Hello and welcome to the Q2 2021 Autoliv, Inc. Earnings Conference Call. [Operator Instructions] And today, I am pleased to present Mikael Bratt, CEO. I will now hand the call over to Anders Trapp, VP Investor Relations. Please begin the meeting.

Thank you, Naz. Welcome everyone to our second quarter 2021 financial results earnings presentation. On this call, we have our President and CEO, Mikael Bratt and our Chief Financial Officer, Fredrik Westin, and me, Anders Trapp, VP Investor Relations. During today’s earnings call, our CEO will provide a brief overview of our second quarter results as well as provide an update on our general business and market conditions. Following Mikael, Fredrik will provide further details and commentary around the financials. We will then remain available to respond to your questions. And as usual, the slides are available at autoliv.com. Turning to the next slide, we have the Safe Harbor statement, which is an integrated part of this presentation and includes the Q&A that follows. During the presentation, we will reference some non-U.S. GAAP measures. The reconciliations of historical U.S. GAAP to non-U.S. GAAP measures are disclosed in our quarterly press release and the 10-Q that will be filed with the SEC. Lastly, I should mention that this call is intended to conclude at 3:00 p.m. Central European Time. So, please follow a limit of two questions per person. I will now hand over to our CEO, Mikael Bratt.

Thank you, Anders. Looking now into the Q2 2021 highlights on the next slide, the COVID-19 pandemic continues to affect us in several ways. And I would like to acknowledge our employees for their hard work and commitment to health and safety. While managing a strong consumer demand for new vehicles, the automotive industry continues to battle with the semiconductor shortage and other component supply disruptions. As a result of the shortage, global light vehicle production in the quarter was 8% lower than what was expected and 8% lower than in the first quarter according to IHS market. Considering these headwinds, I am pleased with our second quarter’s strong sales growth and our outperformance versus light vehicle production. The lower-than-anticipated light vehicle production, rising raw material costs and the large changes in customer call-offs with short notice negatively impacted our profitability in the quarter. Frequent production changes from our customers with short notice limited our ability to use furloughing to mitigate the effects of the lower demand. Although the situation improved towards the end of the quarter, we still expect supply disruptions to impact light vehicle production for the rest of the year. Our performance further improved our debt leverage ratio which is now close to our target of 1x EBITDA. We continue to evaluate opportunities for shareholder value creation. I am also pleased that we have reinstated a quarterly dividend which for the second quarter was declared and paid at $0.62 per share. The industry’s level of sourcing of new orders has normalized and I am pleased with our win rate. We took an important step by setting ambitious climate targets, which include plans to become carbon neutral in our own operations by 2030. Towards the end of the quarter, the semiconductor issue was improving. However, in July, the…

Thank you, Mikael. And this slide highlights our key figures for the second quarter. We are including 2019 in this overview, because of the anomaly of the Q2 2020, which was the first quarter with strict COVID-related lockdowns outside of China. Our net sales were over $2 billion, a 93% increase compared to the same quarter last year. Compared to Q2 2019 sales decreased by 6% while the underlying LVP was down even 15%. Gross profit increased to $384 million and the gross margin increased to 19%. Compared to Q2 2019, the gross margin increased by 40 basis points despite the lower sales. The higher gross margin was primarily driven by direct labor and material efficiencies. In the quarter, capacity alignments had no material impact on the operating profit. The adjusted operating income increased to $166 million due to the higher gross profit. The adjusted operating margin improved by 25 percentage points versus Q2 2020 and was almost in line with Q2 2019 despite 6% lower sales. The operating cash flow was $63 million. This was achieved despite adverse effects from changes in working capital. Reported earnings per share improved to $1.19 and our adjusted return on capital employed improved to 18% and adjusted return on equity to 16%. We reinstated our quarterly dividend at $0.62 per share, the same level as before the dividend was suspended in the second quarter of 2020. Looking now on the adjusted operating margin bridge on the next slide. Our adjusted operating margin of 8.2% was almost 25 percentage points higher than in the second quarter of 2020. The impact of raw material price changes was negative $8 million in the quarter. FX impacted the operating profit negatively by $13 million. This is caused by transactional effects from a number of different currency payers.…

