Q2 2021 Autoliv Inc Earnings Call
Hello, and welcome to the Q2.2021, and I'll Tell you Inc earnings Conference call.
Throughout the call all participants will be in a listen only mode and afterwards, there will be a question and answer session.
And today I'm pleased to present, Michael Bryant CEO I'll now hand, the call over to honest top VP Investor Relations. Please begin the meeting.
Thank you and I have.
Welcome everyone to our second quarter 'twenty to 'twenty, 1 and financial results earnings presentation.
On this call, we have our president and CEO and he got up and our Chief Financial Officer, Eric Steve and me.
On the sharp VP Investor Relations during today's earnings call and our CEO will provide a brief overview of our second quarter results as well as provide an update on our general business and market conditions.
Following Mikael Fredrik will provide further details and commentary around the financials.
We will then remain available to respond to your questions and as usual the slides are available at Altria adult cool Tony.
Turning to the next slides.
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 us GAAP measures.
The reconciliations are historically was GAAP to non us GAAP measures are disclosed in our quarterly press release, and the 10-Q that will be filed with the SEC.
And lastly, I should mention that this call is intended to conclude at 3 P. M. Central European time. So please follow a limit of 2 questions per person.
I will now hand over to our CEO and co brands.
Thank you and US looking now into Q2 'twenty to 'twenty 1 highlights on the next slide.
The COVID-19 pandemic continues to affect us and 7 ways and I would like to acknowledge our employees for their hard work and commitment to health and safety.
Monitoring and strong consumer demand for new vehicles, and the automotive industry continues to backfill with the semiconductor shortage and other components supply disruptions.
As a result of the shortage global light vehicle production in the quarter was 8% lower than what was expected and 8% lower than in the first quarter. According to IHS markit.
Considering these headwinds I'm pleased with our second quarters strong sales growth and our outperformance versus light vehicle production.
The lower than anticipated nice vehicle production, rising raw material cost and and dogs changes and customer call offs with short notice negatively impacted our profitability and the quarter.
Frequent production changes from our customers with short notice this limited our ability to use for annoying to mitigate the effects of the lower demand.
Although the situation improved towards the end of the quarter, we still expect supply disruptions and the impact of light vehicle production for the rest of the year.
Our performance so other improved our debt leverage ratio, which is now close to our target of 1.
Times EBITDA.
We continue to evaluate opportunities for shareholder value creation.
I'm also pleased that we have reinstated a quarterly dividend.
For the second quarter was declared and paid at 62 per share.
The industry's 11 of sourcing of new orders has normalized and I am pleased with our win rates.
We took an important step by setting ambitious climate targets, which include plans to become carbon neutral in our own operations by 2000 to talk to you.
Towards the end of the quarter. The semiconductor issue was improving however in July the situation has deteriorated and North America and Europe again as the number Oems have announced further near term reductions this situation and Asia appears more stable.
And I think and production is expected to remain volatile for the rest of the year with semiconductor shortages and other supply chain issues, leading to higher costs from commodities.
Looking now on the financial highlights on the next slide.
Our consolidated net sales increased close to $1 billion or by 93% compared to Q2 'twenty.
'twenty as a result of light vehicle production recovery from the pandemic related Lockdowns and last year and our strong sales outperformance.
The European and North American market.
Contributed to 3 quarters of the sales increase.
Adjusted operating income excluding cost and capacity alignment improved from minus $172 million 266 million U S dollars.
The adjusted operating margin increased to 8.2%.
And the solid operating income despite light vehicle production being both volatile and lower than expected was a result of good operational execution cost control and positive effects from the structure and efficiency programs.
Operating cash flow was $63 million, despite adverse effects from changes in working capital.
Looking now on sales development on the next slides.
I'm very pleased that our organic sales growth outperformed the global light vehicle production by more than 30 percentage points.
It's mostly achieved partly because of positive geographical mix effect.
Light vehicle production growth strongly and high content per vehicle markets, but mainly because we continue to execute on our strong order book.
We had a very strong sales development and almost all regions and North America, we outperformed by 24 percentage points and in Europe by 38 percentage points in.
And China, we outperformed by almost 5 percentage points, despite that high and because were more effected by the semi conductor shortage.
Looking on the next slide.
We see several notable product launches during the quarter.
The models shown on this slide have and offer live content per vehicle from hundred U S dollars to almost 4 and a 50 U S dollars.
6 of these vehicles or other evs and plug in hybrids.
And extending our exposure to this growing segment.
The long term trend to higher content per vehicle and is supported by the introduction of front center airbags.
Ex belt bags and more pedestrian protection systems.
I will now hand over to our CFO <unk>, who will talk about the financials on the next few slides.
Thank you Micha.
And this slide highlights our key figures for the second quarter.
We are including 2019 and this overview because of the anomaly of the Q2.2020, which was the first quarter with strict COVID-19 related lockdowns outside of China.
Our net sales were over $2 billion, and 93% increase compared to the same quarter last year.
Compared to Q2.2019 sales decreased by 6%, while the underlying L. B P was down and even 15%.
