Autoliv Inc (ALV) 2021 Q4 法說會逐字稿

Welcome to the Q4 2021 Autoliv, Inc. Earnings Conference Call. (Operator Instructions) I'll now hand the floor to VP of Investor Relations, Anders Trapp. Please begin your meeting.

Thank you, Mark. Welcome, everyone, to our fourth quarter and full year 2021 financial results earnings presentation. On this call, we have our President and Chief Executive Officer, Mikael Bratt; and our Chief Financial Officer, Fredrik Westin; and me, Anders Trapp, Vice President, Investor Relations.

During today's earnings call, our CEO will provide a brief overview of our quarterly results as well as provide an update on our general business and market conditions. Following Mikael, Fredrik will provide further details and commentary around the financials. We will then remain available to respond to your questions. And as usual, the slides are available at autoliv.com.

Turning to the next slide. We have the safe harbor statement, which is an integrated part of this presentation, and includes the Q&A that follows. During this 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-K that will be filed with the SEC.

Lastly, I should mention that this call is intended to conclude at 3 p.m. Central European Time. (Operator Instructions)

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

Thank you, Anders. Looking on the next slide. First, I'd like to thank our team once again for their unrelenting commitment in maneuvering through these challenging times. I would especially like to thank our colleagues in the Philippines that successfully restarted our operations after the devastating typhoon that hit the Philippines in December. All of our employees are safe. We experienced a rising number of COVID cases, resulting in a high number of absentees in our operations. We have managed this without any real effects on our business. Supply shortage of semiconductors and other components continued to impact the light vehicle production in the quarter.

It led to a fourth quarter global LVP decline of 13% according to IHS Markit. Component availability improved somewhat towards the end of the quarter. Markets with high safety content per vehicle were the most negatively affected. LVP in the important markets in Western Europe, North America and Japan, combined fell by more than 20% compared to a year ago. The impact from higher costs for raw materials amounted to close to USD 60 million in the quarter, and we expect to continue to see substantial headwinds from raw materials, also in 2022.

Given all of that, I'm pleased that we reached our latest guidance for 2021 with organic sales growth of around 8%, adjusted operating margin of 8.3% and operating cash flow of USD 754 million. Also, I'm happy to report that we estimate that the order intake share was 50% in 2021, supporting our growth target and an increasing market share. Despite the challenging environment, our cash flow was solid, both in the quarter and for the year, and our debt leverage ratio remains well within our target range.

We paid a dividend of $0.64 per share in the fourth quarter. This was 3% more than in the previous quarter.

Looking now on the financial overview on the next slide. Our consolidated net sales of USD 2.1 billion was 16% lower than in Q4 2020, mainly due to lower global light vehicle production. Adjusted operating income, excluding cost for capacity alignment fell from USD 311 million to USD 177 million. The adjusted operating margin was 8.3% in the quarter. The lower operating margin was a result of lower sales. Pricing costs for raw materials and currency effects. Operating cash flow was a solid USD 317 million despite the challenging environment.

Looking now on order intake on the next slide. Our order intake share for the full year continued on a high level, supporting our growth in the years to come. This is strong evidence that our company is the leading company in the passive safety automotive industry, and it shows that we have managed well when launching previous year's high order intake. One of our key performance indicators, customer satisfaction, has continued to improve, and is at a high level. However, this does not mean that we can relax. We always strive for improving products, services, processes and costs. We estimate that we booked 50% of available global order value in 2021. We achieved high win rates with all product types, including front center airbags and hood lifters for pedestrian protection. We are also proud that we were successful in winning many contracts with new pure EV makers.

Our strong order intake and current customer satisfaction makes us confident regarding our midterm sales targets communicated at our Capital Markets Day, last November.

Looking at the next slide. Our sales in the quarter came in lower than expected, with all regions disappointing, except China. This is in contrast to the changes in -- is in contrast to the changes in light vehicle production reported by IHS Markit during the quarter. This suggests that there might have been an element of pull forward of our sales from fourth to third quarter, contributing to the lower-than-expected outperformance.

In China, we did see some improvements of production volumes towards the end of the quarter, supporting our sales. As a result of the declining light vehicle production, our fourth quarter sales declined organically by almost 16%. This was 3 percentage points worse than the LVP according to IHS Markit. The regional mix indicates a negative mix impact of close to 3 percentage points in the quarter. Markets with high safety content per vehicle declined significantly more than low safety content markets. We see the sales underperformance as a temporary, and we expect sales to substantially outperform LVP in 2022.

