Autoliv Inc Q4 FY2021 Earnings Call

Welcome to the Q4 2021 Autoliv, Inc. Earnings Conference Call. Throughout the call, all participants will be in listen-only mode. And afterwards, there will be a question-and-answer session. I’ll now hand the floor to VP of Investor Relations, Anders Trapp. Please begin your meeting.

Thank you, Mark. Welcome, everyone, to our fourth quarter and full-year 2021 financial results earnings presentation. On this call, we have our President and Chief Executive Officer, Mikael Bratt; and our Chief Financial Officer, Fredrik Westin; and me, Anders Trapp, Vice President, Investor Relations. During today's earnings call, our CEO will provide a brief overview of our quarterly results, as well as provide an update on our general business and market conditions. Following Mikael, Fredrik will provide further details and commentary around the financials. We will then remain available to respond to your questions. And as usual, the slides are available at autoliv.com. Turning to the next slide, we have the Safe Harbor Statement, which is an integrated part of this presentation and includes the Q&A that follows. During this presentation, we will reference some non-U.S. GAAP measures. The reconciliation of historical U.S. GAAP to non-U.S. GAAP measures are disclosed in our quarterly press release available on autoliv.com and in the 10-K that will be filed with the SEC. Lastly, I should mention that this call is intended to conclude at 03:00 PM Central European Time. So please limit to 2 questions per person. I now hand it over to our CEO, Mikael Bratt.

Thank you, Anders. Looking at the next slide. First, I'd like to thank our team once again for their unrelenting commitment in maneuvering through these challenging times. I would especially like to thank our colleagues in the Philippines who successfully restarted our operations after the devastating typhoon that hit the Philippines in December. All of our employees are safe. We experienced a rising number of COVID cases resulting in a high number of absences in our operations. We have managed this without any real effects on our business. The supply shortage of semiconductors and other components continued to impact the light vehicle production in the quarter. It led to a fourth quarter global light vehicle production decline of 13%, according to IHS Markit. Component availability improved somewhat towards the end of the quarter. Markets with high safety content per vehicle were the most negatively affected. Light vehicle production in the important markets of Western Europe, North America, and Japan combined fell by more than 20% compared to a year ago. The impact from higher costs for raw materials amounted to close to $60 million in the quarter, and we expect to continue to see substantial headwinds from raw materials also in 2022. Given all of that, I'm pleased that we reached our latest guidance for 2021 with organic sales growth of around 8%, adjusted operating margin of 8.3%, and operating cash flow of $754 million. Also, I'm happy to report that we estimate that the order intake share was 50% in 2021, supporting our growth target and an increasing market share. Despite the challenging environment, our cash flow was solid, both in the quarter and for the year. Our debt leverage ratio remains well within our target range. We paid a dividend of $0.64 per share in the fourth quarter, which was 3% more than in the previous quarter. Looking now at the financial overview on the next slide. Our consolidated net sales of $2.1 billion were 16% lower than in Q4 2020, mainly due to lower global light vehicle production. The adjusted operating income, excluding costs for capacity alignment fell from $311 million to $177 million. The adjusted operating margin was 8.3% in the quarter. The lower operating margin was a result of lower sales, rising costs for raw materials, and currency effects. Operating cash flow was a solid $317 million despite the challenging environment. Looking now at order intake on the next slide. Our order intake share for the full year continued on the high level, supporting our growth in the coming years. This is strong evidence that our company is the leading company in the passenger safety automotive industry. It shows that we have managed well when launching previous years high order intake. One of our key performance indicators, customer satisfaction, has continued to improve and is at a high level. However, this does not mean that we can relax. We always strive for improving products, services, processes, and cost. We estimate that we booked 50% of available global order value in 2021. We received high win rates with all product types, including front center airbags and hood lifters for pedestrian protection. We are also proud that we were successful in winning many contracts with new pure EV makers. Our strong order intake and current customer satisfaction makes us confident regarding our midterm sales targets communicated at our Capital Markets Day last November. Looking at the next slide. Our sales in the quarter came in lower than expected, with all regions disappointing, except China. This is in contrast to the changes in light vehicle production reported by IHS Markit during the quarter. This suggests that there might have been an element of pull forward of our sales from the fourth to third quarter, contributing to the lower than expected outperformance. In China, we did see some improvements in production volumes towards the end of the quarter, supporting our sales. As a result of declining light vehicle production, our fourth quarter sales declined organically by almost 16%. This was 3 percentage points worse than the light vehicle production according to IHS Markit. The regional mix indicates a negative mix impact of close to 3 percentage points in the quarter. Markets with higher safety content per vehicle declined significantly more than low safety content markets. We see the sales underperformance as temporary and we expect sales to substantially outperform light vehicle production in 2022. Based on the latest light vehicle production numbers from IHS Markit, we underperformed in North America by 4 percentage points and in China by 3 percentage points. In China, the main reason for the underperformance was that production of high-end vehicles declined by 10%, while production of low-end vehicles grew by 2%. Regarding North America, our sales during the quarter showed a very different development compared to what IHS Markit reported. This difference can partly be explained by a possible pull forward of our sales from the fourth to the third quarter. We outperformed in Japan, Europe, and the rest of Asia, by between 1 and 4 percentage points. We are confident of a solid outperformance in 2022 in all major regions. On the next slide, we can see some key model launches from the fourth quarter. For the full year 2021, we set a new company record of product launches. We also set a new fourth quarter record. The models shown on this slide have an Autoliv content per vehicle from approximately $200 to almost $450. Five of these vehicles are either EVs or plug-in hybrids, further extending our exposure to this growing market. The long-term trend to higher content per vehicle is supported by the introduction of front center airbags, active seatbelts, and knee airbags on both driver and passenger sides. I will now hand it over to our CFO, Fredrik Westin, who will talk about the financials on the next few slides.

