Q1 2022 Autoliv Inc Earnings Call
Yeah.
Welcome to the Q1 2022 Wireless Inc. Earnings conference call throughout the call all participants will be in listen only mode and afterwards there'll be a question and answer.
Today I'm pleased to present kristian spend to see Oh Brooks.
Great CFO Fredrik.
I will now hand over to VP Investor Relations and this trial. Please go can you meet them.
Thank you Mark.
Come everyone to our first quarter 2022 financial results earnings presentation.
On this call we have our president and CEO makeup adopt our chief financial Officer, Christine and I am on the shop right.
Relations.
During today's earnings call, our CEO will provide a brief overview of our first quarter results provide an update on our general business and market conditions.
Following Mikael Fredrik will provide further details and commentary around the financials.
We'll then remain available to respond to your questions I'm not sure. The slides are available at Ulta, they've got caught.
Turning to the next slide.
We have the safe Harbor statement, which is an integrated part of this presentation and includes the Q&A that follows.
During the presentation, we will reference some non us GAAP measures.
The reconciliations of historical U S GAAP to non us GAAP measures are disclosed in our quarterly press release available at <unk> Dot com.
In 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. Central European time. So please follow a limit of two questions per person.
I now hand, it over to ours.
Thanks Kelly.
Thank you Anders looking on the next slide.
The ongoing war in Ukraine, Eastern Unconceivable tragedy.
It has resulted in a massive humanitarian crisis and my thoughts go to all those affected.
We also continue to experience tough COVID-19 developments and Lockdowns in China that are affecting many people, including our employees.
I would like to thank all of our employees for dealing with and managing through these tough.
Precedented time.
In the quarter, we have managed to very difficult market environment with significant declines in light vehicle production towards the end of the quarter Cigna.
Significant cost inflation and low demand visibility as well as severe disruptions of the global supply chain.
Despite adverse regional mix effects, our sales outperformed global MVP by around three percentage points. According to IHS markit.
In the quarter raw material cost increased.
<unk> impacted our operating margin negatively by more than five percentage points and premium freight costs also increased substantially.
The higher premium freight cost was a result of logistical bottlenecks and volatile customer call offs.
In the quarter, we achieved the targeted level of customer compensation with steel was relatively limited compared to the cost increased 11.
As a result sales and profitability were lower than expected.
In response to the ongoing challenging market conditions, we further strengthened our cost control measures implemented a hiring freeze and accelerated other cost savings and footprint activities.
Despite the challenging environment, our cash flow was positive and our balance sheet remains strong.
The leverage ratio remains within our targeted range.
In the quarter, we paid 64 cents per share and dividend and initiate the stock repurchase program.
Looking at the risk of the year, we expect increased sales outperformance versus light vehicle production.
It is our plan and ambition that our product price increases completed with strict.
Cost control measures with gradual offset the cost increases.
Therefore, we expect the sequential margin improvement in the second half of the year.
Supporting attractor towards our mid term targets.
Looking now on the direct effects on the warning Ukraine on the next slide.
Our hearts are with everyone affected by the massive humanitarian crisis created by the war in Ukraine.
The war has significantly affected the automotive industry, especially in Europe .
We have no operations in Ukraine, but we have identified four sub suppliers in Ukraine.
We are in the process of transferring our components procurement out of Ukraine, and we have not stopped any of our customers.
However, the war has affected our customers' ability to produce vehicles, leading to lost volumes and more volatile customer call offs.
As a result, we lost almost 25% of expected sales in March in Europe .
And if we can play affecting our operational efficiency.
Our belief has one production plant in Russia with around 200 employees in 2021, our sales in Russia reflected less than 1% of our global net sales.
As this is a very volatile and challenging situation. We continue to monitor developments closely and we are reviewing our pretzels in Russia.
Looking now on the financial overview on the next slide.
Our consolidated net sales of $2 1 billion was 5% lower than in Q1 2021.
Due to negative currency effects and lower global light vehicle production.
Adjusted operating income excluding costs for capacity alignment.
And from 237 million to 68 million.
The adjusted operating margin was three 2% in the quarter.
The lower operating margin was mainly a result of rising costs for raw materials higher costs for freight, especially premium freight and lower than expected light vehicle production.
Operating cash flow was $17 million, which was 116 million lower than the same period last year, mainly due to the lower net income.
Looking now on the organic sales development on the next slide.
Our sales in the quarter came in lower than expected with light vehicle production in all regions disappointing, except threshold rest of Asia.
According to IHS Markit global light vehicle production declined by 4% year over year in the quarter.
This was two percentage points worse than expected at the beginning of the quarter.
As a result of the declining light vehicle production, our first quarter sales declined organically by 1%.
This was three percentage points better than the light vehicle production according to IHS markit.
The outperformance came despite the very negative regional mix impact of more than eight percentage points in the quarter as a result of production in those saves the content markets growing.
