Thank you, Naz. Welcome, everyone, to our second quarter 2021 financial results earnings presentation. On this call, we have our President and CEO, Mikael Bratt, and our Chief Financial Officer, Fredrik Westin, and me, Anders Trapp, VP, Investor Relations. During today's earnings call, our CEO will provide a brief overview of our second quarter results, as well as provide an update on our general business and market conditions. Following Mikael, Fredrik will provide further details and commentary around the financials. We will then remain available to respond to your questions, and as usual, the slides are available at autoliv.com. Turning to the next slide. We have the safe harbor statement, which is an integrated part of this presentation and includes the Q&A that follows. During the presentation, we will reference some non-GAAP measures.
The reconciliations of historical GAAP to non-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 3:00 PM Central European Time, so please follow a limit of two questions per person. I will now hand over to our CEO, Mikael Bratt.
Thank you, Anders. Looking now into the Q2 2021 highlights on the next slide. The COVID-19 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 first quarter, according to IHS Markit. Considering these headwinds, I am pleased with our second 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 1 times EBITDA. We continue to evaluate opportunities for shareholder value creation. I'm also pleased that we have reinstated a quarterly dividend, which for the second quarter 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 2030.
Towards the end of the quarter, the semiconductor issue was improving. 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 other 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 $1 billion or by 93% compared to Q2 2020. 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 three-quarters of the sales increase. Adjusted operating income, excluding cost for capacity alignment, improved from -$172 million to $166 million. The adjusted operating margin increased to 8.2%.
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 structural efficiency programs. Operating cash flow was $63 million, despite adverse effects from changes in working capital. Looking now on sales development on the next slide. I am very pleased that our organic sales growth outperformed the global light vehicle production by 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 Autoliv content per vehicle from $100 to almost $450. Six 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, Fredrik Westin, who will talk about the financials on the next few slides.
Thank you, Mikael. This slide highlights our key figures for the second quarter. We are including 2019 in this overview because of the anomaly of the Q2 2020, which was the first quarter with strict COVID-related lockdowns outside of China. Our net sales were over $2 billion, 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 million, 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 $166 million due to the higher gross profit.
The adjusted operating margin improved by 25 percentage points versus Q2 2020, was almost in line with Q2 2019, despite 6% lower sales. The operating cash flow was $63 million. This was achieved despite adverse effects from changes in working capital. Reported earnings per share improved to $1.19, our adjusted return on capital employed improved to 18%, 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 second quarter 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 second quarter of 2020. The impact of raw material price changes was negative $8 million in the quarter. FX impacted the operating profit negatively by $13 million.
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 US dollar. Support from governments in connection with the pandemic was $25 million in the second quarter last year, while it was not material to our financial results in the second quarter of 2021. As illustrated in the chart, the adjusted operating profit was negatively affected by higher SG&A and RD&E, net of government support of $40 million. Operational improvements contributed with over $400 million, 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 first quarter of 2021 is a more relevant comparison. Looking on the next slide, we see that sales declined by $220 million sequentially, or almost 10% compared to the first quarter 2021. Our adjusted operating profit declined by $72 million. Excluding $10 million from increased raw material costs, the decline was $62 million, which results in an operating leverage of around 28%. We have many times communicated that our operating leverage normally is in the 20%-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% incremental 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 of production has been difficult.
We usually see call-off deviations of ±5%. In the second quarter, 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 incremental margin. Looking on the next slide. For the second quarter of 2021, operating cash flow was $63 million, an increase of $192 million compared to the same quarter last year, and $84 million 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 recall. As inventories were impacted by supply chain uncertainties, trade working capital also developed unfavorably with $8 million. For the full year 2021, we expect operating cash flow to be similar to the 2020 levels.
