Good day, and thank you for standing by. Welcome to the Autoliv Incorporated Second Quarter 2023 Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Anders Trapp. Please go ahead.

Thank you, Nadia. So, welcome everyone to our second quarter 2023 earnings call. On this call, we have our President and CEO, Mikael Bratt; and our Chief Financial Officer, Fredrik Westin, and me, Anders Trapp, VP, Investor Relations. During today's earnings call, Mikael and Fredrik will, among other things, provide an overview of the strong sales, earnings and cash flow development we had in the second quarter, the structural cost reduction activities that we're doing to secure our long and medium-term competitiveness and also the expected sequential margin improvement that we see in Q3 and Q4 of this year, as well as provide an update on our general business and market conditions, as always. 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-US GAAP measures. The reconciliations of historical US GAAP to non-US GAAP measures are disclosed in our quarterly press release available on autoliv.com and in the 10-Q 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 to the next slide. I would like to start by thanking our employees for their great contributions. We saw continued improvement in customer call-off volatility in the quarter, but still higher volatility than pre-pandemic levels. We believe this reflects an improving global supply-chain environment for both our customers and suppliers. Our organic sales grew by close to 27%, outperforming light vehicle production significantly in all regions. This strong growth was a result of product launches, higher safety content per vehicle and that we achieved the customer compensations we planned for in the quarter. Our profit margin development was in line with what we had expected as customer call-off volatility improved. We lowered our cost base and that we successfully negotiated the planned customer compensations related to the inflationary pressure. We received a record operating cash flow for the second quarter, driven by an improved adjusted operating income and reversal of the negative working capital effects from the first quarter. Our debt leverage ratio decreased to 1.3 times from 1.6 times a quarter ago. This supports our shareholder returns ambitions. In the quarter, we paid $0.66 per share in dividends and repurchased and retired 475,000 shares. We also announced the acceleration of our structural cost reductions, aiming at simplifying our logistics and geographic footprint. As part of this, we recently announced a headcount reduction of around 1,100, mainly in direct employees, with further actions to be announced as plans materialize. We continue to expect a gradually improving adjusted operating margin during 2023, with significantly greater price compensation and other recoveries in the fourth quarter compared to the third quarter. We continue to be in the forefront of safety technology development, which has helped us keep momentum in our new order intake year-to-date. A great example of new innovations is the revolutionary new Bernoulli airbags that were presented at our Investor Day in Detroit in June and are based on the Bernoulli principle. Now looking at the significant sequential cost improvements on the next slide. The meaningful steps we took in the second quarter support my confidence in sequentially improving adjusted operating margin towards our full-year indications. This, of course, also supports our journey towards our medium-term targets. On this slide, we highlight the sequential improvements. In the quarter, we actively addressed our cost base and investment level and negotiated with our customers to secure pricing and other compensations that reflect the high inflation. Our labor efficiency continues to trend up, supported by the implementation of our strategic initiatives, including optimization and digitalization. Our gross margin improved by 180 basis points compared to the first quarter, as a result of the higher labor efficiency, compensations, higher volumes, and a more stable light vehicle production. At the same time, costs for R&D and SG&A combined declined by 50 basis points in relation to sales. Combined with the gross margin improvement, this led to a substantial improvement in adjusted operating margin. With a more stable vehicle production, we managed to substantially reduce our trade working capital as well. As a result, our operating cash flow reached a new record level for the second quarter. Now looking at the expected adjusted operating margin progression for 2023 on the next slide. For the remainder of 2023, we expect a quarter-by-quarter improvement in adjusted operating margin. We expect continued high year-over-year sales growth supported by launches, higher light vehicle production, and content per vehicle increases. We anticipate that cost compensations from customers will continue to gradually offset cost inflation, especially in the fourth quarter. The positive trajectory will be further supported by improvements from cost reductions, as well as expected gradual improvement of supply chain and light vehicle production stability as we have already seen in the second quarter. The actions we are undertaking makes me confident in the gradual improving performance, which should allow us to deliver a significant full-year increase in cash flow and adjusted operating income. Looking now on the announced structural cost reduction actions on the next slide. To secure our medium and long-term competitiveness and to support our financial targets, we are accelerating our global structural cost reductions, including a substantial reduction of our global workforce, with a particular focus on our European operations. These initiatives will continue to optimize our geographic footprint for a more effective structure while reducing costs and driving improvements in margin and cash flow. We intend to simplify and consolidate how we operate in all areas. The headcount reduction will affect people based in our offices, technical centers, and plants, including leadership positions at all levels. As the first step, we have accrued $109 million, primarily driven by a planned reduction of around 1,100 employees. This first step is expected to reduce costs by around $25 million in 2024, increasing to around $55 million in 2025 and to reach around $75 million when completed. Further actions will be announced as plans materialize. Looking now on our sales growth in more detail on the next slide. Our consolidated net sales increased by $2.6 billion, a record for the second quarter. This was more than $0.5 billion or 27% higher than a year earlier, driven by price, volume, and mix. Out-of-period cost compensations contributed approximately $30 million, the same as in the second quarter last year. Out-of-period compensations are retroactive price adjustments and other compensations that mainly relate to the first quarter but were negotiated in the second quarter. Looking at the regional sales split, Asia accounted for 37%, Americas for 35%, and Europe for 28%. The China share increased to 19% from 17% last year when China was largely closed due to COVID lockdowns. We outlined our organic sales growth compared to light vehicle production on the next slide. I am very pleased that our organic sales growth significantly outperformed global light vehicle production growth in the second quarter, as we continue to execute on our strong order book and successfully achieved the targeted customer compensations. According to S&P Global, second quarter light vehicle production increased by close to 16% year-over-year. This was 250 basis points higher than the expectation at the beginning of the quarter. We outperformed global light vehicle production by around 11 percentage points in the quarter. We outperformed in China by 23 percentage points; in Japan, by 22 percentage points and in the rest of Asia by 13 percentage points. Compared to the first quarter, our sales increased by 6%, twice as much as the light vehicle production growth. We expect the positive year-over-year sales growth trend to continue, and we expect to significantly outperform light vehicle production for the remainder of the year. Looking now on financials in more detail on the next slide. The strong sales increase led to a substantial improvement in adjusted operating income, excluding effects of capacity alignment, antitrust-related matters and litigation settlement, adjusted operating income increased by more than 70% to $212 million from $124 million last year. The adjusted operating margin was 8% in the quarter, an increase of 2 percentage points from the same period last year and by 2.7 percentage points from the first quarter. Operating cash flow was $379 million, which was more than $400 million better than the same period last year, as well as from the first quarter of 2023. Fredrik will provide further comments on our cash flow later in the presentation. On the next slide, we see some key model launches from the second quarter. In the quarter, we had a high number of product launches, especially in China. The models shown on this slide have an Autoliv content per vehicle from approximately $150 to close to $400. These models reflect the changes seen in the automotive industry in recent years with several relatively new OEMs represented, and five out of nine are available as pure EVs. In terms of Autoliv sales potential, the Mercedes E-Class launch is the most significant. The long-term trend to higher CPV is supported by front center airbags, rear side airbags, and pedestrian protection products. For the full year, we expect a record number of launches. By region, we see a higher number of launches in China, South Korea, and Europe. I will now hand it over to our CFO, Fredrik Westin, who will talk about the financials in the next few slides.