Supported by recent launches and more positive regional mix as well as the positive pricing, we see sales outperforming LBP substantially more for the rest of the year.
Based on the latest light vehicle production numbers from IHS Markit, we outperformed in Europe by 12% at this point in Japan by seven percentage points and in America by three percentage points in.
In China sales underperformed by 2%.
The reason for the underperformance in China was mainly the mix effects from production of low end because growing by 17%.
For 2022, we are confident of a solid outperformance in all major regions.
On the next slide we see some key model launches from the first quarter.
In the quarter, we had the high number of launches, especially in Japan and China.
The models shown on this slide have an hour to live content per vehicle from approximately $50 to more than $400.
The long term trend to higher CPD.
He is supported by the introduction of front center airbags battery cutoff switches and pedestrian protection airbag.
We are also launching side airbags and curtain airbags on vehicles produced in India.
Exemplified here by this <unk> supporting the Indian governments intention to make site protection airbags mandatory later this year.
I will now hand, it over to our CFO Fredrik with Dean who will talk about the financials on the next few slides.
Thank you Mikael.
This slide highlights our key figures for the first quarter of 2022 compared to the first quarter of 2021.
Our net sales were $2 1 billion. This was a 5% decrease compared to the same quarter last year.
Gross profit declined by 37% to $288 million, while the gross margin decreased 13, 6%.
The gross margin decrease was primarily driven by raw materials premium freight and the volatile and lower than expected light vehicle production.
The reported operating income decreased to $134 million from $237 million.
In the quarter capacity alignments had a $66 million positive impact on the operating profit.
As a result, the adjusted operating income decreased to $6 million to $8 million from $237 million.
Adjusted operating margin declined to three 2%.
The operating cash flow was $70 million.
Earnings per share diluted decreased by 85 were the main drivers were $1 39 from lower adjusted operating income partly mitigated by 49 cents from capacity alignment <unk> from financial items and three from lower tax.
Our adjusted return on capital employed declined two 7% and the adjusted return on equity to 6%.
We paid a dividend of 64 cents per share in the quarter.
Same as in the previous quarter and repurchased around 230000 shares for $18 million under our three year stock repurchase program.
Looking onto the adjusted operating income bridge on the next slide.
In the first quarter of 2022, our adjusted operating income of $6 million to $8 million was $169 million lower than the same quarter last year.
The impact of raw material price changes was a negative $110 million in the quarter year on year.
Foreign exchange impacted the operating profit negatively by $5 million, mainly as a result of the stronger U S. Dollar.
Support from governments in connection with the pandemic was $7 million higher than in the first quarter compared to last year.
SG&A in audience E net was unchanged.
Our strategic initiatives continue to yield good results. However, these positive effects were more than offset by the difficult market environment.
Premium freight and lower than expected sales, but also high color volatility and broad cost inflation for instance related to logistics and utilities impacted our operations negatively.
Looking on the cash flow performance on the next slide.
For the first quarter of 2022 operating cash flow decreased by $116 million to $70 million compared to last year, mainly due to lower net income.
Compared to prior quarter working capital deteriorated by 18 million, despite a $20 million improvement in trade working capital.
This was mainly a result of a 36 million increase from inventories and $125 million from increase of receivables, partly offset by $241 million from accounts payables. The.
The increase in inventories was due to customers in Europe , stopping production around quarter end because of supply chain distress.
Later to the board in Ukraine, and Lockdowns in China.
For the first quarter capital expenditures net decreased by 82% to 17 million, mainly as a result of the divestiture of a facility in Japan.
Capital expenditures net innovation to sales was 0.8% versus four 1% a year earlier.
Excluding the divestiture in Japan capital expenditures was $112 million.
For the first quarter 2022 free cash flow was $53 million compared to $93 million a year earlier, driven by the lower operating cash flow, partly offset by lower capital expenditures in it.
The cash conversion for the last 12 months was 72%.
In the quarter, we paid 56 million in dividends and repurchased shares for $18 million.
Now looking on our leverage ratio development on the next slide.
We are pleased that our focus on capital management is yielding results and we can maintain a strong balance sheet also in these challenging times.
This has enabled us to start to repurchasing our shares and to maintain our dividend.
The leverage ratio at the end of March 2022 was one four times a significant improvement since the peak of two nine times in 2020 and unchanged versus a year ago.
In the quarter, our 12 months trailing adjusted EBITDA decreased by $176 million, partly offset by the net debt decrease of $19 million.
Now looking at the raw material development onto the next slide.
The extra Gen X shocks on the warrant Ukraine adversely impacted and already distressed global supply chain driving prices of raw materials further upwards.
Cost increases for raw materials generated a headwind of $110 million or around five percentage points to our operating margin in the first quarter.
This was higher than the full year impact in 2021 of $105 million.
And the current price environment, we believe that raw material costs before any customer compensations could be up to six percentage points in operating margin headwind for the full year 2022 with similar year over year effects in all quarters.
