Q3 2020 Autoliv Inc Earnings Call
Welcome to your call fresco. Please continue to standby you conference will begin shortly.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the outer leaves Inc. Q3, 2020 earnings call. At this time all participants are not leasing only mode. After the speakers presentation that will be a question and answer session to ask a question Judy.
The session you need to press star one on your telephone I must advise you that this conference is being recorded today I'll know liked your hand, the conference over to others to drop VP investor relation to Speaker. Please go ahead Sir.
Thank you.
Everyone to one third quarter Twentytwenty financial results earnings presentation.
On this call, we have our president and CEO Mika, though.
Our Chief Financial Officer, Randy Christine and myself on the stop VP Investor Relations.
During today's earnings call to our CEO will provide a brief overview of our third quarter results as well as to provide an update on our general business and market conditions.
Often Michael Frederic will provide further details and commentary around the financials.
At the end of our presentation, we will remain available to respond to your questions and as usual the slides are available through link on the home page.
Web site.
Turning to the next slide [laughter], we have the safe Harbor statement, which is an integrated part of this presentation and includes the acuity that follows.
During the presentation, we will reference some non U.S. GAAP measures.
Reconciliations of historical U.S. GAAP to non U.S. GAAP measures are disclosed in our quarterly press release, and the 10-Q that will be filed with the SEC.
Lastly, I should mention that this call is intended to conclude at three P.M.C.D. So please follow limit of two questions per person.
I will now hand, it over to our CEO me get though.
Thank you Andreas looking now into the Q3 Twentytwenty highlights on the next slide.
Before we start with the former presentation I would like to acknowledge our employees for their hard work and commitment to health and safety cost control quality and delivery of precision in these challenging times.
COVID-19 pandemic is first and foremost a human crisis, where safeguarding health and safety is our first priority.
I am very pleased that our operations reported higher sales higher profit margins and higher cash flow compared to last year, despite challenging market conditions.
This strong performance was a result of faster to unexpected light vehicle production recovery and the forceful actions, we initiated earlier in Twentytwenty two managed effects of the pandemic on our operations.
The NBP recovery is in the quarter started slow and more uptime, but grow gradually stronger and more stable supported by incentives pent up demand and inventory restocking post knockdown.
We continued to execute on our strong order book and our sales increased despite global LDP falling by over 4%.
To manage the ever evolving situation, we have accelerated cost savings reduced expenses and to strengthen our balance sheet. This.
This includes personnel and material cost reductions and executing on structural efficiency programs.
I'm confident that the actions implemented unplanned our positioning alterative, well, regardless of how the market will develop.
It is encouraging that we can report the strongest operating cash flow in our history for the third quarter and Thats.
And as we were able to reduce capex by close to 40% compared to a year earlier.
This enables delivering towards our target to a leverage ratio in the range of Cedar 0.5 to 1.5 times.
The order intake in the first nine months of the year supports a prolong period for outgrowth.
However, customer sourcing activities was as expected low in the quarter with more than half our plan sourcing for the year is expected in the fourth quarter.
We see the positive sales trend continuing in the first weeks over the fourth quarter. However, economic uncertainties risks refer to knockdowns and the risk of increasing unemployment and its impact on the consumer demands may temper the outlook for the fourth quarter light vehicle production.
Looking now on the financial highlights on the next slide.
Our consolidated net sales increased 7.5% compared to Q3 2019, despite the global light vehicle production falling by more than 4%.
Adjusted operating income, including cost for capacity alignment.
Antitrust related matters and in 2019 separation of our business segments increased by 13% to 206 million us dollars.
Mainly as a result of our force cost reduction activities.
The adjusted operating margin increased by 110 basis points to 10.1%, which is the second highest margin for third quarter in the past 10 years.
Operating cash flow of 352 million us dollars and free cash flow of 276 million us dollars were significantly above the Q3 2019 level and the highest cash flow on a record for the third quarter.
Looking now on sales development on the next slide.
I am pleased that our sales outperformed outperformed organically the global light vehicle production by almost 5%.
We'd outperformance in all major regions we.
We had a solid sales development in China growing organically by more than 10%.
Outperforming light vehicle production by close to two percentage points.
Sales in North America increased organically by around 2%, which was more than two percentage points better than the light vehicle production.
Our outperformance was mainly coming from positive vehicle mix and recent launches with several customers such as Tesla VW and two of them.
