Autoliv, inc (ALV) Q2 2021 Earnings Call Transcript

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Autoliv, inc (ALV -0.04%)
Q2 2021 Earnings Call
Jul 19, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello and welcome to the Q2 2021 Autoliv Inc. Earnings Conference Call. [Operator Instructions] Today, I'm pleased to present, Mikael Bratt, CEO.

I will now hand the call over to Anders Trapp, VP, Investor Relations. Please begin the meeting.

Anders Trapp -- Vice President, Investor Relations

Thank you, Naz [Phonetic]. 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-US GAAP measures. The reconciliations of historically US GAAP to non-US 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.

Mikael Bratt -- President and Chief Executive Officer

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 Market. Considering these headwinds, I'm 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 toward 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 industries 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, however, in July, the situation has deteriorated in North America and Europe again, as the 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 '20 as a result of Light Vehicle Production recovery from the pandemic related lockdowns last year and our strong sales outperformance. The European and North American market contributed to three quarters of the sales increase. Adjusted operating income excluding cost for capacity alignment improved from minus $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'm very pleased that our organic sales growth outperformed the global Light Vehicle Production by more than 30 percentage points. This was achieved, partly because of positive geographical mix effects as Light Vehicle Production grow 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 vehicle 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 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 you about the financials on the next few slides.

Fredrik Westin -- Chief Financial Officer

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 and 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 and our adjusted return on capital employed improved to 18% and adjusted return on equity to 16%. We reinstated our quarterly dividend at $0.62 per share, the same level as before the dividend was suspended in the 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 payers. The most significant was a 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.

And 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 increase from 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% to 30% range, with closer to 30% to be expected when sales fluctuate significantly. And we consider a 10% sales drop quarter-over-quarter to be significant. The 28% detrimental 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 plus, minus 5%. In the second quarter we are 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 detrimental 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 record. 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%.

We turn to the next slide. We have, as you know, a long history of a prudent financial policy and our balance sheet focus remains unchanged. The leverage ratio improved from the peak of 2.8 times a year ago to 1.1 times. The improved leverage in the quarter was a result of our EBITDA over the last 12 months increasing by $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 -- by 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. However, 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 for the -- from the remaining customers will take time and likely not have much impact until the next year.

On to the next slide. Demand for new vehicles remains high and inventory levels of new vehicles remain at record low levels in some regions. For example, the inventory levels in North America ended June at 1.4 million units or about 35% of what manufacturers normally would be carrying. Dealer inventories are in general at a normal level in China and we believe that European inventory levels are fairly low especially for premium vehicles. Assuming that the component availability improves, we expect a good demand and low inventories to support a recovery in LVP into 2022, versus what was expected at the beginning of the quarter, Q2 '21 Light Vehicle Production came in 8% softer than expected due to shortages of semiconductors. From here though, the global volume should sequentially improve into the second half of the year. However, production is expected to remain volatile, because of the semiconductor and other shortages. OEMs will likely strongly push for vehicles with no or low CO2 levels as well as larger vehicles that are more profitable for them. For Autoliv, this trend should support further outperformance versus Light Vehicle Production.

For full year 2021, our assumption is now that global LVP will increase by 9% to 11% compared to 2020. IHS Markit has this afternoon released an updated LVP figures and they now forecast global Light Vehicle Production to grow 10% in 2021. For Q2 '21, they have adjusted down 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 the production of light vehicles declined by 9% instead of 8% sequentially from Q1 2021.

I now hand it back to Mikael.

Mikael Bratt -- President and Chief Executive Officer

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 or 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 percentage point to 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 matters. Our full year indication is based on a global Light Vehicle Production increase -- Light Vehicle Production increasing 9% to 11% compared to 2020. We expect sales to increase organically by 16% to 18% supporting a full year 7% outperformance versus Light Vehicle Production. Our net sales increase is assumed to be 20% to 22%, including positive currency translation effects of around 4%. We expect an adjusted operating margin of around 9% to 9.5%. Operating cash flow is expected to be similar to 2020 level. 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 the market leader in our field. Our efforts are aligned with the broader societies 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. This 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 16, 2021. The event will be virtual only and live streamed. At the meeting, we plan to showcase our full potential and provide an update on our strategy and development. Additionally, we plan to show future products, give an update on opportunities in core and adjacent product areas, our plan for the potentials that we see in flexible optimization and digitalization and much more.

