Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Autoliv First Quarter Financial Results 2019. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must also advise you that this conference is being recorded today, Friday, the 20 6th April, 2019.
And I would now like to hand the conference over to your speaker today, Anders Trapp, Vice President, Investor Relations. Please go ahead.
Thank you, Sara. Welcome, everyone, to our Q1 2019 earnings presentation. Here in Stockholm, we have our President and CEO, Mikael Dratt our Interim Chief Financial Officer, Christian Hanke and myself, Anders Dratt, Vice President of Investor Relations. During today's earnings call, our CEO will provide a brief overview of our Q1 results as well as provide an update on our general business and market conditions. Following Michael, our Interim CFO, Christian Hanke, will provide further details and commentary around the Q1 'nineteen financial results and outlook for full year 'nineteen.
At the end of our presentation, we will remain available to respond to your questions. And as usual, the slides are available through a link on the homepage of our corporate website. Turning to the next page. We have the Safe Harbor statement, which is an integrated part of this presentation and includes the Q and A that follows. During the presentation, we will reference some non U.
S. GAAP measures. The reconciliations of historical U. S. GAAP to non U.
S. GAAP measures are disclosed in our quarterly press release and the 10 Q that will be filed with the SEC. All figures in this presentation refers to continuing operations, I. E, excluding discontinued operations. Lastly, I should mention that this call is intended to conclude at 3 p.
M. Central European Time, so please follow a limit of 2 questions per person. I will now turn it over to our CEO, Nick Bratt.
Thank you. Thank you, Anders. Looking now into the Q1 'nineteen highlights on the next slide. Overall, our results were in line with our expectations despite the effects of the labor conflict in Mexico. Our people did a good job managing the largest quarterly light vehicle market decline in the past decade.
The sharp decline in light vehicle production was more than offset by continued growth from recent launches. We were able to outpace global light vehicle production by almost 9 percentage points. However, we have experienced continued headwinds from raw material pricing, which together with a lower capacity utilization in some regions, launch related costs significantly more than offset the operating leverage on the sales growth. We saw a clear improvement in launch related costs compared to the Q4 of 2018, although we still expect it will take a few more quarters to be back at normal launch cost levels. The market driven decline in running production and the ramp up the many new launches created a challenging situation for the organization.
It needs to accelerate and break at the same time. Additionally, new launches as is normal have lower profitability until production is fully ramped up to the designed line capacity. We have implemented a number of actions to mitigate the effect from the lower light vehicle production. We had a solid operating cash flow in the quarter, enabling us to exceed last year's level for continuing operations. Also, although I'm pleased with the social unrest in Mexico is closed, I am never satisfied when we have disturbances and cost increases for us and our customers.
The strike was not directed towards Autoliv as a company. It involved 59,000 people in the city of Matamoros. The strike started with workers in the factories of 45 different companies and eventually extended to 100 companies. Our order intake share remains at a good level, while OEM order activity was relatively modest in the quarter. Looking now at the recap of the Q1 financial performance on the next slide.
Executing on the strong order book, this quarter marks the 4th consecutive quarter of substantially higher organic growth compared to the market. Our consolidated net sales declined by 3% compared to the same quarter of 2018, impacted by weaker currencies, with organic sales increases by close to 2% despite the global light vehicle production falling by close to 7%. Adjusted operating income, excluding costs for capacity alignments and antitrust related matters, decreased by around 32% from $245,000,000 to $166,000,000 impacted by the strike in Matamoros, elevated launch related costs, uneven utilization of assets and raw material pricing. The adjusted operating margin decreased by 320 basis points to 7.7% compared to the same quarter of 2018. Excluding the temporary effects from the Matamoros conflict, we would have been 100 basis points higher or 1 percentage point higher.
EPS diluted decreased by $0.55 compared to the same quarter of 2018, almost entirely as a result of lowering operating income, partly offset by lower effects from tax items. Looking now at the market development. The negative trend that that started around 9 months ago has accelerated in the 1st 3 months of this year. In the Q1 20 19, global light vehicle production is estimated to have fallen by close to 7%, according to ISS, the worst Q1 performance since the financial crisis in 2,008, 2009. China's new light vehicle market continued to decline in March, but at a slower rate than recent months.
Wholesales dropped 6.9% after slumping 17% in the 1st 2 months. However, the decrease in new vehicle sales at retail in the Q1 was much milder, indicating a destocking at dealers. U. S. Light vehicle sales surged in March to a SAAR of 17.5%, strongly rebounding from sluggish results in the 2 months of the year in the 1st 2 months of the year.