Thank you, Fredrik. Turning to the next slide, here we show the main factors behind our updated 2021 indications. Our full year 2021 indications for organic growth and adjusted operating margin are adjusted to reflect the lower and more volatile light vehicle production and higher raw material costs. Compared to our previous guidance, the light vehicle production outlook is lowered by 1 to 3 percentage points due to the component shortage. Our estimate of raw material prices headwinds is increased from 90 basis points to 130 basis points for 2021. These headwinds are to some extent offset by improved sales mix and cost adjustments. We have the details of our indications on the next slide. These indications exclude cost for capacity alignment and any potential antitrust related matters. Our full year indication is based on a global light vehicle production increase – light vehicle production increasing 9% to 11% compared to 2020. We expect sales to increase organically by 16% to 18%, supporting a full year 7% outperformance versus light vehicle production. Our net sales increase is assumed to be 20% to 22%, including positive currency translation effects of around 4%. We expect an adjusted operating margin of around 9% to 9.5%. Operating cash flow is expected to be similar to 2020 levels. Our strategic initiatives are gradually yielding good results. We are confident of our 2022, 2024 targets based on our internal progress and an expected light vehicle market recovery in the next few years. As I mentioned earlier, we have set climate targets for the company. Our next slide, we have these targets. Turning the slide. Autoliv’s vision of saving more lives drives all our work. Sustainability is firmly rooted in our business strategy and as the market leader in our field. Our efforts are aligned with the…

Thank you, Mikael. Turning the page, this concludes our formal comments for today’s earnings call and we would like to open the line for questions. I now turn it back to Naz.

Thank you. [Operator Instructions] Our first question comes from the line of Emmanuel Rosner from Deutsche Bank. Please go ahead. Your line is open.

Hi, everybody. Thank you for taking my questions. First question would be – can you maybe describe the industry production environment you expect for the second half? Sorry, it was somewhat notable that your LVP assumption are now, I guess, a little bit more conservative on the low end than what IHS had at least as of yesterday? And so can you just talk in terms of how much visibility you have in terms of call-off? How much volatility do you still expect to continue and for…?

Yes. I think the range we are indicating is the result of a high amount of uncertainty in the market here and the uncertainty then goes back to when the industry will come back to a more, I would say, stable situation when it comes to a more predictable situation when it comes to semiconductors. As we indicated here in the presentation, we saw some improvements towards the end of the quarter. But coming in now in July here, we see once again, that customers are changing the call-offs with short notice and the volatility continues. So, I think the best we can judge now is that we think we will see a gradual improvement over the situation throughout the rest of the year here. But it will take time until we are back in – I mean, we can say that we have a semiconductor challenge behind us here. So, I think we will continue for quite some time here with a high level of uncertainty. But – I think that’s where we are right now.

That’s helpful. And then as a follow-up, just a question on the raw materials impact. So, based on I guess, the slides where you detail how your contracts work. So, if raw materials were to stay at sort of like current spot prices, how much of an additional impact would that be beyond this year?

Yes, we don’t guide for 2022 at this point of time, but we can say that if they stay at the current levels, there would also be a challenge into next year from that high level. What we have seen in the – the increase that we have seen now sequentially is mainly related to steel and nonferrous metals, where the situation has pretty much deteriorated at the same magnitude as we saw in the first quarter, and hence, the need for us to revise our impact for the full year.

Understood. Thank you.

Thank you.

And the next question comes from the line of Mattias Holmberg from DNB. Please go ahead.

Thank you and thanks for taking the time for my question. You mentioned in the presentation a couple of times potential for shareholder value creation activities when you discussed the leverage ratio. Could you please elaborate a bit on what this could be? And also any potential timing, if there is sort of – you need to wait for the market to stabilize in terms of the semi shortage or if there is anything holding you back from these activities at this point?

No, I think what we wanted to say there is really that, I mean, now we are comfortable back within the range. And – with that, I mean, we have now reinstated the quarterly dividend. And on top of that, of course, we have, as we always have stated in the past, buybacks and alternatively extra dividend as tools for that. But that’s a decision that needs to be made from time-to-time. And here, of course, we need to judge also not only how our balance sheet looks like, but it’s also the predictability about the business cycle and our cash – forward-looking cash generation there. So, it’s – just to reconfirm our intention here to be a shareholder-friendly company in terms of returning liquidity to our shareholders. And of course, the timing, we will come back to when appropriate, and it’s a decision from time-to-time.

