Thank you, Nez. Welcome, everyone, to our Q2 2021 financial results earnings presentation. On this call, we have our President and CEO, Mikael Bratt and our Chief Financial Officer, Frederik Kristin and me, Anders Trapp, VP, Investor Relations. During today's earnings call, our CEO will provide a brief overview of our 2nd 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 Sites are available at autolive.com. Turning to the next slide. We have the Safe Harbor statement, which is an integrated part of this presentation and includes the Q and 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 and the 10 Q 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, so please follow a limit of 2 questions per person.
I will now hand over to our CEO, Mikael Bratt.
Thank you, Anders. Looking now in to the Q2 2021 highlights on the next slide. The COVID-nineteen pandemic continues to affect us in several ways. And I would like to acknowledge our employees for their hard work and commitment to health and safety. While managing a strong consumer demand for new vehicles, the automotive industry continues to battle with the semiconductor shortage and other component supply disruptions.
As a result of the shortage, global light vehicle production in the quarter was 8% lower than what was expected and 8% lower than in the Q1 according to IHS Markit. Considering these headwinds, I'm pleased with our 2nd quarter's strong sales growth and our outperformance versus light vehicle production. The lower than anticipated light vehicle production, rising raw material costs and the large changes in customer call offs with short notice negatively impacted our profitability in the quarter. Frequent production changes from our customers with short notice limited our ability to use furloughing to mitigate the effects of the lower demand. Although the situation improved towards the end of the quarter, we still expect supply disruptions to impact light vehicle production for the rest of the year.
Our performance further improved our debt leverage ratio, which is now close to our target of 1x EBITDA. We continue to evaluate opportunities for shareholder value creation. I'm also pleased that we have reinstated a quarterly dividend, which for the Q2 was declared and paid at $0.62 per share. The industry's level of sourcing of new orders has normalized, and I'm pleased with our win rate. We took an important step by setting ambitious climate targets, which include plans to become carbon neutral in our own operations by 2,030.
Towards the end of the quarter, the semiconductor issue was improving. However, in July, the situation has deteriorated in North America and Europe again as a number of OEMs have announced further near term reductions. The situation in Asia appears more stable. Light vehicle production is expected to remain volatile for the rest of the year with semiconductor shortage and Supply chain issues leading to higher costs for commodities. Looking now on the financial highlights on the next slide.
Our consolidated net sales increased close to SEK 1,000,000,000 or by 93% compared to Q2 20 20. As a result of light vehicle production recovery from the pandemic related lockdowns last year and our strong sales outperformance, The European and North American market contributed to 3 quarters of the sales increase. Adjusted operating income, excluding cost for capacity alignment, improved from minus $172,000,000 to $166,000,000 The adjusted operating margin increased to 8 point of 2%. The solid operating income, despite light vehicle production being both volatile and lower than expected, was a result of good operational execution, cost control and positive effects from the structured efficiency programs. Operating cash flow was SEK 63,000,000 despite adverse effects from changes in working capital.
Looking now on sales development on the next slide. I'm very pleased that our organic sales growth outperformed the global light vehicle production by more than 30 percentage points. This was achieved partly because of positive geographical mix effects as light vehicle production grows strongly in high content per vehicle markets, but mainly because we continued to execute on our strong order book. We had a very strong sales development in almost all regions. In North America, we outperformed by 24 percentage points and in Europe by 38 percentage points.
In China, we outperformed by almost 5 percentage points, despite that high end vehicles were more affected by the semiconductor shortage. Looking on the next slide. We see several notable product launches during the quarter. The models shown on this slide have an autolip content per vehicle from USD 100 to almost USD 4.50. 6 of these vehicles are either EVs or plug in hybrids, further extending our exposure to this growing segment.
The long term trend to higher content per vehicle is supported by the introduction of front center airbags, knee airbags, belt bags and more pedestrian protection systems. I will now hand over to our CFO, Frederik Visteen, who will talk about the financials on the next Few slides.
Thank you, Mikael. This slide highlights our key figures for the Q2. We are including 2019 in this overview because of the anomaly of the Q2 2020, which was the Q1 with strict COVID related lockdowns outside of China. Our net sales were over SEK 2,000,000,000, a 93% increase compared to the same quarter last year. Compared to Q2 2019, sales decreased by 6%, while the underlying LVP was down even 15%.
Gross profit increased to $384,000,000 and the gross margin increased to 19%. Compared to Q2 2019, The gross margin increased by 40 basis points despite the lower sales. The higher gross margin was primarily driven by direct labor and material efficiencies. In the quarter, capacity alignments had no material impact on the operating profit. The adjusted operating income increased to SEK 166,000,000 due to the higher gross profit.
