Q3 2022 Autoliv Inc Earnings Call

Yeah.

Welcome to the Q3 2022 alternative coatings group conference call.

From the home office to Tobey.

Afterwards, I'll be a question and session today I am pleased to present I'm just trucks.

These investor Relations Michael brought to your credit question. The group CFO I'll now hand, the floor to all speakers please stick anyway.

Thank you Mark.

Welcome everyone to our third quarter 'twenty to 'twenty two earnings call.

On this call, we have our president and CEO and he got up and our Chief Financial Officer Predicating on.

On the top VP IR.

During today's earnings call me Gallifrey ethic will among other things provide an overview of the strong sales and margin recovery in the third quarter give an update on the price negotiations.

Outline the expected sequential margin improvement in Q4, that's where I'll provide an update on our general business and market conditions. We.

We will then remain available to respond to your questions and as usual the slides are available on <unk> 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 us GAAP measures are disclosed in our quarterly press release available on <unk> Dot com.

In the 10-Q that will be filed with the FCC.

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 over to our CEO he cutback.

Thank you Anders looking on the next slide.

I'd like to recognize the entire team for delivering a strong quarter, which I believe reflects our strong execution culture.

As the market leader, we are building resilience and strength in a turbulent times.

Our actions initiated earlier in the year are creating both short term and long term improvements.

We're able us to be even more competitive position despite the challenging micro environment.

We continued to negotiate higher prices to compensate for inflation out of pressure. We also achieved another strong outperformance versus MVP, despite a negative regional mix.

Our sales in the quarter reached over $2 3 billion U S dollars the highest so far for the third quarter for our current business structure.

This is despite recessionary light vehicle sales volumes in Europe , and 8% currency headwind.

We also achieved a strong profit recovery.

Increasing our adjusted operating margin to seven 5%.

Our strong performance in the third quarter is especially encouraging considering the market conditions continued to be challenging with almost two percentage points adverse currency effects as well as significant inflationary pressure and high customer call off volatility.

Yeah.

We generated a strong operating cash flow.

Leverage ratio improved to one six times in.

In the quarter, we paid 64 cents per share in dividends and repurchased and canceled 260000 shares.

Our Q3 performance enables us to update our full year indication for the adjusted.

<unk> margin to the upper end of the indication.

We expect continued sequential margin improvement in Q4 through price increases cost reduction activities as well as a higher LDP and engineering income.

The Q3 performance and expected Q4 development.

<unk>, our confidence in our midterm targets.

In addition, we expect that our balance sheet and positive cash flow trend will allow for higher shareholder returns.

Looking now on an update of the inflation compensation negotiations on the next slide.

Yeah.

To support.

Our sustainable business model in an inflationary environment, we continue to work closely with customers to secure price increases to compensate for inflation.

Time, nice vehicle production and supply chain disruptions.

We have reached agreements in more than 90% of the raw material the price.

Price adjustments discussions.

That we initiated earlier.

Price adjustments discussions with our customers for cost increases related to labor logistics and utilities are progressing.

We are also implementing greater pricing flexibility into new and running contracts with our customers to account for changing raw material costs.

Now about half of our contracts contain raw material losses.

This is an increase from around 20% before we started the negotiations.

Losses should provide more stable and predictable earnings going forward as changes in costs should be more aligned with changes in price.

Looking now on our cost control measures on the next slide.

We continue with strict cost control measures controlled hiring and footprint effectiveness.

As a result of these activities head count increased only by 9% year over year, whereas sales grow organically by 32% during the same period.

The increase also reflects preparations for the expected strong sales growth in the fourth quarter.

Also we continue to execute on our capital efficiency program to improve trade working capital.

Considering the uncertainty of the market development, keeping a high degree of flexibility and agility is Samsung and allows us to be an even stronger company long term.

Looking now on the financial overview on the next slide.

Our consolidated net sales of $2 3 billion was 25% higher than in Q3, 2021.

Adjusted operating income excluding costs for capacity alignments increased from Honda and $3 million to $173 million.

The adjusted operating margin was seven 5% in the quarter around two percentage points higher than last year.

The higher operating margin was mainly a result of higher prices operational leverage on higher volumes as well as cost saving activities.

Operating cash flow was $232 million, which was $43 million higher than the same period last year mainly.

Mainly due to improved working capital and higher net income.

Looking now on our sales growth more in detail on the next slide.

Although currency translation effects had a negative impact of 8% the third quarter consolidated net sales increased by more than $450 million to $2 3 billion U S dollars.

Retroactive pricing contributed with approximately $13 million.

Price volume mix contributed with almost 600 million U S dollars in the quarter.