Thank you, Mikael. This slide highlights our key figures for the second quarter of 2023 compared to the second quarter of 2022. Our net sales were $2.6 billion. This was a 27% increase. Gross profit increased by $121 million or 37% to $447 million, while the gross margin increased by 1.3 percentage points to 17%. The gross profit increase was primarily driven by price increases, volume growth, and lower costs for premium freight. This was partly offset by increased costs for personnel related to volume growth and wage inflation, as well as adverse effects from unfavorable exchange rates and energy costs. In the quarter, we made a total adjustment of $118 million to the operating income, of which, $109 million for capacity alignment activities and $8 million related to a litigation settlement. The adjusted operating income increased from $124 million to $212 million and the adjusted operating margin increased by 2 percentage points to 8.0%. I will explain more when we go through the operating income bridge later. The operating cash flow was $379 million and the adjusted earnings per share diluted increased by $1.03, where the main drivers were $0.69 from higher adjusted operating income and $0.35 from taxes. Our adjusted return on capital employed and return on equity increased to 21% and 25%, respectively. We paid a dividend of $0.66 per share in the quarter and repurchased and retired around 475,000 shares for $41 million under our stock repurchase program. Looking now at the adjusted operating income bridge on the next slide. In the second quarter of 2023, our adjusted operating income of $202 million was $88 million higher than the same quarter last year. Our operations were positively impacted by improved pricing and other customer compensations, higher volumes, lower costs for premium freight, as well as our strategic initiatives, partly offset by the significant headwinds from general cost inflation. The impact of raw material prices was limited. Foreign exchange impacted the operating profit negatively by $19 million. This was mainly as a result of negative transaction effects from the Mexican peso. Costs for SG&A and R&D net combined were $25 million higher, mainly due to higher personnel costs and projects. Out-of-period cost compensation contributed around $30 million, about the same as in the second quarter last year. As a result, the leverage on the higher sales, excluding currency effects and a patent settlement in 2022 was in the middle of our typical 20% to 30% operational leverage range. This is despite not getting any leverage on the inflation compensation from our customers. The actions we are now taking, that Mikael talked about previously, should lead to higher operating leverage and profitability as the year progresses. Looking now at the cash flow on the next slide. For the second quarter of 2023, operating cash flow increased to $379 million due to improved adjusted operating income and the reversal of the negative working capital effects from the first quarter. During the second quarter, working capital improved by $230 million, mainly due to accruals for capacity alignments and reduction of trade working capital. Trade working capital was reduced by $117 million, driven by $161 million in higher accounts payables, $39 million in lower inventories that was partly offset by $83 million in higher receivables. Capital expenditures net decreased to $124 million from $139 million in the previous year. Capital expenditure net in relation to sales was 4.7% compared to 6.7% a year earlier. Free cash flow was $255 million, which is $255 million higher than a year earlier. Our full-year indication of an operating cash flow of $900 million is unchanged. Now looking at our leverage ratio development on the next slide. The debt leverage ratio at the end of June 2023 improved by 0.3 times to 1.3 times compared to a quarter earlier. This was a result of $185 million lower net debt and $91 million higher 12 months trailing adjusted EBITDA. The current stock repurchase program authorizes the company to repurchase up to $1.5 billion between January 2022 and the end of 2024. Under the program, Autoliv has currently repurchased 2.4 million shares for a total of $197 million. We are considering several factors when executing the program, such as our balance sheet, the cash flow outlook, our credit rating, and the general business conditions, not only the debt leverage ratio. We always strive for the balance that is best for our shareholders, both long and short-term. I now hand it back to you, Mikael.

