Welcome to the Q3 2021 Autoliv, Inc. Earnings Conference Call. Throughout the call, all participants will be in a listen-only mode and, afterwards, there will be a question-and-answer session. I will now hand over to Anders Trapp, Vice President, Investor Relations. Please begin your meeting.

Thank you, Martin. Welcome everyone to our third 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 I am Anders Trapp, Vice President of Investor Relations. During today's earnings call, our CEO will provide a brief overview of our third 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 available in our SEC regulatory filings, available on autoliv.com. 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 now hand over to our CEO, Mikael Bratt.

Thank you, Anders. Looking on the next slide, first, I'd like to thank our team once again for their unrelenting commitment, particularly in managing the volatility in customer call-offs. Thanks to the team's effort, we were able to supply our customers and achieved solid performance in our plans, despite facing a very challenging market. This slide quite well illustrates how dramatic light vehicle production has developed during 2021, especially since July. Supply shortage of semiconductors and other components severely impacted the light vehicle production in the third quarter. It led to a third quarter global LVP decline of 20%, which was 17% lower than what was expected only three months ago, and 12% below Q2, all according to IHD Markit. Markets with high safety content per vehicle were most affected by the dramatic changes. Europe, Americas, and Japan all saw Q3 LVP being 20% to 25% lower than what was expected three months ago. The decline in light LVP, unpredictable changes in customer call-offs, and high raw material costs resulted in reduced profitability in the quarter, despite strict cost control including a significant headcount reduction. Looking on the next slide, given all that, I am pleased that we continued to strongly outperform the global LVP in the quarter and with strong order intake for the first nine-month of the year. We continue to execute strict measures to mitigate the current adverse business headwinds, including capacity alignment in Europe and in North America. However, as a result of the significant reduced light vehicle production outlook for the year, we are revising our full-year indications for sales, adjusted operating margin, and operating cash flow. Despite the challenging environment, our cash flow was solid, and our debt leverage ratio remains well within our target range. We paid a dividend of $0.62 per share…

Thank you, Mikael. This slide highlights our chief figures for the third quarter of 2021, compared to 2020. Our net sales were $1.85 billion, this was a 9% decrease compared to the same quarter last year, less than half of the 20% decline seen in the global light vehicle production. Gross profit declined by 25%, to $301 million, while the gross margin decreased to 16%. The gross margin decrease was primarily driven by the lower sales and higher raw material costs. In the quarter, capacity alignments had $4 million negative impact on the operating profit. The adjusted operating income decreased to $103 million, from $206 million. As a result, the adjusted operating margin declined by 4.5 percentage points to 5.6%. The operating cash flow was $188 million. Earnings per share diluted decreased by $0.44, where the main drivers were $1.17 from lower adjusted operating income partly mitigated by $0.31 from lower costs for capacity alignment and antitrust related matters, and $0.26 from lower tax. Our adjusted return on capital employed declined to 11%, and the adjusted return on equity to 10%. We declared and paid a quarterly dividend of $0.62 per share in the quarter, the same as in the previous quarter where the dividend was reinstated. Looking now on the adjusted operating margin bridge on the next slide, our adjusted operating profit of $103 million was 50% lower than the same quarter last year. The impact of raw material price changes was a negative $37 million in the quarter. Foreign exchange impacted the operating profit positively by $4 million, mainly as a result of a weaker U.S. dollar. Support from governments in connection with the pandemic was $10 million in the third quarter last year, while it was not material to our financial results in the third quarter of…

Thank you, Fredrik. Turning to the next slide, our revised full-year 2021 indications exclude costs for capacity alignment. Our full-year indication is based on a flat global light vehicle production compared to 2020. Our previous indication from July 17, 2021 was based on an assumption of 9% to 11% LVP growth for 2021. We raised our expectations of sales outperformance versus global LVP from around 7 to around 8 percentage points. As a consequence of the lower light vehicle production assumption and higher outperformance, we now expect our organic sales growth to be around 8%. Including positive currency translation effects of around 3%, our net sales increase is expected to be around 11%. We expect an adjusted operating margin of around 8%. Operating cash flow is expected to be around $700 million. Our strategic initiatives are gradually yielding good results, and we are confident of our 2022-2024 targets based on our internal progress and expected light vehicle recovery in the next few years. Turning the slide, with relentless focus on quality and execution, as well as mitigating near-term headwinds, we also continue to drive forward towards our targets. This, and more, will be explored at our virtual CMD, on November 16. The event will be virtually only and live-streamed. More details will be made available at the beginning of November. And I will now hand it back to Anders.