Inventory increased by 260,000 units during the quarter of to 4,100,000. However, we believe that the inventory is not enough above the estimated optimum level that it should be considered a problem. As a result, nice vehicle production in North America decreased by 2.6%, which was 3 percentage points lower than the original forecast at the beginning of the quarter. European light vehicle production declined by 4.9% in the quarter, continuing the downward trend that started with the introduction of WLTP in September. The decline was concentrated West European market that dropped 7%, while Eastern European production decreased by 0.6%.
Looking to our sales growth on the next slide. Despite the largest quarterly decline in LVP the financial crisis, our growth momentum continued in the Q1. The growth was mainly driven by the large number of product launches in North America, but also supported by positive development in the rest of Asia, especially in India and Thailand. Consolidated net sales in the Q1 declined year over year by 3% to SEK 2,200,000,000 with an organic growth of 2%, offset by negative currency translation effects of 5%. In the quarter, North America contributed with $79,000,000 to the organic growth.
The sales were driven by previous quarters' product launches, mainly with FCA, Honda and Nissan. The organic growth of close to 13% was 15 percentage points higher than the light vehicle production growth. Our sales in South America increased by 16% organically despite the weak LVP. In Europe, we have been affected by weaker demand from a number of OEMs despite the negative mix with important West European market declining more than European East European market, our sales decline was in line with the region's LVP. 1 of the key sales driver in the quarter was steering wheels to Daimler, where we replaced another supplier on several running car models.
Sales in China declined organically by 4%, outperforming light vehicle production by around 10 percentage points. The lower sales was mainly a result of domestic OEMs falling 16% organically, which is basically in line with their LVP. This was partly offset by higher sales to global OEMs, largely due to stronger performance with Honda and VW. Sales in Rest of Asia outgrow light vehicle production by more than 6 percentage points. The growth was mainly driven by sales to Japanese OEMs such as Toyota, Suzuki and Honda.
Looking to our key model launches in Q1 '19 on the next slide. Here you see some of the key models which have been launched during the Q1. We continue to have a high level of launch activities to support new vehicles to be introduced over the coming quarters. These models are well distributed across the globe. We are pleased to show new model, the Range Rover Evoque with pedestrian production airbags.
I want also to especially mention the Toyota Corolla as it is truly global model, which will be built in North America, Europe, China, and we have increased content in this generation. I will now hand over to our interim CFO, Christian Hanke, to speak to the financials.
Thank you, Mikael. Looking now to our financials on the next page. We have our key figures for the Q1, including negative currency translation effects of around $106,000,000 and organic sales growth of $39,000,000 consolidated net sales reached $2,200,000,000 Our gross margin declined year on year. The net operating leverage on the higher sales was more than offset by higher commodity costs and costs related to the preparation for upcoming launches well as ramp up of recent launches. Additionally, we experienced lower capacity utilization in most regions due to the sharp drop in light vehicle production and temporary costs related to the strike in Matamoros.
Our adjusted operating margin of 7.7% declined year on year, mainly due to the lower gross profit and a slightly higher RD and E and SG and A in relation to sales, although they were roughly unchanged in absolute dollar amounts. Our reported EPS decreased by $0.55 mainly as a result of lower operating income. Our adjusted return on capital employed and return on equity were 19% 22%, respectively. Our dividend of $0.62 was $0.02 higher than a year earlier. Looking now on the next slide.
Our adjusted operating margin of 7.7 percent was 320 bps lower year on year. As illustrated by the chart, the adjusted operating margin was impacted by higher raw material costs of 80 bps, 30 bps from SG and A and RD and E, slightly offset by 25 bps from positive FX effects. In addition, we had temporary costs for the social unrest in Matamoros, Mexico. Excluding this cost, our adjusted operating margin would have been 100 bps higher than the 7.7%. The negative leverage on the higher sales was as a result of higher RD and E expenses, other launch related costs and underutilized capacity of our supply chain, production and logistics systems.
The 10 bps higher RD and E was driven by the high number of product launches, especially in China. In the quarter, launches in China alone rose by more than 80%. The profitability development of our products usually follow a typical generic product life cycle, as illustrated on the slide on the right hand of the corner. And I will try to explain in generic terms the principles behind how profitability over a life cycle works out. So please bear with me here for a few moments.
