Autoliv Inc Q2 FY2022 Earnings Call

Welcome to the Q2 2022 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. Today, I am pleased to present CEO and President, Mikael Bratt. I’ll now hand over to VP, Investor Relations, Anders Trapp. Please begin your meeting.

Thank you, Cynthia. Welcome everyone to our second quarter 2022 earnings call. On this call, we have our President and CEO, Mikael Bratt; and our Chief Financial Officer, Fredrik Westin; and I am Anders Trapp, Vice President of Investor Relations. During today's earnings call, our CEO will provide a brief overview of our second quarter 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 the 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-Q 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 follow a limit of two questions per person. I will now hand over to our CEO, Mikael Bratt.

Thank you, Anders. Looking on the next Slide. I would like to start by thanking our employees for a good execution of our mitigating activities in the challenging quarter. We continued to experience tough lockdowns in China that affected the global supply chain and automotive industry, including many of our employees. Although the supply chain situation is improving currently, the automotive industry continues to battle with the semiconductor shortage, limiting global light vehicle production. Thanks to a strong ending of the quarter, our organic sales increased by 8% year-over-year according to IHS Markit. Our organic sales outperformed global light vehicle production by more than 7 percentage points. Our margins developed better-than-expected, despite raw material cost increases impacting our operating margin in the quarter by almost 6 percentage points and extensive inefficiencies from lockdowns in China. Our cost mitigation measures are on track to achieving price increases to compensate for higher costs for raw materials, labor, logistics, and utilities. Additionally, commercial compensation for previous periods and the patent litigation settlement together amounted to around $50 million in the quarter. In response to the ongoing challenging market conditions and to be prepared for possible future challenging conditions, we are strengthening our cost control measures and implementing other cost-saving activities. Mainly due to volatile and timing effects, adverse working capital development led to negative cash flow in the quarter. We expect to recover most of these effects in the second half of the year. The leverage ratio is 1.7 times. In the quarter, we paid $0.64 per share in dividends and repurchased $0.3 million shares under our three-year stock repurchase program. We continue to develop mobility safety solutions and announced a cooperation with POC to investigate the opportunities with integrating airbag technology into bicycle helmets. Looking at the rest of the year, we expect increased sales outperformance versus light vehicle production. It is our plan and ambition that our product price increases coupled with strict cost control measures will gradually offset the raw materials and other inflationary cost increases. Therefore, we expect a sequential margin improvement in the second half year, supporting a trajectory towards our mid-term targets. Looking now on the financial overview on the next Slide, our consolidated net sales of $2.1 billion was 3% higher than in Q2 2021. Adjusted operating income excluding costs for capacity alignments fell from $166 million to $124 million. The adjusted operating margin was 6% in the quarter, around 2 percentage points lower than last year. The lower operating margin was mainly a result of inflationary pressure, volatile LVP, currencies, and effects from lockdowns in China. Operating cash flow was negative $51 million, which was $114 million lower than the same period last year, mainly due to changes in working capital. Looking now on our sales growth in more detail on the next Slide. Although currency translation effects had a negative impact of 5% or $103 million, the second quarter consolidated net sales increased by almost $60 million to $2.1 billion. Retractory pricing contributed approximately $30 million, and price volume mix contributed $132 million or 75% to growth in the quarter. Looking at our organic sales growth per region in Q2 2022 on the next Slide. Our sales in the quarter came in lower than what we expected in the beginning of the quarter, due to light vehicle production in Japan, Western Europe, and North America disappointing. According to IHS Markit, global light vehicle production increased by less than 1% year-over-year in the quarter. This was 2 percentage points worse than expected at the beginning of the quarter, and the mix was worse than expected. Our second-quarter sales grew organically by 8%, which was around 7 percentage points better than global light vehicle production according to IHS Markit, despite the negative regional LVP mix. The organic sales growth was mainly driven by the large number of product launches in the Americas and Europe, as well as price increases. Based on the latest light vehicle production numbers from IHS Markit, we outperformed in Europe by 15 percentage points, in Japan by 10 percentage points, and in the Americas by 8 percentage points. In China, sales underperformed by 4 percentage points. The reason for the underperformance in China was mainly due to the mix effect from the production of low-end vehicles being less affected by the lockdowns. Supported by recent launches and a positive regional mix, as well as further price increases, we see sales outperforming light vehicle production substantially more for the rest of the year. On the next Slide, we see some key model launches from the second quarter. In the quarter, we had a high number of launches, especially in Europe and China. The models shown on this slide have an Autoliv content per vehicle from approximately $120 to more than $550. The long-term trend to higher CPV is supported by the introduction of high contents dealing with. 