In Europe, the trend from previous quarters continued as our sales outperformed light vehicle production by three percentage points impacted by recent launches ASP say to that.
In Japan, the light vehicle production mix was negative with production of smaller vehicles for the domestic market being less affected by the pandemic than larger export vehicles.
Despite this our sales decreased organically in line with the light vehicle production decline.
In rest of Asia organic sales increased by 5%, which was 222 percentage points better than the light vehicle production declined.
Within the region sales in South Korea showed a strong increase.
In the quarter slowing sales of replacement Inflators.
At Cedar 0.6 percentage points negative effect on sales, mainly affecting North America, China and Japan.
Looking on the next slide.
We have several high volume high content model launches during the quarter, we did not experience any major delays of launches and we expect the high number of launches to continue into the fourth quarter.
The models shown on the slide Havent Autoliv content per vehicle between 120 and 330 U.S dollar.
Two of the vehicles are pure E. These and many of the remaining models will be available with some sort of electrified powertrains.
The long term trend to higher CPV is supported by the continued trend of more drawn centre and knee airbags.
For example, Nissan ROE and Ford Mustang, Mackie will have jewell knee airbags from overseas.
Now I will hand over to our Chief Financial Officer Pratik. This Dean will talk about the financials on the next slide.
Thank you May go ahead.
This slide highlights our key figures for the third quarter.
Our net sales were $2 billion, a half percent increase compared to the same quarter last year.
Gross profit increased by $21 million and the gross margin increased by 90 basis points compared to the same quarter 2019.
Gross margin was primarily driven by labor and direct material productivity, despite direct COVID-19 related costs and operational efficiencies.
The adjusted operating income increased by $23 million to 206 million, mainly due to the higher gross profit.
Reported earnings per share was $1.12 and our adjusted return on capital employed and return on equity was 22 and 25% respectively.
The operating cash flow improved by $157 million to $352 million for the third quarter Twentytwenty, which.
We did not pay a dividend in the quarter.
Looking now on the adjusted operating margin bridge on the next slide.
Our adjusted operating margin of 10.1% was 110 basis points higher than in the third quarter 2019.
As illustrated by the chart. The adjusted operating margin was positively impacted by lower cost for raw materials of 40 basis points and lower combined cost for SDMA, an audience of 20 basis points.
Yes in a decline by $6 million or 6% compared to the prior year, mainly due to lower cost for personnel.
Are there any net costs increased by $3 million compared to the prior year as reduced personnel cost was more than offset by negative effects from lower engineering income.
FX effects impacted the operating margin negatively by 60 basis points. This is caused by transactional effects from a number of different currency pairs.
The operation improvements contributed with 110 basis points. This was the result of strict cost discipline put in place during the first half of the year and the effects from our structural efficiency programs, partly offset by the negative impact of COVID-19 related costs and inefficiencies at it.
Additional support came from governance governments in connection with Furloughing short term work weeks and similar activities totaling approximately $10 million.
Looking on the next slide we.
We have the best development there.
Reported earnings per share improved by 14 cents to $1.12 the.
The main drivers behind the increase are around 17 cents from higher adjusted operating income and six cents from favorable impact from tax which was partially offset by four cents from higher capacity alignment and five cents from financial items in Q.
In Q3, Twentytwenty, the adjusted earnings per share increased by 18%.
18 cents to $1.48 compared to the same period, one year ago.
Looking now to our cash flow on the next slide.
For the third quarter of Twentytwenty operating cash flow was $352 million, an increase of 157 million compared to last year.
The increase in operating cash flow was the result of the higher net income and improved working capital our strict inventory console close collaboration with suppliers reduced overdues and improved payables together with positive effects from other non cash items were the main drivers for the improvement.
Capital expenditures amounted to 76 million in the third quarter, which is about 3.8% in relation to sales compared to last year capex decreased by 38% as we suspended or delayed investments substantially.
Our free cash flow was 260 $276 million, an increase of 203 million year over year.
As a consequence of the sharp reduction in Capex, our last 12 months depreciation amortization was in line with Capex at more normalized Markel Marquette will lead to some increase in investments again, but our ambition is however to reduce the gap between capex and DNA overtime.
The last 12 months cash conversion was more than 200% as a result of both the low capex level positive contribution from changes in offer and were in working capital and non cash items over.
Over the last 12 months operating cash flow was almost 700 million with a free cash flow of almost $350 million.
Now looking on the next slide.
We have as you know our long history of prudent financial policy and the.
