Autoliv Inc Q3 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to the Autoliv, Inc. Third Quarter 2025 Financial Results Conference Call and Webcast. Please note that today's conference is being recorded. I would now like to turn the conference over to your first speaker, Anders Trapp, Vice President of Investor Relations. Please go ahead.

Thank you, Lars. Welcome, everyone, to our third quarter 2025 earnings call. On this call, we have our President and Chief Executive Officer, Mikael Bratt; our Chief Financial Officer, Fredrik Westin; and me, Anders Trapp, VP, Investor Relations. During today's earnings call, we will highlight several key areas, including our record-breaking third quarter sales and earnings, as well as our continued strategic investments to drive long-term success with Chinese OEMs. We also provide an update on market developments and the evolving tariff landscape impacting the automotive industry. Finally, our robust balance sheet and strong asset returns reinforce our financial resilience and support sustained high levels of shareholder returns. Following the presentation, we will be available to answer 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-GAAP measures. The reconciliations of historical GAAP to non-GAAP measures are disclosed in our quarterly earnings release available on autoliv.com and in the 10-Q that will be filed with the SEC at the end of this presentation. Lastly, I should mention that this call is intended to conclude at 3:00 pm CET. So please follow a limit of two questions per person. I now hand it over to our CEO, Mikael Bratt.