I will now hand it back to Anders.

Anders Trapp -- Vice President, Investor Relations

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Emmanuel Rosner from Deutsche Bank. Please go ahead, your line is open.

Emmanuel Rosner -- Deutsche Bank -- Analyst

Hi, everybody. Thank you for taking my questions. First question would be, can you maybe describe the industry production environments you expect for the second half? I thought it was somewhere notable that your LVP assumption, now I guess a little bit more conservative on the low end than what IHS had at least as of yesterday. And so can you just talk in terms of how much visibility you have in terms of call-out, how much volatility you still expect you can continue and for how long?

Mikael Bratt -- President and Chief Executive Officer

Yes, I think the range we are indicating is the result of a high amount of uncertainty in the market here and the uncertainty then goes back to when the industry will come back to more, I would say, stable situation when it comes to -- a more predictable situation when it comes to semiconductors. As we indicated here in the presentation, we saw some improvements toward the end of the quarter, but coming in now in July here we see once again that customers are changing the call-offs with short notice and the volatility continues. So 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, but it will take time until we are back in -- I mean, we can say that we have the semiconductor challenge behind us here. So I think we will continue for quite some time here with high level of uncertainty, but I think that's where we are right now.

Emmanuel Rosner -- Deutsche Bank -- Analyst

That's helpful. And then as a follow-up, just a question on the raw materials impact. So based on I guess the slide where sort of you detail how your contracts work. So if raw materials, which we stay at sort of like current spot prices, how much of an additional impact would that be beyond this year?

Fredrik Westin -- Chief Financial Officer

We don't guide for 2022 at this point of time, but we can say that if they stay at the current levels that would also be a challenge into next year from that high level. What we have seen in the -- weather 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 and hence the need for us to revise our impact for the full year.

Emmanuel Rosner -- Deutsche Bank -- Analyst

Understood. Thank you.

Mikael Bratt -- President and Chief Executive Officer

Thank you.

Operator

And the next question comes from the line of Mattias Holmberg from DNB. Please go ahead.

Mattias Holmberg -- DNB -- Analyst

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 is 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?

Mikael Bratt -- President and Chief Executive Officer

No, I think what we wanted to say there is really that, I mean, now we are comfortable back within the range. And with that, I mean we have now reinstated the quarterly dividend. And on top of that, of course, we have, as we always stated in the past, buybacks and alternatively extra dividend as tools for that, but that's a decision that needs to be made from time to time and here of course we need to judge also not only how our balance sheet looks like, but its also the predictability about the business cycle and our cash -- forward- looking cash innovation there. So just to reconfirm, our intention here to be shareholder friendly company in terms of returning liquidity to our shareholders and of course the timing we will come back to when appropriate there. And it's a decision from time to time.

Mattias Holmberg -- DNB -- Analyst

Understood. Thank you. And my second question is the medium term margin target of 12% on the EBIT level that you stated in your CMD in 2019, given the sort of incremental raw material headwinds that we're seeing right now, do you still think that the time horizon of three to five years is realistic or how should we think of that?

Mikael Bratt -- President and Chief Executive Officer

Yes, I mean 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. I think, I mean, as we have indicated here, we think that the Q2 was the trough when it comes to the semiconductor challenge, even though it will take a bit longer until we are on stable grounds there. And as Fredrik indicated here, I mean raw material is something we will have to manage over time regardless level, but it's really time that is needed to balance that and I think when we're looking at this time horizon here, we have that time and we think also that we have a very strong underlying demand when it comes to light vehicles going forward here. So no reason to have any other views than what we have had in the testing.

Mattias Holmberg -- DNB -- Analyst

Thank you so much.

Mikael Bratt -- President and Chief Executive Officer

Thank you.

Operator

And the next question comes from the line of Chris McNally from Evercore. Please go ahead.

Chris McNally -- Evercore -- Analyst

Thanks so much guys. Just wanted to follow-up on the raw materials. I know we can't put a number to it. So maybe if we talk about more of the process for getting reimbursement. It essentially looks like, what you're saying is for the second half that the 130 basis points for the full year is both the gross and the net number. I think it is 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 as we get a sense with the -- through the headwind going into next year?

