Autoliv, Inc. (ALV) Q1 2022 Earnings Call Transcript

Autoliv, Inc. (NYSE: ALV) Q1 2022 earnings call dated Apr. 22, 2022

Corporate Participants:

Anders Trapp — Vice President, Investor Relations

Mikael Bratt — President and Chief Executive Officer

Fredrik Westin — Chief Financial Officer

Analysts:

Hampus Engellau — Handelsbanken Capital Markets — Analyst

Colin Langan — Wells Fargo Securities — Analyst

Rod Lache — Wolfe Research — Analyst

Vijay Rakesh — Mizuho Securities — Analyst

Joseph Spak — RBC Capital Markets — Analyst

Sascha Gommel — Jefferies — Analyst

Agnieszka Vilela — Nordea Markets — Analyst

Philipp Koenig — Goldman Sachs — Analyst

Chris McNally — Evercore ISI — Analyst

Brian Johnson — Barclays — Analyst

Itay Michaeli — Citigroup — Analyst

Prepared Remarks:

Operator

Welcome to the Q1 2022 Autoliv, Inc. Earnings Conference Call. [Operator Instructions]

Today, I am pleased to present, President and the CEO, Mikael Bratt; and Group CFO, Fredrik Westin.

I will now hand over to VP, Investor Relations, Anders Trapp. Please begin your meeting.

Anders Trapp — Vice President, Investor Relations

Thank you, Mark. Welcome everyone to our first quarter 2022 financial results earnings presentation. On this call, we have our President and Chief Executive Officer, 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 first 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-US GAAP measures. The reconciliations of historical US GAAP to non-US GAAP measures are disclosed in our quarterly press release available on autoliv.com and in the 10-Q that will be filed with the SEC.

Lastly, I should mentioned that this call is intended to conclude at 03:00 p.m. Central European Time. So please follow the limit of two questions per person.

I now hand it over to our CEO, Mikael Bratt.

Mikael Bratt — President and Chief Executive Officer

Thank you, Anders. Looking on the next slide. The ongoing war in Ukraine is an un-conceivable [Phonetic] tragedy that has resulted in a massive humanitarian crisis, and my thoughts goes to all those affected. We also continue to experience tough COVID-19 developments and lockdowns in China that are affecting many people, including our employees. I would like to thank all of our employees for dealing with and managing through these tough and unprecedented times.

In the quarter, we have managed a very difficult market environment with significant declines in light vehicle production towards the end of the quarter, significant cost inflation and low demand visibility, as well as severe disruptions of the global supply chain. Despite adverse regional mix effects, our sales outperformed global LVP by around 3 percentage points according to IHS Markit. In the quarter, raw material cost increased — increases impacted our operating margin negatively by more than 5 percentage points and premium freight costs also increased substantially. The higher premium freight cost was a result of logistical bottlenecks and volatile customer call-offs.

In the quarter, we achieved the targeted level of customer compensation, which still was relatively limited compared to the cost increased level. As a result, sales and profitability were lower than expected. In response to the ongoing challenging market conditions, we further strengthened our cost control measures, implemented a hiring freeze and accelerated other cost savings and footprint activities. Despite the challenging environment, our cash flow was positive and our balance sheet remains strong. The leverage ratio remains within our targeted range. In the quarter, we paid $0.64 per share in dividends and initiated the stock repurchase program.

Looking at the rest of the year, we expect increased sales outperformance versus light vehicle production. It is our plan and ambition that our product price increases completed with strict cost control measures with gradual offset the cost increases. Therefore, we expect the sequential margin improvement in the second half of the year, supporting a trajectory towards our mid-term targets.

Looking now on the direct effects on the war in Ukraine on the next slide. Our hearts are with everyone affected by the massive humanitarian crisis created by the war in Ukraine. The war has significantly affected automotive industry, especially in Europe. We have no operations in Ukraine, but we have identified four sub-suppliers in Ukraine. We are in the process of transferring our component procurement out of Ukraine. And we have not stopped any of our customers. However, the war has affected our customers’ ability to produce vehicles, leading to lost volumes and more volatile customer call-offs. As a result, we lost almost 25% of expected sales in March in Europe, significantly affecting our operational efficiency.

Autoliv has one production plant in Russia with around 200 employees. In 2021, our sales in Russia reflected less than 1% of our global net sales. As this is a very volatile and challenging situation, we continue to monitor developments closely, and we are reviewing our presence in Russia.

Looking now on the financial overview on the next slide. Our consolidated net sales of $2.1 billion was 5% lower than in Q1 2021, due to negative currency effects and lower global light vehicle production. Adjusted operating income, excluding costs for capacity alignment fell from $237 million to $68 million. The adjusted operating margin was 3.2% in the quarter. The lower operating margin was mainly a result of rising costs for raw materials, higher costs for freight, especially premium freight and lower than expected light vehicle production. Operating cash flow was $70 million, which was $116 million lower than the same period last year, mainly due to the lower net income.

Looking now on the organic sales development on the next slide. Our sales in the quarter came in lower than expected with light vehicle production in all regions disappointing, except Rest of Asia. According to IHS Markit, global light vehicle production declined by 4% year-over-year in the quarter. This was 2 percentage points worse than expected at the beginning of the quarter. As a result of the declining light vehicle production, our first quarter sales declined organically by 1%. This was 3 percentage points better than the light vehicle production according to IHS Markit. The outperformance came despite the very negative regional mix impact of more than 8 percentage points in the quarter, as a result of production in low-safety-content markets growing. Supported by recent launches and more positive regional mix, as well as a positive pricing, we see sales outperforming LVP substantially more for the rest of the year.