Gross profit increased to $384 million and the gross margin increased to 19% compared to Q2.2019, the gross margin increased by 40 basis points. Despite the lower sales.
The higher gross margin was primarily driven by direct labor and material efficiencies.
And the quarter capacity alignment and had no material impact on the operating profit.
The adjusted operating income increased to 166 million due to the higher gross profit.
The adjusted operating margin improved by 25 percentage points versus Q2.2020.
And it was almost in line with Q2.2019, despite 6% lower sales.
The operating cash flow was $63 million.
This was achieved despite adverse effects from changes in working capital.
Reported earnings per share improved to $1.19, and our adjusted return on capital employed improved to 18% and adjusted return on equity to 16%.
We reinstated our quarterly dividend at 62 cents per share the same level as before the dividend was suspended and the second quarter of 2020.
Looking now on the adjusted operating margin bridge on the next slide.
Our adjusted operating margin of 8.2% was almost 25 percentage points higher than in the second quarter of 2020.
The impact of raw material price changes was negative 8 million and the quarter.
FX impacted the operating profit negatively by $13 million.
This is caused by the transactional effects from a number of different currency pairs and the most significant was the negative impact from a stronger Canadian dollar and a stronger Mexican peso versus the U S dollar.
Support from governments and connection with the pandemic was 25 million and the second quarter last year.
But it was not material to our financial results and the second quarter of 2021.
As illustrated in the chart. The adjusted operating profit was negatively affected by higher SG&A and R&D and E <unk>.
Net of government support of $40 million.
Operational improvements contributed with over 400 million, mainly due to the substantial increase in sales.
If we exclude FX raw material cost increases and governmental support the leverage was 39% on the higher sales supported by good cost discipline and effects from our structural efficiency programs.
As Q2.2020, it was a very special quarter highly impacted by Lockdowns and the first quarter of 2021 is a more relevant comparison.
And looking on the next slide.
We see that sales declined by $220 million sequentially or almost 10% compared to the first quarter 2021.
Our adjusted operating profit declined by $72 million <unk>.
Excluding $10 million from increased raw material costs. The decline was 62 million, which results in and operating leverage of around 28%.
We have many times communicated that our operating leverage normally is and the 20% to 30% range with closer to 30% to be expected when sales fluctuate significantly and we consider 10% sales dropped quarter over quarter to be significant.
The 28% decremental margin is within the communicated normal range. Despite the high volatility and N V P with customer call offs frequently being changed with short notice.
Especially as planning a production has been difficult.
We usually see call off deviations of plus -5% and the second quarter, we have frequently seen call off deviations of up to 50 per cent.
We believe the actions undertaken in the quarter, such as reducing head count by more than 2000 and contributed to limiting the decremental margin.
Looking on the next slide.
For the second quarter of 2021 operating cash flow was 63 million and.
And increase of 192 million compared to the same quarter last year, and 84 million compared to Q2.2019.
Operating cash flow and the quarter was negatively impacted by changes in operating working capital mainly relating to tax and insurance and cash out for the Toyota Prius recalled.
Inventories were impacted by supply chain uncertainties trade working capital also developed unfavorably with $8 million.
For the full year 2021, we expect operating cash flow to be similar to the 2020 levels.
Capital expenditures amounted to 96 million and the quarter were 4.8% of sales.
Compared to the same quarter last year capital expenditures increased by $32 million or by 50%.
Free cash flow was negative 33 million impacted by unfavorable working capital effects.
Our cash conversion and the last 12 months was close to 130%.
If we turn to the next slide.
We have as you know a long history of a prudent financial policy and our balance sheet focus remains unchanged.
The leverage ratio improved from the peak of 2.8 times a year ago to 1.1 times.
The improved leverage and the quarter was a result of our EBITDA over the last 12 months, increasing by 350 million, partly offset by the net debt increase of $85 million.
Further improvements should provide additional opportunities for shareholder value creation.
Onto the next slide.
Supply demand imbalances continue to drive prices of raw materials higher and some key commodities have increased by more than 20% and the past 3 months.
As we mainly by components the effects from changes and spot market prices are usually mitigated and delayed 2 longer term supply contracts.
Year to date, we have been successful and limiting the impact with virtually zero impact and the first quarter and only around 8 million and the second quarter.
However, as raw material prices have continued to increase on a broad base for the third straight quarter.
And we'll see price adjustments coming through which will affect earnings significantly and the second half of the year.
Based on the current situation, we estimate that for the full year of 2021, we will face and operating margin headwind of around 130 basis points for and raw material price changes and our previous estimate was 90 basis points.
We have some but limited contractual pass throughs to our customers.
Negotiations for compensations for there from the remaining customers will take time and likely not have much impact until the next year.
Onto the next slide.
Demand for new vehicles remains high and inventory levels of new vehicles remain at record low levels and some regions for.
For example, the inventory levels and North America ended June at $1.4 million units.
And about 35% of what manufacturers and normally would be carrying.