As a result, the organic sales grew by more than 32% in the third quarter compared to last year.

Looking on the regional sales split.

Asia accounted for 42% of sales in quarter.

North America, 434% and Europe for 24%.

Looking at our organic sales growth per region on the next slide.

Our organic sales in the quarter came in as we expected at the beginning of the quarter.

But with a different regional mix with higher sales in China, and Europe offsetting lower than expected sales in Japan in Americas.

According to S&P global light vehicle production increased by 29% year over year in the quarter.

This was almost seven percentage points better than expected at the beginning of the quarter.

All of the higher than expected volumes came in China and rest of Asia, while volumes in higher content per vehicle markets, North America, Europe , and Japan were lowered unexpected.

Despite the negative region light vehicle production mix, we outperformed global light vehicle production by around four percentage points.

Based on the latest light vehicle production numbers, we outperformed in Europe by 11 percentage points in America by seven percentage points and in Japan, and Japan by six percentage points.

Sales in China outperformed light vehicle production, despite a negative mix with manufacturers of low end vehicles benefiting from more than.

From the latest tax incentives on Evs and car suite engine displacements of up to two liters.

Supported by recent launches and a positive regional mix as well as further price increases we see sales outperforming light vehicle production, even more in Q4.

On the next slide we see some key model launches from the third quarter.

In the quarter, we had a high number of launches, especially in Europe and China.

The models shown on this slide have an hour to live content per vehicle from approximately 95 to more than 400 U S dollars.

The long term trend to higher CPD is supported by the introduction of front center airbags on five of these vehicles.

I will now hand, it over to our CFO , Patrick <unk>, who will talk about the financials on the next slide.

Thank you Mick.

This slide highlights our key figures for the third quarter of 2022 compared to the third quarter of 2021.

Our net sales were $2 3 billion. This was 25% higher than the Q3, 'twenty, one and 11% higher than Q2 this year.

Gross profit increased by 28% to $383 million, while the gross margin increased to 16, 7%.

The gross margin increase was primarily driven by higher prices, partly offset by cost inflation currencies and the volatile light vehicle production.

In the quarter, we made 2 million in provisions for capacity alignment activities.

The adjusted operating income increased from 103 million to $173 million.

Operating margin increased from five 6% to seven 5%.

Your operating cash flow was $232 million and I will provide further comments on our cash flow later in the presentation.

Earnings per share diluted increased by 53 were the main driver was 59 cents from higher adjusted operating income.

<unk> mitigated by six cents from financial items and nonoperating items.

Our adjusted return on capital employed increased to 18% and the adjusted return on equity to 17% up from 11% and 10% respectively.

We paid a dividend of 64 cents per share in the quarter.

As in the previous quarter and repurchased around 260000 shares for $20 million under our stock repurchase program.

Looking now on the adjusted operating income bridge on the next slide.

In the third quarter of 2022, our adjusted operating income of $173 million was $70 million higher than the same quarter last year.

The impact of raw material price changes was a negative $96 million in the quarter year on year.

FX impacted the operating profit negatively by 41 million or almost two percentage points.

This was a result of translation effects due to the stronger U S dollar and transaction effects, mainly relating to the strong U S dollar versus the Japanese yen Korean won and the euro.

SG&A and R&D and Ethernet combined was 13 million higher due to higher costs for it and.

Occasion engineering as well as timing of engineering income.

The profit increase was driven by improved pricing higher volumes as well as our strategic initiatives, partly offset by the significant headwinds from raw materials foreign exchange colorful agility and general cost inflation.

As a result, the leverage on the higher sales excluding currency effects was within the range of normal interval of 20% to 30% despite the substantial headwind from raw materials.

Looking at all the Castro performance onto the next slide.

For the third quarter of 2022 operating cash flow increased by $43 million to $232 million compared to last year, mainly due to strong performance in working capital and the higher net income.

During the quarter trade working capital improved by 65 million despite the steep ramp up in sales.

Improved trade working capital was a result of improved payables in parts due to our capital efficiency program.

In the quarter and the volatile light vehicle production and logistics challenges continued.

It drove inefficiencies in inventories.

The inefficiency and inventory continued to be in excess of 100 million at the end of the quarter.

Our ambition is to eliminate these inefficiencies as soon as possible.

Which does require further stabilization of the supply chain and cool off patterns from our customers.

For the third quarter capital expenditures net increased by 47% to $164 million.

In relation to sales.

Seven 1% versus 6.0% a year earlier.

The higher level to some extent reflects a temporary catch up of investments that were delayed during the pandemic.