During the development phase, costs will be expensed, driving RD and E expenses without additional income. We also invest in new production equipment at this stage. In the introduction or launch phase, revenue is not enough to cover all of the additional expenditure to launch products. During the growth or ramp up phase, volumes increase and productivity improves, results typically moves from loss to profit, and we start to recover engineering and launch costs. In this phase, continuous improvement activities are implemented to improve productivity and profitability further.
So continuing with the quarter, the sharp drop in LVP has mainly affected our more mature products, which with their generally higher profitability, and therefore, there is a greater impact from products that are in the earlier phases of their product life cycle. This has subsequently resulted in a period where with the product mix carrying a lower profitability. Despite this negative mix development, our Q1 performance was in line with our expectations, supporting our full year indication. Looking more into our cash flow on the next slide. Operating cash flow was strong in the quarter and amounted to 150 $4,000,000 almost twice the level achieved for continuing operations in the same quarter of 2018.
Capital expenditures amounted to $108,000,000 in the Q1, which is about 5% in relation to sales. In the Q1 of 2018, capital expenditures for continuing operations were $110,000,000 or 4.9 sales 4.9 percent of sales. For the full year 2019, we expect capital expenditures to decline in relation to sales as the ratio begins to normalize towards the historical range of 4% to 5%. Looking at our full year 2019, excluding any discrete items, we expect our operating cash flow for continuing operations to improve year on year. Looking now to our earnings per share.
On the next slide, we have the EPS development. Reported earnings per share declined by $0.55 to 1 point 2 7 dollars The main drivers behind the decrease are $0.65 from lower operating income and $0.05 from higher financial net, partly offset by lower tax and lower cost to capacity alignment and antitrust related matters. In Q1 2019, the adjusted earnings per share decreased by $0.63 to 1.20 dollars compared to $1.83 for the same period 1 year ago. Moving on to the balance sheet on the next slide. And as you know, we have a long history of a prudent financial policy.
Our balance sheet focus and shareholder friendly allocation policy remains unchanged. Autoliv's policy is to maintain a leverage ratio of around 1x net debt to EBITDA within the range of 0.5x to 1.5x. As of March 31, 2019, the company had a leverage ratio of 1.6x, 6x, which is 0.1x higher compared to December 31, 2018. The main reason for the increase is the lower EBITDA in the quarter. Our strong free cash flow generation should allow deleveraging and should allow continued returns to shareholders while providing flexibility.
We are aiming to be well within the target range by the end of the year 2019, despite the fine for the remaining portion of the ECA investigation that will be paid in the Q2. This excludes any other discrete items and other non foreseeable changes to our business. Looking at our market development for the rest of the year on the next slide. The outlook for major light vehicle markets has become increasingly more uncertain due to weaker consumer confidence, trade tariffs and regulatory changes. According to IHS, the U.
S. Market is seen as slightly down, while Europe and China are expected to stabilize from the recent volatility. Since January, IHS has reduced their full year 2019 vehicle production by 1,900,000 units to 90,400,000 or by 2 or a reduction by 2 percentage points. The WLTP impact in Europe has faded. However, we see an increasing risk for uncertainty among end consumers on what drivetrain technology to choose.
Corporate and fleet sales seem to be less affected. Other factors to watch are effects from Brexit and the new testing, RD and E, that will be mandatory from September 1. In China, IHS expects the softness to continue in the Q2, forecasting a decline about 3% in light vehicle production year over year. As inventory levels are relatively high and the recent trend in sales have not substantially improved, we believe there is some downside risk to this estimate. However, we have heard encouraging positive signals from a number of OEMs in China, pointing to a better second half of twenty nineteen.
Additionally, policymakers have outlined plans to implement more stimulus measures to boost the economy. Our base scenario for global light vehicle production in 2019 is in line with IHS' estimate of a decline of 1%. We expect to outgrow light vehicle production at the similar level as we did in 2018, which was almost 6 percentage points. Turning the page. We have summarized our full year 2019 and indications.
Despite the weaker than expected market development, higher cost for raw material and costs related to the Matamoros strike, our full year 2019 indication, excluding currency translation effects, remains unchanged since we last reported in January. Full year indications assumes mid April exchange rates prevail and excludes cost for capacity alignment and antitrust related matters. Our full year 2019 indication is for an organic sales growth of around 5% and a negative currency 2019. Our indication for the adjusted operating margin is around 10.5% for the full year. We expect the 2019 raw material cost increase to be at least as much as it was in 2018.