Based on the latest light vehicle production numbers from IHS Markit: we outperformed in Europe by 12 percentage point; in Japan, by 7 percentage points; and in Americas, by 3 percentage points. In China, sales underperformed by 2%. The reason for the underperformance in China was mainly the mix effects from production of low-end vehicles growing by 17%. For 2022, we are confident of a solid outperformance in all major regions.

On the next slide, we see some key model launches from the first quarter. In the quarter, we had a high number of launches, especially in Japan and China. The models shown on this slide, have an Autoliv content per vehicle from approximately $50 to more than $400. The long-term trend to higher CPV is supported by the introduction of front center airbags, battery cut-off switches, and pedestrian protection airbags. We are also launching side airbags and curtain airbags on vehicles produced in India. Exemplified here by the Suzuki Glanza, supporting the Indian government’s intention to make side protection airbags mandatory later this year.

I will now hand it over to our CFO, Fredrik Westin, who will talk about the financials on the next few slides.

Fredrik Westin — Chief Financial Officer

Thank you, Mikael. This slide highlights our key figures for the first quarter of 2022 compared to the first quarter of 2021. Our net sales were $2.1 billion. This was a 5% decrease compared to the same quarter last year. Gross profit declined by 37% to $288 million, while the gross margin decreased 13.6%. The gross margin decrease was primarily driven by raw materials, premium freight and the volatile and lower than expected light vehicle production. The reported operating income decreased to $134 million from $237 million. In the quarter, capacity alignments had a $66 million positive impact on the operating profit. As a result, the adjusted operating income decreased to $68 million from $237 million. The adjusted operating margin declined to 3.2%.

The operating cash flow was $70 million. Earnings per share diluted decreased by $0.85, where the main drivers were $1.39 from lower adjusted operating income, partly mitigated by $0.49 from capacity alignment, $0.05 from financial items and $0.03 from lower tax. Our adjusted return on capital employed declined to 7% and the adjusted return on equity to 6%. We paid a dividend of $0.64 per share in the quarter, same as in the previous quarter and repurchased around 230,000 shares for $18 million under our three-year stock repurchase program.

Looking on to the adjusted operating income bridge on the next slide. In the first quarter of 2022, our adjusted operating income of $68 million was $169 million lower than the same quarter last year. The impact of raw material price changes was a negative $110 million in the quarter, year-on-year. Foreign exchange impacted the operating profit negatively by $5 million, mainly as a result of the stronger US dollar. Support from governments in connection with the pandemic was $7 million higher than in the first quarter compared to last year. SG&A and RD&E net was unchanged. Our strategic initiatives continue to yield good results. However, these positive effects were more than offset by the difficult market environment. Premium freight and lower than expected sales but also high call of volatility and broad cost inflation, for instance, related to logistics and utilities impacted our operations negatively.

Looking on the cash flow performance on the next slide. For the first quarter of 2022, operating cash flow decreased by $116 million to $70 million compared to last year, mainly due to lower net income. Compared to prior quarter, working capital deteriorated by $18 million despite a $20 million improvement in trade working capital. This was mainly a result of $136 million increase from inventories and $125 million from increase of receivables, partly offset by $241 million from accounts payables. The increase in inventories was due to customers in Europe stopping production around quarter-end because of supply chain distress related to the war in Ukraine and lockdowns in China. For the first quarter, capital expenditures, net decreased by 82% to $17 million, mainly as a result of the divestiture of facility in Japan. Capital expenditures, net in relation to sales was 0.8% versus 4.1% a year earlier. Excluding the divestiture in Japan, capital expenditures was $112 million. For the first quarter 2022, free cash flow was $53 million compared to $93 million a year earlier, driven by the lower operating cash flow, partly offset by lower capital expenditures, net. The cash conversion for the last 12 months was 72%. In the quarter, we paid $56 million in dividends and repurchased shares for $18 million.

Now, looking on our leverage ratio development on the next slide. We are pleased that our focus on capital management is yielding results and we can maintain a strong balance sheet also in these challenging times. This has enabled us to start the repurchasing of shares and to maintain our dividend. The leverage ratio at the end of March 2022 was 1.4 times, a significant improvement since the peak of 2.9 times in 2020 and unchanged versus a year ago. In the quarter, our 12-month trailing adjusted EBITDA decreased by $176 million, partly offset by the net debt decrease of $19 million.

Now, looking at the raw material development on to the next slide. The exogenous shock from the war in Ukraine adversely impacted an already distressed global supply chain driving prices of raw materials further upwards. Cost increases for raw materials generated a headwind of $110 million or around 5 percentage points to our operating margin in the first quarter. This was higher than the full-year impact in 2021 of $105 million. In the current price environment, we believe that raw material costs before any customer compensations could be up to 6 percentage points in operating margin headwind for the full-year 2022 with similar year-over-year effect in all quarters. This is, of course, a situation, which we must address through serious actions to ensure we are back on the trajectory towards our medium-term profitability targets as soon as possible.