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 second quarter of 2022, compared to the second quarter of 2021. Our net sales were $2.1 billion, this was a 3% increase compared to the same quarter last year. Gross profit declined by 15% to $326 million, while the gross margin decreased to 15.7%. The gross margin decrease was primarily driven by raw materials, currencies, and the volatile and lower-than-expected light vehicle production. In the quarter we had virtually no additional provisions for capacity alignment activities and the adjusted operating income decreased to $124 million from $166 million. The adjusted operating margin declined to 6%. The operating cash flow was minus $51 million, and I will provide further comments later in the presentation. Earnings per share diluted decreased by $0.28 with the main drivers being $0.33 from lower adjusted operating income, partly mitigated by $0.04 from financial items. Our adjusted return on capital employed declined to 13% and the adjusted return on equity to 12%. We paid a dividend of $0.64 per share in the quarter, the same as in the previous quarter, and repurchased around 300,000 shares for $22 million under a three-year stock repurchase program. Looking now on the adjusted operating income bridge on the next Slide. In the second quarter of 2022, our adjusted operating income of $124 million was $42 million lower than the same quarter last year. The impact of raw material price changes was negative $115 million in the quarter year-over-year. FX impacted the operating profit negatively by $20 million as a result of translation effects due to the stronger U.S. dollar and transaction effects mainly relating to the Japanese yen and Korean won. SG&A and R&D net combined was $6 million higher, due to higher costs for IT and application engineering, as well as timing of engineering income. Our improved pricing and other mitigating activities largely offset these significant headwinds. Looking at the income development more closely on the next Slide. In the quarter, the operating profit was helped by income from a patent litigation settlement that amounted to $21 million. We also recovered around $30 million related to cost increases from earlier periods. Excluding the patent litigation settlement and retracted cost recoveries, the adjusted operating income was $73 million or 3.6% of sales. This was a notable improvement compared to the first quarter as customer pricing discussions and our strategic initiatives are yielding results. Looking closer at the cost recovery discussions on the next Slide. To support a sustainable business model in the current high inflationary environment, we continue to work intensively with customers to secure price increases to compensate for inflationary pressure and supply chain disruptions. We have made progress on cost recovery through sustainable price increases with most customers. In many cases, the new pricing is retroactive to cover costs incurred in earlier periods. However, we are still being impacted by inflationary cost increases, so the discussions and negotiations continue. We are also negotiating more flexible customer contracts to ensure that future inflationary pressures are effectively and more timely pushed through the value chain. Looking at the cash flow performance on the next Slide. For the second quarter of 2022, operating cash flow decreased by $114 million to negative $51 million, compared to last year, mainly due to changes in working capital and the lower net income. During the quarter, working capital deteriorated by $239 million. The steep ramp-up in sales and the fact that we concluded a rather large number of compensation negotiations towards the end of the quarter, as well as the patent litigation settlement had a temporary negative effect on working capital. In the second half of 2022, the timing of the customer compensations will support a more favorable cash flow development. In the quarter, the continued volatile light vehicle production and logistics challenges drove inventories higher. The inefficiency in inventory was in excess of $100 million at the end of the quarter. Our ambition is to eliminate these inefficiencies as soon as possible, which requires further stabilization of the supply chain and call-off patterns from our customers. For the second quarter, capital expenditures net increased by 44% to $139 million. In relation to sales, it was 6.7% versus 4.7% a year earlier. The increase is mainly related to the ongoing footprint activities and capacity expansion in China as part of our strategic roadmap. For the second quarter of 2022, free cash flow was minus $190 million, compared to minus $33 million a year earlier, driven by the lower operating cash flow and higher capital expenditures. The cash conversion over the last 12 months was around 30%. In the quarter we paid $56 million in dividends and repurchased shares for $22 million. Now looking at the leverage ratio development on the next Slide. In the quarter, we continued to repurchase shares and we maintained our dividend. The leverage ratio at the end of June 2022 was 1.7 times, this was 0.3 times higher than in the previous quarter as a 12-month trailing adjusted EBITDA decreased by $51 million and our net debt increased by $244 million. We see this as a temporary situation and we expect it to be back within the range later in the year. Now looking at the raw material development on the next Slide. We still experience volatile commodity markets coming from the Ukraine war, COVID-related lockdowns, and general inflationary pressure. It is encouraging that some commodity prices have decreased since March highs, especially metals. Cost increases for raw materials generated a gross headwind of $115 million or almost 6 percentage points to our operating margin in the second quarter. As expected, this was slightly higher than in the first quarter. In the current price environment, we believe that raw material costs before any customer conversations could be around 5.5 percentage points in operating margin headwind for the full year 2022. The situation is addressed through targeted actions and negotiations with customers as previously outlined. We're also stepping up cost-control measures as shown on the next slide. In response to the sharp increase in raw material prices and cost inflation, we continue with strict cost control measures, a hiring freeze, and accelerated cost savings and footprint activities. Additionally, we are reducing consultants and temporary employees, and we are reviewing and prioritizing projects. As a result of these activities, headcount is virtually unchanged year-over-year, despite substantially higher organic sales. We continue to execute on our capital efficiency program to improve trade working capital. We also focus on balancing headcount with expected demand. Now, switching to the market development, I hand it back to Mikael.

