Q2 2023 Autoliv Inc Earnings Call
Okay.
Good day and thank you for standing by welcome to the <unk> incorporated second quarter 'twenty 'twenty suite financial results Conference call. At this time, all participants are in listen only mode.
After the speaker's presentation, there will be the question and answer session.
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Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your first speaker today August trap. Please go ahead.
Thank you and Nordea.
So it won't come everyone to our second quarter 2023 earnings call.
On this call we have our president and C E O.
And our Chief Financial Officer Christine.
Understood.
<unk> Investor Relations.
During today's earnings call me call them Fredrik wind among other things provide an overview of the strong sales earnings and cash flow development, we had in the second quarter.
The structural cost reduction activities that we're doing to secure a longer medium term competitiveness.
And also the expected sequential margin improvement that we see in Q3 and Q4 of this year.
That's why I will provide an update on our general business and market conditions as always we will then remain available to respond to your questions and as usual the slides are available at all to leave the call.
Turning to the next slide.
We have the safe Harbor statement, which is an integrated part of this presentation and includes the Q&A that follows.
During the presentation, we will reference some non us GAAP measures.
The reconciliations of historical U S GAAP to non us GAAP measures are disclosed in our quarterly press release available on <unk> Dot com.
In the 10-Q filed with the SEC.
Lastly, I should mention that this call is intended to conclude at three P. M. Central European time. So please follow a limit of two questions per person.
Now I'll hand, it over to our Chief Executive Officer.
Yeah.
Looking on the next slide.
I would like to start by thanking our employees for their great contributions.
We saw continued improvement in customer call off volatility in the quarter, but still higher volatility than pre pandemic levels.
We believe this reflects an improving global supply chain environment for both our customers and suppliers.
Our organic sales grew by close to 27% outperforming light vehicle production significantly in all regions.
This strong growth was a result of product launches.
Higher safety content per vehicle and that we achieved the customer conversations we planned for in the quarter.
Our profit margin development was in line with what we had expected.
As customer call off volatility improve.
We lowered our cost base and as we successfully negotiated the planned customer compensations related to the inflationary pressure.
We achieved a record operating cash flow for the second quarter, driven by an improved adjusted operating income and a reversal of the negative working capital effects from the first quarter.
Our debt leverage ratio decreased to one three times from 1.6 times a quarter ago.
This supports our shareholder returns ambitions.
In the quarter, we paid 66 cents per share in dividends and repurchased and retired 475000 shares.
We also announced the acceleration of our structural cost reductions.
I mean at simplifying our logistics and geographic footprint.
As part of this we recently announced the head count reduction of around 1100, mainly indirect employees with further actions to be announced as plans materialize.
We continue to expect the gradual improving adjusted operating margin during 'twenty to 'twenty, three with significantly greater price compensation and under recoveries in the fourth quarter compared to the third quarter.
We continue to be in the forefront of safety technology development.
Which has helped us keep momentum in our new order intake year to date.
A great example of new innovations in the revolutionary New Bernoulli airbags that we presented at our Investor day in Detroit in June .
It is based on the Bernoulli principle.
Now looking at the significant sequential cost improvements on the next slide.
The meaningful steps, we took in the second quarter supports my confidence in sequential improving adjusted operating margin towards our full year indication.
This of course also supports our journey towards our medium term targets.
On this slide we highlight the sequential improvements.
In the quarter, we actively addressed our cost base and investment level.
And negotiated with our customers to secure pricing and other compensations that reflects the high inflation.
Our labor efficiency continues to trend up supported by the implementation of our strategic initiatives, including optimization and digitalization.
Our gross margin improved by 180 basis points compared to the first quarter as a result of the higher labor efficiency customer compensations higher volumes and a more stable light vehicle production.
At the same time cost for audience.
And SG&A combined declined by 50 basis points in relation to sales.
Combined with the gross margin improvement this land to a substantial improvement in adjusted operating margin.
With a more stable vehicle production, we managed to substantially reduce our trade working capital as well.
As a result, our operating cash flow reached a new record level for our second quarter.
Now looking at the expected adjusted operating margin progression for 'twenty to 'twenty three on the next slide.
For the reminder of 2023, we expect a quarter by quarter improvement in adjusted operating margin.
We expect continued high year over year sales growth supported by launches higher light vehicle production and content per vehicle increases.
We anticipate that cost compensation from customers will continue to gradually offset cost inflation, especially in the fourth quarter.
