around the over and above normal.

Cost increases we see in the system here and.

Starting off with raw materials that we have also mentioned that we have made some indication.

High level of.

Yeah.

Indexation to do those contracts here also so I mean it works both ways. Obviously, so when we see that come down we will also hand that back to our customers.

When it comes to the other components here and it's a little bit different with nature, but.

I think it's very important to two two.

Get compensation for Otis the inflationary components here and we for this year definitely have the labor and focus here.

I mean, that's that's the nature of inflation it needs to be passed on into two to the end consumer.

Here in meaning that the price of the car at the end of the day, so we need to push that down because there is no possibility for us to compensate our suppliers unless we get the <unk>.

Michael Jack: Pass on here.

Not sustainable.

That's something we also need to continue to work hard with and.

We will do that.

That's our focus here going forward as well.

And then Michael on your second question working capital.

So we reported here that we have achieved around $580 million of the 800 million target that we set ourselves.

In the 800 billion target. We had also detail that about $500 million that would come from improved payables and that we have.

<unk> achieved or even over achieved already to date.

We don't expect more to be contributed from that component.

So the inventory is challenging right now due to the call of volatility as we show here that it's kind of stabilizing at still.

To.

Poor levels.

As I mentioned, we don't expect this to improve significantly during 2024 and accordingly, we do not expect that we will be able to do so much on the inventory side either in 2024.

And we do not guide for working capital, specifically, but you see a very strong operating cash flow guidance here of $1 2 billion.

But there is then more opportunity coming later from improving working capital further.

That's very clear thank you.

Thanks.

Thank you.

Yeah.

Now I will go and take our next question.

Please.

And the question comes from the line of Hospice and the Lau from Handelsbanken. Your line is open. Please ask your question.

Michael Jack: Two questions from me.

Despite the.

Michael Jack: Chris.

Michael Jack: Just curious about.

The drop in active safety.

During the quarter minus 11%.

Given the big spread to the end of the period that increased by more than 9%.

I actually don't have we can take that later, but it's just quite curious Sudan.

Sorry to come back on this stipulation because I'm trying to understand the dynamics there.

I can definitely say that.

We haven't sought our.

Retroactively compensate you guys for rising cost in the quarters, but on the labor side.

Could you maybe give us.

For more detail on how that litigation going given that those cost savings are quite apartment.

Steve.

Are you guys getting compensated.

Restaurants, if they produce also in <unk>.

How does the process work.

I think on the active seatbelt side.

No drama name into that of course, you get mix effects also in specific years.

Where do you have maybe some outgoing car models.

Michael Jack: The high level of of in this case, then active seatbelts.

Michael Jack: And my expectation is that you should see that recovery recovering.

And then in the next year or so so no drama today, Moreover, temporary mix effect.

Okay.

Then on the cost curve.

Compensation here, if I understand you right I mean, the nature and Rob.

As you said.

Labor cost increases <unk> and therefore, it's a I mean.

It will not come down.

Michael Jack: We can.

So of course, there is an absolute necessity that that inflationary component has to come through there is no room for anything else.

That is what we are.

Michael Jack: Are doing here and we of course have very detailed supporting.

Documents too.

Michael Jack: When we go to our customers how that connects to their specific business and how it's correlated so so.

It's something we need to go through and we went through that partly already last year. When we saw in some cases in some regions that we impact the already in 2023 so.

We expect to do more of that.

Thank you.

Thank you Scott.

Now I'll go and take our next question.

With Nellix.

Okay.

And our question comes from the line of Bjorn Andersen from Danske Bank. Your line is open. Please ask your question.

Thank you I have a question also on price.

I mean, you have been very successful in getting compensation, but also we have seen I mean Oems coming from.

High profitability.

And as I say as you mentioned yourself.

We need to see in place in coming to the price of the cars, but we have also seen price cuts on cost if you're also seeing Oems reporting lower profitability.

Accepting perhaps a lower profitability as they are investing in price in a way is this the situation.

Impact sub suppliers in general.

How has it been in the past that's my first question.

Michael Jack: Thank you. Thank you bill.

No I think.

I see what you're.

And I'm, referring to here, but I mean first of all it has never been easy these negotiations not even when we saw record profitability.

At the Oems.

Michael Jack: And I think the point from my side here is that has nothing to do with their profitability or our profitability. This is inflation that needs to be passed on is not sustainable for us to pay our.

Our suppliers are less speaking yet the pass through.

That is something that we are very.

<unk>.

Needs too.

Continue to be firm on there is no other way than than that.

And I think when you look at the price reductions and so on.

Towards the end consumers I think there is of course.

Different reasons for that you see those prices coming down, which probably is more on an individual basis between the Oems.

Comments around that.

Michael Jack: But we need to focus on our business here, which we are doing so so to say, yes to continue to press on there.

And just a follow up and perhaps in deposits.

Not really seen a correlation between.

Our prices and your price negotiation.

I mean, you have your negotiations.

The team at your customers.

The teams.

The price therefore actual cost or is there a correlation.

No I mean.

Not from our perspective is no correlation.

I think Thats my point here.

They need.

I mean, each company. Thank you Eldar business on in.

Our case here, we need to get compensation for the inflation in our system, which include <unk>.

And one more thing I mean last year.

I'd like to remember that you had an outlook that was based on him and LBP a little bit below what was in the market back then I'll buy.

S&P and now we are in line with last year. We also saw this catch up driven sales and now it's more assets you highlight more in line with the market.

Is there a nervousness on where the market will end tough when youre talking to your customers or people in the industry.

Maybe.

Michael Jack: Heading into a more of it.

Low down on them.

More visible this year.

Last year.

I think I mean at least from the dialogues we have.

With our customers' underway for about a year I don't see any discrete balances to what we referred to here is the minus one from S&P global and in general here I think there is.

Moreover, this mix effect between ice and Evs.

And especially in Europe, where maybe the evs is slowing down somewhat.

But it's more of a mix effect, there and for us that is neutral because as you know we are well represented in both categories. We are agnostic to the cause.

The driveline question here so.

We don't see the effect on our end here.

Sure.

Thank you.

Thank you.

Yeah participants due to comp and not take any further questions.

I would like now to hand the conference over.

Michael <unk> for any closing remarks.

Thank you very much.

I am confident that we will deliver a substantial increase in sales operating cash flow and adjusted operating income in 2024, while maintaining substantial shareholder return maintaining substantial shareholder returns.

Actions are creating both short term and long term improvements and we believe these actions enable us to take important steps towards our targets.

While we remain a John and prepare for more adverse market development should that be necessary.

<unk> continues to focus on our vision of saving more lives, which is our most important direct contribution to a sustainable society.

Our first quarter earnings call is scheduled for Friday April 26 2024.

Thank you everyone for participating in today's call. We sincerely appreciate your continued interest in <unk> until next time stay safe.

Michael Jack: Okay.

That does conclude our conference for today. Thank you for participating you may now disconnect have a nice day.

Okay.

[music].

Yes.

Michael Jack: Okay.

[music].

Yes.

[music].

Yes.

[music].

Okay.

[music].

Yeah.

Michael Jack: [music].

Yes.

Okay.

[music].

Yeah.

Okay.

Yes.

[music].

Okay.

[music].

Okay.

Yes.

[music].