Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Q4 2018 Autoliv Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by question and answer session, at which time, if you wish to ask a question, you will need to press star and one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today on Tuesday, January 29th 2019. On the call with you today are the VP Investor Relations, Anders Trapp, President and CEO, Mikael Bratt, and Group CFO, Mats Backman. I would now like to hand the call over to your first speaker, Anders Trapp. Please go ahead, sir.
Thank you, Alice. Welcome everyone to our Fourth Quarter 2018 Earnings Presentation. As Alice said, here in Stockholm, we have our President and CEO, Mikael Bratt, our CFO, Mats Backman, and myself, Anders Trapp, VP Investor Relations. During today's earnings call, our CEO will provide a brief overview of our fourth quarter and full year 2018 results, as well as provide an update on our general business, market conditions, and targets. Following Mikael, our CFO, Mats Backman, will provide further details and commentary around the Q4 2018 and full year 2018 financial results and the outlook for full year 2019. 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 it includes the Q&A that follows. The results herein present the performance of Autoliv, giving effect to the Veoneer spin-off. Historical financial results of Veoneer are reflected as discontinued operations, with the exception of cash flows, which up until Q2 2018 are presented on a consolidated basis of both continuing and discontinued operations. 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-K that will be filed with the SEC. Lastly, I should mention that this call is intended to conclude at 3:00 P.M. Central European Time. Please follow a limit of two questions per person. I will now turn it over to our CEO, Mikael Bratt.
Thank you, Anders. Looking now into the Q4 2018 highlights on the next slide. First, I would like to say that I'm pleased with our sales growth and cash flow despite the increasingly challenging market conditions we faced in the second half of the year. I'm also pleased with the order intake while our profitability still needs to improve. I would like to acknowledge and offer my sincere thank you to the entire Autoliv team for delivering a quarter of strong growth. The team is fully focused on delivering increasing value to us stakeholders through our focus on quality and operational excellence. 2018 was an eventful year for our company. In July, we spun off Veoneer, creating a more focused and flexible Autoliv to meet the opportunities and challenges in our industry. Our new management team is off to a good start.
Some of the team members are new in their executive management position, but all of them have extensive experience in the automotive industry and with Autoliv. In the second half of the year, the industry faced substantial reductions in volumes, especially in Europe, impacted by WLTP and in China, due to lower demand for new vehicles. Thanks to our large number of product launches, I'm happy to be able to say that we outpaced global light vehicle production significantly with an accelerating rate towards the end of the year. I'm also very pleased to report that our order intake continued on a high level in 2018, supporting our growth opportunities for the long term. Looking now at our updated 2020 targets on the next slide. Our sales and earnings capacity is further supported by the continuing strong order intake in 2018.
Our targets of reaching more than $10 billion in sales and around 13% in adjusted operating margin remains unchanged. Due to the slowdown in global light vehicle sales and production and increasing raw material pricing, we do not expect to reach these targets in 2020. I want to be very clear on that the targets have not changed, and we aim to reach them at a later stage when market fundamentals are more solid. IHS now forecasts substantially slower growth in the global light vehicle production for 2020. IHS forecast has been reduced by five million vehicles or more than 5% since when we set out 2020 targets in 2017. The annual growth rates for 2018 to 2020 have thus been lowered from the 2.3% that was included in our original 2020 targets to now only 0.6%.
We do not expect to reach the targets by 2020, we do expect improvement in sales and adjusting operating margin in 2020, assuming light vehicle production returns to growth. Looking now at our order intake in 2018 on the next slide. Our order intake for the full year continued on the same high level as in 2017, supporting our growth opportunities also beyond 2020. This is strong evidence that our company is the leading company in the passive safety automotive industry and shows that we have successfully managed the operations of ramping up of previous year's high level of order intake. Our key performance indicator, customer satisfaction, has improved substantially and is at a high level, the best we have had for several years. This does not mean that we can relax. We always strive for improving products, services, processes, and costs.
We estimate that we booked about 50% of available order value in 2018, making 2018 the fourth consecutive year of booking around more than 50% of available order value. The order intake is broad-based. We have improved our market position in three dimensions: product category dimension, regional dimension, and customer dimension. Looking by customer, in 2018, there were 15 OEMs that made significant passive safety sourcing. We are pleased that we took order intake share above 80% with three different customers, and it was only one customer where we were just below 40% order intake share. We can therefore conclude that our 2018 order intake was a further strengthening our already broad customer base. Looking now at the recap of the fourth quarter highlights on the next slide.
Our growth momentum continued in the fourth quarter, albeit at a lower pace due to softening of the Chinese and Western European markets. The growth was mainly driven by the large number of product launches in North America. In the quarter, Autoliv's organic growth outpaced global light vehicle production by almost 10 percentage points as global light vehicle production declined by more than 5%, according to IHS. As unfavorable market fundamentals took their toll on global auto demand and production. We had a solid operating cash flow in the quarter, enabling us for the full year to almost reach last year's level of continuing operations. However, we have experienced continued headwinds from raw material pricing, which together with the volatility of market demand and launch-related costs, tempered the operating leverage on the stronger sales growth.
