Autoliv Inc. (ALV) Q3 2021 Earnings Call Transcript

Autoliv Inc. (NYSE: ALV) Q3 2021 earnings call dated Oct. 22, 2021

Corporate Participants:

Anders Trapp — Vice President, Investor Relations

Mikael Bratt — President and Chief Executive Officer

Fredrik Westin — Chief Financial Officer

Analysts:

Emmanuel Rosner — Deutsche Bank — Analyst

Hampus Engellau — Handelsbanken — Analyst

Colin Langan — Wells Fargo — Analyst

Agnieszka Vilela — Nordea — Analyst

Erik Golrang — SEB — Analyst

Joseph Spak — RBC Capital Markets — Analyst

Mattias Holmberg — DNB — Analyst

Brian Johnson — Barclays — Analyst

Rod Lache — Wolfe Research — Analyst

Presentation:

Operator

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

Anders Trapp — Vice President, Investor Relations

Thank you, Martin. Welcome everyone to our third quarter 2021 financial results earnings presentation. On this call, we have our President and CEO, Mikael Bratt and our Chief Financial Officer, Fredrik Westin and I am Anders Trapp, Vice President of Investor Relations.

During today’s earnings call, our CEO will provide a brief overview of our third quarter results as well as provide an update on our general business and market conditions. Following Mikael, Fredrik will provide further details and commentary around the financials. We will then remain available to respond to your questions and as usual, the slides are available 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 available in our SEC regulatory filings available on Autoliv.com

Lastly, 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 now hand over to our CEO, Mikael Bratt.

Mikael Bratt — President and Chief Executive Officer

Thank you, Anders. Looking on the next slide. First, I like to thank our team once again for their unrelenting commitment, particularly in managing the volatility in customer call-offs. Thanks to the team’s effort, we were able to supply our customers and achieved solid performance in our plans despite facing a very challenging market.

This slide quite well illustrates how dramatic light vehicle production has developed during 2021 especially since July. Supply shortage of semiconductors and other components severely impacted the light vehicle production in the third quarter. It led to a third quarter global LVP decline of 20%, which was 17% lower than what was expected only three months ago and 12% below Q2 all according to IHS Markit.

Markets with high safety content per vehicle were most affected by the dramatic changes. Europe, Americas and Japan all saw Q3 LVP being 20% to 25% lower than what was expected three months ago. The decline in LVP, unpredictable changes in customer call-offs, and high raw material costs resulted in reduced profitability in the quarter despite strict cost control, including a significant headcount reduction.

Looking on the next slide. Given all that, I’m pleased that we continued to strongly outperform the global LVP in the quarter and with strong order intake for the first nine months of the year. We continue to execute strict measures to mitigate the current adverse business headwinds including capacity alignment in Europe and in North America. However, as a result of a significant reduced light vehicle production outlook for the year, we are revising our full year indications for sales, adjusted operating margin, and operating cash flow. Despite the challenging environment, our cash flow was solid and our debt leverage ratio remains well within our target range. We paid a dividend of $0.62 per share in the third quarter.

Looking now on the financial overview on the next slide. Our consolidated net sales of $1.8 billion was 9% lower than in Q3 2020 due to a 20% decline in LVP. Without our strong sales outperformance, the sales decline would have been almost double. Adjusted operating income excluding cost for capacity alignment fell from $206 million to $103 million. The adjusted operating margin was 5.6%. The lower operating margin was a result of lower sales, higher call-off volatility as well as rising cost for raw materials. Operating cash flow was a solid $188 million despite the challenging environment.

Looking now on sales development on the next slide. I am very pleased that our organic sales growth outperformed the global light vehicle production by almost 8 percentage points. This was achieved as we continued to execute on our strong order book and despite the fact that the largest LVP declines were in high content per vehicle markets. We had a very strong outperformance in all regions. In North America, we outperformed by 7 percentage points and in Europe by 16 percentage points. In China, we outperformed by 6 percentage points in spite of high-end vehicles being more affected by the semiconductor shortage. Although all regions showed outperformance, only one region, Rest of Asia, showed organic sales growth year-over-year. Within this region, sales in India and ASEAN grow strongly with side airbags sales more than doubling compared to last year.

Looking on the next slide. In the third quarter, we had the highest number of product launches for a single quarter ever and we remain on track to launch approximately 750 new products for the full year, also a new record for the company. The models shown on this slide have an Autoliv content per vehicle from approximately $160 to almost $700. This is one of the highest content we have on any vehicle model. Six of these vehicles are either EVs or plug-in hybrids further extending our exposure to this growing market.