Thank you, Fredrik. Looking at the next slide, as supply chains have improved in many areas, vehicle demand and inventory restocking are now the primary drivers of market development. S&P Global now predicts that global light vehicle production in the third quarter will decline by 4% compared to last year. Compared to the second quarter, volumes are expected to drop by about 5%, primarily due to normal seasonal factors from summer shutdowns. Despite concerns about high vehicle prices in certain markets and worsening credit conditions, global full-year 2023 light vehicle production is projected to rise by 5.1%, reaching nearly 84 million vehicles. Light vehicle production in China remains strong due to robust EV demand and export activity. S&P Global forecasts that LVP in North America will increase by more than 8% in 2023, which is 3 percentage points higher than their forecast from three months ago. However, there are worries regarding upcoming union negotiations. Production in Europe continues to exceed expectations, although 2023 volumes are largely supported by inventory restocking and the reduction of OEM sales backlogs. We believe that underlying demand has decreased somewhat. Our full-year sales expectations are based on an estimated global light vehicle production growth of around 4%. Moving on to our 2023 financial expectations on the next slide, barring currency translation effects, our full-year indications remain unchanged and do not account for costs and gains related to capacity alignment, antitrust matters, litigation settlements, and other discrete items. Our full-year indication assumes light vehicle production growth of approximately 4%. We expect organic sales growth of around 15%. Currency translation effects are anticipated to be about positive 1%, in contrast to earlier projections of negative 1%. We foresee an adjusted operating margin of roughly 8.5% to 9%. Operating cash flow is expected to be around $900 million, and our positive cash flow trend should enable increased returns for shareholders. Moving to the next slide, this wraps up our formal remarks for today’s earnings call, and we would now like to open the floor for questions from analysts and investors. I now hand it back to Nadia.

