Q2 2022 Autoliv Inc Earnings Call
Welcome to the Q2 2022 alternatives Plannings conference call throughout the call all participants will be in a listen only mode and afterwards, there will be a question answer session. Today I'm pleased to present CEO and President me tell Brett I will now hand over to VP Investor relations on desktop piece.
Begin your meeting.
Thank you Cynthia and welcome everyone to our second quarter 2022 earnings call.
On this call we have our breath without a CEO adapt our chief financial Officer, Christine and I am on this drop VP Investor Relations. During today's earnings call. Our CEO will provide a brief overview of our second quarter yourself as well as provide an update on our general business and market conditions following nikhil.
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 after the dot com.
Turning to the next slide we have the safe Harbor statement, which is an integrated part of this presentation and includes the Q&A that follows.
During the presentation, we will reference some non U S GAAP measures.
The reconciliations of historical U S GAAP to non U S. GAAP measures are disclosed in our quarterly press release.
Available on ultimate Dot com and in the 10-Q that will be filed with the SEC last 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 will now hand over two hours a week.
Thank you Anders looking on the next slide.
I would like to start by thanking our employees for a good execution of our mitigating activities and challenging quarter.
We continued to experience tough lockdowns in China.
The global supply chain and how to most of the industry, including many of our employees.
Although the supply chain situation is improving country Delta most of the industry continues to battle with the semi conductor shortage limiting the global light vehicle production.
Thanks to a strong ending of the quarter, our organic sales increased by 8% year over year. According to IHS markit.
Organic sales outperformed global light vehicle production by more than seven percentage points.
Our margins developed better than expected despite raw material cost increases impacting our operating margin in the quarter by almost six percentage points and extensive inefficiencies from lockdowns in China.
Our cost mitigation measures are on track to achieving price increases to compensate for higher costs for raw materials labor logistics and utilities. Additionally, commercial compensation for previous periods and the patent litigation settlement together amount.
To round 50 million U S dollars in the quarter.
In response to the ongoing challenging market conditions and to be prepared for.
Possible future challenging conditions, we are strengthening our cost control measures and implementing other cost saving activities.
Mainly due to volatile and timing effects adverse working capital development led to a negative cash flow in the quarter.
We expect to recover most of these.
In the second half of the year.
The leverage ratio is one seven times.
In the quarter, we paid 64 cents per share in dividends and repurchased.
3 million shares under our three year stock repurchase program.
We continue to develop mobility safety solutions and announced a cooperation with Polk to investigate opportunities with integrating <unk> technology into bicycles.
Looking at the rest of the year, we expect increased sales outperformance versus light vehicle production.
It is our plan and a vision that our product price increases coupled with strict cost control measures will gradually offset the raw materials and other inflationary cost increases.
Therefore, we expect a sequential margin improvement in the second half of the year.
<unk> attracts III towards our mid term targets.
Looking now on the financial overview on the next slide.
Our consolidated net sales of 2.1 billion was 3% higher than in Q2 2021.
Adjusted operating income excluding cost for capacity alignments.
And from $166 million to 124 million U S dollar.
The adjusted operating margin was 6% in the quarter around two percentage points lower than last year.
The lower operating margin was mainly our style of inflationary pressure volatile LBP.
Currencies and effects from Lockdowns in China.
Operating cash flow was negative $51 million, which was $114 million lower than the same period last year, mainly due to changes in working capital.
Looking now on our sales growth more in detail on the next slide.
Although currency translation effects had a negative impact of 5% or $103 million. The second quarter consolidated net sales increased by almost $60 million dollar to 2.1.
U S dollar.
Retroactive pricing contributed with approximately 30 million U S dollar and price volume mix contributed with 132 million U S dollars or 7% to the growth in the quarter.
Looking to our organic sales growth per region in Q2 2022 on the next slide.
Our sales in the quarter came in lower than what we expected in the beginning of the quarter.
Due to that light vehicle production in Japan, Western Europe , and North America disappointed.
According to IHS Markit global light vehicle production increased by less than 1% year over year in the quarter.
This was two percentage points worse than expected at the beginning of the quarter and the mix was worse than expected.
Our second quarter sales grow organically by 8%, which was around seven percentage points better than global light vehicle production. According to IHS markit.
Despite the negative regionally.
N V P mix.
The organic sales growth was mainly driven by the large number of product launches in Americas, and Europe as well as price increases.
Based on the latest light vehicle production numbers from IHS Markit, we outperformed in Europe by 15 percentage points.
In Japan by 10 percentage points and in America by eight percentage points.
In China sales underperformed by four percentage points.
The reason for the underperformance in China was mainly the mix effect from production or low end vehicles being less affected by the lockdowns.
