Ladies and gentlemen, thank you for standing by and welcome to the Autoliv, Inc. Q3 2020 Earnings Call. At this time all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. I must advise you that this conference is being recorded today. I’d now like to hand the conference over to Anders Trapp, VP, Investor Relations. Please, go ahead, sir.

Thank you, Nadia. Welcome everyone to our third quarter 2020 financial results earnings presentation. On this call we have our President and CEO, Mikael Bratt; and our Chief Financial Officer, Fredrik Westin; and myself Anders Trapp, VP, Investor Relations. During today's earnings call, our CEO will provide a brief overview of our third quarter results, as well as provide an update on our general business and market conditions. After Mikael, Fredrik will provide further details and commentary around the financials. At the end of our presentation, we will remain available to respond to your questions. And as usual, the slides are available through a link on the homepage of our corporate website. Turning to the next slide. We have the safe harbor statement, which is an integral part of this presentation and includes the Q&A that follows. During the presentation, we will reference some non-U.S. GAAP measures. The reconciliations of historical U.S. GAAP to non-U.S. GAAP measures are disclosed in our quarterly press release and the 10-Q that will be filed with the SEC. Lastly, I should mention that this call is intended to conclude at 3:00 PM CET. So, please, follow a limit of two questions per person. I will now hand it over to our CEO, Mikael Bratt.

Thank you, Anders. Looking now into the Q3 2020 highlights on the next slide. Before we start with the formal presentation, I would like to acknowledge our employees for their hard work and commitment to health and safety, cost control, quality and delivery precision in these challenging times. The COVID-19 pandemic is first and foremost a human crisis, where safeguarding health and safety is our first priority. I am very pleased that our operations reported higher sales, higher profit margins, and higher cash flow compared to last year despite challenging market conditions. The strong performance was a result of faster than expected light vehicle production recovery and the forceful actions we initiated earlier in 2020 to manage the effects of the pandemic on our operations. The LVP recovery in the quarter started slow and volatile but grew gradually stronger and more stable, supported by incentives, pent-up demand, and inventory restocking post lockdown. We continued to execute on our strong order book and our sales increased despite global LVP falling by over 4%. To manage the evolving situation, we have accelerated cost savings, reduced expenses, and strengthened our balance sheet. This includes personnel and material cost reductions and executing on structural efficiency programs. I am confident that the actions implemented and planned are positioning Autoliv well, regardless of how the market will develop. It is encouraging that we can report the strongest operating cash flow in our history for the third quarter and that we were able to reduce CapEx by close to 40% compared to a year earlier. This enables delivering towards our target to a leverage ratio in the range of 0.5 to 1.5 times. The order intake in the first nine months of the year supports a prolonged period for outgrowth. However, customer sourcing activities were, as expected, low in the quarter with more than half our planned sourcing for the year expected in the fourth quarter. We see the positive sales trend continuing in the first weeks of the fourth quarter. However, economic uncertainty, risk for further lockdowns, and the risk of increasing unemployment and its impact on consumer demand may temper the outlook for the fourth quarter light vehicle production. Looking now on the financial highlights on the next slide. Our consolidated net sales increased 0.5% compared to Q3 2019, despite the global light vehicle production falling by more than 4%. Adjusted operating income, including costs for capacity alignments, antitrust related matters, and in 2019 separation of our business segments increased by 13% to US$206 million mainly as a result of our forceful cost reduction activities. The adjusted operating margin increased by 110 basis points to 10.1%, which is the second highest margin for a third quarter in the past 10 years. Operating cash flow of US$352 million and free cash flow of US$276 million were significantly above the Q3 2019 levels and the highest cash flow on record for the third quarter. Looking now on sales development on the next slide. I am pleased that our sales outperformed organically the global light vehicle production by almost 5% with outperformance in all major regions. We had a solid sales development in China, growing organically by more than 10%, outperforming light vehicle production by close to two percentage points. Sales in North America increased organically by around 2%, which was more than two percentage points better than the light vehicle production. Our outperformance was mainly coming from positive vehicle mix and recent launches with several customers such as Tesla, VW, and Toyota. In Europe, the trend from previous quarters continued as our sales outperformed light vehicle production by three percentage points impacted by recent launches at PSA and Toyota. In Japan, the light vehicle production mix was negative with production of smaller vehicles for the domestic market being less affected by the pandemic than larger export vehicles. Despite this, our sales decreased organically in line with the light vehicle production decline. In the rest of Asia, organic sales increased by 5%, which was 22 percentage points better than the light vehicle production decline. Within the region, sales in South Korea showed a strong increase. In the quarter, slowing sales of replacement inflators had a 0.6 percentage points negative effect on sales mainly affecting North America, China, and Japan. Looking on the next slide. We have several high volume, high content model launches during the quarter. We did not experience any major delays of launches and we expect the high number of launches to continue into the fourth quarter. The models shown on this slide have an Autoliv content per vehicle between US$120 and US$330. Two of the vehicles are pure EVs and many of the remaining models will be available with some sort of electrified powertrain. The long-term trend to higher CPV is supported by the continued trend of more front center and knee airbags. For example, the Nissan Rogue and Ford Mustang Mach-E will have dual knee airbags from Autoliv. Now I will hand over to our Chief Financial Officer, Fredrik Westin, who will talk about the financials on the next slide.