And the current volatile market conditions, our balance sheet focus remains unchanged.
The leverage ratio decreased from 2.9 times at the end of last quarter to 2.4 times as of September Thirtyth the improve.
The improved leverage was a result of our net debt decreasing by $265 million in the quarter, while EBITDA over the last 12 months at the same time increased by $29 million. It is worth noting that our net debt is the lowest since the spin off of the year in 2018.
Our ambition is to improve our net debt and EBITDA in the near future. However.
However, as the leverage ratio as calculated on the left last 12 months' data, we expect the ratio to remain elevated for some time.
On the next slide you can see that our liquidity position remains strong.
We had around $2 billion in liquidity and unused credit facilities our September thirtyth.
The revolving credit facility was fully repaid on sales on October 2nd 2020 and is available as needed we have no.
We have no need for any major refinancing of existing debt until 2022.
Therefore, we believe that we have secured and significantly liquidity cushion to manage our business successfully and the current challenging environments.
Now looking on the next slide we have an update on the structural efficiency programs.
We have seen expected positive effects of the programs, we estimate the savings from our two structural efficiency programs in the quarter to be around $15 million.
The second program should reaches full effect during the second half of 2021 with annualized savings of 60 million us dollars.
The progress or mainly impacting Americans in Europe, and when the two programs are fully implemented we expect head count has been reduced by more than 1700 employees the key.
The cost for structural efficiency program too is estimated to be around $65 million and cash outs to be spared from this quarter until the fourth quarter of 2021.
In addition to the structural efficiency programs, we made a further provision of around $30 million in the third quarter for footprint optimization in Europe, including a plant closure involving more than 200 employees in Germany product.
Production is expected to end mid 2023 subject to negotiations with the local works Council.
We continue to evaluate further footprint optimizations.
Looking on the next slide.
We are closely monitoring the development of the COVID-19 pandemic engaging its continuing impact on the automotive industry.
The outlook for major light vehicle markets is still difficult to predict due to economic uncertainty and the risk of further lockdowns. These sales.
These factors may have major effects on light vehicle production in the fourth quarter.
The expectations on light vehicle production in North America have continuously improved in Q4 is now expected to show only a modest contraction supported by stronger us light vehicle sales expectations and continued need to restock depleted inventories.
In Europe, the low inventory level induced by the Lockdowns is expected to support production into the fourth quarter. Despite.
Despite this ice chests assumes European production to fall around 1% in the fourth quarter due to a decline in eastern Europe.
In China light vehicle sales have shown a year over year growth over the past six months and inventories are balanced ISS expect some demand stagnation in the fourth quarter with light vehicle production dropping 5% as the year over year comparisons get more challenging.
Our full year guidance is based on our customer call offs and likely light vehicle production outlook. According to IMS, yes.
On the next slide we have the impact on our business in the fourth quarter.
As we have communicated earlier this year, both tailwinds and headwinds were 2020.
Relative to the fourth quarter of Twentytwenty you can see the main tailwinds include growth from executing on the strong order book and the structural efficiency programs. The main headwinds include operational headwinds from COVID-19, declining and unpredictable light vehicle production as well as lower inflator replacement sales we believe.
The tailwinds and headwinds for the fourth quarter or have similar magnitudes and should lead to an adjusted operating margin for the full year 2020 of around 6%.
However, the economic uncertainty risks for further lockdowns and the potential increase in unemployment and its effect on consumer demand may still impact this fourth quarter outlook.
I will now hand back to Makena.
Thank you Frederic and moving on to the next page.
We have summarized our full year 2020 indications this.
This indication exclude cost for capacity alignment and antitrust related matters.
Hi Fi recent product launches, we expect a further pickup of sales outperformance compared to light vehicle production in the fourth quarter supporting a full year outperformance of around six percentage points.
We expect the 30% organic sense decline our net sales decline is assumed to be around 14.5%, including negative currency translation effects of around 1.5%.
We expect an adjusted operating margin of around 6%.
Operating cash flow is expected to be below the 2019 level of 844 million us dollars.
It is important to note that the outlook assumes that the current relative business stability prevail.
Turning the page to see.
To summarize the key Q3 outcome reflects our efforts to come out of this crisis as a stronger company.
We see the positive sales momentum continuing into the first weeks of the fourth quarter. However, it is important to realize that this crisis is not behind US there are still potential risk for further lockdowns affecting business stability and visibility.
