Earnings Call Transcript - ALV Q3 2021

Operator, Operator

Welcome to the Q3 2021 Autoliv, Inc. Earnings Conference Call. Throughout the call, all participants will be in a listen-only mode and, afterwards, there will be a question-and-answer session. I will now hand over to Anders Trapp, Vice President, Investor Relations. Please begin your meeting.

Anders Trapp, Vice President, Investor Relations

Thank you, Martin. Welcome everyone to our third quarter 2021 financial results earnings presentation. On this call, we have our President and CEO, Mikael Bratt, and our Chief Financial Officer, Fredrik Westin. I am Anders Trapp, Vice President of Investor Relations. During today's earnings call, our CEO will provide a brief overview of our third quarter results, as well as provide an update on our general business and market conditions. Following Mikael, Fredrik will provide further details and commentary around the financials. We will then remain available to respond to your questions. 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 reconciliations of historical U.S. GAAP to non-U.S. GAAP measures are available in our SEC regulatory filings, available on autoliv.com. Lastly, I should mention that this call is intended to conclude at 3:00 p.m. Central European Time, so please follow a limit of two questions per person. I now hand over to our CEO, Mikael Bratt.

Mikael Bratt, CEO

Thank you, Anders. Looking on the next slide, first, I'd like to thank our team once again for their unrelenting commitment, particularly in managing the volatility in customer call-offs. Thanks to the team's effort, we were able to supply our customers and achieved solid performance in our plans, despite facing a very challenging market. This slide quite well illustrates how dramatic light vehicle production has developed during 2021, especially since July. Supply shortages of semiconductors and other components severely impacted the light vehicle production in the third quarter. It led to a third quarter global LVP decline of 20%, which was 17% lower than what was expected only three months ago, and 12% below Q2, all according to IHD Markit. Markets with high safety content per vehicle were most affected by the dramatic changes. Europe, Americas, and Japan all saw Q3 LVP being 20% to 25% lower than what was expected three months ago. The decline in light LVP, unpredictable changes in customer call-offs, and high raw material costs resulted in reduced profitability in the quarter, despite strict cost control including a significant headcount reduction. Looking on the next slide, given all that, I am pleased that we continued to strongly outperform the global LVP in the quarter and with strong order intake for the first nine months of the year. We continue to execute strict measures to mitigate the current adverse business headwinds, including capacity alignment in Europe and in North America. However, as a result of the significantly reduced light vehicle production outlook for the year, we are revising our full-year indications for sales, adjusted operating margin, and operating cash flow. Despite the challenging environment, our cash flow was solid, and our debt leverage ratio remains well within our target range. We paid a dividend of $0.62 per share in the third quarter. Looking now on the financial overview on the next slide, our consolidated net sales of $1.8 billion were 9% lower than in Q3 2020, due to a 20% decline in LVP. Without our strong sales outperformance, the sales decline would have been almost double. Adjusted operating income excluding costs for capacity alignments fell from $206 million to $103 million. The adjusted operating margin was 5.6%. The lower operating margin resulted from lower sales, higher call-off volatility, as well as rising costs for raw materials. Operating cash flow was a solid $188 million, despite the challenging environment. Looking now on sales development on the next slide, I am very pleased that our organic sales growth outperformed the global light vehicle production by almost eight percentage points. This was achieved as we continued to execute on our strong order book, and despite the fact that the largest LVP declines were in high content per vehicle markets. We had a very strong outperformance in all regions. In North America, we outperformed by seven percentage points and in Europe by 16 percentage points. In China, we outperformed by six percentage points in spite of high-end vehicles being more affected by the semiconductor shortage. Although all regions showed outperformance, only one region, Rest of Asia, showed organic sales growth year-over-year. Within this region, sales in India and ASEAN grew strongly, with side airbag sales more than doubling compared to last year. Looking on the next slide, in the third quarter, we had the highest number of product launches for a single quarter ever. And we remain on track to launch approximately 750 new products for the full-year, also a new record for the company. The models shown on this slide have an Autoliv content per vehicle from approximately $160 to almost $700. This is one of the highest contents we have on any vehicle model. Six of these vehicles are either EVs or plug-in hybrids, further extending our exposure to this growing market. Last year's sales, this market accounted for around 10% of our total sales. We expect an almost doubling of sales to this segment in 2021. The long-term trend to higher content per vehicle is supported by the introduction of front-center airbags, knee airbags, and battery cutoff switches. I will now hand over to our CFO, Fredrik Westin, who will talk about the financials on the next few slides.