Thank you, Mikael. This slide highlights our key figures for the third quarter. Our net sales were $2 billion, a 0.5% increase compared to the same quarter last year. Gross profit increased by $21 million and the gross margin increased by 90 basis points compared to the same quarter in 2019. The higher gross margin was primarily driven by labor and direct material productivity despite direct COVID-19 related costs and operational inefficiencies. The adjusted operating income increased by $23 million to $206 million mainly due to the higher gross profit. Reported earnings per share was $1.12 and our adjusted return on capital employed and return on equity were 22% and 25%, respectively. The operating cash flow improved by $157 million to $352 million for the third quarter 2020. We did not pay a dividend in the quarter. Looking now on the adjusted operating margin bridge on the next slide. Our adjusted operating margin of 10.1% was 110 basis points higher than in the third quarter of 2019. As illustrated by the chart, the adjusted operating margin was positively impacted by lower costs for raw materials of 40 basis points and lower combined costs for SG&A and RD&E of 20 basis points. SG&A declined by $6 million or 6% compared to the prior year, mainly due to lower costs for personnel. RD&E net costs increased by $3 million compared to the prior year as reduced personnel costs were more than offset by negative effects from lower engineering income. FX effects impacted the operating margin negatively by 60 basis points. This is caused by transactional effects from a number of different currency payers. The operational improvements contributed with 110 basis points. This was a result of strict cost discipline put in place during the first half of the year and the effects from our structural efficiency programs, partly offset by the negative impact of COVID-19 related costs and inefficiencies. Additional support came from governments in connection with furloughing short-term workweeks and similar activities totaling approximately $10 million. Looking on the next slide, we have the EPS development. The reported earnings per share improved by $0.14 to $1.12. The main drivers behind the increase are around $0.17 from higher adjusted operating income and $0.06 from favorable impact from tax, which was partially offset by $0.04 from higher capacity alignment and $0.05 from financial items. In Q3 2020, the adjusted earnings per share increased by 18% – $0.18 to $1.48 compared to the same period one year ago. Looking now to our cash flow on the next slide. For the third quarter of 2020, operating cash flow was $352 million, an increase of $157 million compared to last year. The increase in operating cash flow was a result of the higher net income and improved working capital. Our strict inventory control, close collaboration with suppliers, reduced overdues and improved payables together with positive effects from other non-cash items were the main drivers for the improvement. Capital expenditures amounted to $76 million in the third quarter, which is about 3.8% in relation to sales. Compared to last year, CapEx decreased by 38% as we suspended or delayed investments substantially. Our free cash flow was $276 million, an increase of $203 million year-over-year. As a consequence of the sharp reduction in CapEx, our last 12 months depreciation and amortization was in line with CapEx. A more normalized market will lead to some increase in investments again. But our ambition is, however, to reduce the gap between CapEx and D&A over time. The last 12 months cash conversion was more than 200%, as a result of both the low CapEx level, positive contribution from changes in working capital, and non-cash items. Over the last 12 months, operating cash flow was almost $700 million with a free cash flow of almost $350 million. Now looking on the next slide. We have, as you know, a long history of a prudent financial policy. In the current volatile market conditions, our balance sheet focus remained unchanged. The leverage ratio decreased from 2.9 times at the end of last quarter to 2.4 times as of September 30. The