Fredrik Westin -- Chief Financial Officer

Yes, sure. We do have some but limited contractual pass-throughs to customers. And of course the negotiations with the remaining customers are ongoing as we see these significant headwinds from raw materials. On the ones where we have indexations, and then, I mean they are typically retroactive. So then you also have to look at what -- where these costs have been looking backwards. That 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. We will have only a limited impact here on the current year. But as we said, I mean, of course, our ambition is to over time should the prices stay at this level also offset them commercially.

Chris McNally -- Evercore -- Analyst

And so, I think it's a fair, we think like absolute numbers $50 million a quarter in the back half of headwind, that's something that we should at least model for Q1 of next year and then at the earliest, maybe we get some breaks in 2Q as you get some commercial recoveries. But that's sort of page we're going to have probably a couple of quarters of this level as it's finally starting to roll through?

Mikael Bratt -- President and Chief Executive Officer

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 the next year.

Chris McNally -- Evercore -- Analyst

Yes, no, problem, I had a try. Maybe just real quick, just high-level, do you exert that same pressure then, like another opportunity to go to your [Indecipherable] base and basically ask for delays and in price increases when obviously you're not buying raw steel, but obviously manufactured parts. Is that another way to sort of to manage the time lag while it takes you a couple of quarters to get commercial recovery from the OEMs?

Mikael Bratt -- President and Chief Executive Officer

I mean, absolutely. That's why you've seen that the impact so far year-to-date has been fairly marginal. I mean it's -- was close to zero in the first quarter and now about $10 million in the second quarter. So that I think is a reflection of how successfully we've been able to push this out with our supply base. But especially on the steel side, it is a very stressed situation and we will have price changes come through that we cannot avoid in the second half.

Chris McNally -- Evercore -- Analyst

Okay, great, thanks so much.

Operator

The next question comes from the line of Hampus Engellau from Handelsbanken. Please go ahead.

Hampus Engellau -- Handelsbanken -- Analyst

Thank you very much. Two questions for 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 May and then you highlighted that June was extra tough. Could you maybe just shed some light on what happened in June and that we can be sure that second quarter is the trough in semis? That's the first question. Second question is, relating to the operating leverage. I mean you highlighted the operating leverage in the second quarter compared to first quarter. And how should we think about Q3 and Q4 here? Is the full-year outlook very more back-end loaded more related to Q4 now with the engineering income or how should we think about that? Those are my two questions. Thank you.

Mikael Bratt -- President and Chief Executive Officer

I can start on the semiconductor side here and then Fredrik maybe will take second question. On the semiconductor side, as we said here, we saw some improvements, I should say stabilization toward the end of the second quarter here. But we have once again seen some plant closures on our customer sites coming up here in July with short notice. So what we want to indicate here is that we see volatility also in the beginning of the third quarter here. I think the challenge here is that uncertainty is so high when it comes to semiconductor. As you know, the automotive industry is only 5% to 10% of the total usage of semiconductors here. So, we are of course also here impacted from what's happening in the total pool of customers for semiconductors. And as we've indicated here, we think it will take a longer period here on -- really on stable grounds when it comes to semiconductor supply gradually improving. That is it to the best of our knowledge now and what we pick up in our interaction with suppliers and customers. So that's the best indication we can give at this point in time.

Fredrik Westin -- Chief Financial Officer

Okay and then Hampus on your question on the operating leverage. I mean, we do expect, even if there is no range on the volume recovery in the second half that we will see a sequential improvement here and that then of course should also have a positive leverage effect, but it also depends a bit with this 9% to 11% or around 9% to 11%, sorry the 16% to 18% that we're saying, gives also a larger spread even for the second half. Then, we also expect the volatility to continue at least in the near term. So we have to see how quickly that comes out, because it will impact also our ability to pull through an incremental sales and then the volatility -- I mean the volatility in the call-offs, that's another component. And then the third one is, of course, raw material, where we expect a fairly even hit here between the quarters in the second half. But when you come -- when it comes to your specific question on engineering income that should pretty much follow the normal pattern as we've seen in previous years.

Hampus Engellau -- Handelsbanken -- Analyst

Excellent. Thank you very much.

Mikael Bratt -- President and Chief Executive Officer

Thank you.

Operator

And the next question comes from the line of Joseph Spak from RBC Capital Markets. Please go ahead.

Joseph Spak -- RBC Capital Markets -- Analyst

Thank you very much. You mentioned typically 25% to 30% pass-through, 30% when it's volatile like it was this quarter on the way down. You also mentioned continued volatility going forward. So does that mean, if we think sales are going to increase sequential here, we should be more toward the lower end, maybe the 25% on the upside and then factor in commodites on top of that, is that how you advised to think about the rest of the year?