It is also related to the ongoing footprint activities and capacity expansion for growth, especially in China.

For the third quarter of 2022 free cash flow was six to 8 million 9 million lower than a year earlier driven by the higher capital expenditures the.

Cash conversion over the last 12 months was around 25%.

In the quarter, we paid 56 million in dividends and again repurchased shares for $20 million in.

In the fourth quarter of 2022, the timing of payment of customer conversations and seasonality of engineering income are expected to support a positive cash flow development.

Now looking on our shareholder returns on the next slide.

I'll tell Ya alterative is shown in the past several years its ability to generate a solid cash flow in a difficult market environment with Covid lockdowns.

Ukraine industry supply chain challenges and substantial decline in light vehicle production.

We have historically used both dividend payments and share repurchases to create shareholder value.

Historically the dividend is usually it represented a yield of approximately 2% to 3% in relation to the average share price since the beginning of 2019, we have reduced the net debt significantly as well as returned 700 million directly to shareholders.

This includes stock buybacks of around $60 million as part of the stock repurchase program that we announced at our capital markets day in 2021.

We expect that our balance sheet and positive cash flow trend will allow for increasing shareholder returns.

Now looking onto the next slide.

The leverage ratio at the end of September 2022 was one six times.

This was a reduction from the one seven times in the previous quarter as our 12 months trailing adjusted EBITDA increased by $58 million and our net debt decreased by $36 million.

Looking at the liquidity position, if we go to the next slide.

At the end of the quarter, we had a significant liquidity cushion of approximately $1 6 billion in cash and Unutilized committed credit credit facilities.

Our unutilized $1 1 billion revolving credit facility with.

With 11, a major banks. This was refinanced in may of this year and matures in 2027 with an extension option to 2029.

To minimize refinancing risks, we have diversified our long term funding sources and we also have a maturity profile that is well spread over the coming years.

None of the credit facilities are subject to financial covenants.

Now looking at our energy usage onto the next slide.

We are continuously monitoring the development of the energy markets and we have taken actions to secure supply and to lock in prices.

The energy issue is mainly a European shadows.

The cost for the energy used in our facilities in 2021 for the company overall correspond to approximately 1% of sales.

Of our total energy use 6% to 6% was purchased electricity and 27% came from natural gas.

Our today does not generally use gas for its manufacturing process. It is mainly used for heating at some of our facilities.

Our main concern at this stage is the potential impact that a shortage of gas or electricity might have on the industry supply chain, especially in Europe . Currently we do see a slight easing of prices in Europe due to the steady inflow of gas, mainly LNG and recent decisions to activate nuclear power plants again.

From the remaining of 2022 energy prices are locked in.

Contract negotiations for 2023 are completed in all regions, except for Europe .

Europe , we have locked in most of the prices for the first half of 2023 several of them are new green energy contracts.

We are still negotiating in a few countries for the second half of the year.

I now hand, it back to you meet that.

Thank you Fredrik looking now at the LDP development on the next slide.

Part of the auto industry continues to operate at or near recessionary levels impacted by supply chain challenges.

For example, due to lack of new vehicles European registrations year to date is approximately 30% lower than for the same period in 2009 during the financial crisis.

For the fourth quarter of 2022 global light vehicle production is expected to grow by 3% compared to the same period in 2021, According to S&P global.

Sequentially MVP is expected to improve by 4% compared to 43.

The availability of automotive semiconductors.

It is expected to improve although no although not as much as previously anticipated.

In North America, and Europe , the near term production forecast continues to be limited by automakers ability to produce not by demand.

In China light vehicle production is supported by robust EV sales and the effects from tax incentives on certain new vehicles.

According to S&P global.

<unk> Global 2022 light vehicle production is forecasted at 79 million units representing year over year growth of 6.8%.

Now looking on to Q4 business outlook on the next slide.

As illustrated by this chart, we have been able to gradually improve the adjusted operating margin from three 2% in the first quarter to seven 5% in the third quarter of 2022.

This is despite continued headwinds from raw materials and other inflationary costs.

The chart also shows the substantial year over year improvements in Q4 that is implied by our full year indication.

The main reasons for the sequential improvement or the price increases and higher volumes as well as our strong focus.

Continuous improvements throughout the organization and our strategic roadmap initiatives.

As implied by our full year indication, we expect the sequential margin improvement trend to continue in Q4.

In addition to higher prices continued volume recovery and cost reduction initiatives, we expect positive seasonal effects from engineering income.

Although uncertainties continue to affect the industry volumes, we expect.

Significantly outperform light vehicle production in Q4.

To put things in context, this year has been dramatic, especially in Europe .