improved leverage was a result of our net debt decreasing by $265 million in the quarter while EBITDA over the last 12 months at the same time increased by $29 million. It is worth noting that our net debt is the lowest since the spin-off of Veoneer in 2018. Our ambition is to improve our net debt and EBITDA in the near future. However, as the leverage ratio is calculated on the last 12 months data, we expect the ratio to remain elevated for some time. On the next slide, you can see that our liquidity position remains strong. We had around $2 billion in liquidity and unused credit facilities on September 30. The revolving credit facility was fully repaid on October 2, 2020 and is available as needed. We have no need for any major refinancing of existing debt until 2022. Therefore we believe that we have secured a significant liquidity cushion to manage our business successfully in the current challenging environment. Now looking on the next slide. We have an update on the structural efficiency programs. We have seen the expected positive effects of the programs. We estimate the savings from our two structural efficiency programs in the quarter to be around $15 million. The second program should reach its full effect during the second half of 2021 with annualized savings of $60 million. The programs are mainly impacting Americas and Europe. And when the two programs are fully implemented, we expect headcount to have been reduced by more than 1,700 employees. The cost for structural efficiency program two is estimated to be around $65 million and cash out to be spread from this quarter until the fourth quarter of 2021. In addition to the structural efficiency programs, we made a further provision of around $30 million in the third quarter for footprint optimization in Europe including a plant closure involving more than 200 employees in Germany. Production is expected to end mid-2023 subject to negotiations with the local works council. We continue to evaluate further footprint optimizations. Looking on the next slide. We are closely monitoring the development of the COVID-19 pandemic engaging its continuing impact on the automotive industry. The outlook for major light vehicle markets is still difficult to predict due to economic uncertainty and the risk of further lockdowns. These factors may have major effects on light vehicle production in the fourth quarter. The expectations on light vehicle production in North America have continuously improved and Q4 is now expected to show only a modest contraction supported by stronger U.S. light vehicle sales, expectations, and continued need to restock depleted inventories. In Europe, the low inventory level induced by the lockdowns is expected to support production into the fourth quarter. Despite this, IHS assumes European production to fall around 1% in the fourth quarter due to a decline in Eastern Europe. In China, light vehicle sales have shown a year-over-year growth over the past six months and inventories are balanced. IHS expects some demand stagnation in the fourth quarter with light vehicle production dropping 5% as the year-over-year comparisons get more challenging. Our full year guidance is based on our customer call-offs and light vehicle production outlook according to IHS. On the next slide, we have the impact on our business in the fourth quarter. As we have communicated earlier this year, we see both tailwinds and headwinds for 2020. Related to the fourth quarter of 2020, you can see the main tailwinds include growth from executing on the strong order book and the structural efficiency programs. The main headwinds include operational headwinds from COVID-19, declining and unpredictable light vehicle production, as well as lower inflator replacement sales. We believe the tailwinds and headwinds for the fourth quarter are of similar magnitudes and should lead to an adjusted operating margin for the full year 2020 of around 6%. However, economic uncertainty, risks for further lockdowns and the potential increase in unemployment and its effect on consumer demand may still impact this fourth quarter outlook. I will now hand back to Mikael.