Thank you so much. Now we're going to take our first question, and the question comes from the line of Emmanuel Rosner from Deutsche Bank. The line is open. Please ask your question.

Thank you for taking my question. My first inquiry is regarding the LVP assumptions and the current environment. It seems that you've slightly improved your assumption to about 4% for the year, whereas previously it was around 3%. You also mentioned some of the risks associated with UAW. Are you factoring in any adjustments? Is the reason for your 4% assumption, as opposed to maybe the 5% S&P figure, due to incorporating a cushion for potential production losses from the UAW strike? Is this reflected in your guidance?

Thank you for the question. Regarding our light vehicle production outlook, we have revised it from 3% to 4% based on the developments in production year-to-date. This adjustment is also aligned with the S&P numbers, which have increased to 5.1% since the beginning of the year. However, we still maintain a slightly more conservative perspective compared to the S&P. At the start of the year, we factored in some risks, including potential UAW-related issues. However, with our well-diversified portfolio, and considering that the Americas account for about a third of it, the impact on light vehicle production from the UAW situation remains manageable and constitutes a smaller portion of our overall business. Therefore, we are comfortable with our overall outlook for the full year.

As a quick follow-up to this, you maintained your organic growth outlook despite the improved LVP assumption. What is the offset here?

No, I think, I mean, it's no big, I would say, question around that, I would say. I mean it's a marginal improvement of our LVP upgrade here with 1 percentage point. And yes, so you shouldn't read into anything to it. Actually, it's more, let's call it, a rounding question here.

And then a question on margin, please. That would be my last question. So I think you made several comments as well as in the slide around sort of like some level of back-end loading between 3Q and 4Q because of seasonality and some of the negotiations. Just curious if it's sort of like more so than expected before? I think in the past, you had said that throughout the year, your margins will improve sequentially by about sort of like 2 points-or-so each quarter throughout the year, more or less. Are you now saying that there will be less so in 3Q and much more in the fourth quarter? Or is it sort of like still the same type of framework just that the fourth quarter has higher margins than the second?

We don't provide quarterly guidance, but we expect the sequential development this year to be similar to last year's. It's important to remember the seasonality we typically see between Q3 and Q4, with Q4 generally being stronger due to increased engineering income. As we continue our price negotiations, which have been somewhat different from our usual business practices, we need to manage these processes thoroughly. This could result in a more back-end loaded performance in the second half of the year, similar to how we experienced a stronger Q2 compared to Q1 as we moved through those negotiations.

Okay. Thank you very much.

Thank you. Now we're going to take our next question. And the next question comes from the line of Bjorn Enarson from Danske Bank. The line is open. Please ask your question.

Thank you. And on these negotiations, if you can talk a little bit about how the compensation looked like in the first half and Q2? How much and what kind of compensation did you get? I mean, you're talking pricing or lump sums or what have you? And also to put that in perspective of what kind of expectation you should have for the second half? Thank you.