Thank you, Fredrik. Looking now at the LVP development on the next Slide. The second quarter light vehicle production was influenced by the ongoing component shortages and the COVID-related lockdowns in China. However, there are signs that the situation is improving and that the second quarter was the low point of this year. As inventories of new vehicles continue to trend at a record low level and strong OEM order backlogs, we believe the short-term light vehicle production development will depend on the industry's ability to build vehicles, not on the macro sentiment. We expect to see substantial year-over-year light vehicle production growth in Q3 and Q4 as the light vehicle production in the second half of 2021 was highly affected by semiconductor shortages, especially in the third quarter. However, total volumes are still expected to be well below the LVP level in the second half of 2020. Additionally, as most LVP growth is forecasted to come in high CPV markets, the regional mix is expected to be favorable in the second half of the year. Looking at LVP forecast in more detail on the next Slide. The auto industry continues to operate at or near recessionary levels impacted by supply chain challenges. For the third quarter of 2022, global LVP is expected to grow by over 20%, compared to the very weak LVP in the third quarter of 2021, according to IHS Markit. Sequentially LVP is expected to improve by 8%, compared to Q2 as the availability of automotive semiconductors is expected to improve. In North America, sales of new vehicles remain well below demand and well below sales a year ago. With dealer inventories remaining at historic low levels, the lockdowns in China affected North American production in the later part of the second quarter, and this situation is expected to improve gradually. For European production, we expect volume recovery as supply constraints continue to ease. In China, light vehicle production in June was up over 30% year-over-year as lockdowns were lifted and demand was stimulated by tax incentives. However, continued supply chain challenges limit the level of growth. Now looking at the 2022 business outlook on the next Slide. We expect higher sales outperformance versus LVP for the rest of the year, supported by launches, regional mix, and higher prices. We also expect improvements in the second half of the year from alignment of direct labor with LVP, footprint optimization activities, and a less volatile LVP. We expect this to lead to strong second half year profitability compared to the first half year. Looking at the updated full-year 2022 indications on the next Slide. Our full-year 2022 indications exclude costs for capacity alignment, anti-trust related matters, and other discrete items. We adjust our full-year indications to a tighter range reflecting our activities and the shorter time span remaining of the year. The updated indications assume that global light vehicle production will grow between 2% and 5%, and that we achieve our targeted cost inflation compensation plus some level of market stabilization. We expect sales to increase organically by around 13% to 16%. Currency translation effects on sales are assumed to be around a negative 5%. We expect an adjusted operating margin of around 6% to 7%, and operating cash flow is expected to be around $750 million to $850 million. Turning to the next Slide. In closing, to summarize our 2022 outlook, we expect continued strong outperformance versus LVP, supported mainly by product launches, increase in content per vehicle, and price increases. We expect to gradually offset much of the cost inflation in the coming quarters, putting us on a trajectory towards our mid-term targets, based on the framework outlined at our Capital Market day in 2021. Additionally, our balance sheet and cash flow should allow for continued shareholder returns. We remain mindful of the risk of deteriorating economic conditions, but I'm confident that our leading position and the work we have done to become more resilient and our experience and agility will enable us to manage future challenging conditions. I will now hand it back to Anders.