Thank you, Fredrik. Moving on to the next page. We have summarized our full year 2020 indications. This indication excludes costs for capacity alignment and antitrust related matters. Backed by recent prior launches, we expect a further pickup of sales outperformance compared to light vehicle production in the fourth quarter, supporting a full year outperformance of around 6 percentage points. We expect a 13% organic sales decline; our net sales decline is assumed to be around 14.5% including negative currency translation effects of around 1.5%. We expect an adjusted operating margin of around 6%. Operating cash flow is expected to be below the 2019 level of $844 million. It is important to note that the outlook assumes that the current relative business stability prevails. Turning the page. To summarize, the Q3 outcome reflects our efforts to come out of this crisis as a stronger company. We see the positive sales momentum continuing into the first weeks of the fourth quarter. However, it is important to realize that this crisis is not behind us. There are still potential risks for further lockdowns affecting business stability and visibility. I am proud that we have a solid organization that can manage strict cash and cost control while continuing to execute on our long-term strategy with the health and safety of our employees as the first priority. I will now hand back to Anders.

Thank you, Mikael. Turning the page. We conclude our formal comments for today's earnings call and we would like to open up the line for questions. So, I hand it back to you, Nadia.

Thank you. Ladies and gentlemen, we now begin the question-and-answer session. And the first question comes from the line of Hampus Engellau from Handelsbanken. Please ask a question.

Thank you very much. Two questions for me. First, just a housekeeping question on engineering income: should we expect any other situation on seasonal pattern that we have seen in Q4 with engineering income being slightly higher? That's my first question. Second question is more on operating leverage. If I remember correctly, I think Autoliv had 1.4% EBIT margin in 2009 and then it went up to 12% in 2010 and we see a similar pattern here on the operating leverage. What kind of a pushback should we think about 2021 in terms of operating leverage? I mean, provided that the IHS outlook of 13% growth of LVPs sticks and you had some outperformance on that? Those are my two questions. Thank you.

I think on the first question there on the engineering side, we have no changes to the seasonality in engineering income as such. But it doesn't mean that it needs to be the same year-over-year here of course. But seasonality-wise it is the same and that is to be expected also this year. When it comes to operating leverage, as you know we have talked about that in previous quarters here and we have guided in terms of a rule of thumb there on a growth scenario with around 20% and when you have these sharp declines more in the magnitude of 30 and also of course when you have big rebounds in the same way also you should be in the 30s. And sequentially I think that's what you also have seen here and actually a little bit stronger than that. When it comes to 2021, I think we wait with any comments around 2021 until we get into the time for making a call on the next year. I would say with the current circumstances, further out you look, it's more difficult it becomes. So, I think right now we are focusing then on the end of this year and the full 2020 outlook here as we have reinstated the guidance for the remaining months here.

Fair enough. Thank you.

Thank you. And your next question comes from the line of Emmanuel Rosner from Deutsche Bank. Please ask a question.

Thank you very much. Your updated guidance suggests a very strong revenue growth rate as we exit 2020. You have mentioned that some of the launches in the fourth quarter were expected to be strong and potentially exceed close to double-digit growth. Can you provide any insights? Are you observing a general acceleration, or is the concentration in the fourth quarter just a matter of timing?

No, I would say generally not. I think it's followed the base assumptions that we went into this year with that our full year outperformance around 6% and that's what we're reconfirming here. We have also said from the beginning here that it would be backend-loaded in the year. And we have not really seen any delays in launches either despite this very volatile time. So, of course, there are ones or twos here and there that slide a little bit. But I would say that's also happening in a normal year. So, nothing exceptional there. So, bottom line is that it's following the original outlook for the year here and beating around 6% outperformance.

Okay. Great. And then second question around your order intake. So you said I guess it was as expected a little bit on the software side in the third quarter. The fourth quarter would be more than half of the year. If I remember well in the first half, you had said that it was flat year-over-year in dollar terms despite obviously meaningful decline in production. So putting it all together, it feels that your order intake for the year could be up quite a bit on a full year basis versus 2019. Is that correct? Is that consistent with your initial expectation? And what does that mean for your mid-term growth profile?