Just as in the previous quarter, the volatility of market demand in the quarter resulted in our supply chain production and logistics system having to manage significant changes to OEM production plans with corresponding uneven utilization of our assets, while at the same time managing the different challenges of the many launches and the high growth in North America. We see a similar environment for the beginning of 2019. With continued uncertainty for light vehicle production, especially in China and Europe, leading to continued challenges with uneven utilization. We are closely following market development and are ready to act if we judge it necessary. We have a high number of temporary employees, both in Europe and China, providing flexibility to flex production volumes up or down. We have implemented actions to reduce costs related to product launches. This includes production, line redesign, employee management, and supplier support management.
Looking now at the recap of the fourth quarter financial performance on the next slide. Executing on the strong order book this quarter marks the third quarter of higher organic growth. Our consolidated net sales increased by close to 2% compared to the same quarter of 2017. With organic sales increasing by more than 4% despite the global light vehicle production falling by 5%. Adjusted operating income, including costs for capacity alignment, antitrust related matters, and separation costs decreased by around 5% from $254 million- $240 million, impacted by elevated launch-related costs, uneven utilization of our assets, and raw material pricing. The adjusted operating margin decreased by 90 basis points to 10.9% compared to the same quarter of 2017.
EPS diluted decreased by $3.32 compared to the same quarter of 2017, almost entirely as a result of the accrual related to the remaining part of the European Commission antitrust investigation and discrete tax items. Looking to our sales growth on the next slide. Thanks to newly introduced models, we could more than offset the sharp growth in light vehicle production in the quarter. Consolidated net sales in the fourth quarter increased year-over-year by 1.6% to $2.2 billion, with an organic growth of 4.2%, partly offset by negative currency translation effects of 2.6%. Sales outperformed light vehicle production in all regions except Europe. The underperformance in Europe was mainly due to the light vehicle production in Western Europe, with its high safety content per vehicle declined by more than 9%. In the quarter, North America contributed with $116 million to the organic growth.
The sales was driven by previous quarters' product launches, mainly with FCA, Honda, and Nissan. The organic growth of close to 21% was 19 percentage points higher than the light vehicle production growth. Our sales in South America declined by 9% organically, basically in line with the light vehicle production decline in the region. In Europe, we have been affected by weaker demands from a number of OEMs, partly related to continued temporary production cuts connected to the new emission testing regulation, WLTP, and model changeovers. Sales in China declined organically by 3.7%, outperforming light vehicle production by 11 percentage points. The lower sales was mainly a result of domestic OEMs, including Great Wall, BAIC, and Wuling, reducing their outputs. This was partly offset by slightly higher sales to global OEMs, largely due to stronger performance with Honda VW.
Looking to our key models launches in Q4 2018 on the next slide. Here you see some of the key models which have been launched during the fourth quarter. Five of the models are built in North America, continuing the strong momentum we have seen over the last few quarters. All but one are SUVs. Of special interest is the Tata Harrier, which is the new model specifically developed for the Indian market. We proudly supply most of the passive safety products to the Harrier, including driver airbag with steering wheel, passenger airbag, side airbags, and curtain airbags. The high safety content of the Harrier demonstrates the growth opportunities in emerging markets when consumers request the same level of safety as in more developed markets. Looking now to our product launches. Our strong launch momentum continues.
We continue to see ramp-up of product launches of business awarded in 2015- 2017, as illustrated by the chart. The number of product launches in 2018 increased by 20% compared to a year earlier. The main increase has been in the U.S. with over 50%, and in China with close to 40% more launches than in 2017. We expect a continued high pace of product launches in 2019, especially in China. We therefore expect a strong organic growth to continue in 2019, with a similar outperformance versus light vehicle production as we had in 2018, which was close to 6%. Looking now to 2019 growth opportunities. Here you see some of the key models supporting our growth in 2019. These models are expected to account for a large share of our organic sales growth during 2019. Seven of these models were launched recently. Two are yet to be launched.
Two are not new launches, but they are to be built in additional production sites to meet global demand. With Autoliv's global production footprint, we are able to support these models at their new production sites, growing our sales. Annually, these 11 models represent around 10% of sales, and our content per vehicle is in the range of $ 140-$ 300. Looking to our underlying market conditions on the next slide. The light vehicle market became increasingly more challenging in the second half of 2018 due to weaker consumer confidence, trade tariffs, and regulatory changes. In the fourth quarter, overall global light vehicle production declined by about 5% according to IHS. This is six percentage points worse than the 1% growth forecasted at the beginning of the quarter. In China, the world's largest market, vehicle sales fell in the fourth quarter by 13%, according to CAAM.
The slowdown is largely driven by weakening consumer demand caused by lower consumer confidence from trade wars, weaker state of economy, and lack of demand stimulus. As you might recall, we did expect a drop that was greater than the 3% decline IHS predicted. The outcome turned out even weaker as the light vehicle production in the fourth quarter declined by 15%, according to industry sources like CAAM and IHS. U.S. light vehicle sales rebounded slightly in the fourth quarter from the slowdowns experienced during the summer. Though most auto market fell below year ago, strong growth from FCA, Tesla, and Volkswagen brought the U.S. into the black for the quarter and the year. Inventory level remains on the healthy level and were basically flat year-over-year.