Understood. Thank you. And my second question is, the medium-term margin target of 12% on EBIT level that you stated in your CMD in 2019, given the sort of incremental raw material headwinds that we are seeing right now, do you still think that the time horizon of 3 years to 5 years is realistic or how should we think of that?

Yes. I mean we are holding on to and confirm, of course, our long-term targets here. No changes to that because of this short-term situation here. I think, I mean, as we have indicated here, we think that the Q2 was the trough when it comes to the semiconductor challenge, even though it will take little bit longer until we are on stable grounds there. And as Fredrik indicated here, I mean, raw material, it’s something we will have to manage over time regardless level, but it’s really time that is needed to balance that. And I think when we are looking at this time horizon here, we have that time and we think also that we have a very strong underlying demand when it comes to light vehicles going forward here. So, no reason to have any other views than what we have had in the past.

Thank you so much.

Thank you.

And the next question comes from the line of Chris McNally from Evercore. Please go ahead.

Thanks so much guys. Just wanted to follow-up on the raw materials, now we can’t put a number to it. So, maybe if we talk about more of the process for getting reimbursement, it essentially looks like what you are saying is for the second half that the 130 basis points for the full year is both a gross and a net number, essentially, there is not going to be much price recovery. Can you talk about just the conversations you are having with your customers? How long does it take for price recovery to happen, how much you typically recover things like that just we get a sense for the headwind going into next year?

Yes, sure. We do have some, but limited contractual pass-throughs to customers. And of course, the negotiations with the remaining customers are ongoing as we see this, significant headwinds from raw materials. On the ones where we have indexations and then I mean they are typically retroactive. So, then you also have to look at what – where these costs have been looking backwards that is built into our guidance. When you look at what we are negotiating, it’s rather limited because as we said, it will take some time for these negotiations and also for them to become effective will have only a limited impact here on the current year. But as we said, I mean, of course, our ambition is to, over time, should the prices stay at this level also offset them commercially.

And I think it’s a fair – if we think like absolute numbers, $50 million a quarter in the back half of headwind. That’s something that we should at least model for Q1 of next year and then at the earliest. Maybe we get some break in Q2 as you get some commercial recoveries. But that’s sort of page, we are going to have probably a couple of quarters of this level as it’s finally starting to roll through.

I think we have to come back to that when we give our 2022 guidance here. I don’t want to make any comment on the quarterly impact here for next year today.

No problem. I had to try. Maybe just real quick, just high level, do you exert that same pressure then as another opportunity to go to your Tier 2 base and basically ask for delays in pricing increases when obviously, you are not buying raw steel, but obviously manufactured parts. Is that another way to sort of – to manage the time lag, while it takes you a couple of quarters to get commercial recovery from OEMs?

I mean, absolutely. That’s why you have seen that the impact so far year-to-date has been fairly marginal. I mean it’s was close to zero in the first quarter and now about $10 million in the second quarter. So that, I think, is a reflection of how successfully we have been able to push this out with our supply base. But especially on the steel side, it is a very stress situation, and we will have price changes here come through that we cannot avoid in the second half.

Okay, great. Thanks so much.

The next question comes from the line of Hampus Engellau from Handelsbanken. Please go ahead.

Thanks very much. Two questions from me. Firstly, on the semi shortage, if I remember correctly, I think I was picking up information that the semi situation had improved somewhat in the beginning of May. And then you highlighted that June was extra tough. Could you maybe share some light on what happened in June? And that we can be sure that second quarter is the trough of semis. That’s the first question. Second question is relating to the operating leverage, I mean you highlighted the operating leverage in the second quarter compared to first quarter. How should we think about Q3 and Q4 here? Is full year outlook, very more back-end loaded, more related to Q4 now with engineering income or how should we think about that? Those are my two questions. Thank you.

I can start on the semiconductor side here, and then Fredrik maybe will take the second question there. On the semiconductor side, as we said here, we saw some improvements, I should say, stabilization towards the end of the second quarter here. But we have once again seen some plant closures on our customer side coming up here in July with short note. So, what we want to indicate here is that we see volatility also in the beginning of the third quarter here. I think the challenge here is that the uncertainty is so high when it comes to semiconductor. As you know, the automotive industry is only 5% to 10% of the total usage of semiconductors. So we are, of course, also here impacted from what’s happening in the total pool of customers for semiconductors. And as we have indicated here, we think it will take a longer period here until we are really on stable grounds when it comes to semiconductor supply gradually improving. That is the best of our knowledge now and what we pickup in our interaction with suppliers and customers. So, that’s the best indication we can give at this point of time.