Yes. We haven't given any specific guidance on order intake for the year. I think the working assumptions that we have said is that the market share that we are growing into is what we intend to defend in outer years here. Then in terms of new order intake specifically in quarters and specific years may fluctuate a little bit of course as they always do because it's not a straight line in terms of activities from the OEM side. And I would say that as far as we have communicated this year and we will come back to the exact win rate when we close 2020 here. But what we've indicated here is that in terms of activities, we are still backfilling our order book, so we can continue to outperform the market here in the years to come.

Great. Thank you.

Thank you. And your next question comes from the line of James Picariello from KeyBanc Capital. Please ask your question.

Hi, guys.

Hi.

What are some of the offsets for next year regarding potential COVID-related costs and the unwinding of this year's temporary austerity measures? How should we understand the company's base incremental margin range and the structural cost savings on top of that? Are there any cost offsets that come to mind? Can you share anything to help clarify this?

I think it’s a little bit too early to make a bridge to 2021 here based on what I said earlier around the uncertainty in the market to start with, but also that it's not until the beginning of next year we will give guidance on where we think we will end up, but in 2021. But what I can say here is that, I mean, our focus here is of course to manage through this crisis as effectively as possible. And I think the whole organization here has shown the strength in terms of street cost control managing the liquidity. And of course, with that also making sure that we carry as much as possible into the sustainable part here of course. But when we also move further into the recovery here, the immediate harsh stops I would say when it comes to cost control and so on of course, will readily fade out. But with that said, we also have a very strong focus inside the company every day here to make the company leaner and more effective as we move forward. And also on the strategic side, the road maps we laid out in the Capital Markets Day last year, leading up to our ambitions here in outer years is still ongoing. So it’s all hands on deck to deliver on those. Then of course, under these circumstances, we need to find in some cases new ways of working around that, but there is a full agenda around that. So, as long as we see end market or light vehicle production here that holds up, we believe that 2021 should be a good stepping stone towards our mid-term targets.

Got it. Is there any quantification around the German plant closure, the savings, and the timing related to that move?

No. What we presented is that the reserve we took is around $30 million, which pertains to approximately 200 employees, and that production will conclude around 2023. However, that's all we would like to disclose on that matter.

As you know, we have a footprint review as a part of the strategic road maps. And we are not communicating a big package here. We communicate when we have decisions and when we move forward on it. So what we communicated now in connection with the Q3 was one of those decisions. And if and when we have more, we will come back to that. But it's an area for our long-term strategy here.

Got it. Thanks, guys.

Thank you. And the next question comes from the line of Brian Johnson from Barclays. Please ask your question.

Yes, I have two questions. First, I'm interested in the issue of cost reduction, and second, I have a more strategic question. Regarding cost reduction, there was a $30 million improvement in operating income year-over-year. I understand you're not providing guidance for 2021, but if we consider the balance between fixed and variable costs, how much of that improvement is likely to reverse since it's primarily a temporary measure?

No. We haven't broken it down. And I think it's in large I would say, of course, the majority of it will come back. Yes, we get into a more normalized situation when you look at the total number. And I mean, we flexed out very, very hard the workforce here, when we had to basically come to a halt in April here. Now when we're coming back here and the volumes are increasing again, and as we also taking market share here, we need to backfill that and get the people back. So it has been a challenging quarter in that regard when we had such big fluctuations. But when you get into a more stable situation, the majority will for sure come back here. But I would say right now for sure in Q3, we have not been able to run the whole operation effectively either. So at the same time we have strict cost control and strict control over our cash here. That is of course an efficiency in the whole volume swings here and also the extra measurements for the COVID-19 situation as well. So it's difficult to give you a complete breakdown on that. And I think I just referred to my answer earlier here that it's all hands on deck to drive towards our midterm targets.

Correct. Second question.

Fredrik have a take on that.

You've seen that we have an effect about $15 million from the structural efficiency program. So that's broken out. And then also…

Okay. So that's very difficult.