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 hand it back to you, Martin.

Thank you. [Operator Instructions] We have our first question; it's from Emmanuel Rosner, Deutsche Bank. Your line is now open.

Thank you very much, and hello everybody. I have two lines of questions. The first one is could you please talk a little bit more about the operating environment you're seeing out there, in particular what you're seeing so far in the fourth quarter? Your updated guidance suggests some sequential improvement in earnings, and therefore just curious how much things have improved so far sequentially? And then as part of this question as well, your light vehicle production outlook slide basically speaks about some improvements seen lately, in North America. And I was curious if you could just elaborate a little bit more about what, specifically, you're seeing.

No, I think -- and thank you for the questions. I think, I mean, first of all, we are affected here in the quarter, and, obviously, we're still in the midst of it around the semiconductor question here. And what we're indicating here is that we see some -- I would say more direct slight improvements, mainly in Asia and the U.S., and it's based on, I would say, the feedback and dialogues we have with customers and, ultimately, the suppliers here as well in the other end here. But I also want to say it here that the visibility is still poor around that. And so, for us, it's all about making sure that we continue to focus on our internal activities here to mitigate as much as possible of the current situation, which I think we have done successfully in the quarter here. And as we have pointed out here, we have managed to deliver to our customer what they have expected, and we have also made the necessary adjustment, and that we will continue to do in the months and quarters to come here, of course. And so, I think that's as far as we can state, really, about the environment connected to the semiconductors. Then the raw material side, we have seen that increasing throughout the year here. And we gave you the sequential development, how it has impacted us. And here, the supply chain team has done a great job to fend off as much as possible. I think what we have seen in the quarter also here is that the energy situation has added to the external headwind. And when we come to magnesium and, I will say, zinc also here, it's very much connected to the energy challenge as well there. So, it's a very volatile environment, but focused on what we can do for sure. So, low visibility, but we are getting used to it, I will say.

These are helpful. And then I was actually going to follow up on the raw materials, if I may. So, it's encouraging to see that you're expecting more recoveries in 2022. If we were to exclude the recoveries just for a second, and focus on the growth impacts, based on what you've seen so far with raw materials, would you expect an incremental headwind, in 2022, of a similar magnitude of what you're seeing in 2021 or less or more? And that's, again, excluding recoveries. And then on the magnesium side, it's, obviously, an important development. Can you just remind us where your exposure is there?

Yes, I think -- I mean we are not giving any forecast on and details around 2022 here today, here. I think, first of all, we need to get through Q4 and come to the next earnings call before we start to talk about that. Then, of course, the current visibility is not helping in that regard either. So, we will have to come back on that question later on.

But to the question on the exposure on magnesium, it's predominantly in our steering wheel business.

Thank you.

The next question is by Hampus Engellau, Handelsbanken. The line is now open for you.

Thank you very much. And sorry for calling back on magnesium, but would it be possibly to maybe add some flavor, risk you see in magnesium shortage here and what we're seeing in China or is it just a price situation for you guys? That's my first question. And then second question is related, if you could also maybe discuss on order intake. I know won't maybe a market share, but maybe you could indicate on how things are trending on the order and your long-term target of having 45% market share in retail sales. Those were my questions. Thank you.

Thank you, Hampus. On the magnesium side, I would say, so far for us, it's more a question of price. And I think it, of course, depends on how the situation in, mainly, China then develops. But we all know that the reason why we have price increases in magnesium is that they have reduced production in China as a result of power shortage there, in the near-term. So, I mean, that is, of course, a topic that we are following very closely to see what alternatives we have. And I will say that, right now, I feel that, in terms of availability, we have that under control as it looks right now. But that's something we follow closely. On the order intake side, as we indicated here, we continue to see a strong new order intake, and it adds to our order book, and support our expected market shares that we had talked about before, around 45%. So, good support for that for the years to come here.

So, just one follow-up, maybe this -- maybe you can't answer this, but it would just be interesting to know how crucial magnesium is in the steering wheel business or is it -- could you change that for another metal in the design of the steering wheel?

