Autoliv, Inc.

Good day and thank you for standing by. Welcome to the Outerleaf Inc. Third Quarter 2025 Financial Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, please press star 1 and 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 and 1 again. Please note that today's conference is being recorded. I would now like to give the conference over to your first speaker, Anders Trapp, Vice President of Investor Relations. Please go ahead.

Thank you, Raz. 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 Gustin, 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-use gap measures. The reconciliation of historical use gaps and non-use gap measures are disclosed in our quarterly earnings release. available on artolib.com and in the tent queue that will be filed with the SEC or at the end of this presentation. Lastly, I should mention that this call is intended to conclude CET, so please 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 relationship 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 one-third 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 profits 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 effect 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 return. We remain committed to our ambition of achieving 300 to 500 million annual in stock repurchases as outlined during our capital markets day in June. Additionally, we have increased our quarter dividend to 85 cents 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 RMD 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 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 the 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 plans 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 seatbelts, hands-on detection, systems for steering wheels and development and production of steering wheel switches. Through this new joint venture, we intend to capture more value from steering wheels and active seatbelts while minimizing capex and competence expansion, enabling faster market entry with lower technology and execution risk. Looking now on 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 $271 million from $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 a solid $258 million, an increase of $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 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. RD&E net cost rose both sequentially and year-over-year, primarily due to lower engineering income, due to 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 70 basis points improvement in 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 have 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 two to three percent respectively. The global regional light beacon production mix was approximately one percentage point unfavorable during the quarter, despite the important North American market showing a positive trend. In the quarter, 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. Steaming 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 more in detail later in the presentation. Looking now on sales growth in more detail on the next slide. Our consolidated net sales were over $2.7 billion, the highest for the third quarter so far. This was around $150 million higher than last year, driven by price, volume, positive currency translation effects, and $14 million from tariff-related compensation. Excluding currencies, our organic growth organic sales growth by 4%, including tariff costs and compensation. China accounted for 90% of our group sales. Asia, including China, accounted for 20%. America for 33%, and Europe for around 28%. We outline 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 America, reservation and China. Based on light vehicle production data from October, we underperformed light vehicle 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 with 8 percentage points, driven primarily by strong sales growth in India and, to a lesser extent, in South Korea. While organic light vehicle production mix ship continued, to impact our overall performance in China, our sales to domestic OEMs grow by almost 23%, eight percentage points more than their light vehicle production growth. Our sales development with the global customers in China was five percentage points lower than their light vehicle production development as our sales declined to some key customers such as Volkswagen, Toyota, and Mercedes. On the next slide, we show some key model launches. The third quarter of 2015 saw a high number of new launches, primarily including China. Although some of these new launches in China remain undisclosed here due to new confidentiality, The new launch is reflecting a strong momentum for Autoliv in this important market. The models displayed here feature Autoliv content per vehicle from 150 US dollars to close to 400 US dollars. We're also pleased to have launched airbags and seatbelts on another small Japanese car. This is a mini Autoliv have historically had limited exposure to this segment in Japan. In terms of autolyse sales potential, the Onvo L90 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 Christin.