Thank you, Anders. Looking on the next slide. I am pleased to share yet another record-breaking quarter, underscoring our strong market position. This success is a testament to the strength of our customer relationships and our commitment to continuous improvement as we navigate the complexities of tariffs and other challenging economic factors. We saw significant sales growth driven by higher than expected light vehicle production across multiple regions, especially in China and North America. Our high growth in India continues, accounting for 1/3 of our global organic growth. I am pleased to highlight that our sales growth with Chinese OEMs has returned to outperformance driven by recent product launches and encouraging development. Looking ahead, we anticipate to significantly outperform light vehicle production in China during the fourth quarter. We improved our operating profit and operating margin compared to a year ago. This strong performance was primarily driven by well-executed activities to improve efficiency, higher sales, and the supplier compensation for an earlier recall. We successfully recovered approximately 75% of the tariff cost incurred during the third quarter and expect to recover most of the remaining portion of existing tariffs later this year. The combination of not yet recovered tariffs and the dilutive effects of the recovered portion resulted in a negative impact of approximately 20 basis points on our operating margin in the quarter. We also achieved record earnings per share for the third quarter. Over the past five years, we have more than tripled our earnings per share, mainly driven by strong net profit growth, but also supported by a reduced share count. Our cash flow remained robust despite higher receivables driven by higher sales and tariff compensations later in the quarter. Our solid performance, combined with a healthy debt level ratio supports continuous strong shareholder returns. We remain committed to our ambition of achieving $300 million to $500 million annually in stock repurchases as outlined during our Capital Markets Day in June. Additionally, we have increased our quarterly dividend to $0.85 per share, reflecting our confidence in our continued financial strength and long-term value creation. Expanding in China is key to strengthening Autoliv's innovation, global competitiveness, and long-term growth. To support our growing partnerships with Chinese OEMs, we are investing in a second R&D center in China. In October, we announced a new important collaboration in China as illustrated on the next slide. We have signed a strategic agreement with Qatar, the leading research institution setting standards in the Chinese automotive sector. This partnership marks a new chapter in our commitment to shaping the future of automotive safety. Together with Qatar, we aim to define the next generation of safety standards and enhance safety on the roads in China and globally. We're also broadening our reach in automotive safety electronics as shown on the next slide. We recently announced our plan to form a joint venture with HSAE, a leading Chinese automotive electronics developer, to develop and manufacture advanced safety electronics. The joint venture will concentrate on high-growth areas in advanced safety electronics, including ECUs for active safety, hands-on detection systems for steering, and the development and production of steering wheel switches. Through this new joint venture, we intend to capture more value from steering wheels and active safety while minimizing CapEx and expanding competence enabling faster market entry with lower technology and execution risks. Looking now at financials in more detail on the next slide. Third quarter sales increased by 6% year-over-year, driven by strong outperformance relative to light vehicle production in Asia and South America, along with favorable currency effects and tariff-related compensation. This growth was partly offset by an unfavorable regional and customer mix. The adjusted operating income for Q3 increased by 14% to USD 271 million from USD 237 million last year. The adjusted operating margin was 10%, 70 basis points better than in the same quarter last year. Operating cash flow was solid at USD 258 million, an increase of USD 81 million or 46% compared to last year. Looking now on the next slide. We continue to deliver broad-based improvement with particularly strong progress in direct costs and SG&A expenses. Our positive direct labor productivity trend continues as we reduced our direct production personnel by 1,900 year-over-year. This is supported by the implementation of our strategic initiatives, including automation and digitalization. Our gross margin was 19.3%, an increase of 130 basis points year-over-year. The improvement was mainly the result of direct labor efficiency, headcount reductions, and compensation from a supplier. R&D and engineering net costs rose both sequentially and year-over-year, primarily due to lower engineering income from the timing of specific customer development projects. Thanks to our cost-saving initiatives, SG&A expenses decreased from the first half-year level combined with the increased gross margin, this led to a 70 basis points improvement in the adjusted operating margin. Looking now on the market development in the third quarter on the next slide. According to S&P Global data from October, global light vehicle production for the third quarter increased 4.6%, exceeding the expectations from the beginning of the quarter by 4 percentage points. Supported by the scrapping and replacement subsidy policy, we continue to see strong growth for domestic OEMs in China. Light vehicle demand and production in North America has proven significantly more resilient than previously anticipated. In contrast, light vehicle production in other high content per vehicle markets, namely Western Europe and Japan, declined by approximately 2% to 3%, respectively. The global regional light vehicle production mix was approximately 1 percentage point unfavorable during the quarter. Despite the important North American market showing a positive trend, we did see call-off volatility continue to improve year-over-year and sequentially from the first half-year. The industry may experience increased volatility in the fourth quarter, stemming from a recent fire incident at an aluminum production plant in North America and production adjustments by key European customers in response to shifting demand. We will talk about the market development in more detail later in the presentation. Looking now on sales growth in more detail on the next slide. Our consolidated net sales were over USD 2.7 billion, the highest for the third quarter so far. This was around USD 150 million higher than last year, driven by price, volume, positive currency translation effects, and USD 14 million from tariff-related compensations. Excluding currencies, our organic growth sales grew by 4%, including tariff costs and compensation. China accounted for 90% of our group sales, Asia, including China, accounted for 20%, and the Americas was 33% and Europe for around 28%. We outlined our organic sales growth compared to light vehicle production on the next slide. Our quarterly sales were robust and exceeded our expectations, driven by strong performance across most regions, particularly in the Americas, Asia, and China. Based on light vehicle production data from October, we underperformed slightly in production by 0.7 percentage points globally, as a result of a negative regional mix of 1.3 percentage points. We underperformed slightly in Europe, primarily due to an unfavorable model and customer mix. In the rest of Asia, we outperformed the market by 8 percentage points, driven primarily by strong sales growth in India and to a lesser extent, in South Korea. While the organic light vehicle production mix should continue to impact our overall performance in China, our sales to domestic OEMs grew by almost 23%, 8 percentage points more than their light vehicle production growth. Our sales development with the global customers in China was 5 percentage points lower than light vehicle production development, as our sales declined to some key customers, such as Volkswagen, Toyota, and others. On the next slide, we show some key model launches. The third quarter saw a high number of new launches, primarily in China. Although some of these new launches in China remain undisclosed for confidentiality, the new launches reflect a strong momentum for Autoliv in this important market. The models displayed here feature Autoliv content per vehicle from USD 150 to close to USD 400. We're also pleased to have launched airbags and seatbelts on some small Japanese cars, marking the main segment Autoliv has historically had limited exposure to. In terms of Autoliv's sales potential, the new L9 is the most significant. Higher content per vehicle is driven by front center airbags on five of these vehicles. Now looking at the next slide. I will now hand it over to Fredrik Westin.