No, it's crucial, of course that is a part of -- is of the main structure of the steering wheel. There is alternatives, but you don't change alternative materials overnight, there is a lot of requirements to do that together with our customers, so that's not a short-term option, really, especially under current circumstances. But, as I said, we are not there, and it's not a concern today.

Fair enough. Thank you.

The next question is by Colin Langan, Wells Fargo. The line is now also open for you.

Thanks for taking the question. The decremental margins on your guidance cut are sort of in the low 20% range, which is actually significantly better than some other suppliers that have recently cut. They have indicated sort of volatility in schedules made it tough to select labor. I mean is that just not structurally an issue for you or are there other cost savings that are offsetting that, because this does seem to be a much better performance?

No, I think it's an equally large problem for us. I am -- if you look at, I mean, the development here in the second -- in the third quarter, where we've had the sequential declining volumes, also there if we exclude the raw material cost impact, we’ve been here in the mid-20% decremental margin range. And I think that's also what we then see, as you say yourself here for the full-year with the guidance that we've no update there, if you exclude the raw material cost impact.

Okay, got it. And then there's been some headlines about recalls around airbags that, I think have you been, it doesn't look like there's a charge. So I assume you haven't been directly impacted? And is that impacting the competitive landscape at all? I think in the past, sometimes you've actually had opportunities to sort of help with the recall needs. Is anything changing there because some of the numbers that are being investigated seem quite large?

I think it depends on which recall, you're referred to. We’re connected to one. But we are providing the complete module. But we’re not providing the inflator. It's an inflator that is sourced from [indiscernible], and this is connected to the Volvo recall. So, the net effect of all the insurance and set liability theory in that recall, we expect no material impact from that. And in the larger scope here of other types of recall with under makes manufacturers, we don't expect to see any volume impact for us in that end, so it was neutral there.

Okay, thanks for taking my questions.

Thank you.

The next question is by Agnieszka Vilela, Nordea. The line is now open for you.

Thank you. My first question is about the capacity alignment actions that you have now in the U.S. and Europe. Could you please elaborate what you're doing there? And also, is there any cost or cost savings associated with these actions?

Yes, so the activity that was recorded now in the third quarter, the $4 million net is related to a initiative in the Americas, we're talking about roughly 100 headcount that we’re adjusting, and that will all come through here in the fourth quarter. And then what we’re referring to then in terms of the other ongoing activities is to the continuation or the finalization of the Structural Efficiency Program number two, which is over 90% completed. But there is still a small part left to be concluded in Europe during the fourth quarter and then also the ongoing footprint activities within Europe related to Germany and Sweden that we’re referring to. But then as we said, we also continue to evaluate further footprint activities and actions, and then we would communicate them as the time would be appropriate.

Perfect, and to that point, aren't you afraid that you might maybe be more or it would be more difficult for you to ramp up the production if we see the recovery in the global car production, if you're doing this kind of actions?

No, I think I mean, the footprint adjustment that Fredrik refers to is obviously a combination of short-term needs, together with the long-term productivity efforts that we’re driving. Then on top of that, we are then doing more short-term initiatives, resulting in a reduction in headcount and also the stoppage days in our plants to offset the, I would say, both the volatility and the lower volumes. And as we really can quickly ramp-up, so we are not taking out any capacity that would limit us from ramping-up. So it's more effectively usage there that we’re working on. So we don't see that risk.

Yes, perfect, thank you. And my second question is about the discussions that you are having with the OEMs about getting compensated for the cancelled volumes. How are these discussions proceeding or do you expect any compensation?

Yes, I mean it is part of a larger negotiations that are ongoing, and it's of course, raw material is the main component that we’re discussing, but then also due to the past behavior of the OEMs with keeping call-off at high levels and then at very, very short-term cancelling them and reducing them quite substantially. We’re now discussing the compensation for that not only related to the inefficiencies in production, but also in terms of inventory carrying costs and so on. And it's -- yes, we have to see how much of that will be successful. It is, as I said, part of larger negotiations that tend to happen towards the end of the year with the customers, but it is definitely something that we will seek compensation for here.

Perfect. Thank you.

The next question is by Erik Golrang, SEB. The line is now open for you.

Thanks. Most of my questions have been answered. I'll ask you another one on raw materials perhaps a bit differently on -- in 2022. I mean, appreciate the color you're giving there and expected more compensations, but on a net basis, do you still see a drag from raw materials even with that? Or is it now a positive based on that compensation?