We don't disclose specific details about the settlements we've achieved, but we can confirm that they align with our expectations for the first half of the year in terms of both timing and amount. This year, we've seen a greater proportion of lump sum settlements or compensations compared to last year, where most were price adjustments. Currently, there are still ongoing negotiations relating to inflation and other factors, and we want to ensure that we choose the right time to successfully conclude these negotiations at an appropriate level.

Okay. Perfect. Clear. And if I may ask a second question. You also talked a little bit about the demand situation and you are still below S&P. But I would assume, I mean, we are in the middle of a catch up now. We see volume from OEMs, and you yourself are very, very strong. Would you dare to have a view on where the underlying demand is? I mean, if we would not have had the sourcing crisis following the COVID situation?

I wouldn't specify a number, but I do believe that in the last few years, there has been a shortfall in meeting current demand, resulting in a backlog. Additionally, we also have a backlog when it comes to replenishing pipelines, particularly in the US, where inventory levels are historically low—about half of what they usually are. This indicates a significant volume that needs to be addressed. Looking at the current LVP outlook for 2023, we are still 25% below the volumes seen in 2017-2018 in Europe, and in North America, we are approximately 12% below. We are starting from a low point, and while we are still at relatively low levels, the gap between underlying demand and the expected production levels gives me some reassurance that we are on solid ground regarding potential risks associated with the outlook. Given our conservative perspective compared to S&P's numbers, I believe we can confidently rely on the LVP levels we are using for our forecast.

Perfect. Thank you.

Thank you. Now we're going to take our next question. Just give us a moment. And the next question comes from the line of Chris McNally from Evercore. The line is open. Please ask your question.

Thanks so much and I appreciate the details. So I'm just going to follow up on Emmanuel's question. If we step back and look at the beginning of the year, it sounds like from your comments, production trending 1%, maybe 2% better. Content per vehicle first half, 13%, 14%, sort of better than the 11% you're guiding implies some deceleration into the back half. I wanted to focus on what's been the negative development. So, we know about the peso, maybe $60 million-or-so for the full year. Curious if there's anything else that's been a headwind from the beginning of the year because if not, it seems like there's some revenue upside that clearly would push you maybe towards the upper end of your margin targets?

Yes, as you mentioned, foreign exchange has been a larger challenge than we anticipated at the start of the year. It amounts to nearly $20 million for the quarter, following a negative impact in the first quarter. Out of that $19 million, $15 million is due to negative transactional effects from the peso, which is quite significant for us. From what I observe regarding our peers' performance, there are no signs of improvement in this area for us. Additionally, we have faced some supply chain challenges, although the overall situation is getting better. We encountered two specific issues: one was a fire at a supplier in Europe, and the other involved capacity issues with a major North American supplier. These affected the quarter not primarily through premium freight, but instead through inefficiencies in our processes and productivity levels in our plants, along with the additional workload of shifting volumes to other suppliers during the quarter. Therefore, we have experienced some significant headwinds. Regarding foreign exchange, our estimates are based on exchange rates as of the end of May, which suggests we can expect continued pressure from exchange rates for the remainder of the year.

That's very helpful, particularly regarding the unique supply issues in Q2. My second question is more about your comments on caution in the EU for the second half. There seems to be mixed messages from the European OEMs concerning "order weakness." We can all see the data from Germany and France. However, I find it perplexing, at least from my perspective, since we received similar comments in Q1. The backlog has weakened from Q4 to Q1, but when looking at sales and registrations, they've improved from Q1 to Q2. Orders typically convert within two to three months, and restocking also appears to show sales and production trending up by about 10%. Can you provide some insight into this notion of order weakness? It seems like a bit of a bogeyman argument from the OEMs. While the consumer is clearly weakened in Europe, that doesn't seem to be reflected in the registration data for Q2.

No. And I think as I said here, I mean, from our horizon there is nothing that indicates the weakness you're referring to there. And of course, difficult to comment to what you have heard from the OEMs here. But I can only say what we said here about our own perspectives here, and that is that we feel comfortable with the outlook we have for the rest of the year here getting to the organic sales growth here of around 15% for the full year, and we have nothing else to say around that.