The positive track III will be further supported by improvements from cost reductions as well as expected gradual improvement of supply chain and light vehicle production stability as.
As we have already seen in the second quarter.
The actions we are undertaking makes me confident in the gradual improving performance, which should allow us to deliver significant full year increase in cash flow and adjusted operating income.
Looking now on the announced structural cost reduction actions on the next slide.
To secure our medium and long term competitiveness and to support our financial targets, we are accelerating our global structural cost reductions, including a substantial reduction of our global workforce.
With a particular focus on our European operations.
These initiatives will continue to optimize our geographic footprint for a more effective structure, while reducing costs and driving improvements in margin and cash flow.
We intend to simplify and consolidate how we operate in all areas.
<unk> count reduction will affect people based in our offices technical centers.
And clients, including leadership positions at all levels.
As a first step we have accrued $109 million, primarily driven by our planned reduction of around 1100 employees.
This first step is expected to reduce costs by around $25 million in 2024, increasing to around $55 million in 2025 and to reach around $75 million when completed.
So other actions will be announced as plans materialize.
Looking now on our sales growth in more detail on the next slide.
Our consulate rated net sales increased by $2 6 billion U S dollar.
A record for our second quarter.
This was more than half a billion U S dollars or 27%.
Higher than a year earlier.
Driven by price volume and mix.
Out of period cost compensations contributed with approximately $38 million.
<unk> in the second quarter last year.
Out of period compensations are retroactive price adjustments and other compensations that mainly relate to the first quarter.
But were negotiated in the second quarter.
Looking on the regional sales split Asia accounted for 37%.
Americas, 435, and Europe with 28%.
The China share increased to 19% from 17% last year.
When China was largely closed due to Covid lockdowns.
We outlined our organic sales growth compared to light vehicle production on the next slide.
I am very pleased that our organic sales growth significantly outperformed global light vehicle production growth in the second quarter.
As we continue to execute on our strong order book and successfully achieved the targeted customer compensations.
According to S&P global set.
<unk> quarter light vehicle production increased by close to 16% year over year.
This was 250 basis points higher than the expectation at the beginning of the quarter.
We outperformed global light vehicle production by around 11 percentage points in the quarter.
We outperformed in China by 23 percentage points.
India Pan by 'twenty two.
At this point and in rest of Asia by 13 percentage points.
Compared to the first quarter, our sales increased by 6%.
Twice as much as the light vehicle production growth.
We expect the positive year over year sales growth trend to continue and we expect to significantly outperform light vehicle production for the reminder of the year.
Looking now on financials in more detail on the next slide.
Yes.
The strong sales increase led to a substantial improvement in adjusted operating income.
Excluding effects of capacity alignment antitrust related matters and a litigation settlement adjusted operating income increased by more than 70% to $212 million from $124 million last year.
The adjusted operating margin was 8% in the quarter and increased by two percentage points from the same period last year and by two seven percentage points from the first quarter.
Operating cash flow was $379 million, which was more than 400 million better than the same period last year as well as from the first quarter of 2023.
Fredrik will provide further comments on our cash flow later in the presentation.
On the next slide we see some key model launches from the second quarter.
In the quarter, we had a high number of product launches, especially in China.
The models shown on this slide have an alternative content per vehicle from approximately 150 to close to 400 U S dollars.
These models reflect the changes seen in the automotive industry in recent years.
With several relatively new Oems represented and that five out of nine are available as pure evs.
In terms of our two lead sale downturn, the Mercedes E class launch is the most significant.
The long term trend to higher CTV is supported by front center airbags reassigned airbags and pedestrian protection.
<unk>.
For the full year, we expect a record number of launches.
By region, we see higher number of launches in China, South Korea and Europe .
I will now hand, it over to our CFO <unk> <unk>, who will talk about the financials on the next few slides.
Thank you Michelle.
This slide highlights our key figures for the second quarter of 2023.
<unk> to the second quarter of 2022.
Our net sales were $2 6 billion, which was a 27% increase.
Gross profit increased by $121 million or 37% to 447 million, while the gross margin increased by one three percentage points to 17%.
The gross profit increase was primarily driven by price increases volume growth and lower costs for premium freight.
This was partly offset by increased costs for personnel related to volume growth and wage inflation as well as adverse effects from unfavorable exchange rates and energy costs.
In the quarter, we made a total adjustment of $118 million to the operating income of which $109 million for capacity alignment activities and $8 million related to a litigation settlement.
The adjusted operating income increased from $124 million to $212 million.