Last year, sales in this market accounted for around 10% of our total sales. We expect an almost doubling of sales to this segment in 2021. The long-term trend to higher content per vehicle is supported by the introduction of front center airbags, knee airbags, and battery cut-off switches. I will now hand over to our CFO, Fredrik Westin, who will talk about the financials on the next few slides.

Fredrik Westin — Chief Financial Officer

Thank you. This slide highlights our key figures for the third quarter of 2021 compared to 2020. Our net sales were $1.85 billion. This was a 9% decrease compared to the same quarter last year, less than half of the 20% decline seen in the global light vehicle production. Gross profit declined by 25% to $301 million while the gross margin decreased to 16%. The gross margin decrease was primarily driven by the lower sales and higher raw material costs.

In the quarter, capacity alignments had $4 million negative impact on the operating profit. The adjusted operating income decreased to $103 million from $206 million. As a result, the adjusted operating margin declined by 4.5 percentage points to 5.6%. The operating cash flow was $188 million. Earnings per share diluted decreased by $0.44 where the main drivers were $1.17 from lower adjusted operating income partly mitigated by $0.31 from lower cost for capacity alignment and antitrust related matters and $0.26 from lower tax.

Our adjusted return on capital employed declined to 11% and the adjusted return on equity to 10%. We declared and paid a quarterly dividend of $0.62 per share in the quarter, the same as in the previous quarter when the dividend was reinstated. Looking now on the adjusted operating margin bridge on the next slide. Our adjusted operating profit of $103 million was 50% lower than the same quarter last year. The impact of raw material price changes was a negative $37 million in the quarter. Foreign exchange impacted the operating profit positively by $4 million mainly as a result of a weaker U.S. dollar.

Support from governments in connection with the pandemic was $10 million in the third quarter last year while it was not material to our financial results in the third quarter this year. The adjusted operating profit was negatively affected by higher SG&A and RD&E, net of governmental support of $4 million. Lower sales, impact from increased call-off volatility, and cost inflation mainly related to logistics and utilities resulted in operational inefficiencies of $56 million in the quarter. Excluding foreign exchange, raw material cost increases, and governmental support, the adjusted operating income leverage was approximately 25% on the organic sales decline. Despite unpredictable customer call-offs, the 25% decremental margin is within our communicated normal range.

Looking on the next slide, through a number of actions, we have mitigated some of the negative effects from the lower sales, the increased call-off volatility, and the cost inflation. These actions include activities such as adjusting production, shortening work week hours, and furloughing personnel. For example, footprint and capacity alignment in Europe as well as moving overhead functions to best cost countries in Americas. We are also evaluating further footprint adjustments. In total, we have reduced headcount by over 4,500 since the end of the first quarter, of which 2,500 in the third quarter.

However, as you can see on the slide, our strict measures include much more than just headcount and work week hour reductions. Demand planning and forecasting are key for achieving efficient operations. During the quarter, planning of production has been challenging as many customers have initially placed high orders and then at late stage, substantially reduced them. In Q3, we have frequently seen call-off deviations of around 50% and in some cases, even higher. In this environment, we cannot only rely on forecast from our customers for production planning.

This means that we need to do our own assessment on weekly volume demand based on customers’ behavior over the past months. We include claims for compensation for lost volumes with short notice in the commercial negotiations with our customers. Our supply chain management teams have been working hard to balance inventories to actual demand. Through negotiations and consolidation of the supply base, we successfully mitigated some of the raw material headwinds in the third quarter. We have also delayed and reduced capital expenditure plans where possible.

More on the raw material impact on the next slide. Supply and demand imbalances continue to drive prices of raw materials higher. Through successful mitigation actions, the raw material headwinds in the third quarter was slightly lower than expected. However, new headwinds involving for example higher magnesium and resin costs mean we still expect a full-year operating margin headwind from raw materials of around 130 basis points.

Year-to-date, we have limited the impact with close to zero impact in the first quarter, around $8 million in the second quarter, followed by around $37 million in the third quarter. We have some limited contractual pass-through to customers. Given this exceptional period of high raw material prices, we believe it is necessary to request compensations from our customers and negotiations are ongoing. It will take time to see the results of these efforts and we do not expect much impact this year. A more significant recovery is expected in 2022.

On to the next slide. For the third quarter of 2021, operating cash flow decreased by $164 million to $188 million compared to the same period last year mainly due to lower net income and less positive effects from changes in operating working capital. Compared to prior quarter, working capital improved with $35 million, benefiting from a $74 million change in trade working capital. This was mainly a result of a $144 million reduction of receivables, partly offset by $49 million from decreased accounts payables and $21 million from increased inventories.