Okay. Very helpful. Thanks so much.

Thank you. Now we're going to take our next question. And the next question comes from the line of Colin Langan from Wells Fargo. Your line is open. Please ask your question.

Great. Thanks for taking my questions. On the structural cost reduction plan, the slides today say it's $75 million. I just want to clarify, is that just for the 1,000 that were announced this week? And so there would be more related to the full 11%, which I think is around 8,000 direct to indirect workers? Or is that actually the whole plan just to make sure I'm comparing that?

No, this is only what has been communicated so far or the last announcement we made here related to the 1,100 and the $100 million associated with restructuring costs with that. And then you have the expected phasing here of the savings that go hand in hand with that. So there's more to come. We have booked around half of the restructuring costs that we would expect for the total program at this point.

So the $75 million in savings is from 1,100 workers, but the overall plan involves nearly 8,000 workers. Is that correct?

We have 2,000 indirect or salaried positions and an additional 6,000 aimed at restoring our productivity in direct labor. The 1,100 we mentioned earlier primarily consists of indirect roles, with a smaller portion being direct labor. There will be more developments in subsequent stages. As I mentioned, we expect the restructuring costs for the entire program to be approximately halfway complete at this time.

Okay. And then just going back to the recoveries. Any color on how much or what percent are completed at this point? And how much is sort of left to go? I think in the past you said like 50%, 60% or where do you kind of stand now?

No, I can't give you a number on that as we are in ongoing discussions with our customers here. But what we can say is that, we have compensation with basically all the customers here. So it's a new way of working here in this environment, and we are taking it step-by-step here and we are engaged in dialogues around all the different components here that we have talked about with all our customers. So we are progressing according to our plan here.

Okay, got it. Thanks for taking my questions.

Thank you.

Thank you. Now we're going to take our next question. Just give us a moment. The next question comes from the line of Michael Jacks from Bank of America. Your line is open. Please ask your question.

Hi. Good afternoon, Mikael and Fred. Thanks for taking my question. Just one or two follow-ups on the restructuring topic. Just to be clear, so if the roughly $100 million that you've just booked equates to half of the total restructuring cost. The indication then is that, you're actually headed for an outcome which is closer to a one-year payback period within that one to two bracket that you initially announced? And then just to clarify on timing, at the CMD, I got the impression that the restructuring program would contribute quite significantly more to the 2024 earnings outlook. And I had penciled in somewhere closer to, I think, $75 million to $100 million. Can you just help us to understand a little bit more on the timing and the sequencing or the sequencing around how the restructuring process is likely to follow from here? And then just one final question, if I may, on pricing. How much did price contribute to organic growth in Q2? Thank you.

Yes. Regarding your second question, we will not provide additional details about the pricing components or compensations we experienced this quarter. In response to your first question, we recorded $109 million in restructuring charges this quarter. This amount represents approximately half of the total projected cost for the program. The announcement did not include all the steps we are taking, but it does involve two planned site closures, one in Germany and one in the U.K., which will have a longer payback time. Nonetheless, we anticipate a savings profile of $25 million next year, $55 million the following year, and a steady rate of $75 million thereafter. We expect cash outflows of around $50 million next year and approximately $40 million the year after. Thus, the payback period for the cash outflows is estimated to be within one to two years. We will share further details and next steps once they are ready to be communicated.

Understood. Thank you very much.

Thank you. Now we're going to take our next question. And the next question comes from the line of Mattias Holmberg from DNB Markets. Your line is open. Please ask your question.

Thank you so much. First of all, I would just like to clarify on Bjorn's earlier question. I just want to make sure that I heard you right that you said that a larger share of the price negotiated this year were lump-sum compensations and last year more on the permanent price adjustment side? And if that was the case, what does this mean in terms of stickiness of these price increases? I mean assuming the inflation is sticky, would that mean you will need to sort of renegotiate to get further lump-sum compensations?