Based on the latest LVP numbers from IHS Markit, we underperformed in North America by 4 percentage points and in China by 3 percentage points. In China, the main reason for the underperformance was that production of high-end vehicles declined by 10% while production of low-end vehicles grew by 2%. Regarding North America, our sales during the quarter showed a very different development compared to what IHS Markit reported. This difference can partly be explained by a possible pull forward of our sales from the fourth to the third quarter. We outperformed in Japan, Europe and rest of Asia with between 1 and 2 -- 1 and 4 percentage points. We are confident of a solid outperformance in 2022 in all major regions.

On the next slide, we can see some key model launches from the fourth quarter. For the full year 2021, we set a new company record of product launches. We also set a new fourth quarter record. The models shown on this slide have an Autoliv content per vehicle from approximately USD 200 to almost USD 450, 5 of these vehicles are either EVs or plug-in hybrids, further extending our exposure to this growing market. The long-term trend to higher CPV is supported by the introduction of front center airbags, active seatbelts and knee airbags on both driver and passenger side.

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

Thank you, Mikael. This slide highlights our key figures for the fourth quarter of 2021 compared to the fourth quarter of 2020. Our net sales were $2.1 billion. This was a 16% decrease compared to the same quarter last year. Gross profit declined by 27% to $368 million, while the gross margin decreased to 17.4%. The gross margin decrease was primarily driven by the lower sales, higher raw material costs and negative FX effects. In the quarter, capacity alignments had a $3 million negative impact on the operating profit. The adjusted operating income decreased to $177 million from $311 million. As a result, the adjusted operating margin declined to 8.3%. The operating cash flow was $317 million. Earnings per share, diluted, decreased by $0.84, where the main drivers were $1.04 from lower adjusted operating income, partly mitigated by $0.10 from financial items, $0.06 from lower tax and $0.05 from lower capacity alignment. Our adjusted return on capital employed declined to 19.1% and the adjusted return on equity to 17.5%. We declared and paid a dividend of $0.64 per share in the quarter, $0.02 more than in the previous quarter.

Looking now on the adjusted operating margin bridge on the next slide. In the fourth quarter of 2021, our adjusted operating income of $177 million was 43% lower than in the same quarter last year. The fourth quarter in 2020 was exceptionally strong with a record adjusted operating income of $311 million, fueled by the rapid recovery of light vehicle production coupled with a very lean cost structure on the back of earlier shutdowns in 2020.

Cost for recalls was $55 million lower than Q4 last year. The impact of raw material price changes was a negative $60 million in the quarter year-on-year. Foreign exchange impacted the operating profit negatively by (inaudible) million, mainly as a result of the fall of the Turkish lira. Support from governments in connection with the pandemic was $3 million lower in the fourth quarter compared to last year.

SG&A and RD&E net of government support was $3 million higher, mainly lower sales but also high call of volatility and cost inflation, for instance, related to logistics and utilities impacted our operations negatively in the quarter. Excluding foreign exchange, raw material cost increases and governmental support, the adjusted operating income leverage was approximately 28% on the organic sales decline. The 28% decremental margin is at the high end of our communicated normal range, impacted by unpredictable customer call-offs and the fact that the fourth quarter 2020 was exceptionally strong.

Looking on the full year 2021 sales performance on the next slide. I'm very pleased that all regions showed organic sales outperformance in 2021. This was achieved as we continue to execute on our strong order book. In North America, we outperformed by 5 percentage points, and in Europe by 12 percentage points. In China, we outperformed by 7 percentage points despite high-end vehicles being more affected by the semiconductor shortage. The 7 percentage points outperformance in Japan was substantially higher than in previous years.

Looking now on the next slide, our key figures for the full year 2021. 2021 was again a turbulent year with significantly lower light vehicle production than expected in the beginning of the year mainly due to shortages of semiconductors. Our net sales were $8.2 billion, with sales increasing organically by 8%, in line with the latest guidance despite LVP being virtually flat year-over-year. The adjusted operating income was increased by 42% to $683 million. The adjusted operating margin was 8.3% compared to our latest guidance of around 8%. The operating cash flow was $754 million compared to the guidance of around $700 million, and earnings per share more than doubled to $4.96. And lastly, dividends of $1.88 were paid.

Looking now at the cash flow on the next slide. For the full year of 2021, operating cash flow decreased by $95 million to $754 million compared to last year as the higher net income was more than offset by changes in working capital. For the fourth quarter of 2021, operating cash flow decreased by $152 million to $317 million compared to the same period last year, mainly due to lower net income and less positive effects from deferred income taxes. Compared to prior quarter, working capital improved by $116 million, benefiting from an $89 million change in trade working capital. This was mainly a result of $145 million reduction of inventories and $68 million from increases of accounts payables but partly offset by $124 million from increased receivables. The decrease in inventories was a consequence of improving LVP volatility and measures taken to normalize inventory levels.