We anticipate the currency effect on the operating margin for 2019 to be neutral. The projected tax rate, excluding unusual items, is expected to be around 28% for the year. The projected operating cash flow, excluding any discrete item, is expected to improve compared to 2019. The projected capital expenditures in relation to sales full year 2019 is expected to decline compared to the 5.6 percent for continuing operations in 2018. The projected RD and E in relation to sales full year 2019 is expected to decline compared to the 4.8% for continuing operations in 2018.
We expect the leverage ratio to be well within our target range of 0.5x to 1.5x by the the year end 2019, excluding any unforeseen discrete items. I will now hand it back to Mikael for some closing remarks.
Thank you, Christian. Turning the page. We have the important 2019 focus areas on the slide here. And as you know, we always strive for improved products, services, processes and costs. These continuous improvements have been and remain key for Autoliv in improving profitability and winning new contracts.
The political uncertainty has been increasing. Volatile raw material prices, trade tariffs, Brexit, new emission regulations as well as more local issues such as increasing difficulties to pass the border between Mexico and the U. S. These developments lead to increased uncertainty. As a company, we are taking a proactive approach towards these geopolitical challenges.
We aim to address volume and cost challenges with cost reduction activities, including hiring freeze, reduction of temporary personnel and other cost measures. We have implemented actions to improve effectiveness of the product launches, which we already have led to significant improvement of which over the course of 2019, we expect will improve our product launch cost effectiveness further. In addition, as the number of launches are stabilizing at the new higher level, we believe we can gradually increase focus on productivity improvements through operational excellence, while our launch related costs gradually declined. In parallel, we are streamlining product design and engineering to speed up new launches and improve engineering efficiency. We are managing raw material cost increases by seeking various forms of compensation, reengineering our products and by other measures.
As light vehicle market may remain volatile, we will monitor and manage accordingly, while we never lose focus on saving more lives. Turning the page. Autoliv will host its next Capital Market Day for investors, analysts and financial journalists on November 19, 2019. The purpose of the event is to give an update on the strategy and development of the Autoliv Group and its worldwide operation. We are happy to invite you to our large hub in Salt Lake area, Utah, U.
S. A, where we have the world's largest inflator manufacturing facility as well as the complete chain of production from propellant to initiator, inflator and final assembly of airbag system as well as the seat belt system. Going forward, after our spin off of Veoneer, we have a solid foundation for continuous growth and an even stronger focus on creating shareholder value and saving more lives. Today, we'll give participants a more in-depth understanding of the our continuous improvement activities and our journey towards Industry 4.0. We will also demonstrate innovation in automotive safety as well as in adjacent product areas and discuss the road ahead beyond 20 20.
I hope to see all of you at our 2019 Capital Markets Day. And by that, I will now hand back to Anders.
Thank you, Michael. Turning the page. This concludes our formal comment for today's earnings call, and we would like to now open up the line for questions. So I now hand it back to you, Sarah.
Thank And your first question comes from the line of James Picariello from KeyBanc Capital. Please ask your question. Your line is now open.
Hey, good morning guys. Just trying to dig into the launch related costs in the quarter. Trying to get a sense for if you could quantify maybe what that looks like in the quarter and what your expectations are for the remainder of the year. It sounds like there's going to be some spillover for the next quarter or so. Just trying to get a bridge to the your full year framework and really digging in on the launch related stuff?
So as we have described earlier here, I mean, we saw elevated launch costs during 2018 here. And we have then indicated that it will take several quarters for us to get that back into the levels which it should be. And we also talked about the number of measurements that we took to make that happen and that we would see a gradual improvement during 2019. And what we're saying here now is that those measurements are biting and getting effects and seeing the effects to our bottom line. So we are tracking towards the expectation to see that gradually improve during 2019.
We haven't quantified it before. And of course, we can't quantify it in the and we won't quantify it here now in the quarter either. But the message here is really that that we are following our plans to resolve that situation.
Understood. I guess maybe asked another way. I know you don't you're not providing quarterly guidance, but can you just give us a sense maybe of the first half versus second half cadence to that gives you the confidence in the full year framework?
No. As we stated when we gave the guidance for the full year, we said that the first half of 'nineteen will be, let's call it, a tougher part of the year and then more improving part during the second half year. So in that sense, it is the back end of the year here where, I mean, the gradient of the improvements here will be seen. So I mean, we have said that around connected end to the light vehicle production development and, of course, our own North cost situation here. That also is gradually improving during the year.