And the adjusted operating margin increased by two percentage points to eight zero percent.
Laying more when we go through the operating income bridge later.
The operating cash flow was $379 million.
And the adjusted earnings per share diluted increased by 103 cents were the main drivers were 69 from higher adjusted operating income and 35 from Texas.
Our adjusted return on capital employed and return on equity increased to 21% and 25% respectively.
We paid a dividend of 66 per share in the quarter and repurchased and retired around 475000 shares for $41 million under our stock repurchase program.
Looking now on the adjusted operating income bridge on the next slide.
In the second quarter of 2023, our adjusted operating income of $202 million was $88 million higher than the same quarter last year.
Our operations were positively impacted by improved pricing and other customer conversations higher volumes lower costs for premium freight as well as our as our strategic initiatives, partly offset by the significant headwinds from general cost inflation.
The impact from the raw material prices was limited.
Foreign exchange impacted the operating profit negatively by $19 million. This was mainly as a result of negative transaction effects from the Mexican peso.
Costs for SG&A and <unk> net combined was $25 million higher mainly due to higher personnel costs and projects.
Out of period cost compensation contributed with around $30 million about the same as in the second quarter last year.
As a result, the leverage on the higher sales, excluding currency effects and a patent settlement in 2022.
Was in the middle of our typical 20% to 30% operational leverage to reach.
This is despite not getting any leverage on the inflation compensation from our customers.
The actions, we're now taking that <unk> talked about previously should lead to higher operating leverage and profitability as the year progresses.
Looking now on the cash flow on the next slide.
Okay.
For the second quarter of 2023 operating cash flow increased to $379 million due to improved adjusted operating income and a reversal of the negative working capital effects from the first quarter.
During the second quarter working capital improved by $230 million, mainly due to accruals for capacity alignments and reduction of trade working capital trade.
Trade working capital was reduced by $117 million, driven by $161 million and higher accounts payables.
$9 million and lower inventories and was partly offset by $83 million and higher receivables.
Capital expenditures net decreased to $124 million from 139 million the previous year.
Capital expenditure net in relation to sales was four 7% compared to six 7% a year earlier.
Free cash flow was $255 million, which is 455 million higher than a year earlier.
Our full year indication of an operating cash flow of $900 million is unchanged.
Now looking on our leverage ratio development on the next slide.
The debt leverage ratio at the end of June 2023 improved by 0.3 times to one three times compared to a quarter earlier.
This was a result of $185 million lower net debt and $91 million higher 12 months trailing adjusted EBITDA.
The current stock repurchase program authorizes the company to repurchase up to $1 5 billion U S dollars between January 2022, and the end of 2024.
Under the program out to leave is currently repurchased two 4 million shares for a total of $197 million.
We're considering several factors when executing the program such as our balance sheet, the cash flow outlook, our credit rating and the general business conditions, not only the depth leverage ratio.
We always strive for the balance that is best for our shareholders, both long and short term.
I'll now hand, it back to you when we can.
Thank you for your Rick now looking at the next slide.
Yeah.
Our supply chains have improved in many regions vehicle demand and inventory restocking or now the main drivers for the market development.
The third quarter Global light vehicle production is now expected by S&P global to decline by 4% compared to last year.
Compared to the second quarter volumes are expected to be about 5% lower.
Mainly due to normal seasonality from summer shutdowns.
Despite concerns surrounding elevated vehicle pricing in some markets.
Deteriorating credit conditions global full year 2023, nice vehicle production is predicted to be increased by five 1% to close to 84 million vehicles.
Light vehicle production in China continues to show relative strength, owing to both a strong EV.
<unk> demand and export activity.
MVP in North America is protected by S&P.
Global to increase by more than 8% in 2023.
This is three percentage points higher than the S&P forecast three months ago.
However, there are concerns around the upcoming union negotiations.
Production in Europe continues to outperform expectations, although 2023 volumes are two launched extend secured by inventory restocking and the reduction of OEM sales backlogs.
We believe underlying demand.
That somewhat.
We based our full year sales indications on our global light vehicle production growth over around 4%.
Looking at our 'twenty to 'twenty three financial indications on next slide.
Okay.
Except for the currency translation effects, our full year 2023 indications are unchanged.
And exclude costs and gains from capacity alignment antitrust related matters and litigation settlement and other discrete items.
Our full year indication is based on the light vehicle production growth assumption of around 4%.
We expect sales to increase organically by around 15%.
Currency translation effects are assumed to be around positive 1%.
Instead of earlier assumptions of negative 1%.