Thank you, Mikael. Turning to the next Slide. This concludes our formal comments for today's earnings call, and we would like to open the line for questions. So I now turn it back to you, Cynthia.

Thank you. Our first question comes from Mattias Holmberg from DNB. Please go ahead, your line is open.

Hello everyone, thank you for the time. My question is about the commercial recoveries, and I would like to know what we should expect moving forward. Is the level of $30 million in Q2 a reasonable assumption for the rest of the year or for any of the other quarters? Additionally, are you only negotiating recoveries for periods in 2022, or are you also considering recoveries for what happened in 2021? Thank you.

Thank you for your questions. When it comes to the price negotiations, we can't guide in any detail or describe any of the details of how these are going, but I would say that what we have achieved so far is in line with what we need to do going forward here to, I would say, restore the balance between our prices to our customers and the cost impacts we see. Focus is, of course, initially here has been on what has come first, so to speak, hitting us in terms of raw materials, but of course, we are covering all the different parameters here that we have talked about when it comes to utilities, inflationary labor costs, and the price side of the business as well here. In terms of the time horizon here, which we are covering in the discussion, it's really focusing on restoring the heights; so to speak, on the price and that we get the balance right there. Of course, there are, as we have indicated here also, retroactive aspects, but it depends on what kind of cost we are talking about and when that occurred and so on. But as we have said all along, our focus here is to get the full compensation for the cost increases that are outside Autoliv's control.

Thank you. Maybe just a quick follow-up on the repricing perhaps is my question. Can you say, out of all the negotiations that you are in, how many have you concluded in this quarter?

I can't give you that indication. I think the main message here is really that, I mean, of course we are negotiating with the full customer base here, meaning all our customers. And depending on the development here, it's an ongoing effort here. So, I would say the work continues very much as we move forward here. And we see the continued inflationary pressure affecting us here. So, it's not finalized in any way. It's an ongoing work as long as we have this cost situation.

Thank you. That's all from me.

Thank you. The next question comes from Emmanuel Rosner from Deutsche Bank. Please go ahead, your line is open.

Thank you very much. Maybe just to start off, following up on the commercial recoveries discussion, so the retroactive ones that you achieved in the second quarter, I think in the press release you are mentioning June playing out better-than-expected, partly due to this. Were these sort of like unexpected, or was just the timing of it a surprise? And should we expect more retroactive recoveries in the second half? I guess where I'm trying to get to is, to what extent will the second half margin run rate could be a good base to estimate 2023 or is it a starting point for 2023 or how much of it would benefit from retroactive recoveries as well?

I can't provide a specific number for you now. However, as I mentioned earlier, our priority is to focus on the heights. The timing of our business negotiations can vary; for example, concluding on a Monday as opposed to a Friday at the end of the quarter can make a difference. Given that we've been in these negotiations for some time, we've engaged in very detailed discussions, which is why it's taking longer. We're negotiating on a contract-by-contract basis with each customer, which involves a lot of specifics at the plant level. Therefore, the discussions are quite intricate, contributing to the timeline. It's challenging to indicate how quickly we will conclude these discussions at this point. Nonetheless, I want to reassure you that we are on track to meet the guidance we've provided for the full year.

So let me ask you this differently then. Let me ask differently and then I have a follow-up on commodities, but your second half implied margins based on your new guidance range at the midpoint is like 8.2%, would this second half margin include also some retroactive recoveries or only forward-looking new pricing?

In short, yes. Everything we get to retroactive will be booked in the second half of the year. So, we will get it there. So, yes.

Yes, there would be retroactive recoveries as well.

In the case there are retroactive, it will affect the second half year.

Right, okay. Let me quickly switch to commodities. Your outlook suggests a 550 basis points impact on margin this year, distributed evenly across the quarters, as indicated in your slides. Some commodities have begun to decline. Could you provide more details on which commodities will pose the biggest challenges in the second half? If prices stabilize at their current lower levels, could that create a positive impact in 2023?