Yes. As I said here, I mean, this is a little bit the new way of working together with our customers here as we are in this current, let's call it, inflationary environment here. And I think it's very important to remember also that, of course, what we're trying to do here and are doing is to mirror the balance between the impact from our suppliers and our customers. So, of course, when we say we have a lump-sum compensation with our customers, we also have a lump-sum situation with our suppliers. So depending on what the type of compensation we get, it's following, of course, in both sides of our P&L statement here. So that's the important thing for us is to keep this balance correctly. And I would say that also, it depends on the type of approach different customers have, but just because it's lump-sum it doesn't mean that it's less stable versus a piece price per se because you can say, some have this as an operating model structure, and we come back to it, and it's a very natural part of discussion. If you have a piece price, of course, that also depending on what the reason for the piece price adjustments, it has some flexibility, and that also when the reason comes down, so to speak. So I should not be spending too much time on the question around lump sum piece price here, because it's overall balance that is the important part here, and that's something we are keeping a lot of focus on, of course.

Yes. That's clear. Thank you. A quick second one, if I may. At the Capital Markets Day, you said, I think, you had about $900 million in capacity for shareholder returns this year. Do you still think this number is relevant or realistic? And can you tell us anything more kind of us understand better why the run rate of the buybacks are quite far off this level?

What we wanted to demonstrate with that calculation was more about the balance sheet capacity we would have in place. However, it does not indicate what we would buy back this year or imply any commitment in that regard. It was meant to show that if we meet our guidance for the year, it could reflect our capacity for share buybacks. We are committed to the $1.5 billion mandate we have, but that is also just a guideline. It's simply an authorization from our Board that allows us to buy back up to $1.5 billion until the end of next year.

Thank you.

Thank you. Now we're going to take our next question. And the next question comes from the line of Dan Levy from Barclays. Your line is open. Please ask your question.

Hi, good afternoon. Thank you for the question. I wanted to first inquire about the improved environment, reduced call-offs, and better stability. You mentioned that your operating leverage is consistent with typical levels, partially driven by recoveries. Given this improved environment, how likely is it that we could see you operating at the higher end of the typical 20% to 30% leverage? Additionally, how long do you expect to maintain potentially higher incremental margins?

Yes. I mean as I indicated during the presentation, if you adjust for FX and then the patent settlement we had last year, the benefit of that from last year, we were in the middle of the 20% to 30% range. In one component that does not allow us to pull through a higher leverage rate is the fact that we don't get any margin on the cost compensation we get from our customers. I mean, these negotiations are very much around the structure or the inflationary costs that have impacted us. And that's what we're putting on the table, but we very rarely get a margin upside on those costs. If you would adjust for, say, that lack of margin on the compensation, we will even be closer to 30% on the leverage side.

Is that level something that can be maintained in the near future, or is it specific to this particular period?

I believe this relates to previous discussions we've had on the subject. Much of it hinges on the type of volume growth we are experiencing. If it comes from LVP and market growth, we can expand within our current footprint and capacity, which would position us at the higher end of the range. Conversely, if the growth arises from new launches and market share increases, we would find ourselves at the lower end of the range. As we have noted, we are experiencing a record number of launches this year, and we anticipate a significant contribution from market share gains as well, suggesting that the leverage from that volume will be at the lower end of the range.

And as a follow-up, I'd just like to dig in on the OpEx. Your SG&A and R&D are both rising, but as a percent of sales, that ratio is coming down. How should we think about the SG&A and R&D going forward? Your release talked about increased personnel projects for SG&A. Presumably, you're going to have some offsets from the headcount reductions. But what should we think about for the trajectory of SG&A and R&D?

Yes. I mean I think we could display already that compared to the first quarter, you've seen a sequential improvement, and we are very focused here on controlling both the SG&A and R&D costs also going forward. And yes, also the headcount reductions we're doing, as we're indicating where we're looking at all levels in the company, all functions, that would also have an impact then on SG&A and R&D going forward. And the increases we've seen so far have been very much also inflation-driven on the labor cost side and to some extent, also higher headcount to support the volume growth.

