ConocoPhillips Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 21, 2023

There are 14 speakers on the call.

Operator

Day and thank you for standing by. Welcome to the Otoli First Quarter 2023 Financial Results Call and Webcast. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised.

Operator

Please note that today's conference is being recorded. I would now like to hand over to your speaker, Mr. Anders Trapp, VP, Investor Relations. Please go ahead.

Speaker 1

Thank you, Rachael. Welcome everyone to our Q1 2023 earnings call. On this call, we have our President and CEO, Mikael Graf And our Chief Financial Officer, Fredrik Kristine and VP, Investor Relations. During today's earnings call, Mikael and Frezik will, among other things, provide an overview of the strong sales development in the Q1, Discuss operating leverage and outline the expected sequential margin improvement for 2023 as well as provide an update on our general business and market conditions. We will then remain available to respond to your questions.

Speaker 1

And as usual, the slides 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 of course, includes the Q and A that follows. During the presentation, we will reference some non U. S.

Speaker 1

GAAP measures. The reconciliations of historical U. S. GAAP to non U. S.

Speaker 1

GAAP measures are published in our quarterly press release available on alchemy.com and in the 10 Q that we filed with the SEC. Lastly, I should mention that this call is intended to conclude at 3 p. M. Central I now hand over to our CEO, Mikael Dratt.

Speaker 2

Thank you, Anders. Looking on the next slide. I would like to start by thanking our employees for a good execution Supporting our strong growth in a challenging environment. The sales performance and strong profit was in line with our earlier communicated expectations. Thanks to a strong ending of the Quarter, our organic sales grew by more than 20%, outperforming light vehicle production significantly.

Speaker 2

The strong growth was a result of product launches, higher prices and higher safety content per vehicle and also supported by a positive regional mix. Our profit development was as expected, Considering that market conditions continued to be challenging, especially in Europe, with significant inflationary pressure And continued customer call off volatility mainly due to strong sales growth, Adverse working capital development led to a negative cash flow in the quarter. We expect a more cash flow trend for the rest of the year. Our leverage ratio increased to 1 In the quarter, we paid $0.66 per share in dividends and repurchased and retired 450,000 shares. We issued our first green bond that allows us to reach new investors and at the same time, help fund advancement of our climate targets.

Speaker 2

We have a strong commitment to climate actions, And this is a milestone in supporting our customers in achieving their sustainability ambitions. We are expanding to Vietnam, investing in increased production capacity of airbags We saw updates to crash test standards and safety regulations in the U. S. In India, which will support continued increase in safety content per vehicle already this year as well as coming years. We also continue to look for ways to improve our footprint and reduce our costs Structurally, the Q1 development is expected, and we continue to expect a gradual improving adjusted operating margin during the year.

Speaker 2

This should allow us to reach the full year indications We set at the beginning of the year. Now looking at the expected adjusted operating margin progression for 2023 on the next Slide. For 2023, we expect a gradual improvement of the adjusted operating margin Quarter by quarter, similar to the track during 2022. We expect continued high sales growth supported by launches, higher light vehicle production and content per vehicle increase. We anticipate price adjustments will gradually throughout the year offset cost inflation That affect us in the Q1.

Speaker 2

The positive trajectory will be further supported by improvements from cost reduction, Footprint optimization as well as expected gradual improvement of the supply chain and light vehicle production stability. FX are limited in the first half of the year and significantly larger in the second half of the year. The progress you're taking makes me confident in a gradual improving performance, which should allow us to deliver a significant full year increase in cash flow and adjusted operating income. Looking now on our sales growth in more detail on the next slide. Our consolidated net sales increased by US2.5 billion dollars A record for the Q1.

Speaker 2

This was close to US317 million dollars or 17% higher than a year earlier, despite a $77,000,000 or 4 percentage point currency headwind. Price, volume mix contributed with US444,000,000 dollars Looking on the regional sales split, Asia accounted for 38%, Americas for 33% and Europe for 29%. The China share decreased from 21% a year ago to 18% now As light vehicle production grew in all regions in the quarter except in China, where it declined significantly. We outlined our organic sales growth compared to light vehicle production on the next slide. I am very pleased that our organic sales growth significantly outperformed global light vehicle production growth in the first This was achieved as we continued to execute on our strong order book.

Speaker 2

According to S&P Global, light vehicle production increased by around 6% year over year in the quarter. This was slightly higher than expectations in the beginning of the quarter. Based on the latest light vehicle production numbers, We outperformed global light vehicle production by around 15 percentage points in the quarter. In the quarter, we outperformed in Japan by 17 percentage points, in China by 16 percentage points And in Europe by 14% this month. Compared to the Q4 last year, light vehicle production In the Q1 fell by around 4%.