Supported by recent launches and positive regional mix as well as further price increases we see sales outperforming light vehicle production substantially more for the rest of the year.
On the next slide we see some key model launches from the second quarter.
In the quarter, we had the highest number of launches, especially in Europe and China.
The model shown on this slide have an hour to live content per vehicle from approximately 120 to more than 550 U S. Dollar.
The long term trend to high <unk> is supported by the introduction of high confidence dealing with.
I will now hand, it over to our CFO <unk> <unk>, who will talk about the financials on the next few slides.
Thank you Ms yet.
This slide highlights our key figures for the second quarter of 2022 compared to the second quarter of 2021.
Our net sales were $2 1 billion. This was a 3% increase compared to the same quarter last year.
Gross profit declined by 15% to $326 million, while the gross margin decreased to 15, 7%. The gross margin decrease was primarily driven by raw materials, <unk> and the volatile and lower than expected light vehicle production.
In the quarter, we had virtually no additional provisions for capacity alignment activities.
And the adjusted operating income decreased to $124 million from $166 million, the adjusted operating margin declined to 6%.
The operating cash flow was minus $51 million and I will provide further comments made during the presentation.
Earnings per share diluted decreased by 28 cents were the main drivers for 33 from lower adjusted operating income partly mitigated by four tenths from financial items.
Our adjusted return on capital employed declined to 13% and adjusted return on equity to 12%.
We paid a dividend of 64 per share in the quarter same as in the previous quarter and repurchased around 300000 shares for $22 million under our three year stock repurchase program.
Looking now on the adjusted operating income bridge on the next slide.
<unk>.
In the second quarter of 2022, our adjusted operating income of $124 million was $42 million nowhere in the same quarter last year.
The impact of raw material price changes was a negative $115 million in the quarter year on year.
FX impacted the operating profit negatively by $20 million as a result of translation effects due to the stronger U S dollar and transaction effects, mainly relating to the pairings Japanese yen to the U S dollar and Korean won to the U S dollar.
SG&A in <unk> net combined was $6 million higher due to higher cost for <unk>.
And application engineering as well as timing of engineering income.
Our improved pricing and other mitigating activities largely offset to these significant headwinds.
Looking on the income developing more closely on the next slide.
In the quarter. The operating profit was helped by income from a patent litigation settlement amounted to $21 million.
Also we had covered around $30 million related to cost increases from earlier periods.
Excluding the patent litigation settlement and retracted cost recoveries. The adjusted operating income was $73 million or three 6% of sales.
This was a notable improvement compared to the first quarter as customer pricing discussions and our strategic initiatives are yielding results.
Looking closer on the cost recovery discussions on the next slide.
To support our sustainable business model in the current high inflationary environment, we continue to work intensely with customers to secure price increases to compensate for inflationary pressure in supply chain disruptions.
We have made progress on cost recovery through sustainable price increases with most customers in many cases, the new pricing is attractive to cover costs incurred in earlier periods. However.
However, we're still being impacted by inflationary cost increases so the discussions and negotiations continue.
We are also negotiating more flexible customer contracts to ensure that future inflationary pressures are effectively and more timely pushed through the value chain.
Looking on the cash flow performance on the next slide.
For the second quarter of 2022 operating cash flow decreased by $114 million to negative 61 million compared to last year, mainly due to changes in working capital and lower net income.
During the quarter working capital deteriorated by $239 million.
The steep ramp up in sales and the fact that we concluded a rather large number of compensation negotiations towards the end of the quarter as well as the patent litigation settlement had a temporary negative effect on working capital.
In the second half of 2022, the timing of the customary compensations will support a more favorable cash flow development.
In the quarter, the continued volatile light vehicle production and logistics challenges drove inventories higher.
The inefficiency in inventory was in excess of $100 million at the end of the quarter. Our ambition is to eliminate these inefficiencies as soon as possible.
Which requires to further stabilization of the supply chain and call off patterns from our customers.
For the second quarter capital expenditures net increased by 44% to 139 million.
In relation to sales it was six 7% versus four 7% a year earlier the.
The increase is mainly related to the ongoing footprint activities and capacity expansion in China as part of our strategic roadmap.
For the second quarter of 2022 free cash flow was minus $190 million compared to minus $33 million a year earlier, driven by the lower operating cash flow and higher capital expenditures.
The cash conversion over the last 12 months was around 30% in the quarter, we paid $56 million in dividends and repurchased shares for $22 million.
Now looking on our leverage ratio development on the next slide.
In the quarter, we continued to repurchase shares and we maintained our dividend.
Leverage ratio at the end of June 2022 was one seven times. This was <unk> three times higher than in the previous quarter as our 12 months trailing adjusted EBIT.
Decreased by $51 million and our net debt increased by $244 million we.