Capital expenditures amounted to $96 million in the quarter, or 4.8% of sales. Compared to same quarter last year, capital expenditures increased by $32 million or by 50%. Free cash flow was negative $33 million, impacted by unfavorable working capital effects. Our cash conversion in the last 12 months was close to 130%. Return 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 x a year ago to 1.1 x. The improved leverage in the quarter was a result of our EBITDA over the last 12 months, increasing by $350 million, partly offset by the net debt increase of $85 million. Further improvements should provide additional opportunities for shareholder value creation. On to 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 three 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 first quarter and only around $8 million in the second quarter. As raw material prices have continued to increase on a broad base for the third 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, inventory levels of new vehicles remain at record low levels in some regions. For example, the inventory levels in North America ended June at 1.4 million units, or about 35% of what manufacturers normally would be carrying. Dealer inventories are in general at a normal level in China, we believe that European inventory levels are fairly low, especially for premium vehicles. Assuming that the component availability improves, we expect the 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%-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 LVP 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 now hand it back to Mikael.
Thank you, Fredrik. Turning to the next slide. Here we show the main factors behind 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 1-3 percentage points due to the component 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 increasing 9%-11% compared to 2020.
We expect sales to increase organically by 16%-18%, supporting a full year 7% outperformance versus light vehicle production. Our net sales increase is assumed to be 20%-22%, including positive currency translation effects of around 4%. We expect an adjusted operating margin of around 9%-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 the 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 first automotive safety component supplier, Autoliv aims to become carbon neutral in its own operation by 2030, and furthermore, aims to net zero emissions across its supply chain by 2040. 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 will 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 roadmap 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 16th, 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 comment for today's earnings call, and we would like to open the line for questions. I now turn it back to Naz.
Thank you. If you do wish to ask a question, please press zero one on your telephone keypad, and if you wish to withdraw your question, you may do so by pressing zero two to cancel. 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, at least as of yesterday. Can you just talk in terms of how much visibility you have in terms of call-offs, how much volatility you still expect to continue, and for how long?
I think the range we are indicating is the result of a high amount of uncertainty in the market here, 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. Coming in now in July here, we see once again that customers are changing the call-offs with short notice, and the volatility continues. I think the best we can judge now is that we think we will see a gradual improvement over the situation throughout the rest of the year here. It will take time until We can say that we have the semiconductor challenge behind us here.
I think we will continue for quite some time here with a high level of uncertainty. I think that's where we are right now.
No, that's helpful. As a follow-up, just a question on the raw materials impact. Based on, I guess, the slide where you detail how your contracts work. If raw materials were to stay at current spot prices, how much of an additional impact would that be beyond this year?
Yeah, we don't guide for 2022 at this point of time. We can say that if they stay at the current levels, there would also be a challenge into next year from that high level. The increase that we've seen now sequentially is mainly related to steel and non-ferrous metals, where the situation has pretty much deteriorated at the same magnitude as we saw in the first quarter, hence the need for us to revise our impact for the full year.
Understood. Thank you.
Thank you.
The next question comes from the line of Mattias 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 now we are comfortable back within the range. With that, we have now reinstated the quarterly dividend. 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. That's a decision that needs to be made from time to time. 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 forward-looking cash generation there. It's just to reconfirm our intention here to be a shareholder-friendly company in terms of returning liquidity to our shareholders. Of course, the timing we will come back to when appropriate there, and it's a decision from time to time.
Understood. Thank you. My second question is the medium-term margin target of 12% on EBIT level that you stated in your CMD in 2019. Given the incremental raw material headwinds that we're seeing right now, do you still think that the time horizon of three to five years is realistic, or how should we think of that?
We are holding on to and confirm, of course, our long-term targets here. No changes to that because of this short-term situation here. 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. As Fredrik indicated here, raw material is something we will have to manage over time, regardless level, but it's really time that is needed to balance that. 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. No reason to have any other views than what we have had in the past there.
Thank you so much.
Thank you.
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 material. I know we can't put a number to it, so maybe if we talk about more 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 a gross and a net number. Essentially, there's not going to be much price recovery. Could 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 recover? Things like that, just so we can get a sense for the headwind going into next year.
Yeah, sure. We do have some, but limited contractual passthroughs to customers. 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 they are typically retroactive. You also have to look at where these costs have been looking backwards. That is 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. As we said, of course, our ambition is to, over time, should the prices stay at this level, also offset them commercially.