Yes, versus different indications taken down the impact that we see for the year from around 6 percentage points to 5.5 percentage points. The main impact is still from steel, even though that impact has also come down, but it remains our, say, the largest year-over-year issue or impact on our cost development. Pretty much all major commodities, for us, we do see an improvement, but due to the contract structure that we have with our supply base, it takes some time then for these spot price movements to flow through into our cost setup, yes. And then for 2023, I mean, it remains to be seen, should they remain at, say, the lower levels where some of the metals right now, obviously that should then be beneficial for us going into 2023, yes.

Great, thank you.

Thank you.

Thank you. The next question comes from Hampus Engellau from Handelsbanken. Please go ahead, your line is open.

Thank you very much. Two questions from me. I guess, Mikael, this is more of a general question. But given the historic pattern on the cost and the price negotiations for you guys, I mean, you’re currently almost have 50% global market share. Is there any initiatives that you might kind of change your pricing model and try to be a little bit more aggressive using your strong market position? Given that you probably should be the market leader in pricing, that's the first question. Second question is more related to how it would work when you're imbalance on the cost that you're currently compensating for the metal prices coming down as an example, will you then be immediately given back that or will you kind of overcompensate. Those are my two questions. Thank you.

Let me address the first question first, and then Fredrik can respond to the second question. Firstly, we need to recognize that we haven't had to approach our customers for price increases in at least 25 years. We do have annual negotiations with customers that include factors like volume and steel prices, as well as a few other items that we review each year. However, we haven't encountered this level of cost item discussions in the industry for a long time. This is a new situation that requires a significant amount of collaboration with our customers on a very detailed basis. The pricing power really manifests during the quoting process. When we receive a request for quotation for a new program, that's when our market position comes into play. We are in contracts with our customers for the duration of that vehicle, and that’s what we are currently negotiating. I believe we are having productive, fact-based discussions with our customers, and we are working through these matters that are gradually yielding results in line with our previous discussions. It's somewhat uncharted territory, but the real pricing power lies in the RFQ process.

And on your second question on the correlation between, say, cost and price development going forward, for us the priority has been to restore our pricing level stand to make sure that whatever the cost inflation has been so far, that we get the right adjustment for that going forward, as Mikael laid out before. We will, after these negotiations, and already now have a higher level of indexation, which then also will reduce our volatility, what our exposure to the spread there between the raw material cost development and our top line. And these structures that we are now on with our customers to a larger extent, they vary from between, say quarterly to annual structures. So, it will vary a little bit on how the cost development will then ultimately come through on the pricing side, in both directions.

Fair enough.

Thank you. The next question comes from Colin Langan from Wells Fargo. Please go ahead, your line is open.

Great. Thanks for taking my questions. Just following up on commodities, you took it down a bit, is there any good news left on the 550 basis points for 2022 or is just, given the contract timing, that's all going to be recovered in '23? And what did sort of drive it, is that just the mark-to-market help from the spot prices, that has nothing to do with the customer negotiations, right?

No. So this is a cost impact that we're guiding for. It does not include any compensation effects from our customers. So, it's the pure, say, cost impact on our profit and loss statement that we're expecting for this year. And as I said, I mean, we have seen commodity prices come down mostly on metals, and we also do expect a limited impact from that towards the second half. We're in the second half of the year, here was on our cost base. But due to the structures that we have with our customers also here we have between quarterly and annual setups, there is a time lag then of how these spot price developments then translate into our cost structure.

There is less flexibility in our projections. The change in full-year guidance suggests an increase of about $12 million in operating income for the year, but Q2 performed significantly better than we anticipated. The $22 million litigation settlement was likely unexpected. Additionally, commodity headwinds appear to be approximately $50 million less than previously estimated. So, I'm curious why we aren't seeing a more substantial increase for the full year or what factors are offsetting that based on the current outlook for the second half.