Dealer inventories are in general at a normal level and China, and we believe that European inventory levels are fairly low, especially for premium vehicles.
Assuming that the component availability improves we expect the good demand and low inventories to support a recovery and N V P into 2022.
Versus what was expected at the beginning of the quarter.
Q2, 'twenty, 1 light vehicle production came in and 8% softer than expected due to shortages of semiconductors.
From here, though the global volume should sequentially improve into the second half of the year. However production is expected to remain volatile because of the semiconductor and other shortages.
Oems would likely strongly pushed for vehicles with no or low C. O 2 levels as well as larger vehicles that are more profitable for them.
For now to leave this trend should support further outperformance versus light vehicle production.
For full year, 2020, 1 our assumption does not want that global GDP will increase by 9% to 11% compared to 22.20.
I had just market has this afternoon and released their updated L. D. P figures and then now forecast global light vehicle production to grow 10% in 2020.1.
For Q2, 'twenty, 1 and they have adjusted down their estimate of global light vehicle production by 160 basis points to 50%. This would indicate that our sales outperformance versus L. P was 35 percentage points in the quarter.
We have also noted that production of light vehicles declined by 9% instead of 8% sequentially from Q1.2021.
And I'll hand, it back to make yet.
Thank you Fredrik turning to the next slide.
Here, we show the main factors behind our updated 'twenty 'twenty, 1 and indications.
Full year 2021 indications for organic growth and adjusted operating margin or adjusted to reflect the lower and more volatile light vehicle production and higher raw material costs.
Compared to our previous guidance the light vehicle production outlook is lowered by 1 to 3 percentage points due to the component shortage.
Our estimate of raw material prices headwinds is increased from 19 basis points to 130 basis points for 2021.
These headwinds are to some extent offset by improved sales mix and cost adjustments.
We have the details of our indications on the next slide.
These indications exclude cost for capacity and 9 months and any potential antitrust related matters.
Our full year indication is based on our global light vehicle production increase Inc. Light vehicle production and increasing 9% to 11% compared to 2020.
We expect sales to increase organically by 16% to 18% supporting our full year, 7% outperformance versus light vehicle production.
Our net sales increase is assumed to be 20% to 22%, including positive currency translation effects of around 4%.
We expect and adjusted operating margin of around 9 to 9.5%.
Operating cash flow is expected to be similar to 2027.
Our strategic initiatives are gradually yielding good results.
We are confident of our 'twenty to 'twenty 2 'twenty 'twenty 4 targets based on our internal progress and and expected nicely and market recovery and the next few years.
And as I mentioned earlier, we have set time and targets for the company.
Our next slide we have these targets.
Turning to slide.
After this vision of saving more lives drives all our work sustainability is firmly rooted in our business strategy and as the market leader in our seed.
Our efforts are aligned with the broader societies agenda.
As the first automotive safety component supplier, often it aims to become carbon neutral and its own operation by 2030, and Furthermore aims to net zero emissions across its supply chain by 2014.
We are also committing to the science based targets initiative.
These initiatives places us among the front runners in the broader group of automotive suppliers.
<unk> to define a detailed carbon footprint abatements strategy is ongoing.
<unk> will cover all main levers for decarbonization, such as renewable electricity and our own and supplier operations, lower carbon logistics energy and materials and sufficiency and low carbon materials.
A more detailed roadmap will be outlined in connection with our and capital markets day in November.
Looking now on the next slide.
We have the pleasure of inviting investors analysts media and other stakeholders to attempt to our capital markets day on Tuesday November 16th 2021.
The event will be virtual only and live streamed.
At the meeting we plan to showcase our full potential and provide an update on us on a Saturday and development.
Additionally, we plan to show future products give an update on opportunities and core and adjacent product areas.
And for the potential that we see in flexible optimization and they get civilization and much more.
I will now hand, it back to Anders.
Thank you Mikael.
Turning the page.
This concludes our formal comments for today's earnings call and we would like to open the line for questions and I'll turn it back to net.
Thank you.
If you wish to ask a question. Please press star 1 on your telephone keypad and maybe.
He wished withdraw your question you may do so by pressing zero 2 to cancel.
Our first question comes from the line of Emmanuel Rosner from Deutsche Bank. Please go ahead. Your line is open.
Oh, hi, everybody and thank you for taking my questions.
First question would be.
Can you maybe describe the.
Industry production environments, you expect for the second half I thought he was.
Someone notable that your LDP assumption.
And now I guess, a little bit more conservative on the low end and what IHS had cash as of yesterday.
And so can you just talk in terms of how much visibility you have in terms of call out how much volatility.
Thank you.
And so humble.
I think.
The range, we are indicating is the result of a high amount of uncertainty and in the market here and down started today and goes back to when.
The industry will yeah.
Come back to more and I would say stable situation when it comes to a more predictable situation when it comes to see him and conductors.
As we indicated here and the presentation, we saw some improvements towards the end of day quarter.
But coming in now and in July here, we see once again that our customers are changing the call offs with short notice and and.
And the volatility continues and so I think the best way.
