Autoliv, Inc.

Good day and thank you for standing by. Welcome to the Outerleaf Incorporated Second Quarter 2023 Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be the question and answer session. To ask a question during the session, you will need to press star 11 on your telephone keypad. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference has been recorded. I would now like to hand the conference over to our 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 Gustin, 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-U.S. GAAP measures. The reconciliations of historical U.S. GAAP to non-U.S. GAAP measures are disclosed in our quarterly press release available on outerly.com and in the PENQ file with the SEC. Lastly, I should mention that this call is intended to conclude at 3 p.m. Central European Time, so please follow the limit of two questions per person. I now hand it over to our Chief Executive Officer, Mikael Bratt.

Thank you, Anders. Looking on 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. The 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 achieved a record operating cash flow for the second quarter, driven by an improved adjusted operating income and a 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 66 cents 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 indirect employees, with further actions to be announced as planned material life. 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 in the revolutionary new Venuli airbag that we presented at our investor day in Detroit in June. that is 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 supports my confidence in sequential improving adjusted operating margin towards our full year indication. This of course also supports our journey towards our medium term target. 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, customer compensations, higher volumes, and a more stable light vehicle production. At the same time, cost for RD&E and SG&A combined declined by 50 basis points in relation to sales. Combined with a 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 a 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 target, 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. At the first step, we have accrued 109 million US dollars, primarily driven by a planned reduction of around 1,100 employees. This first step is expected to reduce cost by around 25 million in 2024, increasing to around 55 million in 2025, and to reach around 75 million US dollars 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 US dollars, a record for a second quarter. This was more than half a billion US dollars or 27% higher than a year earlier, driven by price, volume and mix. Out-of-period cost compensations contributed with approximately $30 million, 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 on the regional sales split, Asia accounted for 37%, America 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 outline 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 a reminder 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 a 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 by two percentage points from the same period last year, and by 2.7 percentage points from the first quarter. Operating cash flow was 379 million US dollars, 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 auto lead content per vehicle from approximately 150 to close to 400 US dollars. These models reflect the changes seen in the automotive industry in recent years. with several relatively new OEMs represented, and that 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 record number of launches. By region we see higher number of launches in China, South Korea and Europe. I will now hand it over to our CFO Fredrik Bestin who will talk about the financials on the next few slides.

Thank you Mikael. This slide highlights our key figures for the second quarter of 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 two 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 103 cents, where the main drivers were 69 cents from higher adjusted operating income and 35 cents from taxes. Our adjusted return on capital employed and return on equity increased to 21% and 25% respectively. We paid a dividend of 66 cents per share in the quarter and repurchased and retired around 475,000 shares for $41 million under our stock repurchase program. Looking now on 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 PSO. Costs for SG&A and RD&E net combined was 25 million higher, mainly due to higher personnel costs and projects. Out-of-period cost compensation contributed with 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 on 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 a reversal of the negative working capital effect 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. It was partly offset by 83 million in higher receivables. Capital expenditures net decreased to 124 million from 139 million 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 455 million higher than a year earlier. Our full year indication of an operating cash flow of 900 million is unchanged. Now looking on 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 US dollars 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 US dollars. 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. Now looking at the next slide. As supply chains have improved in many regions, vehicle demand and inventory restocking are now the main drivers for the market development. The third quarter global light vehicle production is now expected by S&P Global to decline by 4% compared to last year. Compared to the second quarter, volumes are expected to be about 5% lower, mainly due to normal seasonality from summer shutdowns. Despite concerns surrounding elevated vehicle pricing in some markets and deteriorating credit conditions, global full-year 2023 light vehicle production is projected to be increased by 5.1% to close to 84 million vehicles. Life vehicle production in China continues to show relative strength owing to both a strong EV demand and export activity. LVP in North America is projected by S&P Global to increase by more than 8% in 2023. This is three percentage points higher than the S&P forecast three months ago. However, there are concerns around the upcoming union negotiations. Production in Europe continues to outperform expectations, although 2023 volumes are to a large extent secured by inventory restocking and the reduction of OEM sales backlogs. We believe underlying demand have abated somewhat. we base our full year sales indications on a global light vehicle production growth of around 4%. Looking at our 2023 financial indications on next slide. Except for the currency translation effect, our full year 2023 indications are unchanged. and exclude costs and gains from capacity alignment, antitrust-related matters, a litigation settlement, and other discrete items. Our full-year indication is based on a light vehicle production growth assumption of around 4%. We expect sales to increase organically by around 15%. Currency translation effects are assumed to be around positive 1% instead of earlier assumptions of negative 1%. We expect an adjusted operating margin of around 8.5 to 9%. Operating cash flow is expected to be around 900 million US dollars. Our positive cash flow trend should allow for increasing shareholder returns. Turning to the next slide. This concludes our formal comments for today's earnings call, and we would like to open the line for questions from analysts and investors. I now hand it back to Nadja.