Okay. Hampus, on your question on the operating leverage, I mean we do expect even if there is no range on the volume recovery in the second half that we will see a sequential improvement here and then of course should also have a positive leverage affect. But it also depends a bit on with this 9% to 11%, I am sorry 16% to 18% I was saying gives also a larger even for the second half. Then we also expect the volatility to continue at least in the near-term. So, we have to see how quickly that comes out because it will impact also our ability to pull through an incremental sales and then – I mean the volatility in the call-offs. That’s another component. And then the third one is, of course, raw material where we expect a fairly even hit here between the quarters and the second half. But when you come – when it comes to your specific question on engineering income, that should pretty much follow the normal pattern as we have seen in previous years.

Excellent. Thank you very much.

Thank you.

And the next question comes from the line of Joseph Spak from RBC Capital Markets. Please go ahead.

Thank you very much. You mentioned typically 25% to 30% pass-through 30% when it’s volatile like it was this quarter on the way down. You also mentioned continued volatility going forward. So, does that mean if we think sales are going to increase sequentially here, we should be more towards the lower end, maybe the 25% on the upside. And then factor in commodities on top of that. Is that how you advised to think about the rest of the year?

I think the real uncertainty here is just how this volatility that we tried to indicate here where we see typically a fairly narrow range. But now in the second quarter, a very large range of how that develops here over Q3 and then going into Q4 because that will have an impact on, say, our operational effectiveness and then also how – what leverage we can then pull through incremental sales. And that is very difficult to give an indication on right now. I mean, we are not through it yet.

Okay. And then just maybe going back to raw materials one more time, so like – effectively, the entire impact here in the back half. I know you are not talking about ‘22, but it’s like – more like a 230 basis point margin impact in the back half. So, it seems like that’s at least a good run rate to go in through the first half. I guess what I really want to get to is how does this impact your confidence in the 12% margin target over time, because presumably this level of commodities wasn’t contemplated. So, what are some of the offsets? And I know you have a couple of markets later this year. I don’t probably dive into that more detail, but at a high level, maybe you could just help us with that.

Yes. I think what we are saying here is, of course, that the raw materials we need to overcome over time through different means. I mean, we are talking about compensation and offsetting it with our customers. I think it’s also on how we work with our internal improvement journey here and also with our suppliers. And if we see – we are not at all indicating that. But just theoretically, from your question here, if we would see a more long-term increase of raw material. That’s for sure, something we have to overcome and we will overcome. We need to do what we need to do to manage that. But what we believe here is – and working assumption is, of course, that we have a temporary increase here, but it’s difficult to give the time on it. So once again, we are confident in the activities we are doing, and we also see a very strong underlying demand for light vehicles going forward in this timeframe. And I think the raw material will also normalize at a different level than what we are seeing today. And whatever delta start, that is something we will manage.

Okay. Thank you very much.

Next question comes from the line of Rod Lache from Wolfe Research. Please go ahead.

Hi everybody. I would like to just understand a little bit more about the raw material recovery process as well. You are going to be negotiating this presumably later this year with your customers. So, if we think back at prior periods when you had higher raw materials, what did you typically recover in the subsequent year when – through those negotiations?

I don’t think you can say there is a specific rule of thumb in terms of percentage. It’s more related to the nature of the raw material increases, I would say, because if it’s something that is more long lasting and more, let’s call it, inflationary into its nature, you have a higher rate of compensation than if it’s temporary. And I think we have indicated before, if it’s really temporary volatility, it’s not even something we are really discussing that with the customers. So, it all depends on the nature of the increase, so to speak. So yes, time will tell here, what it is when we look at these increases here. But I mean, those negotiations and discussions are, of course, already ongoing here and work is being done in that area.

Okay. And just to clarify, do you typically put that into the recovery into sort of a different bucket than the raw material inflation or do you – when you describe raw material inflation, is that a net number, net of recoveries?

I mean if your question is how we discuss it with our customers.