Fredrik Westin, CFO

Thank you, Mikael. This slide highlights our chief figures for the third quarter of 2021 compared to 2020. Our net sales were $1.85 billion, which was a 9% decrease compared to the same quarter last year, less than half of the 20% decline seen in the global light vehicle production. Gross profit declined by 25%, to $301 million, while the gross margin decreased to 16%. The gross margin decrease was primarily driven by the lower sales and higher raw material costs. In the quarter, capacity alignments had a $4 million negative impact on the operating profit. The adjusted operating income decreased to $103 million, from $206 million. As a result, the adjusted operating margin declined by 4.5 percentage points to 5.6%. The operating cash flow was $188 million. Earnings per share diluted decreased by $0.44, with the main drivers being a $1.17 impact from lower adjusted operating income partly mitigated by $0.31 from lower costs for capacity alignment and antitrust-related matters, and $0.26 from lower tax. Our adjusted return on capital employed declined to 11%, and the adjusted return on equity to 10%. We declared and paid a quarterly dividend of $0.62 per share in the quarter, the same as in the previous quarter where the dividend was reinstated. Looking now at the adjusted operating margin bridge on the next slide, our adjusted operating profit of $103 million was 50% lower than the same quarter last year. The impact of raw material price changes was a negative $37 million in the quarter. Foreign exchange positively impacted the operating profit by $4 million, mainly as a result of a weaker U.S. dollar. Support from governments in connection with the pandemic was $10 million in the third quarter last year, while it was not material to our financial results in the third quarter of this year. The adjusted operating profit was negatively affected by higher SG&A and RD&E net of governmental support of $4 million. Lower sales impacts from increased call-off volatility and cost inflation mainly related to logistics and utilities resulted in operational inefficiencies of $56 million in the quarter. Excluding foreign exchange and raw material cost increases, the adjusted operating income leverage was approximately 25% on the organic sales decline. Despite unplanned unpredictable customer call-offs, the 25% decremental margin is within our communicated normal range. Looking on the next slide, through a number of actions, we have mitigated some of the negative effects from the lower sales, the increased call-off volatility, and the cost inflation. These actions include activities such as adjusting production, shortening workweek hours, and furloughing personnel. For example, footprint and capacity alignment in Europe, as well as moving overhead functions to best cost countries in the Americas. We're also evaluating further footprint adjustments. In total, we have reduced headcount by over 4,500 since the end of the first quarter, of which 2,500 in the third quarter. However, as you can see on the slide, our strict measures include much more than just headcount and workweek hour reductions. Demand planning and forecasting are key for achieving efficient operations. During the quarter, planning of production has been challenging as many customers have initially placed high orders and then at late stage substantially reduced them. In Q3, we have frequently seen call-off deviations of around 50%, and in some cases even higher. In this environment, we cannot only rely on forecasts from our customers for production planning. This means that we need to do our own assessment on weekly volume demand based on customer's behavior over the past months. We include claims for compensation for lost volumes with short notice in the commercial negotiations with our customers. Our supply chain management teams have been working hard to balance inventories to actual demand. Through negotiations and consolidation of the supply base, we successfully mitigated some of the raw material headwinds in the third quarter. We have also delayed and reduced capital expenditure plans where possible. Moving on to raw material impact on the next slide. Supply and demand imbalances