Mikael Bratt -- President and Chief Executive Officer

I think the real uncertainty here is how this volatility that we tried to indicate here where we see typically a fairly narrow range. But now in the second quarter, a very large range, how that develops over Q3 and then going into Q4, because that will have impact on our operational effectiveness and then also with how -- what leverage we can then pull through incremental sales and that is very difficult to give an indication on right now. We're not through it yet.

Joseph Spak -- RBC Capital Markets -- Analyst

Okay. And then just maybe going back to raw materials, one more time. So like effectively the entire impacts here in the back half. I know you're not talking about '22, but it's like a -- more like a 230 basis point margin impact in the back half. So it seems like that's at least a good run rate to go in through the first half. I guess what I really want to get to is, how does this impact your confidence in the 12% margin target over time, because presumably, lot of commodities wasn't contemplated. So what are some of the offsets. I know you have a couple of Markets Day later this year. I don't, probably dive into that more detail, but at a high level, maybe you could just help us with that?

Fredrik Westin -- Chief Financial Officer

Yes, I think what we're saying here is of course that the raw materials we need to overcome over time through different means. I mean, we're talking about compensation and offsetting it with our customers. I think it's also on how we work with our internal improvement journey here and also with our suppliers and if we see, we are not at all indicating that, but 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. But what we believe here is, working assumption is of course that we have a temporary increase here, but it's difficult to give the time on it. So 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. And I think the raw material will also normalize at a different level than what we are seeing today and whatever delta is there, that is something we will manage.

Joseph Spak -- RBC Capital Markets -- Analyst

Thank you very much.

Operator

Next question comes from the line of Rod Lache from Wolfe Research. Please go ahead.

Rod Lache -- Wolfe Research -- Analyst

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. So if we think back at prior periods when you had higher raw materials, what did you typically recover in the subsequent year when -- through those negotiations?

Fredrik Westin -- Chief Financial Officer

I don't think you can say there is a specific rule of thumb in terms of percentage. It's more related to the nature of the raw material increases, I would say, because if it's something that is more long lasting and more let's call it inflationary in this nature, you have a higher rate of compensation than if it's temporary. And I think we have indicated before, if it's really temporary volatility, it's not even something we are really discussing there with the customers. So it all depends on the nature of the increase, so to speak. So yes, time will tell here, what this is, when we look at these increases here, but I mean those negotiations and discussion are of course, already ongoing and work is being done in that area.

Rod Lache -- Wolfe Research -- Analyst

Okay. And just to clarify. Do you typically put that into -- the recovery into sort of a different bucket then the raw material inflation or when you describe raw material inflation, is that a net number, net of recoveries?

Fredrik Westin -- Chief Financial Officer

I mean, if your question is in how we discussed it with our customers?

Rod Lache -- Wolfe Research -- Analyst

No how you discuss it with us, is what I want to -- are you referring to a gross number or is this kind of a net number when you give these -- the basis points of margin?

Mikael Bratt -- President and Chief Executive Officer

That's the cost impact. So it does not...

Rod Lache -- Wolfe Research -- Analyst

Okay. That's just the gross number. Okay. And then lastly, could you just speak to inflation more broadly. I mean, we're seeing obviously a lot of tightness, particularly in North America, but inflation is obviously -- it's not just commodities, there's labor cost inflation, logistics inflation and other things that seems to be a global phenomenon. What's the extent to which you are seeing this and is that something that you would expect to be a bigger factor, as you look forward?

Fredrik Westin -- Chief Financial Officer

No. You see it in multiple areas, not only on the raw material side. As you said, logistics is stressed as well. It's in both in terms of availability and but also in terms of cost for logistics and then also the accuracy of delivery. So it's a very stressed situation and we are dealing with that at the same way as Mikael described here on the -- as we do on the raw material side. So eventually also discussing that with our customers, but primarily at the moment managing that with the supply base and our logistics providers. I'd have to say so far on the labor cost side, we have not seen any significant pressure so far on that. So I think that's one component at least that at the moment seems rather stable.

Rod Lache -- Wolfe Research -- Analyst

Okay, thank you.

Operator

The next question comes from the line of Brian Johnson from Barclays. Please go ahead.

