Autoliv, Inc. (ALV) Q2 2022 Earnings Call Transcript

Autoliv, Inc.  (NYSE: ALV) Q2 2022 earnings call dated Jul. 22, 2022

Corporate Participants:

Anders Trapp — Vice President, Investor Relations

Mikael Bratt — President and Chief Executive Officer

Fredrik Westin — Executive Vice President, Chief Financial Officer

Analysts:

Mattias Holmberg — DNB — Analyst

Emmanuel Rosner — Deutsche Bank Securities — Analyst

Hampus Engellau — Handelsbanken — Analyst

Colin Langan — Wells Fargo — Analyst

Chris McNally — Evercore — Analyst

Giulio Pescatore — Exane BNP Paribas — Analyst

Joseph Spak — RBC Capital Markets — Analyst

Agnieszka Vilela — Nordea — Analyst

Philipp Konig — Goldman Sachs — Analyst

Vijay Rakesh — Mizuho Securities — Analyst

Erik Golrang — SEB — Analyst

Presentation:

Operator

Welcome to the Q2 2022 Autoliv Inc.’s Earnings Conference Call. [Operator Instructions]

Today, I’m pleased to present the CEO and President, Mikael Bratt. I will now hand over to VP, Investor Relations, Anders Trapp. Please begin your meeting

Anders Trapp — Vice President, Investor Relations

Thank you. Cynthia. Welcome everyone to our Second Quarter 2022 Earnings Call. On this call, we have our President and CEO, Mikael Bratt; and our Chief Financial Officer, Fredrik Westin; and I am 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 on 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, available on autoliv.com, and in the 10-Q that will be filed with the SEC.

Last, I should mention that this call is intended to conclude at 3:00 PM Central European Time. So, please follow a limit of two questions per person.

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

Mikael Bratt — President and Chief Executive Officer

Thank you, Anders. Looking on the next slide. I would like to start by thanking our employees for a good execution of our mitigating activities in a challenging quarter. We continued to experience tough lockdowns in China that affected the global supply chain and automotive industry, including many of our employees. Although the supply chain situation is improving currently, the automotive industry continues to battle with the semiconductor shortage, limiting the global light vehicle production.

Thanks to a strong ending of the quarter, our organic sales increased by 8% year-over-year, according to IHS Markit. Our organic sales outperformed global light vehicle production by more than 7 percentage points. Our margins developed better than expected, despite raw material cost increases impacting our operating margin in the quarter by almost 6 percentage points and extensive inefficiencies from lockdowns in China. Our cost mitigation measures are on-track to achieving price increases to compensate for higher costs for raw materials, labor, logistics and utilities. Additionally, commercial compensation for previous periods and the patent litigation settlement, together, amounted to around $50 million in the quarter.

In response to the ongoing challenging market conditions, and to be prepared for possible future challenging conditions, we are strengthening our cost control measures and implementing other cost saving activities. Mainly due to volatile and some timing effects, adverse working capital development led to a negative cash flow in the quarter. We expect to recover most of these effects in the second half of the year. The leverage ratio is 1.7 times. In the quarter we paid $0.64 per share in dividends and repurchased 0.3 million shares under our three-year stock repurchase program.

We continue to develop mobility safety solutions and announced a cooperation with POC to investigate the opportunities with integrating airbag technology into bicycle helmets. 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, coupled with strict cost control measures will gradually offset the raw materials and other inflationary cost increases. Therefore, we expect a sequential margin improvement in the second half of the year, supporting a trajectory towards our mid-term targets.

Looking now on the financial overview on the next slide. Our consolidated net sales of $2.1 billion was 3% higher than in Q2 2021. Adjusted operating income, excluding cost for capacity alignments, fell from $166 million to $124 million. The adjusted operating margin was 6% in the quarter, around 2 percentage points lower than last year. The lower operating margin was mainly a result of inflationary pressure, volatile LVP, currencies and effects from lockdowns in China. Operating cash flow was negative $51 million, which was $114 million lower than the same period last year, mainly due to changes in working capital.

Looking now on our sales growth more in detail on the next slide. Although currency translation effects had a negative impact of 5% or $103 million, the second quarter consolidated net sales increased by almost $60 million to $2.1 billion. Retroactive pricing contributed with approximately $30 million and price volume mix contributed with $132 million or 7% to the growth in the quarter.

Looking to our organic sales growth per region in Q2 2022 on the next slide. Our sales in the quarter came in lower than what we expected in the beginning of the quarter, due to that, light vehicle production in Japan, Western Europe and North America disappointed. According to IHS Markit, global light vehicle production increased by less than 1% year-over-year in the quarter, this was 2 percentage points worse than expected at the beginning of the quarter and the mix was worse than expected.

Our second quarter sales grow organically by 8%, which was around 7 percentage points better than global light vehicle production according to IHS Markit, despite the negative regional LVP mix. The organic sales growth was mainly driven by the large number of product launches in Americas and Europe, as well as price increases.