Okay. And then just one on the recent announcement by the U. S. On airbag itself or just the ECU, just potentially require the replacement of the airbag itself or just the ECU? Just trying to get a sense for whether this could be an additional replacement opportunity for you?
We do not have any information about this. This is a specific question related to ZF, and it's the ECU component there that is related to. So it's a ZF specific question. So no, no, no, no, no, no. Thank you.
Thank you. And your next question comes from the line of Agnieszka Vilela from Nordea. Please ask your question. Your line is open.
Thank you. I have a question on your statement that Q1 result was in line with expectations. Do you mean your sales performance in the quarter? Or do you also mean the underlying EBIT result?
We also mean the underlying result here. So as we stated here, I mean, we saw a year here where the first part of the year is more challenging. And with that forecast we had leading up to the 10.5 percent EBIT margin adjusted EBIT margin, we are following that. And as we indicated here, we are in line or slightly better even if you considering the issue we have been here.
Okay. And the Mexico issue was known when you guided for the full year already? And also, what do you think about the kind of inflationary pressures for the labor in Mexico going forward?
The Mexico was not known for us or for EndoHatt at the time when we guided for the full year. So that was not including our real plans here. This was an isolated situation with the social arrest in the Matamoros area, And we have no indications or signals or thinking around that it should mean inflationary pressure on Mexico in large. So this is an isolated question.
But sorry, but the minimum salaries in Mexico are rising, and you have 20% of your headcount in Mexico. Isn't it affecting you?
No. I think when it comes to the minimum wages, we were on the right side of that from the beginning. So that had a very limited impact to us as we were on the right side to seek on that. Then this was then on top of that, and it was, as I said, a social arrest in that particular area. So I would say that what you're referring to here as minimum wage increases, that's already managed and taken care of in our own books here, so
to speak. And your next question comes from the line of Joe Spak from RBC Capital Markets. Please ask your question. Your line is open.
Hi. This is actually Garrett on for Joe. Can you just looking at your guidance, can you just walk through the factors that give you confidence in hitting the 10.5% margin target for the year after the 7.7% in 1Q? I mean, it seems like you need to average kind of in the mid-eleven percent range for the rest of the year, which it all seemed like record quarters. So just walk us through the confidence hitting that and then what's driving the implied improvement?
Yes. I think, I mean, first of all, as I said here, I mean, we see that with the plan we had and the financial plan we had for the full year, we are starting in the Q1 in a good way with the underlying performance here, and we are in line or slightly better than what we saw there, even considering then the additional headwinds we saw in the Q1. So I think we the organization here managed the sharp decline in a very good way. And I would say also the recovery work around the Matamoros situation, even as we see here came at the cost. So that give us confidence around the underlying performance.
Then as we said here, I mean, it is built on improving second half here from the beginning, and it's also related to the light vehicle production. We are not changing our projection there. I mean we had minus 1% light vehicle production already when we guided for the full year, and it still stands. And we also now see that ISS have come in and show also minus 1%. So that is also according to plan.
Then our also improvements, as I said, in the elevated launch cost is giving results. And also there, we can see that is fighting and giving confidence for the rest of the year based on what we saw in the Q1. But of course, I mean, the bar has raised with this additional headwind, but we believe with the actions that we are taking now on a group level here on everything from hiring freeze to reviewing all types of costs and spending and projects here to mitigate that, let's call it, additional headwind here. So we are working on it and according to our plans.
Okay, that's helpful. And then just on the light vehicle production declines, kind of having a disproportionately negative impact on the mature platforms. I mean, the outlook for 2Q light vehicle production is also challenging. So won't that kind of that margin impact repeat in 2Q?
Yes. I think it is, of course, the mix of that is difficult for us to see exactly at this point. But as I said, we indicated already in our original plan here and our guidance that Q1 and Q2 would be challenging and that we see now also in especially in China. But when it comes to the overall light vehicle production on an aggregate at a global level, I think we have no reason to believe that it should be worse than what we have said here at this point in time. And also, the positive signals we get from some of our local OEMs in China indicating also a better second half of 'nineteen there.
Okay. Thanks so much.
Yes. Thank you.
Thank you. And your next question comes from the line of Andrea Abouchatra from 1 Investments. Please ask your question. Your line is open.