And the cost structure, I think you can assume that it's fairly close to a normal structure, again, also now for the third quarter.

Okay. And second question, you did flag the two BEV key launches as well as EV variants. Is there anything in the seatbelt airbag world that's materially different between an electric vehicle and a similar-sized light vehicle in terms of your CPV and/or your competitive position?

No. I would say the increasing electrical vehicles is neutral to positive for us. At the starting point, it's the same type of products then of course weight and noise become increasingly important in electrical vehicles, so it tend to be quieter and more silent inside the vehicle. So that is very, very important. Then we have also additional progress going in like the power safety switch, which is a feature where you cut the battery source in the event of a crash, so that's an additional product coming into electric EVs, so neutral to positive for us.

And in terms of your competitive position you have two or three very strong competitors; are they showing up at the EV bids as well? And is there any difference in your win rate on EVs versus the broader traditional product lines?

They are certainly involved in electric vehicles, so the products are essentially similar at the outset. In terms of our market position, we are also well represented in the EV sector in connection with that.

Okay. Thank you.

Thank you.

Thank you. And your next question comes from the line of Joseph Spak from RBC Capital Markets. Please ask your question.

Thank you, everyone. I want to get back to some of the performance this quarter because I know you mentioned between SEP 1 and 2, I think it was a $15 million year-over-year benefit. But your direct workforce, I believe actually increased year-over-year on similar sales levels. So it would seem to suggest there's some efficiencies there as well. And I was wondering if you could provide any sort of additional color as to sort of what else sort of drove some of the improved performance in the quarter?

Yeah. I think it's basically list or what we try to describe also in the bridge that we have a favorable impact on, say productivity on the material side to a larger extent. And then to some extent also on the personnel side, but it's more on the production overhead than direct labor. There we still have inefficiencies, due to the COVID-19 restrictions we have in the operations. And then the other component is of course that we still are benefiting from lower discretionary spending, which has continued from the second quarter into the third quarter, which should also carry forward to some extent also into the next quarter but with a – to a lesser extent.

Okay. Thank you. And then the second question is there's been some news about a competitor potentially facing a seatbelt recall. Is that a potential opportunity for you to help out the industry like with the inflator situation?

I mean, the seatbelt is of course a big part of our portfolio and we are always there to support our customers. But in relation to this, I have no specific comments or insight into that. And I think it's early days there as well.

Thank you. And your next question comes from the line of Rod Lache from Wolfe Research. Please ask your question.

Thank you. A few things. One is just typically the Q4 exit rate of revenue outperformance says something about the subsequent year, just as your backlog for the new model year kicks in. And of course next year, regional mix could be pretty good, if Europe and North America accelerate more than China. Are there any offsets or things that we should be keeping in mind? I know that you're not providing guidance for next year, but just at a high level anything that you would want to mention is a potential offsetting headwind?

No. I think – no, I have nothing specific to comment. As I said, I mean, we don't go into the details for 2021. I think, it's early days also. But I mean, I think we have in last year laid out what we believe are our expected average growth rates going forward here and outperformance. So, I think that's still standing. And of course, with the regional swings that you have seen in this year, and when that normalizes you mathematically get a reverse effect of that also. So on top of that, I would say, there is nothing additional to the equation.

Okay. And then the savings on slide 13, I just was hoping you can clarify Program I and Program II was $10 million and $5 million in Q3. And then for 2021 you expect $10 million plus $25 million step-up from the Program II and plus maybe some benefit from incremental footprint reductions. Am I reading that correctly? And maybe you can just also reference that the original plan where you laid out 300 basis points of margin improvement to get to 12%, about 100 basis points of that was structural savings. To what extent are these any of these incremental to what you had originally contemplated?

No. I believe the foundation we see for future opportunities is related to the discussions we had last year. Everything we are doing now is part of the overall process of managing our regular business operations and enhancing efficiency and productivity across the company. Regarding your question about our regional progress, it is not an addition to what you were asking about; it is indeed part of that.