Based on the latest light vehicle production numbers from IHS Markit, we outperformed in Europe by 15 percentage points, in Japan by 10 percentage points, and in Americas by 8 percentage points, in China sales underperformed by 4 percentage points. The reason for the underperformance in China was mainly the mix effect from production of low-end vehicles being less affected by the lockdowns. Supported by recent launches and a positive regional mix, as well as further price increases, we see sales outperforming light vehicle production substantially more for the rest of the year.

On the next slide, we see some key model launches from the second quarter. In the quarter, we had a high number of launches, especially in Europe and China. The models shown on this slide have an Autoliv content-per-vehicle from approximately $120 to more than $550. The long-term trend to higher CPV is supported by the introduction of high content steering wheels.

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

Fredrik Westin — Executive Vice President, Chief Financial Officer

Thank you, Mikael. This slide highlights our key figures for the second quarter of 2022 compared to the second quarter of 2021. Our net sales were $2.1 billion, this was a 3% increase compared to the same quarter last year. Gross profit declined by 15% to $326 million, while the gross margin decreased to 15.7%. The gross margin decrease was primarily driven by raw materials, currencies and the volatile and lower than expected light vehicle production.

In the quarter, we had virtually no additional provisions for capacity alignment activities, and the adjusted operating income decreased to $124 million from $166 million. The adjusted operating margin declined to 6%.

The operating cash flow was minus $51 million, and I will provide further comments later in the presentation. Earnings per share diluted decreased by $0.28, were the main drivers for $0.33 from lower adjusted operating income, partly mitigated by $0.04 from financial items. Our adjusted return on capital employed declined to 13% and the adjusted return on equity to 12%. We paid a dividend of $0.64 per share in the quarter, same as in the previous quarter and repurchased around 300,000 shares for $22 million under our three-year stock repurchase program.

Looking now on the adjusted operating income bridge on the next slide. In the second quarter of 2022, our adjusted operating income of $124 million was $42 million lower than the same quarter last year. The impact of raw material price changes was negative $115 million in the quarter year-on-year. FX impacted the operating profit negatively by $20 million, as a result of translation effects due to the stronger U.S. dollar and transaction effects, mainly relating to the pairings Japanese yen to the U.S. dollar, and Korean won to the U.S. dollar. SG&A and RD&E net combined was $6 million higher due to the higher cost for IT and application engineering, as well as timing of engineering income. Our improved pricing and other mitigating activities largely offset these significant headwinds.

Looking on the income development more closely on the next slide. In the quarter, the operating profit was helped by income from a patent litigation settlement that amounted to $21 million. Also we recovered around $30 million related to cost increases from earlier periods. Excluding the patent litigation settlement and retracted cost recoveries, the adjusted operating income was $73 million or 3.6% of sales. This was a notable improvement compared to the first quarter as customer pricing discussions and our strategic initiatives are yielding results.

Looking closer on the cost recovery discussions on the next slide. To support a sustainable business model in the current high inflationary environment, we continue to work intensively with customers to secure price increases, to compensate for inflationary pressure and supply chain disruptions. We have made progress on cost recovery through sustainable price increases with most customers. In many cases, the new pricing is refractive to cover costs incurred in earlier periods. However, we are still being impacted by inflationary cost increases, so the discussions and negotiations continue. We are also negotiating more flexible customer contracts to ensure that future inflationary pressures are effectively and more timely pushed through the value chain.

Looking on the cash flow performance on the next slide. For the second quarter of 2022, operating cash flow decreased by $114 million to negative $51 million compared to last year, mainly due to changes in working capital and the lower net income. During the quarter working capital deteriorated by $239 million. The steep ramp-up in sales and the fact that we concluded a rather large number of compensation negotiations towards the end of the quarter, as well as the patent litigation settlement had a temporary negative effect on working capital. In the second half of 2022, the timing of the customer compensations will support a more favorable cash flow development.

In the quarter, the continued volatile light vehicle production and logistics challenges drove inventories higher. The inefficiency in inventory was an excess of $100 million at the end of the quarter. Our ambition is to eliminate these inefficiencies as soon as possible, which requires a further stabilization of the supply chain and call-off patterns from our customers.

For the second quarter, capital expenditures, net increased by 44% to $139 million. In relation to sales, was 6.7% versus 4.7% a year earlier. The increase is mainly related to the ongoing footprint activities and capacity expansion in China as part of our strategic roadmap. For the second quarter of 2022, free cash flow was minus $190 million, compared to minus $33 million a year earlier, driven by the lower operating cash flow and the higher capital expenditures. The cash conversion over the last 12 months was around 30%. In the quarter we paid $56 million in dividends and repurchased shares for $22 million.

Now looking on our leverage ratio development on the next slide. In the quarter, we continued to repurchase shares and we maintained our dividend. The leverage ratio at the end of June 2022 was 1.7 times. This was 0.3 times higher than in the previous quarter, as our 12 month trailing adjusted EBITDA decreased by $51 million and our net debt increased by $244 million. We see this as a temporary situation and we expect it to be back within the range later in the year.

Now looking at the raw material development on to the next slide. We still experience volatile commodity markets coming from the Ukraine war, COVID related lockdowns and general inflationary pressure. It is encouraging that some commodity prices have decreased since March highs, especially metals. Cost increases for raw materials generated a gross headwind of $115 million or almost 6 percentage points to our operating margin in the second quarter. As expected, this was slightly higher than in the first quarter.