Speaker 2

Despite this, our sales increased by 7%, Sequentially supported by new launches, market share gains and content for vehicle growth. We expect this positive Sales trend to continue, and we expect to outperform light vehicle production by around 12 percentage points Looking now on financials in more detail on the next slide. The strong sales increase led to substantial improvement in adjusted operating income, including effects of capacity alignments and antitrust related matters, which increased from SEK 68,000,000 to €131,000,000 The adjusted operating margin was 5.3% in the quarter, an increase by 0.1 percentage points from the same period last year. Operating cash flow was negative SEK 46,000,000 which was SEK 116,000,000 lower than the same period last year, mainly from adverse working capital as an effect of significantly higher sales level towards the end of the quarter. Fredrik will provide further confidence on cash flow later in the presentation.

Speaker 2

On the next slide, we see some key model launches From the Q1. In the quarter, we had a high number of product launches, especially in China and Europe. The models shown on this slide have an outputted content per vehicle from approximately 140 to close to USD 550. These models reflect the changes seen in the automotive industry in recent years, With several relative new OEMs represented and that 6 out of 9 are available as pure EV. In terms of Autoliv sales potential, the Subaru launches are the most significant.

Speaker 2

The long term trend to higher content per vehicle is supported by front sensor airbags, more advanced seatbelts and Pedestrian Protection Airbags. I will now hand it over to our CFO, Frederic Wisdin, who will talk about the financials on the next few slides.

Speaker 3

Thank you, Mikael. This Slide 5 reflects some figures for the Q1 of 2023 compared to the Q1 of 2022. Our net sales were SEK 2,500,000,000. This was 17% higher than the Q1 of 2022. The gross profit increased by 32% to SEK 379,000,000 while the gross margin increased to 15.2%.

Speaker 3

The gross profit increase was primarily driven by price increases, volume growth and lower costs for premium freights. In the quarter, we made $4,000,000 in provisions for capacity alignment activities and antitrust related matters. The adjusted operating income increased from SEK 68,000,000 to SEK 131,000,000. The adjusted operating margin increased from 3.2% to 5.3%. We do recognize that the operating leverage on the strong sales growth was limited in the quarter, And I will explain more when we go through the operating income bridge.

Speaker 3

The operating cash flow was negative SEK 46,000,000. Earnings per share diluted decreased by 0 point 0 $8 where the main driver was 0 point 5 $2 from capacity alignments And $0.05 from taxes, partly offset by $0.51 from higher adjusted operating income. Our adjusted return on capital employed and return on equity increased to 13% and 12%, respectively. We paid a dividend of $0.66 per share in the quarter and repurchased and retired around 450,000 shares For $42,000,000 under our stock repurchase program. Looking now on the adjusted operating income bridge on the next slide.

Speaker 3

In the Q1 of 2023, our adjusted operating income of SEK 131,000,000 or CAD 63,000,000 higher than the same quarter last year. The impact of raw material price changes was negative CAD 12,000,000 in the quarter. Foreign exchange impacted the operating profit negatively by DKK25 1,000,000. This was mainly a result of transaction effects From the Mexican peso. Costs for SG and A and RD and E, net combined, was SEK 26,000,000 higher, mainly due to higher personnel costs and projects.

Speaker 3

Our operations were positively impacted by improved pricing, Higher volumes, lower cost for premium freight as well as our strategic initiatives, partly offset by the significant headwinds from general cost inflation. The impact of the strong sales growth was relatively low in the quarter as new product launches only have a lower operating leverage initially. As a result, the leverage on the higher sales, excluding currency effects, was in the low end of our typical 72% operational leverage range. The actions we are now taking that Mikael talked about previously Should lead to significantly higher operating leverage, profitability and cash flow as the year progresses, very much like last year. Looking now on the cash flow on the next slide.

Speaker 3

For the Q1 of 2023, Operating cash flow decreased by SEK 116,000,000 to a negative SEK 46,000,000 due to higher working capital and lower net income. During the quarter, trade working capital increased by $226,000,000 essentially from higher receivables. The higher receivables was a result of high sales towards the end of the quarter. The inefficiencies in inventories did not materially improve as light vehicle production continued to be volatile. For the Q1, capital expenditures net Increased to $143,000,000 from $17,000,000 in the previous year's quarter.

Speaker 3

The Q1 last year was positively affected by the sales of a property in Japan for $95,000,000 Excluding the property sale, CapEx in relation to sales this quarter increased to 5.7% from 5.3% a year ago. The current high level of investment is related to the ongoing footprint activities and capacity expansion for growth, especially in China. For the Q1 of 2023, free cash flow was negative SEK189 million, SEK 242 million lower than a year earlier. Although our cash flow was temporarily weaker in the Q1, we expect a gradual positive cash flow development for the rest of the year From higher net income and a more stable sales level. Our full year indication is for an operating cash flow of SEK 900,000,000 and that is unchanged.