The increase in inventories was a consequence of the low demand visibility and supply chain challenges. Capital expenditure increased by 46% year-over-year to $112 million the increase mainly reflects the lower level in the prior year due to the extraordinary measures taken in 2020. Capital expenditure net in relation to sales was 6.0% versus 3.8% a year earlier. Free cash flow was $77 million impacted by lower operating cash flow and the higher capital expenditure. The cash conversion over the last 12 months was 97%.

On to the next slide. In the past two years, we have managed a very difficult market environment with significant declines in vehicle production and low demand visibility as well as severe disruptions of global supply chains and still we have reduced our net debt by $600 million since mid-2019 and thereby recovered to a balance sheet position that is in line with our target. The leverage ratio is unchanged compared to last quarter at 1.1 times at the end of September 2021. This is a significant improvement compared to 2.4 times one year ago. In the quarter, our last 12 months EBITDA decreased by $96 million balanced by the net debt decrease of $42 million.

Now looking at the light vehicle production development on the next slide. In the near-term, the light vehicle outlook will mainly be determined by the evolution of the situation around semiconductors. In North America, the industry continues to struggle to meet consumer demand for new vehicles due to the shortage of semiconductors. Inventory of new vehicles in the U.S. ended September below 1 million units, the lowest level seen for at least 35 years. Despite healthy underlying demand trends in Europe, component shortages meant that registrations have not returned to the pre-pandemic level.

In China, semiconductor and energy constraints are affecting production especially for higher-end vehicles. Demand is also being impacted by monetary policy and rising concerns about property prices. As a consequence of the supply chain constraints, production is expected to remain volatile in the fourth quarter. There are some indications of moderate improvement in semiconductor availability in Asia and North America, but the visibility remains poor.

For the full year 2021, our assumption is now that global light vehicle production will be flat compared to 2020. Where possible, OEMs will likely continue to prioritize production of vehicles with no or low CO2 levels as well as larger vehicles. For Autoliv, this trend should support further outperformance versus light vehicle production. Assuming that the component availability improves, we expect the good demand and low inventories to support a recovery in LVP in 2022. I now hand it back to Mikael.

Mikael Bratt — President and Chief Executive Officer

Thank you, Fredrik. Turning to the next slide. Our revised full year 2021 indications exclude cost for capacity alignment. Our full year indication is based on a flat global light vehicle production compared to 2020. Our previous indication from July 17, 2021 was based on an assumption of 9% to 11% LVP growth for 2021. We raise our expectations of sales outperformance versus global LVP from around 7 to around 8 percentage points.

As a consequence of the lower light vehicle production assumption and higher outperformance, we now expect our organic sales growth to be around 8%. Including positive currency translation effects of around 3%, our net sales increase is expected to be around 11%. We expect an adjusted operating margin of around 8%. Operating cash flow is expected to be around $700 million. Our strategic initiatives are gradually yielding good results and we are confident of our 2022, 2024 targets based on our internal progress and expected light vehicle market recovery in the next few years.

Turning the slide, with relentless focus on quality and execution as well as mitigating near-term headwinds, we also continue to drive forward towards our targets. This and more will be explored at our Virtual CMD on November 16th. The event will be virtually only and live streamed. More details will be made available at the beginning of November. And I will now hand it back to Anders.

Anders Trapp — Vice President, Investor Relations

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

Questions and Answers:

 

Operator

[Operator Instructions] We have our first question. It’s from Emmanuel Rosner, Deutsche Bank. Your line is now open.

Emmanuel Rosner — Deutsche Bank — Analyst

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

Mikael Bratt — President and Chief Executive Officer

No, I think — thank you for the questions. I think, I mean first of all, we are affected here in the quarter and obviously, we’re still in the midst of it around the semiconductor question here and what we’re indicating here is that we see some, I would say, moderate slight improvements mainly in Asia and the U.S. and it’s based on, I would say the feedback and dialogs we have with customers and ultimately the suppliers here as well in the other end here, but I just want to say to you here that the visibility is still poor around that.

So for us, it’s all about making sure that we continue to focus on our internal activities here to mitigate as much as possible of the current situation, which I think we have done successfully in the quarter here and as we have pointed out here, we have managed to deliver to our customer what they have expected and we have also made the necessary adjustment and that we will continue to do in the months and quarters to come here of course. So I think that as far as we can state really about the environment connected to the semiconductors.

Then the raw material side, we have seen that increasing throughout the year here and we gave you the sequential development, how it has impacted us and here the supply chain team has done a great job to fend off as much as possible. I think what we have seen in the quarter also here is that the energy situation has added to the external headwind and when we come to magnesium and I will say zinc also here, it’s very much connected to the energy challenge as well there. So it’s a very volatile environment, but focus on what we can do for sure. So low visibility, but we are getting used to it I would say.