I think, first of all, we have to see how it plays out in 2022 here. But as Fredrik said here, I mean, there is discussion ongoing for the current situation. Then it depends also on how the raw material or the cost of development overall will be in a more, let's say, medium to long-term development here. And then, of course, that's a different discussion that is needed with the customer if that would be a more long-term scenario with significant higher raw materials. So, I think, basically we have to come back to that as we see how the developments -- how it develops here in the next quarters here. But, of course, it's…

Okay. Thanks. And then more specific question -- yes, okay, one more specific question on magnesium. Maybe I remember this wrong, but there wasn't similar situation now we expect. And if I recall correctly, getting compensation for magnesium was actually a bit more straightforward to you because it was very specific in what comments it -- components it was and how much it was? Is that a fair recollection of history? Or is that just something I…

No, I don't think you can generalize like that on specifically -- me assume here, but, of course, what it is about I will say is, of course, if it's a structural change to the cost in its nature, meaning that it's more long-term and it's also more critical component in our products. It has a different magnitude in the dialogue than maybe other raw materials and so on. But it's very difficult to generalize like that. It is case by case with the customer by customer situation.

Okay, thank you.

The next question is by Joseph Spak, RBC Capital Markets.

Thank you very much. So, the decremental margins quarter-over-quarter were a little bit worse this quarter versus last quarter. I think that probably speaks to some of the volatility we're talking about. But then as we look at what's implied for fourth quarter sequence over third quarter, again you're pointing to some improvement here. It's like 15%, which I think is below historically what you convert on the upside. So is that sort of the right level we should think about here in the very near-term while a lot of this uncertainty remains in the schedules into -- even into the early part of 2022.

The one I say seasonality factor that we have with -- in the fourth quarter, if you want to look at it sequentially is that we expect a higher -- we typically have a higher engineering income in the fourth quarter. And that then, of course, yes, impacts that that sequential calculation that you just made and we referred to. But on the other hand, as we are guiding for, we do expect a more significant headwind from raw material price increases in the fourth quarter versus the third quarter, but overall also sequential volume improvement or also LVP improvement that should help sequentially. So I think those are the main components that you need to consider.

Okay. I guess what I'm asking is like even if volume is higher given like there is still a lot of volatility in the schedules, should we expect that you -- on your conversion on volume would be a little bit below what you sort of aim for over the mid-term because of that volatility?

No, and we -- as we say, I mean, we expect that the visibility remains low also into the fourth quarter and that volatility will most likely remain at that similar levels. We don't expect any significant change.

Okay. And then the second question is just on the volume planning based on customer behaviors that you've seen over the past couple of quarters, I think you just sort of alluded -- you just mentioned here that you're like not adjusting capacity, but does that -- would that at all hinder your ability to ramp up faster if your customers decide to do so? Or is there enough flexibility in the planning that you'd be able to accommodate customer requests?

No, of course, I mean, it's a part of the exercise here to make sure that we can flex up when needed. When we talk about here is really about optimizing our own production schedule based on the, let's call it the net volume over certain time periods here, so we are more effective in that. So we can have some stop days and so on and run more stable the other days and so on. And so it's more to optimize our own production schedule based on the experience that we have here now from the volatile call off situation here. So we're looking back and base our forward looking on that.

Thank you for that.

The next question is by Mattias Holmberg at DNB. The line is yours.

Thank you. One question left from me. And if we take a step back and try to look at the bigger picture, in particular on your medium-term targets, I'm just trying to understand if there is anything in the current situation with the short-term volatility that impacts your trajectory or your ability to reach these targets. I mean, we're one year further down the road now and the years of the medium-term or starting to get closer. So I'm just trying to get your thinking on what's needed in order to get to that level.

I think the way we see it here is that, I mean, we are holding on to all the improvement initiatives that we have lined up to get towards our target and that is paying off. We see positive results yielding from those activities. And I would say that goes on at the same time we manage these short-term. We believe also that -- as we have stated here in our report here is that we assume also that the volumes normalized, meaning the LVP volumes normalized in the years to come here, it is true. We are one year down the road, but there is still a numbers of years left within this time horizon, where the expectation would be that we have less volatility and I would say also more normalized level of absolute number of vehicles being produced. And the combination there makes us, I would say, comfortable in stating that we believe in the targets there could be kept absolutely.

Great, thank you.