Thank you so much. Dear participants, as a reminder, to ask a question, you need to press star 11 on your telephone keypad and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we'll compile the Q&A roster. This will take a few moments. Now we're going to take our first question, and the question comes from a line of Emmanuel Rosner from Deutsche Bank. The line is open, please ask your question.

Thank you so much for taking the question. So first one is really around the LVP assumptions and environment. I think you've improved, I think, your assumption a little bit, maybe 4% for the year. I think previously you were maybe looking at like 3%. At the same time, I think you're mentioning in some of the comments some of the UAW risks. Are you incorporating? Are you baking in something? Is the reason you're at 4% on your assumption versus maybe 5% S&P? Is it because of incorporating maybe some cushion in case there is some production losses from a UAW strike? Is this in your guidance?

Thank you for the question there. When it comes to our light vehicle production outlook here, as you said, we have increased it from three to four, as we have seen the development of the light vehicle production year to date. And also, of course, we are relating it to the S&P numbers that you know is also significantly higher than what it was in the beginning of the year. And they are now looking at 5.1. So with that said, it means that we continue to have a slightly more conservative view than S&P still. So when we started the year at three, we were also then backing some risk that we saw there. So I think, of course, the UAW risk... could be there, but I mean, as we have a very well diverse portfolio here and the US is about, America is about the third and then start to narrow down the OEMs that could be in that situation where it could impact the light vehicle production. It's still even smaller part of our portfolio. So I would say all in all, you have that opportunity baked into the number here, but for us also it's very comfortable when it comes to our overall view for the full year here.

As a quick follow-up to this, you left your organic growth outlook unchanged despite the better 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 one percentage points. And yeah, so you shouldn't read in anything to it. Actually, it's more, let's call it a rounding question here.

And then a question on margin, please, 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 backend loading between 3Q and 4Q because of seasonality and some of the negotiation. 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 would improve sequentially by about sort of like two 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 still the same type of framework, just that the fourth quarter are higher margins than the second?

I think, I mean, we don't guide per quarter here, but what we referred to was that the sequential development throughout the year should be similar to what we had last year in 2022. What we just want to remind you all about here is, of course, first of all, the seasonality that we always have between Q3 and Q4, where Q4 is the stronger quarter, where we have a lot of the engineering income centered towards, as one example. And as we are progressing here with the price negotiations, which is at least up until now, have not been an ordinary course of business here. We have mentioned before that it's some calendar time here, and we think it's important here that we manage through those processes and negotiations with the customer in a thorough way. And that could mean that you have it more back-end loaded in the second half of the year. similar a little bit to what you saw in the first half of the year here also where we had a stronger Q2 in relation to Q1 as we're progressing with the negotiations. Okay, thank you very much.

Thank you. Now we're going to take our next question. And the next question comes from Bjorn Andersson from Danske Bank. Your 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 you did 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.

Yeah, I mean, as always, we don't disclose any details around the settlements that we've achieved there, but we can say that they are in line with our expectations for the first half. So both in terms of timing, but also in terms of height, what we were expecting. There are, because this is now more inflation related and less raw material related, there is a higher share of lump sum settlements or compensations now than what we had last year. Whereas the vast majority last year was piece price adjustments, there's now a higher share of lump sum components in these negotiations or in the outcome of them. And for the rest of the year, it's still that there are still outstanding negotiations related to inflation, but also other components that we are negotiating. And that's what Mikael alluded to here, that we want to secure ourselves the right time here to also then be able to successful these negotiations at the right height.

Okay, perfect. 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 volumes 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?

No, I wouldn't say a number or so, but I think definitely that with the last couple of years, you could say, in terms of delivering in line with the current demand there, we for sure have a backlog. And we also have a backlog when it comes to refill the pipelines, the inventory levels, for example, in the US, where it's still historically low. I would say it's probably half of what it normally is. So there is a significant volume there to be dealt with. And if you look at the 2023 current LVP outlook here, we were still 25% below 2017-2018 volumes in Europe. And in North America, we are below with roughly 12%. we coming from from a low level here we are still at a relatively low level so i think that the delta between the the underlying demand and the current outlook when it comes to production levels gives me i would say relative comfort that we are more on safe ground here when it comes to to potential risks in relation to to the outlook here so we do also i would say that the conservative view, we have a relative S&P's number here. I think we stand confidently on those LVP levels that we are using here for our own 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 Chris McNally from Evercore. Your line is open. Please ask your question.