For the full year 2021, capital expenditures increased by $114 million, which mainly reflects that the level in the prior year was still low due to the pandemic. In relation to sales, CapEx net was 5.5% in 2021 versus 4.6% in 2020. For the fourth quarter, capital expenditures increased by 38% to $153 million. Net capital expenditure in relation to sales was 7.2% versus 4.4% a year earlier.

For the full year 2021, free cash flow was $300 million compared to $509 million a year earlier driven by the lower operating cash flow and higher capital expenditure. And in the fourth quarter 2021, free cash flow was $164 million, and also here impacted by lower operating cash flow and higher capital expenditure. The cash conversion for the full year 2021 was 69%.

Now looking on our leverage ratio development on the next slide. In the past 2 years, we have managed a very difficult market environment with significant declines in light vehicle production, raw material price increases and low demand visibility as well as severe disruptions of global supply chains. And still, we have reduced our net debt by more than $750 million since mid-2019, and thereby recovered to a balance sheet position that is in line with our target. The leverage ratio at the end of December 2021 was 1.2x, a significant improvement since the peak of 2.9x in 2020. In the quarter, our 12-month trailing adjusted EBITDA decreased by $140 million, approximately balanced by the net debt decrease of $148 million.

Now looking at the raw material development on to the next slide, supply-demand imbalances continued to drive prices of raw materials higher during the year. Cost increases from -- for raw materials generated a headwind of $60 million or 3 percentage points to our operating margin in the fourth quarter. In 2021, we limited the impact from raw materials to around 130 basis points or around $105 million, of which $100 million came in the second half of the year. For the full year 2022, we expect raw material costs to amount around 3 percentage points in operating margin headwind, with around 5 percentage points year-over-year impact in the first half and around 1 to 2 percentage points in the second half year. Given this exceptional period of high raw material prices, we believe that customer recoveries will offset some of these expected raw material cost increases. It will take time to see the results of these efforts, and we do not expect to see much results until the second half of 2022. For commercial reasons, we will not discuss the anticipated recovery or its nature at this time.

On to the next slide. Through a number of actions, we have mitigated some of the negative effects from the lower sales and the cost inflation during 2021. These actions include activities such as adjusting production, shortening workweek hours and furloughing personnel. This includes, for example, footprint and capacity alignment in Europe as well as moving over at functions to best cost countries in Americas. We have also initiated further footprint adjustments in Japan and in the rest of Asia. In total, we have reduced head count by over 8,000 since the beginning of the year, of which 1,400 were in the fourth quarter. Other strict measures include management of inventories and payables, negotiating with suppliers and customers to mitigate impacts of raw materials and high call of volatility. Our supply chain management teams have been working hard to balance inventories to actual demand. During the quarter, production planning accuracy improved from November as customer call loss are more stable than before.

This concludes 2021. And now switching to '22. I hand it back to Mikael.

Thank you, Fredrik. Looking now at the LVP development on the next slide. For the first 3 quarters of 2022, global LVP is expected to remain on a similar level as we saw in Q4, at just below 20 million units per quarter. This level should be achievable, assuming no further deterioration of component availability. In North America, the industry continues to struggle to meet consumer demand for new vehicles due to the shortage of semiconductor. Inventory of new vehicles in the U.S. ended December around 1 million units, the lowest level seen for at least 35 years.

Despite healthy underlying demand trends in Europe, component shortage meant that registrations have not returned to the pre-pandemic level. This has led to record long waiting times for new vehicles. In China, we saw a rebound in December for light vehicle sales, indicating an easening of semiconductor chip shortages. As component availability appear to be improving somewhat, we expect a good demand and low inventories to support the recovery in LVP in 2022. IHS Markit expects that the global LVP will be around 80 million units in 2022, a 9% increase over 2021. However, we still see the component availability as a limiting factor for the recovery. We expect a positive regional mix as most growth is expected to come in high content per vehicle markets, such as Western Europe and North America. Where possible, OEMs will likely continue to prioritize production of vehicles with no or low CO2 levels as well as larger vehicles.