A key lever to achieve this is outlined on the next slide. We are engaging in customer discussions aiming at unprecedented price increases to reflect the significant cost inflation, mainly from raw materials but also lost volumes and logistic costs. Over time, we believe and expect the customer recoveries should offset the cost inflation. We were on track to achieve the recoveries we had targeted to cope with the cost increases that we anticipated prior to the latest surge in prices and costs. However, the ongoing inflationary pressures require additional actions. Therefore, we have established a global commercial recovery task force and we have escalated the negotiation processes and are engaged in customer discussions, demanding compensation for the recent additional cost inflation. The main focus is on price increases from mid-year and onwards. In parallel, we’re implementing greater pricing flexibility into new contracts to account for an environment with changing cost levels. For commercial reasons, we will not discuss the level of anticipated recovery or its nature. In addition to commercial recoveries and price increases, we are undertaking other actions as well, as discussed on the next slide.

In response to the increased challenging market conditions, we continue with strict cost control measures, a hiring freeze and accelerated cost savings and footprint activities. In addition to recently announced capacity alignments and footprint actions in Japan, Europe and Americas, we are reducing direct labor, closing one plant in South Korea and we divested a property in Japan. In total, we reduced headcount by over 1,700 versus the same quarter last year despite similar sales levels. Additionally, our measures include management of inventories and payables negotiating with suppliers to mitigate cost inflation. Our supply chain management teams have been working hard to balance inventories to actual demand. During the quarter, production planning accuracy declined as a result of the war in Ukraine and the extensive lockdowns in China.

Now, switching to the market development, I hand it back to Mikael.

Mikael Bratt — President and Chief Executive Officer

Thank you, Fredrik. Looking now at the light vehicle production development on the next slide. While global markets are influenced by the ongoing war in Ukraine, Europe is undeniably the most severely impacted. Beyond the direct impact to Russian LVP, the war in Ukraine also significantly affects wire harnesses production mainly for German automakers. Compared to three months ago, IHS Markit has reduced its global light vehicle production growth for 2022 by more than 4 percentage points to less than 5%, with European accounting for 90% of the reduction. Additionally, we see further risk to supply chains and the broader economic landscape. Given the ongoing uncertainty, we have a scenario-based approached to light vehicle production and therefore, our updated guidance is based on a light vehicle production range.

Looking at LVP forecast in more details on the next slide. For the second quarter of 2022, global light vehicle production is expected to further decline compared to Q1 2022. In North America, sales of light vehicles are slowly improving on a quarter-to-quarter basis and should continue strengthening over the remainder of the year. However, due to low inventory levels, deliveries remain well below demand and well below deliveries a year ago. European production will remain challenged as weak Q1 production is expected to carry forward into Q2 as the war in Ukraine continues to stress the supply chains. Hit by strict COVID containment measures, light vehicle production and sales in China started to decline in March. Lockdowns are also interrupting auto production outside China as export of components are effected. In the near term, global light vehicle production outlook will be determined by the availability of components, as well as the effects of lockdowns in China.

Now, looking on the 2022 business outlook on the next slide. We expect higher sales outperformance versus light vehicle production for the rest of the year, supported by launches, regional mix and higher prices. For the second quarter of 2022, we forecast the adjusted margin to be weaker than in the first quarter due to lower and more volatile light vehicle production and we expect cost inflation to increase faster than our cost compensation. We expect second half of the year improvements from alignment of direct labor with light vehicle production, footprint optimization activities and less volatile light vehicle production in Europe and China. Most importantly, we are negotiating price increases with our customers to compensate for current cost inflation. We believe and expect that our price increases should gradually offset the cost inflation and assuming some degree of market stabilization, we should be back on trajectory towards our mid-term target.

Looking at the updated full-year 2022 indications on the next slide. The updated indications are based on the assumption that global light vehicle production will grow 0% to 5% and that we achieve our targeted price increases, plus some level of market stabilization. We expect sales to increase organically by around 12% to 17%. Currency translation effects are assumed to be around a negative 3%. We expect an adjusted operating margin of around 5.5% to 7%. Operating cash flow is expected to be around $750 million to $850 million. Our full-year 2022 indications exclude cost for capacity alignment, anti-trust related matters and other discrete items.

Turning to the next slide. We now see global light vehicle production growth being 4 percentage points to 9 percentage points lower than in the previous indications from January 2022. Rising raw material costs are expected to have an additional 300 basis points negative impact. We believe our strategic initiatives and other actions should offset some of these additional headwinds. This should lead to an adjusted operating margin for the full-year 2022, that is 2.5 percentage points to 4 percentage points lower than the previous indication. Our adjusted operating margin outlook may still be impacted by supply chain disruptions in the automotive industry and potential risk of surge in COVID cases and its effect on us and the automotive industry.

Turning the page. In closing, to summarize our 2022 outlook, we expect continued strong outperformance versus light vehicle production, supported mainly by product launches, increase in content per vehicle and price increases. Supported by a somewhat more stable markets, we anticipate to gradually offset much of the cost inflation in the coming quarters, which will take us back to a trajectory towards our mid-term targets. Additionally, our balance sheet and cash flow should allow for continued shareholder return.

I will now hand it back to Anders.

Anders Trapp — Vice President, Investor Relations

Thank you, Mikael. Turning to the next slide, which concludes our formal comments for today’s earnings call. And I would like to open the line for question.