No, how you discuss it with us is what I want to know. Are you referring to a gross number or is this kind of a net number when you give these – the basis points of margin?

That’s the cost impact. So it does not...

Okay. That’s just the gross number. Okay. And then lastly, could you just speak to inflation more broadly? I mean, we are seeing obviously, a lot of tightness, particularly in North America, but inflation is obviously – it’s not just commodities, there is labor cost inflation, logistics inflation and other things that seems to be a global phenomenon. What’s the extent to which you are seeing this? And is that something that you would expect to be a bigger factor as you look forward?

No, we see it, say, in multiple areas, not only on the raw materials side. I mean, as you said, logistics is stressed as well. It’s both in terms of availability and – but also in terms of cost for logistics and then also the accuracy of delivery. So, it’s a very stress situation, and we are dealing with that, say, the same way as Mikael described here on the – as we do on the raw materials side. So, eventually also discussing that with our customers, but primarily at the moment, managing that with the supply base and our logistics providers. I would have to say so far on the labor cost side, we have not seen any significant pressure so far on that. So, I think that’s one component at least that at the moment seems rather stable.

Okay. Thank you.

The next question comes from the line of Brian Johnson from Barclays. Please go ahead.

Thank you. Just want to get to more perhaps of a strategic issue around commodities. I’ve always been struck and I’ve had conversations with gone in the past about how Autoliv with its incredible low record of recalls as the tremendous value to your customers. So in addition to just going out and trying to commodity cost recovery, is there an opportunity to recast the contracts going forward to make them more like we see in other supplier segment sectors where raw materials are a big part of the cost of goods sold like axles and so forth and just have straight index-based pass-through agreements. And if so, as you kind of bring new programs on, is that a trend that you’d like. Is that a kind of factor you’d like to put into place?

I think, I mean, first of all, we are a system supplier with a lot of components going into what we deliver to our customers here. And I think – I mean, there is pros and cons with that. But I think we – overall, over time, have a system that – and business relationships that serves us well. So I shouldn’t say that I see any bigger changes to that. It comes back to what more of the structural changes that might be or not be.

Okay. And in terms of the raw materials we should be looking at to kind of think about, you flagged hot-rolled steel. Are there other commodities that we ought to be paying attention to, there are some commodities like copper and lumber that are obviously not in your products that are rolling over already. But what – in addition to steel, what are the key components we have to track?

I think the main ones to manage are steel. That’s around 40% of our raw material exposure. And then I think hot-rolled coil is a good indication. – when it comes – the next two ones are resins. So yes, what we buy for plastic components. And then the third component is textiles. And there, it’s yarn, it’s polyamide, polyester, nylon so on. Those are the main commodities that we’re exposed to.

Okay. And then finally, in terms of cadence, is it fair to think that 4Q is typically a big step up. Should we expect the same, especially as you go through these commercial discussions this year?

Can you explain that again? I didn’t understand your question.

The cadence of margin in the second half.

The seasonality of the performance I think, I mean, the seasonality in our earnings in a year is what it always has been. So we don’t see any changes to that. And of course, certain events like we have to live through here may affect the specific quarter, but seasonality is the same.

Alright. Thank you.

And the next question comes from the line of Ryan Brinkman from JPMorgan. Please go ahead.

Hi, thanks for taking my question. It seems based on some 2Q preannouncements from GM, Ford, Volkswagen and others, that’s the combined impact of a headwind to production and a tailwind of pricing because of the resulting lower inventories has actually been netted out very positively for them so far this year versus for suppliers, the impact is only negative because there is not an offset to pricing from the lower production. I’m curious what impact, if any, this dynamic might be having on your conversations around commodity cost recoveries. Is the tone or tenor of those conversations any different versus in the past when you saw commodity inflation given that the customer pricing and margin is so strong. I think average transaction prices in the U.S. in June, for example, might have been up like 10.7% year-over-year. So curious what you’re seeing there.

I think would like to refer to as stated before here, I think let’s call it, the success from our perspective here in those discussions, it’s more depending on the nature of the raw material increases than anything else. So higher and longer, they are more relevant they are in the customer’s eyes, so to speak. And that’s really what’s judging that. And of course, the change – the difference here between OEM and supplier is because we are in different parts of the total value chain and also the timing of the events here impacts that. But more depending on the nature of the raw material increase.