I am proud that we have a solid organization that can manage the strictest and cost control, while continuing to execute on our long term strategy with the health and safety of our employees as the first priority.
I will now hand back to Andrew.
Thank you Michael turning the page.
We conclude our formal comments for today's earnings call, we would like to open up the line for questions. So.
I hand, it back to you Navio. Thank you ladies and gentlemen, we now begin the question and answer session.
Reminder, if you wish to ask a question. Please press star one on your tennis on any sales to cancel your request. Please press the hash key once again. Please press star one you see wish to ask a question.
And the first question comes from the line of sight to thank allowance from.
Does spanking. Please ask your question.
Thank you very much two questions for me first just a housekeeping question on engineering income if we should expect any.
The other situation on this seasonal pattern that we have seen on Q4 with engineering income and being slightly higher.
That's my first question second question is more on the operating leverage.
If I remember correctly I think Autoliv had 1.4 presented at more than in 2009, and then it went up to 12% in 2000.
2010, and we see a similar pattern here and on the operating leverage and what kind of a push back should we think about 2020. One in terms of operating leverage provided that died chesler took over 13% gopher activities sticks and you have some outperformance from that.
My two questions. Thank you.
No I think on the on the first question on.
On the engineering side.
I mean, we have no changes to the seasonality in engineering income as such.
But it doesn't mean that it needs to be the same a year over year here of course, but seasonality wise. It is the same and.
That is to be expected also this year.
When it comes to the operating leverage.
We have talked about that in the previous quarters here and we have guided in terms of a rule of thumb there on on on a growth scenario with around 20% and when you have these sharp declines more in the magnitude of 30 and also of course, when you have big rebounds.
And in the same way also you should be in the thirties.
Well actually I think thats, what Youre also seeing here.
A little bit stronger than that when it comes to Twentytwenty. One I think we wait wait any comments around 2020, one until we get into.
So.
The time for making a call on on the next year I would say with the current circumstances you further out you look it's more difficult.
Comps so nothing right now where we are focusing them on on.
The end of this year under full full 2020.
Outlook here as we have reinstate the guidance, Florida.
The remaining months here.
Fair enough. Thank you.
Thank you and your next question comes from the line of Manuel rosters from Deutsche Bank. Please ask your question.
Yes. Thank you very much so youre reinstated guidance implies a very strong.
Revenue outgrowth exit rate in 2020 and to be fair, you've always said that in the fourth quarter.
That some of these launches were back end loaded and be strong, but this is potentially better than.
Close to double digit or even better any.
Any sort of fundamental read through in here are you seeing generally.
General acceleration or have seen just shipped out from a timing point of view.
Just more concentrated in the fourth quarter than initially thought.
No I would say.
I would say generally no I think its follow the base assumptions that we went into this year with that.
Our full year outperformance into around.
Around 6% and Thats, what we are reconfirming here.
We have also said from the beginning here that it will be backend loaded in the year and we have not really seen any delays.
In launches either despite this very volatile time.
So of course, there is one so to say on that slide a little bit, but I would say.
I would say that's also happening in a normal year, so nothing exceptional there so.
Bottom line is that.
He is following the regional.
Outlook for the year and BT.
Beating that around 6% outperformance.
Okay, Great and then second question around your.
Order intake.
So.
You said I guess, he was as expected a little bit on.
The softer side in the third quarter, the fourth quarter will be more than half of the year, if I remember well in the first half you had said.
You had said that he was flat year over year in dollar terms in spite of some meaningful decline in production. So putting all together it feels that the order intake for the year could be up quite a bit on a full year basis versus 2019 is that correct is that consistent with your initial expectation and what does that mean for your.
Mid term growth profile.
Yes.
We havent given any specific guidance on on order intake for the year I think the working assumptions that we have said is that the market share that we are growing into its what we intend to do.
To defend in outer years here than in terms of new order intake is specifically.
In quarters.
And specific years May may.
Fluctuate a little bit of course as they always do because it's not a straight line in terms of activities from the OEM side and.
I would say.
That is for US we have communicated this this year and we will come back to the exact the win rate when we close 2020 here, but.
What we have indicated here is that in terms of activities we are still.
Backfilling our order book, So we can continue to.
Foreign market here in the us.
In the years to come.
Great. Thank you.
Thank you and your next question comes from the line of James Picariello from Keybanc capital. Please ask your question.
Hi, guys.
Question on 2021.