So now, I turn it back to you, Mark.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And we have a few questions lined up so far. The first is from Hampus Engellau of Handelsbanken. Please go ahead, your line is open.

Hampus Engellau — Handelsbanken Capital Markets — Analyst

Thank you very much. I just have one question. But it’s maybe a dual question here. What I’m trying to understand, Mike is, the pricing situation that you’re in and especially when I put it into the perspective that the [Indecipherable] have increased new car pricing by 5% to 8%, used car prices are up 25% and many of the OEMs reported record margins last year. And hasn’t this in some way impacted your possibility to push forward price increases? Or could you maybe elaborate on that a bit? And also, what kind of time lag we should expect on the price increases that you have implemented so far? Thanks.

Mikael Bratt — President and Chief Executive Officer

Thank you, Hampus. No. Let me say that, I mean, I feel comfortable going to the customers here and discuss and negotiate these price increases. I mean, it’s clearly show that what we are going to the customers with is the inflationary pressure we see in the industry and it’s not Autoliv-specific issues, if I put it like that. So, I mean, when we go into this discussion, we have well built up cases here. And as you said, they have already started this year, but as a supplier it’s in the business models we have at least had history as a supplier, you can’t anticipate price increases before that happens. So therefore, we can go only go to the customer when we have them, so to speak, and that is what we’re doing now. So therefore, you have this time lag as we have talked about here. But once again, I feel comfortable in our ambitions here of getting the compensation for the inflationary pressure that is in the industry.

Hampus Engellau — Handelsbanken Capital Markets — Analyst

Okay. Thanks.

Operator

Thank you. Our next question comes from the line of Colin Langan at Wells Fargo. Please go ahead, your line is open.

Colin Langan — Wells Fargo Securities — Analyst

Oh, great. Thanks for taking my questions. Just looking at Slide 12, definitely clear that raw material costs of — obviously massively increased since the beginning of 2020. But for a lot of them, there are not too far off of the end of last year. So trying to line up the big increase in raw material headwinds versus where we ended last year a lot of these aren’t too off base. Is it that the assumptions, the initial guidance we’re assuming that some of these started to moderate? Is there sort of a timing issue? I’m just trying to think about where we were at year-end and why the large increase today?

Mikael Bratt — President and Chief Executive Officer

Yeah. So, I mean, as we laid out in the — after the Q4 earnings, we said that it was also based on, say, an expected development of raw material prices going forward. And when we look at what now the — especially the Ukraine war has done to the raw material situation, we see that the increase that we have now from roughly 300 basis points to 600 basis points, roughly 3/4 of that are from steel and non-ferrous metals. And this is really where the — was the forward curves have changed significantly. So we now assume that we will roll over these contracts at significantly higher price levels than what we were assuming just three months ago. So that’s the main difference here in the assumptions going forward.

Colin Langan — Wells Fargo Securities — Analyst

Okay, got it. So it is a sort of forward-looking change. Okay. And then as I’m looking at the full-year guidance, you’ve indicated next quarter is going to be a bit worse than this quarter. So we’re talking 3 percentage maybe for the first half to get to the midpoint, which is like 6.25 really required I think almost a tripling of margins from first half to second half. You mentioned some items, I mean, what are really the major step functions to kind of get the that big sort of first half to second half fleets? When we think it’s sort of ranking order to drive that?

Mikael Bratt — President and Chief Executive Officer

It’s all about closing this time gap between cost increases that we are facing from our value chain with the compensation from our customers here. And as we indicated already in the Q4 earnings release, we stated that the first half of the year will be challenging and we talked there about 500 basis points raw material headwind in the first half and then we should see the compensation coming through the second half of the year and that’s still the dynamics in the guidance we are doing. Now, the difference compared to that, of course, is that, the war in Ukraine put additional pressure on the value chains here and drove up the prices, not only raw material, but also on logistics cost and energy prices, etc., which meant that we now needed to opt our ambitions here with the price increases with the customers. And hence, then you have the time gap again here. So we will see then gradual improvement on price side closing this gap. So, of course, there is a big difference between the first quarter and the last quarter in this forecast, which is also was in the guidance for the year.

Colin Langan — Wells Fargo Securities — Analyst

Got it. All right. Thanks for taking my question.

Mikael Bratt — President and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from the line of Rod Lache at Wolfe Research. Please go ahead, your line is open.

Rod Lache — Wolfe Research — Analyst

Hi, everybody. So I also wanted to ask about the commodities. So last year, thanks for quantifying, you had a 130 basis point drag from raw materials and now you’re up to 600 this year, so 700 basis points cumulatively, can you just remind us, first of all, is that a gross or net number? And I was hoping you can elaborate a little bit on the timeline and magnitude of potential recovery? So if you achieve the recovery that you anticipate in the back half of this year, I would imagine some of that spills over to next year. What can you maybe give us a little bit of color on the magnitude of tailwind that would then — you would then benefit from next year from this?

Fredrik Westin — Chief Financial Officer

Yeah. So the guidance on the raw material side continues to be a gross number as we always had. So there is no recovery or offsets in that number, that’s the effect that we see the raw material prices hitting our P&L on the cost level. And then as Mikael already indicated, if you look at our, say, the margin levels that we achieved during the first quarter and indicating also for the second quarter and then the implied trajectory and then into Q3 and Q4 you can see that we are expecting a significant recovery level. However, with the raw material price increases, say, the net of the cost increase versus offset then by recoveries is less favorable now than it was in the initial guidance. But we should be, as we say back towards the trajectory to meet the 12% margin target that we have for the medium-term and then that should be quite visible already in the Q3 and Q4 performance.