Light vehicle production in North America increased by 1.7%, which is less than the original forecast of 2.6% growth at the beginning of the quarter. European light vehicle sales declined by 8% in the quarter, continuing the downward trend that started with the introduction of WLTP in September. Underlying demand was weaker than expected, as seen in the disappointing registration levels noted for November and December, which we believe goes beyond the impact of WLTP. Overall, production is believed to have declined by 5%. The decline was concentrated to the important West European market that dropped by 9%, while Eastern Europe production increased slightly. In Japan, the year ended on a positive note with light vehicle sales increasing at an estimate of 5% year-over-year in the fourth quarter. I will now hand over to our CFO, Mats Backman, to speak to the financials.
Thank you, Mikael. Looking now to our financials on the next page. We have our key figures for the fourth quarter, including negative currency translation effects of around $ 57 million and organic sales growth of $ 91 million. Our consolidated net sales reached $2.2 billion for the fourth quarter. Our growth margin declined year-over-year. The net operating leverage on the higher sales was more than offset by higher commodity costs and costs related to preparation for upcoming launches, as well as ramp-up of recent launches. Additionally, we experienced unbalanced utilization of our assets in China and Europe. Our adjusted operating margin of 10.9% declined year-over-year, mainly due to the lower growth margin and the higher RD&E, partly offset by lower cost for SD&A in relation to sales.
Our reported earnings per share decreased by $3.32, mainly as a result of the accrual related to the EC antitrust investigation and discrete tax items. Our adjusted return on capital employed and return on equity were 26% and 24%, 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 10.9% was about 90 basis points lower year-over-year for the fourth quarter. As illustrated by the chart, the operating margin was impacted by higher raw material costs of about 80 basis points, partly offset by a net currency tailwind of about 70 basis points. The negative leverage on the higher sales was a result of higher RD&E expenses, other launch-related costs, and unbalanced utilization of our supply chain, production, and logistics systems.
The higher RD&E, which increased compared to the same quarter in prior year by about 40 basis points, was driven by the high number of product launches, especially in North America. In the quarter, launches in North America alone rose by more than 70%. Looking more into full year 2018 performance on the next slide, where we have our key figures for the full year 2018. For the full year 2018, Autoliv sales grew organically by 4.8% comparing to full year 2017, almost six percentage points more than the LVP growth according to IHS. The largest contributors to the organic growth were North America, China, and India, partly offset by Europe and South Korea. The gross profit increased by $ 32 million compared to prior year.
The growth margin decreased by 0.9 percentage points compared to 2017, mainly due to adverse impact from launch-related costs, raw material costs, and currency changes, which more than offset the operating leverage on the increased sales. The adjusted operating margin, excluding cost for capacity alignment, antitrust-related matters, and the separation of our business segment, was 10.5% of sales compared to 11.1% of sales for the full year 2017. The decrease was mainly due to the lower growth margin and higher RD&E costs. Earnings per share from continuing operations, assuming dilution, decreased by 35% to $4.31, compared to $6.68 for the same period one year ago. This was mainly due to the accrual related to remaining portion of the EC investigation, combined with higher underlying tax rates. Our adjusted return on capital employed and return on equity were 22% and 20%, respectively.
Our dividend of $2.46 was $0.08 or 3% higher than a year earlier. Looking now on the next slide, where we have our adjusted operating margin of 10.5% for the full year 2018, which was 60 basis points lower than full year 2017. The adjusted operating margin was impacted by higher raw material costs of about 40 basis points and the net currency headwind of about 10 basis points. The negative leverage on the higher sales was a result of higher RD&E expenses, which increased year-over-year by about 30 basis points, mainly as a result of the many product launches, as well as other launch-related costs and unbalanced utilization of supply chain, production, and logistics systems in the second half of the year. This was partly mitigated by a lower SD&A. Looking on our cash flow on the next slide.
Operating cash flow was strong in the quarter, taking us to more than $ 800 million in full year 2018 for continuing operations, which is close to our earlier indication. Note that our cash flow statement includes discontinued operations up until the second quarter of 2018. This makes year-over-year comparison difficult. Capital expenditures amounted to $ 133 million in the fourth quarter. In the fourth quarter 2017, capital expenditures for continuing operations were $ 128 million. Full year 2018 capital expenditures for continuing operations amounted to $ 486 million, or about 5.6% 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 between 4% and 5%. Looking now to our earnings per share on the next slide.
Reported earnings per share declined by $3.32 to -$1.60, mainly due to the accrual related to the remaining portion of the EC investigation, discrete tax items, and lower operating income. In fourth quarter 2018, the adjusted earnings per share decreased by 38% to $1.42 compared to $2.29 for the same period one year ago. The main driver behind the decrease are $0.44 from discrete tax items, $0.24 from higher tax rates, and $0.12 from lower adjusted operating income. Looking now to our balance sheet on the next slide. We have, as you know, a long history of prudent financial policy. Our balance sheet focus and shareholder-friendly capital allocation policy remains unchanged. Autoliv's policy is to maintain a leverage ratio of around one times net debt to EBITDA within a range of 0.5- 1.5.