Your next question is by Brian Johnson, Barclays.

Yes, couple of questions. First, I just want to kind of as we kind of think through modeling decrementals with the production volatility, can you help us understand where -- which of your product lines within airbags, steering wheels is fungible, and you can kind of keep the factories running smoothly and just send the trucks to different factories in which are really start, stop depending on customer schedules, and then how that feeds through to kind of decrementals margins.

I'm not sure I really followed your question there. Are you asking for more flavor on how the different product lines are being impacted by the volatility or…

Yes. So how that translates into your overall decrementals?

Yes, I think, I mean, when -- we are not breaking it down by product line as you know. I wouldn't say that one product line is easier than another or one is worse than the other here. I think it's the same challenge is here to manage the volatility in the production then of course, if you go down into certain processes, it may look different here because some is more optimized than others, where you're forcing an atomized production level can have maybe more inventory and smoothing it out in that way. And I think you can see that also that we have higher inventory as a result of the volatility. But I wouldn't point out the specific product line here that compared to an under in this regard.

Okay. And second question kind of on is on chips, first, are the chips used in your Restraint Control Systems at all tied-up in the whole global chip shortage? And secondly, while I'm talking about chips, would you have any interest in the Restraint Control electronics business of your former subsidiary?

On your last question, I can answer first and say that, that's nothing we’re entertaining, it’s not our interest to look at that. I mean, we spun it off a number of years ago, and we spun it off for a reason and that that is still valid. Then on where we’re using our semiconductors, it's four, where I would say most of our product lines here and to various extent, but we are not sourcing semiconductors directly ourselves is through various Tier 2 suppliers, but of course, we’re working very closely with them to support them in their foot of securing semiconductors. And we also have, of course direct contact with semiconductor suppliers here in that work. And so far, I think we have worked very well together to secure semiconductors for our own value chain, and we have been able to deliver to our customers what we’re committed to deliver to them there. So, good job from our supply chain team here.

Okay, thank you.

The next question is by Rod Lache, Wolfe. The line is now open for you.

Thanks, I was hoping just to follow-up with two points of clarification. People have asked about this, but like the decremental margins of 25% are quite good, just considering the production volatility. And at some point, that volatility will diminish and you're going to see some increases in production. So would it be reasonable to expect that your incrementals would be better, when that happens or do you have any estimate of what that that volatility is costing you. And then secondly, there is a lot of scrutiny that's being applied to the inflators of your competitors still, including non-Takata inflators. And I think you referenced, the Volvo recall where that's actually a ZF inflator. Just how are your customers thinking about this? And why wouldn't Autoliv gain in some way from what's happening around you?

Maybe I can start to answer the second question, Fredrik can take the first there, and I mean, I don't really recall, I don't comment our competition situation here. I mean, our focus is to always have quality on top of our focus list, so to speak, and we’re securing that with our efforts here. And we of course work with our customers and support them whenever needed. But with quality, we believe that and proven quality to our customer is the best way to look at business opportunities in the future.

And then on the decremental margin, what we want to highlight is that we have maintained a very strong cost and capital discipline we'll see throughout this year, and as we indicated, if you look at our headcount development down 4,500 since Q1 and then a further reduction by 2,500 also during the third quarter. I think that that shows how disciplined we have been or how focused we have been on this. Then you also see the SG&A cost coming down sequentially. And then that is also together with what we're doing on production overhead is also then the effect of the Structural Efficiency Programs that we implemented and that but then get the benefit from. So I think those are the main components of the decremental margins so far again, if you exclude the raw material headwinds. On the incremental side, of course, we want to achieve the high margin as possible, going into the volume recovery once that starts to kick in. But how that plays out for the next year, we will have to come back to that when we talk about the ‘22 guidance. But as we also laid out here that we expect a meaningful progression towards the mid-term target, as we should then pull through on that incremental volume.

Fair enough. Great execution, thank you.

Thanks.

[Operator Instructions] There are no further questions [indiscernible].

Thank you, Martin. While we cannot control short-term market headwinds, we focus on what we can control including keeping each other safe. Our progress makes us confident in our journey towards our targets and our opportunities for shareholder value creation. Our fourth quarter earnings call is scheduled for Friday, January 28, 2022. Thank you everyone for participating in today's call. We sincerely appreciate your continued interest in Autoliv. Hope to see you again in November. Until then, stay safe.