We expect an adjusted operating margin of around eight 5% to 9%.
Operating cash flow is expected to be around $900 million.
Our positive cash flow trend should allow for increasing shareholder returns.
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 from analysts and investors.
Now I'll hand, it back to Nokia.
Thank you so much participants as a reminder to ask a question you need to press star one on your telephone keypad and late planning to be announced to be killed. Your question. Please press star. One again, please can babble will compile the Q&A roster. This will take a few moments.
Okay.
Okay.
Now we're going to take our first question and the question comes from the line of M&A of the Rosner from Deutsche Bank. Your line is open. Please ask your question.
Okay.
Alright. Thank you so much for taking the question.
So.
First one is really around the.
MVP assumptions in an environment I think you.
You have improved I think your assumption.
A little bit maybe 4% for the year I think previously you were maybe looking at like 3%.
At the.
At the same time I think you were mentioning in some of the comments some of the.
UAW risks.
We're incorporating are you baking in something.
Isn't it.
<unk>, 4% on your.
Assumption versus maybe 5% SMT is it because of.
Incorporating maybe some cushion in case there is some production losses from <unk>.
UAW strike is this in your guidance.
Thank you for the question there.
When it comes to our light vehicle production outlook here as you said, we have increased it from three to four as we had seen.
The development of the light vehicle production year to date and also of course, we are.
Relating it to the S&P numbers that you know is also.
Significantly higher than.
It's higher than what it was in the beginning of the year on day are now looking at 510.
With that said it means that we continue to have.
Slightly more conservative view than S&P.
Still so.
When we started the year at three we were also done making some some risks that we saw there so I think.
Of course the UAW.
Yes.
Could be there, but I mean, as we have a very well.
Diverse.
Portfolio here in the U S is about America, it's about a third.
Dan start to narrow down the.
The Oems that could be.
In the.
Uh huh.
Situations, where it could impact of light vehicle production, it's still a smaller part of our portfolio. So I would say all in all you.
You have that.
Baked into the number here, but for us also.
Okay.
Very comfortable when it comes to our overall view for the full year here.
And as a quick follow up.
Yeah.
As a quick follow up to this you left your organic growth.
Outlook unchanged despite.
The better MVP.
Function is there what is the offset here.
No I think it's it's a it's no big.
Thank you.
I would say question around that I would say I mean, it's.
A marginal improvement our LDP.
Upgrading it with one percentage points on and yeah. So.
So.
You Shouldnt read anything to it.
Yeah, it's more let's call it rounding question here.
And then a question on margin increase I would be my last question.
So I think you made several comments as well as in the slide around reflect.
Some level of backend loading between <unk> and <unk> because of seasonality and some of the negotiation just curious if it's sort of like.
More so than expected before thinking in the past you had said that throughout the year your margins will improve sequentially by about two points or so each quarter throughout the year more or less.
Are you now, saying that they would be less so in <unk> and much more in the fourth quarter or is it sort of like <unk>.
The same type of framework, just that the fourth quarter, a higher margin than necessary.
I think I mean.
As you know, we don't guide per quarter here, but what we referred to was that a sequential development throughout the year should be similar to what we had last year in 2022.
What we also want to remind.
You all about here is of course first of all the seasonality that we always have between Q3 and Q4, where Q4 is is the stronger quarter, where we have a lot of the engineering income.
Towards.
As one example.
We are progressing here with the price negotiations with suites.
At least up until now have not been ordinary course of business here.
We have.
I mentioned before that it's some calendar time here and we think it's important here that we.
Managed through those processes and negotiations with the customer in a thorough way and that could mean.
You have it more backend loaded.
In in the second half will be similar to what you saw in the first half of the year here also where we had a stronger Q2 in relation to Q1.
As we are progressing with the negotiations.
Okay. Thank you very much.
Thank you.
Now, we'll take our next question.
And the next question comes from the line of Bjorn <unk> from Danske Bank. Your line is open. Please ask your question.
Thank you and on the negotiations if you can talk a little bit about how the compensation looked like.
In the first half and in Q2.
How much and what kind of compensation you did get that many are talking at the.
Pricing.
Lump sum or what have you and that also.
To put that in perspective.
What kind of expectation you should have that for the second half. Thank you.
Yes.
As always we don't disclose.
Any details around the settlements that we have achieved there, but we can say that they are in line with our expectations for the first half. So both in terms of timing, but also in terms of height.
We're expecting here.
There are because this is not morris inflation related industrial material innovated, a there is a higher share of the lump sum.