continue to drive prices of raw materials higher. Through successful mitigation actions, the raw material headwinds in the third quarter were slightly lower than expected. However, new headwinds involving, for example, higher magnesium and resin costs mean we still expect a full-year operating margin headwind from raw materials of around 130 basis points. Year-to-date, we have limited the impact with close to zero impact in the first quarter, around $8 million in the second quarter, followed by around $37 million in the third quarter. We have some limited contractual pass-throughs to customers. Given this exceptional period of high raw material prices, we believe it is necessary to request compensation from our customers and negotiations are ongoing. It’ll take time to see the results of these efforts, and we do not expect much impact this year. A more significant recovery is expected in 2022. On to the next slide, for the third quarter of 2021, operating cash flow decreased by $164 million to $188 million compared to the same period last year, mainly due to lower net income and less positive effects from changes in operating working capital. Compared to the prior quarter, working capital improved by $35 million benefiting from a $74 million change in trade working capital. This was mainly the result of a $144 million reduction of receivables, partly offset by $49 million from a decrease in accounts payables and $21 million from increased inventories. The increase in inventories was a consequence of low demand visibility and supply chain challenges. Capital expenditure increased by 46% year-over-year to $112 million. The increase mainly reflects the lower level in the prior year due to the extraordinary measures taken in 2020. Capital expenditure, net in relation to sales was 6% versus 3.8% a year earlier. Free cash flow was $77 million impacted by lower operating cash flow and the higher capital expenditure. The cash conversion over the last 12 months was 97%. Now to the next slide, in the past two years, we have managed a very difficult market environment with significant declines in vehicle production and low demand visibility, as well as severe disruptions of global supply chains. And still we have reduced our net debt by $600 million since mid 2019, and thereby recovered to a balance sheet position that is in line with our target. The leverage ratio is unchanged compared to last quarter at 1.1 times at the end of September 2021. This is a significant improvement compared to 2.4 times one year ago. In the quarter, our last 12 months EBITDA decreased by $96 million balanced by the net debt decrease of $42 million. Now looking at the light vehicle production development on the next slide, in the near term, the light vehicle outlook will mainly be determined by the evolution of the situation around semiconductors. In North America, the industry continues to struggle to meet consumer demand for new vehicles due to the shortage of semiconductors. Inventory of new vehicles in the U.S. ended September below 1 million units, the lowest level seen for at least 35 years. Despite healthy underlying demand trends in Europe, component shortages meant that registrations have not returned to the pre-pandemic level. In China, semiconductor and energy constraints are affecting production, especially for higher-end vehicles. Demand is also being impacted by monetary policy and rising concerns about property prices. As a consequence of the supply chain constraints, production is expected to remain volatile in the fourth quarter. There are some indications of moderate improvement in semiconductor availability in Asia and North America, but the visibility remains poor. For the full-year 2021, our assumption is now that global light vehicle production will be flat compared to 2020. Where possible, OEMs will likely continue to prioritize production of vehicles with no or low CO2 levels as well as larger vehicles. For Autoliv, this trend should support further outperformance versus light vehicle production. Assuming that the component availability improves, we expect the good demand and low inventories to support a recovery in LVP in 2022. I now hand it back to Mikael.