The year started with light vehicle production expected to grow by 17% and Europe , while now.

Nine months later, it is expected to decline by 2%.

Additionally, we see.

We were globally affected by volatile light vehicle production with late changes to call offs, The war in Ukraine, and a challenging supply chain, which create the disruptions.

And substantial cost increases.

While we continue to challenge ourselves to further improve I am pleased that our performance in such a dramatic environment enable us to guide towards the upper end of the adjusted operating margin range.

Looking at the updated full year 'twenty to 'twenty two indications on the next slide.

Our full year 2022 indications exclude costs and gains from capacity alignments antitrust related matters and other discrete items.

We are adjusting our full year indication for adjusting operating mode into the upper end of the indication range of 6% to 7%, reflecting our Q3 performance and the shorter time span remaining of the year.

The updated indications assumed at full year 'twenty to 'twenty, two global light vehicle production will grow around 6% and that we achieve our targeted cost compensations plus some level of market stabilization.

We expect sales to increase organically by around 15%.

Currency translation effects on sales are assumed to be around a negative 6%.

Operating cash flow is expected to be around 700 to 750 million U S dollars.

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.

I will now turn it back to Mark.

Thank you.

Wish to ask a question. Please style see every one on your telephone keypad now entered the queue. What's your name has announced you can ask a question. If you followed your question is all set before it should tend to speak to you can dull CRH Sue to counsel.

So once you cannot see where I want to ask a question, we'll see right.

Need to counsel there'll be a preschool Snowball Street Register your question.

Our first question comes from the line of let's say somebody of Dnb. Please go ahead. Your line is open.

Hi, everyone. Thank you two.

Two questions for me I really appreciate the details you gave on the new pricing agreements.

It might be a dumb question, but just to make it really lets say you have a scenario where steep prices fall or rise by expert can you sort of walk us through the difference of how your selling prices would change the contracts where you do have these raw material sources versus the ones, where you did not.

And my second question is on the on the networking capital.

In relation to the inefficiencies in the inventories.

100 million.

Just as it relates to the 800 million I think you mentioned that capital efficiency program that you talked about at the capital markets day last year and how far you've progressed here. Thank you.

Thank you for your question Sir.

Let me start with the wood.

Pricing question there.

What we are stating here is that we have come through 90% of the contracts to be negotiated around raw materials.

And in those we have increase in those negotiations we have increased what we don't call our compensation clauses for the future here and connecting that to the development of raw materials. So we have a better balance.

It's it's difficult and I cant give you a detailed breakdown on that because each agreement you can say has its unique details and and what we are focusing here of course is to make sure that we have a balance between our supplier base and our customer base and and and respected.

My two years here.

But.

We have a better position today than what we had in in and are in the beginning of the year and in relation to that but I caught the fortunate thing give you more more details than that than that.

And when it comes to the net working capital a sporadic too to take that yes. So on the 800 million I mean, we did connect that also with the midterm targets or the timeline 'twenty to 'twenty four.

I think on the you can also see that from the paper side, we are progressing very well.

I would even say we are ahead of target there that you should look at timing wise.

On the inventory side.

You have the right initiatives in place, but unfortunately, the effects are not where we want them to be because of the.

Both the volatility on the supplier side, but also the call of patents on our customer side.

That we cannot get the inventory out there.

Our setups would enable us to do because we have to operate at higher safety stock levels.

But I should the.

The volatility volatility come down that way.

I would expect that this allows us to operate it at a better efficiency level that what we have right now so I would say from an initiatives point of view it it's on track, but unfortunately from the results point of view it as somewhat delayed because of the current market environment.

Great. Thank you both.

Thank you.

Thank you. Our question comes from the line of Colin Langan at Wells Fargo. Please go ahead Youre monetizing.

Oh, great. Thanks for taking my questions just.

Just as we're looking at Q4 and I think your guidance implies something close to 10%. If you go to the midpoint.

Q4 is there anything you know I think you highlighted some seasonality is there any retroactive pricing help there and anything that would prevent us from taking that in any material way in an annualizing that as per our margin for 2023.

I mean, you saw already in the third quarter that we checked we try active part on the pricing negotiations, what's already smaller than in the second quarter and I would expect that this that.

The fourth quarter would be even smaller.

And then the third quarter. So it's not a matter of how you reach activity or something that then increases the margin.

Sequentially it is.

<unk>.

Slightly higher volumes that we expect for the first fourth quarter versus the third and that's particularly in Europe and Japan. It is a further improvement of the price position.

And then the seasonality on the higher engineering income, which is a typical pattern for it for a company that are the main drivers for for the fourth quarter.