Thanks so much, and I appreciate the detail. 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 one, maybe 2% better, we'll know about the UAW. Content per vehicle, first half, 13%, 14%, sort of better than the 11% you're guiding, implies some decel 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.

I mean, as you said, FX has been... headwind that has been larger than we had expected initial of the year. You see here it's close to 20 million in the quarter after a negative was in the first quarter. 15 million of that 19 million is negative transactional effect from the PSO alone. So quite significant for us. And from what I can see here from where the PSO is, how the PSO is moving right now, there's not an indication that that is improving for us. So that is one component. And then we've also had some supply chain issues, even though the overall situation continues to improve. We did have two isolated cases, one with a fire at one of our suppliers in Europe and then some capacity issues with the largest supplier for us in North America. And they also impacted the quarter here. Not so much in premium freight, but in efficiencies in our setup and our productivity levels in the plants. And also a huge workload here to then move the volumes to other suppliers during the quarter. So, yes, we've also had some headwinds here. And the FX part, we don't think that our estimate here is based on exchange rates as of end of May. And that would then imply that there's a continued headwind also from exchange rates for the rest of the year.

That's very helpful, particularly on the idiosyncratic supply issues in Q2. So the second question I have is more macro around some of your comments on EU caution, schedule, second half. There definitely is a little bit of this mixed message out there from the European OEM about, you know, quote-unquote order weakness. I think we all see the German, you know, French order data out there. But I think what's sort of perplexing, at least from my side, is we had those comments in Q1 as well, you know, the backlogs and weakens in Q4 to Q1. But if you look, whether it's, you know, sales, regs, they improved from Q1 to Q2. You know, orders tend to convert in two to three months. And also about, you know, restocking, it looks like sales and production trending that plus 10%. So can you just help put a little bit of color to this idea of order weakness? Because it seems like a little bit of a boogeyman argument thrown out by the OEMs. I mean, obviously the consumer is weak in Europe, but

we just don't see it in the in the rags in in q2 no and and uh yeah i think as i said here i mean from our horizon there is nothing that indicates the weakness you're referring to there and and of course i have difficult to comment to what you and have heard from from the ovms 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 50% 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.

Oh, 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 8,006 direct to indirect workers? Or is that actually the whole plan? Just want to make sure I'm comparing.

No, this is only what has been communicated so far. The last announcement we made here related to the 1100 and the 100 million associated restructuring costs with that. And then you have the expected phasing here of the savings that go 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.

Got it. So 75 is the savings of just 1,100 workers, but the total plan is going to be close to 8,000 workers. Is that right?

Or is that incorrect? It's 2,000 indirect or salaried, and then 6,000 to restore productivity on the direct labor side. And the 1,100 that we mentioned now in the first step is the majority is indirect. There's also a smaller part of direct labor. So there's more to come in further steps. But as I said, the restructuring costs we expect for the total program, we are about halfway through on that.

Okay. And just a 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 sort of said you were like 50, 60 percent. Where do you kind of stand now?

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 compensations available 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 question. Thank you.

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

Hi, good afternoon, Mikael, 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. I had penciled in somewhere closer to, I think, 75 to 100 million. Can you just help us to understand a little bit more on the timing and 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.

Yeah, the second question, again, we will not provide any further breakdown here on what the pricing component was, so the price compensations or cost compensations that we got in the quarter. But on your first question, so we took 109 million in restructuring charge in the quarter. And as I indicated, this is around halfway through of what we think that the total cost for the program will be. Now, the steps that we don't announce in the first, with this announcement, there are two site closures included here or planned site closures, one in Germany and one in the UK. and they have by nature a longer payback time. And still with that, we expect that we have a savings profile here of 25 million next year, 55 million the year after, and then a run rate of 75. The cash outflow, we expect around 50 million next year and then around 40 million the year after. So the payback time, if you're related to the cash outflow, is in the one- to two-year range that we have given. And then we will communicate the next steps here when they are ready to be communicated and then provide also further details when we communicate those steps.

Understood. Thank you very much. Thank you.

Thank you. Now we're going to take our next question. And the next question comes from Mattias Holmberg from D&B Markets. Your line is open. Please ask a 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 negotiations 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? Assuming the inflation is sticky, would that mean you would need to renegotiate to get further lump compositions?