Mikael Bratt, CEO

Thank you, Fredrik. Turning to the next slide, our revised full-year 2021 indications exclude costs for capacity alignment. Our full-year indication is based on a flat global light vehicle production compared to 2020. Our previous indication from July 17, 2021 was based on an assumption of 9% to 11% LVP growth for 2021. We raised our expectations of sales outperformance versus global LVP from around 7 to around 8 percentage points. As a consequence of the lower light vehicle production assumption and higher outperformance, we now expect our organic sales growth to be around 8%. Including positive currency translation effects of around 3%, our net sales increase is expected to be around 11%. We expect an adjusted operating margin of around 8%. Operating cash flow is expected to be around $700 million. Our strategic initiatives are gradually yielding good results, and we are confident of our 2022-2024 targets based on our internal progress and expected light vehicle recovery in the next few years. Turning the slide, with relentless focus on quality and execution, as well as mitigating near-term headwinds, we also continue to drive forward towards our targets. This, and more, will be explored at our virtual CMD on November 16. The event will be virtually only and live-streamed. More details will be made available at the beginning of November. And I will now hand it back to Anders.

Anders Trapp, Vice President, Investor Relations

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

Operator, Operator

Thank you. We have our first question from Emmanuel Rosner at Deutsche Bank. Your line is now open.

Emmanuel Rosner, Analyst

Thank you very much, and hello everybody. I have two lines of questions. The first one is could you please talk a little bit more about the operating environment you're seeing out there, in particular what you're seeing so far in the fourth quarter? Your updated guidance suggests some sequential improvement in earnings, and therefore just curious how much things have improved so far sequentially? And then as part of this question as well, your light vehicle production outlook slide basically speaks about some improvements seen lately in North America. I was curious if you could just elaborate a little bit more about what, specifically, you're seeing.

Mikael Bratt, CEO

Thank you for the questions. First of all, we are currently affected by the semiconductor issue. We are seeing some slight improvements, primarily in Asia and the U.S., based on our discussions with customers and suppliers. However, the visibility remains limited. Our focus is on our internal activities to mitigate the current situation, and I believe we have handled this successfully this quarter. We have managed to meet customer expectations and made necessary adjustments that we will continue to implement in the upcoming months and quarters. As for the semiconductor environment, I think that's about all we can share at this time. Regarding raw materials, we've observed an increase throughout the year, and we've outlined how it has sequentially impacted us. Our supply chain team has done well to minimize the effects. This quarter, we've also faced challenges from the energy situation, particularly with magnesium and zinc, which are closely related to energy issues. It's a volatile environment, but we are concentrating on what we can control.

Emmanuel Rosner, Analyst

These are helpful. And then I was actually going to follow up on the raw materials, if I may. It's encouraging to see that you're expecting more recoveries in 2022. If we were to exclude the recoveries just for a second and focus on the growth impacts, based on what you've seen so far with raw materials, would you expect an incremental headwind in 2022 of a similar magnitude to what you're seeing in 2021 or less or more? And that's, again, excluding recoveries. And then on the magnesium side, it's obviously an important development. Can you just remind us where your exposure is there?

Mikael Bratt, CEO

We are not providing any forecasts for 2022 at this time. First, we need to complete Q4 and reach the next earnings call before discussing that. The current visibility does not assist in this matter, so we will need to revisit that question later.

Fredrik Westin, CFO

To the question on the exposure to magnesium, it's predominantly in our steering wheel business.

Emmanuel Rosner, Analyst

Thank you.

Operator, Operator

The next question is by Hampus Engellau, Handelsbanken. The line is now open for you.

Hampus Engellau, Analyst

Thank you very much. And sorry for calling back on magnesium, but would it be possible to add some flavor on the risk you see in magnesium shortage here and what we're seeing in China? Or is it just a price situation for you guys? That's my first question. And then the second question is related, if you could also maybe discuss order intake. I know you won't maybe market share, but maybe you could indicate how things are trending on the order and your long-term target of having 45% market share in retail sales. Those were my questions. Thank you.

Mikael Bratt, CEO

Thank you, Hampus. On the magnesium side, I would say, so far for us, it's more a question of price. And I think it, of course, depends on how the situation in mainly China develops. But we all know that the reason why we have price increases in magnesium is that they have reduced production in China as a result of power shortages there. That is, of course, a topic that we are following very closely to see what alternatives we have. Right now, I feel that, in terms of availability, we have that under control as it looks right now. But that's something we will follow closely. On the order intake side, as we indicated here, we continue to see a strong new order intake, and it adds to our order book and supports our expected market shares that we had talked about before, around 45%. So, there is good support for that for the years to come.

Hampus Engellau, Analyst

I have a follow-up question. It would be interesting to know how important magnesium is in the steering wheel business, or if it's possible to substitute it with another metal in the steering wheel design.

Mikael Bratt, CEO

No, it's crucial, of course, that is a part of the main structure of the steering wheel. There are alternatives, but you don't change alternative materials overnight; there are a lot of requirements to do that together with our customers, so that's not a short-term option, especially under current circumstances. But, as I said, we are not there, and it's not a concern today.

Hampus Engellau, Analyst

Fair enough. Thank you.