Okay. And just lastly just a minor issue. It looks like mathematically you're expecting Q4 EBIT to increase by something like $26 million and on a revenue increase of something like $186 million. And it looks like even just factoring in the FX changes it's less than the 30% normal incremental. Is this just the unusual cadence of Q4 true-ups and recoveries or anything like that that would be affecting that, or am I getting something wrong?

I don't think this Q4 is particularly exceptional compared to previous Q4s. The full year guidance we provided is based on our current understanding. While there are uncertainties related to COVID-19, I would say the situation is concerning but not severe just yet. We need to monitor the situation to see if there will be any impact, but with the information available to us, this is our best prediction.

Okay. All right. Thank you.

And there’s nothing other than that.

Thank you. Your next question comes from the line of Ryan Brinkman from JPMorgan. Please ask your question.

Hi, great. Thanks for taking my question. Just given the faster pace of recovery in the industry here your reduction in net debt. Do you have any updated thoughts here on capital allocation? I did hear you say that you aim to improve both EBITDA and net debt in the near future. Are there any particular milestones whether in terms of your own net debt or leverage or macro or industry sales figures, et cetera, that the Board may be looking to before reinstating the dividend?

I would say that there is no specific triggering point here. I think it's like we have always said here that our ambition here is to have a pragmatic view on how to and when to return to more normal dividend situation here. I think it's still too early. The uncertainty is still very high as a result of the COVID-19, and it's a question for later date, but it is a question about where are we in terms of stability in the industry and what we think about our own performance going forward from that point on. So we have to come back to that when we have come through this immediate COVID-19 crisis here, but that's where we are right now; it's too early.

Okay. Thanks. And then I realize there have been several questions sort of around this but looking at that 110 basis point improvement attributed to operations on the margin bridge. It would be great if you just sort of speak to what you think kind of the underlying sustainable progress is there, let's say, that there's a vaccine between now and 3Q 2021 such that you no longer have these inefficiencies and direct costs stemming from COVID. You retain some portion of your savings and you cycle past some of the austerity measures. What do you think would be wise to model now if you thought the virus is going away by the third quarter of next year in terms of operations going forward?

I think it's a lot of ifs and buts, and answering that question becomes very hypothetical if I go into details. Additionally, we are not discussing 2021 yet. I want to emphasize what I said earlier: if we have a stable and reasonable market, a healthy market for 2021, we should view that as a stepping stone toward our mid-term targets. However, it's challenging to predict anything more than that given the current high level of uncertainty.

Okay. I see. Thank you very much.

Thank you. And your next question comes from the line of Erik Golrang from SEB. Please ask your question.

Thank you. Two questions from my side. If I read it correctly, your overall volumes were slightly down in the third quarter yet organic growth was positive. So is that a mix factor or has there been any change in pricing development? Then the second question returning to a topic discussed, but could you just help us out what the big swing is Q3 into Q4? Clearly higher organic growth expected in the fourth quarter yet a much more muted year-on-year margin development. What's happening between Q3 and Q4 for you to give that outlook? Thanks.

So maybe Fred, you can take the second question there.

Yes, okay. So can you repeat the second question again, please?

Yes, we have discussed this before, but you mentioned a flat margin development in Q4 year-on-year despite significantly higher organic growth compared to Q3. What is the major factor causing such a substantial shift from Q3 to Q4?

Okay. Yes. Assuming that the volumes align with our predictions, we expect to reach a more normalized operating level. The savings from a reduced discretionary spend are likely to continue, but we anticipate a smaller benefit in the fourth quarter compared to the third quarter. Additionally, we've experienced a net positive impact from COVID-19-related costs and the subsidies received, which has also been beneficial due to the timing of the recovery of these subsidies. Both of these factors will diminish. Furthermore, our plants are still not operating at optimal and efficient levels. These are the main components to consider regarding the factory and the leverage for the fourth quarter.

Okay. Thanks.

It's a mix effect coming through there. So there's no changes to the pricing.