Rod Lache — Wolfe Research — Analyst

Okay. You mentioned premium freight and other cost inflation and that’s why you’re seeing that $61 million drag on a 1% organic decline. Are you expecting to recover that through pricing as well?

And then just lastly, you mentioned additional semiconductor is due to the war in Ukraine, can you just elaborate on what you’re specifically looking at?

Fredrik Westin — Chief Financial Officer

And so, on premium freight was quite substantial in the quarter. I mean, as Mikael mentioned, 5% was — well, more than 5% was the hit from raw materials, which was fairly much in line with our guidance, but then we saw roundabout a 2% hit on the margin also from premium freight. Of which we believe the majority of that is recoverable then throughout the remainder of the year. But then we also saw inefficiencies on the direct labor, mainly due to the call-off volatility, but also related to COVID shut or COVID cases in both Europe, but also parts of Southeast Asia and in China, which hampered our ability to run at normal productivity levels. And on top of that then also the, what you can see the markets, also the freight and utility cost levels have come up quite significantly also in the first quarter. So those are the main components of the $61 million headwinds on the operation side.

And can you repeat your second question on Ukraine? I didn’t fully understand it.

Rod Lache — Wolfe Research — Analyst

You — on one of your slides, you alluded to additional semiconductor risk due to the war in Ukraine. So, it sounded like you were tying that and was that related to neon gas or was there something else that you’re seeing that led you to raise that, is a larger risk associated with the conflict?

Mikael Bratt — President and Chief Executive Officer

Yeah, that’s correct. I mean, that’s one example about the raw material is also going into the semiconductor production that is affected by the war in Ukraine there. But I think on the semiconductor side, I mean, there is also, of course, still some challenges when it comes to the total supply there and that’s also what is the challenging. But overall LVP outlook here, as we have outlined here, at least the China situation there where the semiconductor manufacturing go down slightly in Q1 and, of course, with the lockdowns and the consequences also on the freight out of China, that you can expect some distortions [Phonetic] of that. But it’s all part of the 0% to 5% growth number for LVP included there.

Rod Lache — Wolfe Research — Analyst

Okay. All right. Thank you.

Operator

Thank you. And our next question comes from the line of Vijay Rakesh of Mizuho. Please go ahead, your line is open.

Vijay Rakesh — Mizuho Securities — Analyst

Yeah. Hi, Mikael and Fredrik. Just on the full-year guide. Just wondering if you’re able to — the 12% to 17% year-on-year, are you able to pass on some of the cost? And what’s — what price increases are you embedding in that full-year number? Again, give us some color?

Mikael Bratt — President and Chief Executive Officer

No. We don’t go into any details on the levels and so forth here specifically as we are in the midst of the negotiations with our customers here. So, with that said, I started out this Q&A session here by stating that I feel comfortable with us going down to the customer, achieving and the full compensation for what is then inflationary pressure in the system. Once again, it’s not Autoliv unique cost increases here. It is in — cost pressure in the industry here.

Vijay Rakesh — Mizuho Securities — Analyst

Got it. Makes sense. Yeah. And I think you also mentioned some customer call-offs about 25% of European sales affected. Now, with this Shanghai shut down almost a month into the quarter here. Are you seeing that distress in the supply chain resulting in call-offs in both Europe and China? Or what’s being embedded or what are you seeing in your order activity? Thanks. That’s it.

Mikael Bratt — President and Chief Executive Officer

No. As I said, I think the consequences from what have happened so far in terms of lockdowns in China during the quarter here and as we speak, I will say is included in the 0% to 5% scenario. Then, of course, as we have pointed out here, there is a lot of uncertainty around the COVID situation, as well as the war in Ukraine, etc., on further impact. But what we can identify today, we believe that’s within the 0% to 5% LVP growth there.

If that answers your question.

Vijay Rakesh — Mizuho Securities — Analyst

Yeah, thanks.

Operator

Thank you. And the next question comes from the line of Joseph Spak at RBC Capital Markets. Please go ahead, your line is open.

Joseph Spak — RBC Capital Markets — Analyst

Thank you, everyone. I guess, I just wanted to understand a couple of things on pricing because on Slide 19 you’re showing for the full-year that you’re basically able to offset the — pretty much the entire impact of raw materials. And I know some of that’s going to be on your actions, but that implies and it’s actually a much bigger impact on the raw material headwind in the second half, because you don’t really get any of that in the first half. So, I guess, I’m just trying to understand, are you — look, I can understand how you can price for inflation, but it seems like there is maybe also an element of recovery for prior impact. And is that correct? And then I just also want to confirm that functionally is any recoveries are reported in — are they reported in sales, so it’s also impacting your organic growth or is it a contra expense?

Mikael Bratt — President and Chief Executive Officer

No. I mean, if I start and Fredrik can fulfill on the details there. But, I mean, of course, when we go now to the customers, we are seeking full compensation for what is then the inflationary pressure as I mentioned here. Then, of course, also you have other claims here connected to the specific situation also with the customer is, I mean, as Fredrik alluded to before, some of their premium freights that are caused by the customer is also on the claims lease there, so we include that. And I think that the impact here on our full-year guidance is the timing gap between when we are being hit by the cost and when we get the customer compensation here.