As I said here, this is a little bit the new way of working together with our customers here as we are in this current inflationary environment here. I think it's very important to remember also that, of course, what we're trying to do here and are doing is mirroring 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 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 the different customer has. But just because it's lump sum, it doesn't mean that it's... less stable versus a peace price per se because you could say some have this as a operating model structure and we come back to it and it's a very natural part of the discussion if you have a peace price of course that also depending on what the reason for the peace price adjustments have it has some some flexibility in that also when when the reason comes down so to speak so So I should not be spending too much time on the question around lump sum price here because it's the overall balance that is the important part here. And that's something we are keeping a lot of focus on, of course.

Yeah, that's clear. Thank you. A quick second one, if I may. At the Capital Market 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 to help us understand better why the run rate of the buybacks are quite far off this level?

What we wanted to illustrate with that calculation was more the balance sheet capacity that we would have in place, but it was not any type of indication what we would buyback this year or any commitment in that sense. It was just to show if we deliver on the guidance here for the year, what that could mean in terms of capacity for share buybacks. But we are committed to the 1.5 billion mandate that we have. But again, that is also a a guidance or anything. It's simply an authorization that we have from our board that we can 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 Dan Levy from Buckley. If your line is open, please ask your question.

Hi. Good afternoon to you. Thank you for taking the question. I wanted to just first ask, with the improved environment and reduced call-offs and better stability, you mentioned that your operating leverage was in line with the typical operating leverage you said, and that was partially driven by your recoveries. But now that we have this very improved environment, to what extent could we see you at the upper end of that typical 20 to 30% operating leverage? And how long is the runway on maintaining potentially a higher incremental margin?

Yeah, I mean, as I indicated during the presentation, if you adjust for FX and then the patent settlement we had last year, But the benefit of that from last year, we were in the middle of the 20 to 30 percent range. In one component that does not allow us to pull through at a higher leverage rate is the fact that we don't get any margin on the cost compensation we get from our customers. These negotiations are very much around 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 would even be close to 30% on the leverage side.

Is that type of level, and I realize there's going to be some lumpiness around the recoveries, but is that type of level something that's sustainable for the foreseeable future, or is that sort of unique to this particular period?

I think it goes back to many discussions we've had around this topic. A lot depends on the type of volume growth that we face. If it's LVP and market growth and we just grow into our existing footprint and capacity, then it would be at the higher end of that range. If it is through launches and market share, then it is at the lower end of the range. And as you can, we indicated here that we have a record level of launches this year, and we also expect a larger contribution to market share gains this year, which would then indicate that the leverage on that volume is 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?

Yeah, I mean, I think we could display here already that compared to the first quarter, you've seen a sequential improvement. And we are very focused here on controlling both the SG&E and RD&E 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&E and RD&E going forward. And the increases we've seen so far has been very much also inflation-driven on the labor cost side, and to some extent also a higher headcount to support the volume growth.

Revenue, should we expect that percent to decline, presumably?

Well, as I said, we're very focused here on the cost side. You've seen that as a percent of revenue has improved sequentially, and We're focused on the costs in the company. So, yeah. Could improve. Thank you.

Thank you. Now we're going to take our next question. And the next question comes from Rod Latch from Wolf 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 five. 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 is elements of retroactiveness there, yes. And the question about lump sum or piece price is not a big question regarding the Q3, Q4 balance, if we call it that. Because, I mean, regardless if it's a piece price or lump sum, it takes place when it takes place based on when the negotiations are concluded and have the same quarter effect, so to speak. So that's not really the driver. The driver is more, it is when we conclude the negotiations, regardless if it's a piece price or a lump sum. Then on the recurring of the lump sum, you could say that we are developing a way of working together with our customers here, but it's still a question around evidence-driven negotiation, so to speak. So that's why it takes a long time also in terms of calendar time here, because we are going through the various impacts that have occurred basically on a plant and a component level. So that is what's taking the time. But you could say it's a smoother discussion as we have now been practicing this for a while.

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 mid-term targets that you've been talking about at an 85 million unit production rate. But can we look at those as indicative of a 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 is 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. And just lastly, the pace of buybacks so far have been progressing somewhat slowly, just relative to the $1.5 billion authorization. Can you just give us any thoughts on how you're thinking about that and whether that $1.5 billion through the end of next year is a magnitude that is indicative of something? How are you going to make the decision about the magnitude of buybacks going forward?

It's the same as we have approached it so far. We are moving forward. forward with our program here and as Fredrik have said here and we also said that the 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 his 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 has 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 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, Michael Bradt, 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 reduction, 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.