Thank you, Mikael. I will talk about the financials in more detail now on the line. So turning to the next slide. This slide highlights our key figures for the third quarter of 2025 compared to the third quarter of 2024. The net sales were approximately USD 2.7 billion, representing a 6% increase. The gross profit increased by USD 63 million, and the gross margin increased by 130 basis points. The drivers behind the gross profit improvement were mainly lower material costs, positive effects from the higher sales, and improved operational efficiency. This was partly offset by negative effects from recalls and warranty, depreciation, and unrecovered tariff costs. The adjusted operating income increased from USD 237 million to USD 271 million, and the adjusted operating margin increased by 70 basis points to 10.3%. The reported operating income of USD 267 million was USD 4 million lower than the adjusted operating income. Adjusted earnings per share diluted increased 26% or by USD 0.48, where the main drivers were USD 0.29 from higher operating income from taxes and USD 0.08 from the lower number of shares. This marks our ninth consecutive quarter of growth in adjusted earnings per share, underscoring the strength of our ongoing operational improvements further bolstered by a reduced share count from our share buyback program. Our adjusted return on capital employed was a solid 25.5%, and our adjusted return on equity was 28.3%. We paid a dividend of USD 0.85 per share in the quarter, and we repurchased shares for USD 100 million and retired 0.8 million shares. Looking now at the adjusted operating income bridge on the next slide. In the third quarter of 2025, our adjusted operating income increased by USD 34 million, mostly attributed to USD 43 million, mainly from higher organic sales and the execution of operational improvement plans, supported by better call-off volatility. The out-of-period cost compensation was USD 8 million lower than last year. Costs for R&D and engineering net, as well as SG&A, increased by USD 30 million, mainly due to lower engineering income. The net currency effect was USD 6 million positive, primarily from translation effects. Last year's supplier settlement and this year's supplier compensation combined had a USD 29 million positive impact. The combination of unrecovered tariffs and the dilutive effect of the recovered portion resulted in a negative impact of approximately 20 basis points on our operating margin in the quarter. Looking now at the cash flow on the next slide. The operating cash flow for the third quarter of 2025 totaled USD 258 million, an increase of USD 81 million compared to the same period last year, mainly as a result of higher net income, partly offset by USD 53 million in negative working capital effects. The negative working capital was primarily driven by higher receivables, reflecting strong sales and delayed tariff compensation towards the end of the quarter. Capital expenditures decreased by USD 40 million. Capital expenditures in relation to sales was 3.9% versus 5.7% a year earlier. The lower level of capital expenditures is mainly related to lower footprint capital expenditures in Europe and the Americas and less capacity expansion in Asia. The free operating cash flow was USD 153 million compared to USD 32 million in the same period the prior year from higher operating cash flow and lower capital expenditures. The cash conversion in the quarter, defined as free operating cash flow in relation to net income, was around 87%, in line with our target of at least 80%. Now looking at our trade working capital development on the next slide. The trade working capital increased by USD 197 million compared to the prior year, with the main drivers being USD 165 million in higher accounts receivables, USD 8 million in higher accounts payables, and USD 40 million in higher inventories. The increase in trade working capital is mainly due to increased sales and temporarily higher inventories. In relation to sales, the trade working capital increased from 12.8% to 13.9%. We view the increase in trade working capital as temporary as our multi-year improvement program continues to deliver results. Additionally, enhanced customer call-off accuracy should enable more efficient inventory management. Now looking at our debt leverage ratio development on the next slide. Autoliv's balanced leverage strategy reflects our prudent financial management, enabling resilience, innovation, and sustained stakeholder value over time. The leverage ratio remains low at 1.3x, below our target limit of 1.5x, and has remained stable compared to both the end of the second quarter and the same period last year. This comes despite returning USD 530 million to shareholders over the past 12 months. Our net debt increased by USD 20 million, and the 12 months trailing adjusted EBITDA was USD 41 million higher in the quarter. With that, I hand it back to you, Mikael.