Speaker 3

Now looking on our leverage ratio developments on the next slide. The leverage ratio at the end of March Increased proportionally more than the 12 months trailing adjusted EBITDA increased. We do remain committed to our 2022 to 2020 And as you know, we are considering several factors when executing the program. As we have mentioned many times, we are not only considering the debt leverage ratio when deciding on the pace of the repurchases, we're also considering our balance sheet, cash flow outlook, the debt rating and the general business outlook. We always strive for the balance that is best for our shareholders both long and short term.

Speaker 3

Now looking at the next slide. Sustainability is integrated into everything we do. By reducing the number of road fatalities and making transportation systems safer for everyone, our core business directly contributes To the United Nations Sustainable Development Goals, SDGs. During the Q1, we successfully issued a first €500,000,000 green bond using Autoliv's sustainable financing framework aligned with the ICVA green bond principles. The issuance drew significant interest from debt investors, leading to a successful pricing of the bond, resulting in a coupon of 4.25%.

Speaker 3

The proceeds of our first green bond will be used exclusively for financing green projects, including clean transportation, renewable energy, energy efficiency and decarbonization of operations and products. With the projects financed by the green bond, we believe we can further contribute to sustainable society. Now looking at the liquidity position on to the next slide. At the end of the quarter, we had a liquidity position with approximately SEK 1,800,000,000 in cash and unutilized committed credit facility. With a sustainable financing framework, we have diversified our long term funding sources.

Speaker 3

We also have a maturity profile that is well spread out over the coming years. Note that none of our credit facilities are subject to financial covenants. With the leverage ratio of 0.6 times, a BBB S and P rating with stable outlook, a balanced maturity profile And the strong liquidity position, we are well positioned to operate in any environment. I now hand it back to you, Mikael.

Speaker 2

Thank you, Fredrik. Let's look at the market environment and financial outlook for 2023 For the next few slides. Due to supply constraints of CME Conductors, Large part of the auto industry have been operating at or near recessionary levels. As the supply of semiconductors has improved Somewhat. S&P Global has upgraded their near term light vehicle production forecast.

Speaker 2

The Q2 global light vehicle production is now expected by S&P Global to improve by 13% compared to last year. Compared to the Q1, volumes are expected to be about unchanged. Despite concerns surrounding elevated vehicle pricing in some markets and deteriorating credit conditions, Global production is projected to increase by 3.7% to close to 83,000,000 In 2023 according to S&P Global. The Chinese market remains volatile short term Due to the discontinuation of last year's lower purchase tax and the introduction of new emission rules, leading to destocking of inventories at the dealerships. Light vehicle production in North America is projected by S and P to increase by more than 5% in 2023.

Speaker 2

However, due to recessionary figures and increasing inventory levels, The forecast for second half of twenty twenty three has been revised lower. SLP outlook European light vehicle production has increased by 300,000 units. However, we remain Cautious regarding European Vehicle Demand for 2020. Looking at the 2023 financial indications on next slide. Our full year 2023 indications are unchanged and exclude costs growth assumption of around 3%.

Speaker 2

We expect sales to increase organically by around 50%. Currency translation effects are assumed to be around negative 1%. We expect an Adjusted operating margin of around 8.5% to 9%. Operating cash flow is expected to be around US900 $1,000,000 Our positive cash flow trend should allow for increasing shareholder returns. Turning to the next slide.

Speaker 2

I am looking forward to seeing you at our Investor Day, which will be held on Monday, June 12 at our Technology Center in Auburn Hill, Michigan, U. S. The focus of the event will be on medium- and long term growth opportunities, world leading products, Our strategic road map as well as our innovations in optimization and operation efficiency and what progress we are making. The format is a half day with presentations by members of our executive management team And exhibitions of Autoliv's latest innovation and technologies showcased by subject matter experts. I'm looking forward to seeing many of you there.

Speaker 2

Turning to the next slide. This concludes our formal comments for today's earnings call. And we would like to open the line for questions. I will now turn it back to Yes,

Operator

sir. Thank you, The questions come from the line of Colin Langan from Wells Fargo. Please ask your question. Your line is open.

Speaker 4

Great. Thanks for taking my questions. Just in terms of the labor cost recoveries, any framing of Any impact in Q1? And then I think in the past, you've kind of given an update of what sort of percent of contracts you've been able to renegotiate. Any sort of color there on how that's Trending in Q1 and so far in Q2?