Thank you, Mikael. This slide highlights our key figures for the fourth quarter of 2021 compared to the fourth quarter of 2020. Our net sales were $2.1 billion, which was a 16% decrease compared to the same quarter last year. Gross profit declined by 27% to $368 million, while the gross margin decreased to 17.4%. The gross margin decrease was primarily driven by the lower sales, higher raw material costs, and negative FX effects. In the quarter, capacity alignments had a $3 million negative impact on the operating profit. The adjusted operating income decreased to $177 million from $311 million. As a result, the adjusted operating margin declined to 8.3%. The operating cash flow was $317 million. Earnings per share diluted decreased by $0.84, where the main drivers were $1.04 from lower adjusted operating income, partly mitigated by $0.10 from financial items, $0.06 from lower tax, and $0.05 from lower capacity alignment. Our adjusted return on capital employed declined to 19.1%, and adjusted return on equity to 17.5%. We declared and paid a dividend of $0.64 per share in the quarter, $0.02 more than in the previous quarter. Looking down on the adjusted operating margin bridge on the next slide. In the fourth quarter of 2021, our adjusted operating income of $177 million was 43% lower than in the same quarter last year. The fourth quarter in 2020 was exceptionally strong, with a record adjusted operating income of $311 million, fueled by the rapid recovery of light vehicle production, coupled with a very lean cost structure on the back of earlier shutdowns in 2020. Cost per vehicle was $55 million lower than Q4 last year. The impact of raw material price changes was a negative $60 million in the quarter year-on-year. Foreign exchange impacted the operating profit negatively by $50 million, mainly as a result of the fall of the Turkish Lira. Support from governments in connection with the pandemic was $3 million lower in the fourth quarter compared to last year. SG&A and R&D net of government support was $3 million higher, mainly due to lower sales but also high call-off volatility and cost inflation, for instance, related to districts and utilities that impacted our operations negatively in the quarter. Excluding foreign exchange raw material cost increases and governmental support, the adjusted operating income leverage was approximately 28% of the organic sales declining. The 28% decremental margin is at the high end of our communicated normal range, impacted by unpredictable customer call-offs, and the fact that the fourth quarter 2020 was exceptionally strong. Looking on the full year 2021 sales performance on the next slide, I'm very pleased that all regions showed organic sales outperformance in 2021. This was achieved as we continued to execute on our strong order book. In North America, we outperformed by 5 percentage points and in Europe by 12 percentage points. In China, we outperformed by 7 percentage points, despite high-end vehicles being more affected by the semiconductor shortage. The 7 percentage points outperformance in Japan was substantially higher than in previous years. Looking now on the next slide, our key figures for the full year 2021. 2021 was again a turbulent year, with significantly lower light vehicle production than expected in the beginning of the year, mainly due to shortages of semiconductors. Our net sales were $8.2 billion, with sales increasing organically by 8%, in line with the latest guidance, despite light vehicle production being virtually flat year-over-year. The adjusted operating income increased by 42% to $683 million. The adjusted operating margin was 8.3% compared to our latest guidance of around 8%. The operating cash flow was $754 million compared to the guidance of around $700 million. And earnings per share more than doubled to $4.96. Lastly, dividends of $1.88 were paid. Looking now at the cash flow on the next slide. For the full year of 2021, operating cash flow decreased by $95 million to $754 million compared to last year, as the higher net income was more than offset by changes in working capital. For the fourth quarter of 2021, operating cash flow decreased by $152 million to $317 million compared to the same