Brian Johnson -- Barclays -- Analyst

Thank you. I just want to get some more perhaps of a strategic issue around commodities. I've always been struck at that conversation in the past about how Autoliv with its incredible low record of recalls adds tremendous value to your customers. So in addition to just going out and trying commodity cost recoveries, is there an opportunity to recast the contracts going forward to make them more like we see in other supplier segment sectors where raw materials are a big part of the cost of goods sold like axles and so forth, and just have straight index-based pass-through agreements? And if so, as you kind of bring new programs on, is that a trend that you would like -- is that a kind of factor you would like to put into place?

Mikael Bratt -- President and Chief Executive Officer

I think, I mean first of all, we are a system supplier and with a lot of components going into what we deliver to our customers here, and I think, I mean there is pros and cons with that, but I think we overall, over time have a system that -- and business relationship that service as well. So I shouldn't say that I see any big changes to that. It comes back to what...

Brian Johnson -- Barclays -- Analyst

Okay, and then...

Mikael Bratt -- President and Chief Executive Officer

More of the structural changes that might be or not be.

Brian Johnson -- Barclays -- Analyst

Okay. And in terms of the raw materials we should be looking at to kind of think about you flagged hot-rolled steel. Are there other commodities that we ought to be paying attention to. There are some commodities like copper and lumber that are obviously not in your products that are rolling over already, but in addition to steel, what are the key components we have to track?

Mikael Bratt -- President and Chief Executive Officer

I think the main one to match our steel, that's 40% of our raw material exposure and then I think hot-rolled coil is a good indication. When it comes -- the next two ones are resins. So, yes, what we buy for plastic components and then the third component is textiles and there it's yarn, it's polyamide, polyester, nylon and so on. Those are the main commodities that we are exposed to.

Brian Johnson -- Barclays -- Analyst

Okay. And then finally in terms of cadence, is it fair to think that 4Q is typically a big step-up? Should we expect the same especially as you go through these commercial discussions for this year?

Fredrik Westin -- Chief Financial Officer

Can you explain that again. I didn't understand your question.

Brian Johnson -- Barclays -- Analyst

Dedicated to margin in the second half?

Mikael Bratt -- President and Chief Executive Officer

The seasonality of performance. I think, I mean the seasonality in our earnings in the year is what is always has been. So we don't see any changes there and of course, certain events like we have to live through here may affect the specific quarter, but seasonality is the same.

Brian Johnson -- Barclays -- Analyst

Okay, thank you.

Operator

And the next question comes from the line of Ryan Brinkman from JPMorgan. Please go ahead.

Ryan Brinkman -- JPMorgan -- Analyst

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 netted out very positively for them so far this year versus for suppliers, the impact is only negative, because there is not an offset to pricing from the lower production. I'm curious what impact, if any of this dynamic might be having on your conversations around commodity cost recoveries? Is the tone or tenure 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 US in June, for example, might have been up like 10.7% year-over-year. So curious what you're seeing there?

Fredrik Westin -- Chief Financial Officer

No, I think, I would like to refer to as was stated before here, I think let's call it success from our perspective here in those discussion is more depending on the nature of the raw material increases than anything else. So higher and longer, they are more relevant. They are in the customers' eyes, so to speak, and that's really what's [Indecipherable] that. Then of course the change, the difference here between OEM and supplier is because we are in different parts of the total value chain and also the timing of events here impacts that. But more depending on the nature of the raw material increase.

Ryan Brinkman -- JPMorgan -- Analyst

Appreciate that. And then just lastly, to follow-up on the comment during the prepared remarks that the semiconductor shortage situation had grown worse again in early July in North America and Europe, at least. I think there may have been in expectation earlier that semiconductor availability would just sort of continue to improve sequentially in a more or less linear fashion, particularly maybe short-term here including in July given the cycling past of that fire at the Renaissance 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?

Mikael Bratt -- President and Chief Executive Officer

I think as a net, I would say net indication, I would say it's gradually improving. But then of course it looks a little bit different between the different customers here, how they have been hit so far, but also how the near-term looks like. And it can depend also on who their supplier are in their end, but also the uniqueness of the specific semiconductor. I mean if you have a standard semiconductor or a higher degree of semiconductor -- standard semiconductors, you have -- had more flexibility to find alternative solutions, then if you have a very special designed semiconductors. So that's the material impact on a specific customer. So we haven't seen this, let's call it linear stabilization yet, when we look at the aggregated picture. But...