We see this as a temporary situation and we expect it to be back within the range later in the year.
Now looking at the raw material development onto the next slide.
We still experienced volatile commodity markets coming from the Ukraine War Covid related Lockdowns and general inflationary pressure.
It is encouraging that some commodity prices have decreased since march highs, especially metals.
Cost increases for raw materials generated a gross headwind of $115 million or almost six percentage points to our operating margin in the second quarter.
As expected this was slightly higher than in the first quarter.
And the current price environment, we believe that raw material costs before any customer conversations could be around five five percentage points in operating margin headwind for the full year 2022.
This situation is addressed through targeted actions and negotiations with customers has already outlined.
We're also stepping up cost control measures as shown on the next slide.
In response to the sharp increase in raw material prices and cost inflation, we continue with strict cost control measures, a hiring freeze and accelerated cost savings and footprint activities.
Additionally, we are reducing consultants and temporary employees and we are reviewing and prioritizing projects.
As a result of these activities headcount is virtually unchanged year over year, despite substantially higher organic sales.
Continuing to execute on our capital efficiency program to improve trade working capital. We also focus on balancing head count with expected demand.
Now switching to the market development I hand, it back to make yet.
Thank you Fredrik looking now at the MVP development on the next slide.
The second quarter light vehicle production was influenced by the ongoing component shortages and the Covid related Lockdowns in China.
However, there are signs that the situation is improving and that the second quarter was the low point of this year.
As inventories of new vehicles continue to trend at a record low level and strong OEM order backlogs. We believe the short term light vehicle production development will depend on the industry's ability to build vehicles not on the macro sentiment.
We expect to see substantial year over year light vehicle production growth in Q3, and Q4 as the light vehicle production in the second half of 2021 was highly affected by semiconductor shortages, especially the third quarter.
However, total volumes are still expected to be well below the LBP level in the second half of 'twenty 'twenty.
Additionally, as most LBP.
Most of the MVP growth is forecasted to come in high CPD markets. The regional mix is expected to be favorable in the second half of the year.
Looking at MVP forecast in more detail on the next slide.
The outdoor industry continues to operate at or near recessionary levels impacted by supply chain challenges.
For the third quarter of 2022 global MVP is expected to grow by over 20% compared to the very weak MVP in the third quarter of 2021, According to IHS Markit.
Sequentially MVP is expected to improve by 8% compared to Q2.
As the availability of the motive.
Semiconductors is expected to improve.
In North America sales of new weakens remain well below demand and well below sales a year ago.
With dealer inventories remaining at historically low levels the lockdowns in China affected North American production in the later part of the second quarter.
This situation is expected to improve gradually.
For European production, we expect volume recovery as supply constraints continued to eat.
In China light vehicle production in June was up over 30%.
For the year as Lockdowns were lifted and demand was.
Stimulated by tax incentives.
However continued supply chain challenges limit the level of growth.
Now looking on to 2020 to business outlook on the next slide.
We expect higher sales outperformance versus LBP put the rest of the year supported by launches regional mix and higher prices.
We also expect improvement in the second half of the year from alignment of direct labor with MVP.
Print optimization activities.
And a less volatile LBP.
We expect this to lead to a strong second half year profitability compared to the first half year.
Looking at the updated full year 2022 indications on the next slide.
Our full year 2022 indications exclude cost for capacity alignment antitrust related matters and other discrete items.
We adjust our full year indications to a tighter range, reflecting our activities and the shorter time span remaining of the year.
The updated indications assumes that global light vehicle production will grow between two 5%.
And as we achieve our targeted cost inflation compensation.
Class some level of market stabilization.
We expect sales to increase organically by around 13% to 16%.
Currency translation effects on sales are assumed to be around a negative 5%.
We expect adjusted operating margin of around 6% to 7%.
Operating cash flow is expected to be around $750 million to $850 million.
Turning to the next slide.
In closing to summarize our 2022 outlook, we expect continued strong outperformance versus LPP.
Ported mainly by product launches increasing content per vehicle and price increases.
We expect to gradually offset much of the cost inflation in the coming quarters, putting us on a tractor it towards our midterm targets.
Based on the framework outlined at our capital market day in 2021.
Additionally, our balance sheet and cash flow should allow for continued shareholder returns.
We remain mindful of the risk of deteriorating economic conditions, but I am confident that our leading position. The work we have done to become more resilient and our experience and agility will enable us to manage future challenging conditions.
I will now hand, it back to us.
Thank you.
Turning to the next slide.
This concludes our formal comments for today's earnings call and we would like to open the line for questions.
So I now turn it back to you Cynthia.
Thank you ladies and gentlemen, if you do wish to register for a question. Please press Star Zero, followed by the one on your Kennison.