As of December 31, 2018, the ratio was back within the range, as we reduced our net debt by $ 106 million in the quarter. Our strong free cash flow generation should allow de-leveraging and should allow continued returns to shareholders while providing flexibility. We are aiming to be well within the target range by the end of year 2019, despite the expected fines for the remaining portion of the EC investigation that could be issued during the first half of 2019. This excludes any other discrete items and other non-foreseeable changes to our business. Turning the page. 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 flat or slightly down, while Europe and China are expected to stabilize from the recent volatility.
IHS forecast year-over-year growth in China for the full year 2019, despite a weak first half. The WLTP impact in Europe appears on track to fully fade over the coming months. However, we can see an increasing risk for uncertainty among end consumers on what drivetrain technology to choose. Corporate and fleet sales seems to be less affected. Another factor to watch is the Brexit outcome. In China, IHS expect the softness to continue in the first quarter, forecasting about 9% decline in light vehicle production year-over-year. As inventory levels are relatively high and the recent trend in sales have been deteriorated, we believe there is a downside risk to this estimate. Our base scenario for global light vehicle production in 2019 is below the IHS estimate of 1.1% growth.
We expect to outgrow light vehicle production at a similar level as we did in 2018, which was almost six percentage points. Turning the page. We have summarized our full year 2019 indications. We said we are coming back to how we are planning to guide at our fourth quarter earnings call. We will guide on a full year basis and on the factors that you can see on this slide. Full year indications assumes mid-January 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 the negative currency translation effect of around 1%, resulting in a consolidated net sales growth of 4% for 2019. Our indication for the adjusted operating margin is around 10.5% for the full year 2019.
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 the full year 2019 to be neutral. The projected tax rate, excluding discrete items, is expected to be around 28% for full year 2019. The projected operating cash flow, excluding any discrete items, is expected to increase. We aim to improve the 2018 cash conversion of close to 90% for continuing operations to be around 100% in 2019. The projected capital expenditures in relation to sales full year 2019 is expected to decline compared to the 5.6% for continuing operations in 2018. The projected RD&E in relation to sales for 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 range of 0.5-1.5 by year-end 2019, excluding any unforeseen discrete items. I will now hand back to Mikael for some concluding words.
Thank you, Mats. Turning the page. Our 2019 focus is directed to improve launch effectiveness and productivity. We always strive to improve production and services, processes, and costs. These continuous improvements have been key for Autoliv in improving profitability and winning new contracts. In 2019, we will increasingly focusing on our productivity in all areas, such as production, logistics, testing, and engineering. We have implemented actions to improve effectiveness of product launches, Of the course of 2019, we expect to improve our product launch cost-effectiveness. 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 decline. As light vehicle markets are expected to remain volatile, we will monitor and manage accordingly.
We will also continue our efforts of flawless execution of new launches, improving customer satisfaction further, and thereby supporting our new and stronger market position. Unfortunately, there will be millions of traffic accidents in 2019, some fatal, some where people will get injured. Therefore, we will relentlessly continue to innovate and to deliver best quality products that will save more lives. I will now hand back to Anders.
Thank you, Mikael. Turning the page. This concludes our formal comments for today's earnings call. We would like to open up the line for questions. I will now hand it back to Alice. Operator?
Yes, switching my mic on. Thank you. Thank you, ladies and gentlemen, we will now begin the question-and-answer session. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A queue. This will only take a few moments. If you wish to cancel your request, please press the hash key. Once again, it is star one to ask a question. Thank you. Your first question comes from the line of Emmanuel Rosner from Deutsche Bank. Please go ahead and ask your question.
Hi, everybody.
Hi.
Hi.
First question is around your guidance for the margin in 2019. Can you maybe break out the puts and takes in terms of how you get to a flat margin this year? Perhaps, what is the expected commodities impact? What is the magnitude of continued operational headwinds on a year-over-year basis? Also perhaps any color you can give on the cadence within 2019.
This is Mats. Maybe starting with the kind of external factors and looking into currency and raw materials. When it comes to currencies, we are saying that we expect a neutral effect. However, looking at the raw materials, we are expecting a negative development in line with what we saw in 2018, meaning that we had about 40 basis points negative in 2018, and that's the level that we expect at least for 2019. That's clearly a negative. Looking on other items affecting the margin. First of all, when it comes to launch cost, as we communicated after the third quarter, we talked about several quarters of launch cost going forward. That's something we see now in the beginning of the year as well.
Also to remember that, given the kind of assumption we have of the underlying LVP and the market development, mainly in China, we see the first half of 2019 to be challenging in order to kind of meet the lower volumes and mitigate the effects from lower volumes. That, I would say, kind of conclude the underlying assumptions we have for the 10.5.
That's very helpful. I guess my second question is around your longer-term target of 13% margin. Can you maybe sort of give us a rough bridge of what would get you there? The incremental margins that you are assuming on a go-forward basis, and then how much of the recent headwinds seen in 2018 and 2019 on the operational front, how much of that would reverse and become a tailwind?