Thank you, Fredrik. On to the next slide. The outlook for the global auto industry has improved calls for North America and China. While the industry continues to navigate trade volatility and other regional dynamics, S&P now forecasts global light vehicle production to grow by 2% in 2025, following growth of over 4% in the first nine months of the year. The outlook for the fourth quarter has significantly improved. Nevertheless, they still anticipate a decline in light vehicle production of approximately 2.7% in the quarter. In North America, the outlook for light vehicle production has been significantly upgraded driven by resilient demand and low new vehicle inventories. However, a recent fire incident at an aluminum production plant in North America may impact our customers. For Europe, S&P forecast a 1.8% decline in light vehicle production for the fourth quarter despite some easing of U.S. import tariffs. We continue to see downside risks for Europe, like the European light vehicle production, driven by announced production stoppages at several key customers. In China, light vehicle production is expected to decline by 5%, primarily due to an exceptionally strong Q4 in 2024. Nevertheless, S&P anticipates sustained growth in Chinese light vehicle production over the medium term, supported by favorable government policies for new energy vehicles, more relaxed loan regulations, and increasing export volumes. The outlook for Japan's light vehicle production has improved as carmakers are increasingly shifting exports to markets outside the U.S., aiming to mitigate reduced export volumes to the U.S. In South Korea, domestic demand has been steadily recovering, while exports have also risen driven by increased shipments to other regions compensating for the decline in exports to the U.S. Now looking at our way forward on the next slide. We expect the fourth quarter of 2025 to be challenging for the automotive industry with lower light vehicle production and geopolitical challenges. However, our continued focus on efficiency should help offset some of these headwinds. Consistent with typical seasonal patterns, the fourth quarter is expected to be the strongest of the year. Despite the expected decline in global light vehicle production year-over-year, we foresee higher sales and continued outperformance, particularly in China. Unfortunately, we are also facing some year-over-year headwinds. Unlike the past three years, we do not expect out-of-period inflation compensation in the fourth quarter, given the shift in the inflationary environment. We expect higher depreciation costs due to new manufacturing capacity to meet demand in key regions, and that the temporary decline in engineering income will persist driven by the timing of specific customer development projects. These factors combined are the reason why we currently expect the full year adjusted operating margin to come in at the midpoint of the guided range. However, our solid cash conversion and balance sheet provide a robust foundation for maintaining high shareholder returns. Turning to the next slide. This slide shows our full year 2025 guidance, which excludes effects from capacity alignment and antitrust-related matters. It is based on no material changes to tariffs or trade restrictions that are in effect. Our organic sales are expected to increase by around 3%. The guidance for adjusted operating margin is around 10% to 10.5%. With only one quarter remaining of the year, we expect to be in the middle of the range. Operating cash flow is expected to be around USD 1.2 billion. We now expect CapEx to be around 4.5% of sales, revised from the previous guidance of around 5%. Our positive cash flow and strong balance sheet support our continued commitment to a high level of shareholder return. Our full year guidance is based on a global light vehicle production growth of around 1.5% and a tax rate of around 28%. The net currency translation effects on sales will be around 1% positive. Looking on the next slide. This concludes our formal comments for today's earnings call, and we would like to open the line for questions from analysts and investors. I now hand it back to the operator.

And the questions come from Colin Langan from Wells Fargo.

You raised your light vehicle production forecast from down 1.5% to up 1.5%, but organic sales didn't change. Why aren't you seeing any benefit from the stronger production environment on your organic?