In the current price environment, we believe that raw material costs before any customer compensations could be around 5.5 percentage points in operating margin headwind for the full year 2022. This situation is addressed through targeted actions and negotiations with customers as already outlined. We’re also stepping up cost-control measures as shown on the next slide. In response to the sharp increase in raw material prices and cost inflation, we continue with strict cost control measures, a hiring freeze and accelerated cost savings and footprint activities.

Additionally, we are reducing consultants and temporary employees and we are reviewing and prioritizing projects. As a result of these activities headcount is virtually unchanged year-over-year, despite substantially higher organic sales. We continue to execute on our capital efficiency program to improve trade working capital. We also focus on balancing headcount with expected demand.

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 LVP development on the next slide. The second quarter light vehicle production was influenced by the ongoing component shortages and the COVID related lockdowns in China. However, there are signs that the situation is improving and that the second quarter was the low point of this year. As inventories of new vehicles continue to trend at a record low level and strong OEM order backlogs, we believe the short-term light vehicle production development will depend on the industry’s ability to build vehicles, not on the macro sentiment.

We expect to see substantial year-over-year light vehicle production growth in Q3 and Q4, as the light vehicle production in the second half of 2021 was highly affected by semiconductor shortages, especially the third quarter. However, total volumes are still expected to be well below the LVP level in the second half of 2020. Additionally, as most LVP — most of LVP growth is forecasted to come in high CPV markets, the regional mix is expected to be favorable in the second half of the year.

Looking at LVP forecast in more detail on the next slide. The Auto industry continues to operate at or near recessionary levels impacted by supply chain challenges. For the third quarter of 2022 global LVP is expected to grow by over 20% compared to the very weak LVP in the third quarter of 2021, according to IHS Markit. Sequentially LVP is expected to improve by 8% compared to Q2 as the availability of automotive semiconductors is expected to improve.

In North America, sales of new vehicles remain well below demand and well below sales a year ago. With dealer inventories remaining at historically low levels, the lockdowns in China affected North American production in the later part of the second quarter, this situation is expected to improve gradually. For European production, we expect volume recovery as supply constraints continue to ease. In China, light vehicle production in June was up over 30% year-over-year as lockdowns were lifted and demand was stimulated by tax incentives. However, continued supply chain challenges limit the level of growth.

Now looking on the 2022 business outlook on the next Slide. We expect higher sales outperformance versus LVP for the rest of the year, supported by launches, regional mix and higher prices. We also expect improvements in the second half of the year from alignment of direct labor with LVP, footprint optimization activities and a less volatile LVP. We expect these to lead to a strong second half year profitability compared to the first half year.

Looking at the updated full-year 2022 indications on the next slide. Our full-year 2022 indications exclude cost for capacity alignment, anti-trust related matters and other discrete items. We adjust our full year indications to tighter range, reflecting our activities and the shorter time span remaining of the year. The updated indications assumes that global light vehicle production will grow between 2% and 5% and that we achieve our targeted cost inflation compensation, plus some level of market stabilization. We expect sales to increase organically by around 13% to 16%. Currency translation effects on sales are assumed to be around a negative 5%. We expect an adjusted operating margin of around 6% to 7%. Operating cash flow is expected to be around $750 million to $850 million.

Turning to the next slide. In closing, to summarize our 2022 outlook. We expect continued strong outperformance versus LVP, supported mainly by product launches, increase in content per vehicle and price increases. We expect to gradually offset much of the cost inflation in the coming quarters, putting us on trajectory towards our mid-term targets, based on the framework outlined at our Capital Market Day in 2021.

Additionally, our balance sheet and cash flow should allow for continued shareholder returns. We remain mindful of the risk of deteriorating economic conditions, but I’m confident that our leading position, the work we have done to become more resilient and our experience and agility will enable us to manage future challenging conditions.

I will now hand it back to Anders.

Anders Trapp — Vice President, Investor Relations

Thank you. Mikael. Turning to the next slide. This concludes our formal comments for today’s earnings call and we would like to open the line for questions. So, I now turn it back to you Cynthia.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Mattias Holmberg from DNB. Please go ahead, your line is open.

Mattias Holmberg — DNB — Analyst

Hello everyone, thank you for the time. My question is regarding the commercial recoveries, and it would be very interesting to hear if there’s anything you can say, first of all, in terms of what we should expect going forward? Is sort of the level of the $30 million in Q2 a reasonable assumption for the rest of the year or — and any of the quarters? And then, I’m also interested to hear, you’re only negotiating recoveries for periods in 2022 or if you are also looking into getting recoveries for what happened in 2021? Thank you.

Mikael Bratt — President and Chief Executive Officer

Thank you for your questions. When it comes to the price negotiations, we can’t guide in on a edit or describing on the details of how these are going, but I would say that what we have achieved so far is in line with what we need to do going forward here to, I would say, restore the balance between our prices to our customers and the cost impacts we see. Focus of course initially here has been on what has come first, so to speak, hitting us in terms of raw material, but of course we are covering all the different parameters here that we have talked about when it comes to utilities, inflationary labor cost and the price side of the business as well here.