period last year, mainly due to lower net income and less positive effects from deferred income taxes. Compared to prior quarters, working capital improved by $116 million, benefiting from an $89 million change in trade working capital. This was mainly a result of a $145 million reduction of inventories and $68 million from increases of accounts payables, but partly offset by $124 million from increased receivables. The decrease in inventories was a consequence of improving light vehicle production volatility and measures taken to normalize inventory levels. For the full year 2021, capital expenditures increased by $114 million, which mainly reflects that the level in the prior year was still low due to the pandemic. In relation to sales, capital expenditures net was 5.5% in 2021 versus 4.6% in 2020. For the fourth quarter, capital expenditures increased by 38% to $153 million. Net capital expenditure in relation to sales was 7.2% compared to 4.4% a year earlier. For the full year 2021, free cash flow was $300 million compared to $509 million a year earlier, driven by the lower operating cash flow and higher capital expenditure. In the fourth quarter of 2021, free cash flow was $164 million, also impacted by lower operating cash flow and higher capital expenditure. The cash conversion for the full year 2021 was 69%. Now looking at our leverage ratio development on the next slide. In the past two years, we have managed a very difficult market environment with significant declines in light vehicle production, raw material price increases, low demand visibility, and severe disruptions of global supply chains. Still, we have reduced our net debt by more than $750 million since mid-2019 and thereby recovered to a balance sheet position that is in line with our targets. The leverage ratio at the end of December 2021 was 1.2 times, a significant improvement since the peak of 2.9 times in 2020. In the quarter, our 12 months trailing adjusted EBITDA decreased by $140 million, approximately balanced by the net debt decrease of $148 million. Now looking at the raw material development on to the next slide. Supply-demand imbalances continue to drive prices of raw materials higher during the year. Cost increases for raw materials generated a headwind of $60 million or 3 percentage points to our operating margin in the fourth quarter. In 2021, we limited the impacts from raw materials to around 130 basis points or around $105 million, of which $100 million came in the second half of the year. For the full year 2022, we expect raw material costs to amount to around 3 percentage points in operating margin headwind, with around 5 percentage points year-over-year impact in the first half, and around 1 to 2 percentage points in the second half. Given this exceptional period of high raw material prices, we believe that customer recoveries will offset some of these expected raw material cost increases. It will take time to see the results of these efforts. We do not expect to see much result until the second half of 2022. For commercial reasons, we will not discuss the anticipated recovery or its nature at this time. On to the next slide. Through a number of actions, we have mitigated some of the negative effects from lower sales and cost inflation during 2021. These actions include activities such as adjusting production, shortening workweek hours, and furloughing personnel. This includes, for example, footprint and capacity alignment in Europe, as well as moving overhead functions to best cost countries in the Americas. We have also initiated further footprint adjustments in Japan and in the rest of Asia. In total, we have reduced headcount by over 8,000 since the beginning of the year, of which 1,400 were in the fourth quarter. Other strict measures include management of inventories and payables, negotiating with suppliers and customers to mitigate impacts of raw materials and high call-off volatility. Our supply chain management teams have been working hard to balance inventories to actual demand. During the quarter, production planning accuracy improved from November, as customer call-offs are more stable than before. This concludes 2021. Now switching to '22. I hand it back to Mikael.