What we have said here is that the targets as absolute values here is kept. What we are doing is that we are saying it will not be achieved in 2020, but beyond 2020 here. The main factors here, I would say, is the light vehicle production, which have changed significantly since we set our targets in 2017. That, of course, is a key factor all into this. Also the raw material situation here that has put additional strain on our ability to reach the target here. That's the main factors to get to where we have had as a target.
You've had quite a few operational headwinds that you call that in 2018 and 2019. Do you assume this sort of gets reversed, and what kind of tailwind would that provide?
That is what we have said is the launch-related cost that we have had starting during last year. It was said that in connection with the third quarter here, that it will take several quarters until we are through that. It of course impacts 2019 here. We are gradually improving here, and we expect that to be behind us at some later date.
Thank you.
Thank you. Your next question comes from the line of David Kelley from Wells Fargo. Please go ahead and ask your question.
Hi, good morning. On the assumptions underpinning the outlook, it sounds like relative to what you printed in the deck with regards to IHS assumptions, you're more conservative. Is there any more detail around what you're assuming for China? IHS has it up for the year. I think most suppliers are assuming a down year. Is that a fair assumption for you? How much should we think about the China production, light vehicle production, being down within your revenue outlook?
China is the main factor in the equation here when we are saying that we are more negative for 2019 here, it's mainly also in the beginning of the year, first half. I think IHS has roughly 9% negative in the first quarter. We see significantly more challenging situation in China for the first quarter here. I would say, the second half of the year, I think it's more difficult for us to have a very different opinion here, because the first half of the year, we can see and understand better where we are in relation to our customers' call-offs and in the dialogue we have there.
Okay. The second quarter, you hinted at some risk there as well. I know you only look out in terms of the current quarter, but should we think of taking whatever IHS has for second quarter and discount that as well, assume that's factored within your full-year outlook for second quarter?
Yes.
Okay. Just a second follow-up real quick. Macro-wise, Europe, how conservative are you in Europe? There's still some pressures there. How do you see that playing out over the course of the year? That's been a weak point for you here recently. Just curious on what you're assuming underpinning the market.
I think it's difficult to give you some grading of our view on Europe there more than to say that we see Europe as a market which we believe will be weaker here moving forward. As we have indicated in our presentation here, is that, of course, you have the WLTP effects during the autumn here, and we said in the connection with Q4 that that would affect, to some extent, the fourth quarter as well, which it did. I think around the whole WLTP issue, which is the emission regulations here, we have a wait-and-see from the consumers here, because there is this overall question around diesel versus then alternative drivelines and availability there, delaying some decisions from the consumers. I would say in Europe also, we have the Brexit situation that also impact consumer confidence in some countries.
Right. Okay. Thank you very much.
Thank you.
Thank you. Your next question comes from the line of Chris McNally from Evercore ISI. Please go ahead and ask your question.
Hi. Good afternoon. Just trying to get a sense, I think like most, to just how conservative you're being with this sort of 2020 target pushback, really, rather than pulling the target altogether. From what I think you're saying is that you just changed the timing of the targets and not the absolute values. That would imply that basically the next $1 billion of revenue, you'd have to achieve $ 360 million of EBIT to hit that $ 1.3 billion number, and 36% incremental margins doesn't seem like anything the company's done in the past. Maybe you can help us on what are we missing. It's clearly volume related that's an issue, but why would so much fall through to the bottom line on quote, "the next $1 billion of volume"?
I wouldn't do a calculation for you here, but what we have said here is that we remain the targets, but they are pushed out in time as a consequence of what we just alluded to here in terms of headwinds, primarily then the light vehicle production. That, of course, we see the growth coming from the underlying performance here of the company.
Okay. Is there a time that we may get a little bit more detail? You've done CMDs in the past. Is that something that we may hear from at some point this year? Maybe, obviously, if the targets are being moved from 2020, maybe we get new targets for 2021 or 2022. Is that something you're hoping to communicate with more detail over the course of the year?
We have said that we will have a Capital Markets during the second half of 2019, and that still stands. We will come back on details around that. Of course, in such a meeting, we will formulate more direction when it comes to the years beyond 2020. In what shape and form, we will have to come back to.
Okay, thanks. I can follow up more offline. Thank you.
Thank you.
Thank you. Your next question comes from the line of Ashish Sabadra from Jefferies. Please go ahead and ask your question.
Hi. Thanks for taking my question. I just have probably a similar question on margins, but would the margin shortfall that you had since the time that you've given the targets, do you attribute all of that to the external factors? Even when I try to add up the raw material headwinds since 2017, and if I assume another 30, 40 basis points for 2019, I think that together comes up to 100 basis points. Launch cost, again, should be in that level as well. Maybe I can try to rephrase the question as to, is the 13% dependent on raw material prices reversing by 100 basis points and the LVP reaching the levels that you previously had for 2020?
I think it's a combination of both external and internal factors. Given the launch cost we have had and what we have been communicating in the third quarter and fourth quarter, that makes a new baseline then as we are starting on a lower level then. We have the raw material, as the indication I gave, the 40 basis points 2018 will be at least on that level for 2019 as well then. I think most and foremost is that's the underlying LVP.