Thank you for your question. There are a couple of factors at play here. Firstly, some adjustments we don't account for relate to previous quarters. Certain volumes increased in the first half, while we had already recorded our sales, leading to a different outdoor underperformance during that time. Secondly, we are observing a larger negative mix after nine months and anticipate this for the full year, close to 2 percentage points. This negative market mix is a contributing factor and is now less unfavorable than what we experienced a quarter ago. Additionally, some product launches in China have faced delays and are not meeting our expectations from about a quarter ago. These are the main reasons why the light vehicle production estimate increase is not reflected in our organic sales guidance.

Got it. And then the margin in the quarter was very strong. I thought Q3 was typically one of your weaker margins. Anything unusual in the quarter? I noticed you flagged supplier settlements. I kind of get the nonrepeated bad news last year. Is the $15 million of supplier compensation additional good news? Is that onetime in nature? How should we think of that or anything else that's maybe possibly onetime in nature in the quarter that drove the strong margin?

Yes. The $50 million there is a one-time. It is compensation from a supplier for historical costs that we have versus our customers there. So it's one-time in the quarter here for previous costs that we have had. So I would say here also that I think what you saw in the quarter here was that we had slightly higher sales than expected. So that was an important component, of course. But I think most importantly here is that we continue to see a very strong delivery of the internal improvement work that we are so focused on and that we have been focused on for a while leading to our targets here. So good work done by the whole team here across the whole value chain.

And the questions come from the line of Björn Enarson from Danske Bank.

On your implied guidance for Q4 and also on your cautious comments on Q4, it looks like there are some temporary negative effects that you are talking about. Should we extrapolate the Q4 trends looking into 2026? Or are you quite happy with the productivity work and also that call-offs look a little bit better? So should we have a base assumption that you should progress again towards the midterm target of 12%? Or how should we look upon that?

I think, first of all, that we feel confident when it comes to our ability to eventually get to our 12% target. No doubt about that. What you see here in the Q3, Q4 movement here is nothing if you read into that. I think, as I said before here, we see very good progress in terms of the activities that we control ourselves here, and we see really good traction when it comes to the strategic initiatives that we have accomplished some time back. So good progress there. I think when you look at Q4, it's, I would say, more of a normalization of the quarters here. It is still the strongest quarter in the year. But of course, in the previous last two, three years here, it has been more pronounced since we had this out-of-period compensation that we referred to earlier. Which you will not see in the same way now in this quarter in Q4 2025. So there is a difference there. And I would say also here, I mean, you have seen a little bit stronger Q3 when it comes to sales, and there is a timing effect between Q3 and Q4 compared to when we looked into the second half year. So there is also a part of the explanation. But the bottom line here, we feel comfortable with our own progress here towards the target that we have.

And then maybe just to build on that, just one more detail on the fourth quarter. We do expect that we will have a slightly lower engineering income also in the fourth quarter, as you saw in the third quarter. This is temporary, and it's very dependent on how the engineering activities are with certain customers. And this should then also recover in 2026.

Okay. I saw that comment. And did you say it's likely to be recovered then in early next year then?

Or next year overall, yes, should be a recovery ratio that is more in line with or a bit higher now than what you see in the second half of this year. And that's, again, very dependent on engineering activities with certain customers and how they reimburse us.

Yes, because in some cases, it's built into the pricing. In some cases, it's paid like engineering income specifically. Depending on how that mix looks over time, of course, you have some smaller fluctuation and that is really what we refer to.

And the questions come from the line of Tom Narayan from RBC.

Maybe a follow-up to that last one. The Q4 guidance. You called out three headwinds, the less compensation on inflation, I guess, the higher depreciation, and then the engineering income. Just wondering if you could dimensionalize those three in terms of order of magnitude for Q4. I mean, we know the engineering income is temporary. The other two, I guess, depend on certain factors. Just trying to dimensionalize those three in terms of what is temporary and what continues. And then I have a follow-up.