Couple of months or.
Conversations now than what we had last year, we estimate the vast majority of last year was piece price adjustments. There is now a higher share of lump sum.
Components in these negotiations are they in the outcome of that.
And for the rest of the year, it's still that are still outstanding negotiations.
Related to inflation, but also other components that we are negotiating.
And Thats, what Michelle alluded to here that we want to secure ourselves. The right time here to also then be able to successful lease negotiations at the right height.
Okay perfect.
Clear and if I may ask a second question you also talked a little bit about the demand situation and you are still below.
S&P.
That's.
I would assume I mean, we are in the middle of a catch up now as we see volume from Oems.
Saturday are very very strong.
Hey.
Would you have a view on where the underlying demand.
I mean, if we would not have had the sourcing prices following the COVID-19 situation.
No I think it's no I wouldn't say number or so, but I think definitely that.
We ended the last couple of years.
Shortfall you could say in terms of delivering in line with.
The current demand there.
Sure have a backlog and we also have.
Uh huh.
Backlog when it comes to refill the pipeline.
The inventory levels for example in the U S where it still historically low I would say, it's probably a half of what it normally is so so there is a significant.
Volume that too.
<unk> dealt with and if you look at the 2023 current LBP outlook here, we will still 25% below.
<unk> 17, 2018 volumes in Europe , and in North America, we are below it.
Roughly 12% so.
We are coming from from a low level here, we are still at a relatively low level I think.
The delta between the underlying demand in the current.
Look when it comes to production levels gives me I would say relative comfort.
We are more.
On safe ground here when it comes to potential risks.
In relation to the outlook here. So we don't so I will say that.
The Conservative view, we have a relative S&P's number here I think we.
We stand.
Confidently on the LPT.
<unk> levels that we are using it for our own forecast.
Perfect. Thank you.
Thank you.
Now we're going to take our next question.
Thank you Ms Amendment.
Yeah.
And the next question comes from the line of Chris Mcnally from Evercore. Your line is open. Please ask your question.
Thanks, so much I appreciate the details.
I'm just going to follow up on our manuals question, if we step back and looks at the beginning of the year. It sounds like from your comments production trending one maybe 2% better.
The UAW content per vehicle first half, 13%, 14% sort of better than the 11% Youre guiding implies some deceleration.
The back half an hour.
I wanted to focus on what's been the negative development that we know about the peso, maybe $60 million or so for the for the full year curious if theres anything else.
Thats been.
Headwind from the beginning of the year because it is not it seems like there is some revenue upside.
That clearly would push you may be towards the upper end of your margin targets.
Yeah, I mean, as you said FX has a spin.
Headwind that has been larger or larger than we had expected initial of the year you see here is close to $20 million.
In the quarter after a negative also in the first quarter.
$15 million of that $19 million negative transactional effect from the Psoe load. So so quite significant for us.
And from what I can see it from where the PSS how the pieces moving right now there is not an indication that that this.
Yes, improving for us.
So that is one component and then we've also had some supply chain issues, even though the overall situation continues to improve.
Did have two isolated cases, one with the fire.
One of our suppliers in Europe and then.
Some capacity issues forever, the largest supplier for us in North America, and they also impacted the quarter here.
Not so much in premium freight, but in the inefficiencies and are set up in our productivity levels in the pounds.
And also your huge workload here too.
Then move.
The the volumes to other suppliers during the quarter so.
So yes, we've also had some headwinds here.
And the FX part, we don't think that our estimate is based on exchange rates as of end of May.
That would then imply that there is a continued headwind from exchange rates for the rest of the year.
That's very helpful, particularly on the idiosyncratic kept supply issues in Q2 and the second question I have is more macro around some of your comments on EU caution scheduled second half.
There definitely is a little bit of this mixed message out there from the European OEM.
Concord order weakness I think we all see the German.
French order data out there, but I think what's sort of perplexing for at least from my side as we add those comments in Q1.
Well the backlog weakened in Q4.
Q1, but if you look whether its sales.
Sales regs, they improved from Q1 to Q2 orders tend to convert.
In two to three three months and also about restocking it looks like sales and production trending that plus 10%. So can you just help put a little bit of color to this idea of order.
Weakness because it seems like a little bit of a boogeyman argument thrown out by the Oems I mean, obviously, the consumer's week in Europe , and we just don't see it in the rags in Q2.
No.
Thank you.
Hey.
From our horizon, there is nothing there.
Indicate.