And so as we're thinking about let's say productions flat in 2023, I mean, what are the other sort of key pieces, we should be thinking about how your margins should trend because obviously, it's been on a pretty great trajectory so far sequentially.

Hum.

Have continued pricing helps should that should be more help next year. It looks like in the walk the inflationary headwinds arent what they were at the beginning of the year such that they actually become tailwind next year.

Structuring.

Production volatility, but it seems like a lot of tailwind or any way to maybe frame some of those.

If the next year's sort of flat, but steady production.

I think when it comes to 'twenty to 'twenty, three we will come back with.

More commentary around the progression there as we get to the Q4 presentation. There as we usually do so so it's too early to comment that but but I think what we're showing here in the quarter is really that we are.

Really focusing on first of all the price discussions but.

Our resolve being totally here is really to continue to work with our cost base and drive the efficiencies here and we have talked to on the basis here, which he says you allow us strategic roadmaps to drive efficiency across the whole value chain on that.

And of course.

The cost reductions is cost focus that'd be announced earlier in the spring here.

But of course, I mean, there is still a lot of uncertainty out there as soon as we have alluded to here also in the Q3 presentation here that we we don't have it behind us yet and we have talked about the volatility of labor the labor challenges and component challenge, that's et cetera. So.

We will have to come back and give you more details there.

When the time comes here in the beginning of next year.

Okay, all right. Thanks for taking my question.

Thank you. Our next question comes from the line of Chris Mcnally at Evercore. Please go ahead. Your line is open.

Thanks, so much and I appreciate it.

Maybe if we can focus on an FX headwind, particularly it looks like you know.

In the short term that are transactional headwind from from the Japanese yen in terms of exporting inflate us from the from the U S. Typically FX has kind of washed out.

For you but.

You know obviously extreme moves in.

In the currencies could you just give us an idea of is this something that you can kind of work around them from global supply or should we sort of think this is a.

It's going to be a headwind.

Long as sort of the FX is going against you.

The short term.

Yes, I mean, as we say we have a total.

Currency headwind of 42 million in the in the quarter round.

Around about 25 million of that is from transactional effects and.

You said that the main reasons.

Reasons are the Japanese yen, which has weakened round about 30% year over year against the dollar.

But also as I mentioned, the one in the or the Korean won and the euro.

We do have especially in Asia, we do have FX clauses with a number of customers. So that should compensate for some of these developments.

But should the FX rates stay where they are or where they are right. Now we would also expect a negative impact here in the fourth quarter.

And then we would look into.

More longer term solutions should the rates maintain at this level.

So there is FX causes for some of the Asian contracts, but like anything there is probably a delay and there's probably some some gaps so again issue in in Q4 as a headwind, but there may be some recoveries that can if I.

Think about 2023.

Yes, correct.

Perfect and then just to always to revisit your 12%.

Our medium term margin target.

Still looks like it holds on.

As production normalizes, whatever that is 89 million plus I think the raw materials, you've done a great job of.

Price versus raw so that seems.

Like it's also another check the box maybe this FX is a little bit of a headwind, but I just wanted to confirm.

Confirm that the 12% looks on track once we get them.

Our production normalizing again.

Yes, I think we stay at the hearing and then Q3 reported.

This quarter.

Is important stepping stone towards our mid term targets here and in the framework around or around 12% that we have announced at least 85 million.

Nickel production.

Production level and that we have in that.

The effect of raw material price it at the 2021 years level.

It's still about it yes, absolutely.

Okay, great. Thank you so much.

Thank you.

Thank you our next.

Question comes from the line of Joseph Spak at RBC Capital markets. Please go ahead. Your line is open.

Thanks, everyone.

So I totally appreciate that you're sort of on a.

Punt on on 23 until we get to next quarter, because there's still some moving pieces, but you know.

<unk> sort of mentioned earlier like the implied fourth quarter margins are close to 10% fourth quarter. I know typically has that like hundred hundred 50 basis points from from the Ardine income. So if if if we factor that in and all the other actions you've taken.

Is something around 9% the right base, we should think about and then we need to sort of consider all those other uncertainties on pricing volume commodities FX et cetera does that is that how we should start thinking about it.

I'm, sorry, I think my my House estimate to say me as before.

We cant really.

Give you any comments around 23 until we know until we get there but of course as it said yourself here, there's a lot of.

The.

Moving pieces here and in the external environment that Oh, so it makes it a difficult here now two to two big conclusions, but what I can say is that I mean.

I feel comfortable with what we can control that our that our team is doing that well on and that we are moving forward in the right direction here and as I said Q3 is a it's an important steppingstone on the direction of the movement there.