Thank you, Fredrik. Looking now at light vehicle production development on the next slide. For the first three quarters of 2022, global light vehicle production is expected to remain on a similar level as we saw in Q4, at just below 20 million units per quarter. This level should be achievable, assuming no further iterations or disruptions in component availability. In North America, the industry continues to struggle to meet consumer demand for new vehicles due to the shortage of semiconductors. The inventory of new vehicles in the US ended December around 1 million units, the lowest level seen for at least 35 years. Despite healthy underlying demand trends in Europe, component shortages meant that registrations have not returned to the pre-pandemic level. This has led to record long waiting times for new vehicles. In China, we saw a rebound in December for light vehicle sales indicating an easing of semiconductor chip shortages. As component availability appears to be improving somewhat, we expect the good demand and low inventories to support the recovery in light vehicle production in 2022. IHS Markit expects that the global light vehicle production will be around 80 million units in 2022, a 9% increase over 2021. However, we still see the component availability as a limiting factor for the recovery. We expect a positive regional mix, as most growth is expected to come in high content per vehicle markets, such as Western Europe and North America. Where possible, OEMs will likely continue to prioritize production of vehicles with no or low CO2 levels, as well as larger vehicles. Turning to the next slide. Here you see some of the key models supporting the strong sales growth and outperformance we expect for 2022. These models are expected to account for a quarter of organic sales growth during the year. Most of these models were launched in 2021, some are yet to be launched, including the Chevrolet Silverado. New steering wheels on several new and existing Mercedes vehicles are also to be launched. Our content per vehicle on these 12 models is in the range of $140 to $400. According to IHS Markit, global light vehicle production in 2022 is expected to increase by approximately 9% with a positive regional mix for Autoliv. The mix is expected to provide 2 to 3 percentage points of growth over the market. We also expect content per vehicle growth of around 2%. We foresee substantial sales outperformance in all major regions in 2022. Japan and China are expected to be the markets for us with the highest outperformance, followed by Europe and North America. Backed by these recent product launches, strong rebound in global light vehicle production, and the positive regional light vehicle production mix, we expect sales to increase organically by around 20%. Looking to our expected margin development for 2022 on the next slide. Our strategic initiatives continue to yield good results. We are confident in our 2020-2024 targets. In 2021 we reduced headcount by 11% and we will continue strict cost control in 2022 as previously outlined by Fredrik. This includes executing on capacity alignments, footprint optimization, strategic initiatives and customer recoveries, partly offset by cost inflation from wages, logistics, and energy. The expected same increase should bring strong margin improvements support, while rising raw material costs are expected to amount to around 3 percentage points in operating margin headwinds with a significantly larger year-over-year impact in the first half. We expect customer recoveries to offset some of these expected raw material cost increases, mainly in the second half of the year. This would lead to an improved adjusted operating margin for the full year 2022 of around 9.5% compared to 8.3% in the prior year. Our adjusted operating margin outlook may still be impacted by supply chain disruption in the automotive industry and potential risk of surging COVID cases and its effect on us and the automotive industry. Looking at the detailed indications on the next slide. Our full year 2022 indications exclude costs for capacity alignment, antitrust-related matters, and other discrete items. Our full year indication is based on light vehicle production growth assumption of around 9% compared to 2021. We expect sales to increase organically by around 20%. Currency translation effects are assumed to be around 3% negative. We expect an adjusted operating margin of around 9.5%. Operating cash flow is expected to be around $950 million. Turning the slider to look at our 2022 priorities. The health and safety of our employees is our first priority, while continuing with more activities to further improve efficiency. We will also continue our efforts for flawless execution of new launches, improving customer satisfaction further and thereby supporting our new and stronger market position. Through our capital efficiency program, we aim to unlock capital from receivables, inventory, and payables for other uses. Combined with the execution of our strategic plan, this should lead to strong cash flow generation, which sets out to create attractive shareholder value. By executing on our strategic initiatives, footprint optimization, and negotiating compensations from OEMs, we will mitigate headwinds from raw materials and cost inflation. We also aim to grow mobility safety solutions, supporting our growth targets beyond 2024. I will now hand it back to Anders.