The weakness youre, referring to Darren.
Of course.
To comment to what you.
I have heard from from the Oems here, but.
I can only.
Say, what we said here about our own perspectives here and that is that we feel comfortable with.
The outlook, we have for the rest of the year here getting to the.
Organic sales growth of around 15% for the full year and we have nothing.
Alex to say around that.
Okay very helpful. Thanks, so much.
Thank you.
Now ill go and take our next question.
And the next question comes from the line of Colin Langan from Wells Fargo. Your line is open. Please ask your question.
Oh, great. Thanks for taking my questions.
On the structural cost reduction plan.
The slides say, it's $75 million I just wanted to clarify is that just for the thousand that were announced this week.
So there would be more related to the full 11% are trying I think it's around 8002nd direct to indirect workers are or is that actually the whole plan is to make sure I'm comparing.
Only what has been communicated so far.
The last.
And also we made here are registered the 1100.
The $100 million associated restructuring costs.
With that.
And then you have the expected phasing here after the.
The savings that go in hand with that so there's more to come.
We have booked around half of the restructuring costs that we were.
Would expect for the total program at this point.
Got it. So 75 is the savings of just 1100 workers, but the total plan is going to be close to 8000 workers.
Right around that.
And Chris its 2000 indirect towards salaried.
And then 6000 to restore our productivity in on the direct labor side.
Yeah.
And the $1100 that we mentioned now in the first step is majority is indirect to this also a smaller part of direct labor.
So there's more to come in further steps, but as I said the restructuring cost we expect for the total program.
We are about halfway through on that.
Okay, and then just going back to the recoveries any color on how much or what percent are completed at this point and how much is sort of left to go I think in the past it sort of on your own 50, 60% or.
Where do you kind of stand now.
I can't give you a number on that does we are.
In an ongoing discussions with our customers here, but what we can say is that we have compensations.
We'd all basically all the customers here. So it's a it's a new way of working here in this environment and we are taking it step by step here in <unk>.
We are engaged in dialogues Oh.
One on the different components here that we have talked about with all our customers. So we are progressing according to our plan.
Hello.
Okay got it alright, thanks for taking my questions.
Thank you. Thank you.
Now I will go and take our next question.
Please give us amendment.
And the next question comes from the line of Michael Jack from Bank of America. Your line is open. Please ask a question.
Hi, Good afternoon. Thanks for taking my question, just one or two follow ups on the restructuring topic.
Just to be clear.
The roughly 100 million that you've just booked equate to half of the total restructuring cost indication is that youre actually headed for an outcome, which is closer to a one year payback periods within that 1% to bracket that you initially announced.
And then just to clarify on timing at the C. D. I got the impression that the restructuring program would contribute.
Quite significantly more to the training training for earnings outlook.
I had penciled in somewhere closer to I think $75 million to $100 million and can you just help us to understand a little bit more on the timing and.
The sequencing of it or the sequencing around how the restructuring process is like two banking to follow from here and then just one final question if I may.
On pricing, how much did price contribute to organic growth in Q2. Thank you.
Yes. The second question again, we will not provide any further breakdown here on what the pricing component Warsaw, the price compensations or cost compensations that we got in the in the quarter.
But on your first question. So we took a 109 million restructuring charge in the quarter.
And.
As I indicated this is around halfway through a 440 <unk> think that the total cost for the program will be.
No.
The steps that we don't announce in the first wave of this but this announcement there are two site closures included here.
Site closures, one in Germany, and one in the U K and they have by nature longer payback time.
And still with that we expect that we have savings profile here of 25 million next year of $55 million a year. After and then the run rate of 75.
The cash outflow.
We expect around 50 million next year, and then around $40 million the year after.
So the payback time is related to the cash outflow is in the one to two year range that we have given here.
And then we will communicate the next steps here when they are ready to be communicated.
And then provide also further details.
When we communicate those steps.
Yes.
Understood. Thank you very much.
Thank you. Thank you.
Now we're going to take our next question.
And our next question comes from the line of mid tier comeback from Dnb markets. Your line is open. Please ask your question.
Thank you so much first of all I would just like to clarify on Bjarne. Your question I just wanted to make sure that I heard you right that you said that a larger share of the price negotiation this year, where lump sum compensations and I'll share more on the permanent price adjustment side and if that was the case.
Does this mean in terms of stickiness of these price increases.
You mean, the deflation is sticky would that mean, you would need to sort of re negotiate to get further.
Compensations.