Our first question comes from MS. <unk> from Dnb. Please go ahead your line is open.
Hello, everyone. Thank you for the time.
My question is regarding the commercial recovery and it would be very interesting to hear if there's anything you can say first of all in terms of.
What we should expect to go forward they sort of did that one of the circuit in Q2.
Reasonable assumption for the rest of the year or any of the other quarters and then I'm also interested to hear if you will.
Only negotiating recovery score periods in 2020 to recur also looking into getting recovery score what's happened in 2021. Thank you.
Thank you for your questions.
When it comes to the price negotiations.
We can't.
I Didnt.
Describing the details of this are going but I.
I would say that what we have achieved so far.
In line with what we need to do going forward here to two I would say restore.
The balance between our prices to our customers under cost impacts we see.
The focus of course initially here has been on what has come first so to speak yeah anything else in terms of raw material.
But of course, we are covering all the different pardon me to see that we have talked about when it comes to.
Utilities labor inflationary labor cost.
And the Frac side of the business as well here.
And in terms of a time horizon here, which we are covering in the discussion it's really focusing on on.
Restoring the height so to speak on the pricing that we get the balance right. There of course that our SPM indicated and also retroactive aspects but.
Are there any of it.
It depends on what kind of cost we're talking about then when that card and so on but the spo.
<unk> had all along our focus here is to get the full compensation for for for the cost increases are outside our control.
It will be looking at.
Thank you and maybe I could just a quick follow up on the retracing, perhaps my question can you say.
Oh, well the negotiations that you're in how many have you completed in this quarter.
I call them.
Give you that indication I think the main message here is really that I mean of course, we are negotiating with the full.
Full customer base here, meaning all our customers.
And depending on the development there is ongoing effort here. So so I would say the work continues very much as we move forward here and we see the continued inflationary pressure.
Affecting us here so.
It's not finalized in any way.
Ongoing work as long as we have these calls cost situation.
Thank you that's all for me.
Thank you.
Thank you. The next question comes from Emmanuel Rosner from Deutsche Bank. Please go ahead. Your line is open.
Thank you very much.
Maybe just to start off by following up on the commercial recoveries discussion. So the retroactive ones that you achieved in the second quarter I think in the press release, you're mentioning June playing out better than expected partly due to this.
Were these sort of unexpected or was it just the timing of it.
A surprise and should we expect more retroactive recoveries in the second half.
I guess, what I'm trying to get to is to what extent will do second half margin run rates to be a good space to estimate 2023 or it is a starting point for 2023.
Or how much of it was benefits from retroactive recoveries as well.
I Couldnt quantify that for you here, but.
I said before here I mean, the focus is to get the height.
That's the priority here.
So for us here.
And that of course, then when it comes to the timing of thesis negotiations you could say I mean, if we had concluded on Monday standup Friday.
And at the end of the quarter. It makes our make it makes a difference of course and.
We have been in these negotiations for some time I mean, we have.
Very detailed discussion and that's why it's taking time as well.
Because we are negotiating contract by contract with with each customer here and it's really on plant level as well, so theres a lot of detail that needs to come into to.
Alex it's coming into play here in those discussions that's why he's taking thinking of course time.
And the timing of it is and depending on how quickly we conclude those discussions as good difficult to give that kind of indications at this point in time, but the bottom line of areas that we are on track towards what we have.
<unk> told you before what we need to do.
To reach our full year guidance here.
So let me ask you this differently then.
Let me ask differently and then as a follow up on commodities, but.
Your second half implied margin.
You know based on your new guidance range at the midpoint is like eight 2%.
Second half margin include also some retroactive recovery on the.
Forward looking new pricing.
In in <unk>.
I mean, the short answer is yes, I mean, everything we get to objective will be booked in the second quarter.
In fact that thing.
Sort of a second half year.
So you really need to get it there so yes.
Yes, there would be retroactive recoveries as well.
In the case there is retroactive.
It will affect the second half year.
Right.
That's why I was okay.
I understand your question right.
Right.
Alright, let me just switch to commodities quickly.
So.
I think your outlook is still for 550 basis points.
Hit to margins this year.
But basically evenly spread out by quarter is now as you noted in your slides with some of these commodities, it's sort of like started inflicting down.
Can you just give a little bit more detail on what sort of like commodities.
We'll be the largest headwinds for you in the second half and if prices remain.
We remain where they are sort of like falling back to is there some.
Could that be a tailwind in 2023.
Yeah.
Yeah.
From the indication taken down the impact that we see for the year from around six to five five percentage points.
The main impact is still from a steel.
Even though what that impact has also come down but it remains our.
The largest year over year.
Issue.
The impact on our cost development.