Speaker 2

When it comes to the price negotiations, I would say It's still at this point to start to give you an indication on the bridge. I would say that it's in relation to The full year expectations here on the price adjustments, we are in the early stage here. And I would say it is Limited impact, but it is an impact in line with our expectations in time. So What I would like to say here is that we're making the progress we need to do to support our confidence when it comes to for the full year here. But It's not meaningful to give a percentage point at this point in time, we have contracts connected to labor.

Speaker 4

Got it. And during the quarter, steel prices have jumped quite a bit. Can just remind us sort of what your risk would be and because I know you've sort of changed the way your contracts are structured. So are there triggers that renegotiate this I believe or Any risk there to the outlook from that jump in steel prices?

Speaker 3

No, you're right. We have also seen that steel prices have now turned Upwards again in certain areas. So that means that we whereas we were initially a quarter ago, we're expecting actually to have a positive effect on this Steel prices for the full year, we now expect that to be more or less flat with the outlooks that we have here. We have indicated that we have now a better balance of how we're set up versus our suppliers and then our customers, but we should be able to Yes. Manage this and not have any significant impact on profitability from this development.

Speaker 4

Okay. Any color on the percent of contracts that have sort of clauses that trigger renegotiation? I thought in the past you said something like 90%, maybe I'm misinterpreting that.

Speaker 3

No. We said that we had closed more than 90% of the negotiations related to raw materials and that we are now roughly half Our business on the sales side, on the customer side now has an indexation type of setup That would adjust for raw material fluctuations. And steel has a larger part than other commodities.

Speaker 4

Great. All right. Thanks for taking my questions.

Speaker 2

Thank you.

Operator

We are now going to proceed with our next question. And the questions come from the line of Emmanuel Roffner from Deutsche Bank. Please ask your question.

Speaker 5

Thank you very much. Just a fairly specific question here on a piece of your operating income bridge on Slide number 10. It seems like Currency was a fairly large headwind. It seems like a meaningful portion of As a percentage of last year operating income, but obviously much smaller impact on the revenue side, which is only a few percent. So can you just Go over what's happening there on the FX side?

Speaker 5

Because it seems like excluding that, I think your margins would have been Somewhat meaningfully better.

Speaker 3

Yes. So we're showing here a year over year effect of negative SEK 25,000,000. We're close to SEK 20,000,000 of that is from transactional currency effects. And the translational and then The evaluation parts are smaller, also both negative about SEK 2,000,000 each. And so the negative impact is from the appreciation of the PSO against the U.

Speaker 3

S. Dollars. That's roughly Two thirds of the negative transactional effect, but we also have negative effects on a year over year basis still From the U. S. Dollar Japanese yen and also U.

Speaker 3

S. Dollar Korean won, they have improved sequentially, but they have but still on the year over year You will hear there also a negative impact for us.

Speaker 5

Okay. And any thoughts on the In your outlook, is that a meaningful contributor in the full year?

Speaker 3

No, we don't want to monetize. We do indicate here that on the revenue side, we still see the negative 1% and then how All the currency pairs should pay out over the year. We, of course, do expect if currency rates stay where they are, That's in the second half of the year. We should have a pretty favorable effect from the Asian currencies against the dollar. But we have to see also then how the PSO develops here And others.

Speaker 5

Okay. And then I was hoping to get a little bit more color from you on the Characterization of operating conditions in Europe, I think you've qualified them as still Challenging, obviously, latest IHS suggests that at least in absolute volume terms, things sort of like play that's Meaningfully better than maybe expected just sort of like a few months ago at the start of the quarter. So maybe quite a bit more volume Than expected. Can you just maybe just describe I understand the inflation piece. Just curious about what you're seeing in terms of The choppiness of schedules and the sequential improvement in volume?

Speaker 5

Yes.

Speaker 2

As we said here, I mean, Yes, we will expect 300,000 vehicles more increase here. We are Maybe on the more cautious side there. And the reason for that is because we need to see Some volatility here. It has improved, but it's far from over and behind us here. So that is still a factor.

Speaker 2

And of course, that in combination with the inflationary environment and the challenges also on the labor side here, it is Some way to go before we are out on the other side.

Speaker 5

Okay. Thank you.

Operator

And the questions come from the line of Rod Lache from Wolfe Research. Please ask your question.

Speaker 6

Hello, everybody. Firstly, the quarter itself benefited from stronger than expected production and Obviously, stronger than expected revenue. Can you talk about whether that production part itself actually converted at its Historical rate, I'm not talking about the new business side. And if it did, What were the negative variances versus what you expected at the start of the year? Is it largely currency?

Speaker 6

Or are there any other Developments that you would count as negatives?

Speaker 3

No, I mean, as we indicate, it's not at level that we would want it to be, the leverage ratio. And it's predominantly, it's still the call of volatility and the impact that, that on our ability to operate efficiently in our plans, where we are or have issues to pull through at The historical leverage rates that you would expect. But then on top of that, as you already mentioned, There's a significant contribution here from new launches, market share gains. And of course, that does not have the same margin impact or leverage Rate was just floating with MVP, and that also then is a contributing factor to the somewhat lower leverage in the quarter.