Turning to the next slide. Here, you see some of the key models supporting the strong sales growth and outperformance we expect for 2022. These models are expected to account for 1/4 of our organic sales growth during the year. Most of these models were launched in 2021. Some are yet to be launched, including the Chevrolet Silverado. New steering wins on several new and existing (inaudible) vehicles are also to be launched. Our content per vehicle on these 12 models is in the range of USD 140 to USD 400. According to IHS Markit, global LVP in 2022 is expected to increase by approximately 9% with a positive region mix for Autoliv. The mix is expected to provide 2 to 3 percentage points growth over market. We also expect CPV growth of around 2%. We foresee substantial sales outperformance in all major regions in 2022. Japan and China are expected to be the markets for us with the highest outperformance followed by Europe and North America.

Backed by these recent product launches, strong rebound in global LVP and a positive light vehicle production mix, we expect sales to increase organically by around 20%. Looking to our expected margin development for 2022 on next slide. Our strategic initiatives continue to yield good results, and we are confident in our 2022, 2024 targets. In 2021, we reduced headcount by 11%, and we will continue a strict cost control in 2022, as previously outlined by Fredrik. This includes executing on capacity alignments, footprint optimization, strategic initiatives and customer recoveries partly offset by cost inflation from wages, logistics and energy. The expected sales increase should bring strong margin improvement support while rising raw material costs is expected to amount to around 3 percentage points in operating margin headwind with a significantly larger year-over-year impact in first half. We expect customer recoveries to offset some of these expected raw material cost increases, mainly in the second half year. This would lead to an improved adjusted operating margin for the full year 2022 of around 9.5% compared to 8.3% in the prior year.

Our adjusted operating margin outlook may still be impacted by supply chain disruption in the automotive industry and potential risk of surging COVID cases and its effect on us and automotive industry.

Looking at the detailed indications on the next slide. Our full year 2022 indications exclude cost for capacity alignment, antitrust-related matters and other discrete items. Our full year indication is based on the LVP growth assumption of around 9% compared to 2021. We expect sales to increase organically by around 20%. Currency translation effects are assumed to be around 3% negative. We expect an adjusted operating margin of around 9.5%. Operating cash flow is expected to be around USD 950 million.

Turning the slide to look at our 2022 priorities. The health and safety of our employees is our first priority, while continuing with more activities to further improve efficiency. We will also continue our efforts of flawless execution of new launches, improving customer satisfaction further, and thereby supporting our new and stronger market position. Through our capital efficiency program, we aim to unlock capital from receivables, inventory and payables for other users. Combined with the execution of our strategic plan, this should lead to a strong cash flow generation, which sets Autoliv up for attractive shareholder value creation by executing on our strategic initiatives, footprint optimization and negotiating compensations from OEMs, we will mitigate headwinds from raw materials and cost inflation. We also aim to grow mobility safety solutions, supporting our growth targets beyond 2024. To progress towards our climate target, we will focus on increased resource efficiency and reduction of our carbon footprint. I will now hand it back to Anders.

Thank you, Mikael. Turning the page. This concludes our formal comments for today's earnings call, and we would like to open the line for questions. I'll turn it back to Mark.

(Operator Instructions)

And our first question comes from the line of Emmanuel Rosner of Deutsche Bank.

I have 2 questions. The first one is around the revenue outlook. So very pleased and positively surprised to see your expect 11% growth of the market in 2022 as well as your confirmation that you're on track for the midterm targets. At the same time, just at the recent Capital Markets Day, you had sort of tweaked back down your growth over market midterm framework to just 4 points a year or so on average. So based on the cadence of your backlog, and sort of like the new business that you have won, would you expect sort of like the rest of the horizon to be below average in (inaudible) market?

Thank you for your question. I think at the Capital Markets Day, we did not lower the expectation. We actually increased it. As you remember, in 2019, we talked about this 4% to 5% over the strategic horizon. And now as we have moved forward, we talked about the LVP outperformance for '22, '23 and '24 to be LVP plus around 4%. So when you compare those numbers, it's actually a little bit higher number when you look at our latest update. So what we are saying here is that we are confirming the strong growth that we have as a result of the order book we have built over the last couple of years. So we have the right tractor here going forward, and that is what you see in our guidance for 2022 here.

Okay. Understood. And then second question, I guess, on the raw material headwind for this year, and then obviously partly mitigated by some recoveries. I think in some of your earlier expectations, I think you had assumed that you would have decent amount of clarity on commercial recoveries earlier in the year and potentially some of these commercial recoveries achieved already in the first or second quarter of 2022. Your latest commentary seem to indicate maybe a little bit more back-end loaded in terms of clarity on this and sort of like achieving that. Can you maybe just -- I understand you can't quantify expectation, but can you maybe just characterize what drives this, saying, why will it take sort of a little bit longer? Have your expectations directionally in terms of magnitude change in terms of the ability to recover commodities?