This is of course, the situation, which we must address through serious actions to ensure that we are back on the trajectory towards our medium term profitability targets as soon as possible.
A key lever to achieve this is outlined on the next slide.
Uh huh.
We are engaging in customer discussions aiming at unprecedented price increases to reflect the significant cost inflation, mainly from raw materials, but also lost volumes and logistic costs.
Overtime, we believe and expect that customer recoveries should offset the cost inflation.
We were on track to achieve their recoveries, we had targeted to cope with the cost increases that we anticipated prior to the latest surge in prices and costs.
However, the ongoing inflationary pressures that require additional actions.
Therefore, we have established a global commercial recovery task force and we've escalated the negotiation process and are engaged in customer discussions demanding compensation for the recent additional cost inflation.
The main focus is on price increases from mid year and onwards.
In parallel we're implementing greater pricing flexibility into a new contract to account for an environment with changing cost levels.
For commercial reasons, we will not discuss the level of anticipated recovery for its nature.
In addition to commercial recoveries and price increases we are undertaking other actions as well.
As discussed on the next slide.
In response to the increased challenging market conditions, we continue with strict cost control measures, a hiring freeze and accelerated cost savings and footprint activities.
In addition to recently announced capacity alignment and footprint actions in Japan, Europe , and Americas, we are reducing direct labor closing one plant in South Korea, and we divested a property in Japan.
In total we reduced head count by over 1700 versus the same quarter last year, despite similar sales levels.
Additionally, our measures include management of inventories and payables negotiated with suppliers to mitigate cost inflation.
Our supply chain management teams have been working hard to balance inventories to actual demand during the quarter production planning accuracy declined as a result of the board in Ukraine, and the extensive lockdowns in China.
Now switching to the market development I hand, it back to me together.
Thank you predict looking now at the light vehicle production development on the next slide.
While global markets are influenced by the ongoing war in Ukraine, Europe is undeniably the most severely impacted.
Beyond the direct impact to Russian MVP, the warning Ukraine also significantly.
<unk> wire harnesses production, mainly for Europe European automakers.
Compared to three months ago, IHS Markit has reduced its global light vehicle production growth for 2022 by more than four percentage points to less than 5%.
With European Okay.
<unk> for 90% of the reduction.
Additionally, we see further risk to supply chains, and the broader economic landscape.
Given the ongoing uncertainty we have a scenario based approach to light vehicle production and therefore, our updated guidance is based on the light vehicle production range.
Looking at <unk> forecast in more details on the next slide.
For the second quarter of 2022 Global light vehicle production is expected to further decline compared to Q1 2022.
In North America sales of light vehicles are slowly improving on a quarter to quarter basis and should continue strengthening over the reminder of the year.
However, due to low inventory levels deliveries remain well below demand.
Well below deliveries a year ago.
European production will remain challenged as weak Q1 production is expected to carry forward into Q2 as the warning Ukraine continues to stress the supply chain.
Hit by strict Covid containment measures light vehicle production and sales in China started to decline in March.
Lockdowns are also interrupting out the production outside China exports of components are affected.
In the near term global light vehicle production outlook will be determined by the availability of components as well as the effect of Lockdowns in China.
Now looking on to 2020 to business outlook on the next slide.
Yeah.
We expect higher sales outperformance versus light vehicle production for the rest of the year supported by launches regional mix and higher prices.
For the second quarter of 2022, we forecast the adjusted margin to be weak in the first quarter due to lower and more volatile light vehicle production and we expect cost inflation to increase faster than our cost compensation.
We expect second half of the year improvements from alignment of direct labor with light vehicle production.
Footprint optimization activities and less volatile light vehicle production in Europe and China.
Most importantly, we are negotiating price increases with our customers to compensate for current cost inflation.
We believe and expect that our price increases should gradually offset the cost inflation and assuming some degree of market stabilization, we should be back on track towards our mid term targets.
Looking at the updated full year 2022 indications on the next slide.
The updated indications are based on the assumption that global light vehicle production will grow CRE.
Two 5% and that we achieve our targeted price increases plus some level of market stabilization.
We expect sales to increase organically by around 12% to 17%.
Currency translation effects are assumed to be around a negative 3%.
We expect an adjusted operating margin of around five 5% to 7%.
Operating cash flow is expected to be around $7 50 to 850 million U S dollars.
Our full year 2022 indications exclude cost for capacity alignment antitrust related matters and other discrete items.
Turning to the next slide.
We now see global light vehicle production growth being.
Two nine percentage points lower than in the previous indications from January 2022.
Rising raw material costs are expected to have an additional 300 basis points negative impact.
We believe our strategic initiatives and other access accent should offset some of these additional headwinds.
This should lead to an adjusted operating margin for the full year 2022 that is 2524 percentage points lower than the previous indications. Our adjusted operating margin outlook may still be impacted by supply chain disruptions in the automotive industry and <unk>.
Thompson risk of surge in Covid cases, and its effect on us in the automotive industry.