Speaker 6

Okay. But relative to your expectations, you're suggesting that it's it was a bit more volatile, it sounds like.

Speaker 3

No, I wouldn't say it was more volatile than we had expected. I mean, it's again, we had indicated around 5%. That's where we come in. I think The top line is also very much or very close to our expectations. So at least for us, no big surprises in the quarter.

Speaker 6

Okay. Okay. Can you just give us a little bit more insight into the drivers of this margin improvement from The low fives to the low double digits, which would be implied by your full year guidance. It would seem that you would get there by late this year. How much of that is the internal savings that you anticipate?

Speaker 6

How much do you need to recover Of costs that you've been absorbing?

Speaker 3

The factors are, I mean, we still expect in the top line growth Also from sequentially in the quarter, so that will be a contributing factor. Then of course, the price Adjustments that you're seeking to be able to negotiate and then come through with here starting in the second quarter. And then it's the third one is the stabilization component, which I already mentioned. It's difficult to now give a A split of those 3, but those are the main factors here that we expect to contribute to the margin improvement sequentially.

Speaker 6

Have you defined the Automations and digitization savings for this year and what your objectives are, it sounded like those are Bigger than what you had originally planned 2 or 3 years ago.

Speaker 2

No, we haven't given a specific number for that and not on a yearly basis here. But of course, that is a part of our overall Journey here towards the midterm targets. But I think for this year, it is really all about The work that we are doing now to negotiate price adjustments for the inflationary components and then Continue with our strict cost control and improvement work here to support the leverage that we have And I mean, as we have guided for this year, we are Then indicating 2 percentage points improvement, basically around 2% The percentage points improvement year over year, and we're starting now the Q1 with 2 percentage points improvement Q1 versus Q1. So that set us off to a good start for the full year, in line with our plans and And as we have also said here, we expect a sequential improvement quarter by quarter Similar to the way we saw it in 2022. And that, of course, That comes to that 2023 is very much the same as 2022 in terms of inflationary pressure hitting us first, Yes, we're going through the price negotiations with our customer, and they are trickling in gradually here Throughout the year, in combination with what is also a normal seasonality is that We have the productivity coming through throughout the year, while price downs, etcetera, is happening in the beginning of the year.

Speaker 2

So And instead of price downs here, we're talking about the inflationary pressure. So but this analysis is the same.

Speaker 6

Great. Thank you.

Operator

And the questions come from the line Philippe Collings from Goldman Sachs, please ask your question. Your line is open.

Speaker 7

Yes. Hi, guys, and thanks for taking my questions. My first question is just on the SG and A, which stepped up quite meaningfully in absolute terms compared to sort of the previous quarters. I know that your top line and there's inflation in the system, but were there maybe some agreements that you had, including one time payments That's sort of weight on the SG and A in the Q1? Or do you expect that to sort of remain above 5% of sales in the coming quarters?

Speaker 7

And And then my second question is just on Mikael, on the point that you just touched on earlier is that, you mentioned sort of 2% ahead of last year is what you need to get To the guidance that you set up for the year, if we sort of now think about the Q2, you mentioned better leverage, Obviously, higher volumes and better recoveries. Is it fair to say that maybe in the second quarter, we could See maybe an even better step up compared to the Q1 given that you should have quite a few tailwinds. Any color there?

Speaker 2

Thank you. Many questions. Maybe I start there on Q2 and Frederic take the SG and A question there. I mean, as you know, we're not guiding by quarters here, but I think what we are saying here is that you should expect the similar pattern as Last year, and we did 2 percentage points improvement and around 2 percentage points improvement in the Q1, Which also translates throughout the year to get to the around 8.5% to 9%. And we just said here that In terms of, let's call it, setting up improvement here, it's more geared towards the second half.

Speaker 2

Also, I would say in line with how last year developed. So I think that there's as much Commentary I can give regarding the sequential development on the quarters to come here in 2023.

Speaker 3

Yes. And on the SG and A question, you see from our headcount development that our indirect headcount is up around 4.5%, And that's also the case on the SG and A side. And that is to support a business here that has grown by 21% year over year. That's one factor. Then of course, we have the inflation component also moving into SG and A cost.

Speaker 3

It's both on the labor side but also on the And then we had in this quarter maybe a somewhat higher project related cost. But for the future, our ambition is to also get the right Leverage also on our support cost structure, meaning that we aim to keep the SG and A as lean as possible And then with the top line growth, see a more favorable ratio going forward.

Speaker 7

Thank you very much.