No. I don't think there's any change to what we have thought or said previously. We did have already recoveries in 2021. But as we indicated, they were at a lower levels. And then we expect not to have larger recoveries in 2022. And of course, on the smaller part of our business where we are already indexed, I mean that reset that happens already earlier during the year. So those recoveries will come in earlier. But as the bulk of it will be based on negotiations, they will have an effect more towards the second half of the year.

And just to be clear, is there some level of recovery baked in -- raw materials baked into this 9.5% guidance?

Yes, yes. So we were -- I mean the 3 percentage point headwind we're guiding for on the raw material side is the pure headwind we're seeing on the cost side. So that is not net of any recovery. That's just a pure cost element. But if you look at the high level, the waterfall we're giving to get to the 9.5% even if you take, say, an average leverage on the incremental volume, you can also infer from that, that there is a recovery assumption also baked into the 9.5%.

Our next question comes from the line of Hampus Engellau of Handelsbanken.

Two questions for me. First is on the order intake. If you maybe could discuss a little bit on the drivers behind getting back to 50% market share compared to 45% in 2020. And also if there's an element of -- or how we should think about pricing in regards to stepping up in market share, again in orders? That's my first question. Second question is more related to the semi shortage. If I'm reading OEMs and looking at ICF, it seems like it's reasonable to assume that there will be similar semi shortage in the first quarter as we had in fourth quarter. And it would be interesting to hear your comments on that.

Thank you, Hampus. On the order intake, no, I think, I mean, as we said last year there, I mean, we were pleased with that order intake we had that year as well. And of course, every year, it's not the same. So -- and as you know, we don't have a market share target per se, but we need to fight for the business here, and we believe that we have a strong order book that we have continued to build, and we are heading towards around 45% market share in the future as we have indicated, and that is what we intend to defend here. But of course, defend it with healthy business, and that is what we are focusing on here. So 50% 1 year, around 45% in another year, and that's really no drama in that development of either up or down there. So we have no real differences there, I would say. So for us, the market share is not the top priority, it is to have healthy business defending our position in the market. That's our priority.

And then on the semi shortage side there I mean, I definitely believe that we -- and as you see in our indications here, also, we believe that we will have disturbances for limitations to the LVP growth due to semiconductors on the major part of 2022 as well. I think it's very difficult to have a very clear opinion when semiconductor challenges will be behind us because we all know the growing need for semiconductors, not only in automotive, but also in society in large here and -- it's a catch-up game that needs to be done here from the semiconductor manufacturers here, and that's not a quick fix. But what we think here is that we have come to some kind of more stable situation overall. And as we have commented here, we saw the volatility in the call-ups coming down towards the end of the quarter, and we believe that we will have a more stable situation. However, still growth is being hold back due to semiconductor shortage.

Our next question comes from the line of Victoria Greer at Morgan Stanley. .

A couple of questions from me, please. I wanted to come back to your top line guidance, please. So production, 9% in LVP based on IHS and then making it up to 20% with 1100 basis points of outperformance. But I can think of, I guess, several factors that are probably additional to normal than just the new business in that 1100 basis points is positive geographical mix. You mentioned CPV growth of about 200 basis points. I guess some of that is coming from regional mix. Some of it will be coming from new orders. and maybe there's an element of price increases in that top line guidance also. Could you talk us through, I guess, how much of that 1100 basis points outperformance in 2022 is from these unusual factors with the geographical mix, and how much of it is straight new starts. And the second question is on share buyback, really kind of more of a procedural question than anything else. You obviously set the target across 2022 to 2024 of up to $1.5 billion. How would you expect to execute on that? Could you give us a specific number for 2022? Or should we think about this as more opportunistic?

Thank you for your questions there. I think you touched most of the components there when it comes to the outperformance. As you correctly said there, I mean, mix and content per vehicle on top of the LVP growth stands for, I would say, to 2/3 of the development here. And then the remaining part is really then our growth as a result of the order book level built here. So I think that's the short of it.

On the share buyback side, I think we have nothing to comment around that here. I mean we have presented our buyback program here, leading up to 2024. And we will take those steps towards that -- we are still committed to that, but we will not have any pre-announcement on that. We will inform in due course here when we take the different steps towards that. But we are still, of course, fully committed to that, and we believe we have more to say when we have something to talk about there.

Our next question comes from the line of Mattias Holmberg of DNB.

Sorry to get back to the 2 -- or sorry, the 4 percentage point outperformance guidance for '22 to '24, but I didn't really understand the answer. So I would just like to get clarified. The 4%, should we expect that you grow at least 4 percentage points faster also in '23 and '24 despite the much stronger outperformance now in '22?