Appreciate that. And then just lastly to follow-up on the comment during the prepared remarks that the semiconductor shortage situation had grown worse again in early July in North America and Europe at least. I think there may have been an expectation earlier that semiconductor availability would just sort of continue to improve sequentially in a more or less linear fashion, particularly maybe short-term here, including in July, given the cycling past of that fire at the Renesas factory in Japan. So do you have a sense of the driver of the incremental production disruptions in the first part of July here? And what are automakers communicating to you about the expected disruption in 3Q versus 2Q?

I think as a net I would say, net indication, I would say, it’s gradually improving. But then, of course, it looks a little bit different between the different customers here and how they have been hit so far, but also how the near-term looks like. And it can depend also on who their suppliers are in their end but also the uniqueness of the specific semiconductor. I mean if you have a standard semiconductor or a higher degree of semi-standard semiconductors, you have more flexibility to find alternative solutions than if you have very special designed semiconductors. So that does materially impact on the specific customer there. So, we haven’t seen this, let’s call it, linear stabilization yet when we look at the aggregated picture. Going forward, that’s the indication.

Very helpful. Thank you.

Next question comes from the line of Erik Golrang from SEB. Please go ahead.

Thanks. I have two questions. First one is on the $25 million governmental support you had in the second quarter. Could you remind us that was in Q3 and Q4 last year? Then on the second quarter, you could take something more on orders. You say you’re pleased that we can’t do much with that. So could you put that in some kind of perspective would be very helpful. And then the third question on the key model launches you highlighted in the presentation. Is it just a coincidence there that there are two Chinese models where you seem to have a quite extensive scope of supply, there is that any kind of trend or just a coincidence? Thanks.

So the first question on governmental support. In Q3, that was $5 million and in Q4, it was $2 million last year, so $7 million in total for the second half.

Thank you.

And on the order intake here, as you know, we don’t give any figures throughout the year. We just given figure at the end of the year when we present the Q4 earnings here. But our commentary here should be seen in the light of the order book we have and the market share growth that we have indicated that we have an order intake that supports our journey forward here. So that is how you should interpret that comment there. And then on the model side here, I think, I mean, in this particular quarter, you could say it is a coincidence that it happens to be concentrated here. But I will say on a general note, I think we have a good presence and wins within the EV segment. And also in China, where you see a number of newcomers new startups and also they established makes quickly coming out with EV models that we have a good representation there as well. So we have a strong position in China altogether, I would say that we presented now.

Thank you.

Thank you.

And the next question comes from the line of George Galliers from Goldman Sachs. Please go ahead.

Yes. Thank you for taking my question. You mentioned on the call that you had limited ability to use following as a result of the short notice. Could you just give us a bit of insight into the lead time you need to invoke flowing and the notice period that you’re getting on the production side as we navigate the semiconductor challenges? And assuming that the semiconductor volatility continues, are you able to take any measures to reduce the financial impact? For example, is there any scope for increased flexibility on the furloughing or could you look to build and hold inventory and then adjust production subsequently when you have provided adequate notice to furlough? Thank you.

I think on the furlough side, you can start there and say that, I mean, it’s not really the availability of that tool, if we call it that – that is the problem here. It’s really the volatility that makes it difficult for us to really decide to take out because if we normally are around 5% in terms of plus/minus from the original call-offs from the customers we have today seen up to 50%. So we can’t assume a 50% reduction in takeouts and takeout resources because if that’s not true, we would be short of staff and can’t deliver. So we need to staff ourselves and have capacity to meet the original call-off levels. And then if we see a reduction there, we are, of course, sitting there with that cost. So it’s more a question of having the predictability of the volumes and adjust the capacity accordingly that is the hindering point. If we just had that visibility, of course, we could use in many cases, the flexibility that we have, but is that we don’t have the visibility that is problem.

And even to add on that, means it’s – as we described the volatility in the call-offs, they have even fluctuated, let’s say, week-to-week. So they might be pulled down 1 week and then they increase the next. So it’s been very, very difficult to balance and manage capacity due to that. And then also as we – our plants supply into multiple OEMs. And the one OEM plant maybe shuts down for a week. That does not mean that we can then adjust accordingly or to the full extent in our operations. So there is a complexity there that we need to manage that, yes, has some implications on how quickly we can reduce the cost. But of course, one key is also then to have the right cost discipline. And I think we have proven that here in the second quarter, but also how we’ve come out of the pandemic as of last year. And of course, that also remains a large focus for us here going forward.