Yes. If you examine the Q3 income compared to the previous year and its percentage of sales, it provides a solid outlook for the fourth quarter. This will be our most significant challenge. The second challenge is the reduction in out-of-period compensation from customers related to inflation that we received last year, which will not be present this year. The third challenge is the increase in depreciation expenses.

Okay. And then on the China commentary, we did see–I think the ID is losing share in China due to some government initiatives and whatnot. I would have thought that alone would maybe benefit you guys more? I know macro in China, the domestics are doing better than the global. So I see that. I understand that. But just wondering if the share loss at BYD's seen. I know you're under-indexed to them is benefiting you guys?

Yes. I mean in the overall mix, of course, since we are selling components to them, and you see their portion of the total market flattening out. Of course, it's supportive in the sense of measuring our outperformance relative to OEMs, light vehicle production as such. So mathematically, yes, that effect is there.

And our next questions come from the line of Mike Aspinall from Jefferies.

One first on India. It was 1/3 of the organic growth. Can you just remind us where we are in the shift in content per vehicle in India and how large India is in terms of sales now?

Yes. I think we are seeing strong development in India there, as I said, 1/3 of the growth in the quarter. It's today around 5% of our turnover is coming from India. It's not long ago, it was around 2%. So a significant increase in importance there. We have a very strong market share in India at 60%. So of course, we are benefiting well from the volume growth you see there. And we're expecting India to continue to grow, and we have also invested in our industrial footprint there to defend our market share and to capture the growth here. In terms of content, we expect it to go from around USD 120 in 2024 to roughly USD 140 this year. So you have both content and light vehicle production growth in India to look forward to.

And then we are targeting around USD 160 to USD 170 in the next couple of years.

Great. Excellent. And one more. Just on the JV with HSAE, who are you purchasing these items from before? Were you purchasing from HSAE and now to JV, or have you formed a JV with them and we're purchasing from someone else previously?

I mean they have been an important supplier to us in the past as well. And of course, we have worked with them and established a very good relationship. I could say it hasn't been exclusively with them. We have a global supplier base here, but we see a great opportunity here to not only produce but also develop components for our future models and programs, working together on both development and manufacturing.

And the questions come from the line of Vijay Rakesh from Mizuho.

Mike, just quickly on the China side. I know you mentioned subsidies. When you look at the NAV and the scrapping subsidies, the fleet is down 50% this year. Do you expect that to be extended to '26? Or is there going to be another step down? And I have a follow-up.

Yes. I would say we are not speculating on that. So I guess it's any body's guess here. But overall, we definitely look very positively on China. As we have mentioned here before, we are growing our share with the Chinese OEMs, and we had a good development in the quarter. We're also investing in China as well; as I mentioned in the presentation earlier, we are investing in a second R&D center in Wuhan to work closer with a broader base of customers and to add capacity. We talked about the JV now, and then also the partnership with Qatari here is important steps. So all in all, looking positively in China going forward here for sure. So whether subsidies continue or not, we will see. But overall, it's pointing in the right direction.

Got it. And then I think on the European market, there’s a lot of talk about price competition and imports coming in from Asia and tariffs, etc. How do you see the European auto market play out for 2026?

Yes. I think we will wait to comment on '26 for the next quarterly earnings. As we have said here for the remainder of the year, we are cautious about the European market more from a demand point of view than anything else. That’s really the main question mark around the market and anything else in terms of OEM offerings or anything like that. I think it's really the end consumer question.

And the questions come from the line of Emmanuel Rosner from Wolfe Research.

My first question is actually a follow-up on Colin's question around the organic growth outlook, which is unchanged despite the better LVP. I'm not sure that I understood all the factors, but if we wanted to frame it as growth above market. Initially, you were going to grow 3% despite a shrinking market, now growing 3% in a market that would be growing 1.5%. Can you maybe just go back over the factors that are driving this different expectation for outperformance?