If you recall when we gave the targets and when we talked about the development between 2017 and 2020, if you took that kind of average or the CAGR when it comes to the growth number from 2017 to 2020 was, I believe, 8%, where of the underlying LVP assumption was, if I recall, 2.3%, meaning that the 2.3% was really important in order to get the volume and get the leverage. What we see now in 2019, if we take a snapshot of 2019 on our way to 2020, then we are indicating, if you take the organic sales growth that we give now of 5%, and we are talking about six percentage points outperformance, that would indicate a global LVP of - 1% rather than the + 2.3%. I think that's key as an assumption when we are pushing the numbers beyond 2020.
Okay. I think toward the end of last year, you sounded confident of reducing, if not significantly, reducing the launch cost in 2019, given that the step up of launches would be comparatively less in 2019. Is that still the target?
Yes. We talked about several quarters when we issued the third quarter report, and we have no changes to that.
For 2019, if you grow organically by 5%, R&D is down year-over-year, launch cost is not up, and I think the volatility in LVP cannot be higher than if it's at the same level as what we've seen in 2018, there's no other negative surprise that we are missing in terms of the margin walk, right?
No. I think you also need to consider the mix when it comes to the growth and our growth in particular then. If you're just looking at the fourth quarter, close to 20% organic growth in Americas in the same time as we have a negative development in Europe and China. Coming back a little bit to what we talked about when it comes to uneven utilization of the assets, that we are running full speed in one region in the same time as we're mitigating negative volume effects in terms of under absorption in other regions. That makes it a little bit more difficult to get that kind of leverage comparing to if you had an even growth globally that you were looking at. That is particularly valid for the first half of 2019 when we see this kind of turbulence or volatile development in China.
Okay. Last question. Do you have a chance of passing through some of the raw material headwind? Given that you have close to 50% market share in your industry, if there's any supplier that's able to pass through or at least try to, it should be you. A bit surprised by you flagging much higher raw material headwinds.
There is no automatic pass-through to our customers when it comes to raw materials. It's of course a part of normal discussions, commercial discussions that we have with our customers annually or I would say several times a year here, looking at the different items affecting us, affecting them, et cetera. That's a commercial negotiation it then ends up in.
Thank you.
Thank you.
Thank you. Your next question comes from the line of Joseph Spak from RBC Capital Markets. Please go ahead with your question.
Thank you. Good afternoon, everyone over there.
Hi.
Hi there.
I just want to go back to some of the assumptions. You're talking about 5% organic growth. You show the 1% IHS, but it sounds like you're actually much below that. Are you actually guiding on that 5%? Do you expect industry sales to be down next year? I guess what I'm trying to understand is, in 2018, which was a challenging year, you still had, I guess, good outgrowth versus a down market, and I'm trying to understand if that ratio stays the same or sort of moderates in 2019.
No, it stays the same. It was exactly like I said. We are guiding for 5% organic growth in 2019, in the same time, we're saying that we're looking at an outperformance in line with what we saw in 2018, meaning six percentage points. That would indicate, if you just kind of summarize the numbers, that would indicate that our assumption for the global LVP 2019 is rather - 1% then.
Okay. That's helpful. Bringing that down to the margin, right? You talked about a 40 basis point headwind from raw materials. There's going to be, obviously, some sort of volume hit as well from the industry, although offset by the backlog, I guess conversion, that's going to be key. If you're keeping margins flat, it seems like there's some of these headwinds you talked about, is that really what's the offset to the margin is some of the improved conversion on the new business?
I would say it's a combination. We're talking about the kind of launch cost that kind of continues into 2019 with the statement we made.
Right.
Of the first quarter of several quarters. That's one component that you need to consider. Secondly, also being very important, and especially now in the first half of 2019, that's the risk for kind of under-absorption driven by the volume drop we see in certain markets. Taking China, for instance. Coming back a little bit to this kind of uneven utilization of production assets also need to be considered in this, and especially looking at the first half though. Even though that if we're looking at the fourth quarter and the outcome, the actual for the fourth quarter, I think our Chinese team have done a great job in mitigating the negative volume effect. But it's a limit to what you can do when you see a sudden drop in volumes like we have seen that.
Right. I guess that was sort of my point. If you're talking about absorption, still some launch costs, still some raw material costs. It sounds like I'm hearing more headwinds, but you're still saying the margin's flat, at least for the year. I understand there could be some cadence through the year, but what are the sort of positive offsets to get you back to sort of a flattish margin?
Yeah, first of all, the launch cost cannot go on forever. We started to communicate that in the third quarter and into the fourth quarter, and that's something that we have multiple activities and actions in the company in order to address launch costs. That's one component that should improve now over time, and that's important to remember as well.
Okay. I thought I heard the comment on CapEx that over time you'll get back to the 4%-5%, which I think is what you've said historically. Is that in conjunction with hitting this $10 billion number? Is that the timeframe we think that should normalize, because until then you're going to need the CapEx to support the launches?