What are some of the offsets for next year related to.
Hospital lapping cobot related costs right the unwind of this year.
This year's temporary austerity measures just how should we think about.
What that company and whats companies based incremental margin ranges the structural cost savings layered on top of that then are there any cost offsets that come to mind is there anything.
You could share with us to get to.
To get to that bridge. Thanks.
I think a little bit too early to make a bridge to two 2020. One here based on what I said earlier around the uncertainty in the market to start with but also that.
It's up until the beginning of next year, we will give.
Guidance on on where.
Where we think we will end up at the Twentytwenty one but.
What I can say is that I mean, our focus here.
Is of course to manage through this crisis in as effectively as possible and I think the whole organization has shown the strengths in terms of strict cost control.
Managing the liquidity and of course, when that also making sure that we carry as much as possible into to the sustainable part here of course, but that was when we also move further into the recovery here.
The.
The media to harsh stops.
Say when it comes to the cost controls on of course, we will readily paid out but with that said.
We also have a very strong focus inside the company everyday here to make.
Make the company leaner and more effective as we move forward and also on the strategic side.
The Roadmaps, we laid out in the capital markets day last year.
Leading up to.
Our.
Ambitions here in the outer years is still ongoing so so it's all hands on deck to to deliver on those then of course under these circumstances, we need to find in some cases, new ways of working around that but.
That is.
Full full agenda around that so.
As long as we see a end market or light vehicle production here.
Holds up we believe that the Twentytwenty one should be a good stepping stone towards our mid term targets.
Got it is there any quantification around the city.
German plant closure, the savings and the timing related to that that move.
No. Its just what we said what you presented here is that.
The reserve, we took 30 million and Internet.
And it relates to.
The 200 employees, roughly and that production will end and around 2023.
But thats as much as we.
I would like to share on that.
It was as you know we have a footprint review where support on other strategic Roadmaps.
And we are now coming.
Communicating a big package here, we communicate when we have decisions on when we move forward on it so.
What we communicated in our in connection with the Q3 was one of those decisions and if and when we have more we will come back to that.
This as an area for.
For our long term strategy here.
Yes, thanks, guys.
Thank you and the next question comes from the line of Brian Johnson from Barclays. Please ask your question.
Yes, two questions one kind of keeping probing at the issue of cost.
Cost take out and second more strategic on.
On the cost takeout.
Yes.
Look year over year 30 million improvement in operating income just I'd.
Just I know, you're not giving 21 guidance, but if we kind of think about the pace of.
Fixed versus variable cost with that implies how much of that actually comes back because its a temporary measure.
No, we havent broken it down and.
I think it's.
In in large I would say of course, the minority of it will come back yes, it will get into more normalized situation.
When you look at the total number I mean, and I mean reflects out the very very hard.
The the workforce here when we had to basically come.
Come to a halt in.
April here now when we.
Coming back here and the volumes are are increasing again and as we also.
As we also taking market share here.
We need to backfill that and get people back. So it has been a challenging quarter in that regard.
I'd have such big fluctuations, but when you get into more stable situation. The majority will fuel pump come back here, but I would say right now for sure in Q3, we have not been able to run the whole operation effectively either so at the same time, we have strict cost control our streak.
Control over our cash here.
There is of course.
On efficiency in the whole out.
Volume swings here and also the extra measurements for for.
And the Corona Illico be 19 situation as well so.
It's difficult to give you a complete breakdown on that than I think I asked before.
Yes referred to my answer earlier here that.
It's all hands on deck to drive towards our mid term targets.
Great second question.
Second question.
Thanks, Eric you've seen that we have seven effect about 15 million from the structural efficiency program. So that's that's broken out and then okay that bank.
Yes, and the and the cost structure I think you can assume that its fairly close to.
A normal structure again wholesale for the third quarter.
Okay and second question you did flag the two pads.
Key launches won't be variance.
Is there anything in the belt.
Airbag World, that's materially different between electric vehicle and day.
Similar sized ice vehicle in terms of your CPB and door your competitive position.
No I would say that.
Increasing electrical vehicles is neutral to positive for us.
At the starting point, it's the same type of products then of course, the way noise becomes increasingly important in electrical vehicles tend to more be more silent and.
More quiet inside the vehicle.
That's it.
Very very important then we have also additional progress going in.
Like the power sales the switch.
Which is.
Feature where are you today.
The battery and at the source.
Vast resource in the event of a crash, so thats additional product coming into it so due to.