Turning the page.
In closing to summarize our 2022 outlook. We expect continued strong outperformance versus light vehicle production supported mainly by product launches increasing content per vehicle and price increases.
Supported by a somewhat more stable markets, we anticipate to gradually offset much of the cost inflation in the coming quarters, which will take us back to attract towards our mid term targets.
Additionally, our balance sheet and cash flow should allow for continued shareholder return.
I will now hand, it back to us.
Thank you <unk> turning to the next slide.
Which concludes our formal comments for today's earnings call.
And.
I'd like to open the lines for questions. So I'll turn it back to you Mark.
Thank you.
Wish to ask a question. Please style CRA one on your telephone keypad Schnauzer entered the queue. Once your name has announced you can ask a question. If you found itself with those four ships have to speak you can dull C. C to counsel send once again, that's super ones I'll ask a question or two if you need to cancel.
And we have a few questions lined up so slow the first is from <unk> of Handelsbanken. Please go ahead. Your line is open.
Thank you very much.
I just had one question.
Good question.
What I'm trying to understand like it is.
The pricing situation that you're already in.
When I put it into the perspective is that the Korea wins.
New car pricing by five 8% used car prices are up 25% them. Many of the Oems reported record margins last year and Hudson. Please.
Probably impacted youll possibility to push forward with price increases or could you maybe elaborate them back a bit and also what kind of time lag. We should expect on the price increases that you have implemented so far thanks.
Thank you amperes.
No.
Let me say that I mean, I feel comfortable going to the customers here and.
Discuss then negotiate these price increases I mean, it's clearly so that what we are going into the customers with is the inflationary pressure, we see in the industry and it's not out to these specific issues like that so I mean, when we go into these discussions we have a well built up.
Cases here and she said.
They have already started this year on it but as a supplier.
In the business motives, we have at least had a history as a supplier.
You cant anticipate price increases before that happens. So therefore, we can go only go to the customer when when we have them in so to speak and that is what we're doing now. So therefore you have these time-lag S. As we have talked about here, but once again I feel comfortable in an hour.
Ambitions here of getting the compensation for the inflationary pressure that you see in the industry.
Okay. Thanks.
Thank you. Our next question comes from the line of Colin Langan at Wells Fargo. Please go ahead. Your line is open.
Oh, great. Thanks for taking my questions.
Just looking at slide 12.
It's definitely clear that raw material costs. So that's obviously massively increase since the beginning of 2020.
But for a lot of them, they're not too far off of the end of last year.
China lineup.
Big increase in raw material headwinds.
First as you know where it ended last year a lot of these arent too two off base.
Is it that the assumptions in your initial guidance, we're assuming that some of these started to moderate because there's just sort of a timing issue I'm just trying to think about where we were at year end.
Why is that.
<unk> increased today.
Yeah, So I mean, as we laid out in the after the Q4 earnings.
It was also based on let's say unexpected development off raw material prices going forward.
And when we look at what's now the especially the Ukraine War has done to the raw material situation.
See that the increase.
They would have enough from roughly 300 basis points 600 basis points, roughly three quarters of that are from steel and nonferrous metals.
And this is really where the what the forward curves have changed significantly.
We now assume that we will roll over these contracts at significantly higher price levels than what.
We were assuming just three months ago.
So that's the main difference here in the <unk> and the assumptions going forward.
Okay got it.
Forward looking change, Okay, and then as I'm looking at the full year guidance, you've indicated next quarter's going to be a bit worse than this quarter. So we're talking 3% ish maybe for the first half to get to the midpoint, which is like six in a quarter.
Really requires that almost a tripling of margins from first half to second half and you mentioned some items I mean, what are really the major step functions to kind of get the big sort of first half to second half fleets only thing conserve ranking order and I think that's right.
It's all about closing this time gap between cost increases that we are facing from our value chain with the compensation from from our our customers here and.
As we indicated already in the Q4 earnings release, we stated that at the first half of the year will be challenging and we talked there about.
500.
Basis points raw material headwind in the first half and then we should see it.
The compensation coming through.
Half of the year and that's still the dynamics are in the guidance. We're doing now the difference compared to that of course is that our debt.
The war in Ukraine.
Put additional pressure on on on the value chains here and drove up prices not only raw materials, but also on on <unk>.
Logistics cost and energy.
Energy prices et cetera, which meant that we now need to up our ambitions here with the price increases with our customers and <unk>.
I understand you have the time gap again here. So so we will see then a gradual improvement on price aside closing these gaps. So so of course that is a big difference between the first quarter in the last quarter.
In this forecast, which is also was and the reason that our guidance for the year.
Got it alright, thanks for taking my question.
Thank you.
Thank you and our next question comes from the line of Rod Lache Wolfe Research. Please go ahead. Your line is open.
Hi, everybody.
So I also wanted to ask about the commodities. So last year. Thanks for quantifying. Your you had a 130 basis point drag from raw materials and now you're you're up to 600. This year. So 700 basis points cumulatively can you just remind us first of all is that a gross or net number.