In terms of the time horizon here, which we are covering in the discussion, it’s really focusing on restoring the highs, so to speak, on the price and that we get the balance right there. Of course, there are, as we have indicated here also, retroactive aspects, but there — it depends on what kind of cost we are talking about and when that occurred and so on. But as we have said all along, our focus here is to get the full compensation for the cost increases outside Autoliv’s control is what we’re looking at.

Mattias Holmberg — DNB — Analyst

Thank you. Maybe just a quick follow-up on the repricing, perhaps is my question. Can you say, out of all the negotiations that you are in, how many have you concluded in this quarter?

Mikael Bratt — President and Chief Executive Officer

I can’t give you that indication. I think the main message here is really that, I mean of course we are negotiating with the full customer base here, meaning, all our customers. And depending on the development here, it’s ongoing effort here. So, I would say the work continues very much as we move forward here. And we see the continued inflationary pressure affecting us here. So, it’s not finalized in anyway. It’s an ongoing work as long as we have this cost situation.

Mattias Holmberg — DNB — Analyst

Thank you. That’s all from me.

Mikael Bratt — President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question comes from Emmanuel Rosner from Deutsche Bank. Please go ahead, your line is open.

Emmanuel Rosner — Deutsche Bank Securities — Analyst

Thank you very much. Maybe just to start-off, following up on the commercial recoveries discussion, so the retroactive ones that you achieved in the second quarter, I think in the press release you are mentioning June playing out better than expected, partly due to this. Were these sort of unexpected, or was just the timing of it a surprise and should we expect more retroactive recoveries in the second half? I guess where I’m trying to get to is, to what extent will the second half margin run rate could be a good base to estimate 2023 or it is a starting point for 2023 or how much of it would benefit from retroactive recoveries as well?

Mikael Bratt — President and Chief Executive Officer

I couldn’t quantify that for you here. But as I said before here, I mean, the focus is to get the height, that’s the priority here, for us here. And of course then when it comes to the timing of business negotiations, you could say, I mean if we had concluded on Monday to the end of Friday, it’s a — in a — at the end of the quarter, it makes a difference of course. And as we have been in these negotiations for some time, I mean, we have a very detailed discussion and that’s why it’s taking time as well, because we are negotiating contract-by-contract with each customer here and it’s really on plant level as well.

So, there is a lot of detail that needs to come into — is coming into play here in those discussions and that’s why it’s taking, of course, time. And the timing of it is depending on how quickly we conclude those discussions is good — it’s difficult to give that kind of indications at this point in time. But the bottom line here is that we are on track towards what we have told you before, what we need to do to reach our full year guidance here.

Emmanuel Rosner — Deutsche Bank Securities — Analyst

So let me ask you this differently then. Let me ask differently and then I have a follow-up on commodities, but your second half implied margins based on your new guidance range at the midpoint is like 8.2%, would this second half margin include also some retroactives or only forward-looking new pricing?

Mikael Bratt — President and Chief Executive Officer

The short answer is, yes. I mean, everything we get to retroactive will be booked in the second quarter and in fact that — sorry, second half year, sorry. So, we will get it there. So, yes.

Fredrik Westin — Executive Vice President, Chief Financial Officer

Yes, there would be retroactive recoveries as well.

Mikael Bratt — President and Chief Executive Officer

In the case there is retroactive, it will affect the second half year.

Emmanuel Rosner — Deutsche Bank Securities — Analyst

Right, okay.

Mikael Bratt — President and Chief Executive Officer

That’s why we [Speech Overlap]. If I understand your question correctly.

Emmanuel Rosner — Deutsche Bank Securities — Analyst

Right. All right, let me just switch to commodities quickly. So I think your outlook is still for 550 basis points hit to margin this year. But basically evenly spread out by quarter is now, as you noted in your slides, with some of these commodities have sort of like started inflecting down. Can you just give a bit more detail on what sort of like commodities will be the largest headwinds for you in the second half and if prices sort of like remain where they have sort of like fallen back to, is there some — could that be a tailwind in 2023?

Mikael Bratt — President and Chief Executive Officer

Yeah, versus different indication taken down the impact that we see for the year from around 6 percentage points to 5.5 percentage points. The main impact is still from steel, even though that impact has also come down, but it remains our, say, the largest year-over-year issue or impact on our cost development.

Pretty much all major commodities, for us, we do see an improvement, but due to the contract structure that we have with our supply base, it takes some time then for these spot price movements to flow through into our cost setup, yeah. And then for 2023, I mean it remains to be seen, should they remain at, say, the lower levels where some of the metals right now, obviously that should then be beneficial for us going into 2023, yeah.

Emmanuel Rosner — Deutsche Bank Securities — Analyst

Great, thank you.

Mikael Bratt — President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question comes from Hampus Engellau from Handelsbanken. Please go ahead, your line is open.

Hampus Engellau — Handelsbanken — Analyst

Thank you very much. Two questions from me. I guess, Mikael, this is more of a general question. But given the historic pattern on the cost and the price negotiations for you guys, I mean you currently almost have 50% global market share. Is there any initiatives that you might think can change your pricing model and try to be a little bit more aggressive using your strong market position. Given that you probably should be the market leader in pricing. That’s the first question.