Can judge now is that we think we will see a gradual improvement over the situation and throughout the rest of the year here, but it will take time until we are.
Back in and I mean, we can't say that we have to see them and conductor challenge behind US here. So I think we will continue for quite some time here with.
High level of uncertainty.
And but.
I think that's why we are right now.
Okay. That's helpful and then as a follow up.
Just a question on the raw materials.
Impact so based on that.
Yes.
The slides, where you detailed how you do your contracts work so.
And if raw materials were to stay at.
Sort of like current spot prices.
How much of an additional impact would that be beyond this year.
And we don't.
And we don't guide for 2020.2 at this point of time, but we can say that if.
They stay at the current levels that would also be a challenge into next year from that high level.
And what you've seen and the.
But the increase that we've seen now sequentially is mainly related to our steel and nonferrous metals.
Weather situations has.
Pretty much deteriorated at the same now.
And the 2 as we saw and the first quarter and how.
And they.
The need for us to revise our impact for for the full year.
Understood. Thank you.
Thank you.
And the next question comes from the line of Mathias <unk> from Dnb. Please go ahead.
Thank you and thanks for taking the time for my question.
You mentioned in the presentation, a couple of times and potential for shareholder value creation activities. When you discussed the leverage ratio and could you. Please elaborate debate on what this could be and also any potential timing. If there's sort of you need to wait for the market to stabilize in terms of day in semi.
Semi shortage or if there's anything holding you back from Sunday to activities at this point.
No no I think what we wanted to say that it's really that I mean, now we are comps deliver comfortably back within the range and.
With that I mean, we have now reinstated.
And the quarterly dividend and.
And on top of that of course, we have as we always have stated in the past buybacks and and Oh.
Alternatively, the extra dividend.
Tools for that but.
And that's a decision that needs to be made from time to time and he and of course, we need to judge also and not only how our balance sheet looks like but it's also.
And the pace to be Lithia about.
And the business cycle, and our cash flow right looking cash innovation there so.
It's just to reconfirm, our intention here to be a shareholder friendly company in terms of returning cash.
Liquidity to our shareholders and of course, the timing, we will come back to when and when appropriate.
And it's a disease and from time to time.
Understood. Thank you and my second question is the medium term margin target of 12% on EBIT level that you stated in your C. M D and 2019, and given the sort of incremental raw material headwinds that we're seeing right now do you still think that the.
And our rights and a 3 to 5 years.
Realistic or how should we think of that.
Yeah, I mean, we are holding on to and and called for and of course, our long term targets here.
No changes to that because of this short term situation here.
I think I mean, that's we are indicated here and we think that the Q2 was the trough.
It comes through to see them and conduct a challenge even though it will take.
This with longer and until we are on stable ground, there and as Frederic indicated here I mean raw material and it's something we will have to manage over time, regardless <unk>.
But it's really time and that is needed to balance that and I think when we're looking at this time of rice and here.
We have that time and and we think we'll see that we have a very strong underlying demand when it comes to light vehicles and going forward out here. So no reason to 2 and.
The other views and then we'll feel that and the testing.
Thank you so much.
Thank you.
And the next question comes from the line of Chris Mcnally from Evercore. Please go ahead.
Thanks, so much guys.
Just wanted to follow up on the on the raw materials and nobody can put up a number of killer. So maybe if we talk about more what the process for getting reimbursements and essentially looks like and.
What what youre, saying and sort of second half that the 130 basis points for the full year is is both a growth and the net number I think it is not going to be much.
Thanks recovery can you talk about just the conversations you're having with your customers.
And how long does it take for price recovery to happen.
How might be typically would cover things like as we get a sense for that so the headwind going into next year.
Yeah sure and.
We do have some but limited contractual pass throughs to customers and of <unk>.
Of course, the negotiations with the remaining customers are ongoing.
As we see these these are significant headwinds from raw materials.
And on the ones, where we have indexation.
And then I mean, they are typically retroactive. So then you also have to look at what and where these costs have been.
And looking backwards and that is built in into our guidance.
When you look at what we are negotiating.
It's rather limited because as we said it will take some time for.
And for these negotiations and also for that to become effective.
And will have only a limited impact here on the current year, but as we said of course, our ambition is to over time.
Should the price to stay at this level also offset them commercially.
And so I think it's a fair and we think like absolute numbers $50 million a quarter and the and.
And the back half of a headwind that's something that we should at least model for Q1 of next year and then at the earliest maybe we get some breaks and <unk> and you get some commercial recoveries, but but thats sort of pages, we're going to we're going to have probably a couple of quarters of this level as its finally starting to bolster.
I think we have to come back to that when we when we gave our 2022 guidance here I don't want to make any comment on the quarterly.
Impact here for for Nokia.
The day no problem I had to try and maybe just real quick just high level do you.
And I've seen pressure then.
Another opportunity to go to Europe, Q base, and basically asked with delays and.
And price increases when you, obviously youre not buying raw raw steel, but obviously manufactured parts and is that another way to just sort of to manage that the time lag wallet. It takes you a couple of quarters to get the commercial recovery from.