I think it's fair, if we think of absolute numbers, if it's $50 million a quarter in the back half of headwind, that's something that we should at least model for Q1 of next year. At the earliest, maybe we get some breaks in Q2 as you get some commercial recoveries. That sort of pace, 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 quarterly impact here for next year.
Nope. Yeah.
Not today.
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 tier two base and basically ask for delays in price increases when obviously you're not buying raw steel, but obviously manufactured parts? Is that another way to sort of manage the time lag while it takes you couple of quarters to get commercial recovery from the OEMs?
Absolutely. That's why you've seen that the impact so far year to date has been fairly marginal. It's close to zero in the first quarter and now about $10 million in the second quarter. That, I think, is a reflection of how successfully we've been able to push this out with our supply base. 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 Engellau 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 shed some light on what happened in June, and that we can be sure that second quarter is the trough on semis? That's the first question. Second question is relating to the operating leverage. You highlighted the operating leverage in the second quarter compared to first quarter. How should we think about Q3, Q4 here? Is the full year outlook very more back-ended loaded, more related to Q4 now with engineering income, or how should we think about that? Those are my two questions to you.
I can start on the semiconductor side here, and then Fredrik, maybe you take the second question there. On the semiconductor side, as we said here, we saw some improvements, or I should say, stabilization towards the end of the second quarter here. We have once again seen some plant closures on our customer sides coming up here in July with short notice. What we want to indicate here is that we see volatility also in the beginning of the third quarter here. I think the challenge here is that the uncertainty is so high when it comes to semiconductor. As you know, the automotive industry is only 5%-10% of the total usage of semiconductors here. We are, of course, also here impacted from what's happening in the total pool of customers for semiconductors.
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. That's the best indication we can give at this point in time.
Okay. Hampus, on your question on the operating leverage. 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, of course, should also have a positive leverage effect. It also depends a bit on whether it's 9%-11% or around 9%-11%, sorry, the 16%-18% that we're saying, gives also a larger spread even for the second half. We also expect the volatility to continue, at least in the near term. We have to see how quickly that comes out, because it will impact also our ability to pull through an incremental sales, the volatility in the call-offs. That's another component.
The third one is, of course, raw material, where we expect a fairly even hit here between the quarters in the second half. 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.
The next question comes from the line of Joseph Spak from RBC Capital Markets. Please go ahead.
Thank you very much. You mentioned typically 25%-30% pass through, 30% when it's volatile like it was this quarter on the way down. You also mentioned the continued volatility going forward. 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 this volatility that we try to indicate here, where we see typically a fairly narrow range, but now in the second quarter, a very large range, how that develops here over Q3 and then going into Q4, because that will have impact on our operational effectiveness. Then also how, what leverage we can then pull through incremental sales. That is very difficult to give an indication on right now. We're not through it yet.
Okay. Just maybe, going back to the raw materials one more time. Effectively, the entire impact's here in the back half. I know you're not talking about 2022, but it's more like a 230 basis point margin impact in the back half. 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? I know you have a couple of markets later this year that'll probably dive into that more detail, but at a high level, maybe you could just help us with that?
Yeah. I think what we're saying here is, of course, that the raw materials we need to overcome over time through different means. 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. 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 material, that's for sure something we have to overcome and will overcome. We need to do what we need to do to manage that. 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.
Once again, we are confident in the activities we are doing, and we also see very strong underlying demand for light vehicles going forward in this timeframe. 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 about the raw material recovery process as well. You're going to be negotiating this presumably later this year with your customers. If we think back at prior periods when you had higher raw materials, what did you typically recover in the subsequent year through those negotiations?
I don't think you can say there is a specific rule of thumb in terms of %. It's more related to the nature of the raw material increases, I would say. 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. I think we have indicated before, if it's really temporary volatility, it's not even something we are really discussing there with the customer. It all depends on the nature of the increase, so to speak. Yeah. Time will tell here what this is when we look at these increases here. Those negotiations and discussion are, of course, already ongoing here, and work is being done in that area.