And as I said, it’s — support has been a part of the business model for auto suppliers, as you know, and that, of course, is something we’re working on to shorten as much as possible. But when it comes to the high tier and the facts behind it, I feel comfortable here to go to the customer with the full amount here.

Fredrik Westin — Chief Financial Officer

Yeah. And the recoveries will be in our net sales. So that’s how we will report them. And as such there then also part of the organic growth outperformance. So one of the reasons why we then have increased that from 11% to 12% is also from a higher than previously expected price adjustment from our customers to offset the stronger raw material headwinds that we’re facing.

Joseph Spak — RBC Capital Markets — Analyst

Okay. And then, I guess, Mikael’s maybe building off some of the comment you just made here about changing relationships and you mentioned in your report and I think in your opening comments something about greater pricing flexibility going forward. Does that mean that you are trying to move more towards an indexing model versus prior similar to other suppliers? And if so, is that just for new contracts or is that something you think you can achieve for existing contracts as well?

Mikael Bratt — President and Chief Executive Officer

No. As I said, I mean, I wouldn’t say that it’s down to the question is indexation or not. I think it’s all about that we are in a different environment now than what we have been for the last at least 20 years here. And, of course, there is changing — change over time also for our customers as well for ourselves here. But I think we have good speed and good focus when it comes to get these adjustments in place and as we continue to see at least for some time here continued pressure that will be an ongoing dialogue, of course, with the customer.

Joseph Spak — RBC Capital Markets — Analyst

So, just a follow-up, what do you mean by greater pricing flexibility then, when you mentioned that?

Mikael Bratt — President and Chief Executive Officer

No. It means that we need to make sure that we have faster response time from our customers here to get compensated for the price increases we see in our system. And then you can achieve that with different means, but it’s more, I would say, part of the dialogue with the customers and how you set it up with respective customers. And, of course, as we mentioned, indexation is one tool in that tool box, but it’s something we need to develop individually with our respective customer.

Joseph Spak — RBC Capital Markets — Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Sascha Gommel at Jefferies. Please go ahead, your line is open.

Sascha Gommel — Jefferies — Analyst

Thank you very much. I also got a couple of items. The first one is just a clarification. In that 600 basis points of headwind you’re guiding, is there the freight cost or the logistics headwind included or would that come on top and how much is that in the full-year?

Mikael Bratt — President and Chief Executive Officer

It’s — the 600 basis points is pure raw material. We haven’t specified the freight cost of any other inflationary cost pressures specifically there. It’s part of the overall guidance in fact there. But once again, all that type of cost is what we intend to get compensated for.

Sascha Gommel — Jefferies — Analyst

I see. But is it fair to assume that this kind of logistics headwind remains at least for the second quarter, if not also for the second half?

Mikael Bratt — President and Chief Executive Officer

Yes.

Fredrik Westin — Chief Financial Officer

Yes.

Sascha Gommel — Jefferies — Analyst

Okay, great. And then the second thing I wanted to clarify is the share buyback. On your website, you only reported numbers until the end of March and does that imply you stopped the share buyback at the end of March or are you still buying right now?

Mikael Bratt — President and Chief Executive Officer

As you know, we publish there when transactions are being done. And we don’t comment on what we intend to do and when we intend to do it and so on. But, I mean, we have initiated a buyback program and we are committed to the 1.5 billion by 2024 there in the buyback program.

Sascha Gommel — Jefferies — Analyst

That means, there will no buying early April?

Mikael Bratt — President and Chief Executive Officer

We will continue to inform you when we have done something in the program there.

Fredrik Westin — Chief Financial Officer

Yeah. And we have to report it weekly. So if there was nothing reported, then [Speech Overlap].

Sascha Gommel — Jefferies — Analyst

I appreciate it. Thank you.

Fredrik Westin — Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Agnieszka Vilela of Nordea. Please go ahead, your line is open.

Agnieszka Vilela — Nordea Markets — Analyst

Thank you. When I look at the raw material impact on your EBIT, it was the aggregate — that there is expected to be in the aggregate at $600 million in the past two years, 2021 and now including guidance for 2022. And you say that you have the ambition to recover that and also recover the freight cost and other costs that you’re incurring right now. What gives you confidence that you can reach this kind of recovery? And also, when we should expect that? So will it spillover to 2023 as well? Thanks.

Mikael Bratt — President and Chief Executive Officer

Thank you. I mean, the confidence in achieving this lies in the fact that it is external price pressure towards the industry. It’s not Autoliv-specific. I would rather say that, I mean, I think we have, through our supply chain team, managed to keep down the cost increases here for better part of 2021 and at low levels. I think we have done a great job there. We are not asking for anything more than what has ended up here. So I think we have good arguments and good facts behind this. And once again, it’s inflationary pressure and inflation by definition is passed on here. And as we stated before here, we see then a gradual recovery here over the next coming quarters here. So full focus on 2022 here.

Agnieszka Vilela — Nordea Markets — Analyst

Great. Thank you. And then the last question from me is that, if you look at your leverage it is now approaching 1.5 times, which is the high end of your target. Is it fair to assume that you could pause the share repurchases right now?