Yes. I mean as I said here, I mean, we have indicated that we wouldn't -- coming 3 years, '22, '23 and '24 should have LVP outperformance of around 4% per year. Then, of course, as it comes out here, we -- it will not be a linear development. And we have only guided you here now for 2022. And when it comes to '23 and '24, we will come back there.

Can also add a little bit? I mean as you might have seen that we did not perform as well as we had expected -- our outperformance as well as expected in the fourth quarter, largely due to a negative mix of almost taking out almost 3 percentage points. We think that some of that negative mix we will recover in 2022, which was not part of the original 4% per year growth over market of LVP as an average for '22, '23 and '24. So therefore, it might be somewhat higher actually than combined compared to what we said before, due to these mix effects that we now see positive in '22.

Great. That's clear. Second one for me. You mentioned the 50% market share on order intake. Can you say what market share you had on sales, please?

We are not ready with that calculation, yet. So it's more data required in order to conclude on that calculation. So we have no update when it comes to the -- let's call it, the running portfolio market share there.

We're still waiting for competitors report so on and some more market intelligence to conclude on those calculations here.

Our next question comes from the line of Rod Lache at Wolfe Research.

On the commodities, your Slide 14 charts on commodities, looks like it ends in Q3. Steel looks like it's been coming down a lot since that time frame, hot-rolled coils are now $1,100 or $1,200 a short ton. I'm wondering if that is reflected in your guidance. And maybe you can just educate us a little bit on how that flows through. What kind of lag you typically experience? And if it stayed at spot levels, how does that factor into your 12% margin target?

Yes. No, I think it's a formatting thing than on the access. I believe it is Q4 that is also included in those developments. But you're right, we also here during the first part of Q1, we've seen those trends on certain commodities continuing in a positive direction for us. And the main impact that we see here for next year is continued headwinds here on steel, and that is based on how our contracts are structured, and the timing of how we roll those over. But then we also see an increased impact from nonferrous metals, mainly aluminum and magnesium, but also yarn, especially the polyester and polyamide or nylon will have a significantly larger impact in 2022 than it had in 2021.

So those are the main components of the raw material headwinds that we're seeing. It is -- the guidance is based on our contract structures, so the timing of when we have to roll these contracts over. And then also on the price trends that we're seeing in the market. So they're not necessarily based on our current spot price levels, as we have indicated before. There are always been time lags, how they roll into our contractual setup, and then also the duration of our contracts also play a role. But it's our best estimate at this point of time how our -- yes, the current raw material price situation and trends will be reflected in our cost base.

And at the moment, we're working hard both on say, operational efficiency, also value-added value engineering activities with our supply base and our customers. But also, obviously, on the commercial recoveries to ensure that we can still hit the 12% margin target that we have set out.

Okay. And maybe second, can you give us an update on just the status of just the automation and digitization projects. I think you had $160 million of savings from that. There was maybe $80 million of footprint changes. R&D over the next year or 2 is going to come down by about 100 basis points. So how should we -- any update on how we should be -- what we should be looking for in 2022?

Yes. Again, I think in the bridge or the waterfall chart that we're giving here for 2022, you can already infer from that there are further improvements also included there from those activities. So we see that continuing automation and more operational activities with the shorter payback periods, and then the footprint activities tend to have longer payback periods, so not such a significant component or impact from the second part here on 2022. But those are the main components where we are able then to mitigate the effects from raw material headwinds that are quite significant at 3 percentage points, and still be able to give a 9.5% margin target here for next year or for this year.

Our next question comes from the line of Colin Langan at Wells Fargo.

Just a follow-up on the raw material question. Just want to understand this. Can you remind us the split of your exposure by steel, non-ferrous and nylon? And I would kind of anticipate maybe a 6-month lag between when maybe the spot and your contracts. So does that mean in the outlook that steel is maybe more flat in the second half of the year and then the bulk of the impact is hitting, just seems -- just any color there in terms of how that operates.

Yes. On the commodity breakdown, steel is roughly 45% of our commodity exposure. That is followed by yarn or textiles. That's around 20%, followed by resins or in plastic inputs. That's around 15%. And then nonferrous metals is, yes, between 10% and 15% and then the others make up 5% to 10%. So that's the composition we have. And as you said, I mean, we were expecting the majority of the headwinds on steel to be in the first half of the year. We had very limited impact in the first half of 2021 due to our ability to postpone the impact, and also our contractual setups. But now as those contracts expire, and we have to roll them over, we will see a significant headwind in the first half and then as you say, a much lower impact in the second half on steel.