Operator

And the questions come from the line of Hampus Angelo from Handelsbanken. Please ask your question.

Speaker 8

Thank you very much. It would be interesting if you guys could maybe give us a flavor On how the production of your customers have been during the I mean, your call outs during the quarter, have they been lumpy or more stable? And how should we think about that going forward? And then on your outlook, Michael, The 50% organic growth outlook, is that based on a more conservative number for Europe and the plus 7% that IHS Group have? Those are my questions.

Speaker 8

Thank you.

Speaker 2

Thank you, Ambrus. As I mentioned earlier, I would say that the volatility has improved, But it's not normalized yet. So there is still some way to go. It varies quite a lot between the different customers here, which we also have seen the pattern in the last couple of quarters here that is not One time fits all here in terms of volatility. And it's very much connected to Supply and also the what type of meaning supplier in their term And also what kind of versions of semiconductors they're using.

Speaker 2

And as we're seeing here, Your later and more new technology you have in your semiconductors, you have some better positioning compared to if you have, let's call it, The older and more traditional OEMs and conductors. And there is a lot of activities going on with the ones that All still on the old technology platforms, you could say on semiconductors to redesign and resource that. So Expectation is that it should move in the right direction. And that's also in that space where the semiconductor manufacturers are putting in Your capacity. So more work to be done there, but moving in the right direction.

Speaker 2

So that means the expectation going on at the same time that can have some disturbances, and we have seen that also connected to the release stick issues, for example, where The field predictive fee on shipping sort of shipping lanes and freight schedules are not Reliable as it was before the pandemic here. So there are also other things going on I guess that's the first question there. Regarding the outlook and Europe's weight, and I guess The short answer is yes to your question. Of course, the cautiousness around Europe that I expressed before is a part of our Light vehicle growth of around 3% is the basis for our organic sales is there. So Yes, to your second question now.

Speaker 8

Super. And maybe on that, Is it from what you see in your customer base? Or is it just the General thinking surrounding the European economy and all of that, that makes you more cautious?

Speaker 2

I think it's a combination of the 2. But of course, It's very much connected to the customer interaction, I would say.

Operator

And the questions come from the line of Vijay Rakesh from Mizuho Group. Please ask your question.

Speaker 9

Yes. Hi. Just a quick question. On the when you look at the global LVP, 3.7% this year, What slowdown are you assuming for the U. S.

Speaker 9

Like second half and first half? And any thoughts on Europe, if U. S. Slows down? Just wondering what the assumptions are.

Speaker 2

No, I think our I mean, distribution of our number is not Very much different from what you see from S&P Global. I would say, if you see the different weights from the regions there, It's tightening to our view as well with maybe the exception that we are a little bit lower on Europe, as we said, but that Has affected around 3% instead of 3.5%. So it's already in there. So in terms of regional mix, it Doesn't take too much.

Speaker 9

Yes. And then on China, obviously, it looks like they are assuming a pretty strong growth. Are you assuming any subsidies From China, either on the EV side that drives that LVP in China to the back half as well?

Speaker 2

No, it's nothing we see or story here and have on the radar screen here. I think Overall, we see a high level of activity in the Chinese market here. And as you know, the Shanghai Auto Show is Currently ongoing here this week. So Very dynamic markets and we are, I would say, positive to the Chinese LBCs. Last question.

Speaker 9

Last question, I know you had mentioned 90% of the products have been negotiated with the cost inflation side. Broadly, is there a way to look at what the pricing tailwind would be from the cost pricing negotiations as you run through 2023? Because some of these pricing have continued to go up, but just wondering broadly what's the ballpark pricing tailwind?

Speaker 3

Well, it's more than 90%. We haven't said the exact number, but it's more than 90%. I think the indication we can give is that in the 15% organic growth, we still assume around 3% global LVP. We've said around 3% in content per vehicle and then the remaining to come from pricing and from market share gain. And the more that pricing would be the larger of the 2 components.

Speaker 3

And I think that's as much as we can say on

Operator

And the question comes from the line of Erik Goran from SEB. Please ask your question.

Speaker 10

Thank you. I'll start with 2 questions. The first one is a follow-up on the pricing coming. If it's around 5% For the year, how much was pricing up in the Q1 here? Since you say that there's more to come.

Speaker 10

And then the second question on the expectations of LVP stability and visibility improving. I guess that's Completely out in your hands, right? So if that doesn't happen, how much lower would the full year margin be?

Speaker 2

Let me start with the second question and Fredrik can take the first one there. I mean, in our guidance, of course, We are aware of the market situation here, and we are working hard to manage it. So of course, volatility It is here. Even though we think it's going to improve, of course, we need to improve our way to work in Fashion at the moment. And I think last year, you saw that we had significant premium freight.