Mikael Bratt — President and Chief Executive Officer

I think, as we have said before here, I mean, when to move forward on the share repurchase is a number of factors that needs to be built in that decision and leverage, of course, is one, but it’s also our cash flow generating capabilities going forward here and where we are in general in the cycle here. So there’s a number of factors here. So, it’s not absolute black and white definition on the buyback if it’s 1.5 or 1.6 or 1.4. It is a combination of all the three. And I think we have used the phrase before as we have a pragmatic view on that and that’s still true going forward.

Agnieszka Vilela — Nordea Markets — Analyst

Thank you.

Mikael Bratt — President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Philipp Koenig of Goldman Sachs. Please go ahead, your line is open.

Philipp Koenig — Goldman Sachs — Analyst

Yes, thank you very much for taking my question. I’ve just got a question on the operating leverage. If we think about the second half of the year to sort of get to your guidance, it implies sort of a 9% to 10% margin. You mentioned earlier and also on Slide 19 that you expect to offset the 3% additional raw materials with your pricing and other cost actions. Just thinking about the organic growth, how — when you have positive LVP growth in the second half of the year, do you sort of expect to be back at the normalized operating leverage level or do you think because of higher freight costs and everything that flows into that part of the operations that maybe that will continue to lag and all of the margin improvement will come from the pricing? It would be helpful. Thank you.

Fredrik Westin — Chief Financial Officer

No. We believe that the underlying operational leverage should be within the range that we’re normally talking about 20% to 30% and in probably at the higher end of that range, when you exclude for, say, the inflationary pressure. So if you take those costs out, but also the recovery. So the underlying operational performance should be at the upper end of that 20% to 30% range is our expectation.

Philipp Koenig — Goldman Sachs — Analyst

Okay. Thank you. And then my second question just quickly on the FX, obviously, there was a quite a minimal impact on the EBIT line, although it was fairly more material on the revenues. Is that sort of something you expect going forward, given the hedges that you have in place?

Fredrik Westin — Chief Financial Officer

So we’re expecting roughly a 3% translational effect on revenues, so slightly lower for the full-year than what we had in the first quarter.

Philipp Koenig — Goldman Sachs — Analyst

And on the EBIT?

Fredrik Westin — Chief Financial Officer

What we can see at the moment, it’s not a material effect.

Philipp Koenig — Goldman Sachs — Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Chris McNally of Evercore. Please go ahead, your line is open.

Chris McNally — Evercore ISI — Analyst

One recap and then one on incremental detrimental margin. So focusing on that Slide 19, just to recap on the extra 300 basis points of raw materials from all the question so far. So is it fair to characterize that it’s not really about spot prices having increased essentially when you made the guidance in the beginning of the year, you were expecting, let’s call it, lower steel and magnesium cost for the second half into 2023 that now because prices are elevated is an incremental pressure to your guidance? And you, obviously, going to price for that but there is a delay. Just wanted to make sure I understood that dynamic.

Fredrik Westin — Chief Financial Officer

Yeah, that’s a correct assessment or conclusion. It is that, we don’t — as we have said, many times we don’t buy on the spot markets but the developments of the spot markets have also impacted the prices at which we now can close, they are more long-term agreements, and that’s the effect that we’re talking about. We have then increased our commercial recovery ambitions accordingly. But as Mikael has laid out, there will be a continuous timing or time lag effect should these material cost materialize as they are now, say, as we are guiding for them.

Chris McNally — Evercore ISI — Analyst

Okay. Well understood. So then the second question is really on the first bar on decremental margins associated with lower production. I mean, obviously, I don’t think the Slide 19 is maybe fully to scale, but could you help us understand on, let’s call it, the lost 6%, 7% of core production by your adjustment. What was the sort of normal detrimental margin? And then on top of that, you obviously had some disruption and things like that, but just an idea from here what your decrementals and incrementals could be because of things like freight, it’s hard for us to see what your true detrimental margin was on just pure volume.

Fredrik Westin — Chief Financial Officer

No. It’s what I said before. I mean, if we exclude the inflationary effects and there are, it’s not only raw material, but it is the vast majority is raw material, but then we also have increased labor costs, they have not picked up yet so much in the first quarter, it will be more pronounced in from Q2 going forward. And then, of course, also logistics costs and utilities. But as I said, it is — raw material is the vast majority of that. And that — if you exclude for that, then our operating leverage is at the upper end of the 30% — 20% to 30% range if we look at the underlying performance of the business.

Chris McNally — Evercore ISI — Analyst

Okay. So at the higher end of the range then on top of it is the things like sort of expedited freight. I mean, the only reason I ask is things like labor cost, I’m not sure how much that’s changed in the last two months.

Fredrik Westin — Chief Financial Officer

Labor cost inflation has not been material or not very significant to date. I mean, it’s the way that we — that our contracts are setup. It’s something that typically starts at the end of the first quarter and then is in the run rate as of the second quarter going forward. But that was not so much an impact in the first quarter. It was more of what I said before that the COVID shutdowns and the supply chain volatility led to lower operational efficiency and productivity in our operations and that was an issue here in the first quarter.

Chris McNally — Evercore ISI — Analyst

Perfect. Thanks so much guys.

Fredrik Westin — Chief Financial Officer

Thanks.

Operator

Thank you. Our next question comes from the line of Brian Johnson at Barclays. Please go ahead, your line open.