Okay. Thank you.

Thank you. And your next question comes from the line of Sascha Gommel from Jefferies. Please ask your question.

Yes, good afternoon. Thanks for taking my questions. The first one would actually be on your margin again. I think historically you said that in phases with a very high number of ramp-ups you tend to have a bit of a margin dilution. Now we see that you have a lot of ramp up or a lot of high-volume model. Should we think that as a quality sign for your order book that you have a very healthy order book with very high profitability and the historic comparison doesn't really fit here?

No. I think it's always challenging to adjust the system during a ramp-up. This quarter has had many simultaneous developments. Additionally, there haven't been as many launches as in previous quarters, which we expect to ramp up in the later part of the year, especially in Q4 rather than Q3. There are no changes to the typical scenario where performance during the ramp-up phase is generally lower than when programs are fully mature. So, that remains unchanged. Regarding the health of our order book, it ties in more with the mix of products and platforms rather than suggesting a short-term analysis of Q3 should be interpreted differently.

I see. And then my second question, the reduction in inventories, is that a reflection that your OEM customers are less volatile in their behavior and you think you can run a bit more efficiently? Is that the right interpretation?

It is definitely a much more stable environment now as we come out of the third quarter compared to the beginning of the quarter. We have a better ability to operate with more efficient inventory levels at the end of the quarter than we did at the start. You can see improvements in inventory turnover rates both compared to the previous quarter and year-over-year. This has significantly improved over the last couple of months.

And do you think that there's further room, or is that the level where you think you can hold it relatively speaking obviously?

I think for the moment, I think we believe this is a healthy level. We still have suppliers that are distressed. And it's not going to weigh yet, say, the issues that we have in the supply chain. So for the time being, we think that this is a healthy inventory level that we operate on considering the risk in the entire supply chain.

Appreciate it. Thank you very much.

Thank you. And your last question comes from the line of Victoria Greer from Morgan Stanley. Please ask your question.

Afternoon. Can you hear me okay?

Yeah.

We hear you. Hi, there.

Great. And just two questions please. Firstly, thinking about CapEx for 2021, should we think about any delayed spending that you might need to come back to there? Probably if you could thinking about that in absolute terms would be helpful given that there's a bit of volatility obviously around sales expectations. And the second one, are you seeing any disruption as the restrictions increase again for COVID, particularly in Europe? I think you said that actually things are okay right now, but do you see anything coming down the track there that we should bear in mind? Thanks.

Thank you. Let me take the last question first, and then I'll hand over to Fredrik to comment on the CapEx. I mean, as you say, I mean, we see some restrictions coming into play here in Europe. But, so far nothing is impacting what we can see in our supply chain here or in our customers. So far so good, but we remain very active and vigilant here to take any measurements or actions necessary if that would come into play. And I mean, we have maintained our task force here to review, for example, on almost a daily basis here our supplier base and the freight lines here. So we are well prepared to take that on. But, so far so good.

On the CapEx side, I mean we have now as you see in the third quarter, a higher investment level than the second quarter, and you should expect that also to continue into the fourth quarter. I mean, our ambition is to over time get the CapEx to sales ratio below 5%. But specifically for 2021, I think we will come back to that specific guidance when the time is right for that.

So probably not to think about below 5% for 2021 at this point?

I think we will give that guidance when the time is right.

Great, thank you.

Thank you and you can please continue. We're not taking any more questions.

Thank you very much, Nadia. So let me just say that before we end today's call, I would like to say that we are operating from a position of strength in terms of liquidity, flexibility and dedicated employees. And we will continue to improve efficiency optimize our footprint and implement our strategic road map to support next year being a solid stepping stone on the journey to our 2022-2024 targets. Our fourth quarter earnings call is scheduled for Tuesday, January 26, 2021. And thank you everyone for participating in today's call. We sincerely appreciate your continued interest in Autoliv and until next time stay safe.

That does conclude our conference for today. Thank you for participating. You may now disconnect.