Yes. So, we are really looking at a substantial improvement in the second half of the year. So, we are somewhere around 7% to 9% versus around 4.5% in the first half of the year. You highlighted some of the positive factors, but there are also some further headwinds we see that FX is now a larger headwind than what we had included in our guidance, both for the full year and after Q1, so that will have a larger negative impact on us than we had expected just three months ago. And we also see that there are some other cost components that are non-raw material related for instance logistics, also have a more unfavorable development. So, there are a couple of components that are offsetting the ones that you mentioned.

Okay. All right, thanks for taking my question.

Thank you.

Thank you. The next question comes from Chris McNally from Evercore. Please go ahead, your line is open.

Thank you, team. I’d like to address the raw materials topic a bit more broadly, and I apologize if this is the third or fourth question on it. Instead of focusing on specific timing or contracts, let’s consider the 550 basis points of growth attributed to raw material inflation. There’s clearly a net figure here that is covered to some extent, and we can all derive our own estimates. What I am trying to understand is whether you believe you will recapture most of this in 2022 and 2023, so that by 2024 things will be more normalized. You seem quite confident about your 12% margin, so is it reasonable to view the recoveries as largely covering that net figure and phasing out by the end of 2023, essentially over a two-year period?

Correct. So, what we're aiming for is to get pricing conversations that then offsets these headwinds that you just talked about, including the 5.5 percentage point margin impact of raw materials from this year, and we are not only putting raw materials on the table, but also as we mentioned, utilities, labor cost and also logistics and we have say closed some of those agreements, then also with the hikes that we were aiming for to be able to offset these costs and they should come through here, the majority of this should come through during this year.

Okay, that's great. Looking at the long-term perspective, there is always the question of your normalized guidance of 12%. You mentioned low $90 million production in LMC or HIS, which aligns with the forecasts for 2024. Regarding raw materials, you indicated a flattening. Are we at a point where the 12% target is realistic, or are there other factors to consider? I am trying to determine if 12% is a reliable estimate for 2024, as that seems to align with expected industry production.

I believe what we are focusing on is the framework we presented during the Capital Markets Day, which remains valid. We stated that there would be at least 85 million vehicles, and the impact on the raw material side is back to the levels we saw in 2021. This still holds true. As we discussed today, I’m confident that we are progressing in that direction, but the exact future remains uncertain. I feel assured that we are managing what is within our control effectively, aligning with our previous statements. Therefore, I think we can set a target of around 12%.

Very, very clear, I appreciate it.

Thank you.

Thank you.

Thank you. The next question comes from Giulio Pescatore from BNP Exane. Please go ahead, your line is open.

Hi, thanks for taking my question. The first one on natural gas, you needed for the manufacturing process of airbags. So, I was wondering, are you looking at alternatives to this, first in case, we go into restrictions in Europe. And is there an alternative, is there an easy alternative for you? And then the second question on the top-line. You did increase the LVP guidance, but you didn't increase the organic growth guidance which implies that your outperformance is supposed to be slightly lower, which surprises me given your comments on having positive regional mix going forward, right, such as in H2. So, can you maybe explain what changed there? Thank you.

Giulio on your first question on the natural gas, we do not use gas for, say, processing in our manufacturing processes. So, we were not exposed to natural gas in that sense, we do use it for heating for some of our facilities. So that's the only exposure we have. So in that sense, we are of course monitoring very closely what is happening here in the market, but our exposure would be more on the impact on our suppliers or then indirectly through implications then on our customers. Then on LVP, yes, we're now guiding for an 11% outperformance, so the 2% to 5% range, that's mainly as we said in the presentation that the timeframe has shortened here for the year and we think that range is realistic. We have had quite a significant negative mix year-to-date of around 6%, and that is the main reason why we take down our full-year outperformance then from 12% to 11%. So the mix component in there has deteriorated slightly, while the others like Content Per Vehicle, market share, and also pricing remain unchanged versus our previous guidance.

Thank you.

Thank you.

Thank you. The next question comes from Joseph Spak from RBC Capital Markets. Please go ahead, your line is open.

Thank you very much. I want to revisit the topic of raw materials and the mention of increased flexibility. I recognize that there could be timing considerations, but if these input costs continue to decrease, I'm assuming that the flexible pricing arrangements are reciprocal. As we move past 2023, or possibly even earlier, is it feasible that you may need to concede more than the typical price reductions you have been accustomed to at Autoliv?