<unk>.
I was hoping you can elaborate a little bit on the timeline and magnitude of a potential recovery. So if you. If you achieve the the recovery that you anticipate in the back half of this year I would imagine some of that spills over to next year what what.
Can you maybe give us a little bit of color on the magnitude of tailwind that.
Wood than.
You would then benefit from next year from this.
Yeah. So the the guidance on the raw materials side continues to be a gross number as we always had so theres no recovery or.
Offsets in that number that's the.
The effect that we see the raw material prices hitting our P&L on the on the on the cost level there.
And then just generally.
You indicate that if you looked at our.
The margin levels that we achieved during the first quarter and indicating also for the second quarter and then.
The sit with the implied trajectory and then into Q3 and four you can see that we are expecting a significant recovery level.
However, with the raw material price increases to say that the net of the cost increase versus offset then by recoveries is less favorable now than it was in the initial guidance.
But we should be as we say back towards the trajectory to meet the the 12% margin target that we have for the medium term.
And that should be quite visible already in the Q3 and Q4 for four months.
Okay.
You mentioned.
Premium freight and other cost inflation, and that's why you're seeing that $61 million drag on 1% organic decline or are you.
Expecting to recover that through pricing as well.
And then just lastly, you mentioned additional semiconductor risk due to the war in Ukraine can you just elaborate on what you you're specifically looking at.
So on a premium freight was quite substantially in the quarter I mean, that's making mentioned hypersound was well more than 5%, what's the hit from raw materials, which was fairly much in line with our guidance but.
But that we saw.
Only about a 2%.
<unk> hit on the margin also from premium freight.
Of which we believe the majority of that is recoverable and then throughout the remainder of the year.
But then we also saw inefficiencies on the direct labor, mainly due to the call of volatility, but also related to COVID-19 the shop or Covid cases in both Europe , but also parts of southeast Asia and in China.
Which hampered our ability to run that as normal productivity levels.
And on top of that then also the.
What you can see in the markets also the faith in utility.
Cost levels have come up quite significantly we'll see in the first quarter. So those are the main components of the $61 million headwinds on the operation side Huh.
And if you can you repeat your second question on Ukraine, I didn't fully understand them.
You are on on one of your slides you alluded to additional semiconductor risk due to the Warren in Ukraine.
So it sounded like you were tying that and.
Was that related to neon gas or was there some something else that youre seeing that that led you to to raise that is that is that a larger risk associated with the conflict.
Yes, that's correct I mean, that's one example, but there are other oral Montreal, it's also going into the semiconductor production that that is affected by it but we're in Ukraine, there, but I think on the semiconductor side. I mean, there is also of course are still.
Some challenges when it comes to the total supply there and that's also what is the challenge and for the overall ltvs.
Outlook here as we have outlined here.
The China situation, there, where we actually see him a conductor manufacturing go down slightly in Q1.
With the Lockdowns and the consequences also on the freight out of China.
Can I expect from the services of that but it's all part of the zero to 5% growth number for MVP sort it out.
Okay alright, thank you.
Thank you. Our next question comes from the line of Vijay Rakesh.
Please go ahead your line is open.
Yeah, Hi, Mcmullen Fredrik, just just on the full year guide I'm, just wondering if you're able to you know.
The 12% to 17% year on year are you able to pass on some of the costs and what's what.
Price increases are you embedding in that.
Our full year number you can give us some color.
We don't go into any details on the on the level of Sun.
So force here.
As efficiently as we are.
In the midst of the negotiations with our customers here so.
With that said I started out this Q&A session here by stating that I feel comfortable with.
US going down to the customer are achieving and the phone compensation for what he's done.
Inflationary pressure in the system.
Once again, it's not.
Elderly unique cost increases here it is oh.
Cost pressure in the industry here.
Makes sense.
And I think you also mentioned some customer call offs you know about.
25% of European sales evicted.
The Shanghai shut down almost a month in into the quarter here are you seeing that.
That's no distress in the supply chain, resulting in call us.
And in both Europe and China.
What's being embedded or what have you seen.
Uh huh.
Order activity. Thanks.
So as I said I think the consequences from what have happened so far in terms of Lockdowns in China during the quarter here on as we speak I would say is included in the zero to 5% scenario. Then of course as we have pointed out there is a lot of uncertainty around the COVID-19 situation as well as the war in Ukraine.
On further impact, but what we can identify today, we believe that within the zero to 5% in rupee drugs there.
If that answers your question.
Thanks.
Thank you.
Next question comes from the line of Joseph Spak at RBC Capital markets. Please go ahead your line of sight.
Okay.
Thank you everyone.
I guess I just wanted to.
And a couple of things on pricing because you know.
On slide 19, you're showing for the full year at you're basically able to offset the pretty much the entire impact.
Raw materials and I know some of that seem to be on your actions.