Second question is more related to, how it would work when you’re imbalance on the cost that you’re currently compensating for the metal prices coming down as an example, will you then be immediately given back that or will you kind of overcompensate. Those are my two questions. Thank you.

Mikael Bratt — President and Chief Executive Officer

Let me start by taking the first question first and then let Fredrik answer the second question there. I think, I mean, first of all, we should remember here that we haven’t been in a situation where we have been needed to go to our customary price increases for at least 25 years here. Yes, we have the annual negotiations with the customer, where we have, I would say, certain elements of volume, the steel prices, etc., very few items that we cover every year. But in this magnitude and this breadth of cost items to discuss, we haven’t seen in the industry, I would say for this very long time period. So, this is a new situation, and of course it requires a lot of additional work between ourselves and the customer here on a very, very detailed level.

The pricing power, if you put like that, is really when we have the quote process. So when we have an RFQ for a new program, that’s where you could say that the market position is playing out, then we are in the — in contracts with our customer for the life of that vehicle, simply put, and that is what we now are going through and negotiating here. And I would say, we have good discussions here with our customers and it is a fact based and detailed discussions that we are working our way through here now, and that is gradually paying off fairly in line with what we have discussed. So, little bit new territory, but the real pricing is in the RFQ process.

Fredrik Westin — Executive Vice President, Chief Financial Officer

And on your second question on the correlation between say, cost and price development going forward. I mean for us the priority has been to restore our pricing level stand to make sure that whatever the cost inflation has been so far, that we get the right adjustment for that going forward, as Mikael layout [Phonetic] before.

Hampus Engellau — Handelsbanken — Analyst

Okay.

Fredrik Westin — Executive Vice President, Chief Financial Officer

We will, after these negotiations, and already now have a higher level of indexation, which then also will reduce our volatility, what our exposure to the spread there between the raw material cost development and our top line. And these structures that we are now on with our customers to a larger extent, they vary from between, say, quarterly to annual structures. So, it will vary a little bit on how the cost development will then ultimately come through on the pricing side, in both directions.

Hampus Engellau — Handelsbanken — Analyst

Fair enough.

Fredrik Westin — Executive Vice President, Chief Financial Officer

Thank you.

Operator

Thank you. The next question comes from Colin Langan from Wells Fargo. Please go ahead, your line is open.

Colin Langan — Wells Fargo — Analyst

Great. Thanks for taking my questions. Just following up on commodities, you took it down a bit, is there any good news left on the 550 basis points for 2022 or is just, given the contract timing, that’s all going to be recovered in ’23? And what did sort of drive it, is that just the mark-to-market help from the spot prices, that has nothing to do with the customer negotiations, right?

Mikael Bratt — President and Chief Executive Officer

No. So this is a cost impact that we’re guiding for. It does not include any compensation effects from our customers. So, it’s the pure, say, cost impact on our profit and loss statement that we’re expecting for this year. And as I said, I mean we have seen commodity prices come down mostly on metals, and we also do expect a limited impact from that towards the second half. We’re in the second half of the year, here was on our cost base. But due to the structures that we have with our customers. Also here we have between quarterly and annual setups, there is a time lag then of how these spot price developments then translate into our cost structure.

Colin Langan — Wells Fargo — Analyst

Okay. So, there is less wiggle room there, okay. And then just looking at the full year guidance change. I mean I think it implies around — the midpoint around $12 million increase in operating income for the year, but Q2 came in quite a bit better than expected. You had the $22 million in litigation settlement that I assume was unexpected. Commodity headwinds, I think, are roughly $50 million lower than what you’re expecting. So, why not a bigger full year increase or what sort of is offsetting that since from a second half outlook at this point?

Fredrik Westin — Executive Vice President, Chief Financial Officer

Yeah. So, we are really looking at a substantial improvement in the second half of the year. So, we are somewhere around 7% to 9% versus around 4.5% in the first half of the year. You highlighted some of the positive factors, but there are also some further headwinds, we — we see that FX is now a larger headwinds than what we had included in our guidance, both for the full year and after Q1, so that will have a larger negative impact on us than we had expected just three months ago. And we also see that there are some other cost components that are non-raw material related, for instance, logistics, also have a more unfavorable development. So, there are a couple of components that are offsetting the ones that you mentioned.

Colin Langan — Wells Fargo — Analyst

Okay, all right, thanks for taking my question.

Fredrik Westin — Executive Vice President, Chief Financial Officer

Thank you.

Operator

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

Chris McNally — Evercore — Analyst

Thanks so much. Wanted to kind of go a little bit broader on the raw materials, I apologize if it’s like the third and fourth question on it. But rather being specific on timing and specific contract, if we step back and think about that 550 basis points of growth, raw material inflation. There’s obviously a net number there for you, covered on a certain amount, whatever that net number is, we all can kind of make our own estimate. I guess what we’re trying to figure out is, will that be — do you think you’ll get the majority of that recovered over ’22 and ’23, so that ’24 is sort of “normalized” when you — you sound pretty confident on your 12% margin, is that the right way to think about it, that the recoveries could be sort of the majority of that net and will go away by the end of ’23, sort of a two-year basis?