Understood. Thank you.

And the next question comes from the line of Sascha Gommel from Jefferies. Please go ahead.

Hi. Good afternoon and good morning everybody. Thanks for taking my questions. The first one is around working capital. I was wondering if you can talk a little bit about inventories because they look fairly high. How we should think about them in light of the production disruptions. And then going forward, when production normalizes, do inventories also come down. And then I have a second one on working capital. How much was the Toyota cash out?

Yes, sure. So on working capital, there were as we mentioned, there were a couple of items outside of what we call trade working capital. So the three core components receive both inventory and payables that had a major impact. The previous recall was the largest of those. And I think if you look at our 10-Q, the number we mentioned there in terms of the impact is also an indication for the cash outflow. But then also, we’ve had some tax-related – cash impact from tax-related items, which was the magnitude of $35 million combined. We also had the restructuring outflow of around $6 million. So those were some more unusual items here during the quarter that impacted working capital negatively. Then specifically on inventory, it has been due to the volatility that we described. But then on top of that also then the supply chain challenges that we’re facing with our supply base has led to a pretty significant increase in inventories above our normal design levels. And if you look at days of inventory outstanding, you can see that there is quite a large increase in that during the second quarter. We do expect that as now say the volatility comes down and then the call-off reliability increases that we should be able to get back to our design levels and then also be able to flush the inventory out and reduce inventory going forward.

Okay. That’s helpful. And then my second question is just quickly on the guidance reconciliation how to think about the guidance cut from your earlier guidance. If we go to the midpoint, it’s kind of top line minus 2. And then we – if we have a 20% drop-through and at the 40 bps of raw mats, we get right to your midpoint of the new guidance in terms of margin. Is that how we should think about it? Or is it too simplistic and there are more moving parts than just a bit of top line gone and a bit more on that?

No, those are the main components. The only thing I would add to that is this certainty around the call-off volatility. And then also that we have some headwinds or that we are able to offset those headwinds then with an improved sales mix and cost adjustments. But the main components you have mentioned.

Alright. Appreciate it. Thank you very much.

And the next question comes from the line of Antoine Brégeaut from Exane. Please go ahead. Antoine Brégeaut: Hi, everyone. Thank you for taking my question. Very quickly, just a question on the nature of those call-offs are there mainly delays in your production or have you also seen some cancellations? And then my second question on the bridge, how should we think about SG&A and RD&E impact into Q3, Q4 after your headwind this quarter? Thank you.

No. I think on the call-offs, I can’t – I mean, we don’t see really as cancellations here. I think it’s more delays, you could say, in the production schedules from the OEMs. I think the signal is that if a candor would catch up. But then, of course, longer this continues, it will be more difficult to do it, but no pure cancellation. As I said, I mean, there is what we can and a very strong demand and consumer demand here. So what can be produced will be sold and as you have seen on the inventory levels, I mean, the U.S. are at record low levels. I mean it’s 1.4 million vehicles in inventory compared to 3.5% to 4% as more of a normal level and also relatively low in Europe, especially on premium vehicles. So there is really a strong underlying demand. So it’s, once again, a delay here as a result of the supply disruptions.

And on the SG&A and RD&E levels, in our guidance, we are detailing that we believe that – where we expect already need to be around 4.5% of sales. So I think that gives an indication of where it’s expected to be in the second half. And then SG&A, as I said, we will be very cost disciplined here. You see that there is only a marginal increase from Q1 to Q2. So we will remain that discipline and have a very strong focus also on the SG&A development.

Okay, I will hand it back to you Mikael, after this one.

Thank you, Nat. Before we end today’s call, I would like to acknowledge that we are still in a pandemic, and our first priority remains the health and safety of our employees. Despite short-term market headwinds, our progress in the last year makes us confident in the journey towards our medium-term targets and our opportunities for shareholder value creation. Our third quarter earnings call is scheduled for Friday, October 22, 2021. Thank you, everyone, for participating on today’s call. We sincerely appreciate your continued interest in Autoliv until next time, stay safe.

This concludes our conference call. Thank you all for attending. You may now disconnect your lines.