Pretty much all major commodities for us, we do see an improvement, but due to the contract structure that we have with our supply base. It takes some time then for the spot price movements to claim to that flow through into our cost setup.
And then for 2023, I mean, it remains to be seen it should they remain at.
So at the lower levels, where some of the metro saw that now obviously that should then be.
Beneficial for us going into 2023.
Great. Thank you.
Thank you.
Thank you. The next question comes from.
<unk> from Handelsbanken. Please go ahead your line is open.
Thank you very much two questions from my guess.
Because this is a more of a general question, but.
Given the historic pattern on the coast.
The price negotiations.
So when you guys I mean, you're currently almost at 50% global market share is there any need systems that you might change your pricing most of them trying to be a little bit more aggressive using your strong market position.
Given that you probably should be the market leader.
Pricing.
The first question. The second question is more related to.
How it would work when Youre imbalance on the course that Youre currently compensating for it and you said methanol prices coming down.
But when you have them be immediately given back that's what would you kind of overcompensate Telcel My two questions. Thank you.
Let me start by taking the first question first and then let.
So the second question there.
I mean first of all we should remember here that.
We haven't been in a situation where we have been.
To go to our customer with price increases for.
For at least 25 years here, yes, we have the annual.
Negotiations with the customer where we have I would say certain.
Months of volume.
These steel prices et cetera, very few.
Items that we cover every year, but in this magnitude and this breadth of.
The cost items to discuss we haven't seen in the industry.
Say for Florida for very long time period. So this is a new situation and of course.
It requires a lot of additional work.
<unk> ourselves.
Customer here on a very very detailed level and.
The pricing power, if you put like that.
It's really when we have the quote process.
So when we have an RF Q4, a new program, that's where you can say that the market position is is.
Playing out than we are in.
And and contracts with our customer for the life of that vehicle.
Simply put and that is what we now going through a negotiating here and I would say we have good discussions here with our customers and it is a fact based on detailed discussions that we are working on.
Way through here now and that is gradually paying off fairly in line with what we have discussed so a little bit new territory, but the real pricing is in the RFP process.
Okay and on your second question here on the correlation between cost.
Cost and price development going forward I mean for us the priority has been to restore our pricing levels down to make sure that whatever the.
Cost inflation, that's been so far that we get the right adjustment for that.
Going forward sneaking out before.
We will after these negotiations and already now have higher level of indexation.
Which then also will reduce our volatility or exposure to the spread them between the raw material cost development in our top line.
And these structures that we are now.
On with our customers to a larger extent they vary from between quarterly to annual structures. So it will vary a little bit down.
Or would the cost development, where that ultimately come through on the pricing side in both directions.
Fair enough. Thank you.
Yeah.
Yeah.
Thank you. The next question comes from Colin Langan from Wells Fargo. Please go ahead. Your line is open.
Oh, great. Thanks for taking my questions.
Just following up on commodities.
Took it down a bit is there any good news left on that 550 for 2022 or its just given the contract timing that's all going to be recovered in 'twenty, three and what did sort of drive it's not just the mark to market help from from the spot prices, but that has nothing to do with the customer negotiations right.
No. So this is a.
Cost impact that were guiding for it does not include any compensation effects from our customer starts to pure it cost impact on our profit and loss statement that we're expecting for this year.
And as I said, I mean, we have seen commodity prices come down most of them that dose.
And we also do expect limited impacts from that towards the second half where in the second half of the year here also on our cost base.
But due to the structure that we have with our customers also here, we have between quarterly and annual setups.
There is a time lag that of how these spot price developments then translate into our.
Our cost structure.
Okay.
Yes.
Less wiggle room, there, Okay, and then just looking at the full year guidance change I mean, I think it implies around at the midpoint around $12 million increase in operating income for the year, but Q2 came in quite a bit better than expected you had the $22 million and litigation settlement that I assume was unexpected.
Commodity headwinds I think are roughly 50 million lower than kind of what you're expecting.
So why not.
A bigger full year increase or what sort of offsetting that from a second half outlook at this point.
Yeah.
We are looking at a substantial improvement in the second half of the year. So we are somewhere around 7% to 9% versus around four 5% in the first half of the year.
You highlighted some of the positive factors, but there are also some.
Headwinds.
I see that FX is now a.
A larger headwind than what we had.
And our guidance both for the full year and after Q1.
So that would have a larger negative impact on us than we had expected just three months ago.
And we also see.
Some other cost components are that are normal raw material related offenses logistics.
We also have.
Unfavorable development.
So there are a couple of components that are offsetting the ones that you that you mentioned.
Okay, Alright, thanks for taking my question.
Thank you.
Thank you. The next question comes from Chris Mcnally from Evercore. Please go ahead. Your line is open.
Thanks, so much team.