Fredrik Westin — Executive Vice President, Chief Financial Officer

Correct. So what we’re aiming for is to get pricing conversations that then offsets these headwinds that you just talked about, including the 5.5 percentage point margin impact of raw materials from this year, and we are not only putting raw materials on the table, but also as we mentioned, utilities, labor cost and also logistics and we have say closed some of those agreements, then also with the hikes that we were aiming for to be able to offset these costs and they should come through here, the majority of this should come through during this year.

Chris McNally — Evercore — Analyst

Okay, that’s great. And then just thinking longer term, there is always this question of your, sort of normalized guidance of 12%. I think the way you phrased it is sort of low $90 million production in LMC or IHS, and quoted that happens to be sort of what — where both forecasts are for 2024. And on the raw materials, you talked about a flattening, is the second part of raw materials, are we at a level that the 12% would be realistic or is there another consideration because we kind of had a step-up when you first gave that. I’m trying to get a sense of the 12% is a good proxy for 2024 since that’s where the industry production is expected to be?

Fredrik Westin — Executive Vice President, Chief Financial Officer

What we — zooming in on here, yes, of course, the framework we gave in the Capital Markets Day and that’s still valid and that we said at least 85 million vehicles and we had the net effect on the raw material side at this back at the 2021 years level. So that’s — that still stands and as we have described here today, I think we are heading in that direction than what the world will look like on a certain date, but of course depending [Phonetic] on your question here. But I feel comfortable that what we can control, we are controlling well in line with what we have said here. And so, I think that’s as much we can describe the target of around 12% there.

Chris McNally — Evercore — Analyst

Very, very clear, I appreciate it.

Fredrik Westin — Executive Vice President, Chief Financial Officer

Thank you.

Mikael Bratt — President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question comes from your Giulio Pescatore BNP Exane. Please go ahead, your line is open.

Giulio Pescatore — Exane BNP Paribas — Analyst

Hi, thanks for taking my question. The first one on natural gas. You needed for the manufacturing process of airbags. So, I was wondering, are you looking at alternatives to this, first in case, we go into restrictions in Europe. And is there an alternative, is there an easy alternative for you? And then the second question on the top-line. You did increase the LVP guidance, but you didn’t increase the organic growth guidance which implies that your outperformance is supposed to be slightly lower, it surprises me given your comments on having positive regional mix going forward, right, such as in H2. So, can you maybe explain what changed there? Thank you.

Mikael Bratt — President and Chief Executive Officer

On your first question on the natural gas, we do not use gas for, say, processing in our manufacturing processes. So, we were not exposed to natural gas in that sense. We do use it for heating for some of our facilities. So that’s the only exposure we have. So in that sense, we are of course monitoring very closely what is happening here in the market, but our exposure would be more on the impact on our suppliers or then indirectly through implicate — what impacts on our customers.

Then on LVP, yes, we’re now guiding for a 11% outperformance, so the 2% to 5% range, that’s mainly as we said in the presentation that the timeframe has shortened here for the year and we think that range is realistic. We have had a quite significant negative mix year-to-date of around 6% and that is the main reason why we take down our full year outperformance then from 12% to 11%. So the mix component in there has deteriorated slightly, while the others like Content Per Vehicle, market share and also pricing remain unchanged versus our previous guidance.

Giulio Pescatore — Exane BNP Paribas — Analyst

Thank you.

Mikael Bratt — President and Chief Executive Officer

Thank you.

Operator

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

Joseph Spak — RBC Capital Markets — Analyst

Hey, thank you so much. Maybe just going back to raw materials for a second here and also on the comment on sort of being more flexible. I understand there might be timing impacts here, but if those inputs continue to be deflationary, I’m assuming those flexible pricing arrangements work both ways. So, is it possible that as you sort of get beyond ’23 and maybe before that, that you would have to give back even more than the price downs that you’ve typically become accustomed to for — at Autoliv?

Mikael Bratt — President and Chief Executive Officer

No, I think, I mean as I said, I mean, if we get on more indexation programs, I would say there is no, net — let me put like this, the net effect of what we get out over a cycle or of a period here with these program is not changing. I think we get a smoother development with indexation programs, indexation clauses here because we will get the quickie compensation and of course, yes, it has a quicker reduction, but net-net, it shouldn’t be any difference here because it’s tied together, also of course with our — how we are balancing our supplier base here. So that’s very important component to make sure that that is tying together and we feel comfortable with that setup, we shortened the lead times, that’s basically the net effect.

Joseph Spak — RBC Capital Markets — Analyst

Okay. And then maybe going back to a follow-up on Chris’ question before, as we sort of think going forward and I recognize you’re not going to give or update sort of guidance here, but even if we think like if 8% margin level for the back half is maybe sort of a decent base, and then we look at even for next year sort of industry expectations, plus your outgrowth algorithm and historical 25% incrementals, you can get back to sort of even like over — around 9%, maybe 9.5% next year. So, is it — just remind us, is it really just volume that gets you to the 12%. I mean, I know you’ve taken some actions here in the near-term, but some of them seem maybe more temporary than permanent. So, can you just remind us of really the big drivers to get back to 12%?