Emmanuel Rosner — Deutsche Bank — Analyst

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

Mikael Bratt — President and Chief Executive Officer

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

Fredrik Westin — Chief Financial Officer

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

Emmanuel Rosner — Deutsche Bank — Analyst

Thank you.

Operator

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

Hampus Engellau — Handelsbanken — Analyst

Thank you very much. Sorry for coming back on magnesium, but would it be possibly to maybe add some flavor on risk you are seeing in magnesium shortage given what we’re seeing in China or is it just the price situation for you guys. That’s my first question.

And then second question is related, if you could also maybe discuss on order intake. I know you won’t provide maybe a market share, but maybe you could indicate on how things are trending on the orders and your long-term target of having a 45% market share in retail sales. Those are my questions. Thank you.

Mikael Bratt — President and Chief Executive Officer

Thank you, Hampus. On the magnesium side, I would say so far for us, it’s more a question of price. I think it of course depends on how the situation in mainly China then develops, but we all know that the reason why we have price increases in magnesium is that they have reduced production in China as a result of power shortage there in the near-term. So I mean that is of course a topic that we are following very closely to see what alternatives we have and I would say that right now I feel that in terms of availability, we have that under control as it looks right now, but that’s something we follow closely.

On the order intake side, as we indicated here, we continue to see strong new order intake and it adds to our order book and supports our expected market shares that we have talked about before, around 45%. So good support for that for the years to come here.

Hampus Engellau — Handelsbanken — Analyst

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

Mikael Bratt — President and Chief Executive Officer

It’s crucial. Of course it is a part of the main structure of the steering wheel. There is alternatives, but you don’t change alternative materials overnight. There is a lot of requirements to do that together with our customers. So that’s not the short-term option really especially under current circumstances, but as I said, we are not [Speech Overlap] and it’s not a concern today.

Hampus Engellau — Handelsbanken — Analyst

Fair enough. Thank you.

Operator

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

Colin Langan — Wells Fargo — Analyst

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

Mikael Bratt — President and Chief Executive Officer

I think it’s an equally large problem for us. If you look at the development here in the second — the third quarter where we’ve had the sequential decline in volumes. Also there, if we exclude the raw material cost impact, we’ve been in the mid-20% decremental margin range and I think that’s also what we then see as you say yourself for the full year with the guidance that we have now updated if you exclude the raw material cost impact.

Colin Langan — Wells Fargo — Analyst

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

Mikael Bratt — President and Chief Executive Officer

I think it’s depends on which recall you refer to. We are connected to one, but we are providing the complete module, but we are not providing the inflator. It’s an inflator that is sourced from ZF and this is connected to the Volvo recall. So the net effect of insurance and ZF’s liabilities here in that recall, we expect no material impact from that. And if in the larger scope here of other types of recall with other makes and manufacturers, we don’t expect to see any volume impact for us in that end. So I would say neutral there.

Colin Langan — Wells Fargo — Analyst

Okay, all right, thanks for taking my questions.

Mikael Bratt — President and Chief Executive Officer

Thank you.

Operator

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

Agnieszka Vilela — Nordea — Analyst

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

Mikael Bratt — President and Chief Executive Officer

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

Agnieszka Vilela — Nordea — Analyst

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

Mikael Bratt — President and Chief Executive Officer

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

Agnieszka Vilela — Nordea — Analyst

Perfect, thank you. And my second question is about the discussions that you’re having with the OEMs about getting compensated for the canceled volumes. How are these discussions proceeding and do you expect any compensation?

Mikael Bratt — President and Chief Executive Officer

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

Agnieszka Vilela — Nordea — Analyst

Perfect, thank you.

Operator

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

Erik Golrang — SEB — Analyst

Thanks. Most of my questions have been answered. Can I ask another one raw material perhaps with differently in ’22. I mean I appreciate the color you’re giving there on expected more compensation, but on a net basis, do you still see a drag from raw materials, even with that or is it now a positive based on that compensation?

Mikael Bratt — President and Chief Executive Officer

I think first of all, we have to see how it plays out in ’22 here, but as Fredrik said here, I mean there is discussion ongoing for the current situation. Then it depends also on how the raw material or the cost to development overall will be in a more let’s say medium to long-term development here and then of course that’s a different discussion that is needed with the customer if that would be more long-term scenario with significant higher raw materials. So I think basically we have to come back to that as we see how the developments — how it develops here in the next quarters here, but of course.