Wanted to kind of go a little bit broader on the raw materials I apologize it looks like the third quick question on it but rather specific on timing and specific contract.
We step back and think about that 550 basis points of growth.
Raw material inflation is obviously, a net number there so you've covered on a certain amount whatever that net number as we all can kind of make our own estimate I guess, what we're trying to figure out is will that be.
When you think you'll get the majority of that recovered over 'twenty two 'twenty three.
So that 2024 is sort of quote unquote normalized.
Any comment on your 12% margins is that the right way to think about it that the recoveries could be sort of the majority of that net.
Go go away by by the end of 'twenty, three sort of a two year basis.
Correct, Yeah. So what we're aiming for is to get pricing conversations that then offset these headwinds that you just talked about including the.
Five five percentage point margin impact of raw materials from this year and we are not only putting raw materials on the table, but also as we mentioned utilities labor cost and also logistics.
And we have to close some of those agreements and then also with the heights that we were aiming for.
Able to offset these costs and then they should come through here. The majority of this should come through.
This year.
Okay, that's great and then just thinking longer term.
There's always this question of your sort of normal.
Realized guidance of 12%.
I think the way you phrased it is sort of low $90 million production the way Alan Tse, our IHS I'm quoted that happens to be sort of what we're forecasting.
<unk> forecast is off for 2024 and on the raw materials, you talked about a flattening.
It is the second part the raw materials are we at a level that the 12% would be realistic or is there. Another consideration because we kind of had a step up when you first gave that I'm trying to get a sense. If the 12% is a good proxy for 2024 since that's where the industry production is expected to be.
So I think.
And what we.
You mean on here is so close to the the framework we gave in to kept it the market's day and Thats still valid and that we said at least 85 million vehicles and we had.
The net effect on enrollments undecided at this back at the 2021 years level. So so that's.
That's the the stance on.
Described here today I think we are.
Heading in that direction than what the world will look like.
On a certain date and that's of course to the debate.
Good question.
Yeah, I'm here, but I feel comfortable that what we can control we are controlling well in line with what we have said here and so.
I think that's that's as much we can describe to the target of around 12 there.
No very very clear I appreciate it.
Thank you. Thank you.
Thank you. The next question comes from Danielle <unk> from BNP Exane. Please go ahead. Your line is open.
Hi, Thanks for taking my question. The first one on natural gas you need it for the manufacturing process of airbags. So I was wondering are you looking at alternative who could assist in case, we go into restrictions in Europe and is that I have spent with us.
The alternative for you and then the second question on the top line you did increase the LBP guidance, but you didn't increase.
The organic growth guidance, which implies that your outperformance is supposed to be slightly lower which surprises me given your comments on having.
Positive regional mix going forward, especially next door.
And maybe explain what changed there. Thank you.
On your first question on natural gas.
We do not use gas for us at processing and in our manufacturing.
The process as you know.
So we were not exposed to natural gas and in that sense, we do use it for for heating up for some of our facilities. So that's the only exposure we have.
So in that sense, we of course monitoring very closely what is it.
Happening here the markets, but our exposure would be more on the impact on our suppliers or then indirectly through indicate what impacts that are our customers.
And then on MVP.
We're now guiding for a 11% outperformance so it's a 2% to 5% range. That's mainly as we said in the presentation that the timetable shorten here for the year.
And we think that that range is realistic and we've had a quite significant negative mix year to date of around 6% and at this the main reason why we take down our full year outperformance then from 12 to 11.
So the the.
The mix component in there has deteriorated slightly.
Others like a content per vehicle market share and also pricing remain unchanged versus our previous guidance.
Thank you.
Thank you.
Thank you. The next question comes from Joseph Spak from RBC Capital markets. Please go ahead. Your line is open.
Hey, Thanks, Thank you so much.
Maybe just going back to.
Raw materials for a second here.
And also on the.
The comment on sort of being more flexible.
I understand there might be timing.
Impacts here, but.
If those inputs continue to be deflationary.
I'm, assuming those flexible pricing. Our instance work both ways. So is it is it possible that.
As you sort of get beyond 'twenty, three and maybe before that.
You would have to give back even more than the price downs that you have.
Typically become accustomed to for <unk>.
No I think I mean, as I said I mean, if we get on more indexation program.
Hey.
There is no.
That was let me put it like this the net effect of what we do.
Get out over over a cycle or have a period here where.
This program is not changing I think we get the smoother development indexation forgot programs indexation clauses here, because we will get the quickie compensation and of course yesterday.
Quicker.
Reduction, but net net it shouldn't be any difference here.
Because it's a it is tied to get it also of course without it.
How we are balancing our supplier base here. So that's very important component to make sure that that is tying together and we feel comfortable with that setup. We shortened the lead time. So that's basically the net effect.