Mikael Bratt — President and Chief Executive Officer

I think, I mean, the drivers to get us to the 12% remains the same. I think what have — from when we started this journey, what have happened here of course is, all the disturbance — in the meantime is all the disturbances we have got from the pandemic, from the — I know, the consequences of that and the raw materials and everything we have been through here now. So what we need to do and which we are doing now is to balance that again. And what we need to have going forward is that, we get to more stable market as we are indicating here. Because the volatility up and down with a very short time horizons we have seen here of course is disturbing the trajectory here in the short-term.

So, it’s still very much around driving our efficiency and productivity in the company, where we have the underlying strategic roadmap. So that we have talked about and that is progressing well. We need to continue to get, I mean, the price adjustments in place here to cover and what I talked about the short-term fluctuations. But other than that, I think we have all the components here to get there. And that’s why we feel comfortable to reiterate the targets here for this period, we are talking about.

Joseph Spak — RBC Capital Markets — Analyst

Okay. Maybe if I could squeeze one quick one. What euro rate are you assuming for the back half of the year?

Mikael Bratt — President and Chief Executive Officer

Sorry, The —

Joseph Spak — RBC Capital Markets — Analyst

The euro rate.

Mikael Bratt — President and Chief Executive Officer

Euro rate.

Fredrik Westin — Executive Vice President, Chief Financial Officer

Yeah, the end rate of June, what —

Joseph Spak — RBC Capital Markets — Analyst

So about parity?

Fredrik Westin — Executive Vice President, Chief Financial Officer

Yeah. One or something, yeah. I don’t have it in my head at the moment, but we can come back to you on that.

Joseph Spak — RBC Capital Markets — Analyst

Okay, thank you.

Operator

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

Agnieszka Vilela — Nordea — Analyst

Thank you. I have two questions, starting with your organic growth guidance. It seems like your base it on the LVP assumption of 2% to 5% growth for the year. Yet, IHS is at 5%. So, if you could give us any reasons why you seem to be a bit more cautious here?

Mikael Bratt — President and Chief Executive Officer

Yeah, I think the cautious view here, if you call it that, is that we still see that there is a lot of uncertainty out there. I mean, as we have indicated things moving in the right direction, but we also see that we are not through when it comes to the semiconductors. We still have challenges in the logistical change around the world here, pandemic is still here, plus that I think in Europe here, we are also facing winter here with potentially a challenging energy situations as well. So, there is a lot of uncertainty out there that I think makes it prudent to have a more cautious view on the little development there.

Agnieszka Vilela — Nordea — Analyst

And maybe a follow-up on that. When you speak to your customers, do you feel that they are getting a bit more confident about the volumes when they place the call-offs review?

Mikael Bratt — President and Chief Executive Officer

I think, I mean, the short answer would probably be, yes, on that question. But here maybe you can see some reasons for our cautiousness also is that we see that there has been a lot of — a more confident in the call-offs and what actually have come out. So that has been a big challenge for us, the last couple of quarter here that what has been requested has not been picked up by the customer here.

So, there is of course a will and a wish from the OEM side here to get more volume through and that of course is based on what we have talked about here that there is a strong order book, there is extremely low level of inventory, especially in the U.S. etc., but there is still disturbances in the industry value chain here that makes it difficult to get to the volumes that has been put into the systems there. So, I would say, the only thing that is holding back the volume right now in the short-term, that is the availability of components in the whole industry, not of the less specific.

Agnieszka Vilela — Nordea — Analyst

Yeah. Perfect. And then the second question is on your cost alignment program, you haven’t provided any kind of quantification for this call. What you’re doing there? Do you expect any savings coming from that? Do you expect any cost also to cover this program? Could you give us a bit more details on that?

Fredrik Westin — Executive Vice President, Chief Financial Officer

And I guess you’re referring to the one we indicated here in June —

Agnieszka Vilela — Nordea — Analyst

Yes.

Fredrik Westin — Executive Vice President, Chief Financial Officer

— that we are taking additional steps to reduce cost. We are not expecting to see any meaningful one-time effects or cost restructuring charges to that at this point. So we have not quantified that for you for that reason. It is also a gradual implementation of it and the main effect of those activities is really towards the end of the year and for 2023.

Agnieszka Vilela — Nordea — Analyst

But you don’t provide any cost savings targets for this program?

Mikael Bratt — President and Chief Executive Officer

No, it’s a part of what we are doing here to secure our trajectory here towards the mid-term target. So, we haven’t broken that out specifically. It’s on top of everything else we do here.

Agnieszka Vilela — Nordea — Analyst

Okay, thank you.

Operator

Thank you. The next question comes from Philipp Konig from Goldman Sachs. Please go ahead, your line is open.

Philipp Konig — Goldman Sachs — Analyst

Yeah, thank you for taking my questions. I just want to come back to the recoveries, it seems like you made some particularly strong progress in June, which we also see in your working capital. I was just wondering if that sort of run rate continues, is it fair to say that you might be — even be able to aim for the upper end of the 6% to 7% margin range in terms of what you’re baking in for the second half of the year in terms of the recoveries? And then my second question is just on the near-term volumes sort of, what have the first couple of weeks in July been like as the momentum continued from June, has it been even better? Any color there would be appreciated.