Speaker 2

We don't have that This year and of course, the part of that is that we have then improving and I would say, Added on, support in our plants to create more stability in our own production So to offset that constraint from our customers here. So we find a way to operate in such an environment. And as we move forward, we continue to improve that work. It's not, as And our own ability should support what we are talking about here in terms of full year guidance. I don't see any reason why we shouldn't be able to contain that volatility that we're talking about here

Speaker 3

Yes. And then on the pricing side, I think we need to refer back to what we said after the Q4 earnings release year. And the way that these negotiations go is that we basically, we need to have the cost increases in our cost structure first before we can then get The compensation from the customer. And that has now happened here in the Q1. As we've indicated, the 2 largest components of that we are facing is the impact of the non raw material related inflation in our supply base and then the labor cost inflation in our own operations.

Speaker 3

And those have materialized now in the Q1 already with not So much compensation that came in from the customer side. So pricing has remained relatively flat sequentially.

Speaker 10

So the vast majority of that 5% is not yet in the books?

Speaker 3

Correct, yes.

Speaker 10

Okay. And then a final question on these the drag from new volumes or new contracts ramping and there being weaker leverage on that initially. I mean, that's something we've seen that a couple of times historically. And how I guess you always need new volumes and new contracts to grow over time. So why is that Is there anything you could put a number or frame how much the sort of share of new contracts or new volumes this quarter compared to An average or something like that to put it in perspective?

Speaker 3

Well, I don't think I need to explain why they have initially lower profitability. But the contribution from these launches have been significantly larger in this larger in this Q1 than what you would typically see. In LVP, it's up 6%. Our volumes are up significantly more than that. And that's it was a larger part of the volume growth that came from these launches than in a more normalized quarter.

Speaker 10

Okay. So that means that the higher outperformance, the lower the leverage. Is that always how one should think about it?

Speaker 3

Initially, yes.

Speaker 11

Thank you.

Operator

And the questions come from the line of Michael Jack from Bank of America. Please ask your question.

Speaker 12

Hi, good afternoon. Thanks for taking my questions. Maybe the first one, following on from Frederic's comments On the factors that you consider when deciding on the pace of share buybacks, would it be fair then to assume that there should be somewhat of a linear relationship

Speaker 3

between your margin and cash evolution

Speaker 12

through the between your margin and cash evolution through the year and the execution on the program?

Speaker 3

I don't want to talk about how it probably develops by quarter, but I think you can look at our Normal seasonality and the margin progression that we're also indicating here for the year, and I think that Those 2 together gives you maybe also an indication of what the cash flow generation will look per quarter. Then of course, we will be as I said, it's not only, say, profitability, but then also, I mean, the leverage ratio, which is Clearly connected to that, but also the cash flow and the visibility we have in the near term on the market development and our own business development. Yes, somewhat. It was maybe my answer to your question.

Speaker 12

Right. Understood. And then I guess we're all now very well used to watching out for downside risks It's a likely production, but the aggregate unit sales ambitions of the OEMs for this year clearly require Perhaps an even higher LVP growth than what S and P is expecting. Just curious if this delta is perhaps visible in The production schedules that your customers have provided to you for the coming quarters?

Speaker 3

I mean, if I look at what we see enough for the Q1 that the production volatility is still around us, It's been see, the vast majority of the cases that deviation is on the downside. So meaning that the eye call offs we get Are then revised downwards for the vast majority of our customers. So maybe that's an indication of where That's delta then sits going forward.

Speaker 12

So they start the quarter then really high and then cut As the quarter progresses, is that the trend?

Speaker 3

Yes. And very few deviate on the upside.

Speaker 11

Clear. Thank you.

Speaker 2

But at the same time, it's not the new phenomena. No, no. So it's normally out of oxygen.

Speaker 12

Thank you.

Operator

We are now going to proceed with our next question. And the question comes from the line of Matthias Holmberg from DNB. Please ask your question.

Speaker 13

All right. Thank you. A bit of a philosophical one perhaps. And if we look at your customers, the OEMs, we see some of them basically cutting prices as If it was going out of fashion, so it would be interesting to hear if you can share your view on how lower final selling prices for light works its way through the value chain and perhaps more importantly, explain the logic on how you So are meant to raise prices when your customers are generally cutting prices at this point? Thanks.

Speaker 2

Yes. As I said, a philosophical question here. But first of all, I think what we are talking about here with our customer is Not anything else than the inflationary components of doing business in this industry here. So we're coming with Requesting to offset external factors. I think in the same fashion that we are being Hit with the inflationary costs, then going to the customer, we have the sequential year before we Let's say, the negative impact first, and then we get compensation when we discuss that's called evidence there in our negotiations.