The adjusted operating margin improved by 25 percentage points versus Q2 2020 and was almost in line with Q2 2019 despite 6% lower sales. The operating cash flow was CHF 63,000,000 This was achieved despite adverse effects from changes in working capital. Reported earnings per share improved to $1.19 and our adjusted return on capital employed improved to 18% and adjusted return on equity to 16%. We reinstated our quarterly dividend at $0.62 per share, the same level as before the dividend was suspended in the Q2 of 2020. Looking now on the adjusted operating margin bridge on the next slide.
Our adjusted operating margin of 8.2% was almost 25 percentage points higher than in the Q2 of 2020. The impact of raw material price changes was negative SEK 8,000,000 in the quarter. FX impacted the operating profit negatively by SEK 13,000,000 This is caused by transactional effects from a number of different currency pairs. The most significant was the negative impact from a stronger Canadian dollar and a stronger Mexican peso versus the U. S.
Dollar. Support from governments in connection with the pandemic was SEK 25,000,000 in the Q2 last year, while it was not material to our financial results in the Q2 of 2021. As illustrated in the chart, The adjusted operating profit was negatively affected by higher SG and A and RD and E, net of government support of SEK 40,000,000. Operational improvements contributed with over SEK 400,000,000 mainly due to the substantial increase in sales. If we exclude FX, raw material cost increases and governmental support, the leverage was 39% on the higher sales, supported by good cost discipline and effects from our structural efficiency programs.
As Q2 2020 was a very special Quarter highly impacted by lockdowns, the Q1 of 2021 is a more relevant comparison. And looking on the next slide, we see that sales declined by SEK 220,000,000 sequentially or almost 10% compared to the Q1 2021. Our adjusted operating profit declined by SEK 72,000,000. Excluding €10,000,000 from increased raw material costs, the decline was €62,000,000 which results in an operating leverage of around 28%. We have many times communicated that our operating leverage normally is in the 20% to 30% range, with closer to 30% to be expected when sales fluctuate significantly, and we consider a 10% sales drop quarter over quarter to be significant.
The 28% decremental margin is within the communicated normal range despite the high volatility in LVP with customer call offs frequently being changed with short notice, especially as planning on production has been difficult. We usually see call off deviations of plusminus5%. In the Q2, we have frequently seen call off deviations of up to 50%. We believe the actions undertaken in the quarter, such as reducing headcount by more than 2,000, contributed to limiting the decremental margin. Looking on the next slide.
For the Q2 of 2021, operating cash flow was $63,000,000 an increase of SEK 192,000,000 compared to the same quarter last year and SEK 84,000,000 compared to Q2 2019. The operating cash flow in the quarter was negatively impacted by changes in operating working capital, mainly relating to tax, insurance and cash out for the Toyota Prius recalled. As inventories were impacted by supply chain uncertainties, Trade working capital also developed unfavorably with SEK 8,000,000 For the full year 2021, we expect operating cash flow to be similar to the 2020 levels. Capital expenditures amounted to CHF 96,000,000 in the quarter or 4.8 percent of sales. Compared to same quarter last year, capital expenditures increased by €32,000,000 or by 50%.
Free cash flow was negative EUR 33,000,000 impacted by unfavorable working capital effects. Our cash conversion in the last 12 months was close to 130%. We turn to the next slide. We have, as you know, a long history of a prudent financial policy, and our balance sheet focus remains unchanged. The leverage ratio improved from the peak of 2.8 times a year ago to 1.1 times.
The improved leverage in the quarter was a result of our EBITDA over the last 12 months increasing by EUR 350,000,000 partly offset by the net debt increase of €85,000,000 Further improvements should provide additional opportunities for shareholder value creation. Onto the next slide. Supply demand imbalances continued to drive prices of raw materials higher, and Some key commodities have increased by more than 20% in the past 3 months. As we mainly buy components, the effects from changes in spot market Prices are usually mitigated and delayed through longer term supply contracts. Year to date, we have been successful in limiting the impact with virtually zero impact in the Q1 and only around $8,000,000 in the second quarter.
However, as raw material prices have continued to increase on a broad base for the 3rd straight quarter. We will see price adjustments coming through, which will affect earnings significantly in the second half of the year. Based on the current situation, we estimate that for the full year of 2021, we will face an operating margin headwind of around 130 basis points from raw material price changes. Our previous estimate was 90 basis points. We have some but limited contractual pass throughs to our customers.
Negotiations for compensations from the remaining customers will take time and likely not have much impact until the next year. On to the next slide. Demand for new vehicles remains high, and inventory levels of new vehicles remain at record low levels in some regions. For example, the inventory levels in North America ended June at 1,400,000 units or about 35% of what manufacturers normally would be Dealer inventories are in general at a normal level in China, and we believe that European inventory levels are fairly low, especially for premium vehicles. Assuming that the component availability improves, we expect a good demand and low inventories to support a recovery in LVP into 2022.