But that implies that it's actually a much bigger impact versus the raw material headwind in the second half because he didn't really get any of that in the knee.
In the first half so I guess im trying understand are you like I can understand how you can price for inflation, but it seems like there's maybe also an element of recoveries of prior impact and is that is that correct and then I just also want to confirm that functionally.
Any recoveries are reported and they reported in sales. So it's also impacting your organic growth or is it a contra expense.
No I mean, if you're a startup fulfilling down into details there, but I mean of course, when we go now to the customers we are seeking full compensation for what.
What he's done.
And the inflationary pressure as I mentioned here.
Then of course also you'll have other claims he are connected to specific situations. So we took estimates I mean as Randy alluded to before some of the premium freights that are caused by the customer and it's also on the on the claims list there so.
So we include it in and I think that the the impact here on our full year guidance is the timing.
Gap between when we are being hit by the cost and when we get the customer conversation here and as I said, it's a it's a port that's been a part of the business model for for our suppliers as you know and test of course is something we're working on to shorten as much as possible.
When it comes to the high tier and the facts behind it I feel comfortable here too.
To go through customer Redefault full amount there.
Yeah, and the recoveries would be.
In our Internet sales. So that's how we will report them.
And it has.
Such there then also part of the organic growth outperformance.
So one of the reasons why we then have increased that from 11% to 12% is also from.
Higher than previously expected.
Price adjustments from our customers to offset the stronger raw material headwinds that we're facing.
Okay, and then I guess, Michael maybe building off some of the comment you just you just made here about.
[laughter] changing changing relationships and you mentioned in your report and I think in your opening comments something about greater pricing flexibility going forward does that mean.
That you are trying to move more towards an indexing model versus prior similar to other suppliers in and if so is that just for new contracts or is that something you think you can achieve for existing contracts as well.
No as I said, I mean I wouldn't.
We wouldn't say that it's down to the to the question he is indexation or or or not I think it's all about you know that we are in a different environment now than what we have been named for the last.
He has 20 years here and of course.
And that is changing.
Changing changeover time also for our customers as well for us out there, but I think we have good.
The speed and good focus when it comes to.
Get decent adjustments in place and and as we continue to see at least for for for some time here continued pressure.
That will be an ongoing dialogue of course.
We had a customer or not.
So just a follow up what do you mean by greater pricing flexibility.
Mentioned that.
No.
Is that we need to make sure that we have a faster.
All the time from our customers seem to get compensated for the price increases we see in our system.
And then you can achieve that with different means but it's more I would say part of the dialogue with the customers on how you set it up with respected customers.
Of course, that's administered indexation is one tool in the in that toolbox, but.
It's something we need to develop individually with our respective customer.
Okay. Thank you.
Thank you next question comes from the line of Sasha Global at Jefferies. Please go ahead. Your line is open.
Thank you very much.
Got a couple of items.
The first one is just a clarification.
600 basis points of headwind you're guiding is there.
Freight costs.
The logistics headwind included would that come on top and how much is better than the full year.
The 600 basis points since the pure raw material.
We haven't specified the freight cost and other inflationary cost pressures specifically there are it's a part of the overall.
Guidance effect, there, but once again.
All that type of cost is what we intend to get compensated for it.
Okay.
Fair to assume that.
Logistics headwind remains at least for the second quarter if not adults.
Yes, yes, yes.
Okay, Great and then the second thing I wanted to clarify is the share buyback on your website you only reported numbers until the end of March does that imply you stopped the share buyback at the end of March or are you still buying right now.
As you know we published when transactions are being done.
We don't comment on.
What we intend to do and when we intend to do with them and so on but I mean, we have initiated a buyback program and we are committed to the one and a half billion by 'twenty to 'twenty, four there and and the buyback program.
There was no buying.
April .
We will continue to inform you when when are we have done something into program there and we have to reported weaknesses. So if.
If there was nothing reported I appreciate it.
Right.
Thank you.
Okay.
Thank you.
Question comes from the line of Agnieszka <unk> of Nordea. Please go ahead. Your line is open.
Thank you.
When I look at the raw material impact on your EBIT. It was the aggregate. The three is expected to be the aggregated $600 million in the past two years.
10 to 12, and now including guidance for 2022.
And you say that you have the ambition to recover that then also recovered the freight costs.
Are there costs that you're incurring right now what gives you confidence that you can reach this kind of and.
The recovery in also.
When we should expect that so well it spillover to 'twenty to 'twenty three awesome.
Thanks.
Thank you.
The confidence.
In achieving this lies in the fact that.
It is external.
Nice pressure towards the industry, it's not outlet specific I would rather say that I mean, I think we have it through our supply chain team managed to keep down the.
The cost increases here for better part of 'twenty to 'twenty, one and then at are at lower levels. So I think we haven't done a great job. There we are not asking for anything more than what has ended up here.
So so I think we have good a good arguments on and and good facts behind us.