Okay. Just to clarify, do you typically put the recovery into sort of a different bucket than the raw material inflation? When you describe raw material inflation, is that a net number, net of recoveries?
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 in kind of a net number when you give the basis points of margin?
That's the cost impact, yeah. So it does not include-
Okay. That's just the gross number. Okay.
Yeah.
Lastly, could you just speak to inflation more broadly? We're seeing obviously a lot of tightness, particularly in North America, but inflation is obviously 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 material side. As you said, logistics is stressed as well, both in terms of availability but also in terms of cost for logistics, and then also the accuracy of delivery. It's a very stressed situation. We're dealing with that, say, the same way as Mikael described here as we do on the raw material side. Eventually also discussing that with our customers. Primarily at the moment, managing that with the supply base 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. 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.
Hi. 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 Autoliv, with its incredible low record of recalls, adds a tremendous value to your customers. 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 segments, 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? If so, as you bring new programs on, is that a trend that you'd like? Is that a factor you'd like to put into place?
No. I think, first of all, we are a system supplier with a lot of components going into what we deliver to our customers here. I think there's pros and cons with that, but I think we, overall, over time, have a system and business relationship that serves us well. I shouldn't say that I see any bigger changes to that.
Okay, and then-
More of the structural changes that might be or not be.
Okay. In terms of the raw materials we should be looking at to think about, you flagged hot-rolled coil. Are there other commodities that we ought to be paying attention to? There are some commodities like copper and lumber that are obviously not in your products, that are rolling over already. In addition to steel, what are the key components we ought to track?
I think the main ones to mention are steel. That's around 40% of our raw material exposure. I think hot-rolled coil is a good indication. The next two ones are resins. What we buy for our plastic components. The third component is textiles. It's yarn, it's polyamide, polyester, nylon and so on. Those are the main commodities that we're exposed to.
Okay, 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 between the quarters.
The seasonality of the performance.
No, I think, the seasonality in our earnings in a year is what it always has been. We don't see any changes to that. Of course, certain events like we just have lived through here may affect the specific quarter, but seasonality is the same.
Okay, thank you.
The next question comes from the line of Ryan Brinkman from JP Morgan. 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 to pricing because of the resulting lower inventories, has actually been netting 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 am 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 10.7% year-over-year. Curious what you're seeing there.
No, I think I would like to refer to what I stated before here. I think the, let's call it, the success from our perspective here in those discussions is more depending on the nature of the raw material increases than anything else. Higher and longer they are, the more relevant they are in the customer's eyes, so to speak. That's really what's judging that. Of course, the difference here between OEM and supplier is because we are in different parts of the total value chain, and also the timing of the events here impacts that.
Okay.
It's more depending on the nature of the raw material increase.
Appreciate that. 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 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 first part of July here? And what are automakers communicating to you about the expected disruption in 3Q versus 2Q?
I think as a net indication, I would say it's gradually improving. 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. It can depend also on who their supplier are in their end, but also the uniqueness of the specific semiconductor. If you have a standard semiconductor or a higher degree of standard semiconductors, you have more flexibility to find alternative solutions than if you have very special designed semiconductors. That does materially impact on the specific customer there. We haven't seen this, let's call it linear stabilization yet, when we look at the aggregated picture.
Very helpful. Thank you.
Also 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 $25 million in governmental support you had in the second quarter. Could you remind us what that was in Q3 and Q4 last year? On the second quarter, if you could say something more on orders. You say you're pleased that we can't do much with that, could you put that in some kind of perspective would be very helpful. The third question on the key model launches you highlight in the presentation is it just a coincidence there that there are two Chinese models where you seem to have a quite extensive scope of supply? Is that any kind of trend or just a coincidence? Thanks.
The first question on governmental support, in Q3 that was $5 million, and in Q4 it was $2 million last year, so $7 million in total for the second half.
Thank you.
On the order intake here, as you know, we don't give any figures throughout the year. We just give a figure at the end of the year when we present the Q4 earnings here. 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 journey forward here. I think that is how you should interpret that comment there. On the model side here, I think in this one particular quarter, you could say it's a coincidence that it happens to be concentrated here. I would say on a general note, I think we have a good presence and wins within the EV segment.