Yes. Hi. Thank you for taking the question. I have a couple. First, when looking at your moving parts on margins and the current mix, Do you need car production to return positive growth to see the sort of net benefit in profitability given the unfavorable mix that you have between the established business and the new launches?
This is the first one.
So our guidance is based on the light vehicle production I referred to here and which we have set to minus 1 for the full year. So that is the baseline for our assumptions here. So no, this not needs to be improved from 2018.
Okay. Okay. Then thanks for the Slide 9. It's very useful to understand the path for the new product cycle. So just wondering what is the timing for the introduction sort of lead time for the new launches to reach at least group profitability, if you can give us a sense what is the how long is the introduction phase on average?
I think, I mean, as a generic description of how long it takes to get the program up to the expected performance levels, I would say, it's a 2, 3 year time lag until you get to, let's call it, the peak level or the expected levels there. So you have a ramp up period that is relatively long. And the challenge for us now, of course, is this situation where we have a sharp decline of the running portfolio as a consequence of the light vehicle production. At the same time, we have exceptionally high launch activities here. So the portion of the portfolio there and the mix effect of that is, of course, impacting us here.
Okay. If I may just
It's not between the quarters here. It's the ramp up of the
capacity utilization in Q1 or at least how much lower was it year over year?
Yes. We don't have as you know, our production is and assembly lines is very much dedicated lines to respective programs. So in order to give a meaningful number there, we don't you need to look at each line to get that. So it's not on the aggregate level we're looking at that. We are, of course, measuring OE and etcetera, etcetera per line and in the respective plants depending on what they are doing.
There was this big difference in our different processes this year. So unfortunately, I can't give you a total number for the company in that respect. It needs to be more on a lower level, so to speak.
Okay. Thanks a lot.
And of course, the
7% break, it has an impact.
Okay. Thanks a lot for the answers.
Thank you.
Thank you. And your next question comes from the line of Erik Paulsen from Pareto Securities. Please ask your question. Your line is open.
Yes, hello. This is Erik. I was wondering about the pedestrian protection airbag that you now launched for the Range Rover Evoque here. What is your market expectations going forward for this type of product? And do you think it will be a standard?
And if it will be a standard, how long will this take in the different geographic markets, I'd say?
The pedestrian airbag is something that we have had and worked with for quite some time. And of course, we see a gradual increase, not a strong increase at this point in time, but the interest is increasing. I mean the majority of not the majority, but half of the fatalities on the roads is linked to what we call then the vulnerable road users, where the airbags comes into play. And we also see that with electrical vehicles where it's not easy to discover them as they are very silent. There could be incident there is incidents also where the vulnerable road users are exposed.
And then we see also an increasing interest from those types of vehicles. So gradually, we see the increase of interest here. I wouldn't like to say that it's a meaningful ramp up here in the short term. But in the medium term, we see good opportunities here.
Okay, great. Thank you very much.
Thank
you. We will now take our next question. It comes from the line of Cyprien Wong from Bernstein. Please ask your question. Your line is now open.
Hi, there. Thanks for taking my questions. I had a couple with regards to your discussions with your customers. Firstly, on pricing.
You're all breaking up, Daniel.
Hi, there. Can you hear me?
Yes, I hear you.
Sorry. I've got a couple of questions with regards to discussions with your customers. And the first one on pricing. Are you seeing any higher price pressure than normal or any higher than normal price reduction requests? Are you still in that 2% to 3% range that you give?
No, I can't say that I see higher pressure. I would say there is it's always a very competitive business and has been. And so but we are still within that range in 2% to 4%. So no changes to that.
Okay. And the second one on raw materials. You said you're negotiating reimbursements with your customers. At what level of reimbursement are you assuming in your full year guidance for the raw material headwinds?
We I mean, first of all, we don't have any automatic pass through on raw materials here. It's always a commercial discussion. And we can't, I mean, have a figure for you here to say how successful or unsuccessful we'll be in that dialogue. So that's, of course, a part of activities we have here when it comes to managing the raw material as such. I mean, it's everything working with our suppliers to see how we can control it and then also working with our customers to see how we can offset it.
And it depends, of course, also how the raw material increase looks like, if it's ordinary fluctuations or if there is specific situations that cause for compensation through the whole value chain here. So that's a constant work ongoing here. But what we have said here is that, I mean, the 0.4 I mean, the 40 basis points raw material increases we have indicated for 2019 year over year is, as a result, that is most likely to increase with another 20 basis points here. So we're talking 60 basis points for the full year, and that's the net effect that we are seeing there.