And we will come back with more detail later.

Maybe the simple final question I'd like is is that right that that fourth quarter has about that 100 150 basis points already any benefit.

Yep sounds about right okay.

Second question then.

So you mentioned the five percentage point hit from from raw materials in 'twenty two.

Can you.

Like pro forma for all the way all the new contracts are written what what do you think that would have been in 'twenty two.

I don't understand the question.

So you're you're expecting.

Five percentage.

Percentage point hit from raw materials in 'twenty, two right, but you've you've through through the year you've you've.

You've formed new contracts that that can compensate you for raw materials. So if those had been in place starting on Jan one.

What do you and what do you think that margin hit would've been at for the year.

Yes.

Let me try to answer this way I mean, we have as we said here achieved more than 90 were settled at more than 90% of the negotiations related to raw materials and we have done that at a level that is satisfactory for us to offset the raw material headwinds that we have.

Understood.

So with that we are where we think we should be when it comes to the raw material compensation.

Yeah at the moment, okay. So it would've been.

Arguably somewhat negligible, obviously theres other other inflationary pressure, but strictly on the raw materials it would've been.

I'm pretty pretty minor headwind.

Had we had this from the beginning of something.

Thank you very much.

Yeah.

Thank you. Our next question comes from the line of Agnieszka filler.

Please go ahead your line of sight.

Perfect. Thank you I have two questions one I will ask them one by one so.

Micaela and today, you said that the main reasons for the margin improvement in Q C, where the price increases and higher volumes.

When I look at the.

Martin development in the quarter.

Question here on year.

I come to the conclusion that that's much of this improvement was driven by opex costs, such as R&D and assume nice and not that much by the improvement in gross margin.

And I would expect that pricing and volumes will translate more into the strength in the gross margins. So I would just appreciate your comments on that and what we should expect going forward.

Yeah sure.

So.

First of all I mean, what we're saying is that we have now the let's say the balance in place related to raw materials.

When it comes to the other inflationary pressures on labor logistics, Oh, sorry and in utilities.

That is we have not come as far in those negotiations. So that is one of the reasons why you don't see the full effect on the price negotiations.

On the gross margin line, because there's still some outstanding.

Work to be done on the other the.

The other three components.

Then on the FX part that hits.

To a much larger extent on the gross profit line than it does on the the cost below its actually positive on the costs below gross profit.

So it's a significantly larger FX hits when you look at the gross margin.

So I think you need to consider that to understand maybe the operational performance better.

And then maybe lastly, there is still a lot of inefficiency in our RF set up due to the call of volatility. It is the volatility is improving but it's still far from levels that we had pre COVID-19.

In places people are afraid to still also a cost burden to us it's not as bad as it was in the first quarter.

We even the second but it's still a headwind for us that's also impacting the gross margin.

Okay Perfect and then my last question is about your referring to the 90% of that.

<unk> negotiated the contracts being concluded.

Conclude that.

The contracts that you negotiate are they all contracts that you have or is it just the proportion of the outstanding contracts.

Yeah.

I can can you I don't know if you can say.

I like that maybe it's not so.

So you have say a total contracts with your customers are you addressing all the contracts that you have with the price negotiations or just choosing some of the contracts to address it.

It is it is by customer. So we typically have done an agreement by a customer it might be sometimes by by customer and region, but the 90% indicates that it covers all customer all contracts that we have contracts. Okay. Perfect and then might be short follow up on that so when we look at the Q3.

How much of your sales.

Based on the negotiated prices.

The 90% to lose it.

It's a smaller proportion.

It was less because they're more contracts that toward adjusted during the quarter.

All of that those had to be attractive at the end of it.

Perfect. Thank you.

Thank you. Our next question comes from the line of Phillip connect.

Goldman Sachs. Please go ahead your line is open.

Yeah, Hey, guys. Thanks for taking my question. My first question is just coming back to the raw materials.

You are guiding for around 5% for this year.

If I look at it year to date, we are running at around 5% and it was around 4%.

In the third quarter.

When.

Is it fair to say that this is maybe a bit of a conservative assumption that probably given that Q4 should also see bit of an improvement sequentially and when when do you see a potential rollover I think in the first quarter of this year you had majority of fuel steel contracts that you renegotiated with would these be renegotiated again in the first quarter of next year.

That's my first question.

Yes, we're saying up to five percentage points.

And the reason for that is that yes, we do see that for instance, steel or other nonferrous metals are are coming down and they should also have a positive effect already in the fourth quarter. However that is offset by Yahoo.

<unk> invested in which.

It has a different.

Cost development for us.

And as we've said.