Also in China, where you see a number of newcomers, new startups, and also the established makes quickly coming out with EV models that we have a good representation there as well. We have a strong position in China altogether, I would say.
Thank you.
As presented now. Thank you.
The next question comes from the line of George Galliers from Goldman Sachs. Please go ahead.
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 side as we navigate the semiconductor challenges? 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 it's not really the availability of that tool, if we call it 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 plus minus from the original call-ups from the customers, we have today seen up to 50%. We can't assume a 50% reduction in takeouts and take out resources because if that's not true, we would be short of staff and can't deliver. We need to staff ourselves and have capacity to meet the original call-ups levels. If we see a reduction there, we are of course sitting there with that cost. 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. It's that we don't have the visibility that is the problem.
Even to add on that, as we described the volatility in the call-offs, they have even fluctuated, let's say, week to week. They might be pulled down one week, and then they increase the next week. It's been very, very difficult to balance and manage capacity due to that. Also as our plants supply into multiple OEMs, and say one OEM plant maybe shuts down for a week, that does not mean that we can then adjust accordingly or to the full extent in our operations. There's a complexity there that we need to manage that has some implications on how quickly we can reduce the costs.
Of course, one key is also then to have the right cost discipline, and I think we have proven that here in the second quarter, but also how we've come out of the pandemic as of last year. Of course, that also remains a large focus for us here going forward.
Understood. Thank you.
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? Then I have a second one on working capital. How much was the Toyota cash out?
Yeah, sure. On working capital, as we mentioned, there were a couple of items outside of what we call trade working capital, so the three core components receiv ables inventory and then payables that had a major impact. The Prius recall was the largest of those. 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. Also we've had some cash impact from tax-related items, which was to magnitude of $35 million combined. We also had the restructuring outflow of around $6 million. Those were some more unusual items here during the quarter that impacted working capital negatively.
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. If you look at our days of inventory outstanding, you can see that there's quite a large increase in that during the second quarter. 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. 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 -2, if we have a 20% drop-through and add the 40 basis points 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 gone and a bit more raw mats?
No, those are the main components. Yeah.
Okay.
The only thing I would add to that is this uncertainty around the call-off volatility, also that we are able to offset those headwinds with an improved sales mix and cost adjustments. The main components you mentioned.
All right. Appreciate it. Thank you very much.
The next question comes from the line of Antoine Brégeaut from Exane. Please go ahead.
Hi, everyone. Thank you for taking my question. Very quickly, just a question on the nature of those call-offs. Are there mainly delays in your production, or have you also seen some cancellations? My second question on the bridge, how should we think about SG&A and RD&E impacting Q3 to Q4 after your headwind this quarter? Thank you.
No, I think on the call-offs, we don't see really it as cancellations here. I think it's more delays, you could say, in the production schedules from the OEMs. Of course, the longer this continues, it will be more difficult to do it. No pure cancellation. As I said, there is what we can answer, very strong end consumer demand here. What can be produced will be sold. As you have seen on the inventory levels, U.S. are at record low levels. It's 1.4 million vehicles in inventory compared to 3.5 million-4 million as more of a normal level, and also relatively low in Europe here, especially on premium vehicles. There is really a strong underlying demand. It's once again, a delay here as a result of the supply disruptions.
Yeah. On the SG&A and RD&E levels, in our guidance, we're detailing that we believe that where we expect RD&E to be around 4.5% of sales. I think that gives an indication of where it's expected to be in the second half. SG&A, as I said, we will be very cost disciplined here. You see that there's only a marginal increase from Q1 to Q2. We will remain that discipline and have a very strong focus also on the SG&A development.
Okay. I will hand it back to you, Mikael, after this one.
Thank you, Naz. 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 in the last year makes us confident in the journey towards our medium-term targets and our opportunities for shareholder value creation. Our third quarter earnings call is scheduled for Friday, October 22nd, 2021. Thank you everyone for participating on today's call. We sincerely appreciate your continued interest in Autoliv. Until next time, stay safe.