Your next question comes from the line of Julian Radlinger from UBS.
2 from my side. So the first one, just a clarification, whether you're including the Mexican labor issues that you've experienced in Q1 in your full year guidance. And if you are including them, is it right to say that you just lost around $20,000,000 of EBIT for the full year in Q1 that you think you can get back in the remainder of the year and because of that, you're maintaining the 10.5% margin guidance? Or how should we understand it?
Well, it was not included in the original guidance where we gave it in guidance a confirmation of the guidance of the 10.5 now. So we expect to be able to offset that through our work here that we're doing for the remainder of the year. So that's where we are.
Okay. But could I say that you've implicitly gotten more optimistic about the cost reductions or efficiency improvements and so forth you think can achieve in the remainder of the year versus 2 months ago or 3 months ago?
I would refrain from saying more optimistic or less optimistic. I just can conclude that we are tracking according to our own plans here towards the 10.5%. And with the Matamoros situation, we are saying that we believe that we will be able to and that we should be able to manage that as a part of the work that we're doing remainder of the year here. And of course, we got the bar has increased, but believe it's doable.
Okay. And then my second question is regarding the 135 bps operational headwinds that you show in your operating margin bridge. I'm a little bit surprised about that because in Q3 and Q4, mature markets like Western Europe were also down quite substantially and yet the operating headwind part of your EBIT bridge wasn't as negative, not even close to as negative as it was now. And on top of that, now you're saying that launch costs were actually less of a headwind in the bridge versus Q2, for instance. So can you just explain what was different about Q1 now, the headwind from these mature platforms or in these mature markets compared to Q3 and Q4?
I think I mean, if you look at the sequential development here from Q4 to Q1, What is happening here also is that, I mean, you have the seasonality effects here. I mean, Q4 is a strong quarter when it comes to engineering income. So you get some positive effects from that. And also in the numbers you see here for Q1, we have the Matamoros, which is 1 percentage unit included there. So engineering income at Matamoros alone is 200 basis points.
And then you have the ordinary seasonality between the quarters here where Q1 is weaker quarter. So you have to consider those factors also when you look at the different quarters in the year.
Okay. I'm honestly a little confused about that because the bridge is a year on year bridge, not a quarter on quarter bridge.
Yes. But your question was in relation to Q3 and Q4. So that's why I thought you were talking about that reference. Because if you look at year over year, then I think it is the fact that we have described here, the different components here. We have the raw material, 80 basis points.
We have the Matamoros, 100 basis points, and you have then the operational headwinds with 140 basis points, where, of course, the loan ramp up portion of the portfolio is even higher this year than last year. So the portfolio mix impact becomes stronger the more we ramp up new programs at the same time the light vehicle production of the running portfolio is coming down.
Okay. Yes. Okay. That makes more sense. Okay, perfect.
Thank you very much.
Thank you.
Thank you. And your next question comes from the line of Erik Golrang from SEB.
I have two questions. The first one is on the organic growth guidance for the full year. And should we read it as, I guess, for the second half, it's primarily based on the IHS on the underlying market. But for the Q2, it's sort of a blend of your own call offs and the IHS number, given that you say there's downside pressure to IHS? So is it a mix more or less?
Yes. You could say that. And as we have said before here, I mean, when we judged the first half of the year, we saw a little bit weaker market than what ISLs had at the time. And what have happened since our Q4 earnings call is that ISF have now come to where we were, meaning 1 minus 1% for the full year. So we start to correlate that.
But your own sort of input limits itself, I guess, to the near term. So for the second half, it's all I have for that. Yes.
So the second half is fully ISN,
yes. And then on the second question is on the raw material side, 80 bps headwind in Q1. Did I hear correct that you expected 60 bps headwind for the full year?
For the full year, yes. That's correct.
Okay. And that's up from previous, right? Was that the case previous year to up?
Yes, yes. Because before, we expected 40 basis points up from 'eighteen to 'nineteen. Now we're saying those 40 to 60.
Okay. So that really comes. You've had the headwind both from the Mexico issues and additional raw mat pressure, but you're still sticking to that full year guidance. So there's I guess this is a repeat of previously asked question, but there's quite significant room for improvement there that you've now been able to identify.
Yes. So I mean, the bar has increased for sure. But as I said, I mean, with what we see in the Q1 in terms of our underlying performance, we and in relation to our own forecast there, I mean, we have stopped good in the Q1 here.