Said many times before we have the six to nine months time lag between.

Spot price development in our.

Uh huh.

When when if the cost come into our P&L.

That still holds true.

We need to see how the.

The cost of it whether the indices developing going forward and then what that implies for for.

For next year.

I think it's also important to remember that even though we've seen the raw material cost come down the prices come down they are still at significantly higher levels than they were pre COVID-19.

Okay. Thank you. Thank you and my second question is just connected to the pricing that you moved up to 50% from 20% on the raw materials.

Does that then also include the six to nine months' time lag.

With how it hits your P&L or was it really.

Pretty different across across contracts.

And there's a range on the contracts as well and what we're striving for is to have a.

Good balance between the right set up between the of how the top line is impacted versus how our cost base is impacted.

But there's a there are.

I think I said before it's rather com.

Complex structures when you looked at how the different contracts are set up by customer and then also the adjustment cycles off that.

Our ambition is that we have a better balance.

Between both cost and the top line development.

Thank you.

Thank you.

Thank you on that question comes from the line of Emmanuel Rosner Deutsche Bank. Please go ahead. Your line is open.

Got it thank you very much.

So it's good to see that you have been productive and negotiations around price recoveries for.

Energy freight labor.

When would you expect the timing of these thank you.

Rotations to conclude and what would the benefit to be seen this year or is this something that would be incremental for 2023.

No I think.

Dry dealing gradually coming on here as we move forward, but we didn't negotiations.

And of course, I mean, it's as long as we live in an inflationary environment here and we see continued cost pressure.

It's of course, an ongoing dialogue and discussion with our customer and how to the past days on so.

I wouldn't say that we will be finished at the certain point. It all is connected to how the cost of development will be when it comes to the $6 and factors.

But gradually.

Seeing the effects from that.

Understood.

And then I guess separately, so you mentioned.

And the implied fourth quarter margin outlook, you mentioned some.

Typical seasonality and sort of timing benefits in there would you be more comfortable I'm thinking about your second half.

2022 margin is a good run rate.

You need to start thinking about.

Building expectations for next year is that a cleaner number in terms of where you think your businesses operating on an underlying basis.

Okay.

I think first of all that I mean, the good good thing here is that we are moving.

And they're in the right direction or M. B building in momentum as we manage through these.

Difficult external landscape.

Thank you.

When they talk about run rates here I think we're.

Showing here is that we have a good improvement on the underlying run rate there, but we still have a lot of external factors.

And in heading in the wrong direction, I mean, it's still a headwind for us and we will probably continue to be so and we have mentioned them earlier here around the overall inflationary pressure we have the currency situation.

Volatility, we still see a far from normalized there and we have the component than labor shortages in general for the industry here. So so so I think.

With too many moving pieces on the outside I think it's difficult to be too firm here, but despite all this I think.

We are showing here that our own activities. He is really.

Giving results here and I'm I'm I'm happy to see that then hum feeling that Oh.

We are well set up to continue to deal with it the external environment here.

Okay, great. Thank you.

Thanks.

Okay.

The next question comes from the line of Rod Lache Wolfe Research. Please go ahead. Your line is open.

Okay.

Yeah.

Rob.

Hello.

Can you hear me.

Yes Hello.

Hello, I wanted to ask about the <unk>.

New contract. So if you do see a direct material.

Clients from here or commodity declines from here can you, maybe just give us a little bit of color on how much of that gets retained.

I believe that 40% of your material exposure of steel, which is obviously down a lot, but now you have some index agreements on some of your contracts and then secondly, just regarding the.

The non raw material negotiation, so labor logistics and utilities could you give us a sense of what the value at stake is or what you're targeting in terms of.

Recovery on.

And in that category.

Yep.

Start with the raw material part.

As we said here a couple of times, but there are different setups nowhere with different customers and they.

They follow both different indices in different say renewal cycles.

So our target is really that we have.

The balance between that our cost side and on our customer side.

That does not have a significant impact on our margin going forward, but we have a good.

Our balance here between price and cost.

Boston Doctor, if not to forget I mean.

Indicating that we are now.

We have <unk> on materials here on about half the portfolio knock knocked on more than that so the other half is down still.

Being negotiated and does not fall away and the type of.

Indexation or closer stepped up here.

And then on the non raw material.

It is a significantly smaller part that is or how it test burdened our cost structure so far.

On.

Utilities as we sit here, it's around 1% of our cost base and then we've seen or do we expect for this year to have maybe a 10 basis point increase on them.

On utilities.

As freight and labor are a significantly stronger headwinds.

That that we're facing.

The focus is really not there for us to also have fact based discussions yet with our customers and to be and you have to be able to.