From the Oems.
Absolutely that's why you've seen that the impacts so far year to date has been fairly marginal and I'm gonna pits.
Close to zero and zero and the first quarter and now a $10 million and the second quarter. So that I think is a reflection of how successfully we've been able to push this out with our supply base.
And especially on the steel side. It is a very stress situations and we will have price changes here and it comes through that we cannot avoid in the second half.
Okay, great. Thanks, so much.
The next question comes from the line of hump with single aisle from Handelsbanken. Please go ahead.
Thank you very much 2 questions for me.
Firstly on the some shortage.
And I remember I think I was picking up.
And inflammation and death.
And the situation having troops and looking at the beginning of May and then you highlighted that Jews and those extra tough could you maybe share.
Yes, nice little happened in June and net.
We can be sure that second quarter is the trough and incentives.
First question second question is.
And it's relating to.
Okay.
Operating leverage I.
I mean, you highlighted.
The operating leverage and the second quarter compared to the first quarter and.
How should we think about Q3 and <unk>.
Q4 here.
Is it full year outlook.
More back ended loaded more related to Q4 now with and.
Engineering income or how should we think about that.
I can start on the semiconductor side here and I'm free.
And maybe you can take the second.
And second question there.
On the semiconductor side as we sat here and we saw some some improvements and I should say stabilization towards the end of the second quarter here, but.
But.
We have once again and see and some plant closures on our customer sites coming up here and in July and we.
With short notice so what we want to indicate here is that we see and.
Volatility also in the beginning of the third.
And here I think the challenge here is that the uncertainty is so high when it comes to semiconductor as you know the automotive industry is only 5% to 10% of.
Of the total.
Usage, so semiconductors and so we are of course also here impacted from whats happening and the total pool of customers for semiconductors and and.
And <unk>.
We have indicated here, we think it will take a longer Peter here and obviously, we are really on stable ground. When it comes to semiconductor supply and gradually improving that is day to divest of our knowledge now and and what we pick up.
And our interaction with the.
Suppliers and customers and.
And so that's the best indication, we can give at this point and time.
Okay and that helped us on Europe.
Christian on the operating leverage and we do expect even if theres no range shown on the volume recovery and the second half that we will see a sequential improvement here.
And of course, a show of course, it also has a positive leverage effect.
But it also depends a bit on and with its 911 and wherever outlined to Devon.
I'm, sorry, the 16% to 18% that were saying.
<unk> also had larger spread even for the second half and.
And we also expect the volatility to continue at least in the near term.
So we have to see how quickly that comes out because it will.
The impact on our ability to pull through and incremental sales and then the well I mean, the volatility and the call offs.
That's another component and then the third 1 is of course raw material where.
And we expect a fairly even hit here between the quarters and the second half.
When you come to when it comes to your specific question on engineering income that should pretty much follow the normal pattern and as we've seen in previous years.
Excellent thanks very much.
Thank you.
And the next question comes from the line of Joseph Spak from RBC capital markets. Please go ahead.
Thank you very much.
You mentioned <unk>.
Typically and 25% to 30% pass through 30%.
And when it's volatile like it was.
This quarter on the way down.
You also mentioned the continued volatility going forward. So does that mean, you know, we think sales and kind of increased sequential here we should be.
More towards the lower and maybe the 25% on the upside and then.
Doctor and commodities on top of that is that is that how you advise to think about the rest of the year.
I think the real uncertainty here is just how the volatility that we tried to indicate share where we see typically a fairly narrow range, but now and the second quarter.
And with large range and.
And how that's developed over Q3, and then going into Q4, because that will have impact on our share our operational effectiveness and then also how.
And I have to have what leverage we can then pull through incremental sales and.
And that is very difficult to give an indication on right now and we're not we're not through it yet.
Okay.
And then just maybe you know going.
Going back to raw materials, and 1.1 more time so.
And secondly, the entire impacts here and in the back half I know, you're not talking about 'twenty 2 but.
No.
It's like it's like a more like a 230 basis point margin and pack and the back half. So it seems like that's at least a good run rate to go and through the first half.
I guess, what I, what I really want to get to is.
You know how does this impact your confidence and the 12% margin target over time, because presumably this level of commodities wasn't contemplated so what what are some of the offsets and I know you have a couple of market sales later this year and I don't probably dive into that more detail, but at a high level and maybe you can just help us with that.
Yeah, I think I think yeah.
What we're saying here is of course that the.
And the raw materials, and we need to overcome over time through different means I mean.
We're talking about compensation and and offsetting it with our customers and I think he's also on how we work with our <unk> and <unk>.
Total improvement journey here and and also with our suppliers.
And if we see a.
We are not at all indicating that but.
Particularly from your question here, if we would see and more long term.
Yeah.
Increase of raw materials, and Thats for sure something we have to come and will overcome we need to do what we need to do to manage that but.
And what we believe here is and working assumption is of course that we and other.
Temporary increase here.