And once again, it's it's a inflationary pressure and this inflation by definition is passed on here.
And ER visits.
As I stated before here and we see it on a gradual recovery.
Recovery here or over there.
The next coming quarters here, so a full focus on 2022 here.
Great. Thank you and then the last question from me is that.
If you look at your leverage just now approaching one five times, which is the high end of your target is it fair to assume that you could post the share repurchases right now.
I think yes, we have said before here I mean, one too.
I move for a bond on on.
Share repurchase is a number of factors stuff needs to be built in there.
And that decision on leverage of course is one but it's also our cash flow generating capabilities going forward here and where we are in general in the cycle here. So so there's a number of factors here. So.
It's not the absolute black and white definition on the buyback if it's a one five or one six or one point for it. It's a combination of all three and I think we have used the phrase before do you have a pragmatic view on that.
And that's still still true going forward.
Thank you.
Thank you.
Thank you. Our next question comes from the line of silicone Nick of Goldman Sachs. Please go ahead. Your line is open.
Yes. Thank you very much for taking my question I've just got a question on your operating leverage.
Think about the second half of the year to just sort of get to your guidance.
Implies sort of a 90, 10% margin.
Mentioned earlier and also on slide 19.
Do you expect to offset the 3% additional raw materials with your with your pricing and other cost actions.
Just thinking about the organic growth how when you have positive <unk> growth in the second half of the year.
Do you sort of expect to be back at the at a normalized operating leverage level or do you think because of higher freight costs and everything that flows into that part of the of the operations that maybe that that will continue to lag and and all of the margin margin improvement will come from from the pricing would be helpful. Thank you.
No we believe that the.
Underlying.
Ah I see operational leverage should it should be.
Within the range that we're normally talking about 20% to 30% then it probably at the higher end of that range when you exclude for.
Say the inflationary pressure.
If you take those cost out but also their recovery. So the underlying operational performance should be at the upper end of that 20 to 30 range.
It is our expectation.
Okay. Thank you and then my second question just quickly on the FX.
There was quite a minimal impact on the on the EBIT line.
Although it was it was fairly more material on the revenues is that sort of something you expect going forward given given the hedges that you have in place.
So we're expecting roughly a 3% translational effect on our.
Revenues.
Slightly lower for the full year than what we had in the in the first quarter.
And on the EBIT.
What we can see at the moment, it's not a material effect.
Okay. Thank you.
Thank you next question comes from the line of Chris Mcnally.
Please go ahead your line is open.
Yeah.
One recap and then one on incremental decremental margins, so focusing on that slide 19, just to recap on the extra 300 basis points of raw materials come from all the questions. So far. So is it is it fair to characterize that it's not really about spot prices, having increased but essentially when you made the guidance.
In the beginning of the year, you were expecting lets call it lower steel and magnesium cost for the second half into 'twenty three.
Now because prices are elevated is an incremental questions here.
Your guidance and you're obviously in a price for that but there is a delay just wanted to make sure I understood that that dynamic.
That's correct.
Assessment or a conclusion yet.
Part of it is that we we don't she said many times, we don't buy on the spot markets, but the developments off the spot market have also impacted.
The prices that we at which we know can close.
Our more long term agreements. So that's the effect that we talked about.
We have done increased our commercial recovery.
Ambitions, accordingly, but that's making us laid out that will be a continuous time, the timing or time lag effect.
These material cost materialized as they are now.
As we are guiding for them yet.
Okay, well well understood and then the second question is really on the first bar on decremental margins associated with lower.
The production I mean, obviously I don't think that the slide 19, as maybe fully to scale, but could you help us understand on let's call. It the last six 7% of core <unk>.
Production by your by your adjustment what was the sort of.
You know normal decremental margin and then on top of that you, obviously had some disruption and things like that but just an idea.
From here, what your Decrementals Incrementals could.
Could be because because of things like freight.
It's hard for us to see what your true decremental margin was on just pure volume.
No. It's it's what I said before I mean, if if we exclude the inflationary effects.
There are it's not only raw materials, but it is the vast majority of its raw materials.
But then we also have increased labor costs, they have not picked up yet so much in the first quarter. It would be more pronounced in so from Q2 going forward and.
And then of course also logistics cost of your tenant base.
But as I said it is.
Material is that the vast majority of that.
And that is.
If you exclude for that then our operating leverage.
Is that the upper end of the 30% with 20% to 30% range.
If we look at the underlying performance of the business.
Okay. So at the high end of the ramp in Hong Kong.
Is it things like.
Et cetera.
Expiated, great I mean, the only reason I ask is things like labor cost.
I'm not sure how much that's changed in the last.
Two months.
Labor cost inflation has not been a material or not very significant to date and it's the way that we are that our contracts are set up is something that typically starts at the end of the first quarter and then is in the run rate as of the second quarter going forward.
But that was not so much an impact in the first quarter. It was more what I said before that the COVID-19 shutdowns and the supply chain volatility led to lower operational efficiency and productivity in our operations.