Versus what was expected at the beginning of the quarter, Q2 2021 light vehicle production came in 8% softer than expected due to shortages of semiconductors. From here, though, the global volume should sequentially improve into the second half of
the year.
However, production is expected to remain volatile because of the semiconductor and other shortages. OEMs will likely strongly push for vehicles with no or low CO2 levels as well as larger vehicles that are more profitable for them. For Autoliv, this trend should support further outperformance versus light vehicle production. For full year 2021, Our assumption is now that global LVP will increase by 9% to 11% compared to 2020. IHS Markit has this afternoon released their updated LVP figures, and they now forecast global light vehicle production to grow 10% in 2021.
For Q2 2021, they have adjusted down their estimate of global light vehicle production by 160 basis points to 50%. This would indicate that our sales outperformance versus LDP was 35 percentage points in the quarter. We have also noted that production of light vehicles declined by 9% instead of 8% sequentially from Q1 2021. I'll now hand it back to Mikael.
Thank you, Fredrik. Turning to our next slide. Here we show the main factors behind and our updated 2021 indications. Our full year 2021 indications for organic growth and adjusted operating margin are adjusted to reflect the lower and more volatile light vehicle production and higher raw material costs. Compared to our previous guidance, the light vehicle production outlook is lowered by 1 to 3 percentage points due to the components shortage.
Our estimate of raw material prices headwinds is increased from 90 basis points to 130 basis points for 2021. These headwinds are to some extent offset by improved sales mix and cost adjustments. We have the details of our indications on the next slide. These indications exclude cost for capacity alignment and any potential antitrust related matter. Our full year indication is based on a global light vehicle production increase light vehicle production increasing 9% to 11% compared to 2020.
We expect sales to increase organically by 16% to 18%, supporting a full year 7% outperformance versus Slide Vehicle Production. Our net sales increase is assumed to be 20% to 22%, including positive currency translation effects of around 4%. We expect an adjusted operating margin of around 9% to 9.5%. Operating cash flow is expected to be similar to 2020 levels. Our strategic initiatives are gradually yielding good results.
We are confident of our 2022, 2024 targets based on our internal progress and an expected light vehicle market recovery in the next few years. As I mentioned earlier, we have set climate targets for the company. Our next slide, we have these targets. Turning to slide. Autoliv's vision of saving more lives drives all our work.
Sustainability is firmly rooted in our business strategy and as a market leader in our field. Our efforts are aligned with the broader society's agenda. As the 1st automotive safety component supplier, Autoliv aims to become carbon neutral in its own operation by 2,030 and furthermore aims to net zero emissions across its supply chain by 2,040. We are also committing to the science based targets initiative. These initiatives places us among the front runners in the broader group of automotive suppliers.
The work to define a detailed carbon footprint abatement strategy is ongoing. The scope cover all main levers for decarbonization, such as renewable electricity in our own and supplier operations, lower carbon logistics, energy and materials efficiency and low carbon materials. A more detailed road map will be outlined in connection with our Capital Markets Day in November. Looking now on the next slide. We have the pleasure of inviting investors, analysts, Media and other stakeholders to attend to our Capital Markets Day on Tuesday, November 16, 2021.
The event will be virtual only and live streamed. At the meeting, we plan to showcase our full potential and provide an update on our strategy and development. Additionally, we plan to show future products, give an update on opportunities in core and adjacent product areas, outline further potentials that we see in flexible optimization and digitalization and much more. I will now hand it back to Anders.
Thank you, Mikael. Turning the page. This concludes our formal comments for today's earnings call, and we would like to open the line for questions. I now turn it back to Nezh.
Thank Our first question comes from the line of Emmanuel Rosner from Deutsche Bank. Please go ahead. Your line is open.
Hi, everybody. Thank you for taking my questions. First question would be, Can you maybe describe the industry production environment you expect for the second half? I thought it was Somewhat notable that your LVP assumption are now, I guess, a little bit more conservative on the low end than what IHS had It closed off yesterday. And so can you just talk in terms of how much visibility you have in terms of call out, how much volatility do you still expect to continue And for Amol?
Yes. I think the range we are indicating is the result of a High amount of uncertainty in the market here. And the uncertainty then goes back to when the industry will come back to more, I would say, stable situation when it comes to a more predictable situation when it comes to semiconductors. As we indicated here in the presentation, we saw some improvements towards the end of the quarter. But Coming in now in July here, we see once again that customers are changing the call outs with short notice and the volatility continues.