Ryan Brinkman -- JPMorgan -- Analyst

Very helpful. Thank you.

Mikael Bratt -- President and Chief Executive Officer

But going forward that's the indication.

Ryan Brinkman -- JPMorgan -- Analyst

Thank you.

Operator

Next question comes from the line of Erik Golrang from SEB. Please go ahead.

Erik Golrang -- SEB -- Analyst

Thanks. I had a few 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? Then on the second quarter if you could say something more on orders. You say you are pleased that we can't do much with that. So could you put that in some kind of perspective would be very helpful. And then the third question, on the key model launches you highlight in the presentation is, is it just a coincidence there that there are two Chinese models where you seem to have a quite extensive scope of supply? Is there any kind of trend or just just a coincidence? Thanks.

Mikael Bratt -- President and Chief Executive Officer

So 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.

Erik Golrang -- SEB -- Analyst

Thank you.

Mikael Bratt -- President and Chief Executive Officer

And on the order intake here, as you know, we don't give any figures throughout the year. We also give a figure at the end of the year when we present the Q4 earnings here, but our commentary here should seem -- 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 and that support our journey forward here. So, that is how you should interpret that comment there.

And then on the model side here. I think, I mean in this particular quarter, you could say it's a coincidence that this happens to be concentrated here, but I would say on a general note, I think we have a good presence and wins within the EUV segment, and also in China, where you see a number of new comers, new start-ups and also the established makes quickly coming out with EV models that we have a good representation to as well. So we have a strong position in China altogether, I would say.

Erik Golrang -- SEB -- Analyst

Thank you.

Mikael Bratt -- President and Chief Executive Officer

That's presented now. Thank you.

Operator

And the next question comes from the line of George Galliers from Goldman Sachs. Please go ahead.

George Galliers -- Goldman Sachs -- Analyst

Yes, thank you for taking my question. You mentioned on the call that you had limited ability to use furloughing at the 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 this semiconductor challenges. And assuming that the semiconductor volatility continues, are you able to take any measures to reduce the financial impact? For example, is there any scope for increased flexibility on the furloughing or could you look to build and hold inventory, and then adjust production subsequently when you have provided adequate notice to furlough? Thank you.

Mikael Bratt -- President and Chief Executive Officer

I think on the furlough side, the thought there and say that I mean, it's not really the availability of that tool, if we call it that, that is the problem here. It's really the volatility that makes it difficult for us to really decide to take out. Because if we normally are around 5% in terms of plus-minus from the original call-off from the customers we have today seen up to 50%. So we can't assume a 50% reduction in take-outs and take-out resources, because if that's not true, we would be short of staff and can't deliver. So we need to staff ourselves and have capacity to meet the regional call-off levels. And then if we see reduction there, we of course sitting there with our costs. So it's more a question of having the predictability of the volumes and adjust the capacity accordingly. That is the hindering point. If we just had that visibility, of course we could use in many cases the flexibility that we have, but it is that we don't have the visibility that is the problem.

Anders Trapp -- Vice President, Investor Relations

And even to add on that, I mean it's as we described the volatility in the call-offs, they have even fluctuated, week-to-week. So they might be pulled down one week and then they increase the next week. So it's been very, very difficult to balance and manage capacity due to that. And then also as we -- our plants supply into multiple OEMs, and 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. So there is a complexity there that we need to manage that -- has some implications on how quickly we can reduce the costs. But of course one key is also then to have the right cost discipline and I think we have proven that here in the second quarter, but also how we've come out of the pandemic. As of last year and of course that also remains a large focus for us here going forward.

George Galliers -- Goldman Sachs -- Analyst

Understood. Thank you.

Operator

And the next question comes from the line of Sascha Gommel from Jefferies. Please go ahead.

Sascha Gommel -- Jefferies -- Analyst

Hi, good afternoon, good morning everyone. Thanks for taking my questions. The first one is around working capital, and I was wondering if you can talk a little bit about inventories because they look fairly high, how we should think about them in light of the production disruptions and then going forward, when production normalizes, do inventories also come down. And then have a second one on working capital. How much was the Toyota cash out?