Get the offset also for these class types.

Okay, Great and just lastly can you maybe just give us an update on where you stand on the Digitization and automation initiatives.

What what you're looking at it in terms of.

Implementing that in over the near term.

No I think we have a hold onto to our what we call the strategic Roadmaps, where they get realization I don't think <unk> as a part of them and I think that's a very important too to do that even though we have a lot of challenges are short term here.

And in the market.

And we are progressing according to plan, there and that of course.

It's also what's helping out gradually.

Each quarter.

Okay, well, we won't continue with them.

Thank you.

Thank you. Our next question comes from the line off campus envelope Handelsbanken. Please go ahead your monocytes.

Thank you very much.

Just wanted to.

You guys made me daily activity in Europe .

<unk> had some conversations with other sub supply has to do with the industry is saying.

Cancellations from the Oems.

That could be that they are now seeing better component availability, which means that they're slightly normalizing their inventory.

Well Stewart wants to review them.

Hum experience similar.

Maybe if I can.

I think as we said before here I mean, we have seen a improvement when it comes to the volatility.

But I would say, it's still it's still issue and far from from normalized so that's ongoing.

Of course, the volumes are also have stabilized and improved on an absolute level compared to.

The previous quarters here, so we're moving into right direction, but it's still far from from normalized here.

And it's clearly so that I mean, yes.

Semiconductor availability has improved but we still see differences between the different customers. Here are some is a you can say almost gone and it's not the topic was on the others still are facing some some challenges that so it.

I guess it depends on the OEM here.

Okay.

Fair enough. Thanks.

Thanks.

Thank you and our next question comes from the line of C. J Rakesh Mizuho. Please go ahead. Your line is open.

Yeah, I guess, just just to beat a dead horse again on the pricing side I'm just wondering as you look at your price adjustments in the summer.

And this is and on a rolling basis, I guess, but are you seeing like 2000 1920 as a base for us.

All of these price increases.

Are they more tied to where pricing is now which means that.

Pricing starts to come down it could be it could impact your future pricing can you can you talk to how what what's the starting point, what's the base.

Pricing you're using.

Yes, it's a good point.

Of course, if you don't if you're not on a set up like that.

And then you'll have to jump on to the index you need to make sure that you have to get the right price compensation. That's what we've been extremely focused on so it's for US it's been really about getting the right height on these adjustments to compensate for that.

But basically that.

The evolution that we had to absorb them for it for a period of time here and Thats been a prime focus and as we've closed out an online, but we're at 90% plus.

Of these agreements I think we can also then would have to say that we have gotten very tight as we would have expected otherwise we would not have close them out.

Got it and so then as you look at 'twenty, three U N that pricing might come down, but still they could be fairly elevated you would expect still that can be a fairly good tailwind into 'twenty three as well right.

It's I think it's too early to tell about.

The way that the indices look right now it would indicate that the cost would come down and then that would also then lead to.

An adjustment on the pricing side or vice versa.

And then really hear our ambition is that is that.

We have a better balance between the cost and the pricing development.

And also that this is reflected in a reasonable amount of time and that that reduces our risk profile as a company.

So that's what it has been on my question here.

Got it last question on the inventory side when you look at your OEM customers and the channel can you talk to how inventory levels are.

Improving our if theyre not either sequentially or year on year. If you can give us some color. Thanks a lot.

Actually the main problem for us at the moment is more on the raw materials side.

More on the incoming inventory levels.

And that's where we have.

The larger problems due to still rather.

Distressed supply chains.

And then also longer lead times, so that has been the larger issue for us.

Then of course also the call of volatility.

It causes inefficiencies on the finished good side, but that is not a large problem year over year, I mean that was actually even worse last year than this year.

Got it thank you.

Thank you next question comes.

Alright.

Yeah.

Okay.

Yeah.

Yeah.

I think we're out of time here. So I think we should close the call maybe.

Of course, I'll hand back to you for the closing comments.

Okay. Thank you Mark.

Before we end today's call I would like to say that we are continuing to build resilience and strength in terminal times relying on our strong company culture. Our actions are creating both short term and long term improvements and we believe these actions had a blast to build an even stronger position despite the challenging macro environment.

We remain a John and prepared for a more adverse market development should it be necessary.

<unk> continues to focus on our vision of saving more lives, which is our most important direct contribution to a sustainable society. Our fourth quarter earnings call is scheduled for Friday January 27th 2023. Thank you everyone for participating in today's call. We sincerely appreciate your continued in <unk>.

Dressed in outdoor live until next time stay safe.

Yeah.

Okay.

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