So I think the best we can judge now is that we think we will see gradual improvement over the situation throughout the rest of the year here. But it will take time until we are back in I mean, we can say that we have a semiconductor challenge behind us here. So I think we will continue for quite some time here with high level of uncertainty. But I think that's where we are right now.
That's helpful. And then as a follow-up, Just a question on the raw materials impact. So based on, I guess, the slide where You detail how your contracts work. So if raw materials were to stay at sort of like current spot prices, How much of an additional impact would that be beyond this year?
Yes. We don't I mean, we don't guide for 2022 at this point of time. But we can say that if they stay at the current levels, There would also be a challenge into next year from that high level. What we have seen in The increase that we see now sequentially is mainly related to steel and nonferrous metals, where the situation has pretty much deteriorated at the same magnitude as we saw in the Q1 and hence the need for us to revise here our impact for the full year.
Understood. Thank you.
Thank you.
And the next question comes from the line of Matthias Holmberg from DNB. Please go ahead.
Thank you and thanks for taking the time for my question. You mentioned in the presentation a couple of times potential for shareholder value creation activities when you discussed The leverage ratio, could you please elaborate a bit on what this could be? And also any potential timing if there's sort of You need to wait for the market to stabilize in terms of the
semi shortage
or if there's anything holding you back from these activities at this point?
No, I think what we wanted to say there is really that, I mean, now we are comfortably back within the range. And with that, I mean, we have now reinstated the quarterly dividend. And on top of that, of course, we have, as we always have stated in the past, buybacks and Alternatively, extra dividend as tools for that. But that's a decision that needs to be made from time to time. And here, of course, we need to judge also not only how our balance sheet looks like, but it's also the predictability about the business cycle and our cash forward looking cash generation there.
So It's just to reconfirm our intention here to be a shareholder friendly company in terms of returning liquidity to our shareholders. And of course, the timing, we will come back to when appropriate there. And it's a decision from time to time.
Understood. Thank you. And my second question is the medium term margin target of 12% on EBIT level that you stated in your CMD in 2019, given the sort of incremental raw material headwinds that we're seeing right now, do you still think that The time horizon of 3 to 5 years is realistic? Or how should we think of that?
Yes. I mean, we are holding on to confirm, of course, our long term targets here. No changes to that because of this Short term situation here. I think, I mean, as we have indicated here, we think that the Q2 was the trough When it comes to the semiconductor challenge, even though it will take a little bit longer until we are on stable grounds there. And as Fredrik indicated here, I mean, raw material is something we will have to manage over time regardless level, but it's really time that is needed to balance that.
And I think when we're looking at this time horizon here, We have that time, and we think also that we have a very strong underlying demand when it comes to light vehicles going forward here. So No reason to have any other views than what we have had in the past.
Thank you so much.
Thank you.
And the next question comes from the line of Chris McNally from Evercore. Please go ahead.
Thanks so much guys. Just wanted to follow-up on the raw materials. No, we can't put a number to it. So maybe if we talk about more One of the process for getting reimbursements. It essentially looks like what you're saying is for the second half that the 130 basis points for the full year is both gross and the net number.
Essentially, there's not going to be much price recovery. Can you talk about just the conversations you're having with your customers? How long does it take for price recovery to happen? How much you typically recovered, things like that, just so we can get a sense for the headwind going into next year?
Yes, sure. We do have some but limited contractual pass throughs to customers. And of course, the negotiations with the remaining customers are ongoing as we see these Significant headwinds from raw materials. On the ones where we have indexations, And then I mean they are typically retroactive. So then you also have to look at what where these costs have been looking backwards.
That built into our guidance. When you look at what we are negotiating, It's rather limited because, as we said, it will take some time for these negotiations and also for them to become effective will have only a limited impact here on the current year. But as we said, I mean, of course, our ambition is to over time, should the prices stay at this level,
also offset them commercially. And I think
it's a fair if we think like
And so I think it's a fair if we think of like absolute numbers, it's $50,000,000 a quarter In the back half of headwinds, that's something that we should at least model for Q1 of next year. And then at the earliest, maybe we get some breaks in Q2 as you get some Commercial recoveries, but that sort of page, we're going to have probably a couple of quarters of this level as it's finally starting to roll through.
I think we have to come back to that when we give our 2022 guidance here. I don't want to make any comment on the, say, quarterly impact here for next year.
No problem. I had to try. Maybe just real quick, just high level, do You exert that same pressure then as another opportunity to go to your 2 base and basically ask for delays And pricing increases when obviously you're not buying raw steel, but obviously manufactured parts. Is that another way to sort of To manage the time lag, while it takes you a couple of quarters to get to commercial recovery from the OEMs?