Neutral to positive for us.
And in terms of your competitive position you have two or three very strong competitors are they showing up at the bids as well.
Is there any difference in your win rate on NVS versus the broader the traditional product lines.
I mean, they are they're of course also seem to electrical vehicles. So after this.
That's the starting point, the same type of or products and I would say that.
Relative our market position. We are also well represented in the in the business.
In relation to to that.
Alan relocate to our position.
Thank you.
Thank you.
Thank you and your next question comes from the line.
Joseph Spak from RBC capital markets. Please ask your question.
Thank you everyone.
I want to get back to some of the.
From the performance this quarter because I.
I know you mentioned between Sep, one and two I think it was a 15 million dollar.
Year over year benefit, but your direct workforce I believe actually increased year over year on similar sales levels. So.
Would seem to suggest there's some efficiencies there as well I was wondering if you can provide.
Any sort of additional color as to sort of what else sort of drove some of the improve.
Improved performance in the quarter.
Yes, I think it's it's basically list or what we tried to describe what's in the bridge that we have a favorable.
Packed on productivity on.
On the material side nortechs extending them to.
To some extent on the personnel side, but it's more on the production overhead and direct labor that we still have inefficiencies due to the COVID-19.
Restrictions, we have in the operations.
And then the other component is of course that we still are benefiting from lower discretionary spending.
Which has continued from the second quarter into the third quarter, which should also carry forward to some extent also into into the next quarter, but with a with and to a lesser extent.
Okay. Thank you.
And the second question is.
No theres been some news about.
A competitor potentially facing seat belt recall.
Is that a potential opportunity for you to help out the industry like with the.
Inflator situation.
I mean seatbelt is of course.
Big part of our portfolio on and we are.
We are always there to support our customers, but in relation to this I have no specific.
Comments or or insight into and I think.
I think it's early days there as well.
Okay. Thank you very much.
Thank you and your next question comes from the line of Rod Lache Leach from Wolfe Research. Please ask your question.
Thank you.
A few things one is just typically the Q.
Typically the Q4 exit rate of revenue outperformance says something about the subsequent year just as your backlog for the new model year kicks in and of course next year regional mix could be pretty good if Europe and North America accelerate more than China are there any offsets or things that we should be.
Keep in mind, I know that you're not providing guidance for next year, but just at a high level anything that you would want to mention is that there is a potential offsetting headwind.
No I think yeah, no no nothing specific to just to comment as I said I mean, we don't go into the details for Twentytwenty. One I think it's early days or so, but I mean I think.
I mean, I think we have in in last year laid out what we believe is a.
Our expected average growth rates going forward here and outperformance. So I think thats still still stand and then of course, we did.
We did a regional swings that you have seen this year on weather normalize you mathematically get the.
Reverse the effect of that also so.
On top of that I would say there is nothing additional to to the equation.
Okay and then the savings on slide 13, I just was hoping you can clarify program one and program too was 10 and five in Q3 and then for 2021, you expect 10 plus 25.
Million or step up.
From from from the program, two and plus maybe some benefit from incremental flip footprint reductions is my reading that correctly.
And maybe.
Maybe you could just also just.
Just reference that.
Reference that the original plan that we laid out 300 basis points of margin improvement.
To get to 12% at that 100 basis points of that was structural savings to what extent are these.
Any of these incremental to what you had originally contemplated.
No I think.
The baseline is.
Tom So what we see as opportunities going forward is the.
The communication we had last year then everything we do air now is of course, a portion of the overall Jani and Youre managing through the the ordinary course of business here and the driving.
Efficiency and productivity across the board so in relation to our if I understand your question right here in terms of our.
Regional journey here.
It is not incremental to that.
Vessels were you asking is is a part of it.
Of course.
Okay.
And just lastly, when just a minor issue looks like mathematically you're expecting Q4 EBIT.
To increase by something like 26 million and.
On a revenue increase of something like a 186 and.
Looks like even just factoring in the FX changes, there's less than 30% normal incremental is this just just the unusual cadence of Q4 true ups and recovery.
Recoveries or anything like that that would be affecting that or or am I getting something wrong.
I mean, if there is nothing exceptional where this could Q4 compared to any other Q4's per se and of course, the full year guidance.
Yes, we are giving a boost to the best of our knowledge.
As we have indicated here I mean, we have of course cloud on disguise here in terms of the coal with 19, but the.