Okay. So the second half is mostly the nylon and the nonferrous type of stuff hitting.

Yes. And so it's -- the impact is -- it was -- of the $105 million that we had this year, basically 3/4 almost of that was from steel. And of the 300 basis points we have for 2022, it's much more evenly spread between steel, nonferrous and textiles, yeah that's correct.

That's very helpful. And then just to follow up on the growth over market, one of the things I struggle with is understanding product mix because 2021 seems like all the luxury, holistic stuff like that were in favor that sort of helped mix overall. How are you thinking about that in your guidance? Obviously, geographic mix makes total sense with North America and Europe outperforming. Have you factored in negative product mix? Or do you think it's going to be steady this year? Just your thoughts there would be helpful.

No. I mean, of course, that's a part of our estimation here. And you -- I would say, right now, you have a growth in content per vehicle across the board here. I mean also the low-end vehicle, if we call them that as well as the premium has gradually increase. And I think the actually, the gap between the lower and the premiums remains as both are to a large extent as they both are growing. So that's, I would say, a minor factor there, if you look at the total development of the industry. Then of course, in a single quarter or a single month, you can have those swing depending on which modalities. But as a general -- principally, I would say, the mix effect is mainly under the regional side of things.

Our next question comes from the line of Joseph Spak at RBC Capital Markets.

Sorry, but one more on commodities. And I guess maybe this is a -- I just want to clarify something because I think there was maybe an assumption that fourth quarter would have been the peak for raw materials, and now clearly seems it's more first half. But I'm wondering when you talk about these numbers either absolute like $105 million in '21 or the 300 basis points in this fourth quarter versus the 500 in the first half. Is that a -- is there like a net versus gross? Because I think in answer to Emmanuel's question earlier, you mentioned the 300 basis point impact for '22 is a gross number. But when you talk about it in the actual results, is that also gross or is that netted?

No. It's the same basis. Yes.

It's the same. Okay.

But it's -- so it's the same. It's not the full risk or exposure we would have on commodities. That would be even higher. I mean if we were transacting on spot markets and so on, the raw material impact would be higher. So there are already a lot of mitigating actions in the 300 basis points for this year or the 130 basis points for last year. And that's, I mean, delaying price increases, switching suppliers and so on. So there are already a lot of mitigating activities in the 300 basis points. But it is -- as I said, it's a gross number, how we expect to hit our P&L in terms of cost increases year-over-year from raw materials. But then the recovery part -- but the recovery part from our customers is not included. And as I said, we already had recoveries in 2021. But for commercial reasons, we prefer not to disclose those because the negotiations are ongoing.

Okay. That makes sense. And then just on the comment about that you may have seen some pull forward from the third quarter to the fourth quarter. Can you just expand upon that a little bit? What -- because I guess is -- what you're trying to imply that there may have been some vehicles you ship to that maybe weren't completely assembled because they were missing components, and so they got assembled in a quarter later, which may have sort of created a mismatch in outgrowth when you sort of compare it to production? Or maybe you could talk a little bit more about your views there.

Yes. I mean it's exactly right. I think as I indicated here, I mean, we have had a very volatile 2021, especially Q3 there -- where we had short-term changes to the production schedules, and we believe that some of the material that was actually called off at the end of the day were going into vehicles that were produced later in Q4. So the whole volatility situation has made it a little bit more difficult to read here. And as we have said here, I mean, we -- what we can see the production numbers for Q4 is a little bit higher than what -- on the LVP side, a little bit higher than what activity we could see from our side here. So we believe that there is effect of that, that some of the volumes in Q3 belong really to Q4 in terms of LVP.

Maybe just a quick follow-up. How do you see recent scheduled volatility? And is your expectation of that, that will improve -- that the stability will improve as you move through the year?

We believe so. And as we said, towards the end of the quarter, we saw a stabilization. And when we look into 2022, we are not seeing anything that should indicate that we have increased volatility. But I mean, there is a lot of things going on in the world around us here with raw material prices, energy situations, et cetera, et cetera. So we, of course, keep a very close eye on the development here, but no indications as of today that volatility should return.

Our next question comes from the line of Chris McNally at Evercore.

Two -- just questions around the general pace of the production recovery. The first around the orders, you talked about the 50% share. But if you actually look at the absolutes, I was kind of surprised to see that the absolute level of orders this year was back to 2019. It seems quicker than expected, also we are not expected to get back to the production levels for another year. So just if you can comment on the general pace of industry orders. I mean the numbers are the same 50%. So I know you're pleased with the 50%. But how about the -- just the RFPs that are out there?