Thank you, Mikael. Turning the page, this concludes our formal comments for today's earnings call. We would like to open the line for questions. I'll turn it back to Mark.

Thank you. Our first question comes from the line of Emmanuel Rosner of Deutsche Bank. Please go ahead. Your line is open.

Thank you very much. I have two questions. The first one is about the revenue outlook. I was pleasantly surprised to see that you expect an 11% growth in the market for 2022, and I appreciate your confirmation that you're on track for the midterm targets. However, during the recent Capital Markets Day, you adjusted your growth expectation to just around 4 points a year on average. Considering the pace of your backlog and the new business you've secured, do you anticipate that the remaining period will fall below the average in the market?

Thank you for your question. I think at the Capital Markets Day, we did not lower the expectation; we actually increased it. As you remember in 2019, we talked about this 4% to 5% over the strategic raise, and now we have moved forward. We talked about the LVP outperformance for ’22, ‘23, and ‘24 to be LVP plus around 4%. So, when you compare those numbers, it's actually a little bit higher when you look at our latest update. So what we are saying here is that we are confirming the strong growth that we have as a result of the order book we have built over the last couple of years. So we have the right factors here going forward, and that is what you see in our guidance for 2022 here.

Okay, understood. Regarding the raw material challenges this year, which are somewhat offset by recoveries, it seems that earlier expectations had anticipated more clarity on commercial recoveries earlier in the year, perhaps even by the first and second quarters of 2022. Your recent comments suggest that clarity on this might come later than expected. Could you elaborate on what factors are contributing to this delay? While I understand you cannot provide specific quantifications, can you share if your expectations regarding the magnitude of commodity recovery have changed in any way?

No, I don't think there's any change to what we have thought or said previously. We did have already recoveries in 2021, but as we indicated, they were at lower levels, and then we expect not to have larger recoveries in 2022. Of course, on the smaller part of our business, where we are already indexed, those resets happened earlier during the year. So those recoveries will come in earlier. But the bulk of it will be based on negotiations, and they will have an effect more towards the second half of the year.

And just to be clear, is there some level of recovery on raw materials included in this 9.5% guidance?

Yes. So we were – I mean, the 3 percentage points headwind we're guiding for on the raw material side is the pure headwind we're seeing on the cost side. That is not net of any recovery; that's just a pure cost element. But if you look at the high level, the waterfall we're giving to get to the 9.5% even if you take, say, an average leverage on the incremental volume, you can also infer from that that there is a recovery assumption also baked into the 9.5%.

Perfect. Thank you.

Thank you. Our next question comes from the line of Hampus Engellau of Handelsbanken. Please go ahead. Your line is open.

Thank you very much. Two questions for me. First, just on the order intake, if you maybe could discuss a little bit on the drive this time, getting back to 50% of market share compared to 45% in 2020? And also if there's an element of – or how we should think about pricing in regards to stepping up in market share, again in orders? That's my first question. Second question is more related to semiconductor shortage. If I'm reading OEMs and looking at IHS, it seems like it’s reasonable to assume that there will be a similar semiconductor shortage in the first quarter as we had in fourth quarter and it will be interesting to hear your comments on that? Thanks.

Thank you, Hampus. We were pleased with our total order intake this year. Each year presents its own challenges, and while we don't set a specific market share target, we are committed to competing effectively. We believe our order book remains strong, and we're aiming for around 45% market share in the future, which is what we plan to defend. Ultimately, our focus is on maintaining a healthy business. Achieving 50% in one year and about 45% in another year isn't a clear-cut process, and market share isn't our main concern; rather, it's about ensuring our business remains robust based on our position in the market. Regarding the semiconductor shortage, we anticipate continued disruptions that will affect light vehicle production growth for much of 2022. It's hard to predict when the semiconductor issues will be resolved since demand is rising not only in the automotive sector but across industries. There's a need for semiconductor manufacturers to catch up, and that won't happen overnight. However, we believe we've reached a more stable situation overall, as we've seen reduced volatility and call-offs towards the end of the quarter. Still, growth is being constrained by semiconductor shortages.

Thank you.

Thank you. Our next question comes from the line of Victoria Greer at Morgan Stanley. Please go ahead. Your line is open.

Good morning, afternoon. A couple of questions for me, please. I want you to come back to your top line guidance, please. So production 9% in light vehicle production and based on IHS and then making it up to 20% with 1,100 basis points of outperformance. What I can think of, I guess, several factors that are probably additional to normal than just the new business, and that 1,100 basis points is a positive geographical mix. You mentioned content per vehicle growth of about 200 basis points. I guess some of that is coming from regional mix, some of it will be coming from new orders, and maybe there is an element of price increases in that top line guidance also. Could you talk us through, and I guess how much of that 1,100 basis points outperformance in 2022 is from these unusual factors, like the geographical mix? And how much of it is strictly new business?

Thank you for your questions there. I think you touched most of the components there when it comes to the outperformance. As you correctly said, the mix and content per vehicle on top of the light vehicle production growth stand for, I would say, two-thirds of the development here, and then the remaining part is really our growth as a result of the order book built there. So I think that's the short target. On the share buyback side, I think we have nothing to comment around that here. I mean, we have presented our buyback program here leading up to 2024 and we will take those steps towards that – we are still committed to that, but we will not have any pre-announcement on that. We will inform in due course here when we take the different steps towards that. But we are still, of course, fully committed to that, and we believe we have more to say when we have something to talk about.