And that was an issue in the first quarter.
Perfect. Thanks, so much guys.
Thanks.
Thank you. Our next question comes from the line of Brian Johnson Barclays. Please go ahead your line of sight.
Thank you and thank you for your very kind of honest didn't kind of open what's the situation on the ground with inflation.
Just wanted to kind of get a little bit understanding when we came into the year you were looking towards productive negotiations with the customers to get back to that 10%, 11% margin targets, where you've been kind of since then OEM margins continue to expand but.
Clearly the paint on suppliers with fixed price contracts is increasing so are the Oems expect you to take some pain share and live with lower margins in this environment.
Or can they see their way to getting you not that this would be their thinking back to your original margin targets.
No.
Can't comment on what the Oems are planning or thinking, but I mean in terms of pain sharing I think yeah.
It is quite visible.
The effects, we have had here as a result of the increased prices here and.
Yeah.
We.
Our absolute determined here that this needs to be passed on and that's what we're working on accordingly, as we have expressed here.
And once again, it's not out of the specific costs that is created here and that needs to be passed on at these inflationary pressure on in darkness Dupont. So so.
That's that's what we're working with them and as I said I feel comfortable.
And in these dialogues are based on that assumption.
And just just to follow up kind of thinking of the managerial sort of put into an OEM clearly I would imagine your competitors are going after the Oems for discussions every other component supplier, we're likely to hear this earning season.
It's accelerating discussions so just <unk>.
Logistically, how does that get done is that a program by program negotiation do you have to work your way up to the CEO .
And get final sign off on pricing and just how how does the timing and how this is just the sheer overload I imagine on procurement organizations that are also trying to desperately find slides to keep their factories open how does that affect the timing of a recovery.
Yeah.
No.
Okay.
I mean those factors you mentioned there is nothing I see or we see I mean, we we have our relationships are well established we didn't do Oems and we access them when when we need tax system in and I would say, it's it's a it's more of a negotiation question about time, rather than anything else and of course.
The daily business or are running in parallel that so it's nothing impacting their so no. It is a pure commercial negotiation that is taking place on and it's.
Of course chat.
Challenging times for everyone in the industry here, but nothing dramatic about that in relation to anything like.
That needs to be done, okay, and just one.
Final follow up you do have.
Substantial presence with Japanese Oems.
Just closed out their fiscal year unusually calendar first quarter.
When they true up with suppliers did where you able to get recoveries, there or did you cut out because Ukraine warp relatively late in the quarter.
Do we have to kind of wait till calendar first quarter 'twenty three.
For those negotiations to conclude no I mean, I can't comment on how we succeeded with a specific.
Specific Oems here, but that's what I mentioned here, we were on track when it comes to the commercial recovery based on the regional scenario here, but with the war in Ukraine and the addition of the pressure that has been applied on on on the supply chain some of the price increases coming out of that well.
To upped our.
Ambition levels here and that is what is.
Being brought back on the table here on dish and then on what was almost on top on that that's true for.
For all all Oems in all global players here.
Okay.
Alright, I think that was the last question we are out of time.
Mark.
We did have one further question if you have time for it but we have reached the top of the house.
Sorry, there was one more question I thought it was all else, yes, we'll take one more.
And that's from the line of time Mckinley of Citi. Please go ahead. Your line is open.
Oh, great. Thanks, Thanks for squeezing me in I'll, just two quick ones just going back on the pricing negotiations.
Oh boy, you're expecting in the second half of the year for recoveries roughly how much of it has already been secured versus still to be negotiated and then secondly on the new contracts you're signing for forward programs.
Keeping front are you actually getting higher pricing on your content per vehicle on those programs to kind of compensate for the higher inflationary environment.
No as I said I mean, we can't go in and quantify any detail surround it here I mean, it's all built into the.
Really the consequence of the timing of it is built into our full year guidance and I have to leave it.
That does a S V or sort of discussions here.
And of course, all new quotes that is being discussed and awarded or.
More on the right level than than than I was head of.
The current portfolio currently are running up so that is of course thing in Canada.
So that will be realized.
Yes of course yesterday.
Thank you.
Thank you.
Thank you and with that there are no further questions in the keys I'll hop back to you for closing comments.
Okay. Thank you very much mark.
I know I speak for everyone I talked to leave in expressing our concerns for all those affected by the war in Ukraine.
And he is very volatile and challenging situation, we continue to monitor development closely.
Before we end today's call I would like to say that we intend to do what is needed to do in order to get back on track to our medium term targets and.
And I'm confident that I'll do believe will come out of this challenging time as a stronger company.
Meanwhile, <unk> continues to focus on our vision of saving more lives, which is our most important contribution to a sustainable society.
Our second quarter earnings call is scheduled for Friday July 22nd 2022.
Everyone for participating on today's call. We sincerely appreciate your continued interest in out to leave until next time stay safe.
Okay.
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