Operator, Operator

The next question is by Colin Langan, Wells Fargo. The line is now also open for you.

Colin Langan, Analyst

Thanks for taking the question. The decremental margins on your guidance cut are sort of in the low 20% range, which is significantly better than some other suppliers that have recently cut. They have indicated that volatility in schedules made it tough to select labor. I mean, is that just not structurally an issue for you or are there other cost savings that are offsetting that, because this does seem to be a much better performance?

Fredrik Westin, CFO

No, I think it's an equally large problem for us. If you look at the development here in the third quarter, we’ve had sequential declining volumes as well, and if we exclude the raw material cost impact, we've been here in the mid-20% decremental margin range. That's also what we see for the full-year guidance that we've provided if you exclude the raw material cost impact.

Colin Langan, Analyst

Okay, got it. And then there's been some headlines about recalls around airbags that I think you've been, it doesn't look like there's a charge. So I assume you haven't been directly impacted? Is that impacting the competitive landscape at all? I think in the past, sometimes you've actually had opportunities to help with the recall needs. Is anything changing there because some of the numbers that are being investigated seem quite large?

Mikael Bratt, CEO

It depends on which recall you are referring to. We’re connected to one, but we are providing the complete module. However, we’re not providing the inflator; it's an inflator that is sourced from another supplier, and this is connected to the Volvo recall. So, the net effect of all the insurance and liability theory in that recall, we expect no material impact from that. In the larger scope of other types of recall with other manufacturers, we don't expect to see any volume impact for us in that end, so it was neutral there.

Colin Langan, Analyst

Okay, thanks for taking my questions.

Mikael Bratt, CEO

Thank you.

Operator, Operator

The next question is by Agnieszka Vilela, Nordea. The line is now open for you.

Agnieszka Vilela, Analyst

Thank you. My first question is about the capacity alignment actions that you have now in the U.S. and Europe. Could you please elaborate what you're doing there? Is there any cost or cost savings associated with these actions?

Mikael Bratt, CEO

Yes, so the activity that was recorded now in the third quarter, the $4 million net is related to an initiative in the Americas, we're talking about roughly 100 headcount that we’re adjusting, and that will all come through here in the fourth quarter. What we’re referring to then in terms of the other ongoing activities is the continuation or the finalization of the Structural Efficiency Program number two, which is over 90% completed. However, there is still a small part left to be concluded in Europe during the fourth quarter and also the ongoing footprint activities within Europe related to Germany and Sweden that we’re referring to. We also continue to evaluate further footprint activities and actions, and then we would communicate them as the time would be appropriate.

Agnieszka Vilela, Analyst

Perfect, and to that point, aren't you afraid that you might be more or it would be more difficult for you to ramp up production if we see the recovery in the global car production, if you're doing this kind of actions?

Mikael Bratt, CEO

No, I think, I mean, the footprint adjustment that Fredrik refers to is obviously a combination of short-term needs, together with the long-term productivity efforts we’re driving. Then on top of that, we are then doing more short-term initiatives resulting in a reduction in headcount and also stoppage days in our plants to offset the volatility and lower volumes. We really can quickly ramp-up, so we are not taking out any capacity that would limit us from ramping up. It is more effectively usage that we’re working on. So we don't see that risk.

Agnieszka Vilela, Analyst

Yes, perfect, thank you. And my second question is about the discussions that you are having with the OEMs about getting compensated for the cancelled volumes. How are these discussions proceeding or do you expect any compensation?

Mikael Bratt, CEO

Yes, I mean it is part of a larger negotiations that are ongoing, and it's of course, raw material is the main component that we’re discussing, but then also due to the past behavior of the OEMs with keeping call-off at high levels and then at very short-term cancelling them and reducing them quite substantially. We’re now discussing compensation for that, not only related to the inefficiencies in production, but also in terms of inventory carrying costs and so on. We have to see how much of that will be successful. It is, as I said, part of larger negotiations that tend to happen towards the end of the year with the customers, but it is definitely something that we will seek compensation for.

Agnieszka Vilela, Analyst

Perfect. Thank you.