Great. Thank you.

Thank you. Our next question comes from the line of Mattias Holmberg of DNB. Please go ahead. Your line is open.

Thank you. Sorry to get back to the – the 4 percentage point outperformance guidance for 2022 to 2024. But I didn't really understand the answers. So I would just like to get it clarified. With 4%, should we expect that you grow at least 4 percentage points faster also in 2023 and 2024 despite the much stronger outperformance now in 2022?

Yes. I mean, as I said here, we have indicated that there wouldn’t come in three years, ’22, ’23, and ’24 should have light vehicle production outperformance of around 4% per year. Then, of course, as it comes out here, it will not be a linear development and we have only guided you here now for 2022. When it comes to ’23 and ’24 we will come back then.

I can also add a little bit. As you might have seen that we did not perform as well as we expected, our outperformance that we have expected in the fourth quarter largely due to negative mix of almost taking out 3 percentage points. We think that some of that negative mix will recover in 2022, which was not part of the original 4% per year growth over market or over light vehicle production as an average for ’22, ’23, and ’24. So therefore, it might be somewhat higher, actually combined compared to what we said, due to this mix effect that we now see positive in 2022.

Great. That's clear. Second one for me. You mentioned a 50% market share on order intake. Can you say what market share you had on sales, please?

We are not ready with that calculation yet. So it's more data required in order to conclude on that calculation. We have no update when it comes to what we will call the running portfolio market share.

And we're still waiting for competitors to report and some more market intelligence to conclude on those calculations.

Understood. Thank you.

Thank you. Our next question comes from the line of Rod Lache at Wolfe Research. Please go ahead. Your line is open.

Hi, everybody. On the commodities, your slide 14 charts on commodities looks like it ends in Q3. Steel looks like it's been coming down a lot since that timeframe; hot roll coil is now $1,100 or $1,200 a short ton. I'm wondering if that is reflected in your guidance and maybe you can just educate us a little bit on how that flows through? What kind of lag you typically experience? And if it stayed at spot levels, how does that factor into your 12% margin target?

Yes. I think it's a formatting thing than on the access; I believe it is Q4 that is also included in those developments. But you're right; I mean also during the first part of Q1 we've seen those trends on certain commodities continuing in a positive direction for us. The main impact that we see here for next year is continued headwinds on steel. That is based on how our contracts are structured and then the timing of how we grow those over, but then we also see an increased impact from non-ferrous metals, mainly aluminum and magnesium, but also yarn, especially we have polyester and polyamide or nylon will have a significantly larger impact in 2022 than it had in 2021. So, those are the main components of the raw material headwinds that we're seeing. The guidance is based on our contract structures, so the timing on when we have to roll these contracts over, and then also the price trends that we're seeing in the market. So they're not necessarily based on current spot price levels as we have indicated before. There are always time lags in how they roll into our contractual setup, and then also the duration of our contracts also plays a role. But it's our best estimate at this point of time how our current raw material price situation and trends will be reflected in our cost base. At the moment, we're working hard, both on operational efficiency, also value-added activities with our supply base and our customers, but also obviously on the commercial recoveries to ensure that we can still hit the 12% margin target that we have set out.

Okay. Can you provide an update on the status of the automation and digitization projects? I believe you previously mentioned $160 million in savings from these initiatives, including roughly $80 million from changes in our footprint. Additionally, R&D is expected to decrease by about 100 basis points over the next year or two. What should we be watching for in 2022?

Again, in the bridge or the waterfall chart that we're giving here for 2022, you can already infer from that that there are further improvements also included there from those activities. So we see that continuing automation and more operational activities with very shorter payback periods, and then footprint activities tend to have longer payback periods. It’s not such a significant component or impact on the second part on 2022. But those are the main components why we are able then to mitigate the effects from raw material headwinds that are quite significant at 3 percentage points and still be able to give a 9.5% margin target here for next year.

Okay, great. Thank you.

Thank you. Our next question comes from the line of Colin Langan at Wells Fargo. Please go ahead. Your line is open.

Thank you for taking my questions. I would like to follow up on the raw material inquiry. Could you remind us of the breakdown of your exposure by steel, non-ferrous materials, and nylon? I expect there might be a six-month lag in your contracts for spot prices. Does this suggest that steel could remain relatively stable in the second half of the year in terms of its impact? Any insights on how this operates would be appreciated.