Erik Golrang — SEB — Analyst

Okay, thanks. A little bit more specific question — yeah, okay, more specific question on magnesium. Maybe I remember this wrong, but there was a similar situation a number of years back and if I recall correctly, getting compensation for magnesium was actually a bit more straightforward to you because it was very specific in what components it was and how much it was. Is that a fair recollection of history or is that just something I’m [Speech Overlap].

Mikael Bratt — President and Chief Executive Officer

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

Erik Golrang — SEB — Analyst

Okay, thank you.

Operator

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

Joseph Spak — RBC Capital Markets — Analyst

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

Mikael Bratt — President and Chief Executive Officer

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

Joseph Spak — RBC Capital Markets — Analyst

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

Mikael Bratt — President and Chief Executive Officer

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

Joseph Spak — RBC Capital Markets — Analyst

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

Mikael Bratt — President and Chief Executive Officer

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

Joseph Spak — RBC Capital Markets — Analyst

Thank you for that.

Operator

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

Mattias Holmberg — DNB — Analyst

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

Mikael Bratt — President and Chief Executive Officer

I think the way we see it here is that, I mean we are holding on to all the improvement initiatives that we have lined up to get towards our target and that is paying off. We see positive results yielding from those activities and I would say that goes on. At the same time, we manage the short-term. We believe also there that — as we have stated here in our report here is that we assume also that the volumes normalize, meaning the LVP volumes normalize in the years to come here.

It is true we are one year down the road, but there is still a number of years left within this time horizon where the expectation would be that we have less volatility and I will say also more normalized level of absolute number of vehicles being produced and the combination there makes us I would say comfortable in stating that we believe in the targets there could be kept, absolutely.

Mattias Holmberg — DNB — Analyst

Great, thank you.

Operator

Your next question is by Brian Johnson, Barclays.

Brian Johnson — Barclays — Analyst

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

Mikael Bratt — President and Chief Executive Officer

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

Brian Johnson — Barclays — Analyst

Yes and how that translates into your overall decrementals?

Mikael Bratt — President and Chief Executive Officer

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

Brian Johnson — Barclays — Analyst

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

Mikael Bratt — President and Chief Executive Officer

On your last question, I can answer first and say that that’s nothing we are entertaining. It’s not our interest to look at that. I mean we spun it off a number of years ago and we spun it off for a reason and that is still valid.

Then on where we’re using our semiconductors, it’s for where I will say most of our product lines here and to various extent, but we are not sourcing semiconductors directly ourselves. It’s through various Tier 2 suppliers, but of course we are working very closely with them to support them in the effort of securing semiconductors and we also have of course direct contact with semiconductor suppliers here in that work.

And so far, I think we have worked very well together to secure semiconductors for our own value chain and we have been able to deliver to our customers what we have committed to deliver to them there. So good job from our supply chain team here.

Brian Johnson — Barclays — Analyst

Okay, thank you.

Operator

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

Rod Lache — Wolfe Research — Analyst

Thanks. I was hoping just to follow-up with two points of clarification. People have asked about this, but the decremental margins of 25% are quite good just considering the production volatility and at some point that volatility will diminish and you’re going to see some increases in production. So would it be reasonable to expect that your incrementals would be better when that happens or do you have any estimate of what that volatility is costing you.

And then secondly, there is a lot of scrutiny that’s being applied to the inflators of your competitors still including non-Takata inflators and I think you referenced the Volvo recall where that’s actually a ZF inflator. Just how are your customers thinking about this and why wouldn’t Autoliv gain in some way from what’s happening around you?

Mikael Bratt — President and Chief Executive Officer

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

Fredrik Westin — Chief Financial Officer

And then on the decremental margin, what we want to highlight is that we have maintained a very strong cost and capital discipline. We’ll see it throughout this year and as we indicated, if you look at our headcount development, down 4,500 since Q1 and then a further reduction by 2,500 also during the third quarter. I think that shows how disciplined we have been or how focused we have been on this.

And then you also see the SG&A cost coming down sequentially and then that is also together with what we do on production overhead is also then the effect of the structural efficiency programs that we implemented and again then get the benefit from. So I think those are the main components of the decrementals margins so far again if you exclude the raw material headwinds.

On the incremental side, of course, we want to achieve then as high margin as possible going into the volume recovery once that starts to kick in, but how that plays out for the next year, we will have to come back to that when we talk about the ’22 guidance, but as we also laid out here, we expect then a meaningful progression towards the mid-term target as we should then pull through on that incremental volume.

Rod Lache — Wolfe Research — Analyst

Fair enough, great execution. Thank you.

Operator

[Operator Instructions] There are no further questions and so I hand back.

Mikael Bratt — President and Chief Executive Officer

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