Operator, Operator

The next question is by Erik Golrang, SEB. The line is now open for you.

Erik Golrang, Analyst

Thanks. Most of my questions have been answered. I'll ask you another one about raw materials, perhaps a bit differently. In 2022, I appreciate the insights you're providing and expected more compensation. On a net basis, do you still see a negative impact from raw materials even with that? Or has it turned into a positive due to that compensation?

Mikael Bratt, CEO

I think, first of all, we have to see how it plays out in 2022 here. But as Fredrik said here, I mean, there are discussions ongoing for the current situation. It also depends on how the raw material cost development overall will be in a more, let's say, medium to long-term development here. That's a different discussion needed with the customer if that scenario would be a more long-term situation with significantly higher raw materials. So, I think, basically, we have to come back to that as we see how it develops in the next quarters.

Erik Golrang, Analyst

Okay, thanks. I have a more specific question about magnesium. If I remember correctly, didn't we have a similar situation in the past? It seemed like getting compensation for magnesium was a bit easier because it was clear which components were involved and the quantities. Is that an accurate memory of what happened, or am I misremembering?

Mikael Bratt, CEO

No, I don't think you can generalize like that. What it is about, I would say, is of course, if it's a structural change in the cost's nature, meaning that it's more long-term and it's also a critical component in our products. It has a different magnitude in the dialogue compared to other raw materials. But it's very difficult to generalize like that. It is case by case with each customer.

Erik Golrang, Analyst

Okay, thank you.

Operator, Operator

The next question is by Joseph Spak, RBC Capital Markets.

Joseph Spak, Analyst

Thank you very much. The decremental margins from this quarter compared to the last quarter were slightly worse, which likely reflects some of the volatility we've been discussing. Looking ahead to the fourth quarter in relation to the third quarter, there seems to be some improvement, around 15%, which is below what we typically see historically on the upside. Should we consider this as the appropriate level to expect in the near term while uncertainty continues, even into early 2022?

Mikael Bratt, CEO

We typically see higher engineering income in the fourth quarter, which impacts the sequential calculation you mentioned. However, we anticipate a more significant challenge from rising raw material prices in the fourth quarter compared to the third quarter. On the positive side, we expect sequential volume improvement and LVP improvement, which should provide some help. Those are the key factors to keep in mind.

Joseph Spak, Analyst

Okay. I guess what I'm asking is like even if volume is higher, given like there is still a lot of volatility in the schedules, should we expect that your conversion on volume would be a little bit below what you aim for over the mid-term because of that volatility?

Mikael Bratt, CEO

No, we expect the visibility to remain low also into the fourth quarter and that volatility will mostly likely remain at similar levels. We don't expect any significant change.

Joseph Spak, Analyst

Thank you for that.

Operator, Operator

The next question is by Mattias Holmberg at DNB. The line is yours.

Mattias Holmberg, Analyst

Thank you. One question left from me. If we take a step back and try to look at the bigger picture, in particular on your medium-term targets, I'm just trying to understand if there is anything in the current situation with the short-term volatility that impacts your trajectory or your ability to reach these targets. I mean, we're one year further down the road now, and the years of the medium-term are starting to get closer. So I'm just trying to get your thinking on what's needed in order to get to that level.

Mikael Bratt, CEO

I think the way we see it here is that we are holding on to all the improvement initiatives that we have lined up to get towards our target and that is paying off. We see positive results yielding from those activities. I would say that goes on at the same time we manage these short-term. We believe also that, as we have stated in our report, the volumes will normalize, meaning the LVP volumes will normalize in the years to come. It is true, we are one year down the road, but there are still a number of years left within this time horizon, where the expectation would be that we have less volatility and also more normalized level of absolute numbers of vehicles being produced. The combination there makes us comfortable in stating that we believe in the targets there could be kept absolutely.

Mattias Holmberg, Analyst

Great, thank you.

Operator, Operator

Your next question is by Brian Johnson, Barclays.