But it's difficult to give it the time on it so once again.
We are confident and activities, we are doing and and we also see very strong underlying demand for light vehicles going forward in this time frame and I think the raw materials and also normalize at a different level than what we are seeing today.
And whatever Delta and started to do something we would manage.
Thank you very much.
Next question comes from the line of Rod Lache from Wolfe Research. Please go ahead.
Yes.
Hi, everybody.
I I'd like to just understand a little bit more about the raw material recovery process as well.
You're going to be negotiating this presumably later this year with your customers. So if we think back at it.
Prior periods, when you had higher raw materials.
What did you typically recover and the subsequent year when I'm through those negotiations.
I don't think you can say that is.
You know rule of thumb in terms of percentage, it's more related to the nature of the raw material increases I would say and.
Because if it's something that is more long lasting and more let's call it inflationary and to its nature.
And you'll have a higher.
Rate of compensation and then if it's temporary and I think we had indicated before and if it's really temporary volatility and it got to even something we are.
Really discussing that with the customer and so so it all depends on the nature of the increase and so to speak.
Yes time will tell here what do you see this thing when we look at these increases here, but I mean, those negotiations and discussion and of course.
So already ongoing here and.
Work is being done and up there.
Okay.
And.
Just to clarify do you typically put that into the recovery into sort of a different bucket than the raw material inflation or D. When you describe raw material inflation is that a net number net of recoveries.
I mean, if you if your question is and how we discuss it we.
And our customers.
We know how you discuss it with US is what I went out and are you referring to a gross number or is this and kind of a net number when you give these are the basis points of margin.
That's the cost impact.
Okay. So that's just the gross number okay.
And then lastly could you just speak to inflation more broadly I mean, we're seeing.
A lot of tightness.
Particularly in North America, but inflation is.
Obviously, it's not just commodities and labor cost inflation logistics inflation and other things that seems to be a global phenomenon.
What's the extent to which you youre seeing this and.
Is that something that you would expect to be a bigger factor as you as you look forward.
No when you see it are saying and.
Multiple areas not only on the other raw materials side, and that's just had logistics.
As stressed as well.
Both in terms of.
Availability and but also in terms of cost for logistics and and also the accuracy of delivery and so that's it.
And so very stressed situation.
And and we're dealing with that.
Same way I sneak that described here on day 1 as.
As we do on the raw materials side and so eventually also discussing that with our customers, but primarily at the moment Madison that with our with our supply base and and our logistics providers.
And I'd have to say, so far and on the labor cost side, we've not seen any significant pressure.
So far on that so.
So I think that's 1 component at least.
And that's that it's at.
At the moment seems rather stable.
Okay. Thank you.
The next question comes from the line of Brian Johnson from Barclays. Please go ahead.
Thank you.
And just wanted to get to more perhaps of a strategic issue around commodities I've always been struck and if it compensates with John and the past about how auto leak with its incredible low record of recalls.
And this value to your customers. So in addition to just going out and try and commodity cost recoveries, there and opportunity to recast the contracts going forward to make them more like we see and other suppliers.
Segment sectors, where raw materials are a big part of the cost of goods sold.
<unk> and so forth and just have straight index space pass through agreements and if so would you kind of bring new programs on is that a trend that you'd like is that a kind of factoring I'd like to put into place.
No I think I mean first of all we are a system supplier and with a lot of Inc.
Components going into to what we delivered 2.2 hour and customers here and I think.
And there's pros and cons to that but I think overall over time have a system that and and.
Business relationship that serves us well.
And so.
Sure and say that I see any big changes to that.
It comes back and then.
Or other structural changes that that might be or not be.
Okay and in terms of the raw materials, we shouldn't be looking at to kind of think about it and you flagged hot rolled steel or there are other commodities that we ought to be paying attention to you know there are some commodities like copper and lumber data obviously not in your products.
And are rolling over already.
In addition to steel what are the key components without a track.
Yes, I think that the main wants to match all our steel.
And that's about 40% of our raw.
[noise] material exposure and done and I think hot rolled coil is a good indication.
And when it comes over the next 2 once our residence.
So yeah, what we buy for sales.
The components and then the third component is textiles and there it's yarn.
And probably Amit polyester.
Neither and so on.
Those other.
The main commodities that we're exposed to.
Okay and then finally in terms of cadence is it fair to think that.
<unk>.
And typically a big step up.
Should we expect the same and especially as you go through these commercial discussions and this year.
Can explain that again I didnt understand your question.
The cadence of margin and second half.
Between the 2.
<unk> performance.
I think I mean, the seasonality and our earnings and a year.
Yeah.
Yes.
It is what it always has been so we don't see other changes that and of course.
Events like we.
We have to live through here and it may affect.
And the specific quarter, but seasonality per se.
Okay. Thank you.
And the next question comes from the line of Ryan Brinkman from Jpmorgan. Please go ahead.
Hi, Thanks for taking my question.
And was based on some <unk> pre announcements from GM Ford Volkswagen and others that the combined impact of a headwind to production and a tailwind and the pricing because of the resulting lower inventories.