Fredrik Westin -- Chief Financial Officer

Yes, sure. So on working capital as we mentioned, there were a couple of items outside of what we call trade working capital, so that the three core components receivables, inventory, and then payables that had a major impact, the Prius recall was the largest of those. And I think if you look at our 10-Q, the number we mentioned there in terms of the impact is also an indication for the cash outflow. But then also we've had some tax related -- cash impact from tax-related items which was to magnitude of $35 million combined. We also had the restructuring outflow of around $6 million. So those were some unusual items here during the quarter that impacted working capital negatively.

Then specific on inventory, it has been due to the call-off volatility that we described. But then, on top of that also then the supply chain challenges that we have -- that we are facing with our supply base has led to pretty significant increase in inventories above our normal designed levels. And if you look at our days of inventory outstanding, you can see that there is quite a large increase in that during the second quarter. We do expect that as now 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.

Sascha Gommel -- Jefferies -- Analyst

Okay, that's helpful. And then my second question is just quickly on the guidance reconciliation, how to think about the guidance cuts from your earlier guidance. If we go to the midpoint, it's kind of topline minus 2% and then we, if we have a 20% drop through and to 40 bps of raw mats we get right to your mid-point of the new guidance in terms of margin. Is that how we should think about it or is a too simplistic and there are more moving parts than just a bit of topline gone and a bit more raw mats.

Fredrik Westin -- Chief Financial Officer

No, those are the main components. The only thing I would add to that, is this, certainty around the call-of volatility. And then also that we have some headwinds that we are able to offset those headwinds than with an improved sales mix and cost adjustments. But the main components you've mentioned.

Sascha Gommel -- Jefferies -- Analyst

All right. I appreciate it. Thank you very much.

Operator

And the next question comes from the line of Antoine Bregeaut from Exane. Please go ahead.

Antoine Bregeaut -- Exane -- Analyst

Hi everyone. Thank you for taking the question. Very quickly. Just a question on the nature of those core loss. Are there mainly delays in your production or have you also seen some cancellations? And then my second question is on -- the second question is on the bridge. How should we think about SG&A and RD&E impact into Q3, Q4 after your headwind this quarter? Thank you.

Mikael Bratt -- President and Chief Executive Officer

No, I think on the call-offs, I can't say -- I mean, we don't see really cancellations here. I think it's more delays, you could say in the production schedules from the OEMs. I think the signal is that if they can, they would catch up, but then of course, the longer this continues it will be more difficult to do it. But no pure cancellation. As I said, I mean there is, what we can -- actually very strong demand and consumer demand here. So what can be produced will be sold. And as you have seen on the inventory levels, I mean US are at record low levels. I mean it's 1.4 million vehicles in inventory, compared to 3.5 million to 4 million as more of a normal level and also relatively low in Europe, especially on premium vehicles. So there is really a strong underlying demand. So it's once again a delay here as a result of the supply disruptions.

Fredrik Westin -- Chief Financial Officer

On the SG&A and RD&E levels, in our guidance, we are detailing that we believe that where we expect or do you need to be around 4.5% of sales. So I think that's -- that gives an indication of where it's expected to be in the second half. And then SG&A, as I said we will be very cost disciplined here. You see that there is only a marginal increase from Q1 to Q2. So we will remain at discipline and have a very strong focus also on the SG&A development.

Operator

Okay. I will hand it back to you Mikael after this.

Mikael Bratt -- President and Chief Executive Officer

Thank you Atnas. Before we end today's call, I would like to acknowledge that we are still in the 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 toward our medium term targets and our opportunities for shareholder value creation. Our third quarter earnings call is scheduled for Friday, October 22, 2021. Thank you everyone for participating on today's call. We sincerely appreciate your continued interest in Autoliv. Until next time, stay safe.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Anders Trapp -- Vice President, Investor Relations

Mikael Bratt -- President and Chief Executive Officer

Fredrik Westin -- Chief Financial Officer

Emmanuel Rosner -- Deutsche Bank -- Analyst

Mattias Holmberg -- DNB -- Analyst

Chris McNally -- Evercore -- Analyst

Hampus Engellau -- Handelsbanken -- Analyst

Joseph Spak -- RBC Capital Markets -- Analyst

Rod Lache -- Wolfe Research -- Analyst

Brian Johnson -- Barclays -- Analyst

Ryan Brinkman -- JPMorgan -- Analyst

Erik Golrang -- SEB -- Analyst

George Galliers -- Goldman Sachs -- Analyst

Sascha Gommel -- Jefferies -- Analyst

Antoine Bregeaut -- Exane -- Analyst

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