Revenue, should we expect that percent to decline presumably?

Well, as I said, we are very focused here on the cost side. You've seen that as a percent of revenue, it has improved sequentially. And yes, we're focused on the costs in the company. So yes, it could improve.

Thank you.

Thank you. Now we're going to take our next question. And the next question comes from the line of Rod Lache from Wolfe Research. Your line is open. Please ask your question.

Thank you. Hi, everybody. I appreciate the indication of the Q3 and Q4 margins that you provided on Slide 5. And it sounds like there are lump-sum payments of some kind in those Q3 and Q4 margins, but they should be viewed kind of as recurring lumps kind of like a surcharge for costs at these levels. I guess, I'm just wanting to clarify, are you basically saying that you now have a mechanism for passing along a broader scope of costs going forward? And is there any part of these expectations for Q3 and Q4 that are, in fact, retroactive adjustments? So we shouldn't extrapolate from the level of margin that you're specifically expecting in the second half?

There are indeed retroactive elements involved. The question about lump sum versus piece price isn't significant regarding the balance for Q3 and Q4. Ultimately, it doesn't matter if it's a piece price or a lump sum; the timing is determined by when the negotiations are finalized, and they both affect the same quarter. The key factor is the conclusion of the negotiations, regardless of the pricing method used. As for some recurring aspects of the lump sum, we're developing a collaborative approach with our customers, but we still face challenges related to evidence-driven negotiations. This process takes time due to the need to consider the various impacts at both the plant and component levels. That's the reason for the delays. However, it's a minor discussion since we've been practicing this approach for some time now.

Okay. Can you give us any indication of the extent to which the back half includes retroactive kind of out-of-period gains? I'm just asking because you might look at these numbers and say that it's pretty impressive and at least supportive of these longer-term targets or midterm targets that you've been talking about at an 85 million unit production rate. But can we look at those as indicative of the run rate profitability or just any indication of what is out of period?

No, I think it's really the full year. I mean, the conclusion of the full year that really speaks to it, because I think the important thing here is that we have this development according to our plan, and we are gradually seeing the improvement when you look back. So I mean, of course, on a 12 months rolling, it's giving you some indications there. But I think it's too difficult to draw too many conclusions on the Q3, Q4 prioritization here, so to speak.

Okay. Lastly, the pace of buybacks has been somewhat slow in relation to the $1.5 billion authorization. Can you share your thoughts on this? How does that $1.5 billion target through the end of next year influence your decisions? What factors will you consider when determining the magnitude of buybacks going forward?

I mean it's the same as we have reported so far. I think, I mean, we are moving forward with our program here. And as Fredrik has said here, and we also said at Investor Day here in June is that we are committed to this program. And I think what Fredrik tried to show here and also reiterated here is, our ability to generate liquidity to progress with this plan and what we need to consider here, of course, is also how the world around us is developing. And that is, of course, looking back to when this program was launched and where we are now, and the last year and two years have been quite volatile and challenging. And of course, we have continued with the program, but with some cautiousness considering all the different parameters that were alluded to before here. And as we move forward, we will continue to assess that. But we are having high ambitions when it comes to this. And I think what we showed here today with our cash flow generation and also our outlook gives us a good basis for continuing here with good progress.

All right. Thank you.

Thank you. Dear participants, thank you very much for all your questions today. I would now like to hand the conference over to your speaker Mikael Bratt for any closing remarks.

Thank you, Nadia. Before we end today's call, I would like to say that we are continuing to execute on productivity and cost reduction activities. Our actions are creating both short-term and long-term improvements as is visible from the steps we took in the second quarter. Together with the announced accelerated structural cost reductions, we believe these actions will enable us to build an even stronger position long term. Autoliv continues to focus on our vision of saving more lives, which is our most important direct contribution to a sustainable society. Our third quarter earnings call is scheduled for Friday, October 20, 2023. 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 all disconnect. Have a nice day.