Okay.
And then maybe going back to follow up on Chris's question before I was there sort of think going forward and I recognize youre not going to.
Give or update sort of guidance here, but even if we think like is 8% margin level for the back half is maybe sort of.
A decent base and then.
Then.
You know we look at it.
Even for next year sort of industry expectations, plus your your outgrowth algorithm and historical 25% Incrementals you can get back to sort of even like overnight around nine maybe nine and a half next year. So is it just remind US is it is it really just volume that gets you to the 12% I mean I know.
You've taken some actions here.
In the near term, but some of them seem maybe more temporary than permanent. So can you just remind us of.
Really the big drivers to get back to 12%.
No I think I mean, the drivers to get us to the 12% remains the same I think whatever happens from when we started this journey what have happened here of course is already started but in the meantime, it's don't want to disturb us since we have got from the pandemic from the <unk>.
The consequences of that then and the raw materials and everything we have been through here now so what we need to do and which we are doing now is to balance that again and what we need to have.
Going forward is that we get the more stable market that's been indicating here.
Let the up and down with the very short.
The time horizon as we have seen here of course is disturbing.
The detractory here in the short term.
So.
It's still very much around driving our efficiency and productivity in the company, where we have the the underlying strategic roadmap. So what we have talked about and that is progressing well we need to to continue to.
They get I mean.
The price adjustments in place here to cover done what I talked about the short term fluctuations but.
Other than that I think we have all the components here to get there and that's why we we feel comfortable to reiterate.
The.
Targets here for this period, we're talking about.
Okay, maybe if I could squeeze one quick one what what euro rate are you assuming for the back half of the year.
Sorry the.
The euro rate.
Euro rate.
The end date of June .
Well so about about parity.
Yeah, one or something else.
I don't have it in my head at the moment, but.
I'll come back to you on that.
Okay. Thank you.
Thank you. Our next question comes from Scott <unk> from Nordea. Please go ahead. Your line is open.
Thank you I have two questions starting with your organic growth guidance. It seems to it seems like you're basically on the MVP.
The assumption of two 5% Joe for the year, Yes IHS.
Is that 5%. So if you could give us on the reasons why you seem to be a bit more cautious here.
Yes, I think that the cautious view, where if you call. It that is that we still see that there is a lot of uncertainty out there I mean, that's where we indicate things moving into right direction, but we also see that we are.
Not through when it comes to the CMA conductors we still have.
Chad I was just in a logistical change around the world here pandemic, you're still here plus that I think in Europe here. We are also.
Facing a winter here with a potentially challenging energy situations as well so there is a.
A lot of uncertainty out there that I think makes it.
Prudent to have a.
The more.
Cautious view on the development there.
And maybe a follow up on that when you speak to your customers do you feel that they are getting a bit more confidence about the volumes when the place to call a sofia.
I think yeah.
I mean, the short answer would probably be yes on that question, but.
Maybe you can see some a reason for our cautiousness is also used to do that's why you see that there has been a lot of you know more.
The confidence in the call off than what's actually have come out. So so that's been a big challenge for US. The last couple of quarter here that what has been requested and has not been picked up by by the customer here. So.
Of course will land on a wish.
From the OEM side here to get more volume through and that's of course is based on what we have talked about here that there is a strong order book studies.
It's.
Extremely low low level of inventory, especially in the U S et cetera, but there is still disturbances in this in the in the industry value chain here.
It makes it difficult to get to the volumes that has been put into the system stuff. So.
So I would say the only thing that is holding back the volume right now in the short term that is the availability of components in the whole industry not after the specifics.
Yeah, Okay and then the second question is on your cost alignment program you haven't provided any kind of quantification for what Youre doing there or do you expect any savings coming from that they expect.
And of course also to cover just program could you give us a bit towards it does come back.
And I guess, you're referring to the one we have.
Indicated here in June .
We are taking additional steps to reduce cost we are not expecting to see any.
Meaningful one time effects or restructuring charges to death at this point. So so we have not quantified that for you.
For that reason.
And it is also a gradual implementation of it and the main effect of those activities is really.
Towards the end of the year and for 2023.
But you don't provide then the cost savings targets.
Okay.
No no it's a part of what we.
Do we have to to secure our.
The tractor here towards the midterm targets. So we haven't broken that out specifically, it's on top of everything else we do here.
Okay. Thank you.
Thank you. The next question comes from Philip <unk> from Goldman Sachs. Please go ahead. Your line is open.
Yes, Thank you for taking my questions.
Just wanted to come back to the recovery. So it seems like you made some some particularly strong progress in June which we also see in your working capital.
I was just wondering if that sort of run rate continues.