Yes. On the commodity breakdown, steel is roughly 45% of commodity exposure. That is followed by textiles at around 20%, followed by resins or plastic inputs at around 15%, and then non-ferrous metals is between 10% and 15%, and then the others make up 5% to 10%. That's the composition we have. And then, as you said, we expect the majority of the headwinds on steel to be in the first half of the year. We had very limited impact in the first half of 2021 due to our ability to postpone the impact in our contractual setups. But now, as those contracts expire, we have to roll them over. We will see a significant headwind in the first half, and then, as you say, a much lower impact in the second half on steel.

Okay. So the second half is mostly the nylon and the non-ferrous type of stuff hitting?

Yes. The impact was $105 million this year, with almost three quarters of that coming from steel. For 2022, the 300 basis points are more evenly distributed among steel, non-ferrous, and textiles.

That's very helpful. And then just to follow-up on the growth over market, one of the things I struggle with is understanding product mix because 2021 seems like all the luxury holistic stuff like that were in favor, sort of help mix overall. How are you thinking about that in your guidance? Obviously, geographic mix makes total sense with North America and Europe outperforming. Have you factored in negative product mix, or do you think it's going to be steady this year? Just your thoughts there would be helpful. Thank you.

No. I mean, of course that's a part of our estimation here. I would say right now, there is growth in content per vehicle across the board; both the lower-end and premium vehicles have gradually increased. I think the gap between the lower and premium segments remains relatively consistent as they are both growing. So, I would consider this a minor factor when looking at the overall development of the industry. In a single quarter or month, there can be fluctuations based on specific models, but generally speaking, I would say the mix effect primarily impacts the regional side of things.

Okay. Thanks for taking the questions.

Thank you.

Thank you. Our next question comes from the line of Joseph Spak at RBC Capital Markets. Please go ahead. Your line is open.

Thank you very much. I have one more question regarding commodities. I want to clarify something because there seemed to be an assumption that the fourth quarter would represent the peak for raw materials, which seems more like a first-half scenario. When discussing these figures, such as the $105 million in 2021 or the 300 basis points in this fourth quarter compared to the 500 basis points in the first half, is there a distinction between gross and net? In response to Emmanuel's earlier question, you mentioned the 300 basis point impact for 2022 as a gross number. When you reference the actual results, is that also a gross figure or has it been netted?

No, it's the same basis.

It’s the same. Okay.

The risk or exposure related to commodities is not entirely reflected here; it would be higher if we were adjusting based on spot markets. The impact from raw materials would therefore be greater. We've already taken numerous mitigating measures that account for the 300 basis points this year and 130 basis points last year. This includes delaying price increases and switching suppliers. However, the recovery aspect from our customers is not factored in. As I mentioned before, we did experience recoveries in 2021, but we prefer not to disclose those figures due to ongoing negotiations for commercial reasons.

Okay, that makes sense. Regarding your comment about possibly seeing some pull forward from the third or fourth quarter, could you elaborate on that? It seems like you’re suggesting that some vehicles may have been shipped without being fully assembled due to missing components, which could have resulted in them being assembled in a later quarter. This might have caused a discrepancy when comparing it to production. Could you share more of your thoughts on this?

I mean, you are exactly right. But I think as I indicated here, we have had a very volatile 2021, especially Q3 where we had short-term changes to the production schedules. We believe that some of the material that was actually called off at the end of the day were going into vehicles that were produced later in Q4. So the whole volatility situation has made it a little bit more difficult to read here. As we have said here, the production numbers for Q4 is a little bit higher than on the light vehicle production side, a little bit higher than what activity we could see from our side here. So we believe that there is an effect of that, that some of the volumes in Q3 belong really to Q4 in terms of light vehicle production.

All right. Maybe just a quick follow-up. How do you see recent scheduled volatility, and is your expectation that the stability will improve as you move through the year?

We believe so. As we said towards the end of the quarter, we saw stabilization. When we look into 2022, we are not seeing anything that should indicate we have increased volatility. But, I mean, there are a lot of things going on in the world around us with raw material prices, energy situations, etc. So, we of course keep a very close eye on the development here, but no indications as of today that volatility should return.

Thank you.

Thank you, our next question comes from the line of Chris McNally at Evercore. Please go ahead. Your line is open.