I believe that if we engage in more indexation programs, the overall outcome over a period will remain unchanged. Indexation programs provide smoother developments and quicker compensation, which means while there may be a faster reduction, the net effect should not differ, as it is closely linked to how we manage our supplier base. This is crucial to ensure everything is aligned, and we are confident in this approach. By shortening lead times, we essentially achieve a beneficial outcome.

Okay. Going back to Chris' previous question, as we look ahead, while I understand you won't be providing or updating guidance, might we consider an 8% margin for the second half as a reasonable baseline? If we also take into account next year's industry expectations, along with your growth strategy and historical 25% incrementals, it seems possible to reach around 9% to 9.5% next year. Can you clarify if it solely relies on volume to achieve the 12% margin? I understand you've implemented some measures recently, but some may appear more temporary than lasting. Could you outline the key factors that would lead us back to the 12% margin?

I believe the factors needed to reach our 12% target remain unchanged. Since we began this journey, we have faced various challenges due to the pandemic and its repercussions, as well as issues with raw materials. Our current focus is on rebalancing these factors. Moving forward, it is essential for us to establish a more stable market, as the recent volatility has disrupted our short-term trajectory. We are dedicated to enhancing our efficiency and productivity based on our established strategic roadmap, which is progressing well. We also need to implement price adjustments to manage the short-term fluctuations. Nevertheless, I believe we have all the necessary components to achieve our goals, which is why we feel confident in reaffirming our targets for this period.

Okay. Maybe if I could squeeze one quick one. What euro rate are you assuming for the back half of the year?

Sorry, the

The euro rate.

Yes, the end rate of June, what euro rate are you assuming for the back half of the year?

So about parity?

Yes, one or something, yes. I don't have it in my head at the moment, but we can come back to you on that.

Okay, thank you.

Thank you. Our next question comes from Agnieszka Vilela from Nordea. Please go ahead, your line is open.

Thank you. I have two questions, starting with your organic growth guidance. It seems like your base is based on the LVP assumption of 2% to 5% growth for the year. Yet, IHS is at 5%. So, if you could give us any reasons why you seem to be a bit more cautious here?

Yes, I think the cautious view here, if you call it that, is that we still see that there is a lot of uncertainty out there. I mean, as we have indicated, things are moving in the right direction, but we also see that we are not through when it comes to the semiconductors. We still have challenges in the logistical change around the world here, the pandemic is still here, plus that I think in Europe here, we are also facing winter here with potentially a challenging energy situation as well. So, there is a lot of uncertainty out there that I think makes it prudent to have a more cautious view on the little development there.

And maybe a follow-up on that. When you speak to your customers, do you feel that they are getting a bit more confident about the volumes when they place the call-offs review?

The short answer to your question would likely be yes. However, it's important to note that we are experiencing challenges due to increased confidence in the call-offs that have not translated into actual orders from customers. This has posed significant difficulties for us over the past few quarters, as customer requests have not materialized. There is a clear desire from the OEMs to increase volume, supported by a strong order book and extremely low inventory levels, particularly in the U.S. Nevertheless, disruptions within the industry value chain are hindering our ability to achieve the anticipated volumes. Currently, the primary factor limiting short-term volume is the availability of components across the industry.

Yes. Perfect. And then the second question is on your cost alignment program, you haven't provided any kind of quantification for this call. What you're doing there? Do you expect any savings coming from that? Do you expect any cost also to cover this program? Could you give us a bit more details on that?

And I guess you're referring to the one we indicated here in June.

Yes.

That we are taking additional steps to reduce costs. We are not expecting to see any meaningful one-time effects or cost restructuring charges to that at this point. So we have not quantified that for you for that reason. It is also a gradual implementation of it and the main effect of those activities is really towards the end of the year and for 2023.

But you don't provide any cost savings targets for this program?

No, no, it's a part of what we are doing here to secure our trajectory here towards the mid-term target. So, we haven't broken that out specifically. It's on top of everything else we do here.

Okay, thank you.

Thank you. The next question comes from Philipp Konig from Goldman Sachs. Please go ahead, your line is open.