So as I said here I mean, this is a little bit then the new way of working together with our customers here as we are in this.
Clarence.
Let's call it inflationary environment here.
I think it's very important to remember also that of course, what we trying to do here and are doing is mirroring the balance between.
The impact from our suppliers.
And our customers. So of course, when we say we have a lump sum compensation with our customers.
We will.
Lump sum situation with our suppliers so depending on what the type of compensation we get.
Got it.
Got it.
It's following of course in both both sides of our.
The P&L statements here.
So that's the important thing for us is to keep this balance.
Correctly.
And I would say that also it depends on the type of approach to different customer house, but you asked because it's lump sum it doesn't mean that it's a <unk>.
Less stable versus piece price per se because you can say is that some have been thats operating model structure and we come back to it and it's a very natural part of the discussions if your other piece price of course that also depending on what the reason for the piece price adjustments.
Uh huh.
It has some some flexibility into that also when when the recent comes down so to speak. So so I should not be spending too much time on the question around lump sum pretty surprised here because it's the overall balance that is the important part here.
Something we are.
Uh huh.
Keeping a lot of focus on of course.
Yeah. That's clear. Thank you a quick second one if I may.
At the capital markets Day, you you said I think you had about $900 million in capacity for shareholder returns this year.
Do you still think this number is relevant to realistic but can you tell us anything more topical to understand better why the run rate of the buybacks are quite far off this level.
What we wanted to illustrate with that calculation was more of the.
So the balance sheet capacity that we would have in place, but it was it was not any type of indication of what we would.
Buyback this year or any any commitment in that sounds. So it was just too to show.
If we deliver on our.
The guidance here for.
The year of what that would.
Could mean in terms of capacity for share buybacks.
We are committed to the $1 5 billion mandate that we have but again. This is that is also a a guidance or anything it's simply a.
A service station that we have from our board.
We are or we can buy back up to one $5 billion until the end of next year.
Thank you.
Thank you.
Now we're going to take our next question.
Okay.
And the next question comes from the line of Dan <unk>.
<unk> from Barclays. Your line is open please ask a question.
Hi.
Good afternoon. Thank you for taking the question.
Wanted to just first ask with the improved environment and reduced call offs and better stability.
You mentioned that your operating leverage was in line with the typical operating leverage you said that there was some.
That was partially driven by recoveries.
Recoveries, but now that we have this very improved environment to what extent could we see you at the upper end of that typical 20%, 30% operating.
Leverage and how long is the runway on maintaining potentially a higher.
Incremental margin.
Yes.
Indicated during the presentation.
You adjust for FX and then the.
Patent settlement, we had last year, but the benefit of that from the last year, we were in the middle of the 20% to 30% range.
One component that does not allow us to pull through at a higher leverage rate is the fact that we don't get any margin on the cost compensation, we get from our customers. So these negotiations are very much around the legal structure.
<unk> costs that have impacted us.
And Thats what were putting on the table, but we very rarely get a margin upside on those costs. If you would adjust for that lack of margin.
And the central station.
We will be closer to 30% on the leverage side.
Is that type of level and I realize there's going to be some lumpiness around the recoveries, but is that type of level something thats sustainable for the foreseeable future or is that sort of unique to this particular period.
I think it goes back to many discussions we've had around this topic.
A lot depends on the type of volume growth that we would face benefits.
And market growth and we just grow into it.
Our existing.
Footprint and capacity then it would be at the higher end of that range. If it is through launches and market share than it is at the lower end of the range.
And as we indicated here that we have a record level of launches. This year. We also expect a.
The contribution from market share gains this year, which would then indicate that the leverage on that volume is at the lower end of the range.
Your SG&A and R&D, both rising, but as a percentage of sales that ratio is coming down how should we think about the.
SG&A and R&D.
Going forward.
Your release talked about increased.
Personnel project for SG&A.
Well youre going to have some offsets from.
The head count reductions, but what should we think about the trajectory of SG&A and R&D.
And yes, I mean, I think we could display he already that.
Compared to the first quarter, you've seen a sequential improvement and we are very focused here on controlling both the SG&A inordinate costs also going forward.
And yes.
Also the head count reductions, we're doing as we're indicating where we're looking at all levels in the company all functions that would also have an impact on SG&A in <unk> going forward.
And the increases we've seen so far has been very much loss inflation driven on the labor side.
To some extent also higher head count to support the volume growth.
Revenue should we expect that percent to decline presumably.
Yes.
Well.
As I said when we were very focused here on the cost side, you have seen that as a percent of revenue improved sequentially.