Here. Thank you.
Thank you
very much.
Thank you. And your last question at the moment comes from the line of Brian Johnson from Barclays.
This is Steven Heppel on for Brian. Just a quick question around the temporary personnel cuts that you called out. It sounds like that could be one of the key drivers around the operational improvement or margin improvement costs that some of these headwinds have been discussed. Just wondering
if you
Yes. Just looking at the temporary personnel cuts that you called out, just wondering if you can give us some color as to the regions and product areas that where you're making the specific cuts. It sounds like this is one of the key areas that is helping to offset some of the operational headwinds you saw in Mexico in 1Q along with the raw material headwinds?
No, I mean, we're assessing that plant by plant, function by function, where we need to do adjustments and where we can take out temporary personnel, etcetera. So I would say it's not cheese slicer here. It's really where we have the opportunities in different areas. What we have done, though, compared to, I would say, ordinary course of business here is that we are taking a more group view on activities there and tracking the progression on the activities connected to that.
Okay. Would you I mean, would you say that's the key driver of the kind of margin offset from the headwinds related to higher raw mats in 1Q and the Mexico issue? Or is there other key drivers outside of that?
There is, of course, other activities also. I mean, I think it's a range of activities you need to do this. I mean, first of all, it is to do what we have described here to make sure that the launch cost is completely gone and that we get the productivities where it should be. And we are looking at discretionary spending. We're reviewing our different CapEx projects.
We are looking at the staffing situation, as we may have mentioned, etcetera, etcetera. So it's an array of different initiatives and activities.
Okay. Thanks for taking the question.
Thank you.
Thank you. And your next question comes from the line of Hampus Engellau from Handelsbanken. Please ask your
Two quick questions from me. First, if you could comment on the market share in order intake during the quarter. And in that, if it's new OEMs or if it's already won OEMs that are adding more models to your order that is driving market share currently? 2nd question is if you could make maybe update us on this electronics mechatronics business that you are setting up and what that is targeting? Those are my two questions.
Thanks.
Yes. Thank you, Anders. On the new order intake side, we don't give number percentage more than for the full year and once a year. But as we stated here in the report is that it continued on a good level also in the Q1 here. And it is several OEMs making up the total order intake here.
And I would say we have also on a global perspective a good distribution there. So it's not only in one region either here. So I would say in terms of distribution of orders, it's the normal pattern, so nothing particular there. When it comes to the electrical and mechatronic activities, it's a part of, you could say, our tech centers and our RD and E capabilities here to meet the customer demands when it comes to, let's call it, the electrification of our type of products. So
if you look
at the steering wheels with HMI features, that needs to be there. It is also in seatbelts and airbags, communication with the rest of the vehicles, etcetera. There is a lot of opportunities for us to have, I would say, more sophisticated and advanced product also as the vehicle in itself allows those possibilities here. So that buildup is also going on according to plan here in certain parts of the world where we have the focus for this.
Is there any overlap with what Veoneer is doing in the business you're setting up?
No. This is absolutely not overlapping, and it's not the type of either products or communication that they are working with. So it's I would say our portion here is what you see in many other types of areas where the products have the capabilities of communicating with I mean, through the new technology that is coming. So it's more to create the interfaces here.
And your last question comes from the line of Alexandre Raverdi from Kepler.
Yes. Hi. Thank you for taking my question. I just had one last, please. On RD testing, what do you hear from your customers?
Do you feel that there will be some of disruption in the production? Or do you feel that they are much better prepared than last year?
I think I mean, it's difficult for us to have an insight in it more than what the customers are telling us. And from their side, we don't see any disruption here. But of course, why do we re listing it here? Because that's something, of course, that we need to keep an eye on. So we follow the development there.
It's less of a rigid process than WLTP was. So I think there is a better chance to have a smoother introduction of this new testing here. So but we need to keep it under radar screen here. That's the Okay. Thank you.
Thank you.
Thank you. And
Thank you very much, Sarah. And before we then end today's call, I would like to say that we will continue to execute on our growing business volumes and new opportunities with a never ending focus on quality and operational excellence. Also, I should mention that our Q2 earnings call is scheduled for Friday, July 19, 2019. And once again, thank you to everyone for participating at today's call. We sincerely appreciate your continued interest in Autoliv, and hope to have you on the next call.
Goodbye, and wish you all a nice weekend.
That does conclude your conference for today. Thank you, everyone, for participating. You may now disconnect.