Yes. In that sense, I mean the largest change over yes, a couple of quarters here since we started the year is the negative market mix. So as I said, we now see a negative market mix for the full year of around 2 percentage points, and that has deteriorated over the course of the year. But that's the largest part. Then we also have seen here in the third quarter, also the negative customer mix for us, mostly in North America and Europe. So that's also a deviation from what we expected going into the year. And then the last one that I already mentioned before is that we see some delays on the new launches, in particular in China. So they're not coming through at the same pace that we had expected originally.

Understood. And if I go back to your framework and your midterm margin targets. Can you just maybe remind us the drivers that will get you from the 10% to 10.5% this year towards where we are tracking on some of those? I did notice that you mentioned improved call-offs accuracy, both sequentially and year-over-year. Is that something that you expect to continue and that will be helpful for that?

The framework has not changed, as you would probably expect. So it's still – if we take 2024 as the base point, adjusted operating margin, we still expect 80 basis points improvement from the indirect head count reduction. In the reported numbers here now, you don't see a movement in that, but we had about employees from a labor law change in Tunisia that we now have to account for headcount that distorts that number. You adjust for that, we would also have shown further progress on the indirect headcount reduction. So that is well on track. There was a 60 basis points from normalization of call-offs. That is developing well. We saw 94% call-off accuracy here and also in the third quarter, which is an improvement on a year-over-year basis. We also talked about that we have decreased our direct headcount by 1,900 people despite that organic growth was up 4% on a year-over-year basis. So that's tracking very well. And then the remaining 90 basis points would be from growth component, where we are a little bit behind now this year as we laid or as you talked about before, and then from automation digitalization. And there again, you can see, I think, on the gross margin, even if you exclude the settlement here with the supplier, you can also see that we are progressing well on that component.

And the questions come from the line of Jairam Nathan from Daiwa Capital Markets.

I just wanted to kind of go back to the announcement in China. Just wanted to understand the timing; it seems it coincided with the announcement of Adient, the zero-gravity product. So just to wonder, is there–is this the timing related to some new business win or more opportunities there?

You're talking about the JV or?

The JV, the Qatar partnership, as well as the kind of announced you kind of finalize the Adient gravity product.

I was going to say they're not connected at all as such because, I mean, the JV here is really to vertically integrate in an effective way together with the partner to gain a broader product offering and market reach to our end customers. Qatar is, of course, a development collaboration to make safer cars and safer roads for everyone. This includes light vehicles, commercial vehicles, and valuable radiuses, meaning two-wheelers, etc. So the broad-based research collaboration there. And then the AGM, of course, is connected to the zero-gravity products. So, they are all about safety products, but they are not connected in any way.

Okay. And just a follow-up; I wanted to understand the lower CapEx. Is that something that can be maintained as a percentage of sales in the future?

Yes. I think we have been talking about this in the past also; that our ambition is to bring down the CapEx levels in relation to sales compared to where we have been. We've been through a cycle where we have invested a lot in our facilities around the world here, Europe, where we have consolidated and upgraded a number of plants in various investments, we talked about before, expanding capacity in China. We also upgraded in Japan, etc. So the last couple of years here, we have heavily invested in upgrading our industrial footprint, and we are coming out now into a more normalized phase here; that's why we can bring it down. We are not expecting to see CapEx jump back up in the near term.

The questions come from the line of Hampus Engellau from Handelsbanken.

Two questions from my side. Maybe a follow-up question, but if I remember correctly, you covered about 80% of the tariff costs in the second quarter, and the remaining 20% came in Q3, and now you're moving around 20% for Q3, you would get in Q4. Is the net effect like 100% compensation, if you account for the things you that came from Q2 to Q3? Or you still have a net negative there on the margins?

Let's take that one. We are still net negative here. As we said, we have received some of the outstanding 20% in the second quarter. But most of it remains still. Then in the third quarter here, we got 75%. So we have accumulated more outstandings from Q2 to Q3. But as we have indicated here, we still expect to get full compensation and catch up on this in the fourth quarter and fully compensate. That's our expectations here. Of course, the work is ongoing as we speak, but that's the net result right now.