Yes. I mean if I understand your question right here, I mean, the order value on the RFQs that we are winning, of course, are based on our customers' expectation on these different programs here. So I don't think you can compare it to 2019 where we have -- in terms of production schedules or anything like that. So this is for the future, and some of these programs may go into production in '24 and even in some cases beyond. But I would say, more '24, '25, '26 time horizon. So there is, of course, a different basis for that. So...

I guess my only point was we hear a lot about lack of confidence in the future, and this would sort of say that we're getting back to some level of pre-COVID normalization with the expectations of your customers.

Yes. I think, I mean, the underlying demand there -- at least I don't see any doubt about the strength in that. I think we have a very strong underlying demand driven by the fact that there is a much older fleet out there, and there is replacement need. We have a several years with relatively low production, and it has not been low because of demand. It has been low because of first COVID and then semiconductor shortage and other challenges here on the materials side. And it's still hampered by the fact that the availability is not there. So underlying demand is very strong. We have pipelines, for example, in U.S. that they are on record low levels, as we indicated here. I mean 1 million vehicles. It's 2 million, 3 million just to refill that pipeline to what's normal. So very strong there. And then on top of that, also, we have the shift to electrical vehicles. So there is strong interest from consumers here to go into new vehicles with new technology here. So when the chip shortages and material shortages is behind us, we believe in a very strong recovery here.

And maybe one other comment, we expect the -- say, the lifetime sales that we were quoting on to be even higher for 2021 at the beginning of the year. So we've seen some projects being pushed out into 2022, but we do expect at the moment that 2022 will be, say, also a step up from '21 in terms of business that will be out for sourcing from our customers.

No. I appreciate the detail. And then maybe just a little bit more near-term question about recovery, sequentially. I think on Slide 16, you talked about the next couple of quarters being relatively flat, light vehicle production. I know that's sort of what IHS has. But what's interesting is we're hearing from some of the customers like Toyota, I think is talking about April being 35% higher than February. Is there a potential that while Q1 seems pretty flat that by Q2, as you get out of sort of some of the COVID-related shutdowns that Q2 could be actually up sequentially, I know some of the other forecasts are up 4% to 5% Q1 to Q2.

No. I think -- I mean you're referring to one customer here, and it could very well be slow for various reasons. But as an industry, it's to the best of our knowledge that what we have described here today. And once again, I think the -- I mean the pure limiting factor is the availability of material here. So if that is corrected, you can see quick step ups here. But that's the best data we have as of today. And of course, as you know, the visibility we have is not that far out in terms of (inaudible).

And again, the underlying assumption for the full year is that Q1, 2 and 3 will be relatively flat versus Q4 so that the industry should be able to hold up at those -- at the Q4 volumes. And then a slight increase sequentially into the fourth quarter this year.

I think we have time for one more question.

That will come from the line of Sascha Gommel of Jefferies.

Two quick ones, actually. The first one is on working capital. You mentioned that you see further improvement potential. So I was wondering if you can give us a bit of scope and measures for the main working capital items that you see? And then secondly, on the share buybacks, again, more procedural question. Is it a management or a Board decision like the dividend?

Yes. On the dividend, it's a board decision. As you know, we have a quarterly dividend, and that's decided by the Board quarter-by-quarter.

And buybacks as well? Is buybacks a management decision?

Buybacks, we have a mandate from the Board and that is the mandate one that we have present up to that level. So that is an operational question after that.

And then on working capital, I mean, I think you can see that -- and we did talk about on the Capital Markets Day, how we're focusing, especially on accounts payables. And I think if you look at the multiyear trend. You can see a significant improvement also into 2022. And we are expecting that we will see further improvements from that here over the next few years. And then on inventory, I think we proved also here that in very, very challenging times, we were able to reduce inventory sequentially by almost $150 million, which also shows that we have a lot of focus and traction also on those initiatives. And also here, we expect to see more going forward, and I think we have a good setup for these improvements. So I think we're well on track to get to the $800 million that we've talked about with 2019 as a basis point.

So that was the last question ? So...

Okay. Thank you very much. Before we end today's call, I would like to say that we are operating from a position of strength in many aspects, including market position, growth and dedicated employees. Unfortunately, there will be millions of vehicle collisions in 2022. Autoliv will continue to focus on our vision of saving more lives, which is our key contribution to sustainable society.

Our first quarter earnings call is scheduled for Friday, April 22, 2022. Thank you, everyone, for participating on today's call. We sincerely appreciate your continued interest in Autoliv. Until next time. Stay safe.