Speaker 2

I think if you look at our forecast, I think many of them rather have actually increased prices on the car side. Then I'm aware what you're referring to there. But I think in a broader extent, I think there is no doubt about that The industry as such are aware of what needs to be done here to compensate the value chain to make sure that we have a sustainable Value, Shane, in the industry. So in my discussions with our customers, That's not the factor that we are considering here. We are looking at the facts around inflationary components Keeping the value chain here and that's what we're negotiating around.

Speaker 13

Thank you.

Operator

And the questions come from the line of Dan Levy from Barclays. Please ask your question.

Speaker 11

Hi. Good afternoon to you. Thank you. First, I think this was slightly alluded to, but maybe you could just Talk about on the cash flow specifically, the working capital dynamic, which was quite negative and just the swing of receivables that was $200,000,000 decline. Could you just explain that movement?

Speaker 11

What we should expect going forward on the working capital front?

Speaker 3

Yes. I mean, it was a bit of an unusual, say, Q1 in the sense that it was a very high Month over month ago, starting from January then into December or into March, sorry. And that created a fairly large receivable balance at the end of the quarter, Whereas the other 2 working capital component inventory and tables were They follow also normal pattern, but the very significant sales increase towards the end of the quarter drove up the receivables. But this should normalize Then also the yes, we do not expect the same type of growth profile For the next quarter that we have now within the Q1. And then that working capital buildup should revert somewhat.

Speaker 11

Okay, great. Okay. Thank you. So the working capital should reverse. Great.

Speaker 11

And then just want to go to the question On inflation, specifically, your release talked about inflation pressures in Europe, which didn't Europe specifically in the past. Maybe you could just walk through the inflation dynamics by region and specific to labor, How labor is evolving and what has been the tone and tenor of conversations with automakers to compensate on labor?

Speaker 2

Yes. I think if I start with the negotiations that I think it's just What we have said before here that when I mean, it's I would say, it's never easy To discuss and negotiate the price increases with our customers, We were successful in those discussions during 2022 related to raw material. And We are making progress also here in the non raw material area. Of course, it becomes a little bit more complicated in this space because In reference to the raw material side, you don't have the same type of reference points as you have On the raw material side, meaning that each plant and each size and each country are You need to go through much more of a even more detailed discussion with you perhaps. But In base when you that aside, it's very much the same as on the raw material side.

Speaker 2

So We are making progress in that area. Yes.

Speaker 3

I mean, on the How inflation is hitting us, generally, it's no different from all the data you can get publicly. So it is yes, there's not much to say other than that. I mean, we on the labor cost side, There have been some countries where minimum wages have increased significantly or been raised significantly, which is Mexico. So that has a larger impact. But then also Turkey, where we have a large operation, it's pretty significantly impacted by inflation, of course.

Speaker 3

But in general, you can look at where these indices are and they are publicly available. And we typically follow them also for the countries that we operate in.

Speaker 11

Okay. And then Europe specifically, is there some unique dynamic in Europe?

Speaker 2

I think in Europe, of course, the war in Ukraine has impacted, to some extent, here, of course, Energy and also on freight as a consequence of that. So Yes. I mean, each region has their own reasons also seek, and we hope to know that the challenges in Europe there.

Speaker 3

Yes. But on that, and of course, energy has been a much larger Topic in Europe and also driving the price of purchase components from our supply base. So that has been significantly More compounds in Europe than it has been in other regions.

Speaker 11

Got it. Thank you.

Speaker 2

Thank you.

Operator

Due to time constraint, we will now end the question and answer session here and hand back the conference to the President and CEO, Mikael Bratt for closing remarks. Please go ahead.

Speaker 2

Thank you, Roger. Before we end today's call, I would like to say that we are continuing to execute on privacy and cost reductions activities relying on our strong company culture. Our actions are creating both short term and long term improvements. And additionally, we are We believe these actions will enable us to build an even stronger position. Autoliv continues to focus on our vision of saving more lives, which is our most important direct contribution to a sustainable society.

Speaker 2

Our Q2 earnings call is scheduled for Friday, July 21, 2023. Thank you, everyone, for Participating in today's call, Ms. Cecily appreciate your continued interest in Autoliv. Until next time, stay safe.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you. Hello.

Speaker 3

Yes. Hi.

Operator

Hello. How was everything for you?

Speaker 2

It was very good. Yes, it was well. We can hear.

Operator

Yes. I mean, every now and again, the connection was dropping a little bit, but it didn't really affect the audio portion of your call. So yes.

Speaker 2

But

Speaker 3

the webcast, did that work this time?

Operator

Yes, it did.

Speaker 2

Okay. Very good. Very good. Thank you. Thank you.

Speaker 2

Bye bye.

Speaker 3

Have a great weekend.

Operator

Okay.

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