The favorable trends continued and 2004 became the best year ever for your company. Despite flat vehicle production in our most important markets,
Since 2001, sales have jumped by more than 50% and organic sales (i.e. sales excluding currency effects and acquisitions/ divestitures) have increased by 22%, despite flat vehicle production in our most important markets. During the same period, net income and earnings per share have tripled, even after adjusting for one-time items.
Return on equity grew to 13% in 2004, representing more than twice the level reached in 2001 (see graph). The return on equity in 2004 also exceeds the record level in 1997, when our industry was positively impacted by the "airbag boom" of the 1990s.
Another important area of improvement is cash generation, which hit $377 million before financing activities in 2004, compared to $253 million in 2003. This means a free cash flow yield of more than 9% (cash flow relative to Autoliv's average market capitalization during 2004 of $4 billion).
We have utilized the strong cash flow to create shareholder value. To begin with, we have raised the quarterly dividend per share by more than 170% since 2002, including the dividend for the second quarter 2005. Secondly, we have created value for you by investing $320 million since 2000 in share buy-backs at an average cost of $27.61 per share. At the end of 2004, when our share closed at $48.30, the market value of this investment exceeded half a billion dollars.
Over the past five years we have invested aggressively in Asia, primarily in Japan, Korea and China. With these investments, our market share in Japan has grown to 20%. Equally important is the superior global customer mix that we have attained through this expansion (see graph). Many Asian vehicle manufacturers have set up production in North America and Europe and take market shares from our traditional customers. For Autoliv's long-term success it is therefore crucial that this strategy has been successful.
Our investments in Asia are also important because vehicle production in this region grows more than twice as fast as in Western Europe and North America.
Already in 2005, Asia is expected to become the leading vehicle-producing region in the world, larger than both Western Europe and North America.
The average safety content in Asian vehicles is still much lower than in vehicles in our traditional markets. But more vehicles in Asia are being equipped with improved seat belts, frontal airbags and sometimes even side airbags. As a consequence, the Asian automotive safety market is expanding much faster than our traditional markets, and already before the end of this decade the Asian markets could become the largest market in the world for our industry. Our position in this region and our superior global reach will then be a tremendous competitive asset.
Our strategy to move production to low-labor-cost countries has been key in offsetting the pricing pressure from customers.
In 2004, we closed our Dutch assembly plant and made the decision to move the remaining seat belt manufacturing in Sweden to Estonia.
We now have 35% of headcount (39% of the permanent employees) in low-labor-cost countries, compared to 31% a year ago and less than 10% six years ago when the focus on production reallocation (see graph)
In line with our strategy we continued to invest heavily in R,D&E (Research, Development and Engineering). In 2004, these net expenditures rose by 21% and amounted to 6.0% of sales.
In 2004, we launched the world's first asymmetric driver airbag that is integrated with a new steering wheel. Thanks to an ingenious fixed hub in the steering wheel, the driver airbag does not have to be round any longer but can be designed to provide optimal protection (see R&D Projects).
Last year, we continued to expand our manufacturing capacity, mainly for side airbags. We also see a particularly strong demand for the Inflatable Curtain (sales were up 50% in 2004).
In 2004, the U.S. government proposed new regulations that could, in effect, mandate such curtain airbags on all new vehicles by 2011. As a result, we expect the sales of this product to continue to grow during the rest of this decade.
In 2005, we expect to strengthen our presence in the Asian markets. We are building three new plants in China for steering wheels, electronics and micro gas generators. An existing plant in China will be converted into a seat belt plant for export to Australia and other high-cost countries in the Asia Pacific Region.
We will also, in 2005, explore the opportunities in active safety systems in addition to protecting and strengthening our competitive edge in our core business, i.e. passive safety systems. We plan, for instance, to launch our first significant active safety system before the end of the year. It will be a night vision system with an infrared camera. In passive safety systems we will also launch a new product, a side curtain airbag for convertibles.
We will continue to consolidate our supplier base. As existing long-term contracts expire, we will gradually reduce the number of suppliers from over 2,000 to less than 500.
The move of our own production to low-labor-cost countries will continue, particularly to Mexico, Romania and China. But the greatest cost-savings potential is to purchase more components from low-cost countries and to reduce the number of product versions. In seat belt products, for instance, our current 5-year program calls for a reduction of 50% in the number of product versions.
Finally, we will continue to invest in additional capacity for the Inflatable Curtain in response to the expected new regulation in the U.S. on side-impact protection.
In 2005, light vehicle production is expected to increase by less than one percent in our major markets, i.e. North America, Europe and Japan. The vehicle model and customer mix that have been very favorable for us during the last two years should continue to assist us in North America. In Europe and Japan, however, there will be no significant vehicle introductions that could boost our growth as in 2003 and 2004.
The demand for the Inflatable Curtain should continue to be strong. The rate, however, by which sales of this new product grows will inevitably slow down as the sales volumes increase each year.
Given current exchange rates, sales could be favorably impacted by 4%.
In summary, this means that we expect sales to grow faster than the underlying market but not as much as in 2004 when we outperformed light vehicle production in the Triad by as much as 8%. In 2005, we should also continue to take market share. We should therefore be able to meet our target to grow faster than our market.
We are confident that we will be able to continue reducing our internal costs, but rising prices of steel and other raw materials will have a negative effect on cost reduction results at least in the short- and medium-term perspective (our raw material exposure is described under Risks and Risk Management).
In conclusion, we believe we could hit another sales record in 2005, but it will be difficult to improve operating margin even further at least as long as the current pricing pressure from raw materials continues.
Lars Westerberg
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ProfitabilityReturns on equity and capital employed have gradually improved since the low point in 2001 and are at 13% and 16%, in 2004, record highs for the new Autoliv company that was started in 1997. |
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Headcount AllocationTotal headcount has increased by 33% since 1999 to nearly 40,000 compared to sales that have increased by 61% during the same period. This sales increase has been achieved despite an 8% reduction of headcount in high-labor-cost countries which are the dominant markets for automotive safety products. As a consequence of this headcount allocation, Autoliv now has 35% of its headcount in low-cost countries compared to 31% in 2003 and less than 10% in 1999. |
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Sales MixAutoliv's sales mix has diversified since 2000 when we started to accelerate our investments in Japan and the other Asian markets. Now the rapidly-growing markets in the Rest of the World (RoW) (i.e. mainly Asia excluding Japan) account for 10% of revenues compared to 5% in 2000. Autoliv's dependence on the "Big 3" in North America (GM, Ford and Chrysler) has declined from 22% to 16% of sales during the same period. This also reflects the weaker U.S. dollar. |