Thank you, Mikael. I will talk about the financials more in detail now on the slides, so turn 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 2.7 billion, representing a 6 percent increase. The gross profit increased by 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 237 million to 271 million, and the adjusted operating margin increased by 70 basis points to 10.0%. The reported operating income of 267 million was 4 million lower than the adjusted operating income. Adjusted earnings per share diluted increased 26% or by 48 cents where the main drivers were 29 cents from higher operating income, nine cents from taxes and eight cents from 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 and further bolstered by a reduced share count from our share buyback program. Our adjusted return on capital employed was a solid 25.5 percent, and our adjusted return on equity was 28.3 percent. We paid a dividend of 85 cents per share in the quarter, and we repurchased shares for 100 million U.S. dollars and retired 0.8 million shares. Looking now on the adjusted operating income bridge on the next slide. In the third quarter of 2025, our adjusted operating income increased by 34 million. Operation contributed with 43 million, mainly from high organic sales and from the execution of operational improvement plans supported by better call-off volatility. The out-of-period cost compensation was $8 million lower than last year. Cost for RD&E net and SG&A increased by $30 million, mainly due to lower engineering income. The net currency effect was $6 million positive, mainly from translation effects. Last year's supplier settlement and this year's supplier compensation combined had a $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 totalled 258 million, an increase of 81 million compared to the same period last year, mainly as a result of higher net income, partly offset by 53 million negative working capital effects. The negative working capital was primarily driven by higher receivables reflecting strong sales and delayed tariff compensations toward the end of the quarter. Capital expenditures net decreased by 40 million. Capital expenditures net in relation to sales was 3.9% versus 5.7% a year earlier. The lower level of capital expenditures net is mainly related to lower footprint capex in Europe and Americas and less capacity expansion in Asia. The free operating cash flow was 153 million compared to 32 million in the same period the prior year from higher operating cash flow and the lower capex net. The cash conversion in the quarter defined as free operating cash flow in relation to the net income was around 87 percent, in line with our target of at least 80 percent. Now looking at our trade working capital development on the next slide. The trade working capital increased by 197 million compared to the prior year, where the main drivers were 165 million in higher accounts receivables, 8 million in higher accounts payables, and 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 of accuracy should enable a 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 1.3 times, below our target limit of 1.5 times, and has remained stable compared to both the end of the second quarter and the same period last year. This comes despite returning 530 million to shareholders over the past 12 months. Our net debt increased by 20 million, and the 12 months trailing adjusted EBITDA was 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 particularly for North America and China. While the industry continues to navigate the trade volatility and other regional dynamics, S&P now forecast global light vehicle production to grow by 2% in 2025, following growth of over 4% in the first nine months of the year. Their outlook for the fourth quarter has significantly improved. 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 inventory. However, a recent fire incident at an aluminum production plant in North America may impact our customers. For Europe, S&P forecasts a 1.8% decline in light vehicle production for the fourth quarter, despite some easing of US import tariffs. We continue to see downside risks for Europe, like the European light vehicle production, driven by announced production stoppage 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 LVP over the medium term, supported by favorable government policies for new energy vehicles, more relaxed auto 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 US, aiming to mitigate reduced export volumes to the US. 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 US. Now looking on 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 outperformer, 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 the key regions and that the temporary decline in engineering income will persist, driven by the timing of specific customer development projects. These factors combined in the reason for 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 provides us and 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 as well as no significant changes in the macroeconomic environment or changes in customer call-off volatility or significant supply chain disruption. Our organic sales is 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 1.2 billion US dollars. We now expect CapEx to be around 4.5% of sales. from the previous guidance of around 5%. Our positive cash flow and strong balance sheet supports 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 effect 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 Raz.

Thank you, Sal. As a reminder to ask a question, please press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Once again, please press star one and one and wait for your name to be announced. To withdraw your question, please press star one and one again. We are now going to proceed with our first question. And the questions come from the line of Colleen Langan from Wells Fargo. Please ask your question.

Oh, great. Thanks for taking my questions. You raised your light vehicle production forecast from down a half to up one and a half, but organic sales didn't change. Why aren't you seeing any benefit from the stronger production environment on your organic?

Yeah. Thanks for your question. There are a couple of components here. The first one is that some of these adjustments that we also don't take into account are for past quarters. So some of the volumes have been raised also in the first half, whereas we had already recorded our sales for that. So then we had a different outdoor underperformance in the first half of the year. So that's one part of the explanation. And then we also see a larger negative mix now after nine months and also expect that for the full year. That is close to two percentage points, this negative market mix, which is also one of the reasons. And that's even less unfavorable now than we saw a quarter ago. So those are some explanations. And then on top of that, we see that some of the launches in China have been been a bit delayed and that they are not coming through fully in line with our expectations that we had here about a quarter ago. So those are the main reasons why you don't see that LVP estimate increase comes through on our organic sales guidance.

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

Yeah, the $50 million there is a one-timer. It's compensation from... a supplier for historical cost that we had 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 Autoliv team here across the whole value chain. Got it. All right.