I I mean absolutely. That's why you've seen that the impact so far year to date has been fairly marginal. I mean it's Close to 0 in the Q1 and now about SEK 10,000,000 in the Q2. So that, I think, is a reflection of how successfully we've been able to push this out with our supply base. But especially on the steel side, it is a very stressed situation, and we will have price changes here come through that we cannot avoid in the second half.
Okay, great. Thanks so much.
The next question comes from the line of Hampus Ingellau from Handelsbanken. Please go ahead.
Thank you very much. Two questions from me. Firstly, on the semi shortage. If I remember correctly, I think I was picking up information that the semi situation had improved somewhat in the beginning of May, and then you highlighted that June was extra tough. Could you maybe Just in light of what happened in June and that we can be sure that second quarter is the drop on semis.
That's the first question. 2nd question is relating to the operating leverage. I mean, you highlighted the operator leverage in the Q2 compared to Q1. How should we think about Q3 in Q4 here. Is full year outlook very more back end loaded more related to Q4 now with engineering income?
Or how should we think about that? Those are my two questions.
I can start on the semiconductor side here, and then Fredrik Yes, maybe we'll take the second question there. On the Semiconductor side, as we said here, we saw Some improvements and I should say stabilization towards the end of the second quarter here. But We have once again seen some plant closures on our customer sites coming up here in July with short notice. So what we want to indicate here is that we see volatility also the beginning of the Q3 here. I think the challenge here is that the uncertainty is so high when it comes to Semiconductor.
As you know, the As you know, the automotive industry is only 5% to 10% of the total Usage of semiconductors, so we are, of course, also here impacted from what's happening in the total pool of customers for semiconductors. And as we have indicated here, we think it will take a longer period here Until we are really on stable grounds when it comes to semiconductor supply, gradually improving. That is to the best of our knowledge now and what we pick up in our interaction with suppliers and customers. So that's the best indication we can give at this point in time.
Okay. And then Hampus on your question on the operating leverage. I mean we do expect Even if there's no range on the volume recovery in the second half, that we will see a sequential improvement here. And that then of course, should also have a positive leverage effect. But it also depends a bit on whether it's 9% to 11% or around 9% to 11 sorry, the 16% to 18% that we're seeing gives also a larger spread even for the second half.
Then we also expect the volatility to continue at least in the near term. So we have to see how quickly that comes out because it will impact also our ability to pull through an incremental sales and then the I mean the volatility in the call offs. That's another component. And then the third one is, of course, raw material, where we expect a fairly even hit here between the quarters and the second half. But when you come when it comes to your specific question on engineering income, that should pretty much follow the normal pattern as we've seen in previous years.
Excellent. Thank you very much.
Thank you.
And the next question comes from the line of Joseph Spak from RBC Capital Markets. Please go ahead.
Thank you very much. You mentioned typically The 25% to 30%, pass through 30%, when it's volatile like it was, this quarter on the way down. You also mentioned continued volatility going forward. So does that mean if we think sales are going to increase sequential here, we should be More towards the lower end, maybe the 25% on the upside and then factor in commodities on top of that. Is that How you advise to think about the rest of the year?
I think the real uncertainty here is how the this volatility that we tried to indicate here, where we see Typically a fairly narrow range, but now in the Q2, a very large range. How that develops here over Q3 and then going into Q4 because that will have impact on, say, our operational effectiveness and then also how If we have more leverage, we can then pull through incremental sales. And that is very difficult to give an indication on right now. I mean, we're not through it yet.
Okay. And then just maybe going back to the raw materials one more time. So, like effectively the entire impacts here in the back I know you're not talking about 2022, but it's like a more like a 230 basis point margin impact in the back half. So it seems like that's at least a good run rate to go in through the first half. I guess what I really want to get to is How does this impact your confidence in the 12% margin target over time?
Because Presumably, this level of commodities wasn't contemplated. So what are some of the offsets? And I know you have a couple Later this year, I don't probably dive into that more detail, but at a high level, maybe you could just help us with that.
Yes. I think What we're saying here is, of course, that the raw materials we need to overcome over time Through different means. I mean, we're talking about compensation and offsetting it with our customers. I think it's also on how we work with our internal improvement journey here and also with our suppliers. And if we see, We are not at all indicating that.
But just theoretically from your question here, if we would see a more long term increase of raw materials. That's for sure something we have to overcome and will overcome. We need to do what we need to do to manage that. But what we believe here is and working assumption is, of course, that we have a temporary increase here, but it's difficult to give a time on it. So once again, we are confident in the activities we are doing, and also see very strong underlying demand for light vehicles going forward in this time frame.