We'll describe is that it's it's is on discount Ilene This guy, but it's not raining yet. So so we have to wait and see if we will have an impact but with everything we know now and.
This is the best we can predict.
Okay, all right. Thank you, but other than that.
Thank you. Your next question comes from the line of Ryan Brinkman from JP Morgan. Please ask your question.
Great. Thanks for taking my question, just given the faster pace of recovery in the industry here your reduction in net debt do you have any updated thoughts here on capital allocation I did hear you say that you aim to improve both EBITDA and net debt in the near future are there any particular.
Particular milestones whether in terms of your own net debt or leverage or.
You know macro or industry sales figures et cetera that the board may be looking to.
Before reinstating the dividend.
I will say that there is no.
Specific triggering point here I think is like we have always said here that the.
Our ambition here is to have a pragmatic view on on how to.
And when to return to a.
More normal dividend situation here I think it's still too early and uncertainty is still very high as a result of the coal we had 19 and the.
It's a question for later date, but.
Yes.
It is a question about where are we in terms of stability in the industry.
And what we think about our own performance going forward from that point on so.
We have to come back to that when we we've come through.
Come through this immediate COVID-19 crisis here, but.
That's where we are at now it's too early.
Okay. Thanks, Len I realize there have been several questions sort of around this but looking at that 110 basis point improvement attributed to operations on the.
The margin bridge.
It would be great. If you just sort of speak to what you think kind of the underlying sustainable progress is there you know, let's say that theres a vaccine between now and three Q 21, such that you no longer have these inefficiencies and direct cost stemming from Cove, Ed you retain.
In some portion of.
Some portion of your savings.
And you cycle path from the austerity measures what do you think.
Would be wise to model now if you thought the virus is going away by the third quarter of next year in terms of operations going.
Going forward.
No.
I think our.
We need to see a lot of if somebody sent US a quick question then becomes very hypothetical answer if I would get into any details. There. So so plus that we are not talking about 2020 one yet so.
Uh huh.
I would like to.
Really really reiterate what I said before here about.
If we have a stable more reasonable market a healthy market a full four 2020 one.
We should see that as a stepping stone towards zone mid term targets, but more than that I think is a difficult to to to to say at this point in time.
The uncertainties around.
Okay I see thank you very much.
Thank you and your next question comes from the line of Eric Go Rang from S. E. B. Please ask your question.
Thank you two questions from my side, if I read it correctly or over.
Overall volumes.
Or slightly down in the third quarter, yet organic growth was positive. So is that a mix factor in any kind of change on the pricing.
Development.
Then the second question on returning to that topic discussed, but could you just help us out what the big swing is Q3 into Q4.
Clearly high organic growth expected in the fourth quarter.
Yet they much more muted year on year margin development, what's what's what's happening between Q3 and Q4, please to give that that outlook. Thanks.
It's a metric you can take the second question.
Peter.
Okay.
So the.
Can you repeat the second question again please.
Yes, sure. So just I mean, we've talked about it but you indicate the flat more flattish margin development in Q4 year on year in spite of kill a high organic growth than what we saw in Q3, so what's the big Delta that.
Chip development to such a big extent from Q3 into Q4.
I'm not sure I understand your question can you can you ask it differently.
Well there is a bit different.
Okay, but different do you have a slide deck, where you indicate the balanced.
Balance between negative and positive factors on margins for Q4, and I get that also the yeah. The full year margin outlook implies much more muted year on year development for the margin in spite of organic growth. So what's the.
What moves between Q3 and Q4 in terms of pulling back to the margin development year on year Okay.
Okay.
Yes, so we will run into a more sales assuming that.
Assuming that the volumes now come has says we are predicting them have with the outlook, we will come into more normalized operating level.
With that.
Yeah.
The thing is we have currently from a sales lower discretion.
Discretionary spend.
Our assumption is that they will affect.
Be reduced and also going into the into the fourth quarter. So you will have a smaller benefit from that in the fourth quarter than what you had in the third quarter. Then also we've had a net positive from if you look at the the cost incurred relative to COVID-19, and the benefit or subsidies received adipose or say a net benefit.
Also because of timing of how we recovered some of the subsidies so.
So those are two elements that that will go away.
And then it's yes, if we can also look at the productivity in the plants. We are still operating as we said at Sep not optimized and efficient levels.
So those I think are the main components such as the factory and if you then look at the leverage for the fourth quarter.
Okay. Thanks.
Thanks Nolan.