Thanks for taking my questions.

Thank you. We are now going to proceed with our next question. And the questions come from the line of Bjorn Inosson from Danske Bank.

Please ask your question.

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

I think, I mean, first of all, that we feel confident when it comes to our ability to eventually get to our 12% target, no doubt about that. And I mean, what you see here in the Q3-Q4 movement here is nothing you should read into that. I think, as I said before here, I mean, 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 outlined since some time back. So, good progress there. When you look at Q4 over Q4 here, it's, I would say, more of, first of all, a normalization of the quarters here. I mean, Q4 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 here. 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 here. 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 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 in early next year then?

Well, in the next year overall, yes. Then you should see 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.

Okay. In some cases, it's built in the piece price. In some cases, it's paid like engineering income specifically. And depending on how that mix looks over time, of course, you have some smaller fluctuation. And that is really what we refer to.

Okay. Very clear. Thank you.

Thank you.

We are now going to proceed with our next question. And the questions come from the line of Tom Narayan from RBC. Please ask your question.

Hi. Thanks for taking the question. 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 this 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, you know, I guess depends on certain factors. Just trying to dimensionalize those three in terms of what is temporary and what continues.

And then I'll follow up. Yeah. So I think the engineering income, you can look at Q3 on a year-by-year basis and how that's percent of sales. And that, I think, is a pretty good indication also for how that could be in the fourth quarter. And that's the largest headwind we will have. The next one is the fact that we had this out-of-period compensation from our customers related to inflation compensation last year. That falls away this year. The second largest and then the third largest is the depreciation expense increase.

Okay. And then on the China commentary, you know, we did see, I think, you know, that the OID is losing share in China due to some, you know, just 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 is seen. I know you're under indexed to them. Is benefiting you guys? Thanks.

Yeah. I mean, in the overall mix, of course, since we are only selling components to them, and you see their portion of the total market flatting out, of course, it's supportive in the sense of measuring our performance relative to COM's LVP as such. So mathematically, yes, you have that effect there.

Great. Thanks a lot. I'll turn it over.

Thank you. We are now going to proceed with our next question. And our next questions come from the line of Mike Aspinall from Jefferies. Please ask a question.

Thanks. Good day, Michael, Fredrik, and Anders. One first on India. It was one third 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?

Yeah, I think we already see the strong development in India there. And as I said, one third of the growth in the quarter. It's today around 5% of our turnover is coming from India and it's not long ago it was around two. So it's a significant increase of importance there. And we have a very strong market share in India, 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 be able to defend our market share and to capture the growth here. Content-wise, we expect it to go from $120 in 2024 to roughly $140 this year. So you have both content and GDP growth in India to look forward to.

And then we expect it to go up to around $160 to $170 in the next couple of years.

Great. Excellent. Thank you. And one more. Just on the JV with Hang Seng, who were you purchasing these items from before? Were you purchasing from Hang Seng and now to JV, or have you formed a JV with them and were 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 there. I couldn't say it hasn't been exclusively with them. We have a global supplier base here but we see great opportunity here to not only produce but also develop components for our future models and programs here.

We work together here, both on development and manufacturing. Okay, so they're moving, I guess, from a supplier, and now you guys are going to be working together. Yeah, yeah. Okay, great. Thank you. Thank you.

Thank you. We are now going to proceed with our next question. And the questions come from Valerian of Vijay Rakesh from Mizuho. Please ask your question.

Yeah, hi, Michael. Just quickly on the China side, I know you mentioned subsidies. When you look at the NEV and the scrapping subsidy, it is down like 50% this year. Do you expect that to be extended to 26% or is there going to be another step down in FOMO?

I would say we are not speculating in that. So I guess it's anybody's guess here. But I think overall, we definitely look very positively on China. And as we mentioned here before, we are growing our share with the Chinese OEMs here and good development in the quarter here. And we're also investing in China as well here. So as I mentioned in the presentation earlier, I mean, we are investing in a second R&D center in Wuhan. to make sure that we also continue to work closer with the broader base of customers there, so adding capacity. We talked about JV just now here, and then also the partnership with Qatar here is important steps here. So all in all, looking positively on China going forward here, for sure. So Subsidies or not, we will see, but overall it's pointing in the right direction here.