And I think the raw material will also normalize at a different level than what we are seeing today. And whatever delta is there, that is something we will manage.
Thank you very much.
Next question comes from the line of Rod Lache from Wolfe Research. Please go ahead.
Hi, everybody. I'd like to just understand a little bit more The raw material recovery process as well, you're going to be negotiating this presumably later this year with your customers. So if we think back at prior periods when you had higher raw materials, What did you typically recover in the subsequent year when through those negotiations?
I don't think you can say there is a specific rule of thumb in terms of percentage. It's more related to the nature Sure of the raw material increases, I would say. Because if it's something that is more long lasting and more, let's call it, inflationary into its nature, you have a higher rate of compensation than if it's temporary. And I think we have indicated before, if it's really Temporary volatility is not even something we are really discussing there with the customer. So It all depends on the nature of the increase, so to speak.
So yes, time will tell here what this is when we look at these increases here. But I mean those negotiations and discussion are, of course, already ongoing here and work is being done in that area.
Okay. And just to clarify, do you typically put that into the recovery To sort of a different bucket than the raw material inflation? Or do you when you describe raw material inflation, is that a net number, net of recoveries?
I mean, if your question is in how we discuss it with our customers?
No, how you discuss it with us is what I want to know. Are you referring to a gross number? Or is this kind of a net number when you give these The basis points of margin.
That's the cost impact. So it does
not Okay.
That's just the gross number.
Okay. And then lastly, could you just speak to inflation more broadly? I mean, we're seeing Obviously, a lot of tightness, particularly in North America, but inflation is obviously it's not just commodities, there's labor cost inflation, logistics inflation and other things that seems to be a global phenomenon. What's the extent to which you're seeing this? And is that something that you would expect to be a bigger factor As you look forward?
No. We see it, say, in multiple areas, not only on the raw materials side. I mean, as you said, logistics is stressed as well. It's both in terms of availability and but also in terms of cost for logistics and then also the accuracy Delivery, so it's a very same stress situation. And we're dealing with that, say, the same way as Mikael described here on the as we do on the raw material side.
So eventually also discussing that with our customers, but primarily at the moment managing that with Thai Basin and our logistics providers. I'd have to say, so far on the labor cost side, we've not seen any significant pressure so far on that. So I think that's one component at least that at the moment seems rather stable.
Okay. Thank you.
The next question comes from the line of Brian Johnson from Barclays. Please go ahead.
Thank you. Just want to get to more perhaps of a strategic issue around commodities. I've always been struck and I've had conversations with Jan in the past about How Autolip with its incredible low record of recalls adds a tremendous value to Your customers. So in addition to just going out and trying to commodity cost recovery, is there an opportunity to Recast the contracts going forward to make them more like we see in other Supplier segment sectors where raw materials are a big part of the cost of goods sold like, axles and so forth and just have Straight index based pass through agreements. And if so, as you kind of bring new programs on, is that a trend that you'd like.
Is that a kind of factor you'd like to put into place?
I think, I mean, first of all, we are a system supplier and With a lot of components going into what we deliver to our customers here. And I think I mean, there is pros and cons with that. But I think we overall, over time, have a system that And business relationship that serves us well. So I shouldn't say that I see any bigger changes to that. It comes back to what there is
going to be more
of the structural changes that might be or not be.
Okay. And in terms of the raw materials we should be looking at to kind of think about, you flagged hot rolled steel, are there other commodities that we ought to be paying Tension to there are some commodities like copper and lumber that are obviously not in your products that are rolling over already. But in addition to steel, what are the key components we have to track?
Yes. I think the main ones to mention are steel. That's 40% of our raw material exposure. And then I think hot rolled coil is
a good
indication. When it comes the next two ones are resins. So yes, what we buy for So plastic components, and then the 3rd component is textiles. And there, it's yarn, It's polyamide, polyester, so nylon and so on. Those are the main commodities that we are exposed to.
Okay. And then finally, in
terms of cadence, is it fair
to think that 4Q is typically a big step up? Should we expect the same, especially as you go through these commercial discussions this year?
Can you explain that again? I didn't understand your question.
The cadence of margin in second half?
The seasonality of the performance. I think, I mean, the seasonality in our earnings in a year is what it Always have been, so we don't see any changes to that. And of course, certain events like we have to live through here May affect the specific quarter, but seasonality is the same.
Okay. Thank you.
And the next question comes from the line of Ryan Brinkman from JPMorgan. Please go ahead.