No, I think it's very kind of clearly connected to the order intake and volumes. It's capacity-related investments that we're making, and we have been preparing for this kind of higher volumes for a couple of years right now. What we said really is that we think that we have peaked in relation to sales in what we see right now, and now we will gradually start to reduce in relation to sales going forward though.
Okay. Thank you.
The big support we get is really from the organic growth and higher sales number though.
Thank you very much.
Thank you. Your next question comes from the line of James Picariello from KeyBanc Capital Markets. Please go ahead and ask your question.
Hey, good afternoon, guys. Just a question for Mats. The more obvious question, are you willing to talk about your decision to move to your sidekick, Veoneer, or is that something that you don't want to address?
No, I think I'm leaving that for the Veoneer. It's not maybe for me to comment anything on this call when it comes to that.
Okay. Understood. All right. For orders, just fractionally down year-over-year. Historically, you guys talk about a two to three year lead time before production begins. Is that something that you're still seeing at this point, or given all the headwinds from a global light vehicle production backdrop standpoint, are things getting pushed a bit?
I think we definitely see the same type of time horizon when it comes to new orders. 18-36 months, as you referred to here. With the weakening light vehicle production, I would say it's nothing that impacts the launch plans here. In terms of launching new vehicles and for us then supporting these new launches, no changes, and that's why I think we are talking about this outperformance here, where we see no changes to that.
Okay. If we continue to see some commodity deflation or at least some stabilization, given the three to six month lead time of the delay there, and you're realizing it in your P&L, is there any upside to this another year of 40 basis points headwind from a commodity standpoint, if we continue to see some deflation?
I think lower raw material price, of course, is helpful over time. There is a lead time in all that. I don't think you can make such a rough calculation on that. It's many moving parts into that.
Okay. Just last one for CapEx. You say it's going to be down as a percentage of sales year-over-year. Previously, you said that we should expect to see some normalization within a 4%-5% of sales range. Is the high end, that 5%, is that something that you're targeting in terms of your capital deployment for 2019? Thanks.
No. The only thing we are guiding for is a lower capital expenditures in relation to sales. When we're talking about the 4%-5%, that's a more kind of a normalized historical level that we should aim for. We are not that granular when it comes to the 2019 other than saying that we will decrease the capital expenditures in relation to sales throughout the year.
Thanks very much, guys.
Thank you. We will now take our next question. Our next question comes from the line of Ryan Brinkman from Barclays Capital. Please go ahead and ask your question.
Yes.
Hello there.
Ryan, your line disconnected. Please repress star and one. Ryan Brinkman, please repress star and one. Thank you. Your line is now reopened.
Hello, can you hear me?
Yep, we can hear you.
Yes. Could you give us a sense of the operating margin, ideally by region, but just how some of the pressures play out by region? Is it fair to assume that China and Europe were really the source of lack of incremental profits, and U.S. was more or less okay, or was the launch activity in the U.S. weighing that down as well?
We are not that detailed giving margin and profitability per region. If you're looking at the fourth quarter in particular, when we are talking about increased launch costs, that's related to the region where we have had most launches. For U.S., for instance, looking at the fourth quarter, I believe we had more than 70% increase in number of launches in the fourth quarter, year-over-year. In terms of profitability in North America, that's definitely affected by launch costs because that's the region where we have the launch cost and where we have most of the launches. Other than that, I wouldn't get into a more granular guidance when it comes to the profitability per region.
Okay. Just next question. Since a lot of the issues here seem to be launch related, as we get into 2020 and even 2021, to the extent you have visibility, given your strong win rate, is this about 710 launch cadence likely to continue into those years?
As we said, the strong order intake here supports our growth beyond 2020, definitely with what we have seen now for 2018.
If we're looking at launches and by region, so to speak, the first wave that we have seen has been very much related to North America. As you probably recall, we have been talking about market share gains mainly in three regions. That's North America, China, and Japan. Looking into 2019, we will see an increased number of launches in China as well, though.
Okay.
I guess final question. Given that, is there anything you're doing, just as a broad operational focus to make launches smoother? Because it seems like for the next two or three years, they're going to be a fact of life, good news for the top line, but as we've seen in 4Q 2018 and 2019 guide, doesn't really help with the margin.
Definitely. As we said, the higher launch cost we've seen during 2018 is being addressed in various ways. When we say that it will take a couple of quarters to solve that, or several quarters to solve that, it's through actually making sure that we have an efficient launch organization for the new higher level of launches that we have seen now as a consequence of the new order intake. That's through continuous improvement efforts and effectiveness in the launch teams that will take care of that.
Okay. Thank you.
Thank you, speakers. There are three remaining questions in the queue if you wish to take them.
Yes, I think we can take them.
Thank you very much. The next question comes from the line of Vijay from Mizuho. Please go ahead and ask your question.
Hey, thanks. Mikael and Mats, just when you look at the U.S., was a bright spot for you, grew pretty nicely 2018. What are you expecting in 2019 given some of the challenges in the U.S. side with the inventories and rates going up?
I think when it comes to the total market in the U.S., we see more a sideways movement there.