Got it. And then I think as you look at the European market, 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?

I think we wait to comment on 26 for the next quarterly earnings here when it's time for it. But 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. I think that's really the main question mark around the market. anything else in terms of OEM reshuffling or anything like that. I mean, it's really the end consumer question. It comes to you.

Thank you.

We are now going to proceed with our next question. And the questions come from the line of Emanuel Rosner from Wolf Research.

Please ask a question.

Great. Thank you so much. My first question is actually a follow-up, I think, 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 like growth above market, initially you were going to grow 3% despite a shrinking market. Now you're growing 3% in a market that would be growing 1.5%. Can you maybe just go back over the factors that are driving these different expectations for outperformance?

Yeah. In that sense, I mean, the largest change over 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 two percentage points. And that has deteriorated over the course of the year. That's the largest part. Then we also have seen here in the third quarter also the negativity customer mix for us in mostly North America and Europe. So that's also deviation to 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. Thank you. And if I put, you know, 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, you know, the 10 to 10 and a half this year to, you know, towards the 12% target? You know, where are we tracking in on some of those? And I did notice that you mentioned improved call-offs, accuracy, both sequential and year-over-year. Is that something that you expect to continue and that will be helpful for that?

Yeah. The framework has not changed, as you would probably expect. So it's still, if we take 2024 as the base point with 9.7%, adjusted operating margin. We still expect 80 basis points improvement from the indirect headcount reduction. In the reported numbers here now, you don't see a movement in that, but we had about 260 employees from a labor law change in Tunisia that we now have to account for as headcounts. That distorts that number. If you adjust for that, we would also have shown further progress on the indirect head count reduction. So that is well on track. Then we said 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 head count 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 components, where we are maybe a little bit behind now this year, 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 there that we are progressing well on that component.

Thank you.

Thank you. We are now going to proceed with our next question.

And the questions come from the line of Jayram Nathan from Daiwa Capital Markets America. Please ask your question.

Hi. Thanks for taking my question. I just wanted to kind of go back to the announcement in China, out of China. Just wanted to understand better the timing. It seems it kind of coincided with also the announcement of ADN, the zero gravity product. So just one, is this the timing related to a new business win or more opportunities there? You're talking about JV or? The JV, the CATARC partnership, as well as the kind of you announced, you kind of finalized the ADN gravity product.

Yeah. I was going to say that they're not connected at all as such. Because, I mean, JV here is really to vertically integrate in an effective way together with a partner to gain a broader product offering here to say that, more to our end customer basically. Katark is of course development collaboration to make safer vehicles safer roads for everyone so it's including light vehicles commercial vehicles and and vulnerable road users meaning two-wheelers etc so the broad-based research collaboration there. And then the agent, of course, is connected to the zero gravity. So, I mean, yeah, to some extent, of course, they are all about the safety products as such, but they are not connected in any way.

Okay. Thanks. And just as a follow-up, I wanted to understand the lower capex. Is that something that can be maintained as a percentage of sales into the future?

Yeah, I think, I mean, 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. And we have been through a cycle here where we have invested a lot in our facilities around the world here. Europe, where we have consolidated and upgraded a number of plants. India investments we talked about before. expanding capacity in China. We also upgraded in Japan, etc. So, in those couple of years here, we have invested heavily in upgrading our industrial footprint and we are coming out now into a more normalized phase here and that's why we can bring it down here. So, we are not expecting to see CapEx jump up back in the near term here.

Okay, thank you. Let's go ahead.

Thank you. We are now going to proceed with our next question. And the questions come from the line of Hampus Ancelou from Handelsbanken. Please ask your question.

Thank you very much. Two questions from my side. Maybe a bit of a nitty-gritty question, but if I remember correctly, you covered about 80% of the tariff cost in the second quarter, and the remaining 20% came in Q3. And now you're moving around 20% Q3 you would get in Q4. Is the net effect like 100% compensation if you account for the things that came from second quarter to Q3? Or is there a net negative there on the margin?