Thank you for taking my questions. I want to revisit the recoveries, as it appears you made significant progress in June, which is reflected in your working capital. If this momentum continues, is it reasonable to consider aiming for the upper end of the 6% to 7% margin range for the second half of the year regarding recoveries? Additionally, could you share insights on near-term volumes? How have the first few weeks of July compared to June? Has there been an improvement? Any information on that would be appreciated.

Okay, thank you. No, I don't think I can't give you any more details around the progression there. I think what we have said here is that we are making progress and are in line with what we have indicated before, and we have narrowed the range here to the 6% and 7% adjusted operating income, and I can't narrow it down any further for you there, unfortunately. When it comes to the momentum in the market, I think we can say here that it's holding up and there is no question that there is an underlying demand, and it's all about now securing in the whole industry, the ability to secure components. And I would say there is a lot of uncertainty out there regarding that and we just need to see how it comes through here, but it is not too early to say anything around that when it comes to the beginning of the quarter here. Yes.

Thank you very much.

Thank you.

Thank you. The next question comes from Vijay Rakesh from Mizuho Securities. Please go ahead, your line is open.

Yes. Hi, I was just wondering, I think you made a comment on chip supply having improved, just wondering where you had been seeing any constraints and where you're seeing some of the supply improving?

No, as I said, I mean we see some improvements, and of course we also hear from our customers here and that there are some improvements there, it's still very, let's call it, spotty here, because it's not across all customers. There are some customers that are more confident than others in terms of securing semiconductors for their own production. Of course, the lockdowns in China created some bumps on the road here, also outside China when it comes to the semiconductor supply. And I think also we see that there are still lower specs of vehicles here to not need as many semiconductors that the other otherwise would. So, of course if the availability is improving here, I think the demand will also go up here. So that's why we are also cautious here that we are not out of the woods here yet when it comes to the semiconductors. But it's trending in the right direction. That's what we feel when we talk to our customers, plus that of course, our own semiconductor needs is under control there.

Got it. And for the last question, I know many inquiries are regarding pricing. Are you linking it to a commodity index? It seems that the overall commodity index is beginning to show signs of easing. I'm curious if there is a time frame for these price increases, perhaps around six months? Could you provide more details about whether you're using a broader index and what the timeline looks like for the price adjustments? Thanks.

Yes, there isn't a clear-cut answer to your question; it's a combination of factors. Almost every OEM has a different approach for these discussions. Some use steel indices based on various types of indices, while others incorporate commodities that might not be covered by some. Therefore, there are multiple arrangements you can choose from with a specific OEM. This makes it challenging to provide a straightforward answer. As I mentioned earlier, the frequency of these adjustments tends to be either quarterly or annually.

Got it. Thank you.

We can take one last question.

Thank you. The last question comes from Erik Golrang from SEB. Please go ahead, your line is open.

Thank you. I have a question regarding raw materials. Can I confirm that you mentioned you are striving for full compensation for the raw material and logistics challenges that were beyond your control? If I summarize, the raw material challenges you've faced since the beginning of 2021 amount to over $300 million, and you have received about $30 million in compensation so far, with expectations for the remainder in the second half of the year. Am I interpreting that correctly?

No, what we are discussing here, and as I emphasized earlier, our focus is on obtaining full compensation regarding costs. We are negotiating now for the expenses related to setups and to restore balance between our incoming costs and prices. So, that's the primary focus.

And maybe to clarify, I mean, the $30 million that we spent out is only the recovery that we received that is related to prior to the second quarter. So these are retroactive adjustments going back there to January 1 that we are disclosing that are not related to the second quarter. The recoveries we got overall is higher than $30 million.

Very good. Thank you.

Thank you. That was the last question. Now, I turn the conference back to you for any closing comments.

Thank you, Cynthia. Before we end today's call, I would like to say that the recent developments in supply chains, customer production plans, raw material prices, and our cost recovery discussions are encouraging. And we are well prepared for an improved market development. However, we are also making sure we are agile and prepared for more adverse market development should that be necessary. Autoliv continues to focus on our vision of saving more lives, which is our most important contribution to a sustainable society. Our third-quarter earnings call is scheduled for Friday, October 21st, 2022. Thank you everyone for participating on today's call. We sincerely appreciate your continued interest in Autoliv. Until next time, stay safe.

Thank you. This does conclude today’s conference call. Thank you all for attending. You may now disconnect your lines.