And then on the first question on pricing.
Organic growth is better than volumes.
It's a mix, it's a mix effect.
See coming through that.
So it's no no changes to the pricing.
Okay.
Thank you.
Thank you and your next question comes from the line of Sasha Gomes from Jefferies. Please ask your question.
Yes. Good afternoon. Thanks for taking my questions. The first one would actually be on your margin again, I think historically said.
In phases with very high number ramp ups.
You tend to have a bit of margin dilution.
Now we see that you have a lot of ramp ups or a lot of high volume module model.
So we think that.
The may call that you signed for your order book that you have a very healthy order book with very high profitability and that is to start.
The store in comparison.
It doesn't really fit here.
No.
I think as always.
It's a lot of work to trim the system. When you have a ramp up I think when you look at this quarter. It's so many things going on at the same time here.
And I would say this.
I would say this has also been a quarter, where you have had not so many launches. Thus we have had before as we said that also is geared toward.
The later part of the year, so we see that coming through more into Q4 than in Q3, but there is no changes to the the I would say the normal effect, where you have a lower performance of the of the programs in the ramp up phase than you have when it's mature at that.
So thats no changes to that.
Do we have a healthier order book.
So that is also hangs together more question about how is the mix coming through in terms of.
Product and.
Different platforms coming through so that is nothing I think you should read into this short term.
So Oh Q3.
Sales and then my second question.
The reduction in inventories is is that a reflection that your OEM customers less volatile than their behavior. You think you can run a bit more.
More efficient ship right.
Right and the protection.
Well definitely there is a much more stable environment now we're coming out of the third quarter than we had at the beginning of the quarter. Yes, yes. So this we have a much better ability to operate that at more efficient inventory levels at the end of the quarter that we had at the beginning of the quarter I think you can see that both.
If you look at the inventory turnover rates versus the previous quarter, but also year over year. This improvement.
So so yes that is significantly improved over the last couple of months.
And you think that there is further room or is that the level, where you think you can hold it relatively speaking.
I think for for the moment I think we believe this is a healthy level, we still have suppliers that are.
Distressed.
And it's not going away yet see the the issues that we have in the supply chain.
So for the time being we think.
We think that this is a.
Healthy inventory level that operate on considering the risk in the end the entire supply chain.
Appreciate it thank you very much.
Thank you and your last question comes from the line of Victoria and good to hear from Morgan Stanley. Please ask your question.
Hi afternoon can you hear me okay.
Hi, there.
Great and just two questions. Please firstly thinking about Capex for 2021 should we think about any delayed spending that you might need to come back to you. There probably if you could in thinking about that in absolute terms would be helpful. Given that there's a bit of volatility obviously your range sales expectations and the second one are you.
Seeing any restriction any disruption as the restrictions and increased again for for coverage, particularly in Europe.
I think you said that actually things are okay, but no, but do you see anything coming down the track there that we should we should bear in mind. Thanks.
Thank you let me let me take the last question first on the hand over to Fred victim to comment on the Capex.
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And as you say I mean, we see some restrictions coming into play here in Europe, but so far.
Nothing is impacting in what we can see an hour or so.
Supply chain here already in our customers. So so far so good but we are.
Remain very active and on it a lot here to take any measurements or actions necessary. If that would would would come into play and I mean, we have maintained our task force here too.
If you for example on an almost daily basis here.
The our our supplier base and and and afraid the lines here. So.
We are well prepared to take that on but so far so good.
On the Capex side.
We have now as you see in the third quarter the higher.
The higher investment level than the second quarter and you should expect that also to continue into the.
The fourth quarter.
Our ambition is to over time get the capex to sales ratio to below 5%.
But.
Specifically for Twentytwenty, one I think we will come back to that specific guidance.
And when the time is right for that.
So probably not to think about below five four for 21 at this point.
I think we will give that guidance when that when the time is right.
Great. Thank you.
Thank you and you can please continue we're not taking any more questions.
Thank you very much not yet so.
So let me I'll say that before we end today's call I would like to say that we are operating from a position of strength in terms of liquidity and flexibility and dedicated employees.
And we will continue to improve efficiency optimize our footprint and implement our strategic roadmap to support next year being assaulted steppingstone on the June into our Twentytwenty two 2020 four target.
Our fourth quarter earnings call is scheduled for Tuesday January 26, Twentytwenty one answer.
Thank you everyone for participating in todays 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 disconnect.
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