Thank you, team. I have two questions regarding the overall pace of the production recovery. First, you mentioned a 50% share of orders, but I was surprised to see that the total number of orders this year has returned to 2019 levels. This seems to be happening faster than anticipated, especially since we don’t expect to reach pre-production levels for another year. Could you comment on the overall pace of industry orders? I understand you're satisfied with the 50%, but what can you tell us about the RFQs that are currently out there?

Yes, if I understand your question correctly, the order value on the RFQs we are winning is based on our customers' expectations for these different programs. I don’t believe you can compare it to 2019 in terms of production schedules. This is looking ahead, and some of these programs may go into production in 2024 and possibly beyond, but I would say more in the 2024, 2025, 2026 timeframe. There are different factors at play. I have no doubt about the strength of the underlying demand. We have a very strong demand driven by the fact that there is an older fleet out there that needs replacement. Production has been relatively low for several years, not due to demand but because of COVID, semiconductor shortages, and other material challenges. Availability is still an issue. Strong underlying demand persists, with pipelines in the US at record low levels; for example, we need to refill those pipelines significantly to reach normal levels. Additionally, there’s a shift toward electric vehicles, with strong consumer interest in new vehicles featuring new technology. Once the chip and material shortages are resolved, we anticipate a strong recovery.

Maybe one comment: we expect that the lifetime sales that we were quoting on to be even higher for 2021 at the beginning of the year. We've seen some projects being pushed out into 2022, but we do expect at the moment that 2022 will also be a step up from ’21 in terms of business that will be out for sourcing from our customers.

I appreciate the detail. And then maybe just a little bit more near-term question about recovery sequentially. I think on Slide 16 you talked about your next couple of quarters being relatively flat light vehicle production. I know that’s sort of what IHS has. But what's interesting is, we're hearing from some of the customers like Toyota; I think it's talking about April being 35% higher than February. Is there a potential that while Q1 seems pretty flat that by Q2, as we get out some of the COVID-related shutdowns that Q2 could be actually up sequentially? Some of the other forecasts are up 4% to 5% in Q1 to Q2.

No, I think you are referring to one customer here; it could very well be slow for various reasons. But as an industry, to the best of our knowledge, what we have described here today indicates that the main limiting factor is the availability of material. The data we have as of today shows that there are quicker step ups. However, as you know, our visibility does not extend very far in terms of call-offs.

Again, the underlying assumption for the full year is that Q1, Q2, and Q3 will be relatively flat versus Q4, so the industry should be able to hold up at those Q4 volumes and then see a slight increase sequentially into the fourth quarter this year.

I think we have time for one more question.

Thank you. And that will come from the line of Sascha Gommel Of Jefferies. Please go ahead. Your line is open.

Good morning, good afternoon. Thanks for squeezing me in. Two quick ones, actually. The first one is on working capital. You mentioned that you see further improvement potential. So I was wondering if you can give us a bit of scope and measures for the main working capital items that you see? And then secondly on the share buyback, again, more of a procedural question. Is it a management or a board decision like the dividend?

Yes. On the dividend, it's a board decision. As you know, we have quarterly dividends and those are decided by the board quarter by quarter.

And buybacks as well. Is buybacks a management decision?

Buybacks, we have a mandate from the board, and that is the mandate we have presented up to that level. So then it’s an operational question after that.

I appreciate it. Thank you.

Yes. And then on working capital, I think you can see that we did talk about during the Capital Markets Day how we're focusing, especially on accounts payables. If you look at the multi-year trend, you can see a significant improvement also into 2022. We are expecting that we will see further improvements from that year over the next few years. And then on inventory, I think we proved also here that in very challenging times, we were able to reduce inventory sequentially by almost $150 million, which also shows that we have a lot of focus and traction on those initiatives. We expect to see more going forward. We have a good setup for these improvements. I think we're well on track to get to $800 million that we've talked about with 2019 as a basis point.

Thanks.

So that was the last question.

Okay. Thank you very much. Before we end today's call, I would like to say that we are operating from a position of strength in many aspects, including market position, growth, and dedicated employees. Unfortunately, there will be millions of vehicle collections in 2022. Autoliv continues to focus on our vision of saving more lives, which is our key contribution to a sustainable society. Our first quarter earnings call is scheduled for Friday, April 22, 2022. Thank you, everyone, for participating in today's call. We sincerely appreciate your continued interest in Autoliv. Until next time, stay safe.