Brian Johnson — Barclays — Analyst

Thank you. And thank you for a very kind of honest and kind of open the situation on the ground with inflation. I just want to kind of get a little bit understanding, when we came into the year, you were looking towards productive negotiations with the customers to get back to that 10% to 11% margin targets where you’ve been kind of since then OEM margins continue to expand but clearly the paying on suppliers with fixed price contracts is increasing. So are the OEMs expect you to take some pain share and live with lower margins in this environment? Or can they see their way to getting you — not that this would be their thinking, back to your original margin targets?

Mikael Bratt — President and Chief Executive Officer

No. I can’t comment on what the OEMs are planning or thinking. But, I mean, in terms of pain sharing, I think, it’s quite visible, the effects we have had here as a result of the increased prices here. And we are absolute determine here that this needs to be passed on and that’s what we’re working accordingly as we have expressed here. And once again, it’s not Autoliv-specific costs that is created here and that needs to be passed on. It is inflationary pressure and that needs to go on. So that’s what we’re working with. And as I said, I feel comfortable in these dialogues based on that assumption.

Brian Johnson — Barclays — Analyst

And just a follow-up kind of thinking of this managerial for them putting through an OEM. Clearly, I would imagine your competitors are going after the OEMs for discussions every other component supplier would likely to hear that certain season, it’s accelerating discussions. So just logistically, how does that get done? Is that a program by program negotiation? Do you have to work your way up to the CEO and get final sign off on pricing? And just how does the timing and how this is just the sheer overload I imagine on procurement organizations that are also trying desperately find supply to keep their factories open? How does that affect the timing of recovery?

Mikael Bratt — President and Chief Executive Officer

No. I mean, those factors you mentioned, there is nothing I see or we see. I mean, we have our relationships well established within the OEMs and we access them when we need to access them. And I would say, it’s more a negotiation question about time more than anything else. And, of course, the daily business are running in parallel there, so it’s nothing impacting there. So, no, it’s a pure commercial negotiation that is taking place. And it’s, of course, challenging times for everyone in the industry here, but nothing dramatic about that in relation to anything that needs to be done.

Brian Johnson — Barclays — Analyst

Okay. And just final follow-up, you do have a substantial presence with Japanese OEMs. They just closed out their fiscal year, usually calendar first quarter is when they true up with suppliers. Did — were you able to get recoveries there or did you kind of because Ukraine war broke relatively late in the quarter? Do we have to kind of wait till calendar first quarter ’23 for those negotiations to conclude?

Mikael Bratt — President and Chief Executive Officer

No. I mean, I can’t comment on how we succeeded with specific OEMs here. But as we have mentioned here, we were on track when it comes to the commercial recovery based on the regional scenario here. But with the war in Ukraine and additional pressure that has been applied on the supply chains and price increases coming out of that, we needed to upped our ambition levels here and that is what is being brought back on the table here. Additionally, on what was on top and that’s true for all OEMs and all global players here.

Brian Johnson — Barclays — Analyst

Okay, thanks.

Anders Trapp — Vice President, Investor Relations

All right. I think that was the last question. We are out of time. Mark?

Operator

We did have one further question, if you have time for it, but we have reached the top of the hour. So completely up to you.

Anders Trapp — Vice President, Investor Relations

Sorry, there was one more question. I thought it was all out. Yes. We take one more.

Operator

Okay. And that’s from the line of Itay Michaeli of Citi. Please go ahead, your line is open.

Itay Michaeli — Citigroup — Analyst

Great. Thanks. And thanks for squeezing me in. I’ll just two quick ones. Just going back on the pricing negotiations. What you’re expecting in the second half of the year for recoveries? Roughly how much of it’s already been secured versus still to be negotiated?

And then secondly, on the new contracts you’re signing for forward programs, are you actively — are you actually getting higher pricing on your content per vehicle on those programs to kind of compensate for the higher inflation environment?

Mikael Bratt — President and Chief Executive Officer

No. As I said, we can’t go in and quantify any details around it here. I mean, it’s all built into the — and really the consequence — the timing of it is built into our full-year guidance, and I have to leave it like that as we are in the midst of the discussions here. And, of course, all new quotes that is being discussed and awarded are more in the right level than, I would say, the current portfolio currently are running at. So that is, of course, taking care of there. So [Speech Overlap], of course, it was yesterday.

Itay Michaeli — Citigroup — Analyst

That’s great. Thank you.

Mikael Bratt — President and Chief Executive Officer

Thank you.

Operator

Thank you. And with that, there are no further questions in the queue. So I’ll hand back to you for the closing comments.

Mikael Bratt — President and Chief Executive Officer

Okay. Thank you very much, Mark. I know I speak for everyone at Autoliv in expressing our concerns for all those affected by the war in Ukraine. In this very volatile and challenging situation, we continue to monitor the development closely.

Before we end today’s call, I would like to say that we intend to do what it is needed to do in order to get back on track to our medium-term targets. And I’m confident that Autoliv will come out of this challenging time as a stronger company. Meanwhile, Autoliv continues to focus on our vision of saving more lives, which is our most important contribution to a sustainable society.

Our second quarter earnings call is scheduled for Friday, July 22, 2022. Thank you, everyone, for participating on today’s call. We sincerely appreciate your continued interest in Autoliv. Until next time, stay safe.