Is it fair to say that you might be even be able to aim for the upper end of the 6% to 7% margin range in terms of.
What are you baking in for the second half of the year in terms of the recoveries.
And then my second question is just on the near term near term volumes sort of what after first couple of weeks in July have been like have some momentum continued from.
From June Hasnt been even better.
Any color there would be appreciated.
Okay. Thank you.
I don't think I cant really I cant give you anymore.
Detailed surround the progression there I think what we have said here is that we are making progress.
And are in line with what we.
Having indicated before and we have narrowed the range to six and 7% adjusted operating income in.
I can't narrow it down even further for you there. Unfortunately.
When it comes to the momentum in the market I think.
You can kind of say here that it's holding up.
And there's no question that there is an underlying.
Demand in and.
It's all about now securing in the whole industry.
The ability to secure components.
And.
I would say.
There's a lot of uncertainty out there regarding that and we just need to see how it comes.
It comes through here, but.
There.
I stopped.
Too early to say anything around that when it comes to.
At the beginning of the quarter.
Got it.
Yep.
Thank you very much.
Thank you.
Yeah.
Thank you. The next question comes from Vijay Rakesh from Mizuho Securities. Please go ahead. Your line is open.
Yeah, Hi, I was just wondering I think you made a comment on chip supply having improved just one thing.
Where you had been seeing.
Any constraints in where you are seeing some of the supply improving.
No.
I mean, we see we see some improvements on all fronts. We also hear from our customers here.
There are some some.
Improvements there, it's still a very let's call it spoke to here because it's not across all customers that are some customers that don't more.
More confident than others in terms of securing our semiconductors for for their own production.
Of course, the Lockdowns in China created some bumps on the road here also outside China. When it comes to the semi conductor supply and I think also we see that there is still a.
D space.
Lower specs of vehicles here too to not need as many semiconductor stuff the other.
Otherwise would.
So of course, if the availability is improving here I think the demand will also go up here. So that's why we are also cautious here that.
We are not out of the woods here you have to when it comes to the semiconductors, but it's trending into right direction. That's what we feel when we.
<unk> talked to our customers cluster to of course our own.
Semiconductor needs.
It's under control there.
Got it and then last question I know a lot of questions on the pricing side.
I mean on the pricing are you pegging it to a commodity index because it looks like the broader commodity index is starting to.
Soften a bit.
I'm just wondering is there like do these price increases are they like a six month horizon is there how are you. If you can give some more color on.
Using a broader index and what the timeframe for the price increases.
Thanks.
Yes.
No the straightforward answer to that question, it's a mix.
Pretty much every OEM uses a different structure for these type of.
Discussions.
So it's some some have.
Stephen This is based on different types of indices.
And then you have also commodities that are not covered others do cover them. So its a basket of.
Arrangements that you then can can choose to have with a certain Oems as it's difficult to give a.
Simple answer to that question and as I've mentioned before.
The cadence of these adjustments or between quarterly and hadn't yield.
Got it thank you.
We can take one last question.
The last question comes from Eric Coldwell from Seb. Please go ahead. Your line is open.
Yes. Thank you I have one question.
Returning to the raw material subject.
But can I understand you correctly that you said that you were aiming for full compensation of raw material and logistics headwinds that were out of your control then I mean, if I just come up they're all net headwind you've had since the start of 'twenty. One that's in excess of 300 million and now you've got $30 million of compensation do you expect the rest in the second half.
Is that the right way to go.
No.
But what we're talking about here and as I emphasized before here our focus about that discussion about retroactive in essence on our focus here is to get full compensation when it comes to heights. So negotiating here now it would've.
Cost of tests as he thought.
And restored the balance so to speak between our incoming costs.
Rice.
Okay.
Our focus and maybe to clarify the 30 million that we spelled out as only the recovery that we received that is related to prior to the second quarter.
So these are retroactive adjustments going back then to January 1st that's where it is.
Closing that are not related to the second quarter.
Recoveries, we got overall is it's higher than $30 million.
Very good thank you.
Yeah.
Thank you that was last question now I will turn the conference. Thank you for any closing comments.
Thank you Cynthia.
Before we end today's call I would like to say that the recent developments in supply chain customer production plans raw material prices and our cost recovery discussions are encouraging and we are well prepared for an improved market development. However, we are also making sure we are a John unprepared for.
More adverse market development should that be necessary alternate continues to focus on our vision of saving more lives, which is our most important contribution to a sustainable society.
Our third quarter earnings call is scheduled for Friday October 21st 2022.
Everyone for participating on today's call. We sincerely appreciate your continued interest in <unk> until next time stay safe.
Thank you. This does conclude today's conference call. Thank you all for attending you may now disconnect your lines.
Okay.
Yeah.
[music].