Brian Johnson, Analyst

Yes, couple of questions. First, I just want to kind of as we think through modeling decrementals with the production volatility, can you help us understand which of your product lines within airbags and steering wheels is fungible, and you can kind of keep the factories running smoothly and just send the trucks to different factories, in which are really start-stop depending on customer schedules, and then how that feeds through to kind of decremental margins?

Mikael Bratt, CEO

I'm not sure I follow your question. Are you asking for more flavor on how the different product lines are being impacted by the volatility?

Brian Johnson, Analyst

Yes. So, how that translates into your overall decrementals?

Mikael Bratt, CEO

I think we're not breaking it down by product line as you know. I wouldn't say that one product line is easier or worse than another. The challenge remains in managing the volatility in production; when you look into specific processes, you may notice differences as some are more optimized than others. Forcing a more atomized production level can lead to higher inventory and help smooth things out. We have increased inventory due to this volatility, but I wouldn't highlight a particular product line over another.

Brian Johnson, Analyst

Okay. And the second question is on chips. First, are the chips used in your Restraint Control Systems at all tied up in the whole global chip shortage? Secondly, while I'm talking about chips, would you have any interest in the Restraint Control electronics business of your former subsidiary?

Mikael Bratt, CEO

On your last question, I can answer and say that that's nothing we’re entertaining; it’s not our interest to look at that. We spun it off a number of years ago, and we spun it off for a reason that is still valid. As for where we’re using our semiconductors, it's four, where I would say most of our product lines to various extents. However, we are not sourcing semiconductors directly ourselves; it’s through various Tier 2 suppliers, but of course we’re working very closely with them to support them in their efforts to secure semiconductors. We have direct contact with semiconductor suppliers in that work. So far, we've worked very well together to secure semiconductors for our own value chain, and we've been able to deliver to our customers what we’re committed to.

Brian Johnson, Analyst

Okay, thank you.

Operator, Operator

The next question is by Rod Lache, Wolfe. The line is now open for you.

Rod Lache, Analyst

Thanks, I was hoping just to follow-up with two points of clarification. People have asked about this, but like the decremental margins of 25% are quite good, just considering the production volatility. At some point, that volatility will diminish, and you're going to see some increases in production. Would it be reasonable to expect that your incrementals would be better when that happens, or do you have any estimate of what that volatility is costing you? Secondly, there is a lot of scrutiny that's being applied to the inflators of your competitors still, including non-Takata inflators. I think you referenced, the Volvo recall where that's actually a ZF inflator. Just how are your customers thinking about this? Why wouldn't Autoliv gain in some way from what's happening around you?

Mikael Bratt, CEO

Maybe I can start to answer the second question. I don't recall or want to comment on our competition situation here. Our focus is to always maintain quality on top of our focus list, and we’re securing that with our efforts here. We work with our customers and support them whenever needed. Proven quality to our customers is the best way to look at business opportunities in the future.

Fredrik Westin, CFO

On the decremental margin, what we want to highlight is that we've maintained a very strong cost and capital discipline we've seen throughout this year. As we indicated, if you look at our headcount development down 4,500 since Q1 and a further reduction by 2,500 in the third quarter, I think that shows how disciplined we have been or how focused we have been on this. You also see the SG&A cost coming down sequentially. That is together with what we're doing on production overhead to take benefit from our Structural Efficiency Programs. As you said, on the incremental side, we want to achieve the high margin possible when recovery starts. How that plays out for the next year, we will have to come back to that when we talk about the ‘22 guidance. But we also laid out that we expect meaningful progression towards the mid-term target.

Rod Lache, Analyst

Fair enough. Great execution, thank you.

Fredrik Westin, CFO

Thanks.

Operator, Operator

There are no further questions.

Mikael Bratt, CEO

Thank you, Martin. While we cannot control short-term market headwinds, we focus on what we can control, including keeping each other safe. Our progress makes us confident in our journey towards our targets and our opportunities for shareholder value creation. Our fourth quarter earnings call is scheduled for Friday, January 28, 2022. Thank you, everyone, for participating in today's call. We sincerely appreciate your continued interest in Autoliv. Hope to see you again in November. Until then, stay safe.