When it comes to the underlying demand, I think also inventory levels in the industry is at okay-ish level here. When it comes to that, I think we're looking quite positively on North America with what we see today. Of course, our launch activities continue in North America. We are not giving a breakdown or indication for the overall organic growth, but of course, North America continue to be a key region in terms of that. As Mats said here, the wave started in North America, but China and Japan is the other regions where we're looking at growth. Okay on North America.
Got it. I know you mentioned you haven't seen any push-outs with the slowdown in LVP in China and Europe, but especially with some of the OEMs tweaking their mix away from sedans, are you seeing any changes in the order book on your passive side? Thanks.
No, I think we continue to see the same as we have that alluded to before here, we always need to lean forward here, making sure that we have good competitiveness from our side here.
All right. Last question. On the launch costs, what are you assuming for 2019? Obviously, you have a lot of launches going on the first half, but for the full year, what is the impact from launch costs? Thanks.
No, we are not giving kind of an exact number when it comes to kind of launch costs and communicating kind of elevated launch costs into 2019. I just kind of repeating what Mikael said. We talked about the launch cost to be elevated for several quarters, and that's what we're looking into, looking now at the first half of 2019. We cannot be more specific than that.
Got it. Thanks.
Thank you. Your next question comes from the line of Julien Raffestin from UBS. Please go ahead and ask your question.
Yes, thanks a lot. Just two left from my side. I'll start with the easy one. In the Q3 presentation, you provided a slide that showed the number of launches in 2017 and 2018, and in that presentation you had 2018, 740 launches. Now, in the latest presentation, that number's gone down to 710. Given that you provided the Q3 presentation pretty far at the end of the year, what has changed in the last two months or so that brought that number down?
Some launches have been pushed into 2019.
Okay. Simple question, simple answer. The other question I had is maybe just getting back to the 2020 targets one more time or one last time, and putting it a little bit differently than many of the questions that were asked today on that. Can you just explain why you felt confident enough to guide for 2020 targets over a year ago and all the way up to Q3 2018, but now that we're actually closer to that date, you don't want to provide a guidance anymore? Or put differently, what changed in your visibility most recently that makes you reluctant to provide a guidance when you gave one before that?
I think it's important to point out here that the 2020 was not a guidance. It was a target for 2020 set at the capital market and communicated at Capital Markets Day in 2017. That was a three-year target for the company. Very different from a guidance.
Okay.
What we have done now is that we have said that more than $10 billion in turnover remains, and around 13% EBIT remains, adjusted EBIT remains, but it's pushed out in time.
Okay. Fair enough. Thank you, gentlemen.
Thank you. Your final question comes from the line of Armintas Sinkevicius from Morgan Stanley. Please go ahead and ask your question.
Good afternoon, everyone.
Armintas.
Yeah, I'll keep it very quick. I have two questions. One is on the underperformance in EU. You guys were, I think, underperformed by 1.5%. I was just wondering if you could just be a bit more granular on where that comes from, because we knew the production was going to fall. I think you mentioned higher safety content. I just wanted a bit more clarification on that. My second question was around your cost reductions in China despite lowered production there. I think you said something earlier that the China team were at the limits in cost reductions there. I just wanted a bit more clarification on other regions, and how much room for cost reductions you have.
I think the first question here in Europe, it's related to mix. As we alluded to before, we are in the cars with high content of passive safety products. When you see that type of volume going down and you see the ones with lower content going up, which was the main difference between West and Eastern Europe, we have a mix effect that results in the number you saw here. Very similar to what we saw here in the previous quarter as well in Q3.
Okay.
When it comes down to the cost flexibility, I would say that we are always focusing on making sure that we have high flexibility in our total value chain. I think what we refer to here in China is really that they have demonstrated good work in that area. We need to make sure, and we have made sure that we are working with that in all our region, of course, as a part of our daily business here to secure that.
Looking at China, we have flexibility, and the team has done a great job as well. I think it's one thing that we need to remember looking at the development of sales in China. What we're showing for the quarter now, for the fourth quarter, is, I believe, -3.7% or something like that, close to -4%. If you are looking into that in more detail, we have a significantly worse development with the local OEMs in China, and we actually have some growth with global OEMs. Meaning that we are getting a kind of an uneven utilization if we're looking at production lines when we have such a difference in growth between the different brands and between the local OEMs and global OEMs. Which makes it a little bit tougher to mitigate the volume effects when it comes to fixed cost absorption as well then.
Are you saying that it just makes it difficult to kind of predict what the kind of impact will be based on the difference between the local and global OEMs in China?
No, not to predict the impact as such, but to mitigate the effects from lower volumes.
Okay. Yeah. Makes sense. It's based on mix, then?
Yes.
Things like that. Okay, fine. Thank you.
Thank you.
Thank you. That was the final question for your call. Speakers, please continue.
Thank you, Alice. Before we 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 operation excellence. Also, I should mention that our first quarter earnings call is scheduled for Friday, April 26th in 2019. Thank you to everyone to participate on today's call. We sincerely appreciate your continued interest in Autoliv and hope to have you on the next call. Goodbye for this time.
Thank you, ladies and gentlemen. That does conclude our conference for today. Thank you for participating. You may all now disconnect.