And we're focused on the cost in the company.
So yes.
Could improve.
Thank you.
Thank you.
No I was going to take our next question.
Yes.
Yeah.
And our next question comes from the line of Rod Lache from Wolfe Research. Your line is open. Please ask your question.
Thank you hi, everybody.
I appreciate the <unk>.
Indication of the Q3 and Q4 margins that you provided on slide five.
And it sounds like.
There are lump sum payments of some kind.
Those Q3, and Q4 margins, but they should be viewed kind of as recurring lumps.
Kind of like a surcharge for costs at these levels.
I guess I'm just wanting to clarify.
Are you basically saying that you now have a mechanism for passing.
Along a broader scope of of course.
Going forward and is there any part of these expectations for Q3 and Q4 that are in fact retroactive adjustments. So should we shouldn't extrapolate from the fit.
The level of margin that you're you're specifically expecting in the second half.
No doubt there is elements of retroactive.
The attractiveness there.
Yes.
The.
The question about lump sum piece price.
It's not the big question regarding.
The Q3 Q4.
So if we call it that.
Because I mean, regardless, if it's a piece price.
Lump sum.
It takes place when it takes place based on when the negotiations will conclude and I have the same quarter effect. So to speak. So so it does not relate to drive this driver is more or less at this when we concluded negotiations regardless, if it's a piece by some lump sum.
And then on the lithium recurring of the lump sum you could say that I mean, we are developing a way of working together with our customers here, but it's still.
A question around evidence driven negotiation so to speak so that's why it takes so long.
Time also in terms of calendar time here.
Because we are going through the various impacts that the card.
Basically on the plant on a component level. So so that is what's taking the time, but you can say.
It's a smooth discussion as we all know been practicing this for awhile.
Okay can you give us any indication of the extent to which.
The back half includes retroactive kind of out of period gains I'm, just asking because you.
You might look at these numbers and say that it's pretty impressive in and at least.
Supportive of these.
Longer term targets are midterm targets that you've been talking about at an 85 million unit production rate.
But you can we can we look at those as indicative of.
Of the run rate profitability or just any indication of what is out of period.
No I think it's really the full year.
I mean, the conclusion of the full year that really speaks to it because.
The important thing here is that we have this development. According to our plan and we are gradually seeing the improvement when you. When you look back so I mean the horse.
Yeah.
12 months Rolling is giving you some some indications there but.
So I think it's too difficult to draw too many conclusions on on Q3 Q4.
Prioritization here.
This week.
And just lastly.
The pace of buyback so far has been progressing somewhat slowly just relative to the one 5 billion authorization.
Can you just give us any.
Any thoughts on how you were thinking about that and how whether that one 5 billion through the end of next year is is a magnitude that is.
Indicative of something or or.
I guess, how are you going to make the decision about the magnitude of buybacks going forward.
It's the same.
We have appropriate so for I think I mean, we are moving forward with our program here in the US <unk> said here and we also said that the.
Investor Day here in June is that we are committed to this program and I think what <unk> tried to show where also reiterated here is our ability to generate liquidity to to progress with this plan and what we need to consider here of course is also how how the world around us.
Developing and that is.
Yeah.
Of course looking back to Wendy's program was launched on where we are now the last.
Year.
Two years has been quite.
Volatile and challenging and of course, we have continued with the program, but with some cautiousness considering all the different parameters.
We're alluded to before year end.
We move forward, we will continue to assess that but we.
We are having high ambitions when it comes to this and I think what we showed here today with our cash flow generation and also our outlook gives us.
Good basis for them.
Continuing here with.
With good progress.
Okay alright, thank you.
Thank you.
Yeah participants. Thank you very much for all your questions today I would now like to hand, the conference over to your Speaker, Michael <unk> for any closing remarks.
Thank you Nadia.
Before we end today's call I would like to say that we are continuing to execute on productivity and cost reduction activities. Our actions are creating both short term and long term improvements.
Is visible from the steps we took in the second quarter two.
Together with the announced accelerated structural cost reductions. We believe these actions will enable us to build an even stronger position long term.
<unk> continues to focus on our vision of saving more lives, which is our most important direct contribution to a sustainable society.
Our third quarter earnings call is scheduled for Friday October 22023.
Thank you everyone for participating in today's call. We sincerely appreciate your continued interest in our go live.
And until next time stay safe.
That does conclude our conference for today. Thank you for participating you may now all disconnect have a nice day.
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Okay.
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