Mikael Bratt — President and Chief Executive Officer

Okay, thank you. No, I don’t think I can — I can’t give you any more details around the progression there. I think what we have said here is that we are making progress and are in line with what we have indicated before and we have narrowed the range here to the 6% and 7% adjusted operating income and I can’t narrow it down even further for you there, unfortunately.

When it comes to the momentum in the market, I think we can say here that it’s holding up and there is no question that there is an underlying demand and it’s all about now securing in the whole industry, the ability to secure components. And I would say there is a lot of uncertainty out there regarding that and we just need to see how it comes through here, but there is not — too early to say anything around that when it comes to the beginning of the quarter here.

Philipp Konig — Goldman Sachs — Analyst

Thank you very much.

Mikael Bratt — President and Chief Executive Officer

Thank you.

Operator

Thank you. The next question comes from Vijay Rakesh from Mizuho Securities. Please go ahead, your line is open.

Vijay Rakesh — Mizuho Securities — Analyst

Yeah, hi, I was just wondering, I think you made a comment on chip supply having improved, just wondering where you had been seeing any constraints and where you’re seeing some of the supply improving?

Mikael Bratt — President and Chief Executive Officer

As I said, I mean we see some improvements and off course we also hear from our customers here and that there are some improvements there, it’s still very, let’s call it, spotty here, because it’s not across all customers. There are some customers that are more — more confident than others in terms of securing semiconductors for their own production. Of course the lockdowns in China created some bumps on the road here, also outside China when it comes to the semiconductor supply. And I think also we see that there is still lower specs of vehicles here to not need as many semiconductors that the other otherwise would.

So of course if the availability is improving here, I think the demand will also go up here. So that’s why we are also cautious here that we are not out of the woods here yet when it comes to the semiconductors. But it’s trending in the right direction. That’s what we feel when we talk to our customers, plus that of course our own semiconductor needs is under control there.

Vijay Rakesh — Mizuho Securities — Analyst

Got it. And last question, I know a lot of question is on the pricing side. Is — I mean on the pricing, are you pegging it to a commodity index, because it looks like the broader commodity index is starting to kind of soften a bit. I’m just wondering is there like a — do these price increases, are there like a six-month horizon. Is there — how are you — if you can give some more color around, I mean, if you are using a broader index and what the time frame for the price increases are? Thanks.

Mikael Bratt — President and Chief Executive Officer

Yeah, it’s — there is no straightforward answer to that question, it’s a mix, pretty much every OEM uses a different structure for these type of discussions. So, it’s — some have — steel indices is based on different types of Indices. Then you have also commodities that are not covered, others do cover them. So, it’s a basket off arrangements that you then can choose to have with a certain OEM. So, it’s difficult to give a simple answer to that question. And as I mentioned before, the cadence of these adjustments are between quarterly and annual.

Vijay Rakesh — Mizuho Securities — Analyst

Got it. Thank you.

Mikael Bratt — President and Chief Executive Officer

We can take one last question.

Operator

Thank you. The last question comes from Erik Golrang from SEB. Please go ahead, your line is open.

Erik Golrang — SEB — Analyst

Yes, thank you. I have one question, and I am returning to the raw material subject, that — Can I understand you correctly that you said that you were aiming for full compensation of raw material and the logistics headwinds that were out of your control. I mean if I just sum up, the raw mat headwind you’ve had since the start of ’21, that’s in excess of $300 million and now you’ve got some $30 million in compensation, and you expect the rest in the second half. Is that the right way to read it?

Mikael Bratt — President and Chief Executive Officer

No, what we are talking about here, and as I emphasized before here, our focus — I’ve already had discussion about retroactiveness and so on. Our focus here is to get full compensation when it comes to heights. So, when we are negotiating here now is for the cost that has that setups and to restore that balance, so to speak, here between our incoming cost and the price. Okay, so that’s the focus.

Fredrik Westin — Executive Vice President, Chief Financial Officer

And maybe to clarify, the $30 million that we spent out is only the recovery that we received that is related to prior to the second quarter. So these are retroactive adjustments going back there to January 1, that we are disclosing that are not related to the second quarter. The recoveries we got overall is higher than $30 million.

Erik Golrang — SEB — Analyst

Very good. Thank you.

Operator

Thank you. That was the last question. Now, I turn the conference back to you for any closing comments.

Mikael Bratt — President and Chief Executive Officer

Thank you Cynthia. Before we end today’s call, I would like to say that the recent developments in supply chains, customer production plans, raw material prices and our cost recovery discussions are encouraging and we are well prepared for an improved market development. However, we are also making sure we are agile and prepared for more adverse market development should that be necessary. Autoliv continues to focus on our vision of saving more lives, which is our most important contribution to a sustainable society.

Our third quarter earnings call is scheduled for Friday, October 21st, 2022. Thank you everyone for participating on today’s call. We sincerely appreciate your continued interest in Autoliv. Until next time, stay safe.

Operator

[Operator Closing Remarks]