Hi, thanks for taking my question. It seems based on some 2Q pre announcements from GM, Ford, Volkswagen and others that the combined impact of a headwind to production and a tailwind of pricing because of the resulting lower inventories has actually been netted out very positively for them so far this year versus for suppliers, the impact is only negative because there's not an offset to pricing from the lower production. I'm curious what impact, If any, this dynamic might be having on your conversations around commodity cost recoveries. Is the tone or tenor of those conversations Any different versus in the past when you saw commodity inflation given that the customer pricing and margin is so strong? I think Average transaction prices in the U.
S. In June, for example, might have been up like 10.7% year over year. So curious what you're seeing there?
No, I think I would like to refer to what I stated before here. I think let's call it the success From our perspective here in those discussions, it's more depending on the nature of the raw material increases than anything else. So Higher and longer they are, the more relevant they are in the customer's eyes, so to speak. And that's really what's judging that. And of course, the change the difference here between OEM and supplier is because we are in different Part of the total value chain and also the timing of the events here impacts that.
But more depending on the nature of the raw material increase.
Appreciate that. And then just lastly, to follow-up on the comment During the prepared remarks that the semiconductor shortage situation had grown worse again in early July in North America and Europe at least. I think there may have been an expectation earlier that semiconductor availability would just sort of continue to improve Sequentially in a more or less linear fashion, particularly maybe short term here, including in July, given the cycling past of that fire at the Renesas factory in Japan. So do you have a sense of the driver of the incremental production disruptions in the 1st part of July here and what are automakers communicating to you about the expected disruption in 3Q versus 2Q?
I think as a net I would say net indication, I would say, it's gradually improving. But then, of course, it looks a little bit different between the different customers here on how they have been hit so far, but also how the near term looks like. And it can depend also on who their supplier are in their end, But also the uniqueness of the specific semiconductor. I mean, if you have a standard Semiconductor or a higher degree of semiconductor standard semiconductors, you have more flexibility to find alternative solutions than if you have very special designed semiconductors. So that does a material impact on the specific customer there.
So we haven't seen this, let's call it, linear stabilization yet when we look at the aggregated picture.
Very helpful. Thank you.
That's the indication.
Thank you.
Next question comes from the line of Erik Golrang from SEB. Please go ahead.
Thanks. I have two questions. First one is on the SEK 25,000,000 in governmental support you had in the Q2. Could you remind us That was in Q3 and Q4 last year. Then on the Q2, if you could take something more on orders.
You say you're pleased that We can't do much with that. So could you put that in some kind of perspective would be very helpful. And then the third question on the Key model launches you highlight in the presentation. Is it just a coincidence there that there are 2 Chinese models where you seem to have a quite Extensive scope of supply. Is there any kind of trend or just a coincidence?
Thanks.
So the first question on governmental support. In Q3, that was €5,000,000 and in Q4, it was €2,000,000 last year. So €7,000,000 in total for 2nd half.
Thank you.
And on the order intake here, as you know, we don't give any Figures throughout the year. We have given figure at the end of the year when we present the Q4 earnings here. But Our commentary here should be seen in the light of the order book we have and the market share growth that we have indicated that we have an order intake here That supports our yearning forward here. So that is how you should interpret that comment there. And then on the model side here, I think, I mean, in this particular quarter, you could say it's a coincidence that this happens to be concentrated here.
But I will say on a Here, but I would say on a general note, I think we have a good Presence and wins within the EV segment and Also in China, where you see a number of newcomers and new startups and also the established makes Quickly coming out with EV models that we have a good representation there as well. So we have a strong position in China altogether, I would say.
Thank you.
That's presented now. Thank you.
And the next question comes from the line of George Galliars from Goldman Sachs. Please go ahead.
Yes. Thank you for taking my question. You mentioned on the call that you had limited ability to use furloughing as a result of the short notice. Could you just give us a bit of insight into the lead time you need to invoke furloughing and the notice period that you're getting on the production As we navigate the semiconductor challenges and assuming that the semiconductor volatility continues, Are you able to take any measures to reduce the financial impact? For example, is there any scope for increased flexibility on the furloughing?
Or could you look to build and hold inventory and then adjust production subsequently when you have provided adequate notice to furlough? Thank you.
I think on the furlough side, I can start there and say that, I mean, it's not really the availability of that Tool, if we call it that, that is the problem here. It's really the volatility that makes it difficult for us to really decide to take out because If we normally are around 5% in terms of plusminus from the original call outs from the customers, we have today Seen up to 50%. So we can't assume a 50% reduction in takeouts and takeout resources because If that's not true, we would be short of staff and can't deliver. So we need to staff ourselves and have capacity to meet the original call logs levels. And then if we see a reduction there, we are, of course, sitting there without costs.
So it's more a question of having the predictability of the volumes and adjust The capacity accordingly, that is the hindering point. If we just had that visibility, Of course, we could use, in many cases, the flexibility that we have. But it's that we don't have the visibility that is a problem.