<unk> been netting out very positively for them. So far this year versus for suppliers. The impact is only negative because there's not an offset.
Pricing from the lower production and I'm curious what impact if any this dynamic might be having on your conversations around commodity cost recoveries.
Tone or tenor of those conversations any different versus in the past when you saw commodity inflation given that the customer pricing and margin is so strong I think average transaction prices and the U S. And June for example might have been up like 10, 7% year over year. So im curious what youre seeing there.
No I think Jan.
We'd like to refer to as I stated before here and I think the let's call. It 2 success from our perspective here and those discussion is more depending on the nature of the raw material increases than anything else.
So.
You hire on longer and they are and even more relevant there are and and and.
Customers ice and so to speak.
And that's really what I'm seeing that and of course the change at the difference here between OEM and supplier is because we are in different parts of the total value chain and and also the timing of the events here.
Impacts net.
Okay, it's more depending on the nature of the enrollment to increase.
I appreciate that and then just lastly to follow up on the comment during the prepared remarks that the semiconductor shortage situation had grown worse again in early July and North America and Europe at least I think there may have been and expectation earlier that semiconductor availability would just sort of continue to improve.
Sequentially and up more or less linear fashion.
And particularly maybe short term here and including in July given the cycling past of that fire at the Renaissance factory and Japan. So do you have a sense of the driver of the incremental production disruptions and the first part of July here and what our automakers communicating to you about the expected.
<unk>.
In <unk> versus <unk>.
I think so.
Net.
I would say net.
In the case and I would say it's gradually improving.
But then of course, it looks a little bit different between the different our customers here.
And how they have been hit so far but also how are the near term and looks like.
And it can't depend also on and know who their supplier.
And that and but also the uniqueness of the specific superconductor.
And if you have a standard semiconductor or a higher degree of semiconductor standard semiconductors, you have have more flexibility to find alternative solutions and if you are a very special.
Designed and seemingly doctors, so that does and.
Materially impact on specific customer net.
So.
We haven't seen this let's call it linear and stabilization yet.
When we look at the aggregate that picture.
Very helpful and syndication.
Thank you.
Next question comes from the line of Eric will rank from Seb. Please go ahead.
Thanks and have 2 questions first 1 is on the I'm trying to find out and any government support yard and the second quarter could you remind us where that falls in Q3, and Q4 last year and.
And then on the second quarter, if you could take something more on orders and you say you were pleased that we were.
And do much with that so could you put that in some kind of stuck and people would be very helpful. And then the third question on the.
Key model launches you highlight in the presentation.
Is it just a coincidence there that there are 2 Chinese smallest where you seem to have a quite extensive scope of supply is there and is that and.
And any kind of trend or just a.
Just a coincidence.
So the first question on non governmental support.
And Q3 that was 5 million and in Q4, and what's 2 million passengers, So 7 million and total for the second half.
Thank you.
And on the order.
And intake here and as you know, we don't give any figures.
And throughout the year, we also give it.
And figure out the end of the year and when we presented the Q4 earnings here, but our commentary here and should see and be seen in the light of the order book, we have and the market share growth that we have indicated that we have and order intake.
Portfolio and therefore about here.
So.
Okay.
You should interpret that comment there and then on the on the module side here I think I mean in this particular quarter you could say, it's a queen incidents that this happens to be concentrated here, but I would say on and general note I think we.
We have a good.
Yeah.
Press zone and.
Wins within the <unk> segment and also in China, where do you see a number of our new commerce.
And you'll start ups and also their established makes.
Quickly.
Yeah.
Coming out with EV models that we have a good reputation to as well. So we have a strong position and China altogether I would say.
Thank you mats.
And because up to now thank you.
And the next question comes from the line of George <unk> from Goldman Sachs. Please go ahead.
Yes. Thank you for taking my question you mentioned on the cool that you had.
Limited ability to use our loving it the results of the short notice could you just give us a bit of insight and the lead time you'd need to and folks living and that notice period that youre getting on the production side as we navigate this semiconductor challenges.
And assuming that the semiconductor volatility continues while you're able to take any measures to reduce the financial impact. For example is there any scope for increased flexibility on the furloughing or could you look to build and hold inventory and then adjusted production and subsequently when you have provided adequate notice.
To fund and I. Thank you.
I think on the on the furlough Sajdak and.
And say that I mean, it's not really the debate ability of debt.
To listen and call it up and is the problem and its really the volatility that makes it difficult for us to do to really decided to take out because.
If we normally are around 5% in terms of plus minus from the region and call out some of the customers. We have today see and up to 50%. So we cant assume a 50 per.
And reduction and Takeouts and take out to resource the because.
If that's not true we would be short of staff and cant deliver so we need to staff ourselves and have capacity to meet the regional.
Core loss levels and.
And if we see a reduction there we of course see thing that we got the weighted up costs. So it's more a question of having the predictability of the volumes and adjusted them.
And the capacity and accordingly that is.