Fair enough. And the last question was more related to what you see today in terms of launches for 2026, maybe compared to 2025 if you have–could share some light on that?

I have no figure yet for '26 to share with you. But I think in general terms, we have good order intake to support our overall market position. We see, however, that especially on the EV side, planned programs or launches are being delayed or canceled. So there are some reshuffling there. But what impact that we have in '26 compared to '25, we are not ready to communicate that yet. But as I said, we have good order intake to support our market position.

And the questions come from the line of Edison Yu from Deutsche Bank.

This is Winnie Yan for Edison. My first question is on the supplier contract that came out of GM, indicating maybe more favorable contract terms for suppliers on a go-forward basis. Just curious if this is something that's more isolated and more dependent on the OEM, or do you see like heading into this a broader trend that can close potentially as a headwind heading to next year?

Yes. No, I don't want to comment specific customer contracts or conditions here. But of course, I mean, it's constantly ongoing development regarding what the OEMs want to include in the contract. I would say that I see good ability to manage those clauses and contracts that are put in front of us here. I must say I don't feel any major concerns around a more difficult situation. I think we are quite successful in negotiating and settling contracts with our customers here. So nothing exceptional there from our point of view, I would say.

Got it. And then on the Ford fire impact, you did mention some potential impacts into Q4. So I was curious if you can help us delineate that? Is that something to be concerned about? Or is it more of a negligible impact for you guys?

Yes. I think I mean every car that is not produced is not a good thing, of course, and especially the customer in question here. But I mean, you have seen the announcements made by the OEMs here. Just as a reference, the Ford F-150 is around 1% of our global sales. So we're good about this manageable level from our point of view.

And the next questions come from the line of Dan Levy from Barclays.

Great. I just wanted to follow up on that prior question. The headlines on Experia yesterday causing some potential supply issues. Just how much of a potential risk have you seen or heard on that in the fourth quarter for European production?

For the European production. No, I think it's too early to comment on that. I mean, it's just a few days from the incident here. I think, first of all, I think we have a very good supply chain team that are managing through that situation here. We have been here before with supply chain cost challenges. I would say the last couple of years, there have been many topics here. So the team is well prepared to maneuver through it. We'll see and get back on that, but I would say it's too early to be too granular or detailed around it. As I said, solid ground, we don't see much yet on the customers.

Just as a follow-up, I wanted to double-click on the China performance. So you did very well outperformance with the domestic OEMs. But in spite of that, the total China performance was negative 3 points, even though the domestics are the clear majority. I think we were all a bit sure. I know you sort of unpacked this a bit before in one of the prior questions. But can you maybe just explain the dynamics of why even though you outperformed the domestic, the overall China performance was negative? And what–can you explain what flips going forward that is leading you to say that your China growth going forward should outperform?

Yes. I mean we still guide for us, as we said before here, we believe that we will see improvements here in the coming quarters. I think it's a really important milestone here what we reported on the OEM outperformance, which was really strong here in the quarter. But still, the global OEMs are the majority of our total sales. Some of our customers here that are significant had a negative mix impact on us this quarter, unfortunately. So that was on the negative side here. But we don't see this as a major trend shift; it's a mix effect that we see from quarter to quarter. The important takeaway is that we see this strong growth development with Chinese OEMs that is also growing their share of the total market, which sets us up for our development in China over time.

Given the time constraints, this concludes the question-and-answer session. I will now hand back to Mr. Mikael Bratt for closing remarks.

Thank you very much. Before we conclude today's call, I want to reaffirm our commitment to meeting our financial targets. We remain focused on cost efficiency, innovation, quality, sustainability, and mitigating tariffs amidst ongoing market headwinds. We anticipate a strong fourth quarter performance. Our fourth quarter call is scheduled for Friday, January 30, 2026. Thank you for your attention, and till next time, stay safe.

This concludes today's conference call. Thank you all for participating. You may now disconnect your lines. Thank you.