And even to add on that, I mean, it's as we described, the volatility in the call offs, they have even fluctuated, I'd say, week to week. So they might be pulled down 1 week and then they increase the next week. So it's been very, very difficult to balance and manage capacity due to that. And then also as we our plants supply into multiple OEMs and So one OEM can't maybe shut down for a week. That does not mean that we can then adjust accordingly or to the full extent in our operations.
So there's a complexity there that we need to manage that, yes, has some implications on how quickly we can reduce the costs. But of course, one key is also then to have the right cost discipline. And I think we have proven that here in the Q2, but also how we've come out of The pandemic as of last year, and of course, that also remains a large focus for us here going forward.
Understood. Thank you.
And the next question comes from the line of Sascha Gommel from Jefferies. Please go ahead.
Good afternoon. Good morning, everyone. Thanks for taking my questions. The first one is around working Capital, I was wondering if you can talk a little bit about inventories because they look fairly high. How we should think about them in light of the production disruptions?
And then going forward, when production normalizes, do inventories also come down? And then I have a second one on working capital. How much was the Toyota cash out?
Yes, sure. So on working capital, there were as we mentioned, there were a couple of items outside of what we call trade working capital. So there are the 3 Core components receivables, inventory and then payables that had a major impact. The Prius recall was the largest of those. And I think if you look at our 10 Q, the number we mentioned there in terms of the impact is also an indication for the cash outflow.
But then also, we've had some tax related or the cash impact from tax related items, which was to magnitude of SEK 35,000,000 combined. We also had the restructuring outflow of around SEK 6,000,000. So those were some more unusual items here during the quarter that impacted working capital negatively. Then specific on inventory, it has been due to the call off volatility that we described. But then on top of that also then the supply chain challenges that we're facing with our supply base has led to a pretty significant increase in inventories above our normal design levels.
And if you look at our days of inventory outstanding, you can see that there is quite a large increase in that during the Q2. We do expect that as now, say, the volatility comes down and the call off reliability increases that we should be able to get back to our design levels and then also be able to flush that inventory out and reduce inventory going forward.
Okay. That's helpful. And then my second question is just quickly on the guidance reconciliation, how to think about the guidance cut from your earlier guidance. If we go to the midpoint, it's kind of top line minus 2. And then we if we have a 20% drop through and add to 40 bps of raw mats, we get right to your midpoint of the new guidance in terms of margin.
Is that how we should think about it? Or is it too simplistic and there are more moving parts than just a bit of top line gum and a bit more raw mats?
No, those are the main components. The only thing I would add to that is this, yes, certainty around the call of volatility and then also that we have Some headwinds that we are able to offset those headwinds then with an improved sales mix and cost adjustments, But the main components you mentioned.
All right. Appreciate it. Thank you very much.
And the next question comes from the line of Antoine Peugeot from Exane. Please go ahead.
Hi, everyone. Thank you for taking my question. Very quickly, just a question on the nature of the call offs. Are there mainly delays in your production? Or have you also seen Some cancellations.
And then my second question on the bridge. How should we think about So SG and A and RD and E impact into Q3, Q4 after your headwind this quarter? Thank you.
No, I think on the call outs, I can't say I mean, we don't see really those cancellations here. I think it's more Delays, you could say, in the production schedules from the OEMs. I think the signals is that in Zekanda would catch up. But then, of course, the longer this continues, it will be more difficult to do it. But no pure cancellation.
As I said, I mean, there is What we can answer, very strong demand end consumer demand here. So of Cambria produced will be sold. And as you have seen on the inventory levels, I mean, the U. S. Are at record low levels.
I mean, it's 1,400,000 vehicles in inventory compared to 3,500,000 to 4,000,000 as more of a normal level and also relatively low In Europe, especially on premium vehicles, so there is really a strong underlying demand. So it's Once again, a delay here as a result of the supply disruptions.
Yes. And on the SG and A and RD and E levels, In our guidance, we are detailing that we believe that where we expect RD and E to be around 4.5% of sales. So I think that That gives an indication of where it's expected to be in the second half. And then SG and A, as I said, we will be very cost disciplined here. You see that There's only a marginal increase from Q1 to Q2.
So we will remain that disciplined and have a very strong focus also on the SG and A development.
Okay. I will hand it back to you, Mikael, after this one.
Thank you, Nath. Before we end today's call, I would like to acknowledge that we are still in a pandemic and our first priority remains the health and safety of our employees. Despite short term market headwinds, our progress the last year makes us confident in the journey towards our medium term targets and our opportunities for shareholder value creation. Our Q3 earnings call is scheduled for Friday, October 22, 2021. Thank you, everyone, for participating on today's call.