The hindering point, if we ask Todd that visibility and of course, we could use.
And in many cases, the flexibility that we have but it's that we don't have the visibility that this problem.
And even to add on that.
As we described the volatility and the call offs are they they have even fluctuated since a week to week. So they might be pulled down and 1 week and then they increase the next week.
It's been very very difficult to mountain to balance and manage capacity due.
Due to that and and also as we or our plans and supply into multiple Oems.
And so if 1 OEM plant, maybe shuts down for a week that does not mean that we can then adjusted accordingly to the full extent and and all operations and so there's a complexity there that we need to manage.
That's yeah.
Has some implications on how quickly we can reduce the cost.
But of course and 1 key is also done to have the right cost discipline and I think we have proven that here and in the second quarter, but also how we've come out of the pandemic as of last year and of course that also.
And it remains a large focus for us going forward.
Understood. Thank you.
Yeah.
And the next question comes from the line of Sasha Goldman from Jefferies. Please go ahead.
Good afternoon, and good morning, everyone and thanks for taking my questions. The first 1 is around working capital and I was wondering if you can talk a little bit about inventories for instant book.
Hi, how we should think about them.
In light of the production disruptions and then going forward when production normalizes to inventories also come down.
And then I have a second 1 on working capital and how much was the Toyota and cash out.
Yeah sure so on.
And working capital to work as we mentioned there were a couple of items outside of what we call trade working capital so that the 3 core components receivables inventory and payables.
<unk> had a major impact.
3 call was the largest of those.
And I think if you look at our 10-Q, the number and we mentioned they are in terms of the impact is also an indication for the cash outflow.
But then also we had some tax related.
And so all of the cash impact from tax related items.
Which was a magnitude of 35 million combined.
We also had the restructuring outflow of around $6 million and so those were some.
More unusual items here during the quarter that impacted working capital negatively.
And then a specific on inventory it has been due to the call of volatility that we described but then on top of that also then.
These supply chain challenges that we have that were facing with our supply base.
Has led to a pretty significant increase in inventories above our normal designed levels.
And if you look at RSA a days of inventory outstanding you can see that there is quite a large increase in debt during the second quarter, we do expect that as now.
The volatility comes down and the call of the liability increases that we should be able to get back to our desired levels and then also be able to flush that inventory out and reduce inventory.
Going forward.
Okay. That's helpful. And then my second question and so quickly on the guidance reconciliation how to think about the guidance cut from your earlier guidance. If we go to the midpoint, it's kind of top line -2.
And then if we have a 20% drop through and up to 40 bps of raw mats, we get right to your midpoint of the new guidance in terms of margin is that how we should think about it or is it too simplistic and there are more moving parts and just a bit of topline gun and a bit more raw mats.
No those are the main component and so the only thing I would add to that is this a certainty around the call of volatility.
And then also that we have some headwinds.
And that we are.
But to offset those headwinds and with an improved sales mix and cost adjustments.
And the main components you mentioned.
Alright I appreciate it thank you very much.
And the next question comes from the line of and 12 Pushup from Zhang. Please go ahead.
Hi, everyone and thank you for taking my question very quickly just a question and the nature of those are core loans.
And again, mainly due date and your prediction or have you also seen some cancellations and then Mexico and questions on second question on the bridge and how should we think about SG&A and you.
In fact into Q3 Q4.
Thank you.
Okay.
No I think other call outs.
I mean, we don't see really test counts relations he and I think it's more.
Delays, so you could say and the production schedules flow from the Oems I think.
And is that if the candidate would catch up but then of course the longer. It continues its been a b and b more difficult to do it but no no pure cancellation as I said I mean, there is.
What we came out very strong and demand and.
And consumer demand here so.
And what can be produced will be sold and a CFC and on the inventory levels I mean, the U S dollar at record low levels.
I mean, it's a $1.4 million vehicles and inventory compared to 3.
3 and a half to for us and more of a normal level and also relatively low in Europe parent, especially on premium vehicles. So there is millions and strong underlying demand and so it's.
And once again, a delay here and that's a result of the supply disruptions.
Yeah, and on the SG&A and R&D and <unk> levels.
Our guidance, we are detailing that we believe that where we can expect or do you need to be around 4 and 5% of sales. So I think that's that gives you an indication of where it's expected to be and the second half and then SG&A as I said, we will be very cost disciplined here you see that there's only a marginal increase from Q1 to Q2 and so.
So we will remain disciplined and have a very strong focus also on the SG&A development.
I will hand, it back to you Michael after this 1.
Thank you enough.
Before we end today's call I would like to acknowledge that we are still in the pandemic and our first priority remains the health and safety of our employees.
By short term market headwinds, our progress and the last year. It makes us confident and the journey towards our medium term targets and.
And our opportunities for shareholder value creation.
Our third quarter earnings call is scheduled for Friday October 22nd 2021.
Thank you everyone for participating on today's call. We sincerely appreciate your continued interest and I want to live.
Until next time stay safe.
This concludes our conference call. Thank you all for attending you may now disconnect your lines.
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