Yeah, we see that.

Go ahead.

Oh, please go ahead.

Okay.

Yeah. No, we... Sorry. Let's take this for a second. We are still negative here. As we said, we have received some of the outstanding 20 in the second quarter in Q3, but most of it remains still. And then in the third quarter here, we got 75. So we have accumulated more outstanding 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. Fully compensated, that's our expectations here. Of course, The work is ongoing here as we speak with that, but that's the next result right now.

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

I have no figure yet for 2026 to share with you here, but I think in general terms, I mean, we have good order intake here to support our overall market position here. We see, however, some, especially on the EV side, planned programs or launches being delayed or canceled here. So there are some reshuffling there, but what kind of impact that will have In 26 compared to 25, we are not ready to communicate that yet. But as I said, we have good ordering take care to support our market position. Thank you very much.

Thank you. We are now going to proceed with our next question. And the questions come from the line of Edison Yu from Deutsche Bank. Please ask your question.

Hi, this is Winnie Ong for Edison. Thanks for taking the call. My first question is on the supplier contract news that came out of GM, indicating maybe a less favorable contract terms for suppliers on a go-forward basis. I'm just curious if this is something that's more isolated and more depends on the OEM, or do you see heading to 2026 maybe a broader trend that can pose potentially as a headwind heading to next year?

Yeah, no, I don't want to comment specific customer contracts or conditions here, but of course, I mean, it's constantly ongoing development here in terms of what the OEMs want to put into their contract. But I would say that I see good ability to manage those clauses and contracts that are put in front of us here. And I must say, I don't feel any major concerns around 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. Thank you. And then on the Ford fire impact, you did mention some potential impacts into Ford Q. So I was just 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?

Yeah, I think, I mean, every car that is not produced is not a good thing, of course, and especially for the for the customer in question here. But I mean, you have seen the announcement made by the OEMs here. And just as a reference here, I mean, the Ford 160 is around 1% of our global sales. So it's not good, but it's manageable, I would say, from our point of view. Just as a reference. Thank you so much.

Thank you. We are now going to proceed with our next question. And the questions come from the line of Dan Levy from Barclays. Please answer your question.

Hi, great. Thank you for taking the question. I just wanted to just follow up on that prior question. You know, the headlines on Xperia yesterday causing some potential supply issues. Just how much of that 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, hours or most into the situation here. I think first of all, I think we have a very good supply chain team that are a lot here and are managing through the situation here. We have been here before with the supply chain constraints and I would say the last couple of years, there's been many topics here. So, I mean, the team is well prepared to maneuver through this and we'll see and come back on that. But I would say it's too early to be too granular or too detailed around that. And as I said, we don't see so much yet from the customers.

Thank you. Just as a follow-up, I wanted to double-click on the China performance. So, you know, you did very well outperformance with the domestic OEM. But in spite of that, the total China performance was negative three points, even though the domestics are the clear majority. I think we were all, you know, a bit surprised. 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 domestics, the overall China performance was negative? And can you explain what flips going forward that is leading you to say that your China growth going forward should outperform?

Yeah, I mean, we feel, as we said before here, I mean, we believe that we will see improvement here in the quarter to come. And I think it's a really important milestone here, what we reported on the COEM outperformance, which was really strong here in the quarter. But still, the global OEMs is a bigger, you know, majority of our total sales. And some of our customers here that are significant had a negative mixed impact on us this quarter, unfortunately. what goes on the negative side here. But we don't see this as a major trend shift here. It's a mixed effect that we see from quarter to quarter. But I think the important takeaway here is that we see this strong growth development with the Chinese OEMs that is also growing their share of the total market. So that sets us up for, I would development in China all the time.

Okay, thank you.

Given the time constraint, this concludes the question and answer session. I want to hand back to Mr. Mikael Brandt for closing remarks.

Thank you very much, Raz. 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. With ongoing market headwinds, we anticipate strong fourth quarter performance. Our fourth quarter call is scheduled for Friday, January 30, 2026. Thank you for your attention. Until next time, stay safe.

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